-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BiuShx6hY1u5zq4nZSscx/DUDg2Mcy1gP8N/Y0xlUnrzlFlfjP/lUH+nPrSsweri /3FqWgoLexTWDncJnNNO3w== 0000898432-98-000347.txt : 19980401 0000898432-98-000347.hdr.sgml : 19980401 ACCESSION NUMBER: 0000898432-98-000347 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: V ONE CORP/ DE CENTRAL INDEX KEY: 0001008946 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 521953278 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21511 FILM NUMBER: 98582584 BUSINESS ADDRESS: STREET 1: 20250 CENTURY BOULEVARD STREET 2: SUITE 300 CITY: GERMANTOWN STATE: MD ZIP: 20874 BUSINESS PHONE: 3015155200 MAIL ADDRESS: STREET 1: 20250 CENTURY BOULEVARD STREET 2: SUITE 300 CITY: GERMANTOWN STATE: MD ZIP: 20874 FORMER COMPANY: FORMER CONFORMED NAME: VIRTUAL OPEN NETWORK ENVIRONMENT CORP/ DATE OF NAME CHANGE: 19970122 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Year Ended: December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 0-21511 V-ONE CORPORATION --------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 52-1953278 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 20250 Century Blvd., Suite 300, Germantown, Maryland 20874 ---------------------------------------------------------- (Address of principal executive offices) (Zip Code) (301) 515-5200 -------------- (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $0.001 par value per share (Title of Class) Traded on the Nasdaq National Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X ] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and non-voting equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of on February 27, 1998 was approximately $35,840,000. This calculation does not reflect a determination that persons are affiliates for any other purposes. Registrant had 13,033,043 shares of Common Stock outstanding as of February 27, 1998. DOCUMENTS INCORPORATED BY REFERENCE Part III -- Portions of the registrant's definitive proxy statement to be issued in conjunction with registrant's 1998 annual stockholder's meeting to be held on May 14, 1998. Forward-Looking Statements In addition to historical information, this Annual Report contains forward-looking statements that involve risks and uncertainties. These statements may differ in a material way from actual future events. For instance, factors that could cause results to differ from future events include rapid rates of technological change and intense competition, among others. Readers are cautioned not to place undue reliance on these forward-looking statements. V-ONE Corporation undertakes no obligation to publicly revise these forward-looking statements or to reflect events or circumstances that arise after the date hereof. PART I ITEM 1. BUSINESS V-ONE Corporation ("V-ONE" or the "Company") develops markets and licenses a comprehensive suite of network security products that enable organizations to conduct secured electronic transactions and information exchange using public switched networks, such as the Internet. The Company's suite of products address network user authentication, perimeter security, access control and data integrity through the use of smart cards, tokens, digital certificates, firewalls and encryption technology. The Company's products interoperate seamlessly and can be combined to form a complete, integrated network security solution or can be used as independent components in customized security solutions. The Company's products have been designed with an open and flexible architecture to enhance application functionality and to support emerging network security standards. In addition, the Company's products enable organizations to deploy and scale their solutions from small single-site networks to large multi-site environments, and can accommodate both wireline and wireless media. The Company offered 3,000,000 shares of its Common Stock, par value $0.001 ("Common Stock"), in an initial public offering (the "IPO") on October 24, 1996 at $5.00 per share. On November 22, 1996, the Company's underwriters exercised their option to purchase an additional 200,000 shares of Common Stock from the Company and certain shareholders for $5.00 per share. On December 8, 1997, the Company issued 4,000 shares of Series A Convertible Preferred Stock ("Series A Stock") to Advantage Fund II Ltd. ("Advantage") for $4 million in the aggregate. Each share of Series A Stock is convertible into shares of Common Stock and Series A Warrants. For additional information, please refer to Item 5. "Market for Registrant's Common Equity and Related Stockholder Matters - Series A Convertible Preferred Stock" in the Company's Form 10-K. The Company was incorporated in Maryland in February 1993 and reincorporated in Delaware in February 1996. Effective July 2, 1996, the Company changed its name from "Virtual Open Network Environment Corporation" to "V-ONE Corporation." The Company's principal executive offices are located at 20250 Century Boulevard, Suite 300, and Germantown, Maryland 20874. The Company's telephone number is (301) 515-5200. BACKGROUND OVERVIEW. Over the last decade, decentralized computing has emerged as a result of the widespread adoption of personal computers, local area networks and wide area networks. This emergence has enabled users to communicate with each other and share data throughout an entire organization. With the recent popularization 2 of the Internet and increased performance capabilities offered by high-speed modems, ISDN services and frame relay technology, the volume of data transferred over networks has increased dramatically. Further fueling this expansion, carriers and Internet Service Providers have dramatically reduced their tariffs for their high speed aggregation services running over T-1 and T-3 transits which have data transfer rates that approximate local area network performance. In addition, leading hardware and software vendors have adopted and support TCP/IP, the Internet's non-proprietary communications protocol, for computer communications and information exchange. This open platform, along with the emergence of the Internet, allows increasing numbers of businesses and consumers to engage in electronic commerce, such as home banking, credit verification, securities trading and home shopping. The problem is that TCP/IP networks are unsecure. Using the Company's technology, users can create "virtual" private networks at a fraction of the cost of actual private WANs. Organizations, recognizing the potential cost savings using public networks, such as the Internet, as an extension of their enterprise networks, have begun connecting branch offices and remote and mobile users to mission critical applications and corporate resources such as groupware, customer databases and inventory control systems. Also, the Internet can be used as a lower cost alternative to value-added networks as a means to link companies with customers, suppliers and trading partners. This instantiation is known in the industry as Extranet architecture. The need for internal security continues to grow as businesses deploy intranets, internal networks using TCP/IP protocols, and browser-based applications to facilitate geographically dispersed communications and the transmission of information throughout an enterprise in a cost-effective manner. With the increased use of the Internet and intranets, many organizations are discovering that network security is a key element in successfully implementing distributed applications and services, including electronic mail, electronic data interchange, electronic commerce and information exchange services. Information becomes more vulnerable as organizations rely heavily on computer networks for the electronic transmission of data. In the absence of comprehensive network security, individuals and organizations are able to exploit system weaknesses to gain unauthorized access to networks, network transmissions and individual network computers. These individuals and organizations use such access to alter or steal data or, in some cases, to launch destructive attacks on data and computers within a network. NETWORK SECURITY ELEMENTS. Each of the following elements is critical in creating a complete network security solution to protect an organization's data, network and computer systems: - - - Data Privacy through Encryption -- Preventing unauthorized users from viewing private data through the process of "scrambling" data before it is transmitted or placed into electronic storage. - - - User Identification and Authentication -- Verifying the user's identity to prevent unauthorized access to computer and network resources. - - - Authorization -- Controlling which systems, data and applications a user can access. - - - Data Integrity -- Ensuring that network data, whether in storage or transmission, has not been changed or compromised by any unauthorized manipulation. - - - Non-repudiation -- Verifying that data transmissions have been executed between specific parties so that neither party may legitimately claim that the transaction did not occur. 3 NETWORK SECURITY PRODUCTS. Over the years, a number of network security products have been developed, including passwords, token-based access devices, firewalls, encryption products, biometric devices, smart cards and digital certificates. Each of these products was designed with a specific function or objective; however, few were designed to meet all of the needs of enterprise-wide network security. Single function or "point" products that have been developed to address one or a limited number of network security requirements include the following: Passwords and Tokens -- Until recently, passwords were the most common method of authentication. Static (non-changing) passwords were developed as the first attempt to address the need for authentication. Static passwords, however, are inadequate as they are susceptible to "sniffing" (unauthorized viewing) and to attacks using software designed to randomly generate and enter thousands of passwords. As a result, dynamic passwords, including single-use passwords, were created to provide a greater level of authentication. Dynamic password implementations include the use of time-varying and challenge-response passwords. Generally, dynamic passwords require the use of a hand-held, electronic device called a hardware token. Dynamic passwords were subsequently strengthened by incorporating two-factor identification, which provides a higher level of authentication in that two independent components are combined to identify a user (for example, a bank ATM card and a PIN code). However, dynamic passwords and two-factor identification provide only a limited level of security because the sessions they authenticate are still vulnerable to interception. Biometric Systems - Biometric systems are used to measure fingerprint images, voice analysis, or facial/retinal characteristics. They provide strong user authentication while eliminating the need for cards or passwords. Firewalls -- Firewalls are network access control devices that regulate the passage of information based on a set of user-defined rules. Generally, firewalls are based upon one of two technical architectures: packet filters (customarily used in routers) or proxy-based application-level gateways. Packet filters screen network traffic and allow or prevent network access based upon source and destination Internet protocol addresses. Proxy-based application-level gateways provide access to applications on the network only after the user has identified the desired application and submitted a valid password. Encryption -- Encryption products provide privacy for transmitted data. Encryption algorithms scramble data so that only users with the appropriate decoding key are able to view transmitted or stored data. Public-key encryption has recently gained additional credibility for managing the keys (codes) used to encrypt and subsequently decrypt user designated data. Smart Cards -- Smart cards are similar in size to credit cards, but contain a small, tamper-proof microprocessor chip and are capable of storing data and processing complex encryption algorithms. Smart cards are advanced authentication tokens that are also capable of storing information, such as credit card or bank account numbers, medical records, photographic images or digital certificates. Digital Certificates -- A digital certificate serves as an individual's electronic identification card. The certificates are digitally certified by a third party, called a certificate authority, who vouches for the identity of the certificate holder. Digital certificates are being standardized as a means of authenticating on-line users and are perceived to be a key technology for the expansion of secure transactions and electronic commerce. As organizations increase their dependence on the Internet and deploy intranets, the Company believes that there will be an increasing need for a comprehensive enterprise-wide network security solution. Many network security vendors, 4 however, have focused on developing products that address only one or a limited number of specific security requirements. In addition, products developed by different vendors are often difficult to integrate with each other and pose interoperability problems. Consequently, the Company believes that organizations will increasingly demand comprehensive network security solutions that are easy to implement and transparent to the user. These solutions must have the ability to integrate with existing applications, networks and/or mainframe applications, while being flexible and powerful enough to address the needs created by newly developed technologies. THE V-ONE SOLUTION The Company offers a comprehensive suite of network security products that address the need for identification and authentication, integrity, non-repudiation, authorization and encryption. This combination of network security products enables organizations to identify and authenticate network users while controlling access to specific network services. The Company's technology is designed to prevent unauthorized access to an organization's mission critical applications and internal data without impeding permitted uses of the organization's resources and information. The Company's products are compatible with many leading hardware platforms and operating systems, as well as many third-party security products. The Company's customers are able to integrate V-ONE's security products into their networks with minimal impact on existing systems and applications. The Company's current suite of products can be combined and configured to provide network perimeter security, secure remote access and intra/inter-enterprise security to facilitate secured electronic commerce and information exchange. The Company's principal products are SmartGate, a client/server product that offers identification and authentication, integrity, non-repudiation, authorization and encryption; and SmartWall, and an application-level firewall that incorporates SmartGate's functionality. The Company provides customers with two-factor identification, mutual authentication, fine-grained access control and encryption by combining smart card emulation technology with the SmartGate server. In addition, SmartGate users can access enterprise networks from remote locations using SmartCAT technology incorporated in SmartGate. The Company's technology provides customers with the ability to create network security solutions designed to meet their specific network security requirements. V-ONE's customers can securely deploy a broad range of services and applications to engage in secured electronic transactions, information exchange and remote access to mission critical applications and corporate resources. The Company's technology is designed to be (i) modular, allowing organizations to utilize the security product or products best suited to address their immediate needs, with a seamless migration path to additional products as required, (ii) scaleable, ranging from a single system supporting several users to multiple systems potentially supporting hundreds of thousands of users, and (iii) portable, securing access independent of any particular user's machine or network entry point through the use of smart card technology. STRATEGY The Company's goal is to become the leading provider of comprehensive, open and interoperable network security products that are easy to install, convenient to use, and highly scalable. The Company's strategy to realize its goal contains the following elements: - - - Provide an Interoperable, Scaleable and Open Solution. The Company intends to continue to provide network security products that operate on leading platforms and that are interoperable and compatible with other network security products. The flexible and open architecture of the Company's products enable the Company to deliver component technologies for a seamless and interoperable system. In addition, the Company's technology is scaleable, application-independent and designed both to integrate with existing technologies as well as to support emerging standards and applications. 5 - - - Augment and Integrate with Existing Security Products. The Company will continue to offer products that interoperate with a wide variety of third-party security products, including multiple firewalls and tokens, allowing a customer to augment existing network security systems. The Company believes that its technology protects a customer's existing network security investments because the Company's products are designed to integrate easily with point products currently employed by its customers. The Company believes that this strategy will enable it to gain access to potential customers who have previously made network security investments but whose network security needs are continuing to evolve. - - - Leverage Key Reference Accounts in Selected Vertical Markets. The Company has identified strategic vertical markets that require sophisticated network security solutions and has targeted its marketing and direct sales efforts on key participants within these selected vertical markets. By successfully installing its products at key accounts, the Company intends to leverage positive references from its installed customer base to expand its market penetration within those information critical industries. The Company intends to increase its marketing and sales efforts to expand its customer base in additional vertical markets. - - - Develop and Leverage Strategic Alliances. The Company has established strategic alliances to increase the distribution and market acceptance of its network security products including an alliance with GTE Internetworking, a unit of GTE Corp. ("GTE") and MCI Telecommunications Corporation ("MCI"). The Company intends to continue to strengthen its existing strategic alliances while forging new relationships with key industry participants. In addition, the Company is exploring opportunities to develop new products and expand the functionality of its existing products through alliances with key vendors of complementary technologies. PRODUCTS AND SERVICES The Company's network security products are designed to protect an organization's information and networks from unauthorized access while allowing users of the network to conduct business securely over the Internet and intranets. These products have been designed to interoperate seamlessly and enhance application functionality. The Company designs its products so that they can be combined in different configurations to provide customized solutions for its customers. The following table lists the Company's current products:
- -------------------------------------------------------------------------------------------------------------- PRODUCT CATEGORY DESCRIPTION DATE OF INTRODUCTION DMSGate(TradeMark) X.400 Mail Guard A multi-platform security gateway meeting the Q4 1996 National Security Agency's DMS Firewall Plus requirements SmartGate(Registered) Client/server End-to-end, application level network data Q4 1995 security security system providing two-factor identification, mutual authentication, encryption and access control SmartWall(Registered) Network perimeter An application level, dual-homed firewall that Q4 1994 security protects internal networks while enabling remote (firewall) access to internal resources SmartCAT(Registered) Smart card Smart card client software that is interoperable Q2 1994 technology with third-party smart cards and smart card readers incorporated in SmartGate(R) technology 6 - ------------------------------------------------------------------------------------------------------------ PRODUCT CATEGORY DESCRIPTION DATE OF INTRODUCTION Online Registration Client/server A system that allows remote creation and Q2 1996 Service(TradeMark) token management of secure tokens and workstation distribution configuration files incorporated in SmartGate(R) technology Wallet Electronic Electronic technology that enables secure payment Q3 1995 Technology(TradeMark) commerce transactions containing credit card information incorporated in SmartGate(R) technology - ------------------------------------------------------------------------------------------------------------
DMSGate -- DMSGate is a platform independent security gateway for flexible deployment of defense messaging system (DMS) security services. DMSGate meets the National Security Agency's DMS Firewall Plus requirements and is available as a software module hosted on leading vendor firewalls. SmartGate -- SmartGate is designed to interoperate easily with most TCP/IP-based applications and to allow the end user to securely use existing and future software applications over the Internet and intranets. SmartGate employs two-factor identification (two independent components are combined to authenticate a user) and mutual authentication (both the server and client, SmartPass(TM), determine that the other party to the transaction is authorized to participate in the transaction) through the use of virtual or physical smart cards or other authentication devices. SmartGate establishes a secured, encrypted link over an unsecured network once both parties to a communication over the unsecured network have been identified and authenticated. The authorized user is then granted access to only those services and data for which the user has been approved. SmartGate supports secure remote administration, which can be accessed using a Web browser or telnet. SmartGate also supports the data encryption standard ("DES") (which, in most forms, cannot be exported from the United States without the approval of the Department of Commerce) and the RC4 encryption algorithm of RSA Data Security, Inc. ("RSA") (which is exportable). SmartGate server software versions are available on a variety of leading operating systems, including Berkeley Software Development, Inc.'s BSD/OS, Sun Microsystems, Inc.'s SunOS and Solaris, and Hewlett-Packard Company's HP-UX. SmartGate client supports Microsoft Corporation's Windows versions 3.0 and 3.1, Windows 95 and Windows NT. A turnkey version of SmartGate server is available for BSD/OS on an Intel Pentium hardware platform. SmartWall -- SmartWall, the Company's firewall product, provides a high level of protection against unauthorized access to a secured network from an unsecured network. SmartWall also allows transparent access from the secured network to services and applications on the unsecured network. SmartWall includes a secured graphical user interface for firewall administration, strong mutual authentication to identify users and complete transparency for authorized traffic. In addition, SmartWall allows multiple sites to be administered from any location using a Web browser or telnet. SmartWall supports multiple types of existing encryption products, authentication tokens, proxy services and secure transmission channels. SmartGate is bundled into every SmartWall. SmartWall software-only versions are currently available on a variety of leading operating systems, including Windows NT, BSD/OS, Solaris and HP-UX. A SmartWall turnkey system is currently available for BSD/OS. 7 SmartCAT -- The SmartCAT product, when used with the SmartGate server, provides two-factor identification and mutual authentication using physical smart card technology. There are three key parts to the SmartCAT product: (i) a standard smart card (ISO/IEC 7816-3, T=0 compliant), (ii) a smart card reader designed by the Company, and (iii) the Company's proprietary SmartPass client software. Together these elements provide smart card-based encryption and authentication services. Online Registration Service -- A user must be registered to access an authentication-based system. The Online Registration Service product is a system for efficient on-line enrollment of large user communities. The Online Registration Service completely automates the creation and exchange of the user's keys and initializes the user's default access privileges. The Online Registration Service either creates a virtual smart card or formats a physical smart card that contains a shared secret key that is PIN code protected. Online registration service is now incorporated in SmartGate server version 2.4 and SmartPass client version 3.0. Wallet Technology -- Wallet Technology enables secured electronic credit card payment transactions over unsecured networks. Wallet Technology encrypts the credit card information supplied by the purchaser and forwards that information to the vendor. The vendor adds the purchase value to the encrypted credit card information and sends all of this information to the credit card issuer/processor. The issuer/processor decodes this information and either authorizes or rejects the purchaser's request. The Company's design does not allow the vendor to view the unencrypted credit card information supplied by the purchaser. Elements of the Wallet Technology are incorporated in SmartGate. Network Security Support -- The Company's support staff provides pre-and post-sales support, vulnerability analysis, performance analysis, systems integration and system security architecture support. The Company's support staff also provides fee-based engineering services. TECHNOLOGY The cornerstone of the Company's network security solution is its patented SmartGate client/server security technology. SmartGate enables two-factor identification, mutual authentication and fine-grained access control for most TCP/IP-based client/server applications. Using SmartGate technology, organizations can employ two-factor identification and mutual authentication to identify and authenticate a network user while fine-grained access control restricts each user's access to only those services to which the user is entitled. Two-Factor Identification -- Two-factor identification employs two independent components to identify a user using an identity token contained in a physical or virtual smart card. The information in the physical or virtual smart card is secured by a PIN code that is set by the user and is not known by anyone else. SmartCAT provides the means for accessing and using smart cards via smart card readers. SmartGate client provides the means for using virtual smart cards. Both physical and virtual smart cards store information about the user including the user's keys, which are used for authentication. The keys also contain information that allows the SmartGate client to authenticate the SmartGate server with which it communicates. Mutual Authentication -- Mutual authentication employs a dual set of challenges and encrypted responses that interact to enable both the client and the server to determine that the other party to the transaction is authorized to participate in the transaction. SmartGate's mutual authentication employs dual challenges coupled with encrypted responses to ensure non-repudiation between the two parties to an electronic transaction. When a client application attempts to make a connection with an application service protected by a SmartGate server, the SmartGate client performs a mutual authentication process with the SmartGate server protecting the application service. During the authentication process, the SmartGate server sends a challenge to the SmartGate client, and the SmartGate client uses the secret keys on the physical or virtual smart card to correctly respond to the challenge. In addition, the SmartGate client sends a 8 challenge to the SmartGate server, and the SmartGate server must prove to the SmartGate client that the server is the issuer of the client's secret key. Fine-Grained Access Control -- Fine-grained access control employs access control lists to compare an identified user's request for services against a list of entitlements to determine whether to grant the user access to the requested service. SmartGate employs an access control list to define the specific Web content page, file or host application that identified users are permitted to use. If SmartGate determines that the user is permitted to access the requested service, the connection is passed through the SmartGate server to the requested service; otherwise the connection is dropped. In addition to providing identification, authentication and access control, the SmartGate client and server independently compute a session key for encrypting the current TCP/IP data stream. The encryption key is computed based on information exchanged during the authentication process and is never transmitted over the network. SALES AND MARKETING The Company markets its network security products through its "direct touch" sales force through systems integrators, value-added resellers ("VARs") and international distributors. The sales organization is equally incented to work with resellers and channel partners. This agnostic approach anticipates the need to grow sales via opening new channels. "Direct touch" gives V-ONE the option to work directly in support of a sales opportunity without requiring the Company to assume the burden of credit collection or high inventory levels but still ship direct if required by the end customer. The Company is currently seeking to expand its sales and marketing staff and intends to devote additional resources to marketing and business development activities in order to expand its third-party distribution channels. Direct Marketing Effort -- The Company has developed its initial marketing and direct touch sales efforts on key industry participants within certain industry and market segments, including financial services, telecommunications and information services companies and government agencies. The Company employs a direct touch sales force to market its products to these key industry participants. The Company's direct touch sales force solicits prospective customers and provides technical advice and support with respect to the Company's products. The Company anticipates hiring additional sales representatives and opening regional sales offices in select cities. In 1996, the Company opened regional sales offices in New York, New York and San Francisco, California and added a Chicago, Illinois regional sales office in 1997. Indirect Marketing Effort -- An important component of the Company's sales strategy is the development of indirect sales channels such as Internet Service Providers ("ISPs"), systems integrators and value-added network service providers. The Company utilizes indirect sales channels to leverage the efforts of its direct sales force. The Company has initiated sales and marketing programs to sign up integrators, value-added resellers ("VARs") and original equipment manufacturers within the United States. The Company has signed VAR agreements with GTE, MCI and GE Information Services, Inc. ("GEIS"). The Company has established relationships with international distributors in the United Kingdom, Sweden, Germany, Belgium, Canada, Chile, Japan, Singapore, Korea and Australia, including relationships with Internet Solutions, Ltd. in the United Kingdom and ASCII Network Technology, Inc. in Japan. Strategic Alliance Development -- The Company plans to increase market penetration by developing and capitalizing upon strategic alliances. These alliances are intended to increase the distribution and market acceptance of V-ONE's network security products in markets where direct sales and traditional indirect sales efforts are not cost-effective. The Company intends to continue efforts to strengthen its existing relationships while also forging new relationships with key industry participants. 9 CUSTOMER SERVICE AND SUPPORT The Company believes that customer support and product maintenance is critical to retaining existing customers and attracting prospective customers. The Company provides on-site installation support and basic administrator training with each turnkey hardware product sale. Each turnkey product comes with 24 hours a day, seven days per week hardware and software support for 90 days. Upon expiration of the 90-day period, customers may purchase an annual maintenance plan. Purchasers of the Company's software products may also purchase annual maintenance plans. The annual maintenance plan provides customers access to the Company's customer service line, technical support personnel and software upgrades. The Company provides additional user or administrator training, on-site support, vulnerability analysis, performance analysis, systems integration and system security architecture support as an optional service through its support staff. Additionally, the Company provides customer support services for those customers who have entered into an evaluation agreement with the Company. PRODUCT DEVELOPMENT The market for the Company's products is dynamic and rapidly changing. The Company believes that its future success will depend upon its ability to: (i) enhance its existing products, (ii) identify new opportunities to leverage existing technologies, and (iii) develop new technologies resulting in new products, markets and services. Accordingly, the Company expects to continue to make a significant investment in research and development, product market analysis and systems integration. The Company believes that its customer-driven development strategy will enable it to continue to broaden its product offerings. COMPETITION The market for network security products and services is intensely competitive. The Company expects competition to intensify in the future. Currently, the Company competes in several different markets, including hardware assisted encryption devices, token authentication, smart card-based security applications and electronic commerce applications. The Company's competitors for Internet and intranet perimeter security and access control include Advanced Network and Services (a subsidiary of America Online, Inc.), Ascend Communications, Inc., AXENT Technologies, Inc., Bay Networks, Inc., Check Point Software Technology Ltd., Cisco Systems, Inc., Digital Equipment Corporation, Harris Computer Systems Corporation, International Business Machines Corporation, Milkyway Networks Corporation, Network Systems Corporation, Secure Computing Corporation, Sun Microsystems, Inc. and Trusted Information Systems, Inc. ("TIS"). The Company competes to a lesser degree with token vendors because the Company's SmartGate product supports many vendor tokens. Token vendors include CRYPTOCard Inc., AXENT Technologies, Inc., Leemah DataCom Security Corporation, National Semiconductor Inc., Racal-Guardata, Inc. and Security Dynamics Technologies, Inc. ("Security Dynamics"). Security Dynamics has acquired RSA. RSA's data encryption and authentication technology is licensed to and incorporated within certain products of the Company. As a result, Security Dynamics may become a more substantial competitor of the Company. For smart card-based security applications, the Company principally competes with those token vendors listed above who offer smart card technology. The Company's principal competitors in electronic commerce applications are Netscape Communication's Secure Socket Layer, Open Market Inc.'s Secure HTTP and Cylink Corporation's transaction software. 10 Because of the rapid expansion of the network security market, the Company will face competition from existing and new entrants, possibly including the Company's customers, suppliers and/or resellers. There can be no assurance that the Company's competitors will not develop network security products that may be more effective than the Company's current or future products or that the Company's technologies and products would not be rendered obsolete by such developments. Many of the Company's current and potential competitors have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources than the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products, than the Company. There can be no assurance that the Company's customers will not perceive the products of such other companies as substitutes for the Company's products. The Company believes that the principal competitive factors affecting the market for network security products include effectiveness, scope of product offerings, technical features, ease of use, reliability, customer service and support, name recognition, distribution resources and price. Current and potential competitors have established, or may establish in the future, strategic alliances to increase their ability to compete for the Company's prospective customers. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, which would materially adversely affect the Company's business, financial condition and results of operations. BACKLOG The Company's customers order on an as-needed basis. The Company has typically been able to ship products within 30 days after the customer submits a firm purchase order. The Company does not generally maintain long-term contracts with its customers that require customers to purchase its products. Accordingly, the Company has not maintained and does not anticipate maintaining a backlog. In 1997, product revenues from Internet Solutions Ltd. and Government Technology Services, Inc. ("GTSI") accounted for approximately 23% and 11%, respectively, of total revenues. In 1996, product revenues from MCI and the National Security Agency ("NSA") accounted for approximately 12% and 12%, respectively, of total revenues. In 1995, product revenues from GEIS, NCTS Washington, a division of the Department of the Navy, and the U.S. Defense Information Systems Agency accounted for approximately 19%, 10%, and 10%, respectively, of total revenues. SUPPLY SOURCES Components used in the Company's network security products consist primarily of computer diskettes and computer magnetic tapes purchased from commercial vendors. Components used in the Company's turnkey SmartWall and SmartGate server products consist primarily of off-the-shelf computers, memory, displays, power supplies and third-party peripherals (such as hard drives and network interface cards). The Company has agreements with at least two vendors for each of its parts and components. However, the Company orders most of each of its parts and components from a single vendor to maintain quality control and enhance working relationships. The Company uses smart card readers manufactured by two contract manufacturers based on the Company's design specifications. The Company has outsourced to hardware fulfillment companies its hardware and hardware integration requirements. While the Company believes that alternative sources of supply could be obtained, the Company's inability to develop alternative sources if and as required in the 11 future could result in delays or reductions in product shipments that could have a material adverse effect on the Company's business, financial condition and results of operations. REGULATION AND GOVERNMENT CONTRACTS The Company's information security products are subject to the export restrictions administered by the U.S. Department of Commerce, which permit the export of encryption products only with the required level of export license or through a license exception KMI (Key Management Infrastructure). U.S. export laws prohibit the export of encryption products to a number of hostile countries. Although to date the Company has been able to secure all required U.S. Export licenses, including the license exception KMI, there can be no assurance that the Company will continue to be able to secure such licenses in a timely manner in the future, or at all. In certain foreign countries, the Company's distributors are required to secure licenses or formal permission before encryption products can be imported. To date, except for certain limited cases, the Company's distributors have not been denied permission to import the Company's products. LICENSE AGREEMENTS RSA Data Security, Inc. Agreement. The Company's SmartCAT and Wallet Technology software incorporate data encryption and authentication technology owned by RSA. The Company has a perpetual license agreement with RSA, which became effective as of December 30, 1994. On May 23, 1996, RSA exercised an option granted under the agreement to convert its right to receive future royalties into 2% of the Company's outstanding voting securities, after giving effect to the issuance to RSA, until the date of the Company's IPO. Pursuant to a separate agreement between RSA and Massachusetts Institute of Technology ("MIT"), MIT is entitled to receive a portion of any royalties that RSA receives. As a result, the Company issued directly to MIT a portion of the shares of Common Stock to which RSA was entitled under the RSA Agreement. The Company issued 188,705 shares of Common Stock to RSA and MIT immediately prior to consummation of the IPO. RSA was acquired by Security Dynamics in 1996. There can be no assurance that the Company will be able to maintain its license rights for the RSA data encryption and authentication technology, and the loss of such rights could have a material adverse effect on the Company's business, financial condition and results of operations. If either RSA terminates or fails to renew the respective license agreement or take any other action that results in the loss of, or inability to maintain, such licensed technology, the Company may incur lost sales, delays in delivery of the Company's current products and services or delays in the introduction of new products and services, which could have a material adverse effect on the Company's business, financial condition and results of operations. PATENTS, PROPRIETARY TECHNOLOGY, TRADEMARKS AND LICENSES The Company relies on trademark, copyright, patent and trade secret laws, employee and third-party non-disclosure agreements and other methods to protect its proprietary rights. The Company has received three patents, which expire in 2013 and 2014, and has pending four patent applications with the United States Patent and Trademark Office that cover certain aspects of its technology. Prosecution of these patent applications and any other patent applications that the Company may subsequently determine to file may require the expenditure of substantial resources. The issuance of a patent from a patent application may require 24 months or longer. There can be no assurance that the Company's technology will not become obsolete while the Company's applications for patents are pending. There also can be no assurance that any pending or future patent application will be granted, that any future patents will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. The Company has pursued patent protection outside of the United States for the technology covered by the most recently filed patent applications although there can be no assurance that any such 12 protection will be granted or, if granted, that it will adequately protect the technology covered thereby. The Company's success is also dependent in part upon its proprietary software technology. There can be no assurance that the Company's trade secrets or non-disclosure agreements will provide meaningful protection for its proprietary technology and other proprietary information. In addition, the Company relies on "shrink wrap" license agreements that are not signed by the end user to license the Company's products and, therefore, may be unenforceable under the laws of certain jurisdictions. Further, there can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by the Company or that its technology will not infringe upon patents, copyrights or other intellectual property rights owned by others. Further, the Company may be subject to additional risk as it enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of the Company's rights may be ineffective in foreign markets, and technology manufactured or sold abroad may not be protectable in jurisdictions in circumstances where protection is ordinarily available in the United States. The Company believes that, due to the rapid pace of technological innovation for network security products, the Company's ability to establish and, if established, maintain a position of technology leadership in the industry is dependent more upon the skills of its development personnel than upon legal protections afforded its existing or future technology. As the number of security products in the industry increases and the functionality of these products further overlaps, software developers may become subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products. The Company also may desire or be required to obtain licenses from others to effectively develop, produce and market commercially viable products. Failure to obtain those licenses could have a material adverse effect on the Company's ability to market its software security products. