-----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, LuGxTE0ycHcbGUkkGUDPswBSkFza4v++IAAvfNQ/S7FPaGgVf3NJhrGKTNKyKn+q SJsVr/6GLVi/zWN0EYAdlQ== 0000898432-99-000461.txt : 19990409 0000898432-99-000461.hdr.sgml : 19990409 ACCESSION NUMBER: 0000898432-99-000461 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: V ONE CORP/ DE CENTRAL INDEX KEY: 0001008946 STANDARD INDUSTRIAL CLASSIFICATION: 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: 99584168 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, 1998 [ ] 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 March 1, 1999 was approximately $50,284,000. This calculation does not reflect a determination that persons are affiliates for any other purposes. Registrant had 16,761,299 shares of Common Stock outstanding as of March 1, 1999. DOCUMENTS INCORPORATED BY REFERENCE Part III -- Portions of the registrant's definitive proxy statement to be issued in conjunction with registrant's 1999 annual stockholder's meeting to be held on May 13, 1999. 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 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. FINANCING ACTIVITIES 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 was convertible into shares of Common Stock, $0.001 par value per share, of the Company ("Common Stock") and warrants to purchase shares of Common Stock ("Series A Warrants"). Due to the Maximum Share Amount limitation found in Section 7(a)(1) of the Certificate of Designations of the Series A Stock ("Certificate"), the Company was obligated to convert shares of Series A Stock held by Advantage. On September 21, 1998, the Company sent an inconvertibility notice to Advantage pursuant to Section 7(a)(2) of the Certificate indicating that, as of September 11, 1998, Advantage had the right to have some of its shares of Series A Stock 2 redeemed by the Company for the Share Limitation Redemption Price (which term is defined in the Certificate). On September 22, 1998, the Company and Advantage entered into a waiver agreement ("Waiver Agreement") and Amendment No. 1 ("Amendment No. 1") to the Registration Rights Agreement dated as of December 3, 1997 by and between the Company and Advantage (as amended, "Registration Rights Agreement"). Pursuant to the Waiver Agreement, the Company redeemed 2,462 shares of Series A Stock for $3,200,000 in the aggregate on November 20, 1998. Advantage waived all accrued dividends on the Series A Stock. No shares of Series A Stock remain outstanding. Simultaneously with the execution of the Waiver Agreement, the Company granted to Advantage warrants to purchase 100,000 shares of the Company's Common Stock at an exercise price of $2.125 per share and warrants to purchase 389,441 shares of the Company's Common Stock at an exercise price of $4.77 per share, all of which expire on September 21, 2003 (collectively "Additional Warrants"). Pursuant to the terms of Amendment No. 1, the Company has agreed to file a registration statement with respect to the shares of Common Stock underlying the Additional Warrants. On November 20, 1998, the Company sold 1,860,000 shares of its Common Stock, at $2.00 per share to a group of accredited investors pursuant to its Placement Agent Agreement dated October 9, 1998, as amended, between the Company and LaSalle St. Securities, Inc. ("LaSalle"). The shares of Common Stock were sold pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended ("Securities Act"). The Company received $3,366,600 in net sale proceeds after payment of commissions of 8% of the gross sale proceeds and non-accountable expense allowance of 1.5% of the gross sale proceeds to LaSalle. LaSalle also received warrants in the aggregate to purchase 50,000 shares of Common Stock at an exercise price of $2.125 per share. These warrants were issued pursuant to Rule 506 of Regulation D promulgated under the Securities Act. Between December 4, 1998 and December 9, 1998, the Company, sold 675,000 shares of its Common Stock at $2.00 per share to certain accredited investors pursuant to Rule 506 of Regulation D promulgated under the Securities Act. The Company received $1,308,000 in net sale proceeds after payment of commissions to LaSalle and Coldwater Capital LLC. On February 24, 1999, V-ONE obtained a $3,000,000 term loan from Transamerica Business Credit Corporation. The term loan is due on August 31, 1999. Thereafter, the term loan will convert into a revolving credit facility if V-ONE is not in default under its credit agreement with Transamerica. The maximum amount that can be borrowed by V-ONE under the revolving credit facility is the lesser of $3,000,000 and 80% of eligible receivables. The revolving credit facility expires on August 31, 2000. In connection with this loan, V-ONE granted a security interest in all of its assets, including its intellectual property, to Transamerica. If V-ONE is unable to repay the loan or there is an event of default under the loan, Transamerica could foreclose on its security interest. Pursuant to the terms of the loan agreement relating to this term