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, that the patents underlying such licenses will be valid and enforceable or that the proprietary nature of the unpatented technology underlying such licenses will remain proprietary. There has been, and the Company believes that there may be in the future, significant litigation in the industry regarding patent and other intellectual property rights. Although the Company is not currently the subject of any material intellectual property litigation, litigation involving other software developers, including companies from which the Company licenses certain technology, could have a material adverse affect on the Company's business, financial condition and results of operations. IMPACT OF THE YEAR 2000 ISSUE ON THE COMPANY The Year 2000 Issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Based on a recent assessment, the Company has determined that its principle management information system software, Dynamics and Dynamics C/S+, provided by Great Plains Software, Inc., Fargo, ND, is year 2000 qualified. V-ONE's products are year 2000 qualified. EMPLOYEES As of February 27, 1998, the Company had 71 full-time employees and 3 consultants. Of these employees and consultants, 37 were in sales and marketing, 13 25 were in development and 12 were in finance and administration. None of the Company's employees are represented by a labor union or are subject to a collective bargaining agreement. The Company has never experienced a work stoppage and believes that its employee relations are good. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF COMMON STOCK The Company operates in a rapidly changing environment that involves numerous risks, some of which are beyond the Company's control. The following discussion highlights some of the risks the Company faces. LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT. The Company was founded in February 1993 and introduced its first product in December 1994. Accordingly, the Company did not generate any significant revenues until 1995 when it commenced sales of its SmartWall firewall product and introduced its SmartGate client/server system. Revenues for 1995, 1996 and 1997 are approximately $1,104,000, $6,266,000, and $9,403,000. The Company's growth in recent periods may not be an accurate indication of future results of operations in light of the Company's short operating history, the evolving nature of the network security market and the uncertainty of the demand for Internet and intranet products in general and the Company's products in particular. As of December 31, 1997, the Company had accumulated a deficit of approximately $18,339,000. The Company currently expects to incur additional net losses over the next several quarters as a result of operating expenses incurred to fund research and development and to increase its sales and marketing efforts. Because of the Company's limited operating history, there can be no assurance that the Company will achieve or sustain profitability or significant revenues. To address these risks, the Company must, among other things, continue its emphasis on research and development, successfully execute and implement its marketing strategy, respond to competitive developments and seek to attract and retain talented personnel. There can be no assurance that the Company will successfully address these risks and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL. The Company's success will depend, to a large extent, upon the performance of its senior management and its technical, sales and marketing personnel, many of who have only recently joined the Company. There is keen competition in the software security industry to hire and retain qualified personnel and the Company is actively searching for additional qualified personnel. The Company's success will depend upon its ability to retain and hire additional key personnel. The loss of the services of key personnel or the inability to attract additional qualified personnel could have a material adverse effect upon the Company's results of operations and product development efforts. The Company currently has $1.0 million "key man" life insurance policies on the lives of each of James F. Chen, its Chairman and founder, Jieh-Shan Wang, its Senior Vice President of Engineering, and Marcus J. Ranum, its Chief Scientist (Mr. Ranum is no longer an employee of the Company, but is serving in this capacity as a consultant). This coverage, however, may not be sufficient to mitigate the impact that the loss of the services of Mr. Chen, Mr. Wang or Mr. Ranum would have on the Company. Although the Company has entered into employment agreements with Mr. Chen and Mr. Wang, as well as with David D. Dawson, its President and Chief Executive Officer, that provide for fixed terms of employment, the Company has not historically provided such types of employment agreements to its other employees, including its executive officers. This may adversely impact the Company's ability to attract and retain the necessary technical, management and other key personnel, which could have a material adverse effect upon the Company's results of operations and product development efforts. MANAGEMENT OF GROWTH. The Company has experienced and may continue to experience substantial growth and turnover in the number of its employees and the scope of its operations, resulting in increased responsibilities for management and added pressure on the Company's operating and financial systems. As of February 27, 14 1998, the Company had 71 employees, as compared to 75 employees on January 1, 1997 and 34 employees on January 1, 1996. To manage growth effectively, the Company will need to continue to improve its operational, financial and management information systems and will need to hire, train, motivate and manage a growing number of employees. Competition is intense for qualified technical, marketing and management personnel. There can be no assurance that the Company will be able to achieve or manage any future growth, and its failure to do so could delay product development cycles and marketing efforts or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company is not currently involved in negotiations for any acquisitions, the Company may undertake acquisitions in the future. Any such transaction would place additional strains upon the Company's management resources. ANTICIPATED FLUCTUATIONS IN QUARTERLY RESULTS. As a result of the Company's limited operating history, the Company does not have historical financial data for a significant number of periods on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future revenues. The Company's quarterly sales and operating results generally depend on the volume and timing of, and ability to fill, orders received within the quarter, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall of demand for the Company's products in relation to the Company's expectations could have an immediate adverse impact on the Company's business, financial condition and results of operations. In addition, the Company plans to increase its operating expenses to fund the rapid growth of its sales and marketing operations, distribution channels, customer support capabilities and research and development activities. To the extent that such expenses precede or are not subsequently followed by increased revenues, the Company's business, financial condition and results of operations may be materially adversely affected. The Company expects to experience significant fluctuations in future quarterly operating results, which may be caused by a number of factors, such as the pricing and mix of products and services sold, the introduction of new products by the Company and its competitors, the timing of orders and the shipment of products, market acceptance of the Company's products, the ability of the Company's direct sales force and resellers to market its products successfully, the mix of distribution channels used and other factors that may be beyond the Company's control. Thus, the Company believes that comparisons of quarterly operating results are not meaningful and should not be relied upon, nor will they necessarily reflect the Company's future performance. Because of the foregoing factors, it is likely that in some future quarters the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. DEPENDENCE ON THE INTERNET AND INTRANETS. The Company's success depends substantially upon the market acceptance of the Internet and Intranets as mediums for commerce and communication. Although the Company believes that its software security products will facilitate and fortify commerce and communication over the Internet and Intranets, there can be no assurance that commerce and communication over the Internet and Intranets will expand or that the Company's products will be adopted for security purposes. In addition, the Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure, such as a reliable network backbone or timely development of complementary products and services. If the Internet and intranets do not develop as mediums of commerce and communication or the Internet does not develop as a viable commercial marketplace due to inadequate development of infrastructure or complementary products and services, or for other reasons beyond the Company's control, the Company's business, financial condition and results of operations may be materially adversely affected. RISKS ASSOCIATED WITH THE EMERGING NETWORK SECURITY MARKET. The market for the Company's products is in an early stage of development. The rapid development of Internet and Intranet computing has increased the ability of users to access 15 proprietary information and resources and has recently increased demand for network security products. Because the market for network security products is only beginning to develop, it is difficult to assess the size of the market, the product features desired by the market, the optimal price structure for the Company's products, the optimal distribution strategy and the competitive environment that will develop in this market. Declines in demand for the Company's products, whether as a result of competition, technological change, the public's perception of the need for security products, developments in the hardware and software environments in which these products operate, general economic conditions or other factors beyond the Company's control, could have a material adverse effect on the Company's business, financial condition or results of operations. DEPENDENCE ON PRINCIPAL PRODUCTS; UNCERTAINTY PRODUCT ACCEPTANCE. The Company currently generates most of its revenues from its SmartWall and SmartGate products. Accordingly, any factor that adversely affects sales of these products could have a material adverse effect on the Company. While SmartWall and SmartGate have met with a favorable degree of market acceptance since sales of SmartWall commenced in the first quarter of 1995 and since SmartGate was introduced in the fourth quarter of 1995, respectively, there can be no assurance that SmartWall or SmartGate will continue to be accepted in the future. In addition, there can be no assurance that there will be market acceptance of any of the Company's products that may be introduced in the future. The Company's success will, in part, depend upon the Company's ability to design, develop and introduce new products, services and enhancements on a timely basis to meet changing customer needs, technological developments and evolving industry standards. INTELLECTUAL PROPERTY RIGHTS; INFRINGEMENT CLAIMS. The Company relies on trademark, copyright, patent and trade secret laws, employee and third-party non-disclosure agreements and other methods to protect the proprietary rights of the Company and the companies from which the Company licenses technology. Prosecution of patent applications and any other patent applications that the Company may subsequently determine to file may require the expenditure of substantial resources. The issuance of a patent from a patent application may require 24 months or longer. There can be no assurance that the Company's technology will not become obsolete while the Company's applications for patents are pending. There also can be no assurance that any pending or future patent application will be granted, that any future patents will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. The Company currently intends to pursue patent protection outside of the United States for the technology covered by the most recently filed patent application although there can be no assurance that any such protection will be granted or, if granted, that it will adequately protect the technology covered thereby. The Company currently holds patents on its Wallet Technology, its SmartGate Technology, and its Smartcard Technology. The Company's success is also dependent in part upon its proprietary software technology and technology licensed from others. There can be no assurance that the Company's trade secrets or license or non-disclosure agreements will provide meaningful or contractually required protection for the proprietary technology and other proprietary information of the Company and the companies from which the Company licenses technology. Further, the Company relies on "shrink wrap" license agreements that are not signed by the end user to license the Company's products and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, there can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by the Company or that its technology will not infringe upon patents, copyrights or other intellectual property rights owned by others. Further, the Company may be subject to additional risk as the Company enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of the Company's rights may be ineffective in foreign markets and technology developed by the Company may not be protectable in such foreign jurisdictions in circumstances where protection is ordinarily available in the United States. 16 The Company believes that, due to the rapid pace of technological innovation for network security products, the Company's ability to establish and, if established, maintain a position of technology leadership in the industry is dependent more upon the skills of its development personnel than upon legal protections afforded its existing or future technology. As the number of security products in the industry increases and the functionality of these products further overlap, software developers may become subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products. The Company also may desire or be required to obtain licenses from others in order to develop, produce and market commercially viable products effectively. Failure to obtain those licenses could have a material adverse effect on the Company's ability to market its software security products. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, that the patents underlying such licenses will be valid and enforceable or that the proprietary nature of the unpatented technology underlying such licenses will remain proprietary. Any claims or litigation, with or without merit, could be costly and could result in a diversion of management's attention, which could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in such claims or litigation could also have a material adverse effect on the Company's business, financial condition and results of operations. RISK OF ERRORS OR FAILURES; PRODUCT LIABILITY RISKS. The complex nature of the Company's products can make the detection of errors or failures in certain of its software products difficult when such products are introduced, which may result in delays and lost revenues during the correction process. In addition, there can be no assurance that any technology licensed by the Company for use in its products does not contain errors that would adversely affect such products. Despite testing by the Company and current and prospective customers, there can be no assurance that errors will not be discovered in new products or releases after commencement of commercial shipments, possibly resulting in delay, adverse publicity, loss of market acceptance and claims against the Company. A malfunction or the inadequate design of the Company's products could result in tort or warranty claims. The Company generally attempts to reduce the risk of such losses to itself and to the companies from which the Company licenses technology through warranty disclaimers and liability limitation clauses in its license agreements. There can be no assurance that the Company has obtained adequate contractual protection in all instances or where otherwise required under agreements the Company has entered into with others or that such measures will be effective in limiting the Company's liability to end users and to the companies from which the Company licenses technology. The Company also relies on "shrink wrap" license agreements that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. The Company currently has product liability insurance. However, there can be no assurance that adequate insurance coverage was obtained by the Company, and any product liability claim against the Company for damages resulting from security breaches could be substantial and could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, a well-publicized actual or perceived security breach could adversely affect the market's perception of security products in general, or the Company's products in particular, regardless of whether such breach is attributable to the Company's products. This could result in a decline in demand for the Company's products, which could have a material adverse effect on the Company's business, financial condition and results of operations. CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS; RISK OF NEW PRODUCT INTRODUCTION. The network security industry is characterized by rapid changes, including evolving industry standards, frequent new product introductions, continuing advances in technology and changes in customer requirements and preferences. Advances in techniques by individuals and entities seeking to gain unauthorized access to networks could expose the Company's existing products to new and unexpected attacks and require accelerated development of new products or 17 enhancements to existing products. There can be no assurance that the Company will be able to counter challenges to its current products, that the Company's future product offerings will keep pace with technological changes implemented by competitors or persons seeking to breach network security, that its products will satisfy evolving consumer preferences or that the Company will be successful in developing and marketing products for any future technology. Failure to develop and introduce new products and product enhancements in a timely fashion could have a material adverse effect on the Company's business, financial condition and results of operations. RISK OF DEFECTS AND DEVELOPMENT COSTS. The Company may experience schedule overruns in software development triggered by factors such as insufficient staffing or the unavailability of development-related software, hardware or technologies. Further, when developing new software products, the Company's development schedules may be altered as a result of the discovery of software bugs, performance problems or changes to the product specification in response to customer requirements, market developments or Company initiated changes. Changes in product specifications may delay completion of documentation, packaging or testing, which may, in turn, affect the release schedule of the product. When developing complex software products, the technology market may shift during the development cycle, requiring the Company either to enhance or change a product's specifications to meet a customer's changing needs. These factors may cause a product to enter the market behind schedule, which may adversely affect market acceptance of the product or place it at a disadvantage to a competitor's product that has already gained market share or market acceptance during the delay. EVOLVING DISTRIBUTION CHANNELS. The Company has previously relied primarily on its direct sales force for the sale and marketing of its products, but is now focusing on a channel distribution strategy. The Company has added to its internal sales and marketing staff in orders to increase this sales effort. There can be no assurance the cost of such expansion will not exceed the revenues generated or that the Company's sales and marketing organization will successfully compete against the more extensive and well-funded sales and marketing operations of certain of its current and future competitors. The Company has developed a distribution strategy that involves the development of strategic alliances with resellers and international distributors to enable the Company to achieve broad market penetration. Although the Company has begun to establish its reseller distribution channel, there can be no assurance that the Company will be able to continue to attract integrators and resellers that will be able to market the Company's products effectively and will be qualified to provide timely and cost-effective customer support and service. The Company generally ships products to distributors, integrators and resellers on a purchase-order basis, and its distributors, integrators and resellers generally carry competing product lines. Therefore, there can be no assurance that any distributor, integrator or reseller will continue to represent the Company's products. The inability to recruit, or the loss of, important sales personnel, distributors, integrators or resellers could materially adversely affect the Company's business, financial condition and results of operations in the future. In addition, the Company has experienced difficulty in collecting, on a timely basis, receivables from these distributors. Although the Company has begun to make efforts to collect these receivables on a timely basis, there can be no assurance that the Company will be able to do so and the failure to collect such receivables could have a material adverse effect on the Company's financial condition and results of operations. INTERNATIONAL SALES. The Company has increased its presence in overseas markets by expanding international distribution relationships for its suite of network security products, including SmartWall and SmartGate. There can be no assurance, however, that the Company will be successful in expanding its relationships with international distributors or in gaining commercial acceptance of its products abroad. To the extent that the Company expands international sales, currency fluctuations could make its products less competitive in foreign markets and contribute to fluctuations in the Company's operating results. Political 18 instability, difficulties in staffing and managing international operations, potential insolvency of international resellers, longer receivable collection periods and difficulty in collecting accounts receivable also pose risks to the development of international marketing efforts. Moreover, the laws of certain countries, or the enforcement thereof, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. There can be no assurance that these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. LONG SALES CYCLE; SEASONALITY. Sales of the Company's products generally involve a significant commitment of capital by customers, with the attendant delays frequently associated with large capital expenditures. Prior to such sales, the Company often permits customers to evaluate products being considered for license, generally for a period of up to 30 days. For these and other reasons, the sales cycle associated with the Company's products is likely to be lengthy and subject to a number of significant risks over which the Company has little or no control and, as a result, the Company believes that its quarterly results are likely to vary significantly in the future. The Company may be required to ship products shortly after it receives orders and, consequently, order backlog, if any, at the beginning of any period may represent only a small portion of that period's expected revenues. As a result, product revenues in any period will be substantially dependent on orders booked and shipped in that period. The Company plans its production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. If revenues fall significantly below anticipated levels, the Company's financial condition and results of operations could be materially and adversely affected. In addition, the Company may experience significant seasonality in its business, and the Company's financial condition and results of operations may be affected by such trends in the future. Such trends may include higher revenues in the third and fourth quarters of the year and lower revenues in the first and second quarters. The Company believes that revenues may tend to be higher in the third quarter due to the fiscal year end of the U.S. Government and higher in the fourth quarter due to year-end budgetary pressures on the Company's commercial customers and the tendency of certain of its existing and prospective customers to implement changes in computer or network security prior to the end of the calendar year. LIQUIDITY AND CAPITAL REQUIREMENTS; DEPENDENCE ON THE PUBLIC OFFERING. The Company anticipates that its existing capital resources will be adequate to satisfy its capital requirements at least through March 31, 1999. The Company's future capital requirements, however, will depend on many factors, including its ability to successfully market and sell its products. To the extent that the funds generated by the Company's initial public offering in 1996, the recent sale of 4,000 shares of Series A Stock (see "Market for Registrant's Common Equity and Related Stockholder Matters"), and from the Company's on-going operations are insufficient to fund the Company's future operating requirements, it may be necessary to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms that are not favorable to the Company and, in the case of equity financings, could result in dilution to the Company's shareholders. If adequate capital is not available, the Company may be required to curtail its operations significantly. RISK OF SALES TO U.S. GOVERNMENT. In 1995, the Company derived a substantial portion of its revenue from the sale of SmartWall to departments and agencies of the U.S. Government and government contractors. In 1996, the Company's revenues were attributable, in part, to a contract with the National Security Agency. In 1997, approximately one-third of the Company's total sales were attributable to contracts with various agencies and departments of the United States government and of state and local governments. Because no government agency or department has an obligation to award contracts to, or to purchase products from, the Company in the future, the Company believes that future government contracts and orders for its network security products will in part be dependent upon the continued favorable reaction of government agencies and departments to the development capabilities of the Company and the reliability and perception of its products. There can be no assurance that the Company will be able to sell its products to government departments and agencies and government contractors or that such sales, if any, will result in commercial acceptance of the Company's products. In addition, reductions or delays in funds available for 19 projects the Company is performing or to purchase its products could have an adverse impact on the Company's government contracts business. Contracts involving the U.S. government are also subject to the risks of disallowance of costs upon audit, changes in government procurement policies, the necessity to participate in competitive bidding and, with respect to contracts involving prime contractors or government-designated subcontractors, the inability of such parties to perform under their contracts. The Company is also exposed to the risk of increased or unexpected costs, causing losses or reduced profits, under government and certain third-party contracts. Any of the foregoing events could have a material adverse effect on the Company's business, financial condition and results of operations. EFFECT OF GOVERNMENT REGULATIONS OF TECHNOLOGY EXPORTS. The Company currently sells its products abroad and intends to continue to expand its relationships with international distributors for the sale of its products overseas. The Company's international sales and operations could be subject to risks such as the imposition of governmental controls, export license requirements, restrictions on the export of critical technology, trade restrictions and changes in tariffs. In particular, the Company's information security products are subject to the export restrictions administered by the U.S. Department of Commerce, which, in the case of some products, permit the export of encryption products only with a specific export license. These export laws also prohibit the export of encryption products to a number of countries, individuals and entities and may restrict exports of some products to a narrow range of end-users. In certain foreign countries, the Company's distributors are required to secure licenses or formal permission before encryption products can be imported. While the Company has obtained a license exception to export strong encryption from the U. S. Department of Commerce, there is no assurance that the Company or its distributors will be able to secure required licenses in a timely manner, if at all. As a result, foreign competitors that face less stringent controls on their products may be able to compete more effectively than the Company in the global network security market. There can be no assurance that these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. MARKET VOLATILITY. The market price of the Company's Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results and other factors, such as announcements of new products by the Company or its competitors and changes in financial estimates by securities analysts or other events. Moreover, the stock market has experienced extreme volatility that has particularly affected the market prices of equity securities of many technology companies and that has often been unrelated and disproportionate to the operating performance of such companies. Broad market fluctuations as well as economic conditions generally and in the software industry specifically, may adversely affect the market price of the Company's Common Stock. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT The executive officers and directors of the Company, and their respective ages at December 31, 1997, are as follows:
NAME AGE POSITION James F. Chen 47 Chairman of the Board and Director David D. Dawson 50 President, Chief Executive Officer and Director Jieh-Shan Wang 43 Senior Vice President and Chief Technical Officer Charles B. Griffis 53 Senior Vice President, Chief Financial Officer and Treasurer Christopher T. Brook 58 Vice President of Product Development 20 Charles C. Chen 43 Director Harry S. Gruner 38 Director William E. Odom 65 Director
JAMES F. CHEN founded the Company in February 1993 and has since served as a director. From inception until November 21, 1997, Mr. Chen served as the Company's President and Chief Executive Officer. On November 21, 1997, Mr. Chen was elected Chairman of the Board. From 1980 to 1990, Mr. Chen managed INTELSAT's worldwide ground network engineering projects. From 1990 to January 1993, he managed the INTELSAT Ground Network Engineering Department and, from March 1992 to January 1993, he also directed its Management Information Systems Division. Mr. Chen holds an M.S. in Computer Science from George Washington University and a B.S. in Electrical Engineering from Georgia Institute of Technology. He is Charles C. Chen's brother. DAVID D. DAWSON has served as the President and Chief Executive Officer of the Company since November 21, 1997 and as a director since December 12, 1997. From March 1996 until November 1997, he served as General Manager of Ascend Communications, Inc., a data communications hardware company. From April 1994 until March 1996, he served as Chief Operating Officer, and from November 1995 until March 1996, he served as Chief Executive Officer of Morning Star Technologies, a firewall and communications company. From October 1992 until April 1994, he was Vice President of Development for Net Express Systems, a data communications hardware company. Mr. Dawson holds an M.S. in Computer Science from Fairleigh Dickinson University, an M.S. in Operations Research from Air Force Institute of Technology, and a B.S. in Electrical Engineering from the United States Military Academy at West Point. JIEH-SHAN WANG, Ph.D. has been with the Company since its inception and has served as the Company's Senior Vice President and Chief Technical Officer since January 1997. From April 1996 to December 1996, Dr. Wang served as the Company's Senior Vice President and Chief Technical Officer, from August 1995 to April 1996, Dr. Wang served as the Company's Vice President of Engineering and, from April 1994 to August 1995, he served as Chief Engineer. Dr. Wang was with INTELSAT from June 1991 to April 1994, as Senior Systems Engineer, where he led a team of engineers in the development of network applications. Dr. Wang holds a Ph.D. in Physics from the University of Maryland and a B.S. in Physics from National Taiwan University. CHARLES B. GRIFFIS has served as the Company's Senior Vice President and Chief Financial Officer since September 1996 and began serving as the Company's Treasurer as of January 1, 1997. Prior to joining the Company, Mr. Griffis served as Senior Vice President and Chief Financial Officer of Masstor Systems Corporation, a company that filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on September 8, 1994, from April 1990 to September 1996. From November 1983 to April 1990, Mr. Griffis served as a General Partner of Griffis, Sandler & Co., a private venture capital firm, and as President of Charles Griffis & Co., Inc., a business consulting firm. Mr. Griffis holds an M.B.A. in Finance from Columbia University and a B.A. in History from Yale University. CHRISTOPHER T. BROOK has served as the Company's Vice President of Product Development since February 1997. From September 1996 to February 1997, Mr. Brook served as the Company's Director of Product Development. Mr. Brook was with GE Information Services, Inc. for approximately 27 years prior to joining the Company, holding a number of technology-related positions including Manager of Directory Services and Network Architecture, Manager of Network Architecture and most recently, Manager of Emerging Technology, where Mr. Brook was responsible for investigating new information technologies. Mr. Brook graduated from Clifton College (Bristol, England) with an emphasis in the Classics. 21 CHARLES C. CHEN, D.D.S has served as a director of the Company since February 1993 and as the Company's Secretary from December 12, 1995 until February 2, 1998. Since July 1982, Dr. Chen has practiced periodontics with Zupnik, Winson & Chen, D.D.S.P.A. Dr. Chen holds a D.D.S. from the Baltimore College of Dental Surgery, University of Maryland, and a B.S. in Chemistry from the University of Maryland. He is James F. Chen's brother. HARRY S. GRUNER has served as a director of the Company since June 1996. Since November 1992, he has been a general partner of JMI Equity Fund, a private equity investment partnership. From August 1986 to October 1992, Mr. Gruner was with Alex. Brown & Sons Incorporated, most recently as a principal. Mr. Gruner is also a director of the META Group, Inc., a syndicated information technology research company, and Hyperion Software, Inc., a financial software company, and numerous other privately held companies. Mr. Gruner holds an M.B.A. from Harvard Business School and a B.A. in History from Yale University. (RETIRED) LT. GEN. WILLIAM E. ODOM has served as a director of the Company since June 1996. Since October 1988, General Odom has served as Director of National Security Studies at the Hudson Institute. He has also served as an adjunct professor at Yale University since January 1989. Prior to his retirement from the military in 1988, General Odom held several military posts including, Director of the National Security Agency, Assistant Chief of Staff for Intelligence and Military Assistant to the National Security Advisor during the Carter Administration. He is also a director of Nichols Research Corporation, American Technologies Group and American Science & Engineering. General Odom holds an M.A. and Ph.D. from Columbia University and a B.S. from the United States Military Academy at West Point. ITEM 2. PROPERTIES The Company leases approximately 28,312 square feet of office space in Germantown, Maryland under a lease agreement that will expire on July 1, 2003. The Company expects that this space will be sufficient for its needs through March 31, 1999. The Company also leases approximately 10,699 square feet, which is sublet in Rockville, Maryland under leases that will expire on April 17, 2001. The Company also leases office space in Rochelle Park, New Jersey, Chicago, Illinois and Walnut Creek, California under leases that can be extended on a month to month basis. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the quarter ended December 31, 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been traded in the Nasdaq National Market since the Company's IPO on October 24, 1996. According to records of the Company's transfer agent, the Company had approximately 73 stockholders of record on March 23, 1998. Because brokers and other institutions hold many of such shares on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders. The following table sets forth the low and high sale prices as of the close of market of the Company's Common Stock from the time of the Company's IPO for each quarter through the quarter ending December 31, 1997 and through the period ended March 23, 1998. 1996 ---- High Sale Price Low Sale Price --------------- -------------- Fourth Quarter $7.750 $4.750 1997 ---- High Sale Price Low Sale Price --------------- -------------- First Quarter $9.250 $5.375 Second Quarter $6.375 $4.000 Third Quarter $6.250 $3.000 Fourth Quarter $5.063 $2.750 1998 ---- High Sale Price Low Sale Price --------------- -------------- First Quarter through March 23, 1998 $4.125 $2.250 The Company has never declared or paid cash dividends on its Common Stock or other securities. The Company anticipates that all of its net earnings, if any, will be retained for use in its operations and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Payments of future cash dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results and current and anticipated cash needs. No dividends may be paid on the Common Stock until all accrued and unpaid dividends, if any, are paid on the Series A Stock. 23 SERIES A CONVERTIBLE PREFERRED STOCK On December 8, 1997, the Company issued 4,000 shares of Series A Stock to Advantage for $4 million in the aggregate. Each share of Series A Stock is convertible into shares of Common Stock and warrants to purchase shares of Common Stock ("Series A Warrants"). As a result of the issuance of the 4,000 shares of Series A Stock, the Company issued to Wharton Capital Partners, Ltd. ("Wharton") for its services as the Company's exclusive financial consultant, warrants ("Consultant Warrants") to purchase 60,000 shares of Common Stock at an exercise price of $4.725 per share. As of January 5, 1998, Wharton assigned Consultant Warrants to purchase 12,000 shares of Common Stock to Dennis Rush. The number of shares issuable on exercise of the Consultant Warrants and the exercise price per share is subject to adjustment in certain circumstances. The Company also paid Wharton a fee of $200,000. The Consultant Warrants expire on December 8, 2002. The terms of the Series A Stock and the Consultant Warrants were determined by the Company's Board of Directors. The shares of Series A Stock, Series A Warrants and Consultant Warrants were issued in reliance on Rule 506 of Regulation D. On December 8, 1997, the Company and Advantage entered into a commitment letter ("Commitment Letter") pursuant to which Advantage agreed to purchase shares of a new series of preferred stock for $4 million on the same terms and conditions as the Series A Stock, subject to certain conditions, some of which are that (1) the Company obtain shareholder approval with respect to the issuance of the Series A Stock and any new series of preferred stock pursuant to certain rules of the Nasdaq National Market, (2) the Company's stockholders' equity, including the Series A Stock, is at least $13.5 million, and (3) the ratio of the Company's total liabilities to stockholders' equity, including the Series A Stock, is not less than 1:4. The commitment becomes effective April 21, 1998 and expires on December 8, 1998. The Company may terminate the Commitment Letter at any time, on ten days' prior notice. Advantage also has the right to terminate the Commitment Letter in certain circumstances. The Company is obligated to pay Advantage a non-refundable commitment fee of $3,333 per month during the stated commitment period. Under the Subscription Agreement dated as of December 3, 1997 between the Company and Advantage, (1) the Company agreed not to sell any equity securities or securities convertible into equity securities entitling the holder to purchase shares of the Company's Common Stock at a price below the market price of the Common Stock on the date of such issuance or acquisition ("Discounted Securities") until April 21, 1998 and (2) the Company granted Advantage a right of first refusal on sales of Discounted Securities until December 8, 1998. Under a letter dated October 22, 1997 between the Company and Wharton ("Wharton Letter"), the Company retained Wharton as its exclusive financial consultant and granted Wharton an exclusive on certain offshore or discounted financings for a period that ended on March 22, 1998 and a right of first refusal on any offshore or discounted financings until June 8, 1998. Wharton has agreed that its rights as described in the preceding sentence are subject and secondary to the rights of Advantage and do not apply to any sale of preferred stock pursuant to the Commitment Letter. Under the Wharton Letter, the Company is obligated to issue additional warrants to Wharton to purchase 15,000 shares of Common Stock for each $1 million of additional financing provided by persons introduced by Wharton (including the transaction contemplated by the Commitment Letter) at an exercise price of $4.725 per share and to pay Wharton a consulting fee equal to 5% of the amount raised. The net proceeds of the offering ($3.8 million) have been, and the net proceeds of any additional issuance pursuant to the Commitment Letter will be, used for general working capital purposes. On December 3, 1997, the Company entered into a registration rights agreement with Advantage ("Advantage Registration Rights Agreement") and, on December 8, 24 1997, the Company entered into a registration rights agreement with Wharton ("Wharton Registration Rights Agreement" and, collectively with the Advantage Registration Rights Agreement, the "Registration Rights Agreements"). As of January 5, 1998, Dennis Rush became a beneficiary of the Wharton Registration Rights Agreement. Under the Registration Rights Agreements, the Company was obligated to file a registration statement with the Securities and Exchange Commission ("SEC") by January 7, 1998 registering the shares of Common Stock issuable upon conversion of the Series A Stock and the shares of Common Stock issuable on exercise of the Series A Warrants and the Consultant Warrants. This registration statement was timely filed and has been declared effective by the SEC. Advantage, Wharton and Rush have also been granted certain piggyback registration rights. The following is a summary of the terms and features of the Series A Stock: DIVIDENDS. Each share of Series A Stock is entitled to receive dividends at a rate of $50.00 per annum, which are cumulative and accrue without interest (other than with respect to dividends in arrears). Dividends are payable on March 1, June 1, September 1 and December 1 of each year. Dividends not paid when due bear interest at 12% per annum. The Company may pay dividends on the Series A Stock in shares of Common Stock valued at the "Computed Price" of the Common Stock. The "Computed Price" of a share of Common Stock is the product of the applicable "Conversion Percentage" (which term is described below) and the "Average Market Price." The "Average Market Price" is the average of the lowest sale price on the Nasdaq National Market on each of the five trading days having the lowest sale price during the 25 consecutive trading days prior to the measurement date, which in the case of a dividend paid in shares of Common Stock is the dividend payment date. No dividends may be paid on any parity dividend stock or junior dividend stock (such as the Common Stock) until all accrued and unpaid dividends are paid on the Series A Stock. CONVERSION RIGHTS. Each share of Series A Stock is convertible at the option of the holder into shares of Common Stock and Series A Warrants. The number of Series A Warrants issuable on conversion of a share of Series A Stock is the number of shares of Common Stock issued on conversion per share of Series A Stock divided by 5. The exercise price per share of each Series A Warrant is $4.77 per share. Each Series A Warrant is exercisable for 5 years from the date of conversion. The number of shares of Common Stock issuable on exercise of the Series A Warrants and the exercise price per share is subject to adjustment in certain circumstances. The number of shares of Common Stock issuable per share of Series A Stock is determined by dividing the sum of (a) $1,000, (b) accrued and unpaid dividends, and (c) interest on dividends in arrears ("Conversion Amount") by the lesser of (1) $4.77 ("Ceiling Price") and (2) the product of the applicable Conversion Percentage and the Average Market Price on the conversion date. The "Conversion Percentage" is generally 85%; however, if (1) the registration statement ceases to be available for use by any holder of Series Stock that is named therein as a selling stockholder for any reason, or (2) a holder of Series A Stock becomes unable to convert any shares of Series A Stock in accordance with the Certificate of Designations of Series A Convertible Preferred Stock ("Series A Certificate") (other than by reason of the 4.9% limitation described below), then (A) the applicable Conversion Percentage is permanently reduced by 2% per month up to a maximum aggregate reduction in the Conversion Percentage of 10% and (B) the Ceiling Price is permanently reduced by $.0954 per month up to a maximum aggregate reduction in the Ceiling Price of $.477. However, in lieu of each such reduction, the Company can make cash payments equal to 2% of the aggregate subscription price per share ($1,000 per share) of Series A Stock (which amount is limited to 10% of the aggregate subscription price). The Conversion Amount is adjusted in the event the Company issues certain rights or warrants or distributes to the holders of securities junior to the Series A Stock evidences of indebtedness or assets. 25 No holder of Series A Stock is entitled to receive shares of Common Stock on conversion of its Series A Stock or on exercise of its Series A Warrants to the extent that the sum of (1) the shares of Common Stock owned by such holder and its affiliates and (2) the shares of Common Stock issuable on conversion of the Series A Stock and on exercise of its Series A Warrants would result in beneficial ownership by such holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock. Beneficial ownership for this purpose is determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, excluding shares of Common Stock so owned through ownership of unconverted shares of Series A Stock and unexercised Series A Warrants. If a holder tenders his or her shares of Series A Stock for conversion and does not receive certificates for all of the shares of Common Stock and Series A Warrants to which such holder is entitled when required, then, among other things, the Ceiling Price otherwise applicable to such conversion is reduced by $.0954 and the Conversion Percentage otherwise applicable to such conversion is reduced by 2%. RANKING. The Series A Stock ranks (1) senior to the Common Stock, (2) on a parity with any additional series of the class of preferred stock, which series the Board of Directors may from time to time authorize, (3) on a parity with the shares of any additional class of preferred stock (or series of preferred stock of such class) that the Board of Directors or the stockholders may from time to time authorize, which class (or series thereof) by its terms ranks on a parity with the shares of Series A Stock and (4) senior to any other class or series of preferred stock (other than as stated in the immediately preceding clauses (2) and (3)) of the Company. STATED CAPITAL. Under the Series A Certificate, the amount to be represented in stated capital at all times for each share of Series A Stock is required to be the greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2) to the extent legally available, the accrued but unpaid dividends on such share of Series A Stock, and (3) an amount equal to the accrued and unpaid interest on dividends in arrears through the date of determination by (b) the applicable Conversion Percentage and (ii) an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock that would, at the time of such determination, be issuable on conversion of one share of Series A Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears (determined without regard to the 4.9% limitation) times (y) the arithmetic average of the closing bid price of the Common Stock for the five consecutive trading days ending one trading day prior to the date of such determination. The Company is required to take such action as may be required to maintain the required amount of stated capital not less frequently than monthly. VOTING RIGHTS. The Series A Stock generally has no voting rights except as otherwise provided by the Delaware General Corporation Law. However, the affirmative vote or consent of the holders of a majority of the outstanding shares of the Series A Stock, voting separately as a class, will be required for (1) any amendment, alteration or repeal, whether by merger or consolidation or otherwise, of the Company's Certificate of Incorporation if the amendment, alteration or repeal materially and adversely affects the powers, preferences or special rights of the Series A Stock, or (2) the creation and issuance of any security of the Company that is senior to the Series A Stock as to dividend rights or liquidation preference; provided, however, that any increase in the authorized preferred stock of the Company or the creation and issuance of any stock that is both junior as to dividend rights and liquidation preference is not deemed to affect materially and adversely such powers, preferences or special rights and any such increase or creation and issuance may be made without any such vote by the holders of Series A Stock except as otherwise required by law. MANDATORY REDEMPTION. The Series A Certificate provides that the Company is not obligated to issue, upon conversion of the Series A Stock, more than the number of shares of Common Stock that the Company may issue pursuant to the rules of Nasdaq ("Maximum Share Amount"), less the aggregate number of shares of Common Stock issued by the Company as dividends on the Series A Stock. The Company is 26 seeking approval from the holders of Common Stock to issue shares of Common Stock in connection with the Series A Stock in excess of the amounts permitted by Nasdaq Rule 4460(i)(1)(D). If the Company would not be obligated to convert shares of Series A Stock because of the Maximum Share Amount limitation, the Company is required to give a notice to that effect to each holder of Series A Stock. In such event, a holder may require the Company to redeem such portion of its Series A Stock that cannot be converted as a result of this limitation at the "Share Limitation Redemption Price" per share. The "Share Limitation Redemption Price" is the greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends on the share of Series A Stock to be redeemed, and (3) an amount equal to the accrued and unpaid interest on dividends in arrears on such share through the applicable redemption date by (b) the applicable Conversion Percentage and (ii) an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock that would, but for the redemption pursuant to this provision of the Series A Certificate, be issuable on conversion of one share of Series A Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears (determined without regard to the 4.9% limitation) times (y) the arithmetic average of the closing bid price of the Common Stock for the five consecutive trading days ending one trading day prior to the redemption date. In addition, the Company is obligated to redeem all outstanding shares of Series A Stock on December 8, 2000 at the "Redemption Price" per share. The "Redemption Price" is the greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends on the share of Series A Stock to be redeemed, and (3) an amount equal to the accrued and unpaid interest on dividends in arrears on such share through the applicable redemption date by (b) the applicable Conversion Percentage and (ii) an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock that would, but for the redemption pursuant to this provision of the Series A Certificate, be issuable on conversion of one share of Series A Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears (determined without regard to the 4.9% limitation) times (y) the arithmetic average of the closing bid price of the Common Stock for the five consecutive trading days ending one trading day prior to the redemption date. OPTIONAL REDEMPTION BY THE COMPANY. As long as the Company is in compliance in all material respects with its obligations to the holders of Series A Stock under the Series A Certificate and the Advantage Registration Rights Agreement, the Company may redeem all or, from time to time, part of the outstanding shares of Series A Stock at the Redemption Price per share. OPTIONAL REDEMPTION BY THE HOLDERS OF SERIES A STOCK. In the event an "Optional Redemption Event" occurs, each holder of Series A Stock has the right to require the Company to redeem all or a portion its shares of Series A Stock at the "Optional Redemption Price" per share. "Optional Redemption Event" means any one of the following: (1) for any period of five consecutive trading days there is no closing bid price of the Common Stock on any national securities exchange or the Nasdaq National Market; (2) the Common Stock ceases to be listed for trading on the Nasdaq National Market, the New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX") or the Nasdaq SmallCap Market; (3) the inability for 30 or more days (whether or not consecutive) of any holder of shares of Series A Stock who is entitled to optional redemption rights to sell such shares of Common Stock issued or issuable on conversion of shares of Series A Stock pursuant to the registration statement for any reason on each of such 30 days; (4) the Company fails or defaults in the timely performance of any material obligation to a holder of shares of Series A Stock under the terms of the Series A Certificate or under the Advantage Registration Rights Agreement or any other agreements or documents entered into in connection with the issuance of shares of Series A Stock; (5) any consolidation or merger of the Company with or into another entity (other than a merger or consolidation of a subsidiary of the Company into the Company or a wholly owned subsidiary of the Company) where the shareholders of the Company immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the 27 surviving corporation of such consolidation or merger immediately following such transaction or the common stock of such surviving corporation is not listed for trading on the Nasdaq National Market, the NYSE, the AMEX or the Nasdaq SmallCap Market; or (6) the taking of any action, including any amendment to the Company's Certificate of Incorporation, that materially and adversely affects the rights of any holder of shares of Series A Stock. The "Optional Redemption Price" is the greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends on the share of Series A Stock to be redeemed, and (3) an amount equal to the accrued and unpaid interest on dividends in arrears on such share through the applicable redemption date by (b) the applicable Conversion Percentage and (ii) an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock that would, but for the redemption pursuant to this provision of the Series A Certificate, be issuable on conversion of one share of Series A Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears (determined without regard to the 4.9% limitation) times (y) the arithmetic average of the closing bid price of the Common Stock for the five consecutive trading days ending one trading day prior to the redemption date. LIMITATIONS ON REDEMPTIONS AND TENDER OFFERS. Neither the Company nor any subsidiary of the Company may redeem, repurchase or otherwise acquire any shares of Common Stock or other securities of the Company junior to the Series A Stock in dividend rights or liquidation preference ("Junior Stock") if the number of shares so repurchased, redeemed or otherwise acquired in such transaction or series of related transactions (excluding any shares surrendered to the Company in accordance with one of its stock option plans) is more than either (x) 5% of the number of shares of Common Stock or such Junior Stock, as the case may be, outstanding immediately prior to such transaction or series of related transactions or (y) 1% of the number of shares of Common Stock or Junior Stock, as the case may be, outstanding immediately prior to such transaction or series of related transactions if such transaction or series of related transactions is with any one person or group of affiliated persons, unless the Company or such subsidiary offers to purchase for cash from each holder of shares of Series A Stock at the time of such redemption, repurchase or acquisition the same percentage of such holder's shares of Series A Stock as the percentage of the number of outstanding shares of Common Stock or Junior Stock, as the case may be, to be so redeemed, repurchased or acquired at a purchase price per share of Series A Stock equal to the greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends on such share of Series A Stock, plus (3) an amount equal to the accrued and unpaid interest on dividends in arrears through the date of purchase by (b) the applicable Conversion Percentage and (ii) an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock that would, but for this purchase, be issuable on conversion of one share of Series A Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears (determined without regard to the 4.9% limitation) times (y) the arithmetic average of the closing bid price of the Common Stock for the five consecutive trading days ending one trading day prior to the date of purchase. Neither the Company nor any subsidiary of the Company may (1) make any tender offer or exchange offer ("Tender Offer") for outstanding shares of Common Stock, unless the Company contemporaneously therewith makes an offer, or (2) enter into an agreement regarding a Tender Offer for outstanding shares of Common Stock by any person other than the Company or any subsidiary of the Company, unless such person agrees with the Company to make an offer, in either such case to each holder of outstanding shares of Series A Stock to purchase for cash at the time of purchase in such Tender Offer the same percentage of shares of Series A Stock held by such holder as the percentage of outstanding shares of Common Stock offered to be purchased in such Tender Offer at a price per share of Series A Stock equal to the greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends on such share of Series A Stock, and (3) an amount equal to the accrued and unpaid interest on dividends in arrears through the date of purchase by (b) the applicable Conversion Percentage and (ii) an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock that would, but 28 for this purchase, be issuable on conversion of one share of Series A Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears (determined without regard to the 4.9% limitation) times (y) the highest price per share of Common Stock offered in such Tender Offer. SINKING FUND. The shares of Series A Stock are not subject to the operation of a purchase, retirement or sinking fund. LIQUIDATION PREFERENCE. The holders of the Series A Stock are entitled to a liquidation preference of $1,000 per share plus accrued and unpaid dividends plus interest on accrued and unpaid dividends in arrears. WARRANT GRANTED TO DAVID D. DAWSON On November 21, 1997, the Company issued warrants to purchase 300,000 shares of Common Stock at an exercise price of $3.125 per share to its President and Chief Executive Officer, David D. Dawson, in connection with his employment by the Company. These warrants were issued in reliance on Rule 506 of Regulation D. WARRANT GRANTED TO SVG On November 4, 1997, the Company issued warrants to purchase 25,000 shares of Common Stock at an exercise price of $3.875 per share to SVG in connection with the execution of a consulting agreement between SVG and the Company. These warrants were issued in reliance on Section 4(2) of the Securities Act of 1933. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data set forth below with respect to the Company's Statements of Operations from February 16, 1993 (date of inception) to December 31, 1993 and for the years ended December 31, 1994, 1995, 1996 and 1997 and balance sheets as of December 31, 1993, 1994, 1995, 1996 and 1997 are derived from the financial statements of the Company included elsewhere in this Annual Report. The financial data set forth below should be read in conjunction with the Company's financial statements and the notes thereto included elsewhere in this Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
For the Period February 16, Year ended December 31, 1993 (date of inception) to December 31, ------------------------------------------------------------ 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Statement of Operations Data: Revenues: Products $ --- $ --- $1,101,418 $ 5,955,592 $ 8,899,973 Consulting and services 76,183 59,716 2,083 310,557 502,771 --------- --------- ---------- ----------- ----------- Total revenues 76,183 59,716 1,103,501 6,266,149 9,402,744 --------- --------- ---------- ----------- ----------- 29 Cost of revenues: Products --- --- 376,359 1,969,117 2,064,645 Consulting and services 38,090 35,114 800 56,502 96,949 ---------- --------- --------- ---------- ---------- Total cost of revenues 38,090 35,114 377,159 2,025,619 2,161,594 ---------- --------- --------- ---------- ---------- Gross profit 38,093 24,602 726,342 4,240,530 7,241,150 ---------- --------- --------- ---------- ---------- Operating expenses: Sales and marketing 6,652 36,212 130,917 3,744,630 9,341,208 General and administrative 74,212 315,192 1,350,361 4,879,940 3,801,828 Research and development 21,000 127,926 304,973 1,960,727 3,012,051 Restructuring costs --- --- --- --- 800,000 ---------- ---------- ---------- ---------- ---------- Total operating expenses 101,864 479,330 1,786,251 10,585,297 16,955,087 ---------- ---------- ---------- ---------- ---------- Operating loss (63,771) (454,728) (1,059,909) (6,344,767) (9,713,937) ---------- ---------- ---------- ----------- ---------- Other (expense) income: Interest expense (1,913) (2,360) (66,615) (518,965) (13,130) Interest income --- --- 4,513 168,176 341,469 ---------- ---------- ----------- ----------- ---------- Total other expenses (1,913) (2,360) (62,102) (350,789) 328,339 ---------- ---------- ----------- ----------- ---------- Net loss (65,684) (457,088) (1,122,011) (6,695,556) (9,385,598) Dividend on preferred stock --- --- --- --- 12,600 Deemed dividend on preferred stock --- --- --- --- 600,000 ---------- ---------- ----------- ----------- ----------- Loss attributable to holder of common stock $ (65,684) $ (457,088) $(1,122,011) $(6,695,556) $(9,998,198) ========== ========== =========== =========== =========== Basic loss per share attributable to holder of common stock $ (.01) $ (.06) (0.14) $ (0.72) $ (0.78) ========== ========== =========== =========== =========== Weighted average shares outstanding 6,186,978 8,046.766 8,099,223 9,245,305 12,868,859 ========== ========== =========== =========== =========== December 31, ---------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ----- ----- ---- Balance Sheet Data: Working capital (deficit) $ (19,436) $ 245,598 $ (168,311) $12,643,160 $ 7,858,856 Total assets 28,182 394,906 2,050,602 15,697,415 11,860,086 Long-term debt, less current --- --- 126,908 134,704 300,861 portion Series A Convertible Preferred --- --- --- --- 3,766,297 Stock Total shareholder's equity (11,523) 318,028 (139,938) 13,993,745 6,158,020 (deficit) Cash dividends per common share --- --- --- --- ---
30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW The Company offered 3,000,000 shares of Common Stock, par value $0.001 ("Common Stock"), in its initial public offering ("IPO") on October 24, 1996 at $5.00 per share. On November 22, 1996, the Company's underwriters exercised their option to purchase an additional 200,000 shares of Common Stock from the Company (117,791 shares) and certain shareholders (82,209 shares) for $5.00 per share. Net of the underwriting discount and related expenses, the Company raised approximately $13,195,000 from the IPO and the underwriter's exercise of the overallotment. On December 8, 1997, the Company issued 4,000 shares of Series A Stock to Advantage for $4 million in the aggregate. Each share of Series A Stock is convertible into shares of Common Stock and Series A Warrants to purchase Common Stock. Net of fees and related expenses, the Company raised approximately $3,766,000. The Company generates revenues primarily from software licenses and sale of hardware products and, to a lesser extent, consulting and related services. The Company anticipates that revenues from products will continue to be the principal source of the Company's total revenues. Under the Company's revenue recognition policy, revenues are generally recognized from the license of software upon the signing of a contract and the product shipment. The Company often permits customers to evaluate products being considered for purchase, generally for a period of up to 30 days, in which event the Company does not recognize revenues until the customer has accepted the product. Accordingly, the Company's revenue recognition policy does not necessarily correlate with the signing of a contract or the shipment of a product. As of December 31, 1997, the Company had an accumulated deficit of approximately $18,339,000. The Company currently expects to incur net losses over the next several quarters as a result of greater operating expenses incurred to fund research and development and to increase its sales and marketing efforts. To date, the Company has expensed all development costs as incurred in compliance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed." The Company believes that with its current development cycle, it will be able to continue to expense all development costs as incurred. The Company recently has hired and intends to continue to hire additional senior level personnel. In addition, general and administrative costs have increased significantly since the Company's date of inception and the Company expects such costs to continue to increase in the future. In 1997, product revenues from Internet Solutions Ltd. and Government Technology Services, Inc. ("GTSI") accounted for approximately 23% and 11%, respectively, of total revenues. In 1996, product revenues from MCI Telecommunications Corporation ("MCI") and the National Security Agency ("NSA") accounted for approximately 12% and 12%, respectively, of total revenues. In 1995, product revenues from GEIS, NCTS Washington, a division of the Department of the Navy, and the U.S. Defense Information Systems Agency accounted for approximately 19%, 10%, and 10%, respectively, of total revenues. RESULTS OF OPERATIONS The following table sets forth-certain statement of operations data as a percentage of revenues for the periods indicated: 31 For the Period Ended Dec. 31, Dec. 31, Dec. 31, 1995 1996 1997 --------- -------- -------- Revenues: Products 99.8 % 95.0 % 94.7 % Consulting and services 0.2 5.0 5.3 ------ ------ ------ Total revenues 100.0 100.0 100.0 ------ ------ ------ Cost of revenues: Products 34.1 31.4 22.0 Consulting and services 0.1 0.9 1.0 ------ ------ ------ Total cost of revenues 34.2 32.3 23.0 ------ ------ ------ Gross profit 65.8 67.7 77.0 ------ ------ ------ Operating expenses: Sales and marketing 11.9 59.8 99.3 General and administrative 122.4 77.9 40.4 Research and development 27.6 31.3 32.0 Restructuring costs - - 8.5 ------ ------ ------ Total operating expenses 161.9 169.0 180.3 ------ ------ ------ Operating loss (96.1) (101.3) (103.3) ------ ------ ------ Other (expense) income: Interest expense (6.0) (8.3) (0.1) Interest income 0.4 2.7 3.6 ------ ------ ------ Total other expenses (5.6) (5.6) 3.5 ------ ------ ------ Net loss (101.7) (106.9) (99.8) Dividend on preferred stock - - (0.1) Deemed dividend on - - (6.4) preferred stock ------ ------ ------ Loss attributable to holders of (101.7)% (106.9)% (106.3)% common stock ====== ====== ====== 32 COMPARISON OF YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 REVENUES Total revenues increased from approximately $1,104,000 in 1995, to approximately $6,266,000 in 1996 and to approximately $9,403,000 in 1997. Product revenues are derived principally from software licenses and the sale of hardware products. Product revenues increased significantly from approximately $1,101,000 in 1995, to approximately $5,956,000 in 1996 and to approximately $8,900,000 in 1997. The increase from 1995 to 1996 was due principally to increased sales of the Company's SmartWall product and the introduction of its SmartGate product in December 1995, along with increased sales and marketing efforts. The increase from 1996 to 1997 was due principally to increased sales of the Company's SmartGate product. Consulting and services revenues are derived principally from fees for services complementary to the Company's products, including consulting, maintenance and training. Consulting and services revenues increased substantially from approximately $2,000 in 1995, to approximately $311,000 in 1996 and to approximately $503,000 in 1997. Consulting and services revenues increased from 1995 to 1996 and from 1996 to 1997 as the Company increased staffing to support consulting and services and product sale installations. COST OF REVENUES Total cost of revenues as a percentage of total revenues were 34.2%, 32.3% and 23% in 1995, 1996 and 1997, respectively. Cost of product revenues consists principally of the costs of computer hardware, licensed technology, manuals and labor associated with the distribution and support of the Company's products and shipping costs. Cost of product revenues increased from approximately $376,000 in 1995, to approximately $1,969,000 in 1996 and to approximately $2,065,000 in 1997. Cost of product revenues as a percentage of product revenues was 34.2%, 33.0% and 23.2% for 1995, 1996 and 1997, respectively. The dollar increase and percentage decrease in 1996 were primarily attributable to an increase in revenues from increased sales and marketing efforts and from the introduction of SmartGate, combined with a higher product mix of software licenses to turnkey hardware sales. The dollar increase and substantial percentage decrease in 1997 were primarily attributable to an increase in revenues combined with a higher mix of SmartGate software licenses to SmartWall turnkey hardware sales. Cost of consulting and services revenues consists principally of personnel and related costs incurred in providing consulting, support and training services to customers. Cost of consulting and services revenues increased significantly from approximately $800 in 1995, to approximately $57,000 in 1996 and to $97,000 in 1997. Cost of consulting and services revenues as a percentage of consulting and services revenues was 38.4%, 18.2%, and 19.3% for 1995, 1996 and 1997, respectively. The dollar increases in 1996 over 1995 and in 1997 over 1996 were attributable to increased staffing to support consulting and services. The percentage decrease from 1995 to 1996 was principally due to allocation over a larger revenue base. The percentage increase from 1996 to 1997 was principally due to a reduced emphasis on consulting and a greater concentration on training and support. OPERATING EXPENSES Sales and Marketing -- Sales and marketing expenses consist principally of the costs of sales and marketing personnel, advertising, promotions and trade shows. Sales and marketing expenses increased from approximately $131,000 in 1995, to approximately $3,745,000 in 1996 and to approximately $9,341,000 in 1997. Sales and marketing expenses as a percentage of total revenues were 11.9%, 59.8% and 99.3% in 1995, 1996 and 1997, respectively. The dollar increase in 1996 was principally due to increased personnel, higher levels of sales and marketing efforts and sales associated with the sales of SmartWall and SmartGate. The percentage increase was due to significantly higher expenses. The dollar increase in 1997 was principally due to increased personnel, higher levels of sales and marketing efforts, the recognition of approximately $1,332,000 for bad 33 debt expenses and an increase of approximately $1,248,000 in allowances for accounts receivable. The percentage increase was due to significantly higher expenses. Sales and marketing expenses are expected to decrease both in the aggregate and as a percentage of total revenues in the near term as a result of the Company's efforts to reduce expense. This statement is based on current expectations. It is forward-looking, and the actual results could differ materially. For information about factors that could cause the actual results to differ materially, please refer to Item 1. "Business - Risk Factors that May Affect Future Results and Market Price of Common Stock" in the Company's Form 10-K. General and Administrative -- General and administrative expenses consist principally of the costs of finance, management and administrative personnel and facilities expenses. General and administrative expenses increased substantially from approximately $1,350,000 in 1995 to approximately $4,880,000 in 1996 and decreased significantly to approximately $3,802,000 in 1997. General and administrative expenses as a percentage of total revenues were 122.4%, 77.9% and 40.4% in 1995, 1996 and 1997, respectively. In 1996, the Company recorded non-cash compensation expense of approximately $2,515,000 in conjunction with the grant of options to purchase 590,394 shares of Common Stock at an exercise price of $3.75 per share and options to purchase 10,000 shares of Common Stock at an exercise price of $4.50 per share, each granted pursuant to the Company's 1996 Incentive Stock Plan, and the grant of options to purchase 383,965 shares of Common Stock at an exercise price of $0.75 per share pursuant to the Company's 1996 Non-Statutory Stock Option Plan, the underlying shares of which were funded by a contribution of 383,965 shares of Common Stock by James F. Chen, the Company's founder and Chairman of the Board. The non-cash compensation expense was recognized in the second quarter of 1996. In the fourth quarter of 1996, the Company recognized a non-cash compensation expense of approximately $264,000 in conjunction with a contribution to the Company of 52,885 shares of Common Stock by James F. Chen. The remainder of the dollar increase in 1996 was principally attributable to additional hiring of management and administrative personnel and professional and legal fees. The percentage decrease was primarily due to allocation over a larger revenue base. The dollar decrease in 1997 was due to the absence of non-cash compensation expenses, partially offset by higher costs for the recruitment of senior management, professional and legal fees, and a $200,000 non-cash charge attributable to the resetting of the exercise price on certain warrants in the fourth quarter of 1997 (see "4. Related Party Transactions" in the Notes to Financial Statements). The percentage decrease was primarily due to the reduced level of expenditure and the allocation over a larger revenue base. The Company anticipates that general and administrative expenses will increase in future periods. This statement is based on current expectations. It is forward-looking, and the actual results could differ materially. For information about factors that could cause the actual results to differ materially, please refer to Item 1. "Business - Risk Factors that May Affect Future Results and Market Price of Common Stock" in the Company's Form 10-K. Research and Development -- Research and development expenses consist principally of the costs of research and development personnel and other expenses associated with the development of new products and enhancement of existing products. Research and development expenses increased from approximately $305,000 in 1995, to approximately $1,961,000 in 1996 and to approximately $3,012,000 in 1997. Research and development expenses as a percentage of total revenues were 27.6%, 31.3% and 32.0% in 1995, 1996 and 1997, respectively. The dollar and percentage increases in 1996 and 1997 were primarily due to increases in the number of personnel associated with the Company's product development efforts. The Company believes that a continuing commitment to research and development is required to remain competitive. Accordingly, the Company intends to allocate substantial resources to research and development, but research and development expenses may vary as a percentage of total revenues. This statement is based on current expectations. It is forward-looking, and the actual results could differ materially. For information about factors that could cause the actual results to differ materially, please refer to Item 1. "Business - Risk Factors that May Affect Future Results and Market Price of Common Stock" in the Company's Form 10-K. 34 Restructuring Charge -- Restructuring charge expense consist of the costs associated with the Company's shift in its sales and marketing efforts toward a channel distribution strategy. Accordingly, the Company recognized in the second quarter of 1997 a restructuring charge of $800,000, comprised of $400,000 relating to certain marketing expenses and $400,000 relating to reductions in the Company's workforce. The restructuring and its associated expenses were completed by the end of 1997. Interest Income and Expense -- Interest income represents interest earned on cash, cash equivalents and marketable securities. Interest income in 1995 was approximately $5,000 from interest earned on the net proceeds from the Company's private financings, approximately $168,000 in 1996 from interest earned on the net proceeds from the Company's IPO and private financings and approximately $341,000 in 1997 from interest earned on the net proceeds from the Company's IPO and the private placement. Interest expense represents interest payable or accreted on promissory notes and capitalized lease obligations. Interest expense was approximately $67,000 in 1995. Interest expense increased substantially to approximately $519,000 in 1996. The increase was primarily due to the Company's issuance of $1,250,000 in promissory notes in 1995, the issuance of approximately $1,250,000 promissory notes in 1996 and the issuance of a promissory note in the amount of $1,500,000 in 1996. Interest expense was approximately $13,000 in 1997 was attributable to interest accreted on promissory notes and capitalized lease obligations. Income Taxes -- The Company did not incur income tax expenses in December 31, 1995, 1996 and 1997 as a result of the net loss incurred during these periods. As of December 31, 1997, the Company had net operating loss carry forwards of approximately $15,395,000 as a result of net losses incurred since inception. Dividend on Preferred Stock -- The Company provided approximately $13,000 for a dividend on preferred stock. Deemed Dividend on Preferred Stock - In December 1997, the Company recorded a deemed dividend on the Series A Stock of $600,000, or $150 per share of Series A Stock, in accordance with the Securities and Exchange Commission's position on accounting for preferred stock which is convertible at a discount to the market price for common stock. LIQUIDITY AND CAPITAL RESOURCES On October 24, 1996, the Company commenced an IPO of its Common Stock, which ultimately provided the Company with net proceeds, inclusive of the underwriter's exercise of the overallotment, of approximately $13,195,000. On December 8, 1997, the Company issued 4,000 shares of Series A Stock to Advantage for $4 million in the aggregate. Each share of Series A Stock is convertible into shares of Common Stock and Series A Warrants. Net of fees and related expenses, the Company raised approximately $3,766,000. As of December 31, 1997, the Company had nominal debt and had cash and cash equivalents of approximately $6,203,000 and working capital of approximately $7,858,000. The Company's operating activities used cash of approximately $1,121,000, $5,119,000, and $8,823,000 in 1995, 1996 and 1997, respectively. Cash used in operating activities was principally a result of net losses and increases in accounts receivable, prepaid expenses and inventory, which were partially offset by increases in accounts payable, the establishment of allowances for potentially uncollectible accounts receivable and non-saleable inventory, non-cash expenses related to the issuance of certain stock options and non-cash charges for preferred stock dividends. Capital expenditures for property and equipment were approximately $20,000, $562,000 and $669,000 in 1995, 1996 and 1997, respectively. These expenditures 35 have generally been for computer workstations and personal computers, office furniture and equipment, and leasehold additions and improvements. The Company expects capital expenditures to be less in 1998, as it has completed its relocation to Germantown, Maryland and intends primarily to lease computer equipment and office furniture in the future. In 1997, the Company paid a security deposit of $370,000 as part of the six year operating lease agreement for its principle office in Germantown, Maryland and made an investment of $250,000 in Network Flight Recorder, Inc. Network Flight Recorder, Inc. develops software to provide network administrators with network audit capabilities and is headed by Marcus J. Ranum, the Company's Chief Scientist. Prior to its IPO, the Company had financed its operations through the private sale of equity securities, notes to shareholders and short-term borrowings. In 1995, the Company raised approximately $400,000 through the sale of Common Stock. In addition, in December 1995 and January 1996, the Company raised $2,500,000 from the sale of 7% unsecured promissory notes scheduled to mature on June 30, 1996. In addition, in April 1996, the Company raised approximately $1,000,000 by selling an additional 222,222 shares of its former Series A Convertible Preferred Stock ("Old Series A Stock) at $4.50 per share. In April and May of 1996, the Company exchanged all of the 7% unsecured promissory notes for Old Series A Stock. Upon consummation of the IPO, each share of Old Series A Stock automatically converted into 1.20 shares of Common Stock and the Old Series A Stock was retired. In June 1996, the Company raised an additional $1,500,000 by issuing to JMI Equity Fund II, L.P. ("JMI") an 8% unsecured senior subordinated note with detachable warrants to purchase 333,332 shares of Common Stock of which 266,666 were exercisable at $4.50 per share ("$4.50 Warrants") and 66,666 were exercisable at $0.015 per share ("$0.015 Warrants"). The note was redeemed upon consummation of the IPO and the $0.015 Warrants were exercised on June 28, 1996. Pursuant to the terms of the $4.50 Warrants, upon consummation of the IPO at a price per share of $5.00, the $4.50 Warrants were adjusted to entitle JMI to purchase 319,999 shares of Common Stock at $3.75 per share. The $4.50 Warrants were further adjusted on November 21, 1997 to entitle JMI to purchase 383,999 shares of Common Stock at $3.125 per share as a result of the issuance of warrants to David D. Dawson to purchase 300,000 shares of Common Stock at an exercise price of $3.125 per share. As of March 18, 1998, 276 shares of Series A Stock had been converted at an exercise price of $2.1144, which will result in a further adjustment of the $4.50 Warrants and a further non-cash expense during the first quarter of 1998. The $4.50 Warrants may be further adjusted as a result of subsequent conversions of the Series A Stock and/or the issuance of options under the Company's proposed 1998 Incentive Stock Plan. Financing activities include cash received of approximately $1,261,000 from the exercise of stock options during 1997. Also in the second quarter of 1997, the Company received 6,020 shares of Common Stock as payment for stock options issued under the 1996 Non-Statutory Stock Option Plan. The Company retired the 6,020 shares of Common Stock. The Company believes that its current cash and cash equivalents and funds that may be generated from on-going operations will be sufficient to finance the Company's operations at least through March 31, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not Applicable 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA V-ONE CORPORATION FINANCIAL STATEMENTS -------- As of December 31, 1996 and 1997 and for the years ended December 31, 1995, 1996, and 1997 AND REPORT THEREON -------- 37 Coopers Coopers & Lybrand L.L.P. & Lybrand a professional services firm REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of V-ONE Corporation We have audited the accompanying balance sheets of V-ONE Corporation (the Company) as of December 31, 1996 and 1997 and the related statements of operations, shareholders' equity and cash flows for the years ended December 31, 1995, 1996, and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We have conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and 1997 and the results of its operations and its cash flows for the years ended December 31, 1995, 1996, and 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. McLean, Virginia March 13, 1998 38 V-ONE CORPORATION BALANCE SHEETS -------- ASSETS