loan, receipt by V-ONE of an opinion from its independent auditors which expresses doubt with regard to the ability of V-ONE to continue as a going concern constitutes an event of default under the loan agreement and allows Transamerica to foreclose on its security interest. V-ONE has received such an opinion from its independent auditors in connection with their review of V-ONE's financial statements as of and for the year ended December 31, 1998. As of the date of such opinion, there was an event of default under the loan agreement; however, Transamerica has subsequently waived this event of default. In consideration for such waiver, V-ONE has agreed to (a) grant an affiliate of Transamerica warrants to purchase 100,000 shares of Common Stock at an exercise price of $3.25 per share and (b) accept an additional financial covenant that V-ONE's net worth will be $5,000,000 as of June 30, 1999 and September 30, 1999. There can be no assurance that V-ONE will be able to comply with the loan covenants. 3 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 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 wide area networks. 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 extranets, 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. 4 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, 5 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, 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 6 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. - - - - Augment and Integrate with Existing Security Products. The Company intends to 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:
- - --------------------------------------------------------------------------------------------------------------- DATE OF PRODUCT CATEGORY DESCRIPTION INTRODUCTION 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 Air SmartGate(TRADEMARK) Wireless Client/ A system that provides an end-to-end security Q4 1998 Server Security system for two-way pagers 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 - - --------------------------------------------------------------------------------------------------------------- 7 - - --------------------------------------------------------------------------------------------------------------- SmartCAT(REGISTERED) Smart card Smart card client software that is interoperable Q2 1994 technology with third-party smart cards and smart card readers that incorporate SmartGate(REGISTERED) technology 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(REGISTERED) technology Wallet Electronic Electronic technology that enables secure payment Q3 1995 Technology(TRADEMARK) commerce transactions containing credit card information incorporated in SmartGate(REGISTERED) technology - - ---------------------------------------------------------------------------------------------------------------
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(TRADEMARK), 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 RedHat's Linux, Berkeley Software Development, Inc.'s BSD/OS, Sun Microsystems, Inc.'s Solaris, and Trusted Solaris, and Hewlett-Packard Company's HP-UX. SmartGate client supports Microsoft Corporation's Windows versions 3X, Windows 95 and 98 and Windows NT. A turnkey version of SmartGate server is available for BSD/OS on an Intel Pentium hardware platform. Air SmartGate - working in a manner similar to SmartGate allows for secure, encrypted, authenticated communication between two-way pagers and e-mail through a SmartGate server. 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. 8 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 2.6 and SmartPass client version 3.3. 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 9 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. 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. In 1996, the Company opened regional sales offices in New York, New York and San Francisco, California. The Company added a Chicago, Illinois regional sales office in 1997, and added regional offices in Boston, Massachusetts, Columbus, Ohio, Northern Virginia, and Houston, Texas in 1998. 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 established relationships with international distributors in the United Kingdom, Sweden, Germany, Belgium, Canada, China, Chile, Japan, Singapore, South Africa, South Korea and Australia. 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. V-ONE has broadened its customer base and had no customers with 10% or more of its 1998 sales. Approximately 12% of 1997 sales were to Government Technology Services, Inc. 10 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 Ascend Communications, Inc., AXENT Technologies, Inc., Northern Telecom Limited (Nortel Networks), Check Point Software Technology Ltd., Cisco Systems, Inc., International Business Machines Corporation, Secure Computing Corporation, Sun Microsystems, Inc. and Network Associates, Inc. The Company competes to a lesser degree with token vendors because the Company's SmartGate product supports many vendor tokens. Token vendors include, AXENT Technologies, Inc., Leemah DataCom Security Corporation, National Semiconductor Inc., Racal-Guardata, Inc. and Security Dynamics Technologies, Inc. ("Security Dynamics"). 