December 31, 1996 1997 ---- ---- Current assets: Cash and cash equivalents $10,894,375 $ 6,203,525 Accounts receivable, less allowances of $252,395 and $1,500,405 as of December 31, 1996 and 1997, respectively 2,647,195 2,556,979 Finished goods inventory, less allowances of $50,000 and $212,700 as of December 31, 1996 and 1997, respectively 418,870 368,120 Prepaid expenses and other current assets 173,411 328,261 ----------- ------------ Total current assets 14,133,851 9,456,885 Property and equipment: Office and computer equipment 790,373 1,251,922 Furniture and fixtures 98,579 165,316 ----------- ------------ 888,952 1,417,238 Less accumulated depreciation (132,365) (415,657) ----------- ------------- 756,587 1,001,581 Licensing fee, net of accumulated amortization of $70,764 and $353,820 as ofDecember 31, 1996 and 1997, respectively 778,409 538,434 Other assets 28,568 863,186 ----------- ------------ Total assets $15,697,415 $11,860,086 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 1,311,044 $ 1,151,589 Deferred revenue 97,748 412,647 Notes payable - current 16,667 16,667 Capital lease obligations - current 65,232 17,126 ----------- ------------ Total current liabilities 1,490,691 1,598,029 Notes payable - noncurrent 22,222 5,555 Deferred rent 78,275 36,879 Capital lease obligations - noncurrent 112,482 295,306 ----------- ------------ Total liabilities 1,703,670 1,935,769 Commitments and contingencies 39 Mandatorily redeemable series A convertible preferred stock, $0.001 par value; 13,333,333 shares authorized; -0- and 4,000 shares issued and outstanding as of December 31, 1996 and 1997, respectively (liquidation preference of $4,012,600) - 3,766,297 Shareholders' equity: Common stock, $0.001 par value; 33,333,333 shares authorized; 12,658,347 and 13,070,235 shares issued and outstanding; -0- and 1,476,000 reserved for conversion, as of December 31, 1996 and 1997, respectively 12,658 13,070 Additional paid-in capital 22,608,866 24,649,538 Notes receivable from sales of common stock (287,400) (166,011) Accumulated deficit (8,340,379) (18,338,577) ----------- ----------- Total shareholders' equity 13,993,745 6,158,020 ----------- ----------- Total liabilities and shareholders' equity $15,697,415 $11,860,086 =========== ===========
The accompanying notes are an integral part of these financial statements. 40 V-ONE CORPORATION STATEMENTS OF OPERATIONS --------
1995 1996 1997 ---- ---- ---- Revenues: Products $ 1,101,418 $ 5,955,592 $ 8,899,973 Consulting and services 2,083 310,557 502,771 ------------ ----------- ----------- Total revenues 1,103,501 6,266,149 9,402,744 ------------ ----------- ----------- Cost of revenues: Revenues: Products 376,359 1,969,117 2,064,645 Consulting and services 800 56,502 96,949 ------------ ----------- ----------- Total cost of revenues 377,159 2,025,619 2,161,594 ------------ ----------- ----------- Gross profit 726,342 4,240,530 7,241,150 ------------ ----------- ----------- Operating expenses: Sales and marketing 130,917 3,744,630 9,341,208 General and administrative 1,350,361 4,879,940 3,801,828 Research and development 304,973 1,960,727 3,012,051 Restructuring costs - - 800,000 ------------ ----------- ----------- Total operating expenses 1,786,251 10,585,297 16,955,087 Operating loss (1,059,909) (6,344,767) (9,713,937) ------------ ----------- ----------- Other (expense) income: Interest expense (66,615) (518,965) (13,130) Interest income 4,513 168,176 341,469 ------------ ----------- ----------- Total other (expense) income (62,102) (350,789) 328,339 ------------ ----------- ----------- Net loss (1,122,011) (6,695,556) (9,385,598) Dividend on preferred stock - - 12,600 Deemed dividend on preferred stock - - 600,000 ------------ ----------- ----------- Loss attributable to holders of common stock $ (1,122,011) $(6,695,556) $(9,998,198) ============ =========== =========== Basic loss per share attributable To holder of common stock $ (0.14) (0.72) $ (0.78) ============ =========== =========== Weighted average number of common shares outstanding 8,099,223 9,245,305 12,868,859 ============ =========== ===========
The accompanying notes are an integral part of these financial statements. 41 V-ONE CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) ----------
Notes Additional Receivable Common Stock Paid-in from Accumulated Shares Amount Capital Stock Sales Deficit Total ------ ------ ------- ----------- ------- ----- Balance, January 1, 1995 7,863,139 $ 7,863 $ 832,937 $ - $ (522,772) $ 318,028 Sale of common stock 107,954 108 399,892 - - 400,000 Contribution capital in lieu of cash compensation (132,666) (133) 133 - - - Issuance of common stock in accordance with anti-dilution agreement 56,000 56 (56) - - - Issuance of common stock as payment for accrued interest 76,666 77 32,468 - - 32,545 Issuance of common stock as payment for services 333,333 333 141,167 - - 141,500 Contributed capital in lieu of cash compensation - - 90,000 - - 90,000 Net loss - - - - (1,122,011) (1,122,011) ---------- ------- ---------- --------- ---------- ----------- Balance, December 31, 1995 8,304,426 8,304 1,496,541 - (1,644,783) (139,938) Contribution of common stock from related party (383,965) (384) 288,360 - - 287,976 Issuance of common stock related to 1996 Non-Statutory Stock Option Plan 383,965 384 1,727,459 287,400) - 1,440,443 Issuance of common stock as payment for services 11,111 11 49,989 - - 50,000 Issuance of non-qualified stock options below fair market value - - 487,796 - - 487,796 Issuance of warrants to purchase common stock - - 299,000 - - 299,000 Exercise of warrants to purchase common stock 66,666 67 933 - - 1,000 Issuance of common stock as payment of a note 73,333 74 329,926 - - 330,000 Contribution of common stock from related party (153,333) (153) 153 - - - Issuance of common stock as payment on accrued interest 153,333 153 64,937 - - 65,090 Repurchase of fractional shares of common stock related to the reverse stock split (9) - (41) - (40) (81) Issuance of common stock as payment of licensing fees 188,705 188 848,985 - - 849,173 42 Public sale of common stock at $5.00 per share, net of issuance costs 3,000,000 3,000 12,641,755 - - 12,644,755 Contribution of common stock from related party (52,885) (53) 264,531 - - 264,478 Conversion of preferred stock to common stock at 1-to-1.2 ratio 949,209 949 3,558,605 - - 3,559,554 Issuance of common stock due to exercise of overallotment option 117,791 118 549,937 - - 550,055 Net loss - - - - (6,695,556) (6,695,556) ---------- ------ ---------- --------- ---------- ---------- Balance, December 31, 1996 12,658,347 12,658 22,608,866 (287,400) (8,340,379) 13,993,745 Issuance of common stock related to 1995 and 1996 Stock Option Plans 417,908 418 1,260,975 - - 1,261,393 Payments received in connection with notes receivable for stock - - - 88,480 - 88,480 Retirement of common stock (6,020) (6) (32,903) 32,909 - - Issuance of warrants to purchase common stock - - 200,000 - - 200,000 Dividend and deemed dividend on preferred stock - - 612,600 - - 612,600 Net loss - - - - (9,998,198) (9,998,198) ---------- -------- ----------- --------- ------------ ---------- Balance, December 31, 1997 13,070,235 $ 13,070 $24,649,538 $(166,011) $(18,338,577) $6,158,020 ========== ======== =========== ========= =========== ==========
The accompanying notes are an integral part of these financial statements. 43 V-ONE CORPORATION STATEMENTS OF CASH FLOWS --------
For the years ended December 31, 1995 1996 1997 ---- ---- ---- Cash flows from operating activities: Net loss attributable to common stock $(1,122,011) $(6,695,556) $(9,998,198) Adjustments to reconcile net loss to net cash from used in operating activities: Provision for doubtful accounts receivable 23,620 228,775 1,248,010 Provision for obsolete inventory 50,000 - 162,700 Depreciation and amortization 24,623 172,582 591,965 Loss on disposal of assets - - 101,354 Interest expense on accretion of note payable - 299,000 - Consulting expense satisfied by issuance of common stock - 45,833 - Compensation expense satisfied by issuance of common stock 141,500 - - Compensation expense for issuance of non-qualified stock options - 487,796 - Compensation expense recognized for receipt of contributed capital 90,000 - - Compensation expense for common stock contributed to stock option plan - 287,976 - Compensation expense for issuance of common stock related to 1996 non-statutory stock option plan - 1,440,443 - Compensation expense recognized for conversion of preferred stock to common - 264,425 - Noncash charges for preferred stock dividends and accretion of preferred stock to common - - 612,600 Noncash charge related to issuance of warrants of preferred stock to common - - 200,000 Accrued interest satisfied with common stock 32,545 65,090 - Accrued interest satisfied with preferred stock - 59,554 - Changes in assets and liabilities: Accounts receivable (265,172) (2,633,578) (1,157,794) Inventory (307,630) (161,240) (111,950) Prepaid expenses and other (24,145) (173,667) (782,549) Accounts payable and accrued expenses 235,919 1,194,035 114,048 ------------- ----------- ----------- Net cash used in operating activities (1,120,751) (5,118,532) (9,019,814) ------------- ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (19,840) (562,190) (353,110) Investment in affiliate - - (250,000) Collection of note receivable - - 88,480 ------------- ------------- ------------ Net cash used in investing activities (19,840) (562,190) (514,630) ------------- ------------ ------------ 44 Cash flows from financing activities: Issuance of common stock 400,000 - - Issuance of common stock in public sale - 15,000,000 - Payment of stock issuance costs - (2,355,245) (233,703) Issuance of common stock due to exercise of overallotment option - 550,055 - Issuance of preferred stock - 1,000,000 4,000,000 Issuance of debt with detachable warrants - 1,500,000 - Exercise of options and warrants - 1,000 1,261,393 Issuance of notes payable 1,300,000 1,250,000 - Issuance of notes payable to related parties 454,351 - - Principal payments on capitalized lease obligations (7,011) (43,843) (167,429) Repayment of notes payable - (11,111) (16,667) Repayment of notes payable to related parties - (1,644,144) - ---------- ----------- ----------- Net cash provided by financing activities 2,147,340 15,246,712 4,843,594 ---------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 1,006,749 9,565,990 (4,690,850) Cash and cash equivalents at beginning of period 321,636 1,328,385 10,894,375 ---------- ----------- ----------- Cash and cash equivalents at end of period $1,328,385 $10,894,375 $ 6,203,525 ========== =========== ===========
The accompanying notes are an integral part of these financial statements. 45 V-ONE CORPORATION STATEMENTS OF CASH FLOWS - (Continued) --------
For the years ended December 31, 1995 1996 1997 ---- ---- ---- Noncash investing and financing activities: Property and equipment acquired through capital leases $ 123,392 $ 98,165 $ 302,147 ========== ========== =========== Retirement of fully depreciated property and equipment $ - $ 5,405 $ - ========== ========== $========== Retirement of common stock $ - $ - $ 32,909 ========== ========== =========== Deemed dividend and dividend on preferred stock $ - $ - $ 612,600 ========== ========== =========== Issuance of common stock as compensation $ 141,500 $ - $ - ========== ========== =========== Issuance of stock purchase warrants $ - $ - $ 200,000 ========== ========== =========== Accrued interest satisfied with common stock $ 32,545 $ 65,090 $ - ========== ========== =========== Notes received for stock options exercised $ - $ 287,400 $ - ========== ========== =========== Consulting expense recognized by issuance of common stock $ - $ 50,000 $ - ========== ========== =========== Notes payable plus accrued interest satisfied with preferred stock $ - $2,559,554 $ - ========== ========== =========== Issuance of common stock to satisfy note payable to related party $ - $ 330,000 $ - ========== ========== =========== Issuance of common stock payment of licensing fee $ - $ 849,173 $ - ========== ========== =========== Conversion of preferred stock to common stock $ - $3,559,554 $ - ========== ========== =========== Repurchase of fractional shares of common stock related to the reverse stock split $ - $ 81 $ - ========== ========== =========== Supplemental cash flow disclosure: Cash paid for interest $ 182 $ 133,042 $ 13,130 ========== ========== ===========
The accompanying notes are an integral part of these financial statements. 46 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 1. NATURE OF BUSINESS V-ONE Corporation ("V-ONE" or the "Company") develops, markets and licenses a comprehensive suite of network security products that enable organizations to conduct secured electronic transactions and information exchange using private enterprise networks and public networks, such as the Internet. The Company's principal market is the United States, with headquarters in Maryland, and regional offices in New York and California; and secondary markets located in Europe and Japan. The Company was originally incorporated in the State of Maryland on February 16, 1993 with the authorization to issue 5,666,666 shares of Common Stock. The Board of Directors authorized and the shareholders approved a stock split of the Company's Common Stock as of November 11, 1995 increasing authorized Common Stock to 13,333,333 shares. Effective February 7, 1996, the Company merged with a pre-existing corporation formed in Delaware. The Delaware corporation became the surviving corporation. In connection with its reincorporation, the Company increased the number of authorized shares of Common Stock from 13.3 million to 33.3 million and authorized 13.3 million shares of Preferred Stock. On June 12 and June 28, 1996, respectively, the Board of Directors authorized and the shareholders approved a two-for-three reverse stock split of the outstanding shares of the Company's Preferred and Common Stock, which was effective July 2, 1996. All references to Common Stock, Preferred Stock, options and per share data have been restated to give effect to both stock splits. 2. SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Revenues are generally recognized from the license of software upon the signing of a contract and shipment of the product. The Company often permits customers to evaluate products being considered for purchase, generally for a period up to 30 days, in which event the Company does not recognize revenues until the customer has accepted the product. Accordingly, the Company's revenue recognition policy does not necessarily correlate with the signing of a contract or the shipment of a product. Allowances for estimated future returns, credits and doubtful accounts are netted against accounts receivable. Service and training revenues are recognized as the services are performed. Maintenance and support revenues are recognized ratably over the contract term, typically one year. Payments received in advance of revenue recognition are included in deferred revenue. In certain instances, the Company recognizes revenues from the sale of systems using the percentage of completion method as the work is performed, measured primarily by the ratio of labor hours incurred to total estimated labor hours for each specific contract. When the total estimated cost of a contract is expected to exceed the contract price, the total estimated loss is charged to expense in the period when the information becomes known. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-2 (SOP 97-2) SOFTWARE REVENUE RECOGNITION, which requires specific criteria be met prior 47 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ to the recognition of revenue from software arrangements consisting of multiple elements. This statement becomes effective for fiscal years beginning after December 15, 1997. The Company believes that future adoption of this statement will not have a significant impact on its results of operations or financial position. RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed" requires the capitalization of certain software development costs once technological feasibility is established, which the Company generally defines as completion of a working model. Capitalization ceases when the products are available for general release to customers, at which time amortization of the capitalized costs begins on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. To date, the period between achieving technological feasibility and the general availability of such software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates and could impact future results of operations and cash flows. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include time deposits with commercial banks used for temporary cash management purposes. INVENTORIES Inventories are valued at the lower of cost or market and consist primarily of computer equipment for sale on orders received from customers, items held for stock and training kits. Cost is determined based on specific identification. PROPERTY AND EQUIPMENT Office and computer equipment and furniture and fixtures are recorded at cost. Depreciation and amortization of property and equipment is calculated using the straight-line method over a useful life of the assets, generally three to seven years. Depreciation expense was $24,623, $101,818 and $285,213 for the years ended December 31, 1995, 1996 and 1997, respectively. 48 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ Repairs and maintenance costs are charged to expense as incurred. Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss on such disposition is included in the determination of net income. 49 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ INCOME TAXES 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. Deferred tax assets and liabilities are measured by applying presently enacted statutory tax rates, which are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized, to the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in net income in the period that the tax rate is enacted. The Company provides a valuation allowance against net deferred tax assets if, based upon available evidence, it is more likely that some or all of the deferred tax assets may not be realized. COMPUTATION OF NET LOSS PER COMMON SHARE The Company adopted Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128") effective December 31, 1997. All prior period net loss per share amounts have been restated to comply with the provisions of SFAS 128. Basic earnings (or loss) per share is computed by dividing net income or (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common and potentially dilutive common equivalent shares outstanding, determined in the following table. However, the computation of diluted loss per share was antidilutive in each of the years presented; therefore, basic and diluted loss per share are the same.
1995 1996 1997 ---- ---- ---- Weighted average shares outstanding used to compute basic earnings per share 8,099,223 9,245,305 12,868,859 Incremental shares issuable upon the assumed conversion of convertible preferred stock - - - Incremental shares issuable upon the assumed exercise of stock options and warrants - - - ---------- ---------- ---------- Shares used to compute diluted earnings per share 8,099,223 9,245,305 12,868,859 ========== ========== ==========
RISKS, UNCERTAINTIES AND CONCENTRATIONS Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash equivalents and accounts receivable. The Company's cash balances 50 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ exceed federally insured amounts. The Company invests its cash primarily in money market funds with an international commercial bank. The Company had cash invested in these funds of $1,175,279, $10,875,652, and $5,981,688 as of December 31, 1995, 1996 and 1997, respectively. The Company has not experienced any losses to date on its invested cash. The Company sells its products to a wide variety of customers in a variety of industries. The Company performs ongoing credit evaluations of its customers but does not require collateral or other security to support customer accounts receivable. In management's opinion, the Company has provided sufficient provisions to prevent a significant impact of credit losses to the financial statements. In 1995, three customers accounted for approximately 39% of total revenues. In 1996, two customers accounted for approximately 24% of total revenues and, when combined with a third customer, aggregated 41% of total accounts receivable at December 31, 1996. As of December 31, 1997 and for the year then ended, two customers comprised 34% and 56% of total revenues and accounts receivable, respectively. The Company had significant purchases of product from one major supplier in the amount of approximately $307,000 during fiscal 1996 and approximately $1,201,000 from the same supplier and another major supplier during fiscal year 1997, representing 16% and 58% of total product cost of revenues for those periods, respectively. No supplier accounted for more than 10% of total product cost of revenues in 1995. 3. NOTES PAYABLE In October 1995, the Company entered into a $50,000 loan agreement with an international financial institution. The loan requires monthly payments of interest at a rate equal to the institution's prime lending rate for the first twelve months or 8.25% as of December 31, 1996. In October 1996, the interest rate increased to 1.5% over prime or 10% as of December 31, 1997. The Company is required to repay the loan through 36 monthly payments commencing May 1996. The loan is collateralized by the assets of the Company. In both December 1995 and January 1996, the Company issued $1,250,000 in 7% uncollateralized promissory notes to fourteen individual investors. During April 1996, the principal and accrued interest was converted into shares of the Company's former Series A Convertible Preferred Stock ("Old Series A Stock") which was, concurrent with the Company's initial public offering ("IPO"), converted to Common Stock (See Note 7.) Maturities of notes payable as of December 31, 1997 are as follows: 1998 $ 16,667 1999 5,555 ------------ $ 22,222 ============ 51 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 4. RELATED PARTY TRANSACTIONS On June 1, 1995, the Company borrowed $330,000 from Scientek Corporation and issued a promissory note, bearing no interest, due June 1, 1996. The note was assigned to Hai Hua Cheng (a former board member of the Company), by Scientek Corporation. The terms of the note provided that, as further consideration for the loan, the Company would issue 153,333 shares of Common Stock to Mr. Cheng immediately after repayment of the loan. On June 12, 1996, in consideration for Mr. Cheng's agreement not to demand payment of the note until May 31, 1997, the Board of Directors authorized the Company to offer Mr. Cheng the option to receive Common Stock based on a $4.50 per share conversion price in lieu of cash in payment of the note. The Board reserved and authorized the issuance of 73,333 shares of Common Stock for this purpose. On June 28, 1996, the Company repaid the loan by issuing 226,666 shares of Common Stock to Mr. Cheng, inclusive of the 153,333 shares of Common Stock described above. In connection with this loan, the Company recognized interest expense of $56,954 and $40,681 during the years ended December 31, 1995 and 1996, respectively. The Company's founder, Chairman of the Board, and majority shareholder, advanced the Company operating funds under three separate promissory notes. The notes bore interest at 8% and were due on demand. Following the consummation of the IPO, the Company repaid the outstanding balance of the notes and all accrued interest. During June 1996, the Company borrowed $1,500,000 and issued an 8% uncollateralized senior subordinated note due June 18, 2000, with 333,332 detachable warrants to purchase Common Stock. Of the original 333,332 detachable warrants, 266,666 were exercisable at $4.50 per share, and 66,666 were exercisable at $0.015 per share. Because the initial offering price per share of Common Stock in the IPO was less than $7.00, each share of Old Series A Stock was automatically converted into 1.20 shares of Common Stock and the 266,666 warrants were converted into 319,999 warrants exercisable at $3.75 per share. James F. Chen, the Company's founder and Chairman of the Board, contributed 13,333 shares of Common Stock due to the increase in the Old Series A Stock's conversion ratio. The Company allocated $1,201,000 and $299,000 to notes payable and additional paid-in capital, respectively, based upon the pro-rata fair market value of the instruments. As of December 31, 1996, the $299,000 allocated to additional paid-in capital was fully amortized. Following the consummation of the IPO, the Company repaid the outstanding balance of the note and all accrued interest. The 66,666 detachable warrants with an exercise price of $0.015 were exercised on June 28, 1996. The remaining 319,999 detachable warrants with an exercise price of $3.75 outstanding at December 31, 1996, increased to 383,999 exercisable at $3.125, as a result of the anti-dilution clause arising from the issuance of 300,000 warrants with an exercise price of $3.125 to David D. Dawson, President and Chief Executive Officer, on November 21, 1997. The Company recognized expense of $200,000 due to the increase and decrease in the number of the detachable warrants and exercise price, respectively. These warrants may be further adjusted as a result of subsequent conversions of the Company's new Series A Convertible Preferred Stock (see Note 7) and/or the issuance of options under the Company's 1998 Incentive Stock Plan. In January 1997, the Company made an investment of $250,000 in Network Flight Recorder, Inc. ("NFR") in exchange for ten percent of NFR common stock. NFR develops software to provide network administrators with network audit capabilities. NFR is headed by the Company's former Chief Scientist, who continues to work as a consultant for the Company. 5. SELECTED BALANCE SHEET INFORMATION Other assets consist of the following at December 31: 52 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 1996 1997 ----------- ------------ Deposits $ 28,568 $ 613,186 Investment in NFR - 250,000 ----------- ------------ $ 28,568 $ 863,186 =========== ============ Accounts payable and accrued expenses consist of the following at December 31: 1996 1997 ----------- ------------ Accounts payable $ 645,602 $ 601,046 Accrued compensation 172,299 473,507 Accrued IPO costs 139,679 - Accrued contract costs 155,000 - Accrued marketing costs 55,000 48,193 Sales tax payable 118,464 28,843 Other accrued expenses 25,000 - ----------- ------------ $ 1,311,044 $ 1,151,589 =========== ============ 6. INCOME TAXES The tax effect of temporary differences that give rise to significant portions of the deferred income taxes are as follows at December 31: 1996 1997 ------------ ------------ Deferred tax assets (liabilities): Deferred revenue $ 37,750 $ - Inventory allowance 19,310 82,145 Allowance for bad debts 97,475 579,456 Deferred rent 30,230 14,243 Non-deductible accruals 93,993 59,071 Stock-based employee compensation 188,388 188,388 Licensing fee (300,622) (123,980) Net operating loss carryforward 2,894,848 5,698,817 ------------ ------------ Total gross deferred tax asset 3,061,372 6,416,243 Valuation allowance (3,061,372) (6,416,243) ------------ ------------ Net deferred tax asset $ - $ - ============ ============ The net change in the valuation allowance from 1996 to 1997 is due principally to the increase in net operating losses. Valuation allowances have been recognized due to the uncertainty of realizing the benefit of net operating loss carryforwards. At December 31, 1997, the Company had net operating loss carryforwards of approximately $15,395,000 for Federal and state income tax purposes available to offset future taxable income. The net operating loss carryforwards begin to expire in 2008. 53 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 7. SHAREHOLDERS' EQUITY OLD SERIES A STOCK During April and May, 1996, the Board of Directors authorized the issuance of 791,011 shares of Old Series A Stock with a par value of $0.001. On April 15, 1996, the Company repaid the full amount of the 7% uncollateralized promissory notes outstanding, including accrued interest, to seven of the investors who participated in the December 1995 and January 1996 note offering, by issuing shares of the Company's Old Series A Stock, at a price of $4.50 per share. The Company paid cash to each of these investors in an amount equal to the value of any fractional shares of Old Series A Stock that would otherwise have been transferred to such investors. In addition, the Company permitted the seven investors to purchase an additional 222,222 shares of Old Series A Stock at a price of $4.50 per share. Of the remaining seven investors, two transferred their notes to one of the other remaining investors. The remaining five investors exchanged their notes, including the transferred notes, for shares of the Company's Old Series A Stock on May 24, 1996, also at a price of $4.50 per share. A total of 791,011 shares of Old Series A Stock were issued on May 24, 1996. In connection with the IPO, each share of Old Series A Stock automatically converted into 1.20 shares of Common Stock. The 791,011 shares of Old Series A Stock were converted into 949,209 shares of Common Stock. James F. Chen, the Company's founder and Chairman of the Board, contributed 39,552 shares of Common Stock, to the Company due to the increase in the Old Series A Stock's conversion ratio, because the initial offering price per share of Common Stock in the IPO was less that $7.00. MANDATORILY REDEEMABLE PREFERRED STOCK On December 8, 1997, the Company issued 4,000 shares of Series A Stock to Advantage Fund II Ltd. ("Advantage") for $4 million, less issuance costs of approximately $234,000. Each share of Series A Stock is convertible into shares of Common Stock and warrants to purchase shares of Common Stock ("Series A Warrants"). The holders of Series A Stock are entitled to receive, at the discretion of the Board of Directors, dividends at the rate of $50.00 per annum per share, which are fully cumulative, accrue without interest from the date of original issuance and are payable quarterly commencing March 1, 1998. The amount of the dividends payable per share of Series A Stock for each quarterly dividend is computed by dividing the annual dividend amount by four. Dividends not paid on a payment date, whether or not such dividends have been declared, will bear interest at the rate of twelve percent per annum until paid. The Company can elect to issue shares of the Company's Common Stock in payment of dividends on the Series A Stock. In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of Series A Stock are entitled to receive out of the assets of the Company, an amount per share of Series A Stock equal to the liquidation preference before any payment shall be made to holders of any class of Common Stock or any stock ranking on liquidation junior to the Series A Stock, an amount equal to the sum of (1) all dividends accrued and unpaid thereon to the date of final distribution to such holders, (2) accrued and unpaid interest on dividends in arrears and (3) $1,000. The liquidation preference of 54 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ the Series A Stock is $4,012,600 as of December 31, 1997. In the event, the assets of the Company are insufficient to pay liquidation preference amounts, then all of the assets available for distribution shall be distributed ratably among the holders of Series A Stock. CONVERSION RIGHTS. Each share of Series A Stock is convertible at the option of the holder into shares of Common Stock and warrants to purchase Common Stock ("Series A Warrants"). The number of Series A Warrants issuable on conversion of a share of Series A Stock is the number of shares of Common Stock issued on conversion per share of Series A Stock divided by 5. The exercise price per share of each Series A Warrant is $4.77 per share. Each Series A Warrant is exercisable for 5 years from the date of conversion. The number of shares of Common Stock issuable on exercise of the Series A Warrants and the exercise price per share is subject to adjustment in certain circumstances. The number of shares of Common Stock issuable per share of Series A Stock is determined by dividing the sum of (a) $1,000, (b) accrued and unpaid dividends, and (c) interest on dividends in arrears ("Conversion Amount") by the lesser of (1) $4.77 ("Ceiling Price") and (2) the product of the applicable Conversion Percentage and the Average Market Price on the conversion date. The "Conversion Percentage" is generally 85%; however, if (1) the registration statement ceases to be available for use by any holder of Series Stock that is named therein as a selling stockholder for any reason, or (2) a holder of Series A Stock becomes unable to convert any shares of Series A Stock in accordance with the Certificate of Designations of Series A Convertible Preferred Stock ("Series A Certificate") (other than by reason of the 4.9% limitation described below), then (A) the applicable Conversion Percentage is permanently reduced by 2% per month up to a maximum aggregate reduction in the Conversion Percentage of 10% and (B) the Ceiling Price is permanently reduced by $.0954 per month up to a maximum aggregate reduction in the Ceiling Price of $.477. However, in lieu of each such reduction, the Company can make cash payments equal to 2% of the aggregate subscription price per share ($1,000 per share) of Series A Stock (which amount is limited to 10% of the aggregate subscription price). The Conversion Amount is adjusted in the event the Company issues certain rights or warrants or distributes to the holders of securities junior to the Series A Stock evidences of indebtedness or assets. The "Average Market Price" is the average of the lowest sale price on the Nasdaq National Market on each of the five trading days having the lowest sale price during the 25 consecutive trading days prior to the measurement date, which in the case of a dividend paid in shares of Common Stock is the dividend payment date. No holder of Series A Stock is entitled to receive shares of Common Stock on conversion of its Series A Stock or on exercise of its Series A Warrants to the extent that the sum of (1) the shares of Common Stock owned by such holder and its affiliates and (2) the shares of Common Stock issuable on conversion of the Series A Stock and on exercise of its Series A Warrants would result in beneficial ownership by such holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock. Beneficial ownership for this purpose is determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, excluding shares of Common Stock so owned through ownership of unconverted shares of Series A Stock and unexercised Series A Warrants. If a holder tenders his or her shares of Series A Stock for conversion and does not receive certificates for all of the shares of Common Stock and Series A Warrants to which such holder is 55 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ entitled when required, then, among other things, the Ceiling Price otherwise applicable to such conversion is reduced by $.0954 and the Conversion Percentage otherwise applicable to such conversion is reduced by 2%. MANDATORY REDEMPTION. The Series A Certificate provides that the Company is not obligated to issue, upon conversion of the Series A Stock, more than the number of shares of Common Stock that the Company may issue pursuant to the rules of Nasdaq ("Maximum Share Amount"), less the aggregate number of shares of Common Stock issued by the Company as dividends on the Series A Stock. The Company is seeking approval from the holders of Common Stock to issue shares of Common Stock in connection with the Series A Stock in excess of the amounts permitted by Nasdaq Rule 4460(i)(1)(D). If the Company would not be obligated to convert shares of Series A Stock because of the Maximum Share Amount limitation, the Company is required to give a notice to that effect to each holder of Series A Stock. In such event, a holder may require the Company to redeem such portion of its Series A Stock that cannot be converted as a result of this limitation at the "Share Limitation Redemption Price" per share. The "Share Limitation Redemption Price" is the greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends on the share of Series A Stock to be redeemed, and (3) an amount equal to the accrued and unpaid interest on dividends in arrears on such share through the applicable redemption date by (b) the applicable Conversion Percentage and (ii) an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock that would, but for the redemption pursuant to this provision of the Series A Certificate, be issuable on conversion of one share of Series A Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears (determined without regard to the 4.9% limitation) times (y) the arithmetic average of the closing bid price of the Common Stock for the five consecutive trading days ending one trading day prior to the redemption date. In addition, the Company is obligated to redeem all outstanding shares of Series A Stock on December 8, 2000 at the "Redemption Price" per share. The "Redemption Price" is the greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends on the share of Series A Stock to be redeemed, and (3) an amount equal to the accrued and unpaid interest on dividends in arrears on such share through the applicable redemption date by (b) the applicable Conversion Percentage and (ii) an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock that would, but for the redemption pursuant to this provision of the Series A Certificate, be issuable on conversion of one share of Series A Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears (determined without regard to the 4.9% limitation) times (y) the arithmetic average of the closing bid price of the Common Stock for the five consecutive trading days ending one trading day prior to the redemption date. OPTIONAL REDEMPTION BY THE COMPANY. As long as the Company is in compliance in all material respects with its obligations to the holders of Series A Stock under the Series A Certificate and the registration rights agreement with Advantage, the Company may redeem all or, from time to time, part of the outstanding shares of Series A Stock at the Redemption Price per share. 56 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ OPTIONAL REDEMPTION BY THE HOLDERS OF SERIES A STOCK. In the event an "Optional Redemption Event" occurs, each holder of Series A Stock has the right to require the Company to redeem all or a portion its shares of Series A Stock at the "Optional Redemption Price" per share. "Optional Redemption Event" means any one of the following: (1) for any period of five consecutive trading days there is no closing bid price of the Common Stock on any national securities exchange or the Nasdaq National Market; (2) the Common Stock ceases to be listed for trading on the Nasdaq National Market, the New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX") or the Nasdaq SmallCap Market; (3) the inability for 30 or more days (whether or not consecutive) of any holder of shares of Series A Stock who is entitled to optional redemption rights to sell such shares of Common Stock issued or issuable on conversion of shares of Series A Stock pursuant to the registration statement for any reason on each of such 30 days; (4) the Company fails or defaults in the timely performance of any material obligation to a holder of shares of Series A Stock under the terms of the Series A Certificate or under the registration rights agreement with Advantage or any other agreements or documents entered into in connection with the issuance of shares of Series A Stock; (5) any consolidation or merger of the Company with or into another entity (other than a merger or consolidation of a subsidiary of the Company into the Company or a wholly owned subsidiary of the Company) where the shareholders of the Company immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving corporation of such consolidation or merger immediately following such transaction or the common stock of such surviving corporation is not listed for trading on the Nasdaq National Market, the NYSE, the AMEX or the Nasdaq SmallCap Market; or (6) the taking of any action, including any amendment to the Company's Certificate of Incorporation, that materially and adversely affects the rights of any holder of shares of Series A Stock. The "Optional Redemption Price" is the greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends on the share of Series A Stock to be redeemed, and (3) an amount equal to the accrued and unpaid interest on dividends in arrears on such share through the applicable redemption date by (b) the applicable Conversion Percentage and (ii) an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock that would, but for the redemption pursuant to this provision of the Series A Certificate, be issuable on conversion of one share of Series A Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears (determined without regard to the 4.9% limitation) times (y) the arithmetic average of the closing bid price of the Common Stock for the five consecutive trading days ending one trading day prior to the redemption date. STOCK OFFERING In October 1996, the Company completed an underwritten initial public offering of 3,000,000 shares of its Common Stock, at a public offering price of $5.00 per share (the "IPO"). The net proceeds from the IPO of approximately $12,645,000 were used to repay indebtedness outstanding under the Company's senior subordinated note and promissory notes due to the Company's founder and Chairman of the Board. (See Note 4.) On November 22, 1996, the Company's underwriters exercised their option to purchase an additional 200,000 shares of Common Stock of which 117,791 shares were issued by the Company at $5.00 per share. 57 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ STOCK SPLITS On November 11, 1995, the Board of Directors authorized and the shareholders approved a ten-for-one stock split of the outstanding shares of the Company's Common Stock. On June 12 and June 28, 1996, respectively, the Board of Directors authorized and the shareholders approved a two-for-three reverse stock split of the outstanding shares of the Company's Preferred and Common Stock, which was effective July 2, 1996. All references to Common Stock, Preferred Stock, options and per share data have been restated to give effect to both stock splits. WARRANTS In addition to the warrants discussed in Note 4, the Company has issued other warrants during fiscal 1997. On December 8, 1997, the Company issued warrants to purchase 60,000 shares of Common Stock at an exercise price of $4.725 to its underwriter in consideration for services rendered in connection with the private placement of its Series A Stock. Such warrants are due to expire on December 8, 2002. In connection with a marketing agreement, the Company issued to a consultant 25,000 warrants to purchase Common Stock at an exercise price of $3.875 per share, exercisable as of November 4, 1997. As of December 31, 1997, warrants aggregating 768,999 remain outstanding. STOCK OPTIONS PLANS The Company has the following three stock options plans: 1995 Non-Statutory Stock Option Plan, the 1996 Non-Statutory Stock Option Plan and the 1996 Incentive Stock Plan ("Plans"). The Plans were adopted to attract and retain key employees, directors, officers and consultants. The Plans are administered by a committee appointed by the Board of Directors ("Compensation Committee"). 1995 NON-STATUTORY STOCK OPTION PLAN The Compensation Committee determines the number of options granted to a key employee, the vesting period and the exercise price provided it is not below market value on the date of the grant for the 1995 Non-Statutory Stock Option Plan ("1995 Plan"). In most cases, the options vest over a two year period and terminate ten years from the date of grant. The 1995 Plan will terminate during May 2005 unless terminated earlier with the provisions of the 1995 Plan. On June 12, 1996, the Board of Directors determined that no further options would be granted under the 1995 Plan. Option activity for the period from the 1995 Plan's inception to December 31, 1996 was as follows: Shares Price -------- -------------- Balance as of December 31, 1994 - - Granted 350,293 $0.4245-$2.505 Exercised - - Canceled - - -------- 58 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ Balance as of December 31, 1995 350,293 $0.4245-$2.505 Granted 2,000 $4.50 Exercised - - Canceled (2,000) $4.50 -------- Balance as of December 31, 1996 350,293 $0.4245-$2.505 Granted - Exercised (119,070) $0.4245-$2.505 Canceled - -------- Balance as of December 31, 1997 231,223 ======== The Compensation Committee was authorized by the Board of Directors to grant options for a total of 352,293 shares of Common Stock under the 1995 Plan. As of December 31, 1996, the Compensation Committee had granted a total of 352,293 options with a ten year term, of which 213,331 are exercisable at $0.4245 per share, 136,962 are exercisable at $2.505 per share and 2,000 are exercisable at $4.50 per share. As of December 31, 1995, 1996 and 1997, 44,445, 229,087 and 231,223, respectively, of the options were vested. As of December 31, 1996 and 1997, the Company had no shares of Common Stock available for grant under the 1995 Plan. 1996 NON-STATUTORY STOCK OPTION PLAN The Compensation Committee, which administers the 1996 Non-Statutory Stock Option Plan ("Non-Statutory Plan"), established the option price to be the fair market value of the stock on the date of grant. The options were not transferable, were subject to various restrictions outlined in the Non-Statutory Plan and must have been exercised by December 31, 1996. During April 1996, the Company's founder and Chairman of the Board contributed 383,965 shares of Common Stock to the Company and the Company issued those shares to employees in connection with the exercise of stock options granted under the Non-Statutory Plan. The Company recognized compensation expense of $287,976 with a corresponding increase to additional paid-in capital to record this transaction. Option activity for the period from the Non-Statutory Plan's inception to December 31, 1996 was as follows: Shares Price ---------- --------- Balance as of December 31, 1995 - - Granted 383,965 $0.75 Exercised (383,965) $0.75 Canceled - - ---------- Balance as of December 31, 1996 - - ========== 59 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ The options were exercised on April 22, 1996 at $0.75 a share in exchange for notes and par value in cash. No additional options are available for grant under the Non-Statutory Plan. The Company recognized $1,439,867 in compensation expense based upon the difference between the fair market value of $4.50 at the date of grant and the exercise price of $0.75 per share. The notes are full recourse promissory notes bearing interest at 6% per annum and are collateralized by the underlying Common Stock. Principal and interest are payable in installments. Maturities range from April 1997 to April 2006. The Company has accounted for these notes as a reduction to shareholders' equity as of December 31, 1996 and 1997. 1996 INCENTIVE STOCK PLAN During June 1996, the Company adopted the 1996 Incentive Stock Plan ("1996 Plan"), under which incentive stock options, non-qualified stock options and restricted share awards may be made to the Company's key employees, directors, officers and consultants. Both incentive stock options and options that are not qualified under Section 422 of the Internal Revenue Code of 1986, as amended ("non-qualified options"), are available under the 1996 Plan. The options are not transferable and are subject to various restrictions outlined in the 1996 Plan. The Compensation Committee or the Board of Directors determines the number of options granted to a key employee, officer or consultant, the vesting period and the exercise price provided that it is not below market value. The 1996 Plan will terminate during June 2006 unless terminated earlier by the Board of Directors. The 1996 Plan also provides for the automatic grant of a non-qualified option to purchase 6,666 shares of Common Stock to each new non-employee director. All options have a five year term and are exercisable on the date of grant. As of December 31, 1996, two of the Company's directors were eligible to participate in the 1996 Plan and each director was granted a non-qualified option to purchase 6,666 shares of Common Stock. Option activity for the period from the 1996 Plan's inception to December 31, 1997 was as follows:
Incentive Non-Qualified Stock Options Stock Options Shares Price Share Price ------ ----- ----- ----- Balance as of December 31, 1995 - - - - Granted 386,310 $4.50-$9.00 837,903 $3.75-$9.00 Exercised - - - - Canceled (41,476) $4.50-$9.00 (29,066) $3.75 ---------- ---------- Balance as of December 31, 1996 344,834 $4.50-$9.00 808,837 $3.75-$9.00 Granted 703,501 $4.50-$5.88 612,000 $3.75-$5.88 Exercised (28,196) $4.50-$5.00 (270,642) $3.75 Canceled (88,202) $4.50-$9.00 (110,097) $3.75-$9.00 ---------- ---------- Balance as of December 31, 1997 931,937 $4.50-$9.00 1,040,098 $3.75-$9.00 ========== ==========
60 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ Awards may be granted under the 1996 Plan with respect to a total of 2,333,333 shares of Common Stock under the 1996 Plan. As of December 31, 1997, of the total 1,040,098 non-qualified options, 395,435 are vested and exercisable as of December 31, 1997. As of December 31, 1997, the Company had 62,460 share of Common Stock available for grant under the 1996 Plan. The Company accounts for the fair value of its grants under the Plans in accordance with the Accounting Principles Board Opinion 25 and related Interpretations. Accordingly, no compensation expense has been recognized for the Plans. Had compensation expense been determined based on the fair value at the grant dates for awards under the Plans consistent with the method of SFAS 123, the Company's net loss and loss per common share would have been increased to the pro forma amounts indicated below: 1995 1996 1997 ----- ----- ---- Net loss As reported $1,122,011 $6,695,556 $9,998,198 Pro forma $1,154,939 $9,509,366 $10,312,521 Loss per common share As reported $0.14 $0.72 $0.78 Pro forma $0.14 $1.03 $0.80 The fair value of each option is estimated on the date of grant using a type of Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the years ended December 31, 1995, 1996 and 1997, respectively: dividend yield of 0% in all periods; expected volatility of 43%, 43%, and 56%; risk-free interest rate of 6.2%, 6.5%, and 6.0%; and expected terms of 3.0, 3.4, and 4.0 years, respectively. A summary of the status of the Plans is presented below:
Year ended December 31, 1995 1996 1997 ---- ---- ---- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Options outstanding beginning of period - - 350,293 $1.238 1,503,964 $2.433 Options exercised - - (383,965) $0.750 (417,908) $3.018 Options canceled - - (72,542) $5.480 (198,299) $4.977 Options granted 350,293 $1.238 1,610,178 $2.438 1,315,501 $4.146 ------- ------- --------- --------- Options outstanding end of period 350,293 $1.238 1,503,964 $2.433 2,203,258 $3.960 Options exercisable at end of period 44,445 $0.425 786,846 $3.118 746,858 $3.621 Weighted-average fair value of options granted during the period - $0.094 - $1.758 - $2.039
61 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ As of December 31, 1997, the weighted average remaining contractual life of the options that range from $3.75 to $9.00 is 9 years. As of December 31, 1995, 1996 and 1997, the pro forma tax effects under SFAS 109 would include an increase to both the deferred tax asset and the valuation allowance of $12,700, $1,086,700 and $121,392, respectively, and no impact to the statement of operations. 8. COMMITMENTS LEASES The Company is obligated under various operating and capital lease agreements, primarily for office space and equipment through 2003. Future minimum lease payments under these non-cancelable operating and capital leases as of December 31, 1997 are as follows: Operating Capital --------- ------- 1998 $ 915,021 $ 96,188 1999 943,293 93,249 2000 886,197 91,188 2001 575,807 85,428 2002 818,547 69,345 ---------- --------- Total minimum payments $4,138,865 435,398 ========== Interest (122,966) --------- Present value of capital lease obligations 312,432 Less: current portion (17,126) -------- Capital lease obligations non-current $ 295,306 ========= Rent expense was $92,785, $258,607, and $550,693, for the years ended December 31, 1995, 1996 and 1997, respectively. At December 31, 1997, the Company's future minimum sublease rental income payments with respect to certain non-cancelable operating leases with terms in excess of one year are as follows: 1998 $144,462 1999 204,043 2000 214,489 2001 74,712 ---- -------- Total minimum payments $637,706 ======== The cost and accumulated depreciation of assets under capital leases were as follows as of December 31: 62 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 1996 1997 ----- ---- Furniture $ 8,752 $ 8,752 Computers and equipment 209,725 440,147 --------- --------- 218,477 448,899 Accumulated depreciation (34,192) (86,428) --------- --------- $ 184,256 $ 362,471 ========= ========= LICENSE AGREEMENTS In 1994, the Company entered into two licensing agreements whereby the Company obtained the right to modify and sell certain technology used in its product line. One of the agreements requires the Company to pay fees based on product and subscription sales for any product using the licensed technology. The other agreement provides for payment of fees based upon gross revenues of the Company. This latter agreement also gives the other party ("Licensor") the right to forfeit future licensing fees in exchange for 2% of the Company's outstanding voting stock, after giving effect to the issuance. The Licensor elected to receive voting stock in May 1996. In October 1996, the Company issued 188,705 shares of Common Stock to the Licensor. The fair market value of the stock issued, $944,000, is recorded as an asset by the Company and is being amortized over the period of its estimated useful life, 3 years. The Company incurred amortization expense and fees totaling $110,860, $135,779, and $775,356 relating to these agreements in 1995, 1996 and 1997, respectively. EMPLOYMENT AGREEMENTS Effective November 21, 1997, the Company entered into a three year employment agreement with David D. Dawson, the President and Chief Executive Officer. This agreement provides for severance payments if Mr. Dawson is terminated without cause during the term of the agreement, and includes one year renewal options. The agreement also provides a relocation cost allowance; and an incentive compensation package based on performance criteria, for each year of the contract term. The relocation cost allowance and certain incentive compensation have been reflected in the financial statements. During 1997, the Company amended the Chairman of the Board of Directors and certain senior executives of the Company's standing employment agreements. Such agreements provide for minimum salary levels and incentive bonuses payable if specified management goals are attained. In the event of termination due to a change in control of the Company or employment location, the aggregate commitment under these agreements should all six covered executives be terminated is approximately $662,000 to be discounted at a rate of 1% above the prevailing one-year Treasury Bill rate. Additionally, all outstanding stock options become fully vested with no change in term, and current year bonuses to the extent earned will be payable upon termination. 63 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 9. EMPLOYEE 401(K) DEFERRED COMPENSATION PLAN Effective January 1, 1997, the Company adopted the V-ONE 401(k) Plan (the "401(k) Plan"). The 401(k) Plan is a contributory profit sharing plan covering all eligible employees of the Company. An employee is eligible to participate in the 401(k) Plan upon completing three months of service and upon reaching age 21. The 401(k) Plan is subject to the regulations issued by the United States Treasury Department and Department of Labor under the Employee Retirement Income Security Act of 1974. Under the provisions of the 401(k) Plan, eligible participants can contribute in pretax dollars an amount up to 15% of their annual compensation, not to exceed the maximum legal deferral. Employer contributions are discretionary and are determined by the management of the Company. There were no employer contributions for the year ended December 31, 1997. Vesting for Company contributions and actual earnings thereon is based on the participant's number of years of continuous service with the Company. A participant is fully vested after six years of continuous service. Regardless of years of service, a participant is fully vested upon the occurrence of: (a) normal retirement age; (b) death; (c) termination of the 401(k) Plan; or (d) retirement due to disability. 10. FINANCING The Company has incurred net losses of $1,122,011, $6,695,556, and $9,998,198 for the years ended December 31, 1995, 1996 and 1997. Management considers the Company's current working capital position sufficient to cover operating losses over the next operating cycle. Management has historically been successful in obtaining outside financing to meet obligations and funding working capital requirements as they come due. 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter 1995 Net revenues $150,257 $218,961 $356,021 $378,262 Gross profit 97,667 140,401 230,539 257,735 Net loss (154,791) (245,136) (60,536) (661,548) Net loss per common share (0.02) (0.03) (0.01) (0.08) 1996 Net revenues 1,021,811 1,354,576 1,720,543 2,169,219 Gross profit 699,813 876,023 1,205,105 1,459,589 Net loss (994,660) (3,393,401) (977,514) (1,329,978) Net loss per common share (0.12) (0.40) (0.11) (0.11) 1997 Net revenues 2,414,015 2,134,581 2,764,352 2,089,807 Gross profit 1,852,711 1,815,739 2,070,376 1,502,334 Net loss (871,219) (3,149,492) (433,643) (5,543,844) Net loss per common share (0.07) (0.25) (0.03) (0.43)
64 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 12. SUBSEQUENT EVENTS 1998 INCENTIVE STOCK OPTION PLAN On February 2, 1998, the Board of Directors authorized the adoption of the 1998 Incentive Stock Option Plan (the "1998 Plan"), subject to approval of the shareholders at the annual shareholders meeting scheduled for May 14, 1998. The purpose of the 1998 Plan is to advance the interests of the Company by providing for the acquisition of an equity interest in the Company by non-employee directors, officers, key employees and consultants. If approved, the 1998 Plan will become effective February 2, 1998 and terminate February 2, 2008. The Company has reserved 2,500,000 shares of Common Stock for awards granted under the 1998 Plan. Incentive stock options may be granted to purchase shares of Common Stock at a price not less than fair market value on the date of grant. Only employees may receive incentive stock options; all other qualified participants may receive non-qualified stock options with an exercise price determined by a Committee or the Board. Options are generally exercisable after one or more years and expire no later than ten years from the date of grant. The 1998 Plan also provides for reload options and restricted share awards to employee and consultant participants subject to various terms. On the effective date of the 1998 Plan, each non-employee director of the Board (excluding Messrs. Charles Chen, Harry Gruner, and William Odom) shall be granted non-qualified options to purchase 10,000 shares of Common Stock, with an exercise price of fair market at date of grant. Such options are fully vested at grant date and shall have a five year expiration term. REPRICING OF OUTSTANDING STOCK OPTIONS UNDER THE 1996 INCENTIVE STOCK OPTION PLAN On February 17, 1998, the Board authorized the offer to reset the exercise price of all full-time employees' (exclusive of Vice Presidents and the President) incentive stock options and non-qualified stock options granted under the 1996 Incentive Stock Option Plan. If accepted by the option holder, such options are to be replaced with non-qualified options at the new exercise price of $2.625 per share. To be eligible for repricing, a participant must: 1) be a full-time employee on February 17, 1998, 2) agree to remain in the employ of the Company until August 17, 1998, and 3) acceptance of this offer must have been exercised by February 24, 1998. At the close of business on February 24, 1998, employees holding options to purchase 451,736 shares of Common Stock in the aggregate had exercised their right to reprice at the new exercise price of $2.625 per share. CONVERSION OF SERIES A PREFERRED STOCK During March 1998, holders of Series A Stock elected to convert 276 shares into 130,774 shares of Common Stock at a conversion price of $2.1144 per share, and received warrants to purchase 26,155 shares of Common Stock at an exercise price of $4.77 per share. Had the preferred stock transaction occurred on January 1, 1997, pro forma basic loss per share would have been approximately $(0.77) per share for the year ended December 31, 1997. The above transaction triggers a change in the 383,999 detachable warrants with an exercise price of $3.125, outstanding at December 31, 1997 as a result of the anti-dilution clause. Such detachable warrants 65 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ are now exercisable for 567,535 shares of Common Stock at an exercise price of $2.1144 per share and will result in a noncash charge to income of approximately $388,000 in the first quarter of fiscal 1998. 66 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item concerning directors and executive officers is incorporated herein by reference to the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 14, 1998. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item concerning executive compensation is incorporated herein by reference to the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 14, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item concerning security ownership of certain beneficial owners and management is incorporated herein by reference to the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 14, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item concerning certain relationships and related transactions is incorporated herein by reference to the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 14, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Exhibits Number Description - ------ ----------- 3.1 Amended and Restated Certificate of Incorporation as of July 2, 1996 (1) 3.2 Amended and Restated Bylaws dated as of February 2, 1998 3.3 Certificate of Amendment to Certificate of Designation, Preferences, and Rights of Series A Convertible Preferred Stock dated September 9, 1996 (1) 3.4 Certificate of Elimination of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock (2) 3.5 Certificate of Designations of Series A Convertible Preferred Stock (2) 9.1 Voting Trust Agreement between Hai Hua Cheng and James F. Chen, Trustee (1) 9.2 Voting Trust Agreement between Robert Zupnik and James F. Chen, Trustee (1) 9.3 Voting Trust Agreement between Dennis Winson and James F. Chen, Trustee (1) 67 10.1 Employment Agreement between V-ONE Corporation ("V-ONE") and James F. Chen dated as of June 12, 1996 (1) 10.2 V-ONE 1995 Non-Statutory Stock Option Plan (1) 10.3 V-ONE 1996 Non-Statutory Stock Option Plan (1) 10.4 V-ONE 1996 Incentive Stock Plan (1) 10.5 Software License Agreement between Trusted Information Systems, Inc. ("TIS") and V-ONE executed October 6, 1994 (1) 10.6 First Amendment to the Software License Agreement between TIS and V-ONE (1) 10.7 Second Amendment to the Software License Agreement between TIS and V-ONE (1) 10.8 Third Amendment to the Software License Agreement between TIS and V-ONE (1) 10.9 Fourth Amendment to the Software License Agreement between TIS and V-ONE (1) 10.10 OEM Master License Agreement between RSA Data Security, Inc. ("RSA") and V-ONE dated December 30, 1994 and Amendment Number One to the OEM Master License Agreement between RSA and V-ONE (1) 10.11 Amendment Number Two to the OEM Master License Agreement between RSA and V-ONE and Conversion Agreement dated May 23, 1996(1) 10.12 Promissory Note for Hai Hua Cheng with Allonge and Amendment dated June 12, 1996 (1) 10.13 Form of Exchange and Purchase Agreement dated April 1996 (1) 10.14 Registration Rights Agreement Between V-ONE and JMI Equity Fund II, L.P. ("JMI") (1) 10.15 8% Senior Subordinated Note due June 18, 2000 Issued by V-ONE to JMI (1) 10.16 Warrant to Purchase 100,000 shares of Common Stock Issued by V-ONE to JMI (1) 10.17 Warrant to Purchase 400,000 shares of Common Stock Issued by V-ONE to JMI (1) 10.18 Employment Agreement between V-ONE and Jieh-Shan Wang dated as of July 8, 1996 (1) 10.19 Subscription Agreement dated as of December 3, 1997 between V-ONE and Advantage Fund II Ltd. (2) 10.20 Registration Rights Agreement dated as of December 3, 1997 between V-ONE and Advantage Fund II Ltd. (2) 10.21 Commitment Letter dated December 8, 1997 between V-ONE and Advantage Fund II Ltd. (2) 10.22 Registration Rights Agreement dated as of December 8, 1997 between V-ONE and Wharton Capital Partners, Ltd. (2) 10.23 Warrant to Purchase 60,000 shares of Common Stock Issued on December 8, 1997 by V-ONE to Wharton Capital Partners, Ltd. (2) 10.24 Letter Agreement between V-ONE and Wharton Capital Partners, Ltd. dated October 22, 1997 (2) 10.25 V-ONE 1998 Incentive Stock Plan 10.26 Warrants dated November 21, 1997 to Purchase 300,000 shares of Common Stock granted to David D. Dawson 10.27 Employment Agreement dated November 21, 1997 between V-ONE and David D. Dawson 10.28 Amendment to Employment Agreement dated November 7, 1997 between V-ONE and Charles B. Griffis 10.29 Amendment to Section 2.08 of 1996 Incentive Stock Plan 10.30 Lease Agreement dated March 24, 1997 between Bellemead Development Corporation and V-ONE (3) 23.1 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule for the Year Ended December 31, 1997 - -------------------------------------------------------------------------------- (1) The information required by this exhibit is incorporated herein by reference to V-ONE's Registration Statement and Form S-1 (No. 333-06535). (2) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 8-K dated December 8, 1997. 68 (3) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 10-Q for the three months ended June 30, 1997. - ------------------------------------------------------------------------------ (b) Financial Statement Schedules The financial statement schedules filed as part of this report are listed in the Index to Financial Statements and Schedules on page F-1 immediately following the signature page to this report. (c) Reports on Form 8-K (ii) Form 8-K dated December 3, 1997 reporting, under Item 5, the retaining of David D. Dawson to serve as President and Chief Executive Officer replacing James F. Chen, founder of V-ONE, who will continue in his role as Chairman, and the resignation of H.H. Cheng as a director of V-ONE. (ii) Form 8-K dated December 8, 1997 reporting, under Item 5, the issuance of the Series A Convertible Preferred Stock. 69 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. V-ONE Corporation Date: March 27, 1998 By: /s/ David D. Dawson -------------------- David D. Dawson President and Chief Executive Officer Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. Signature Title Date - --------- ----- ---- /s/ James F. Chen Chairman of the Board March 27, 1998 - --------------------- And Director James F. Chen /s/ David D. Dawson President, Chief Executive March 27, 1998 - --------------------- Officer and Director David D. Dawson /s/ Charles B. Griffis Senior Vice President, Chief March 27, 1998 - ---------------------- Financial Officer and Treasurer Charles B. Griffis (Principal Financial Officer) /s/ Mark R. Fields Controller (Principal March 27, 1998 - --------------------- Accounting Officer) Mark R. Fields /s/ Charles C. Chen Director March 27, 1998 - --------------------- Charles C. Chen /s/ Harry S. Gruner Director March 27, 1998 - --------------------- Harry S. Gruner /s/ William E. Odom Director March 27, 1998 - --------------------- William E. Odom 70 V-ONE CORPORATION INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Page ---- Financial Statement Schedules: Schedule II Valuation and Qualifying Accounts and Reserves F-2 F-1 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS V-ONE CORPORATION (For the years ended December 31, 1995, 1996 and 1997)
Additions Balance at Charged to Balance at Beginning of Costs and End of Description Period Expenses Deductions Period ALLOWANCE FOR DOUBTFUL ACCOUNTS December 31, 1995 --- 23,620 --- 23,620 December 31, 1996 23,620 228,775 --- 252,395 December 31, 1997 252,395 1,248,010 --- 1,500,405 DEFERRED TAX ASSET VALUATION ALLOWANCE December 31, 1995 165,804 340,489 --- 506,293 December 31, 1996 506,293 2,555,079 --- 3,061,372 December 31, 1997 3,061,372 3,779,331 --- 6,416,243 ALLOWANCE FOR NON-SALABLE INVENTORY December 31, 1995 --- 50,000 --- 50,000 December 31, 1996 50,000 --- --- 50,000 December 31, 1997 50,000 162,700 --- 212,700
F-2 EXHIBIT INDEX Number Description - ------ ----------- 3.1 Amended and Restated Certificate of Incorporation as of July 2, 1996 (1) 3.2 Amended and Restated Bylaws dated as of February 2, 1998 3.3 Certificate of Amendment to Certificate of Designation, Preferences, and Rights of Series A Convertible Preferred Stock dated September 9, 1996 (1) 3.4 Certificate of Elimination of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock (2) 3.5 Certificate of Designations of Series A Convertible Preferred Stock (2) 9.1 Voting Trust Agreement between Hai Hua Cheng and James F. Chen, Trustee (1) 9.2 Voting Trust Agreement between Robert Zupnik and James F. Chen, Trustee (1) 9.3 Voting Trust Agreement between Dennis Winson and James F. Chen, Trustee (1) 10.1 Employment Agreement between V-ONE Corporation ("V-ONE") and James F. Chen dated as of June 12, 1996 (1) 10.2 V-ONE 1995 Non-Statutory Stock Option Plan (1) 10.3 V-ONE 1996 Non-Statutory Stock Option Plan (1) 10.4 V-ONE 1996 Incentive Stock Plan (1) 10.5 Software License Agreement between Trusted Information Systems, Inc. ("TIS") and V-ONE executed October 6, 1994 (1) 10.6 First Amendment to the Software License Agreement between TIS and V-ONE (1) 10.7 Second Amendment to the Software License Agreement between TIS and V-ONE (1) 10.8 Third Amendment to the Software License Agreement between TIS and V-ONE (1) 10.9 Fourth Amendment to the Software License Agreement between TIS and V-ONE (1) 10.10 OEM Master License Agreement between RSA Data Security, Inc. ("RSA") and V-ONE dated December 30, 1994 and Amendment Number One to the OEM Master License Agreement between RSA and V-ONE (1) 10.11 Amendment Number Two to the OEM Master License Agreement between RSA and V-ONE and Conversion Agreement dated May 23, 1996(1) 10.12 Promissory Note for Hai Hua Cheng with Allonge and Amendment dated June 12, 1996 (1) 10.13 Form of Exchange and Purchase Agreement dated April 1996 (1) 10.14 Registration Rights Agreement Between V-ONE and JMI Equity Fund II, L.P. ("JMI") (1) 10.15 8% Senior Subordinated Note due June 18, 2000 Issued by V-ONE to JMI (1) 10.16 Warrant to Purchase 100,000 shares of Common Stock Issued by V-ONE to JMI (1) 10.17 Warrant to Purchase 400,000 shares of Common Stock Issued by V-ONE to JMI (1) 10.18 Employment Agreement between V-ONE and Jieh-Shan Wang dated as of July 8, 1996 (1) 10.19 Subscription Agreement dated as of December 3, 1997 between V-ONE and Advantage Fund II Ltd. (2) 10.20 Registration Rights Agreement dated as of December 3, 1997 between V-ONE and Advantage Fund II Ltd. (2) 10.21 Commitment Letter dated December 8, 1997 between V-ONE and Advantage Fund II Ltd. (2) 10.22 Registration Rights Agreement dated as of December 8, 1997 between V-ONE and Wharton Capital Partners, Ltd. (2) 10.23 Warrant to Purchase 60,000 shares of Common Stock Issued on December 8, 1997 by V-ONE to Wharton Capital Partners, Ltd. (2) 10.24 Letter Agreement between V-ONE and Wharton Capital Partners, Ltd. dated October 22, 1997 (2) 10.25 V-ONE 1998 Incentive Stock Plan 10.26 Warrants dated November 21, 1997 to Purchase 300,000 shares of Common Stock granted to David D. Dawson 10.27 Employment Agreement dated November 21, 1997 between V-ONE and David D. Dawson 10.28 Amendment to Employment Agreement dated November 7, 1997 between V-ONE and Charles B. Griffis 10.29 Amendment to Section 2.08 of 1996 Incentive Stock Plan 10.30 Lease Agreement dated March 24, 1997 between Bellemead Development Corporation and V-ONE (3) 23.1 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule for the Year Ended December 31, 1997 - -------------------------------------------------------------------------------- (1) The information required by this exhibit is incorporated herein by reference to V-ONE's Registration Statement and Form S-1 (No. 333-06535). (2) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 8-K dated December 8, 1997. EX-3.2 2 AMENDED AND RESTATED BYLAWS OF V-ONE CORPORATION as of February 2, 1998 ARTICLE I. MEETINGS OF SHAREHOLDERS Section 1.1 PLACES OF MEETINGS. All meetings of the shareholders shall be held at such place, either within or without the State of Delaware, as from time to time may be fixed by the Board of Directors. Section 1.2 ANNUAL MEETING. The annual meeting of the shareholders for the election of Directors and transaction of such other business as may come before the meeting shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Unless otherwise designated by the Board of Directors, the annual meeting shall be held on the first Friday of the month of June. Section 1.3 SPECIAL MEETINGS. A special meeting of the shareholders for any purpose or purposes may be called at any time by the President or the Chairman of the Board or a majority of the Board of Directors as prescribed by statute. Section 1.4 NOTICE OF MEETINGS. Written notice of all meetings shall be given, stating the place, date, and hour of the meeting and stating the place within the city or other municipality or community at which the list of stockholders of the Corporation may be examined. The notice of a meeting shall in all instances state the purpose or purposes for which the meeting is called. If any action is proposed to be taken which would, if taken, entitle stockholders to receive payment for their shares of stock, the notice shall include a statement of that purpose and to that effect. Except as otherwise provided by the General Corporation Law of the State of Delaware, a copy of the notice of any meeting shall be given, personally or by telex, telefax, telephone, telegraph or postal mail, not less than ten days nor more than sixty days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he/she may have furnished by request in writing to the Secretary of the Corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the U.S. mail. If a meeting is adjourned to another time, not more than thirty days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice by him/her before or after the time stated therein. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the stockholders need be specified in any written waiver of notice. Section 1.5 QUORUM. Any number of shareholders together holding at least a majority of the outstanding shares of stock entitled to vote with respect to the business to be transacted, who shall be present in person or represented by proxy at any meeting duly called, shall constitute a quorum for the transaction of business. If less than quorum shall be in attendance at the time for which a meeting shall have been called, the meeting may be adjourned from time to time by a majority of the shareholders present or represented by proxy without notice other than by announcement at the meeting. Section 1.6 PROXIES AND VOTING. Each shareholder shall, at every meeting of the shareholders, be entitled to one vote in person or by proxy for each share of capital stock having voting power held by such shareholder as of the record date set for the meeting. All action requiring the approval of the shareholders shall be authorized by a majority of the votes cast except where the General Corporation Laws of the State of Delaware prescribes a different percentage of votes and/or a different exercise of voting power; provided, however, that directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. A proxy shall be authorized by an instrument in writing, dated and signed by the shareholder entitled to vote or his duly authorized attorney-in-fact. The original or a facsimile of the proxy shall be filed with the Secretary. All voting may be taken either by voice vote or by written ballots, except where otherwise required by law. No proxy shall be voted after three years from its date, unless the proxy provides for a longer period. Section 1.7 INSPECTORS AND JUDGES. The person presiding at any meeting of shareholders may, but need not, appoint one or more inspectors or judges. Each inspector or judge, if any, before entering upon the discharge of his/her duties, shall take and sign an oath faithfully to execute the duties of inspector or judge at such meeting with strict impartiality and according to the best of his/her ability. The inspectors or judges, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and 2 determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting, the inspector or inspectors or judge or judges, if any, shall make a report in writing of any challenge, question or matter determined by him/her or them and execute a certificate of any fact found by him/her or them. Section 1.8 WRITTEN CONSENT. Any action required or permitted by law to be taken at a shareholders' meeting may be taken without a meeting, without action by the Board of Directors, without prior notice, and without a vote, if consents in writing setting forth the action are signed by all shareholders entitled to vote upon the action. Written consents, in order to be valid, must be delivered by postal mail or telefax to the Secretary of the Corporation for inclusion in the minutes or filing in the corporate minutes. Every written consent shall bear the signature of each shareholder who makes the consent and the date upon which the consent was signed. ARTICLE II. DIRECTORS Section 2.1 POWERS OF DIRECTORS. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which shall exercise all powers of the Corporation, except as otherwise expressly provided by law, the Certificate of Incorporation, or these Bylaws. Section 2.2 NUMBER OF DIRECTORS. The number of Directors which shall constitute the Board of Directors shall be not more than seven. The first Board of Directors shall consist of the following three Directors: James F. Chen, Charles Chen, and H.H. Cheng. Thereafter, within the limits specified above, the number of Directors shall be determined by resolution of the Board of Directors at the annual meeting. Section 2.3 ELECTION OF DIRECTORS. Directors shall be elected at each annual meeting of shareholders to succeed those Directors whose terms have expired and to fill any vacancies then existing. Directors shall hold their offices for terms of one year and until their successors are elected on a staggered basis as provided for in the Amended and Restated Certificate of Incorporation. Section 2.4 ADVANCE NOTICE OF NOMINATION OF DIRECTORS. Unless a Director is nominated by a member of the Board of Directors, no person shall be 3 nominated or elected as a Director unless the Board receives written notice of his nomination not less than 120 calendar days in advance of the anniversary date of the Corporation's previous year's annual meeting of stockholders. Section 2.5 NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Newly created directorships resulting from an increase in the authorized number of Directors shall be filled by vote of a majority of the Directors then in office and shall be distributed among the three classes of Directors so that, as nearly as possible, each class will consist of an equal number of Directors. Vacancies in the Board of Directors however occurring shall be filled by a majority of the Directors then in office, although less than a quorum, or by a sole remaining Director. A Director chosen to fill a vacancy shall have the same term as that Director's predecessor. Section 2.6 REMOVAL AND RESIGNATION OF DIRECTORS. Directors may be removed from office only for cause at a meeting called expressly for that purpose by the vote of shareholders holding not less than 67% of the shares entitled to vote at an election of Directors or by a vote of a majority of the Directors. Directors may resign at any time upon written notice to the Corporation. Such resignation shall become effective upon receipt and need not be accepted by the Board to become effective. ARTICLE III. BOARD OF DIRECTORS' MEETINGS Section 3.1 REGULAR MEETINGS. The first meeting of the Board of Directors shall be held at such time and place as shall be fixed by the vote of the shareholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected Directors in order legally to constitute the meeting, provided a quorum shall be present, or it may convene at such place and time as shall be fixed by the consent in writing of all the Directors. Thereafter regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors shall from time to time determine. No notice shall be required for any such regular meetings. Section 3.2 SPECIAL MEETINGS. Special meetings of the Board of Directors, or the reconvening of any regular meeting, may be called by one-third of the Directors then in office, or by the President or Chairman of the Board, by giving: (1) no less than one day's actual notice to each Director by oral communication, computer e-mail, telegram, telefax or telex; or (2) no less than 10 days' notice to each Director by registered letter. 4 Section 3.3 PARTICIPATION IN MEETINGS BY TELEPHONE. Members of the Board of Directors, or any Committee thereof, may participate in meetings by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and be heard. Section 3.4 UNANIMOUS WRITTEN CONSENT. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any Committee thereof, may be taken without a meeting if all the members of the Board of Directors or Committee consent thereto in writing and the writing is filed in the minute book of the Corporation. Section 3.5 QUORUM. Except as otherwise provided in these Bylaws, a majority of the Directors in office shall constitute a quorum for the transaction of business, and the vote of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. If a quorum shall fail to attend any meeting, a majority of those Directors present may adjourn and reconvene the meeting at another place, date, or time, without further notice other than an announcement at the originally scheduled meeting. Section 3.6 CONDUCT OF BUSINESS. The Board of Directors shall have the authority to make, and from time to time to alter, amend and supplement, rules of conduct for its own meetings. Any Director shall have the right to put any item on the agenda of any meeting of the Board of Directors. ARTICLE IV. COMMITTEES Section 4.1 ESTABLISHMENT. The Board of Directors, by resolution adopted by a majority of the number of Directors fixed by these Bylaws, may establish such Committees of the Board as it may deem advisable, consisting of not less than two Directors; and the members, terms and authority of such Committees shall be as set forth in the resolutions establishing the same; provided, however, no Committee of the Board of Directors shall have the power to (1) amend the Certificate of Incorporation; (2) adopt an agreement of merger or consolidation; (3) recommend to the shareholders the sale, lease or exchange of all or substantially all of the Corporation's assets; (4) recommend to the shareholders a dissolution of the Corporation or a revocation of a dissolution; (5) amend the Bylaws of the Corporation; (6) declare a dividend; (7) authorize the issuance of stock; (8) change the number of Directors or fill a vacancy in the Board of Directors or in any Committee; or (9) perform any other function prohibited by law. Persons who are not directors may attend and participate in Committee meetings in an advisory capacity at the invitation of the Committee, but they may not vote. 5 The Board of Directors may establish rules and regulations for the conduct of the proceedings of any Committee and may appoint the chairman of the Committee and a secretary of the Committee. To the extent that the Board of Directors does not exercise these powers of appointment, they may be exercised by the Committee, subject to the power of the Board of Directors to change the Committee's action. Each Committee may be terminated at the will of the Board of Directors. Section 4.2 MEETINGS. Regular and special meetings of any Committee established pursuant to this Article may be called and held subject to the same requirements with respect to time, place and notice as are specified in these Bylaws for regular and special meetings of the Board of Directors. Section 4.3 QUORUM AND MANNER OF ACTING. A majority of the members of any Committee serving at the time of any meeting thereof shall constitute a quorum for the transaction of business at such meeting. The action of a majority of those members present at a Committee meeting at which a quorum is present shall constitute the act of the Committee. Section 4.4 TERM OF OFFICE. Members of any Committee shall be elected as above provided and shall hold office so long as they serve as Directors or until their successors are elected by the Board of Directors or until such Committee is dissolved by the Board of Directors. Section 4.5 RESIGNATION AND REMOVAL. Any member of a Committee may resign at any time by giving written notice of the member's intention to do so to the President, the Chairman of the Board or the Secretary of the Corporation, or may be removed, with or without cause, at any time by such vote of the Board of Directors as would suffice for the member's election. Section 4.6 VACANCIES. Any vacancy occurring in a Committee resulting from any cause whatever may be filled by a majority of the number of Directors fixed by these Bylaws or by a majority of the remaining Committee members. ARTICLE V. OFFICERS Section 5.1 GENERAL. The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chairman of the Board and Chief Executive Officer, a President, a Treasurer, a Secretary, and such Vice-Presidents as the Board of Directors may from time to time determine. Other offices may be established by the Board of Directors from time to time. Any number of offices may be held by the same person. Any number of offices may be left temporarily 6 vacant at the option of the Board of Directors. The officers of the Corporation shall be reaffirmed or replaced at the first meeting of the Board of Directors subsequent to each annual meeting of shareholders, unless the Board of Directors determines, upon appointing an officer, that he/she shall serve for a different term. All executive officers have a right to act as a second signatory on contracts when such a second signature is required by law. Section 5.2 CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. The offices of Chairman of the Board and Chief Executive Officer shall be separate offices. They may be filled either by one or two individuals as the Board may determine from time to time; provided, however, that the Chairman of the Board shall be a member of the Board of Directors. The Chairman of the Board shall preside at all meetings of the shareholders and the Board of Directors. The Chief Executive Officer shall be responsible for putting into effect all orders and resolutions of the Board of Directors and shall have general active management of the business of the Corporation. Except where, by law, the signature of the President is required, both the Chairman of the Board and the Chief Executive Officer shall possess the same power as the President to sign all certificates, contracts, and other instruments of the Corporation which may be authorized by the Board of Directors. Section 5.3 PRESIDENT. The President, in the absence of the Chairman of the Board and Chief Executive Officer, shall preside at all meetings of the shareholders and of the Board of Directors, shall have general and active management of the business of the Corporation, and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall have authority to sign all stock certificates, contracts and other instruments of the Corporation, and to affix the seal of the Corporation to such documents. The President has the authority to delegate portions of his power to one or more Vice Presidents. The President shall perform such other functions as the Board of Directors may from time to time require. Section 5.4 CHIEF OPERATING OFFICER. The Chief Operating Officer shall perform such functions as the Board of Directors may from time to time require. Section 5.5 EXECUTIVE VICE PRESIDENT AND VICE PRESIDENT. In the absence of the President, an Executive Vice President or a Vice President (as one or more may be appointed by the Board of Directors; or in the absence of such delegation appointed by the President) shall perform the duties of the President. The Vice Presidents shall not have the power to sign stock certificates, contracts or other instruments of the Corporation, nor to affix the seal of the Corporation to such documents, unless authorized to do so by the 7 President. The Vice Presidents shall perform such other functions as the Board of Directors may from time to time require. Section 5.6 TREASURER. The Treasurer shall have responsibility for the Corporation's funds and for keeping full and accurate accounts of receipts and disbursements in books belonging to the Corporation. The Treasurer shall deposit, or authorize deposit of, all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse, or authorize disbursements of, the funds of the Corporation as necessary and proper for the operation of the Corporation, taking proper receipts for such disbursements; provided, however, that the Board of Directors shall, from time to time, set a maximum expenditure amount, and disbursement of sums over and above such amount shall require a resolution of the Board of Directors. The Treasurer may authorize another officer of the Corporation or an accountant retained by the Corporation to disburse sums of the Corporation necessary and proper for the daily operating expenses of the Corporation, up to a maximum amount which the Treasurer shall set from time to time, which will not exceed any maximum expenditure amount set by the Board of Directors. The Treasurer shall not be required to be bonded. The Treasurer shall, when required, render to the President or the Board of Directors an account of the transactions and of the financial condition of the Corporation. The accounting of the Corporation shall be maintained according to generally accepted accounting principles. The Treasurer shall have the authority to retain, from time to time, an attorney or accountant to review the accounts, prepare the tax returns of the Corporation, and perform such other services as may be necessary and proper to maintain the financial records of the Corporation. The Treasurer shall perform such other functions as the Board of Directors may from time to time require. Section 5.6 SECRETARY. The Secretary shall issue all authorized notices for, and shall prepare and maintain custody of the minutes of, all meetings of the shareholders and the Board of Directors. The Secretary shall have charge of the corporate books. The Secretary shall have custody of the seal of the Corporation and shall have authority to affix the seal to any instrument requiring it and to attest to the authenticity of that seal by the Secretary's signature. The Secretary shall authenticate records of the Corporation. The Secretary shall sign all stock certificates. The Secretary shall perform such other functions as the Board of Directors may from time to time require. 8 Section 5.7 DELEGATION OF AUTHORITY. The Board of Directors may, from time to time, delegate the powers and duties of any executive officer to any other executive officer, and may designate the powers of non-executive officers to any other officers or agents, notwithstanding the provisions hereof. Section 5.8 COMPENSATION. The salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors or set forth in employment agreements or other compensation arrangements approved by the Board. Section 5.9 REMOVAL. Any officer may be removed at any time, with or without cause, by the Board of Directors. ARTICLE VI. INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS, AND EMPLOYEES Section 6.1 RIGHT TO INDEMNIFICATION. Each person who was or is made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he/she is or was a Director, officer, agent, or employee of the Corporation shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended, against any expenses, (including attorneys fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection therewith. Notwithstanding the above, no Director shall be indemnified nor held harmless in violation of the provisions set forth in the Certificate of Incorporation; and no Director, officer, agent, or employee shall be indemnified nor held harmless by the Corporation unless: (1) In the case of conduct in his/her official capacity with the Corporation, he/she acted in good faith and in a manner he/she reasonably believed to be in the best interests of the Corporation; (2) In all other cases, his/her conduct was at least not opposed to the best interests of the Corporation nor in violation of the Certificate, Bylaws or any agreement entered into by the Corporation; and (3) In the case of any criminal proceeding, he/she had no reasonable cause to believe that his/her conduct was unlawful. 9 Section 6.2 RIGHT TO ADVANCEMENT OF EXPENSES. The right to indemnification conferred in Section 6.1 of this Article shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that such an advancement of expenses shall be made only upon delivery to the Corporation of (1) a statement of his/her good faith belief that he/she has met the standard of conduct described in Section 6.1; and (2) an undertaking by or on behalf of the indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision that he/she is not entitled to be indemnified for such expenses. Section 6.3 DETERMINATION AND AUTHORIZATION TO INDEMNIFY. The Corporation may not indemnify a Director under Section 6.1 unless authorized after a determination has been made that indemnification of the Director is permissible in the circumstances because he/she has met the standard of conduct in Section 6.1. This determination shall be made by the Board of Directors by a majority vote of a quorum consisting of Directors not at the time parties to the proceeding. Section 6.4 NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, agreement, vote of shareholders or disinterested Directors, or otherwise. Section 6.5 INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any Director, officer, employee or agent of the Corporation against any expense, liability or loss. ARTICLE VII. STOCK Section 7.1 ISSUANCE. The Corporation may issue shares of capital stock of any class or series now or hereafter authorized in the Certificate of Incorporation, in accordance with the authority granted by a Board of Directors resolution. Section 7.2. STOCK CERTIFICATES. Each shareholder shall be entitled to a certificate signed in the name of the Corporation by the President and by the Secretary, and affixed with the seal of the Corporation. The Treasurer may sign in lieu of the Secretary. Signatures on the certificate may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such 10 certificate is issued, it may be issued by the Corporation with the same effect as if he/she were such officer at the date of its issue. Section 7.3 TRANSFER OF STOCK. Transfer of stock may be made only on the transfer ledger of the Corporation kept at an office of the Corporation or in the possession of the Secretary or the corporate transfer agent. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 7.4 RECORD DATE. In order that the Corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock, the Board of Directors may fix a record date. Such record date shall not precede the date on which the Board of Directors' resolution fixing the record date is adopted, and shall not be more than 70 days prior to the meeting or such other action as above described. If no record date is fixed by the Board of Directors for determination of who is entitled to vote or receive notice of a shareholders' meeting, the record date shall be at the close of business on the day preceding the day on which notice is given; or if notice is waived, at the close of business on the day preceding the day on which the meeting is held. If no record date is set for determining shareholders entitled to receive a dividend or other distribution or allotment of rights or to exercise any rights in respect to any change, conversion or exchange of stock, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. In order that the Corporation may determine the shareholders entitled to consent in writing to corporate action taken without a meeting, the Board of Directors may fix a record date, which shall not precede and shall not be more than ten days after the date on which the resolution fixing the record date is adopted. If no record date has been fixed by the Board of Directors, and the Board of Directors is not required by law to take some action prior to the action for which written consent is sought, the record date shall be the first date on which a signed written consent is properly delivered to the Corporation. 11 If no record date had been fixed by the Board of Directors and the Board of Directors is required by law to take some action prior to the action for which written consent is sought, the record date shall be the close of business on the day on which the Board of Directors adopts a resolution taking such prior action. Section 7.5 REPLACEMENT CERTIFICATES. New stock certificates may be issued to replace certificates lost, stolen, destroyed, or mutilated, upon such terms and conditions, including proof of loss or destruction and the giving of a satisfactory bond of indemnity, as the Board of Directors may from time to time determine. Section 7.6 HOLDERS OF RECORD. The Corporation shall be entitled to treat the holder of record of any share or shares of capital stock as the holder and owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim of right, title, or interest in such share or shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by law. Section 7.7 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 VIII. LIST OF SHAREHOLDERS The officer or agent having charge of the transfer books for shares shall make, at least ten days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, arranged by voting group and within each voting group by class or series of shares, with the address of each and the number of shares held by each, which list, for a period of ten days prior to such meeting, shall be kept on file at the principal business office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share transfer book, or a duplicate thereof, shall be prima facie evidence as to who are the shareholders entitled to examine such list or share transfer book or to vote at any meeting of the shareholders. 12 ARTICLE IX. MISCELLANEOUS Section 9.1 DIVIDENDS. Dividends upon the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors in its absolute discretion, from time to time, believes is proper as a reserve fund to meet contingencies, or equalize dividends, or for such other purposes as the Board of Directors determines is conducive to the interests of the Corporation. The Board of Directors may at any time modify or abolish any such reserve fund. Section 9.2 ANNUAL STATEMENT. The Board of Directors shall present at each annual meeting, and at any special meeting of the shareholders when called for by vote of the shareholders, a full and clear statement of the business and condition of the Corporation. Section 9.3 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors from time to time. Section 9.4 CHECKS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 9.5 SEAL. The Corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Section 9.6 AMENDMENTS. These Bylaws may be altered, amended, repealed, or replaced by new Bylaws by the affirmative vote of a majority of the Board of Directors at any regular or special meeting of the Board of Directors unless the Certificate of Incorporation or law reserve this power to the shareholders. 13 I HEREBY CERTIFY that the foregoing is a full, true and correct copy of the Bylaws of V-ONE Corporation, a Delaware corporation, as in effect on the date hereof. WITNESS my hand and the seal of the Corporation. Dated: February 2, 1998 By: /s/ Joseph D. Gallagher ----------------------- Joseph D. Gallagher Secretary (SEAL) EX-10.25 3 V-ONE CORPORATION 1998 INCENTIVE STOCK PLAN ARTICLE I. PURPOSE, ADOPTION AND TERM OF THE PLAN 1.01 PURPOSE. The purpose of the V-ONE Corporation 1998 Incentive Stock Plan (hereinafter referred to as the "Plan") is to advance the interests of the Company (as hereinafter defined) and its Subsidiaries (as hereinafter defined), if any, by encouraging and providing for the acquisition of an equity interest in the Company by non-employee directors, officers, key employees and consultants through the grant of awards with respect to shares of Common Stock (as hereinafter defined). The Plan will enable the Company to retain the services of non-employee directors, officers, key employees and consultants upon whose judgment, interest, and special effort the successful conduct of its operations is largely dependent and to compete effectively with other enterprises for the services of non-employee directors, officers, key employees and consultants as may be needed for the continued improvement of its business. 1.02 ADOPTION AND TERM. The Plan shall become effective on February 2, 1998 ("Effective Date"), subject to the approval of a simple majority of the holders of Voting Stock (as hereinafter defined) represented, by person or by proxy, and entitled to vote at an annual or special meeting of the holders of Voting Stock. The Plan shall terminate on February 2, 2008, or such earlier date as shall be determined by the Board (as hereinafter defined); provided, however, that, in the event the Plan is not approved by a simple majority of the holders of Voting Stock at or before the Company's 1998 annual meeting of holders of Voting Stock, the Plan shall terminate on such date and any Awards (as hereinafter defined) made under the Plan prior to such date shall be void and of no force and effect. ARTICLE II. DEFINITIONS For purposes of the Plan, capitalized terms shall have the following meanings: 2.01 "Award" means (a) any grant to an Employee or a Consultant Participant of any one or a combination of Non-Qualified Stock Options or Incentive Stock Options described in Article VI, or Restricted Shares described in Article VII, or (b) any grant to a Non-Employee Director of a Non-Employee Director Option described in Article VIII. 2.02 "Award Agreement" means a written agreement between the Company and a Participant or a written acknowledgment from the Company specifically setting forth the terms and conditions of an Award granted to a Participant under the Plan. 2.03 "Beneficiary" means an individual, trust or estate who or that, by will or the laws of descent and distribution, succeeds to the rights and obligations of the Participant under the Plan and an Award Agreement upon the Participant's death. 2.04 "Board" means the Board of Directors of the Company. 2.05 "Cause" means, with respect to an Employee Participant or a Consultant Participant, termination for, as determined by the Committee in its sole and absolute discretion, (i) dishonest or fraudulent conduct relating to the Company or any of its Subsidiaries or their businesses; (ii) conviction of any felony that involves moral turpitude or otherwise reflects on the Company or any of its Subsidiaries in a significantly adverse way; or (iii) gross neglect by the Participant in the performance of his or her duties as an employee or a consultant, or any material breach by a Participant under any employment agreement or consulting agreement with the Company or any of its Subsidiaries. 2.06 "Change in Control" means the occurrence, after the Effective Date, of any of the following events, directly or indirectly or in one or more series of transactions: (i) Approval of the Company's shareholders of a consolidation or merger of the Company with any Third Party, unless the Company is the entity surviving such merger or consolidation; (ii) Approval of the Company's shareholders of a transfer of all or substantially all of the assets of the Company to a Third Party or a complete liquidation or dissolution of the Company; (iii) A Third Party (other than James F. Chen and his affiliates or Advantage Fund Limited, Advantage Fund II Ltd. and/or their affiliates), directly or indirectly, through one or more subsidiaries or transactions or acting in concert with one or more persons or entities: (A) acquires beneficial ownership of more than 20% of the Voting Stock; (B) acquires irrevocable proxies representing more than 20% of the Voting Stock; (C) acquires any combination of beneficial ownership of Voting Stock and irrevocable proxies representing more than 20% of the Voting Stock; (D) acquires the ability to control in any manner the election of a majority of the directors of the Company; or (E) acquires the ability to directly or indirectly exercise a controlling influence over the management or policies of the Company; (iv) any election has occurred of persons to the Board that causes a majority of the Board to consist of persons other than (A) persons who were members of the Board on the Effective Date and/or (B) persons who were nominated for election as members of the Board by the Board (or a committee of the Board) at a time when the majority of the Board (or of such committee) consisted of persons who were members of the Board on the Effective Date; PROVIDED, HOWEVER, that any persons nominated for election by the Board (or a committee of the Board), a majority of whom are persons described in clauses (A) and/or (B), or are persons who were themselves nominated by such Board (or a committee of such Board), shall for this purpose be deemed to have been nominated by a Board composed of persons described in clause (A); or (v) A determination is made by the SEC or any similar agency having regulatory control over the Company that a change in control, as defined in the securities laws or regulations then applicable to the Company, has occurred. Notwithstanding any provision contained herein, a Change in Control shall not include any of the above described events if they are the result of a Third Party's inadvertently acquiring beneficial ownership or irrevocable proxies or a combination of both for more than 20% of the Voting Stock, and the Third Party 2 as promptly as practicable thereafter divests itself of beneficial ownership or irrevocable proxies for a sufficient number of shares so that the Third Party no longer has beneficial ownership or irrevocable proxies or a combination of both for more than 20% of the Voting Stock. 2.07 "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto. References to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements, or supersedes said section. 2.08 "Committee" means a committee of the Board as may be appointed, from time to time, by the Board. The Board may, from time to time, appoint members of the Committee in substitution for those members who were previously appointed and may fill vacancies, however caused, in the Committee. The Committee shall be composed of at least two directors of the Company, each of whom is a "non-employee director" as defined in Rule 16b-3, as promulgated by the SEC under the Exchange Act, and an "outside director" within the meaning of Section 162(m). The Committee shall have the power and authority to administer the Plan in accordance with Article III. If, however, at least two of the Company's directors are not both "non-employee directors" and "outside directors," the Plan shall be administered by the Board and the term "Committee" as used herein shall mean the Board. 2.09 "Common Stock" means the Common Stock, par value $.001 per share, of the Company. 2.10 "Company" means V-ONE Corporation, a corporation organized under the laws of the State of Delaware, and its successors. 2.11 "Consultant Participant" means a Participant who is a consultant to the Company or one of its Subsidiaries. 2.12 "Date of Grant" means the date designated by the Plan or the Committee as the date as of which an Award is granted, which shall not be earlier than the date on which the Committee approves the granting of such Award. 2.13 "Disability" means any physical or mental injury or disease of a permanent nature that renders an Employee or a Consultant Participant incapable of meeting the requirements of the employment or other work that the Employee or Consultant Participant performed immediately before that disability commenced. The determination of whether an Employee or a Consultant Participant is disabled and when an Employee or a Consultant Participant becomes disabled shall be made by the Committee in its sole and absolute discretion. 2.14 "Disability Date" means the date which is six months after the date on which an Employee or a Consultant Participant is first absent from active employment or work with the Company due to a Disability. 2.15 "Employee Participant" means a Participant who is an employee of the Company or one of its Subsidiaries. 2.16 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2.17 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 3 2.18 "Fair Market Value" of a share of Common Stock means, as of any given date, the closing sales price of a share of Common Stock on such date on the principal national securities exchange on which the Common Stock is then traded or, if the Common Stock is not then traded on a national securities exchange, the closing sales price or, if none, the average of the bid and asked prices of the Common Stock on such date as reported on the National Association of Securities Dealers Automated Quotation System ("Nasdaq"); PROVIDED, HOWEVER, that, if there were no sales reported as of such date, Fair Market Value shall be computed as of the last date preceding such date on which a sale was reported; PROVIDED, FURTHER, that, if any such exchange or quotation system is closed on any day on which Fair Market Value is to be determined, Fair Market Value shall be determined as of the first date immediately preceding such date on which such exchange or quotation system was open for trading. In the event the Common Stock is not admitted to trade on a securities exchange or quoted on Nasdaq, the Fair Market Value of a share of Common Stock as of any given date shall be as determined by the Committee in its sole and absolute discretion, which determination may be based on, among other things, the opinion of one or more independent and reputable appraisers qualified to value companies in the Company's line of business. 2.19 "Incentive Stock Option" means an Option designated as an incentive stock option and that meets the requirements of Section 422 of the Code. 2.20 "Non-Employee Director" means each member of the Board who is not an employee of the Company or of any of its Subsidiaries. 2.21 "Non-Employee Director Option" means an Option granted in accordance with Article VIII. 2.22 "Non-Qualified Stock Option" means an Option that is not an Incentive Stock Option. 2.23 "Option" means any option to purchase Common Stock granted to a Participant pursuant to Article VI or to a Non-Employee Director pursuant to Article VIII. 2.24 "Participant" means any employee of or consultant to the Company or any of its Subsidiaries selected by the Committee to receive an Option under the Plan in accordance with Article VI and/or Restricted Shares under the Plan in accordance with Article VII and, solely to the extent provided in Article VIII, any Non-Employee Director. 2.25 "Plan" means the V-ONE Corporation 1998 Incentive Stock Plan as set forth herein, and as the same may be amended from time to time. 2.26 "Reload Option" shall have the meaning set forth in Section 6.03(e) of the Plan. 2.27 "Restricted Shares" means shares of Common Stock subject to restrictions imposed in connection with Awards granted under Article VII. 2.28 "Rule 16b-3" means Rule 16b-3 promulgated by the SEC under Section 16 of the Exchange Act and any successor rule. 2.29 "SEC" means the Securities and Exchange Commission. 2.30 "Section 162(m)" means Section 162(m) of the Code and the regulations thereunder. 4 2.31 "Subsidiary" means a company more than 50% of the equity interests of which are beneficially owned, directly or indirectly, by the Company. 2.32 "Ten Percent Shareholder" means a Participant who, at the time of grant of an Option, owns (or is deemed to own under Section 424(d) of the Code) more than 10% of the Voting Stock. 2.33 "Termination of Employment" means, with respect to an Employee Participant, the voluntary or involuntary termination of a Participant's employment with the Company or any of its Subsidiaries for any reason, including, without limitation, death, Disability, retirement or as the result of the sale or other divestiture of the Participant's employer or any similar transaction in which the Participant's employer ceases to be the Company or one of its Subsidiaries. Whether entering military or other government service shall constitute Termination of Employment, and whether a Termination of Employment is a result of Disability, shall be determined in each case by the Committee in its sole and absolute discretion. Termination of Employment means, with respect to a consultant, termination of his or her services as a consultant to the Company or one of its Subsidiaries. 2.34 "Third Party" includes a single person or a group of persons or entities acting in concert not wholly owned directly or indirectly by the Company. 2.35 "Voting Stock" means the classes of stock of the Company entitled to vote generally in the election of directors of the Company. ARTICLE III. ADMINISTRATION 3.01 COMMITTEE. The Plan shall be administered by the Committee, which shall have exclusive and final authority in each determination, interpretation, or other action affecting the Plan and its Participants. The Committee shall have the sole and absolute discretion to interpret the Plan, to establish and modify administrative rules for the Plan, to select the officers, other key employees and consultants to whom Awards may be granted, to determine the terms and provisions of the respective Award Agreements (which need not be identical), to determine all claims for benefits under the Plan, to impose such conditions and restrictions on Awards as it determines appropriate, to determine whether the shares offered with respect to an Award will be treasury shares or will be authorized but previously unissued shares, and to take such steps in connection with the Plan and Awards granted hereunder as it may deem necessary or advisable. No action of the Committee will be effective if it contravenes or amends the Plan in any respect. 3.02 ACTIONS OF THE COMMITTEE. Except when the "Committee" is the "Board" in the circumstance described on the last sentence of Section 2.08, all determinations of the Committee shall be made by a majority vote of its members. Any decision or determination reduced to writing and signed by all of the members shall be fully as effective as if it had been made at a meeting duly called and held. The Committee shall also have express authorization to hold Committee meetings by conference telephone, or similar communication equipment by means of which all persons participating in the meeting can hear each other. ARTICLE IV. SHARES OF COMMON STOCK 4.01 NUMBER OF SHARES OF COMMON STOCK ISSUABLE. Subject to adjustments as provided in Section 9.05, 2,500,000 shares of Common Stock shall be available 5 for Awards granted under the Plan. The Common Stock to be offered under the Plan shall be authorized and unissued Common Stock, or issued Common Stock that shall have been reacquired by the Company and held in its treasury. 4.02 CALCULATION OF NUMBER OF SHARES OF COMMON STOCK AWARDED TO ANY PARTICIPANT. In the event the purchase price of an Option is paid, or tax or withholding payments relating to an Award are satisfied, in whole or in part through the delivery of shares of Common Stock, a Participant will be deemed to have received an Award with respect to those shares of Common Stock. 4.03 SHARES OF COMMON STOCK SUBJECT TO TERMINATED AWARDS. The Common Stock covered by any unexercised portions of terminated Options, shares of Common Stock forfeited as provided in Section 7.02(a) and shares of Common Stock subject to Awards that are otherwise surrendered by the Participant without receiving any payment or other benefit with respect thereto may again be subject to new Awards under the Plan. ARTICLE V. PARTICIPATION 5.01 ELIGIBLE PARTICIPANTS. Participants in the Plan shall include such officers, other key employees of and consultants to the Company or its Subsidiaries, whether or not directors of the Company, as the Committee, in its sole and absolute discretion, may designate from time to time. In making such designation, the Committee may take into account the nature of the services rendered by the officers, key employees and consultants, their present and potential contributions to the success of the Company, and such other factors as the Committee, in its sole and absolute discretion, may deem relevant. The Committee's designation of a Participant in any year shall not require the Committee to designate such person to receive Awards in any other year. The Committee shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of their respective Awards. A Participant may hold more than one Award granted under the Plan. During the term of the Plan, no Employee Participant may receive Awards with respect to more than 500,000 shares of Common Stock. Non-Employee Directors shall receive Non-Employee Director Options in accordance with Article VIII, the provisions of which are automatic and non-discretionary in operation. Non-Employee Directors shall not be eligible to receive any other Awards under the Plan unless they are no longer Non-Employee Directors on the Date of Grant of such Awards. ARTICLE VI. STOCK OPTIONS 6.01 GRANT OF OPTION. Any Option granted under this Article VI shall have such terms as the Committee may, from time to time, approve, and the terms and conditions of Options need not be the same with respect to each Participant. Under this Article VI, the Committee may grant to any Employee or Consultant Participant one or more Incentive Stock Options, Non-Qualified Stock Options or both types of Options; PROVIDED, HOWEVER, that Incentive Stock Options may only be granted to Employee Participants. To the extent any Option does not qualify as an Incentive Stock Option (whether because of its provisions, the time or manner of its exercise or otherwise), that Option or the portion thereof that does not so qualify shall constitute a separate Non-Qualified Stock Option. 6.02 INCENTIVE STOCK OPTIONS. In the case of any grant of an Incentive Stock Option, whenever possible, each provision hereof and in any Award Agreement relating to such Option shall be interpreted to entitle the holder thereof to the tax treatment afforded by Section 422 of the Code, except (a) in 6 connection with the exercise of Options following a Participant's Termination of Employment, (b) in accordance with a specific determination of the Committee with the consent of the affected Participant and (c) to the extent that the operation of Section 9.05 would cause an Option to no longer be entitled to such treatment. If any provision hereof or that Award Agreement is held not to comply with requirements necessary to entitle that Option to that tax treatment, then except as otherwise provided in the preceding sentence: (i) that provision shall be deemed to have contained from the outset such language as is necessary to entitle the Option to the tax treatment afforded under Section 422 of the Code; and (ii) all other provisions hereof and of that Award Agreement remain in full force and effect. Except as otherwise specified in the first sentence of this Section 6.02, if any Award Agreement covering an Option the Committee designates to be an Incentive Stock Option hereunder does not explicitly include any term required to entitle that Incentive Stock Option to the tax treatment afforded by Section 422 of the Code, all such terms shall be deemed implicit in the designation of that Option, and that Option shall be deemed to have been granted subject to all such terms. 6.03 TERMS OF OPTIONS. Options granted under this Article VI shall be subject to the following terms and conditions and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (a) OPTION PRICE. The option price per share of Common Stock purchasable under an Option shall be determined by the Committee at the time of grant but, if the Option is an Incentive Stock Option, the option price per share shall not be less than 100% of the Fair Market Value of a share of Common Stock on the Date of Grant; PROVIDED, HOWEVER, that, if an Incentive Stock Option is granted to a Ten Percent Shareholder, the option price per share shall be at least 110% of the Fair Market Value of a share of Common Stock on the Date of Grant and PROVIDED, FURTHER, that, except as otherwise required under the Code with respect to Incentive Stock Options and as required by Rule 16b-3 with respect to Options granted to persons subject to Section 16 of the Exchange Act, no amendment of an Option shall be deemed to be the grant of a new Option for purposes of this Section 6.03(a). Notwithstanding the foregoing, the option price per share of Common Stock of an Option shall never be less than par value per share. (b) OPTION TERM. The term of each Option shall be fixed by the Committee, but no Option shall be exercisable more than ten years after its Date of Grant; PROVIDED, HOWEVER, that, if an Incentive Stock Option is granted to a Ten Percent Shareholder, the Option shall not be exercisable more than five years after its Date of Grant. (c) EXERCISABILITY. An Award Agreement with respect to Options may contain such performance targets, waiting periods, exercise dates, restrictions on exercise (including, but not limited to, a requirement that an Option is exercisable in periodic installments), and restrictions on the transfer of the underlying shares of Common Stock, if any, as may be determined by the Committee at the time of grant. To the extent not exercised, installments shall cumulate and be exercisable, in whole or in part, at any time after becoming exercisable, subject to the limitations set forth in Sections 6.03(b), (g) and (h). If an Option is an Incentive Stock Option and if required by Section 422 of the Code, the aggregate Fair Market Value of the shares of Common Stock underlying such Option and all other incentive stock options granted to the Employee Participant (determined at the time the Option is granted) that become exercisable in any one calendar year shall not exceed $100,000. (d) METHOD OF EXERCISE. Subject to whatever installment exercise and waiting period provisions that apply under Section 6.03(c) 7 above, Options may be exercised in whole or in part at any time during the term of the Option, by giving written notice of exercise to the Company specifying the number of shares of Common Stock to be purchased. Such notice shall be accompanied by payment in full of the purchase price in such form as the Committee may accept (including payment in accordance with a cashless exercise program approved by the Committee). If and to the extent the Committee determines in its sole and absolute discretion at or after grant, payment in full or in part may also be made in the form of shares of Common Stock already owned by the Participant (and for which the Participant has good title, free and clear of any liens or encumbrances) based on the Fair Market Value of the shares of Common Stock on the date the Option is exercised; PROVIDED, HOWEVER, that any already owned Common Stock used for payment must have been held by the Participant for at least six months. No Common Stock shall be issued on exercise of an Option until payment, as provided herein, therefor has been made. A Participant shall generally have the right to dividends or other rights of a stockholder with respect to Common Stock subject to the Option only when certificates for shares of Common Stock are issued to the Participant. (e) RELOAD OPTIONS. The Committee shall have the authority to specify, at the time of grant or, with respect to Non-Qualified Stock Options, at or after the time of grant, that an Employee or a Consultant Participant shall be granted a Non-Qualified Stock Option (a "Reload Option") in the event such Participant exercises all or a part of an Option (an "Original Option") by surrendering in accordance with Section 6.03(d) of the Plan already owned shares of Common Stock in full or partial payment of the purchase price under the Original Option, subject to the availability of shares of Common Stock under the Plan at the time of such exercise; PROVIDED, HOWEVER, that no Reload Option shall be granted to a Non-Employee Director. Each Reload Option shall cover a number of shares of Common Stock equal to the number of shares of Common Stock surrendered in payment of the purchase price under such Original Option, shall have a purchase price per share of Common Stock equal to the 100% of the Fair Market Value of a share of Common Stock on the Date of Grant of such Reload Option, and shall expire on the stated expiration date of the Original Option. A Reload Option shall be exercisable at any time and from time to time after the Date of Grant of such Reload Option (or, as the Committee in its sole and absolute discretion shall determine, at or after the Date of Grant, at such time or times as shall be specified in the Reload Option). Any Reload Option may provide for the grant, when exercised, of subsequent Reload Options to the extent and upon such terms and conditions, consistent with this Section 6.03(e), as the Committee in its sole and absolute discretion shall specify at or after the Date of Grant of such Reload Option. A Reload Option shall contain such other terms and conditions, which may include a restriction on the transferability of the shares of Common Stock received upon exercise of the Original Option representing at least the after-tax profit received upon exercise of the Original Option, as the Committee in its sole and absolute discretion shall deem desirable, and which may be set forth in rules or guidelines adopted by the Committee or in the Award Agreements evidencing the Reload Options. (f) NON-TRANSFERABILITY OF OPTIONS. No Option shall be transferable by the Participant otherwise than by will or the laws of descent and distribution. (g) ACCELERATION OR EXTENSION OF EXERCISE TIME. The Committee, in its sole and absolute discretion, shall have the right (but shall not in any case be obligated) to permit purchase of Common Stock subject to any Option granted to an Employee or a Consultant Participant prior to the time such Option would otherwise become exercisable under the terms of the Award Agreement. In addition, the Committee, in its sole and absolute discretion, shall have the right (but shall not in any case be obligated) to permit any Option granted 8 to an Employee or a Consultant Participant to be exercised after its expiration date, subject, however to the limitation set forth in Section 6.03(b). (h) EXERCISE OF OPTIONS UPON TERMINATION OF EMPLOYMENT. The following provisions apply to Options granted to Employee and Consultant Participants: (i) EXERCISE OF VESTED OPTIONS UPON TERMINATION OF EMPLOYMENT. (A) TERMINATION. Unless the Committee, in its sole and absolute discretion, provides for a shorter or longer period of time