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. 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 11 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 1998, no customer accounted for more than 10% of product revenues, while in 1997, Government Technology Services, Inc. ("GTSI") accounted for approximately 12% of total revenues. In 1996, product revenues from MCI and the National Security Agency ("NSA") accounted for approximately 14% and 14%, 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 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. 12 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 the license agreement or takes 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 four patents, which expire in 2013, 2014, and 2015 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 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 13 "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 concerns the potential exposures related to the automated generation of business and financial misinformation resulting from the application of computer programs that have been written using six digits (E.G., 12/31/99), rather than eight (E.G., 12/31/1999), to define the applicable year of business transactions. V-ONE has completed the identification and assessment of most of its IT systems, and those systems have been modified by the suppliers of those systems to V-ONE to address Year 2000 problems. In addition to its internal systems, V-ONE has assessed the level of Year 2000 problems associated with most of its suppliers of software incorporated or bundled with its products, other suppliers, customers and creditors. V-ONE has also identified and assessed most of its non-IT systems, which include its telephone systems, heating and air-conditioning, elevators, and other business equipment. Almost all of these suppliers have indicated that their software and other products are Year 2000 compliant. In addition, most of V-ONE's non-IT systems appear to be Year 2000 compliant. V-ONE's own software products are Year 2000 compliant. 14 V-ONE's costs to date for its Year 2000 compliance program, excluding the salaries of its employees, has not been material. In fact, most of V-ONE's IT systems have been modified by the suppliers of those systems and such modifications were included as part of normal upgrades of those systems. Although V-ONE has not completed its assessment, it does not currently believe that the future costs associated with its remaining IT systems or its non-IT systems will be material. V-ONE cannot determine currently its most likely worst case Year 2000 scenario, as it has not identified and assessed all of its systems, particularly its non-IT systems. As V-ONE completes its identification and assessment of internal and third party systems, it expects to develop contingency plans for various worst-case scenarios. V-ONE expects to complete such contingency planning by September 1999. A failure to address Year 2000 issues successfully could have a material adverse effect on V-ONE's business, financial condition, results of operations and cash flows. EMPLOYEES As of March 1, 1999, the Company had 67 full-time employees and 1 consultant. Of these individuals, 30 were in sales and marketing, 25 were in development and 13 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 V-ONE operates in a rapidly changing environment that involves numerous risks, some of which are beyond V-ONE's control. The following discussion highlights some of the risks V-ONE faces. This Annual Report on Form 10-K contains "forward-looking statements." Such statements involve known and unknown risks and uncertainties that could cause V-ONE's actual performance or achievements to differ from any future performance or achievements expressed or implied by such statements. Readers should carefully consider the following risk factors before purchasing common stock of V-ONE. Readers are also referred to other documents to be filed by V-ONE with the SEC, which may identify important risk factors for V-ONE. V-ONE'S LIMITED OPERATING HISTORY, ACCUMULATED DEFICIT AND FINANCING ACTIVITIES. As of December 31, 1998, V-ONE had an accumulated deficit of approximately $29,692,000. V-ONE currently expects to incur additional net losses over the next several quarters. V-ONE will need to raise additional capital through various financing activities in the short term to finance its ongoing operations and is presently exploring sources of such financing. Because of V-ONE's limited operating history, V-ONE may not achieve or sustain profitability or significant revenues. To address these risks, V-ONE 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. V-ONE may be unable successfully to address these risks and the failure to do so could have a material adverse effect on V-ONE's business, financial condition, results of operations and cash flows. V-ONE was founded in February 1993 and introduced its first product in December 1994. Accordingly, V-ONE 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, 1997 and 1998 were approximately $1,104,000, $5,319,000, $5,973,000 and $6,260,000, respectively. 