in the Award Agreement or a longer period of time in accordance with Section 6.03(g), upon an Employee or a Consultant Participant's Termination of Employment other than by reason of death or Disability, an Employee or a Consultant Participant may, within three months from the date of such Termination of Employment, exercise all or any part of his or her Options as were exercisable on the date of Termination of Employment if such Termination of Employment is not for Cause. If such Termination of Employment is for Cause, the right of the Employee or Consultant Participant to exercise such Options shall terminate on the date of Termination of Employment. In no event, however, may any Option be exercised later than the date determined pursuant to Section 6.03(b). (B) DISABILITY. Unless the Committee, in its sole and absolute discretion, provides for a shorter or longer period of time in the Award Agreement or a longer period of time in accordance with Section 6.03(g), upon an Employee or a Consultant Participant's Disability Date, the Employee or Consultant Participant may, within one year after the Disability Date, exercise all or a part of his or her Options, whether or not such Option was exercisable on the Disability Date, but only to the extent not previously exercised. In no event, however, may any Option be exercised later than the date determined pursuant to Section 6.03(b). (C) DEATH. Unless the Committee, in its sole and absolute discretion, provides for a shorter or longer period of time in the Award Agreement or a longer period of time in accordance with Section 6.03(g), in the event of the death of an Employee or a Consultant Participant while employed by the Company or a Subsidiary, the right of the Employee or Consultant Participant's Beneficiary to exercise the Option in full (whether or not all or any part of the Option was exercisable as of the date of death of the Employee or Consultant Participant, but only to the extent not previously exercised) shall expire upon the expiration of one year from the date of the Employee or Consultant Participant's death or on the date of expiration of the Option determined pursuant to Section 6.03(b), whichever is earlier. (ii) EXPIRATION OF UNVESTED OPTIONS UPON TERMINATION OF EMPLOYMENT. Subject to Sections 6.03(g) and 6.03(h)(i)(B) and (C), to the extent all or any part of an Option granted to an Employee or a Consultant Participant was not exercisable as of the date of Termination of Employment, such right shall expire at the date of such Termination of Employment. Notwithstanding 9 the foregoing, the Committee, in its sole and absolute discretion and under such terms as it deems appropriate, may permit an Employee or a Consultant Participant who will continue to render significant services to the Company or a Subsidiary after his or her Termination of Employment to continue to accrue service with respect to the right to exercise his or her Options during the period in which the individual continues to render such services. ARTICLE VII. RESTRICTED SHARES 7.01 RESTRICTED SHARE AWARDS. Restricted Shares may be issued either alone or in addition to other Awards granted under the Plan. The Committee may grant to any Employee or Consultant Participant an Award of shares of Common Stock in such number, and subject to such terms and conditions relating to forfeitability and restrictions on delivery and transfer (whether based on performance standards, periods of service or otherwise) as the Committee shall establish. The terms of any Restricted Share Award granted under the Plan shall be set forth in an Award Agreement, which shall contain provisions determined by the Committee and not inconsistent with the Plan. The provisions of Restricted Share Awards need not be the same for each Participant receiving such Awards. (a) ISSUANCE OF RESTRICTED SHARES. As soon as practicable after the Date of Grant of a Restricted Share Award by the Committee, the Company shall cause to be transferred on the books of the Company shares of Common Stock, registered on behalf of the Participant in nominee form, evidencing the Restricted Shares covered by the Award, but subject to forfeiture to the Company retroactive to the Date of Grant if an Award Agreement delivered to the Participant by the Company with respect to the Restricted Shares covered by the Award is not duly executed by the Participant and timely returned to the Company. Each Participant, as a condition to the receipt of a Restricted Share Award, shall pay to the Company in cash the par value of a share of Common Stock multiplied by the number of shares of Common Stock covered by such Restricted Share Award. All shares of Common Stock covered by Awards under this Article VII shall be subject to the restrictions, terms and conditions contained in the Plan and the Award Agreement entered into by and between the Company and the Participant. Until the lapse or release of all restrictions applicable to an Award of Restricted Shares, the stock certificates representing such Restricted Shares shall be held in custody by the Company or its designee. Upon the lapse or release of all restrictions with respect to an Award as described in Section 7.01(d), one or more stock certificates, registered in the name of the Participant, for an appropriate number of shares of Common Stock as provided in Section 7.01(d), free of any restrictions set forth in the Plan and the Award Agreement, shall be delivered to the Participant. (b) SHAREHOLDER RIGHTS. Beginning on the Date of Grant of the Restricted Share Award and subject to execution of the Award Agreement as provided in Section 7.01(a), the Participant shall become a shareholder of the Company with respect to all shares of Common Stock subject to the Award Agreement and shall have all of the rights of a shareholder, including, but not limited to, the right to vote such shares of Common Stock and, except as otherwise determined by the Committee and specified in the applicable Award Agreement, the right to receive dividends (or dividend equivalents); PROVIDED, HOWEVER, that any shares of Common Stock distributed as a dividend or otherwise with respect to any Restricted Shares as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such Restricted Shares and shall be held in custody by the Company as prescribed in Section 7.01(a). (c) RESTRICTION ON TRANSFERABILITY. None of the Restricted 10 Shares may be assigned or transferred (other than by will or the laws of descent and distribution), pledged or sold prior to lapse or release of the restrictions applicable thereto. (d) DELIVERY OF SHARES OF COMMON STOCK UPON RELEASE OF RESTRICTIONS. Upon expiration or earlier termination of the forfeiture period without a forfeiture and the satisfaction of or release from any other conditions prescribed by the Committee, the restrictions applicable to the Restricted Shares shall lapse. As promptly as administratively feasible thereafter, subject to the requirements of Section 9.04, the Company shall deliver to the Participant or, in case of the Participant's death, to the Participant's Beneficiary, one or more stock certificates for the appropriate number of shares of Common Stock, free of all such restrictions, except for any restrictions that may be imposed by law. 7.02 TERMS OF RESTRICTED SHARES. (a) FORFEITURE OF RESTRICTED SHARES. Subject to Section 7.02(b), all Restricted Shares shall be forfeited and returned to the Company and all rights of the Participant with respect to such Restricted Shares shall terminate unless the Participant continues in the service of the Company or any Subsidiary of the Company as an employee or consultant, as the case may be, until the expiration of the forfeiture period for such Restricted Shares and satisfies any and all other conditions set forth in the Award Agreement. The Committee, in its sole and absolute discretion, shall determine the forfeiture period (which may, but need not, lapse in installments) and any other terms and conditions applicable with respect to any Restricted Share Award. (b) WAIVER OF FORFEITURE PERIOD. Notwithstanding anything contained in this Article VII to the contrary, the Committee may, in its sole and absolute discretion, waive the forfeiture period and any other conditions set forth in any Award Agreement under appropriate circumstances (including the death, Disability or retirement of the Participant or a material change in circumstances arising after the Date of Grant of an Award) and subject to such terms and conditions (including forfeiture of a proportionate number of Restricted Shares) as the Committee shall deem appropriate, provided that the Participant shall at that time have completed at least one year of employment or service as a consultant after the Date of Grant. ARTICLE VIII. NON-EMPLOYEE DIRECTOR OPTIONS 8.01 GRANT OF NON-EMPLOYEE DIRECTOR OPTIONS. On the earlier to occur of (a) the date a Non-Employee Director is elected as such for the first time by the holders of Voting Stock and (b) the date this Plan is approved by a simple majority of the holders of Voting Stock, each Non-Employee Director shall be granted a Non-Employee Director Option consisting of an Option to purchase 10,000 shares of Common Stock; PROVIDED, HOWEVER, that (i) directors Charles C. Chen, Harry S. Gruner and William E. Odom shall each not be eligible to receive an Option under this Section 8.01, and (ii) if a Non-Employee Director receives, after the Effective Date of this Plan, an option ("1996 Plan Option") to purchase shares of Common Stock under the Virtual Open Network Environment Corporation 1996 Incentive Stock Plan ("1996 Plan"), the number of shares subject to the Option granted under this Section 8.01 shall be reduced by the number of shares covered by the 1996 Plan Option. The option price for such Non-Employee Director Options shall be the Fair Market Value of a share of Common Stock on the Date of Grant. All such Options shall be designated as Non-Qualified Stock Options and shall have a five year term. Each such Option shall be exercisable in full on the Date of Grant of such Option. 11 If a Non-Employee Director's service with the Company terminates by reason of death, any Option held by such Non-Employee Director may be exercised for a period of one year from the date of death or until the expiration of the Option, whichever is shorter. If a Non-Employee Director's service with the Company terminates other than by reason of death, any Option held by such Non-Employee Director may be exercised for a period of three months from the date of such termination, or until the expiration of the stated term of the Option, whichever is shorter. All applicable provisions of the Plan (other than Sections 6.03(g) and (h)) not inconsistent with this Section 8.01 shall apply to Options granted to Non-Employee Directors. ARTICLE IX. TERMS APPLICABLE TO ALL AWARDS GRANTED UNDER THE PLAN 9.01 AWARD AGREEMENT. No person shall have any rights under any Award granted under the Plan unless and until the Company and the Participant to whom such Award shall have been granted shall have executed and delivered an Award Agreement authorized by the Committee expressly granting the Award to such person and containing provisions setting forth the terms of the Award. 9.02 PLAN PROVISIONS CONTROL AWARD TERMS. The terms of the Plan shall govern all Awards granted under the Plan, and in no event shall the Committee have the power to grant to a Participant any Award under the Plan that is contrary to any provisions of the Plan. If any provision of any Award shall conflict with any of the terms in the Plan as constituted on the Date of Grant of such Award, the terms in the Plan as constituted on the Date of Grant of such Award shall control. 9.03 MODIFICATION OF AWARD AFTER GRANT. Except as provided by the Committee, in its sole and absolute discretion, in the Award Agreement or as provided in Section 9.05, no Award granted under the Plan to a Participant may be modified (unless such modification does not materially decrease the value of the Award) after the Date of Grant except by express written agreement between the Company and the Participant, provided that any such change (a) shall not be inconsistent with the terms of the Plan, and (b) shall be approved by the Committee. 9.04 TAXES. The Company shall be entitled, if the Committee deems it necessary or desirable, to withhold (or secure payment from the Participant in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Company with respect to any Award. The Company may defer issuance of Common Stock under an Award unless indemnified to its satisfaction against any liability for any such tax. The amount of such withholding or tax payment shall be determined by the Committee or its delegate and shall be payable by the Participant at such time as the Committee determines. A Participant shall be permitted to satisfy his or her tax or withholding obligation by (a) having cash withheld from the Participant's salary or other compensation payable by the Company or a Subsidiary, (b) the payment of cash by the Participant to the Company, (c) the payment in shares of Common Stock already owned by the Participant valued at Fair Market Value, and/or (d) the withholding from the Award, at the appropriate time, of a number of shares of Common Stock sufficient, based upon the Fair Market Value of such Common Stock, to satisfy such tax or withholding requirements. The Committee shall be authorized, in its sole and absolute discretion, to establish rules and procedures relating to any such withholding methods it deems necessary or appropriate (including, without limitation, rules and procedures relating to elections by Participants who are subject to the provisions of Section 16 of the Exchange Act to have shares of Common Stock withheld from an Award to meet those withholding obligations). 9.05 ADJUSTMENTS TO REFLECT CAPITAL CHANGES; CHANGE IN CONTROL. 12 (a) RECAPITALIZATION. The number and kind of shares subject to outstanding Awards, the purchase price or exercise price of such Awards, the amount of Non-Employee Director Options to be granted on any date under Article VIII, the limit set forth in the last sentence of the first paragraph of Section 5.01 of the Plan, and the number and kind of shares available for Awards subsequently granted under the Plan shall be appropriately adjusted to reflect any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other change in capitalization with a similar substantive effect upon the Plan or the Awards granted under the Plan. The Committee shall have the power and sole and absolute discretion to determine the nature and amount of the adjustment to be made in each case. In no event shall any adjustments be made under the provisions of this Section 9.05(a) to any outstanding Restricted Share Award if an adjustment has been or will be made to the shares of Common Stock awarded to a Participant in such person's capacity as a stockholder. (b) SALE OR REORGANIZATION. After any reorganization, merger, or consolidation in which the Company is or is not the surviving entity, each Participant shall, at no additional cost, be entitled upon the exercise of an Option outstanding prior to such event to receive (subject to any required action by stockholders), in lieu of the number of shares of Common Stock receivable on exercise pursuant to such Option, the number and class of shares of stock or other securities to which such Participant would have been entitled pursuant to the terms of the reorganization, merger, or consolidation if, at the time of such reorganization, merger, or consolidation, such Participant had been the holder of record of a number of shares of Common Stock equal to the number of shares of Common Stock receivable on exercise of such Option. Comparable rights shall accrue to each Participant in the event of successive reorganizations, mergers, or consolidations of the character described above. (c) OPTIONS TO PURCHASE STOCK OF ACQUIRED COMPANIES. After any reorganization, merger, or consolidation in which the Company shall be a surviving entity, the Committee may grant substituted Options under the provisions of the Plan, replacing old options granted under a plan of another party to the reorganization, merger, or consolidation whose stock subject to the old options may no longer be issued following such reorganization, merger, or consolidation. The foregoing adjustments and manner of application of the foregoing provisions shall be determined by the Committee in its sole and absolute discretion. Any such adjustments may provide for the elimination of any fractional shares of Common Stock that might otherwise become subject to any Options. (d) CHANGE IN CONTROL. Upon a Change in Control, unless otherwise specifically prohibited by Rule 16b-3: (1) Any and all Options shall become exercisable in full, to the extent not previously exercised, as of the date of the Change in Control; and (2) The restrictions on vesting on all Restricted Share Awards shall be deemed to have satisfied as of the date of the Change in Control. (e) EXISTENCE OF AWARDS. The existence of outstanding Awards shall not affect the right of the Company or its stockholders to make or authorize any and all adjustments, recapitalizations, reclassifications, reorganizations and other changes in the Company's capital structure, the Company's business, any merger or consolidation of the Company, any issue of bonds, debentures or preferred stock of the Company, the Company's liquidation or dissolution, any sale or 13 transfer of all or any part of the Company's assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise. 9.06 SURRENDER OF AWARDS. Any Award granted to a Participant under the Plan may be surrendered to the Company for cancellation on such terms as the Committee and holder approve. 9.07 NO RIGHT TO AWARD; NO RIGHT TO EMPLOYMENT. Except as provided in Article VIII, no director, employee, consultant or other person shall have any claim or right to be granted an Award. Neither the Plan nor any action taken hereunder shall be construed as giving any director, employee or consultant any right to be retained by the Company or any of its Subsidiaries. 9.08 AWARDS NOT INCLUDABLE FOR BENEFIT PURPOSES. Income recognized by a Participant pursuant to the provisions of the Plan shall not be included in the determination of benefits under any employee pension benefit plan (as such term is defined in Section 3(2) of ERISA) or group insurance or other benefit plans applicable to the Participant that are maintained by the Company or any of its Subsidiaries, except as may be provided under the terms of such plans or determined by resolution of the Board. 9.09 GOVERNING LAW. The Plan and all determinations made and actions taken pursuant to the Plan shall be governed by the laws of the State of Delaware other than the conflict of laws provisions of such laws, and shall be construed in accordance therewith. 9.10 NO STRICT CONSTRUCTION. No rule of strict construction shall be implied against the Company, the Committee, or any other person in the interpretation of any of the terms of the Plan, any Award granted under the Plan or any rule or procedure established by the Committee. 9.11 COMPLIANCE WITH RULE 16B-3 AND SECTION 162(M). It is intended that the Plan be applied and administered in compliance with Rule 16b-3 and with Section 162(m). If any provision of the Plan would be in violation of Section 162(m) if applied as written, such provision shall not have effect as written and shall be given effect so as to comply with Section 162(m) as determined by the Committee in its sole and absolute discretion. The Board is authorized to amend the Plan and the Committee is authorized to make any such modifications to Award Agreements to comply with Rule 16b-3 and Section 162(m), as they may be amended from time to time, and to make any other such amendments or modifications deemed necessary or appropriate to better accomplish the purposes of the Plan in light of any amendments made to Rule 16b-3 or Section 162(m). Notwithstanding the foregoing, the Board may amend the Plan so that it (or certain of its provisions) no longer comply with either or both of Rule 16b-3 or Section 162(m) if the Board specifically determines that such compliance is no longer desired and the Committee may grant Awards that do not comply with Rule 16b-3 and/or Section 162(m) if the Committee determines, in its sole and absolute discretion, that it is in the interest of the Company to do so. 9.12 CAPTIONS. The captions (I.E., all Article and Section headings) used in the Plan are for convenience only, do not constitute a part of the Plan, and shall not be deemed to limit, characterize, or affect in any way any provisions of the Plan, and all provisions of the Plan shall be construed as if no captions have been used in the Plan. 9.13 SEVERABILITY. Whenever possible, each provision in the Plan and every Award at any time granted under the Plan shall be interpreted in such 14 manner as to be effective and valid under applicable law, but if any provision of the Plan or any Award at any time granted under the Plan shall be held to be prohibited by or invalid under applicable law, then (a) such provision shall be deemed amended to accomplish the objectives of the provision as originally written to the fullest extent permitted by law, and (b) all other provisions of the Plan and every other Award at any time granted under the Plan shall remain in full force and effect. 9.14 LEGENDS. All certificates for Common Stock delivered under the Plan shall be subject to such transfer restrictions, if any, set forth in the Plan and such other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the SEC, any stock exchange upon which the Common Stock is then listed, and any applicable federal or state securities law. The Committee may cause a legend or legends to be put on any such certificates to make appropriate references to such restrictions. 9.15 INVESTMENT REPRESENTATION. The Committee may, in its sole and absolute discretion, demand that any Participant awarded an Award deliver to the Committee at the time of grant or exercise of such Award a written representation that the shares of Common Stock subject to such Award are to be acquired for investment and not for resale or with a view to the distribution thereof. Upon such demand, delivery of such written representation by the Participant prior to the delivery of any shares of Common Stock pursuant to the grant or exercise of his or her Award shall be a condition precedent to the Participant's right to purchase or otherwise acquire such shares of Common Stock by such grant or exercise. The Company is not legally obliged hereunder if fulfillment of its obligations under the Plan would violate federal or state securities laws. 9.16 AMENDMENT AND TERMINATION. (a) AMENDMENT. The Board shall have complete power and authority to amend the Plan at any time it is deemed necessary or appropriate; provided, however, that the Board shall not, without the affirmative approval of a simple majority of the holders of Voting Stock, represented, by person or by proxy, and entitled to vote at an annual or special meeting of the holders of Voting Stock, make any amendment that requires stockholder approval under any applicable law or rule, unless the Board determines that compliance with such law or rule is no longer desired with respect to the Plan as a whole or the provision to be amended. No termination or amendment of the Plan may, without the consent of the Participant to whom any Award shall theretofore have been granted under the Plan, adversely affect the right of such individual under such Award; provided, however, that the Committee may, in its sole and absolute discretion, make provision in an Award Agreement for such amendments that, in its sole and absolute discretion, it deems appropriate. (b) TERMINATION. The Board shall have the right and the power to terminate the Plan at any time. No Award shall be granted under the Plan after the termination of the Plan, but the termination of the Plan shall not have any other effect and any Award outstanding at the time of the termination of the Plan may be amended and exercised and may vest after termination of the Plan at any time prior to the expiration date of such Award to the same extent such Award could have been amended or would have been exercisable or vest had the Plan not terminated. 9.17 COSTS AND EXPENSES. All costs and expenses incurred in administering the Plan shall be borne by the Company. 9.18 UNFUNDED PLAN. The Plan shall be unfunded. The Company shall not 15 be required to establish any special or separate fund or make any other segregation of assets to assure the payment of any Award under the Plan. 9.19 LOANS. The Committee shall be entitled to grant to Participants granted Non-Qualified Stock Options (other than Non-Employee Director Options) the right to pay the exercise price of such Options by delivery to the Company of an amount of cash equal to the par value per share of Common Stock purchased on exercise and a recourse promissory note. Each such recourse promissory note shall have the following terms and conditions: (a) such promissory note shall bear interest at 2% over the prime rate of Citibank on the date the promissory note is issued, (b) interest shall be due and payable quarterly in arrears, (c) the principal amount shall be due in full on the second anniversary date, (d) principal and accrued interest may be prepaid at any time, in whole or in part, without penalty, (e) in the event of a default in the payment of principal or interest when due and the continuance of such default for ten (10) days, the full principal amount of the promissory note plus accrued and unpaid interest shall become immediately due and payable, and (vi) the promissory note shall be secured by a pledge to the Corporation of shares of Common Stock having a Fair Market Value at all times at least equal to 110% of the principal amount of the promissory note. 16 EX-10.26 4 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENSE OF REGISTRATION OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT AND LAWS. Warrant to Subscribe for 300,000 shares Warrant to Subscribe for Common Stock of V-ONE CORPORATION THIS CERTIFIES that David D. Dawson ("Holder") has the right to subscribe from V-ONE Corporation, a Delaware corporation ("Corporation"), not more than 300,000 fully paid and nonassessable shares of the Corporation's Common Stock $.001 par value per share ("Common Stock"), at a price of $3.125 per share ("Exercise Price"). The Holder of this Warrant agrees with the Corporation that this Warrant is issued and all rights hereunder shall be held subject to all of the conditions, limitations and provisions set forth herein. 1. DEFINITIONS. The following capitalized terms, when used in this Warrant, shall have the following meanings: 1.01 "Beneficiary" means an individual, trust or estate who or that, by will or the laws of descent and distribution, succeeds to the rights and obligations of the Holder under this Warrant upon the Holder's death. 1.02 "Board" means the Board of Directors of the Corporation. 1.03 "Cause" means, with respect to the Holder, termination for, as determined by the Board in its sole discretion, (i) dishonest or fraudulent conduct relating to the Corporation or any of its Subsidiaries or their businesses; (ii) conviction of any felony that, in the judgment of the Board, involves moral turpitude or otherwise reflects on the Corporation or any of its Subsidiaries in a significantly adverse way; or (iii) gross neglect by the Holder in the performance of his duties as an employee, or any material breach by the Holder under any employment agreement with the Corporation or any of its Subsidiaries. 1.04 "Change in Control" means the occurrence, after the Effective Date, of any of the following events, directly or indirectly or in one or more series of transactions: (i) Approval of the Corporation's shareholders of a consolidation or merger of the Corporation with any Third Party, unless the Corporation is the entity surviving such merger or consolidation; (ii) Approval of the Corporation's shareholders of a transfer of all or substantially all of the assets of the Corporation to a Third Party or a complete liquidation or dissolution of the Corporation; (iii) A Third Party (other than James F. Chen and his affiliates), directly or indirectly, through one or more subsidiaries or transactions or acting in concert with one or more persons or entities: (A) acquires beneficial ownership of more than 20% of the Voting Stock; (B) acquires irrevocable proxies representing more than 20% of the Voting Stock; (C) acquires any combination of beneficial ownership of Voting Stock and irrevocable proxies representing more than 20% of the Voting Stock; (D) acquires the ability to control in any manner the election of a majority of the directors of the Corporation; or (E) acquires the ability to directly or indirectly exercise a controlling influence over the management or policies of the Corporation; (iv) any election has occurred of persons to the Board that causes a majority of the Board to consist of persons other than (A) persons who were members of the Board on the Effective Date and/or (B) persons who were nominated for election as members of the Board by the Board (or a committee of the Board) at a time when the majority of the Board (or of such committee) consisted of persons who were members of the Board on the Effective Date; provided, however, that any persons nominated for election by the Board (or a committee of the Board), a majority of whom are persons described in clauses (A) and/or (B), or are persons who were themselves nominated by such Board (or a committee of such Board), shall for this purpose be deemed to have been nominated by a Board composed of persons described in clause (A); or (v) A determination is made by the SEC or any similar agency having regulatory control over the Corporation that a change in control, as defined in the securities laws or regulations then applicable to the Corporation, has occurred. Notwithstanding any provision contained herein, a Change in Control shall not include any of the above described events if they are the result of a Third Party's inadvertently acquiring beneficial ownership or irrevocable proxies or a combination of both for 20% or more of the Voting Stock, and the Third Party as promptly as practicable thereafter divests itself of beneficial ownership or irrevocable proxies for a sufficient number of shares so that the Third Party no longer has beneficial ownership or irrevocable proxies or a combination of both for 20% or more of the Voting Stock. 2 1.05 "Disability" means any physical or mental injury or disease of a permanent nature that renders the Holder incapable of meeting the requirements of the employment or other work that the Holder performed immediately before that disability commenced. The determination of whether the Holder is disabled and when the Holder becomes disabled shall be made by the Board in its sole and absolute discretion. 1.06 "Disability Date" means the date which is six months after the date on which the Holder is first absent from active employment or work with the Corporation or a Subsidiary due to a Disability. 1.07 "Effective Date" means November 21, 1997. 1.08 "Fair Market Value" of a share of Common Stock means, as of any given date, the closing sales price of a share of Common Stock on such date on the principal national securities exchange on which the Common Stock is then traded or, if the Common Stock is not then traded on a national securities exchange, the closing sales price or, if none, the average of the bid and asked prices of the Common Stock on such date as reported on the National Association of Securities Dealers Automated Quotation System ("Nasdaq"); provided, however, that, if there were no sales reported as of such date, Fair Market Value shall be computed as of the last date preceding such date on which a sale was reported; provided, further, that, if any such exchange or quotation system is closed on any day on which Fair Market Value is to be determined, Fair Market Value shall be determined as of the first date immediately preceding such date on which such exchange or quotation system was open for trading. In the event the Common Stock is not admitted to trade on a securities exchange or quoted on Nasdaq, the Fair Market Value of a share of Common Stock as of any given date shall be as determined in good faith by the Board, which determination may be based on, among other things, the opinion of one or more independent and reputable appraisers qualified to value companies in the Corporation's line of business. Notwithstanding the foregoing, the Fair Market Value of a share of Common Stock shall never be less than par value per share. 1.09 "Subsidiary" means a company more than 50% of the equity interests of which are beneficially owned, directly or indirectly, by the Corporation. 1.10 "Termination of Employment" means, with respect to the Holder, the voluntary or involuntary termination of the Holder's employment with the Corporation or any of its Subsidiaries for any reason, including death, Disability, retirement or as the result of the sale or other divestiture of the Holder's employer or any similar transaction in which the Holder's employer ceases to be the Corporation or one of its Subsidiaries. Whether entering military or other government service shall constitute Termination of Employment, and whether a Termination of Employment is a result of Disability, shall be determined in each case by the Board. 1.11 "Third Party" includes a single person or a group of persons or entities acting in concert not wholly owned directly or indirectly by the Corporation. 3 1.12 "Voting Stock" means the classes of stock of the Corporation entitled to vote generally in the election of directors of the Corporation. 2. VESTING. Subject to Section 3 hereof, this Warrant shall entitle the Holder to purchase up to 75,000 shares of Common Stock on or after November 21, 1998, and an additional 75,000 shares of Common Stock on each of November 21, 1999, 2000 and 2001; provided that this Warrant may not be exercised after November 21, 2007. 3. EXERCISE OF WARRANT UPON TERMINATION OF EMPLOYMENT. 3.01 TERMINATION OF VESTED WARRANT UPON TERMINATION OF EMPLOYMENT. (i) IN GENERAL. Upon the Holder's Termination of Employment by the Corporation other than by reason of death or Disability, he or she may, within 90 days from the date of such Termination of Employment, exercise all or any part of this Warrant, whether or not it was exercisable on the date of Termination of Employment, but only to the extent not previously exercised, if such Termination of Employment by the Corporation is not for Cause. If such Termination of Employment by the Corporation is for Cause, or if the Termination of Employment is the result of the Holder's voluntarily terminating his employment with the Corporation or a Subsidiary (other than by reason of death or Disability), the right of the Holder to exercise this Warrant shall terminate on the date of Termination of Employment. In no event, however, may this Warrant be exercised later than November 21, 2007. (ii) DISABILITY. Upon the Holder's Disability Date, he or she may, within one year after the Disability Date, exercise all or a part of this Warrant, whether or not this Warrant was exercisable on the Disability Date, but only to the extent not previously exercised. In no event, however, may this Warrant be exercised later than November 21, 2007. (iii) DEATH. In the event of the death of the Holder while employed by the Corporation or a Subsidiary, the right of the Holder's Beneficiary to exercise this Warrant in full (whether or not all or any part of this Warrant was exercisable as of the date of death of the Holder, but only to the extent not previously exercised) shall expire upon the expiration of one year from the date of the Holder's death or on November 21, 2007, whichever is earlier. 3.02 TERMINATION OF UNVESTED WARRANT UPON TERMINATION OF EMPLOYMENT. Except as specified in Sections 3.01 and 6.03, to the extent all or any part of this Warrant was not exercisable as of the date of Termination of Employment, the unexercisable portion of this Warrant shall expire at the date of such Termination of Employment. 4. EXERCISE. This Warrant shall be exercisable by written notice to the Corporation, which must be received by the Secretary of the Corporation not later than 5:00 P.M. local time at the principal executive office of the Corporation on the expiration date of this Warrant. Such written notice shall set forth (a) the number of shares of Common Stock being purchased, (b) the aggregate exercise price for the shares of Common Stock being purchased, (c) the exact name as it should appear on the stock certificate(s) to be issued for the shares of Common Stock being purchased, and (d) the address to which the stock 4 certificate(s) should be sent. The aggregate exercise price of shares of Common Stock purchased upon exercise of this Warrant shall be paid in full (a) in cash, (b) by delivery to the Corporation of already owned shares of Common Stock, or (c) in any combination of cash and already owned shares of Common Stock. In the event that any shares of Common Stock shall be transferred to the Corporation to satisfy all or any part of the aggregate exercise price, the part of the aggregate exercise price deemed to have been satisfied by such transfer of shares of Common Stock shall be equal to the product derived by multiplying the Fair Market Value as of the date of exercise times the number of shares of Common Stock transferred to the Corporation. The Holder may not transfer to the Corporation in satisfaction of the aggregate exercise price any fraction of a share of Common Stock, and any portion of the aggregate exercise price that would represent less than a full share of Common Stock must be paid in cash by the Holder. 5. TAXES. The Corporation shall be entitled to withhold (or secure payment from the Holder in lieu of withholding) the amount of any withholding or other tax required by law to be withheld or paid by the Corporation with respect to this Warrant. The Corporation may defer issuance of Common Stock under this Warrant unless indemnified to its satisfaction against any liability for any such tax. The amount of such withholding or tax payment shall be determined by the Corporation or its delegate and shall be payable by the Holder at such time as the Corporation determines. The Holder shall be permitted to satisfy his or her tax or withholding obligation by (a) having cash withheld from the Holder's salary or other compensation payable by the Corporation, (b) the payment of cash by the Holder to the Corporation, (c) the payment in shares of Common Stock already owned by the Holder valued at Fair Market Value, and/or (d) the withholding from this Warrant, at the appropriate time, of a number of shares of Common Stock sufficient, based upon the Fair Market Value of such Common Stock, to satisfy such tax or withholding requirements. 6. CERTAIN EVENTS. 6.01 RECAPITALIZATION. The number and kind of shares subject to this Warrant and the Exercise Price of this Warrant shall be appropriately adjusted to reflect any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other change in capitalization with a similar substantive effect upon this Warrant. The Board shall have the power and sole discretion to determine the nature and amount of the adjustment to be made in each case. 6.02 SALE OR REORGANIZATION. After any reorganization, merger, or consolidation in which the Corporation is or is not the surviving entity, the Holder shall, at no additional cost, be entitled upon the exercise of this Warrant, to the extent outstanding prior to such event to receive (subject to any required action by stockholders), in lieu of the number of shares of Common Stock then receivable on exercise pursuant to this Warrant, the number and class of shares of stock or other securities to which the Holder would have been entitled pursuant to the terms of the reorganization, merger, or consolidation if, at the time of such reorganization, merger, or consolidation, the Holder had been the holder of record of a number of shares of Common Stock equal to the number of shares of Common Stock then receivable on exercise of this Warrant. Comparable rights shall accrue to the Holder in the event of successive reorganizations, mergers, or consolidations of the character described above. 5 6.03 CHANGE IN CONTROL. In the event the Holder is employed by the Corporation or a Subsidiary when a Change in Control occurs, this Warrant shall become exercisable as of the date of the Change in Control. 6.04 EXISTENCE OF THIS WARRANT. The existence of this Warrant shall not affect the right of the Corporation or its stockholders to make or authorize any and all adjustments, recapitalizations, reclassifications, reorganizations and other changes in the Corporation's capital structure, the Corporation's business, any merger or consolidation of the Corporation, any issue of bonds, debentures or preferred stock of the Corporation, the Corporation's liquidation or dissolution, any sale or transfer of all or any part of the Corporation's assets or business, or any other corporate act or proceeding, whether of a similar nature or otherwise. 7. APPLICABLE LAW. This Warrant is issued under and shall for all purposes be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of laws. 8. RESTRICTIONS ON TRANSFER. This Warrant and the Common Stock issuable on exercise hereof have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state, and may not be sold, transferred, pledged, hypothecated or otherwise disposed of in the absence of registration or the availability of an exemption from registration under said Act and laws, and any share of Common Stock issued upon Exercise of this Warrant shall bear an appropriate legend to that effect. 9. BENEFIT OF THIS WARRANT. Nothing in this Warrant shall be construed to confer upon any person other than the Corporation and the Holder any legal or equitably right, remedy or claim under this Warrant and this Warrant shall be for the sole and exclusive benefit of the Corporation and the Holder. 10. LOSS OF WARRANT. Upon receipt by the Corporation of evidence of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Corporation, and upon surrender and cancellation or this Warrant, if mutilated, the Corporation shall execute and deliver a new Warrant of like tenor and date. 11. NOTICE TO CORPORATION. Notice or demands pursuant to this Warrant to be given or made by the Holder of this Warrant to or on the Corporation shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, until another address is designated in writing by the Corporation, V-ONE Corporation, 20250 Century Boulevard, Germantown, MD 20874, Attention: Chief Financial Officer. 6 IN WITNESS WHEREOF, the Corporation has caused this Warrant Certificate to be duly executed under its corporate seal as of the 21st day of November, 1997. V-ONE CORPORATION By: /s/ Charles Griffis ---------------------------- Name: Charles Griffis Title: Senior Vice President ACCEPTED AND AGREED: /s/ David D. Dawson - ------------------------ David D. Dawson 7 EX-10.27 5 V-ONE CORPORATION 20250 Century Blvd. Suite 300 Germantown, MD 20874 November 21, 1997 Employment Agreement V-One Corporation, a Delaware corporation (the "Company"), and David D. Dawson agree as follows: 1. POSITIONS AND RESPONSIBILITIES 1.1 You shall serve in the executive capacity as President and Chief Executive Officer and perform the duties customarily associated with such capacity from time to time and at such place or places as the Company shall designate or as shall be appropriate and necessary in connection with such employment. 1.2. You will, to the best of your ability, devote your full professional time and best efforts to the performance of your duties hereunder and the business and affairs of the Company. 1.3. You will duly, punctually and faithfully perform and observe any and all rules and regulations which the Company may now or shall hereafter reasonably establish governing the conduct of its business. 1.4. Subject to confirmation by the present Board of Directors, in accordance with the Charter and Bylaws of the Company, you will be elected as a director to fill a term expiring at the annual meeting of shareholders in the year 2000; provided, however, that in the event you employment as CEO should terminate for any reason, you hereby irrevocably agree to resign as a director effective upon such termination. 2. TERM OF EMPLOYMENT 2.1. The term of your employment agreement shall commence on November 21st 1997 and terminate in two years, subject to automatic renewal for successive one-year terms unless either party shall have notified the other in writing not less than 30 days prior to the then current expiration date of this Agreement of such party's determination not to renew this Agreement. 2.2. The Company shall have the right, on written notice to you, (a) to terminate your employment immediately at any time for cause, or (b) to terminate your employment at any time after November 21st 1997, or to not renew the Agreement at any time, without cause provided the Company shall be obligated in either case to pay to you as severance pay an amount equal to one year's base salary (or, if greater than one year, base salary for the remainder of the period from the date of termination to November 21st 1999) less applicable taxes and other required withholding and any amount you may owe to the Company, payable in full immediately upon such termination. 2.3. For purposes of Section 2,2, you may be terminated for cause if, in the reasonable determination of the Company's Board of Directors, you are convicted of any felony or of any crime involving moral turpitude, or participate in fraud against the Company, or wrongfully disclose any trade secrets or other confidential information of the Company to any of its competitors, or materially breach Section 5 of this Agreement or any provisions of the Proprietary Information Agreement (as defined in Section 6 hereof) between you and the Company. 3. COMPENSATION; STOCK OPTIONS; RELOCATION 3.1. The Company shall pay to you for the services to be rendered hereunder a base salary at an annual rate of $200,000 subject to increase, in accordance with the policies of the Company as determined by its Board of Directors from time to time, payable in installments in accordance with Company policy. (a) The Compensation Committee of the Board of Directors will review the base salary from time to time, no less frequently than annually, and may in its sole discretion adjust the base salary upward but not downward, to reflect performance, appropriate industry guideline data and other factors. (b) If certain performance goals reasonably established from time to time by the Board of Directors of the Company are met, you will be entitled to a cash performance bonus of 40% of base salary, with respect to each fiscal year. The amount of such bonus percentage may be increased but not decreased by the Board of Directors of the Company. Performance in excess of 100% of plan objectives will be rewarded at an incrementally higher percentage. Metrics will also be reasonably established to measure and compensate appropriately for performance below the plan goals. 3.2. You shall also be entitled to all rights and benefits for which you shall be eligible under deferred bonus, pension, group insurance, profit-sharing or other Company benefits which may be in force from time to time and provided for the Company's executives generally. 3.3. You will be reimbursed for reasonable expenses incurred on behalf of the Company upon presentation of appropriate receipts. 3.4 Stock Options You have been granted option to purchase 800,000 shares of V-One Corporation Common Stock. The purchase price per share is $3.125 The option vests over four years at a rate of one-fourth per year on each of November 21st 1998, 1999, 2000 and 2001. In the event that the Company should terminate you without case, then the option for the year in which such termination occurs shall fully vest and shall be exercisable within 90 days. All unvested options will also immediately vest in full upon the declaration of an Change in Control as set forth in Paragraph 2.06 of the V-One 1996 Incentive Stock Plan. The options granted will be ISO's as defined by the Internal Revenue Code to the maximum extent possible. Options above that limit will issued as non-qualified stock options. Unvested warrants/options will expire in the event your employment is terminated voluntarily by you, or in the event your employment is terminated by the Company for cause. 3.5 Relocation The Company will pay for your direct relocation expenses, including the reasonable and customary cost of moving your household goods and reasonable and customary closing costs for the sale of your present home and the purchase of a new home, such as real estate brokers' commissions, together with an additional Amount of cash sufficient to pay any personal income taxes payable as a result of the Company's payment of your direct relocation expenses. In the interim, the Company will also provide you a furnished apartment, or suitable living quarters, in the general vicinity of the Company's corporate headquarters. The total amount of moving & living expenses associated with your relocation will be limited to $60,000. 4. BOARD OF DIRECTORS Subject to the provisions of the Company's charter and bylaws, one directorship (in addition to your own) shall be reserved for election of a person nominated by you and approved by a majority of the directors. In addition, a committee of the Board, consisting of you, James F. Chan, and one other director agreed upon by you and James F. Chen will be formed to make recommendations for replacement of members of the Board of Directors during the first twelve months of your tenure. Notwithstanding the foregoing, however, it is understood and agreed that no action concerning the composition of the Board of Directors shall be taken except in strict conformity with the charter and bylaws of the Company. It is further understood that the charter presently provides that a director may not be removed from office except for cause and upon a vote of at least 67% of the outstanding shares of the capital stock of the Company entitled to vote generally in the election of directors cast at a meeting called for that purpose. 5. OTHER ACTIVITIES DURING EMPLOYMENT 5.1 Except as stated herein or with the prior written consent of the Company's Board of Directors, you will not during the term of this Agreement undertake or engage in any other employment, occupation or business enterprise other than ones in which you are a passive investor with the exception of your current position on the Board of Directors of Progressive Systems which all parties acknowledge is not in competition with the Company. 5.2. Except as permitted by Section 5.3, you will not acquire, assume or participate in, directly or indirectly, any position, investment or interest adverse or antagonistic to the Company, its business or prospects, financial or otherwise, or take any action toward or looking toward any of the foregoing. 5.3. During the term of your employment by the Company except on behalf of the Company or its subsidiaries, you will not directly or indirectly, whether as an officer, director, stockholder, partner, proprietor, associate, representative, consultant, or otherwise become or be interested in any other person, Corporation, firm, partnership or other entity whatsoever which manufactures, markets, sells, distributes or provides consulting services concerning products or services which compete with those of the Company or any of its subsidiaries. However, nothing in this Section 5.3 shall preclude you from holding less than ten percent of the outstanding capital stock of any corporation required to file periodic reports with the Securities and Exchange Commission under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the securities of which are listed on any Securities exchange, quoted on the National Association of Securities Dealers Automated Quotation System or traded in the over-the-counter market. During the term of your employment with the Company you will also not directly or indirectly intentionally solicit, endeavor to entice away from he Company, or any of its subsidiaries, or otherwise interfere with the relationship of the Company, or any of its subsidiaries with, any person who is employed by or otherwise engaged to perform services for the Company, or any of its subsidiaries (including, but not limited to, any independent sales representatives or organizations), or any person or entity who is, or was within the then most recent 12-month period, a customer or client of the Company, or any of its subsidiaries, whether for your own account or for the account of any other person, corporation, firm, partnership or other entity whatsoever. 6. FORMER EMPLOYMENT 6.1. You represent and warrant that your employment by the Company will not conflict with and will not be constrained by any prior employment or consulting agreement or relationship. You represent and warrant that you do not possess confidential information arising out of prior employment which, in your best judgment, could be utilized in connection with your employment by the company in the absence of Section 6.2. 6.2. If, in spite of the second sentence of Section 6.1, you should find that confidential information belonging to any former employer might be usable in connection with the company's business, you will not intentionally disclose to the Company or use on behalf of the Company any confidential information belonging to any other former employers; but during your employment by the company you will use in the performance of your duties all information which is generally known and used by persons with training and experience comparable to your own and all information which is common knowledge in the industry or otherwise legally in the public domain. 7. PROPRIETARY INFORMATION AND INVENTIONS You agree to be bound by the provisions of the Proprietary Information Agreement dated the date of this Agreement between you and the Company (the 'Proprietary Information Agreement'). 8. SURVIVAL Your duties under the Proprietary Information Agreement shall survive termination of your employment with the Company to the extent provided under such Proprietary Information Agreement. 9. ASSIGNMENT This Agreement and the rights and obligations of the parties hereto bind and inure to the benefit of any successor or successors of the Company by way reorganization, or merger and any assignee of all or substantially all or its business and properties, but, except as to any such successor or assignee of the Company, neither this Agreement nor any rights or benefits hereunder may be assigned by the Company or by you. 10. INTERPRETATION In case any one or more of the provisions contained in the agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provision of this agreement; and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If, moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 11. NOTICES Any notice which the Company is required or may desire to give to you shall be given by personal delivery or registered or certified mail, return receipt requested, addressed to you at the address of record with the Company, or at such other place as you may from time to time designate in writing. Any notice which you are required or may desire to give to the Company hereunder shall be given by personal delivery or by registered or certified mail return receipt requested, addressed to the Company at its principal office, or at such other office as the Company may from time to time designate in writing, to the attention of the Chairman of the Compensation Committee. The date of personal delivery or the date of mailing such notice shall be deemed to be the date of delivery thereof. 12. WAIVER If either party should waive any breach of any provisions of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provisions of this Agreement 13. COMPLETE AGREEMENT AMENDMENTS The foregoing, together with a proprietary Information Agreement between you and the Company, is the entire agreement of the parties with respect to the subject matter thereof and supersedes all prior understandings. This Agreement may not be amended, supplemented canceled or discharged except by written instrument executed by both parties hereto. 14. APPLICABLE LAW This agreement has been negotiated in, and shall be governed by the laws of the State of Maryland, without giving effect to conflict of law principles. 15. HEADING The heading of the sections hereof are inserted for convenience only and deemed to constitute a part hereof nor to affect the meaning thereof. V-One Corporation By /s/ William E. Odom -------------------------- Chairman, Compensation Committee Board of Directors Accepted and agreed as of the 21st Day of November 1997 /s/ David D. Dawson - ------------------------ David D. Dawson EX-10.28 6 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT, made and entered as of this 7 day of NOVEMBER , 1997 ("Effective Date"), by and between V-ONE Corporation, a Delaware corporation with its principal executive offices at 20250 Century Blvd, Suite 300, Germantown, Maryland 20874 ("Company"), and CHARLES B. GRIFFIS, an individual residing at 13010 BOSWELL COURT, POTOMAC, MD 20854, ("Employee"); WHEREAS, the Company wishes to assure itself of the continued services of Employee for the period provided in this Amendment, and Employee is willing to serve in the employ of the Company on a full-time basis for said period; WHEREAS, the Company and Employee desire to set forth the amounts payable and benefits to be provided by the Company to Employee in the event of a termination of Employee's employment with the Company under the circumstances set forth herein, including after the happening of a Change in Control (as defined herein); and WHEREAS, the parties intend that the provisions of this Agreement shall be in lieu of Employee's right to make any claim or demand with respect to any presently existing or prospectively adopted severance policy of the Company; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. EMPLOYMENT. The Company agrees to continue Employee in its employ, and Employee agrees to remain in the employ of the Company, for the period stated in Section 3 hereof and upon the other terms and conditions herein provided. 2. POSITION AND RESPONSIBILITIES. The Company employs Employee, and Employee agrees to serve, as SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER of the Company on the conditions hereinafter set forth. Employee agrees to perform such services consistent with his position as SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER as shall from time to time be assigned to him by the Company's Chief Executive Officer. 3. TERM AND DUTIES. (a) TERM OF EMPLOYMENT. Provided that the Employee has been continuously employed by the Company through the date immediately preceding a Change of Control (as hereinafter defined), the term of the employee's employment shall be extended for a period of 12 months from the date of the Change of Control, unless sooner terminated in accordance with the terms of this Amendment. (b) DUTIES. During the period of his employment hereunder by the Company and except for illness, reasonable vacation periods having an aggregate duration of not less than that provided pursuant to the Company's practices in effect on the Effective Date, and reasonable leaves of absence, Employee shall devote all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder. (c) HEADQUARTERS LOCATION. The Company agrees to maintain Employee's offices within Montgomery County in the State of Maryland ("Base Employment Area"). 4. COMPENSATION AND REIMBURSEMENT OF EXPENSES. (a) COMPENSATION. (i) For all services rendered by Employee in any capacity during his employment under this Agreement the Company shall pay Employee as compensation (A) an annual salary ("Base Salary") and (B) such bonus for such period, if any, as may be awarded to Employee from time to time by the Board or by a committee designated by the Board. Effective as of the Effective Date and until adjusted in accordance with the provisions hereof, Base Salary shall be paid at the rate of not less than $150,000.00 per year. Such bonus shall be based on results of operations, special contributions made by Employee, seniority, competitive conditions in the Company's industry, and such other factors as the Board (or a committee or committees designated by the Board) shall consider relevant. (ii) Such salary shall be payable in accordance with the customary payroll practices of the Company, but in no event less frequently than monthly, and any such bonus shall be payable in the manner specified by the Board, or committee of the Board, at the time any such bonus is awarded. (b) REIMBURSEMENT OF EXPENSES. The Company shall pay or reimburse Employee, in accordance with such polices and procedures as the Board may establish from time to time, for all reasonable travel and other expenses incurred by Employee in the performance of his obligations under this Agreement. (c) CONTINUATION OF STOCK OPTIONS. In addition to the foregoing compensation, the stock option rights granted to Employee under the existing employment agreement or at any time during the course of the Employee's employment, shall remain in full force and effect. 5. PARTICIPATION IN BENEFIT PLANS. The payments provided for in this Agreement, except where specifically provided otherwise, are in addition to any other benefits to which Employee may be, or may become, entitled under any of Page 2 the Company's group hospitalization, health, dental, care, and/or sick-leave plans; life, other insurance and/or death benefit plans; travel and/or accident insurance plans; deferred compensation plans; capital accumulation programs; restricted income and/or stock purchase plans; stock option plans; retirement income and/or pension plans; supplemental pension plans; excess benefit plans; short- and long-term disability programs; and other present and future group employee benefit plans and programs for which Company executives are or shall become eligible. Employee shall be eligible to receive, during the period of his employment under this Agreement and during any subsequent period for which he shall be entitled to receive payments from the Company under Section 6, all of the foregoing benefits and emoluments for which employees are eligible under every such plan and program to the extent permissible under the general terms and provisions of such plans and programs and in accordance with the provisions thereof. Nothing contained in this Agreement shall prevent the Board from amending or otherwise altering any such plan, program, or arrangement as long as such amendment or alteration equitably affects all the Company's employees of the level of vice president or above. 6. TERMINATION OF EMPLOYMENT. Employee's employment under this Agreement may be terminated by the Company or Employee as follows: (a) DISABILITY. (i) If Employee fails to perform his duties under this Agreement on account of Disability (as hereinafter defined), the Company may give notice to Employee to terminate this Agreement on a date not less than thirty (30) days thereafter ("Notice Period") and, if Employee has not resumed full performance of his duties under this Agreement within such Notice Period, then Employee's employment under this Agreement will terminate on the date provided in the notice ("Disability Termination Date"). (ii) During any period of Disability, the Company shall maintain and pay for health insurance benefits for Employee at least equal to those he had at the commencement of such Disability. (iii) As used in this Agreement, the term "Disability" shall mean the complete inability of Employee to perform his duties under this Agreement by reason of his total and permanent disability, as determined by an independent physician selected with the approval of the Board and Employee. (b) DEATH. If Employee dies while employed under this Agreement, his employment under this Agreement will terminate as of the date of his death ("Date of Death"). Within thirty (30) days after the Date of Death, the Company shall pay to the Employee's legal representative Employee's Base Salary as then Page 3 in effect that has accrued to the last day of the month in which the Date of Death occurs. (c) TERMINATION BY EMPLOYEE. In the event that (i) the Company terminates Employee's employment for any reason (other than because of death, Disability, or "just cause" (as hereinafter defined)) within one (1) year following a Change of Control (as hereinafter defined), (ii) Employee terminates his employment with the Company because of the Company's material breach of this Agreement, (iii) Employee's Base Salary, as in effect on the Effective Date or as the same may be increased from time to time, is reduced (unless such reduction is permitted by this Agreement), or (iv) the Company's principal executive offices are relocated to a location outside the Base Employment Area or the Company requires Employee to be based anywhere other than the Company's principal executive offices (except for required travel on the Company's business) then: (1) the Company shall pay Employee within ten (10) days following the date his employment with the company is so terminated ("Employee Termination Date") as severance pay a lump sum payment equal to the sum of (A) the aggregate amount of the future Base Salary payments Employee would have received if he continued in the employ of the Company until twelve (12) months following the Employee Termination Date and (B) Employee's projected bonus for the year in which the Employee Termination Date occurs, which shall be computed assuming that Employee had remained in the Company's employ until the end of that year and that all performance goals or other performance measures have been met at the then current level for the remainder of that year. The payment required by clause (A) shall be calculated at the highest rate of Base Salary paid to Employee at any time under this Agreement with such payments discounted to present value at a discount rate equal to one percent (1%) above the per annum one-year Treasury Bill rate, as published in the Eastern Edition of the Wall Street Journal, on the Employee Termination Date (or the next preceding date on which such rate is published), applied to each such future payment from the time it would have become payable to the date Employee receives payment, and (2) all unvested stock options provided for under the terms of the existing employment agreement shall immediately vest on the Employee Termination Date and the exercise period for such options shall be extended to the latest date on which such options could have been exercised if the Employee had remained employed by the Company through the original term as provided in paragraph 3(a) above. Page 4 No termination of employment pursuant to this Section 6(c) shall operate to prohibit Employee from negotiating and entering into a new employment contract with the Company or such entity as survives the Change in Control. (d) RETIREMENT. Employee shall be entitled to terminate his employment with the Company on, or at any date after, a date on which he is at least sixty-five (65) years old. Any date on which Employee elects to retire shall be referred to as the "Retirement Termination Date." The Company shall pay to Employee his Base Salary as then in effect that has accrued to the last day of the month in which the Retirement Termination Date occurs. (e) TERMINATION BY THE COMPANY FOR JUST CAUSE. (i) The Company may terminate Employee's employment for "just cause" at any time by giving written notice thereof to Employee. (Except as provide below, the date of such notice is the "Just Cause Termination Date" unless otherwise provided in the notice). Within thirty (30) days after the Just Cause Termination Date, the Company shall pay to Employee his Base Salary as then in effect that has accrued to the Just Cause Termination Date. For the purposes of this subparagraph, "just cause" shall mean termination because of Employee's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses), or material breach of any provision of this Agreement. Unless otherwise determined by the Board, Employee shall have no right to receive compensation or other benefits under this Agreement after a termination for just cause. (ii) Notwithstanding the foregoing, Employee shall not be deemed to have been terminated for just cause pursuant to this Section 6(e) unless and until he shall have received a copy of a resolution duly adopted by the affirmative vote of a majority of the Board, at a meeting held for that purpose, declaring that in the good faith opinion of the Board one or more of the conditions set forth in clause (i) of this Section 6 (e) has occurred and specifying the particulars thereof. 7. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events, directly or indirectly or in one or more series of transactions: (i) A consolidation or merger of the Company with any third party (which includes a single person or entity or a group of persons or entities Page 5 acting in concert) not wholly owned directly or indirectly by the Company (a "Third Party"), unless the Company is the entity surviving such merger or consolidation; (ii) A transfer of all or substantially all of the assets of the Company to a Third Party or a complete liquidation or dissolution of the Company; (iii) A Third Party (other than James F. Chen and his affiliates), directly or indirectly, through one or more subsidiaries or transactions or acting in concert with one or more persons or entities: (A) acquires beneficial ownership of more than 20% of the classes of stock of the Company entitled to vote generally in the election of directors of the Company ("Voting Stock"); (B) acquires irrevocable proxies representing more than 20% of the Voting Stock; (C) acquires any combination of beneficial ownership of Voting Stock and irrevocable proxies representing more than 20% of the Voting Stock; (D) acquires the ability to directly or indirectly exercise a controlling influence over the management or policies of the Company; (E) becomes the Chief Executive Officer or holds a comparable management position. (iv) any election has occurred of persons to the Board that causes a majority of the Board to consist of persons other than (A) persons who were members of the Board on the Effective Date and/or (B) persons who were nominated for election as members of the Board by the Board (or a committee of the Board) at a time when the majority of the Board (or of such committee) consisted of persons who were members of the Board (or a committee of the Board on the Effective Date; PROVIDED, HOWEVER, that any persons nominated for election by the Board (or a committee of themselves nominated by such Board (or a committee of such Board), shall for this purpose be deemed to have been nominated by a Board composed of persons described in clause (A); or (v) A determination is made by the Securities and Exchange Commission ("SEC") or any similar agency having regulatory control over the Company that a Change in Control, as defined in the securities laws or regulations then applicable to the Company, has occurred. Notwithstanding any provision contained herein, a Change in Control shall not include any of the above described events if they are the result of a Third Party's inadvertently acquiring beneficial ownership or irrevocable proxies or a Page 6 combination of both for 20% or more the Voting Stock, and the Third Party as promptly as practicable thereafter divests itself of beneficial ownership or irrevocable proxies for a sufficient number of shares so that the Third Party no longer has beneficial ownership or irrevocable proxies or a combination of both for 20% or more of the Voting Stock. 8. EXCISE TAX. (a) EXCESS PARACHUTE PAYMENT. Notwithstanding anything to the contrary in this Agreement, if tax counsel selected by the Company and acceptable to Employee determines that any portion of any payment by the Company to Employee under this Agreement or otherwise would constitute an "excess parachute payment," then the payments to be made to Employee by the Company shall be reduced such that the value of the aggregate payments that Employee is entitled to receive under this Agreement and any other agreement, plan or program of the Company shall be one dollar ($1.00) less than the maximum amount of payments that Employee may receive without becoming subject to the tax imposed by Section 4999 of the Code; PROVIDED, HOWEVER, that the foregoing limitation shall not apply in the event that such tax counsel determines that the benefits to Employee on an after-tax basis (i.e., after federal, state, and local income and excise taxes) if such limitation is not applied would exceed the after-tax benefits to Employee if such limitation is applied. (b) THE COMPANY NOT RESPONSIBLE FOR EXCISE TAX. If the Internal Revenue Service assesses an excise tax against Employee pursuant to Sections 280G and 4999 of the Code, the Company shall be under no obligation to Employee with respect to the amount of (i) the excise tax or (ii) any additional federal income tax due from and payable by Employee as the result of his receipt of any payment hereunder or otherwise. 9. COVENANT NOT TO COMPETE. Employee covenants and agrees that, in consideration of the amounts to be paid Employee hereunder and other good and valuable consideration, for a period of two (2) years beyond the Retirement Termination Date or the Just Cause Termination Date (each a "Termination Date"), Employee shall not be employed as an executive officer of, control, manage, or otherwise participate in the management of the business of a "significant competitor" of the Company. The term "significant competitor" shall mean any company or division of a company that, on the date of its employment of Employee, derives more than 50% of its gross revenues from network security products and/or services, or a company that owns or controls a majority of the voting securities of any such company. The Company and Employee agree that the terms and conditions of this Section 9 shall survive the termination of this Agreement following the Termination Date. Page 7 10. CONFIDENTIAL INFORMATION. (a) Employee shall not, directly or indirectly, during the term of his employment hereunder and at any time after a termination of his employment for any reason, to the detriment of the Company, knowingly divulge, disclose, disseminate, publish, reveal or otherwise communicate to any unauthorized person any Confidential Information relating to the Company, the Company's subsidiaries or affiliates, or to any of the businesses operated by any of them. (b) Employee confirms that Confidential Information constitutes the exclusive property of the Company and the Company's subsidiaries and affiliates. Upon a termination of his employment hereunder, Employee will promptly return to the Company all Materials (whether prepared by Employee or others) containing, constituting, embodying or illustrating Confidential Information, and all other property of the Company or of the Company's subsidiaries and affiliates then in his possession or custody. (c) As used in this Section 10 the following terms shall have the following meanings: (i) the term "Confidential Information" means information disclosed to Employee or known to Employee as a consequence of or through his employment by the Company and not generally known in the Company's industry. Such information includes, but is not limited to, information relating to the Company's products, research, development, accounting, finances, marketing, merchandising and selling, and specifically includes future business plans, client lists, lists of current and prospective employees and consultants, potential acquisition candidates, and training and operating methods and techniques. The term "Confidential Information" does not include information that (A) at the time it was received by Employee was generally available to the public; (B) prior to its use by Employee, becomes generally available to the public through no act or failure of Employee; or (C) is received by Employee from a person who is not a party to this Agreement and who is not under an obligation of confidence with respect to such information. (ii) "Materials" includes, but is not limited to, books, notebooks, documents, records, photographs, films, video tapes, audio tape recordings, computer disks, diskettes or other electronic or optical storage media, software and support materials, and similar or other materials. (d) Employee shall not otherwise knowingly act or conduct himself (i) to the material detriment of the Company or the Company's subsidiaries or affiliates, or (ii) in a manner that is inimical or contrary to the interests thereof. Page 8 (e) The Company and Employee agree that the provisions of this Section 10 shall survive the termination of this Agreement for any reason whatsoever. 11. GENERAL PROVISIONS. (a) ENTIRE AGREEMENT. This Amendment, together with the employment agreement existing between the parties immediately prior to the Effective Date (as amended herein), contains the entire understanding between the parties hereto with respect to the employment of Employee. (b) CONSOLIDATION, MERGER, OR SALE OF ASSETS. Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation or corporations; PROVIDED, HOWEVER, that such consolidation, merger or transfer shall not affect Employee's rights under Section 6(c) hereof. Upon such a consolidation, merger, or transfer of assets and assumption, the term "the Company", as used herein, shall mean such other corporation or corporations, and this Agreement shall continue in full force and effect and such other corporation or corporations shall be liable for all payments to Employee under the Agreement. (c) NO DUTY TO MITIGATE. Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by Employee offset in any manner the obligations of the Company hereunder. (d) NONASSIGNABILITY. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof is assignable by Employee, his beneficiaries, or legal representatives without the Company's prior written consent; PROVIDED, HOWEVER, that nothing in this Section 11 (d) shall preclude (i) Employee from designating a beneficiary to receive any benefit payable hereunder upon his death, or (ii) the executors, administrators, or other legal representatives of Employee or his estate from assigning any rights hereunder to the person or persons entitled thereto. (e) NO ATTACHMENT. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or the execution, attachment, levy, or similar process or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. (f) GENERAL CREDITOR. All payments required hereunder shall be made from the Company's general assets and Employee shall have no rights greater than the rights of a general creditor of the Company. Page 9 (g) NOTICES. All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or sent by certified mail, return receipt requested, first-class postage prepaid, to the parties to this Agreement at the following addresses: (i) if to the Company at: V-ONE CORPORATION 20250 Century Boulevard Suite 300 Germantown, Maryland 20874 and (ii) if to Employee at the address set forth at the end of this Agreement or to such other address as either party to this Agreement shall have last designated by notice to the other party. All such notices and communications shall be deemed to have been received on the earlier of the date of receipt or the third business day after the date of mailing thereof. (h) BINDING EFFECT; BENEFITS. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any person, other than the parties to this Agreement or their respective successors or permitted assigns, any legal or equitable right, remedy, or claim under or in respect of any agreement or any provision contained herein. (i) DISPUTE RESOLUTION. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the then existing Commercial Arbitration Rules of the American Arbitration Association ("AAA"). A request for arbitration shall be filed in the AAA office closest to the Company and the arbitration shall be conducted in Montgomery County, Maryland. (ii) The parties irrevocably consent to the jurisdiction of the Federal and state courts located in the State of Maryland for any purpose relating to this agreement. (iii) The arbitrator(s) may, in the course of the proceedings, order any provisional remedy or conservatory measure (including, without limitation, attachment, preliminary injunction, or the deposit of specified security) that the arbitrator(s) consider to be necessary, just, and equitable. The failure of a party to comply with such an interim order may, after due notice and opportunity to cure such noncompliance, be treated by the arbitrator(s) as a default, and some or all of the claims or defenses of the defaulting party may Page 10 be stricken and partial or final award entered against such party, or the arbitrator(s) may impose such lesser sanctions as may be deemed appropriate. A request for interim or provisional relief by a party to a court shall not be deemed incompatible with the agreement to arbitrate or a waiver of that agreement. (iv) The parties acknowledge that any remedy at law for breach of this Agreement may be inadequate, and that, in the event of a breach of Sections 9 and 10 by Employee, any remedy at law would be inadequate in that any such breach would cause irreparable competitive harm to the Company. Consequently, in addition to any other relief that may be available, either party may seek temporary and permanent injunctive relief, including, without limitation, specific performance, without the necessity of the prevailing party proving actual damages and without regard to the adequacy of any remedy at law. (v) In the event Employee is the prevailing party in any arbitration or court proceeding, then Employee shall be entitled to reimbursement by the Company for all reasonable legal and other professional fees and expenses incurred by Employee in such proceeding or in enforcing any award, including reasonable attorneys' fees. (j) WAIVER. Either party hereto may by written notice to the other (i) extend the time for the performance of any of the obligations or other actions of the other under this Agreement; (ii) waive compliance with any of the conditions or covenants of the other contained in this Agreement; and (iii) waive or modify performance of any of the obligations of the other under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, covenant, or agreement contained herein. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach, and no failure by either party to exercise any right or privilege hereunder shall be deemed a waiver of such party's rights or privileges hereunder or shall be deemed a waiver of such party's rights to exercise that right or privilege at any subsequent time or times hereunder. (k) AMENDMENT. This Agreement may be terminated, amended, modified, or supplemented only by a written instrument executed by Employee and the Company. (l) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the law of the State of Maryland, regardless of the law that might be applied under principles of conflict of laws; PROVIDED, HOWEVER, that Page 11 any arbitration under Section 11(i) hereof shall be conducted in accordance with the United States Arbitration Act as then in force. (m) SECTION AND OTHER HEADINGS. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. (n) WITHHOLDING OF TAXES. The Company may withhold from amounts required to be paid to Employee hereunder any applicable federal, state, local, and other taxes with respect thereto; PROVIDED, HOWEVER, that the Company shall promptly pay over the amounts so withheld to the appropriate taxing bodies and provide to executive appropriate statements on forms proscribed for such purposes on the amounts so withheld. (o) SEVERABILITY. If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held so invalid, and each such other provision shall, to the full extent consistent with law, continue in full force and effect. If any provision of this Agreement shall be held invalid in part, such invalidity shall in no way affect the rest of such provisions not held so invalid, and the rest of such provision, together with all other provisions of this Agreement, shall to the full extent consistent with law continue in full force and effect. (p) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and its seal to be affixed hereunto by its officers thereunto duly authorized, and Employee has signed this Agreement, all as of the Effective Date. ATTEST: V-ONE CORPORATION /s/ Edward V. Curry By: /s/ James F. Chen - ------------------------------- --------------------------------- (Corporate Seal) WITNESS: Employee: /s/ Lisa M. Albrecht /s/ Charles B. Griffis - -------------------------------- ------------------------------------ Page 12 EX-10.29 7 AMENDMENT TO SECTION 2.08 OF THE VIRTUAL OPEN NETWORK ENVIRONMENT CORPORATION 1996 INCENTIVE STOCK PLAN FURTHER RESOLVED, that Section 2.08 of the Virtual Open Network Environment Corporation 1996 Incentive Stock Plan be, and it hereby is, amended to read in its entirety as follows: COMMITTEE means a committee of the Board as may be appointed, from time to time, by the Board. The Board may, from time to time, appoint members of the Committee in substitution for those members who were previously appointed and may fill vacancies, however caused, in the Committee. The Committee shall be composed of at least two directors of the Company, each of whom is a "non-employee director" as defined in Rule 16b-3, as promulgated by the SEC under the Exchange Act, and an "outside director" within the meaning of Section 162(m). The Committee shall have the power and authority to administer the Plan in accordance with Article III. If, however, at least two of the Company's directors are not both "non-employee directors" and "outside directors," the Plan shall be administered by the Board and the term "Committee" as used herein shall mean the Board. EX-23.1 8 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of V-ONE Corporation on Form S-3 (Registration No. 333-43795) and the Registration Statement of V-ONE Corporation on Form S-8 (Registration No. 333-17749) of our report dated March 13, 1998, on our audits of the financial statements of V-ONE Corporation as of December 31, 1997 and 1996 and for the three fiscal years in the period ended December 31, 1997, which report is included on page 38 in this Form 10-K. /s/ Coopers & Lybrand L.L.P. McLean, Virginia March 30, 1998 EX-27 9
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 12-MOS DEC-31-1997 DEC-31-1997 6,203,525 0 2,556,979 1,500,405 368,120 9,456,885 1,417,238 415,657 11,850,086 1,598,029 0 3,766,297 0 13,070 6,144,950 11,860,086 9,402,744 9,402,744 2,161,594 16,955,087 0 0 13,130 (9,385,598) 0 (9,385,598) 0 0 (612,600) (9,998,198) (0.78) (0.78)
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