15 Losses attributable to holders of Common Stock for 1995, 1996, 1997 and 1998 were approximately $1,122,000, $7,813,000, $10,828,000 and $9,407,000, respectively. V-ONE's growth in recent periods may not be an accurate indication of future results of operations in light of V-ONE'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 V-ONE's products in particular. RISKS RELATING TO AVAILABILITY OF CAPITAL. It is anticipated that V-ONE will continue to expend significant amounts to fund its operations and research and development. V-ONE's cash and cash equivalents may not be sufficient to meet its requirements beyond August 31, 1999. In order to maintain V-ONE's operations and research and development at present levels, V-ONE anticipates that it will need to secure additional financing through the sale of equity securities by the third quarter of 1999. If such additional financing is not available to V-ONE, it will attempt to reduce its cash requirements through significant reductions in operating levels. V-ONE may be unable to place equity securities on favorable terms or in an amount required to meet its future cash requirements. In addition, V-ONE may not be successful in reducing operating levels or, if operating levels are reduced, V-ONE may not be able to maintain operations for any extended period of time. RISKS RELATING TO SECURED LOAN. On February 24, 1999, V-ONE obtained a $3,000,000 term loan from Transamerica Business Credit Corporation ("Transamerica"). The term loan is due on August 31, 1999. Thereafter, the term loan will convert into a revolving credit facility if V-ONE is not in default under its credit agreement with Transamerica. The maximum amount that can be borrowed by V-ONE under the revolving credit facility is the lesser of $3,000,000 and 80% of eligible receivables. The revolving credit facility expires on August 31, 2000. In connection with this loan, V-ONE granted a security interest in all of its assets, including its intellectual property, to Transamerica. If V-ONE is unable to repay the loan or there is an event of default under the loan, Transamerica could foreclose on its security interest. Pursuant to the terms of the loan agreement relating to this term loan, receipt by V-ONE of an opinion from its independent auditors which expresses doubt with regard to the ability of V-ONE to continue as a going concern constitutes an event of default under the loan agreement and allows Transamerica to foreclose on its security interest. V-ONE has received such an opinion from its independent auditors in connection with their review of V-ONE's financial statements as of and for the year ended December 31, 1998. As of the date of such opinion, there was an event of default under the loan agreement; however, Transamerica has subsequently waived this event of default. In consideration for such waiver, V-ONE has agreed (a) to grant an affiliate of Transamerica warrants to purchase 100,000 shares of Common Stock at an exercise price of $3.25 per share and (b) accept an additional financial covenent that V-ONE's net worth will be $5,000,000 as of June 30, 1999 and September 30, 1999. There can be no assurance that V-ONE will be able to comply with the loan covenants. RISKS ASSOCIATED WITH THE EMERGING NETWORK SECURITY MARKET. The market for V-ONE's products, particularly its client/server VPN or virtual private network products, is in an early stage of development and the market's acceptance of these products has been slower than expected. The rapid development of Internet and intranet computing has increased the ability of users to access 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 and potential customers are only beginning to realize the benefits of VPN technology, it is difficult to assess the size of the market, the product features desired by the market, the best price structure for V-ONE's products, the best distribution strategy and the competitive environment that will develop in this market. The demand for V-ONE's products could decline 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 V-ONE's control. Any such decline would adversely effect V-ONE. 16 ANTICIPATED FLUCTUATIONS IN QUARTERLY RESULTS. At V-ONE's board of directors meeting on March 4, 1999, V-ONE revised its revenue recognition policy. V-ONE had previously used a "sell-in" model with distributors, where revenue is recognized when product is sold to the distributor. V-ONE is now using a "sell-through" model, where revenue is recognized when the distributor has delivered the licenses to end-user customers and the end-user customers have registered the software with V-ONE. This revision in policy will cause revenue to be recognized later in the distribution cycle and may make V-ONE's quarterly financial results more variable. In addition, future revenues may be less affected by V-ONE's direct sales efforts unless V-ONE directly assists resellers in sales to end users. V-ONE is applying the revised revenue recognition policy to its financial statements for the year ended December 31, 1998. In addition, V-ONE has restated its financial statements for the years ended December 31, 1997 and 1996 and for the quarters ended September 30, 1998, 1997 and 1996, June 30, 1998 and 1997 and March 31, 1998 and 1997 for consistency of presentation. V-ONE'S DEPENDENCE ON KEY PERSONNEL. V-ONE's success depends, to a large extent, upon the performance of its senior management and its technical, sales and marketing personnel, many of whom have only recently joined V-ONE. There is intense competition in the software security industry to hire and retain qualified personnel. V-ONE is actively searching for additional qualified personnel. V-ONE'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 materially and adversely effect V-ONE's results of operations and product development efforts. V-ONE has entered into employment agreements with David D. Dawson, its Chairman of the Board, President and Chief Executive Officer, Charles B. Griffis, its Senior Vice President and Chief Financial Officer, and Robert F. Kelley, its Vice President of Engineering, that provide for fixed terms of employment. However, V-ONE has not historically provided such types of employment agreements to its other employees. This may adversely impact V-ONE's ability to attract and retain the necessary technical, management and other key personnel. RISK OF V-ONE'S INABILITY TO MANAGE GROWTH. To manage growth effectively, V-ONE needs to continue to improve its operational, financial and management information systems and to hire, train, motivate and manage its employees. Competition is intense for qualified technical, marketing and management personnel. V-ONE may be unable to achieve or manage any future growth. Its failure to do so could delay V-ONE's product development cycles and marketing efforts. V-ONE has experienced and may experience future growth in the number of its employees and the scope of its operations, resulting in increased responsibilities for management and added pressure on V-ONE's operating and financial systems. As of January 1, 1999, V-ONE had 77 employees, as compared to 83, 77, and 34 employees on January 1, 1998, 1997, and 1996, respectively. RISK OF V-ONE'S DEPENDENCE ON SMARTGATE AND SMARTWALL. V-ONE currently generates most of its revenues from its SmartWall and SmartGate products. 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. However, SmartWall or SmartGate may not continue to be accepted in the future. In addition, any or all of V-ONE's other current or future products could fail to win market acceptance. V-ONE's success depends, in part, on V-ONE'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. 17 RISK OF INADEQUATE PROTECTION FOR V-ONE'S TECHNOLOGIES. V-ONE relies on trademark, copyright, patent and trade secret laws, employee and third-party non-disclosure agreements and other methods to protect the rights of V-ONE and the companies from which V-ONE licenses technology. V-ONE currently holds patents on its Wallet Technology, its SmartGate technology, its Smartcard Technology, and its On-Line Registration technology. Others may independently develop similar technologies or duplicate any technology developed by V-ONE. Prosecution of patent applications and any other patent applications may require the expenditure of substantial resources. For example, the issuance of a patent may require 24 months or longer. During this period, V-ONE's technology may become obsolete. Pending or future patent applications may not be granted, future patents may be challenged, invalidated or circumvented and the rights granted may not provide competitive advantages to V-ONE. V-ONE currently intends to pursue patent protection outside of the United States for the technology covered by the most recently filed patent applications. This protection may not be granted. Even if it is granted, it may not adequately protect the covered technology. V-ONE's success also depends on its software technology and technology licensed from others. V-ONE's trade secrets, license agreements and non-disclosure agreements may not provide appropriate protection for V-ONE's technology or the technology it licenses from others. Further, V-ONE relies on license agreements that are not signed by the end user to license V-ONE's products. These license agreements may be unenforceable under the laws of certain jurisdictions. V-ONE may be subject to additional risk as V-ONE enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of V-ONE's rights may be ineffective in foreign markets and technology developed by V-ONE may not be protectable in foreign jurisdictions. As the number of security products in the industry increases and the functionality of these products overlap, software developers may become subject to infringement claims. Third parties may in the future assert infringement claims against V-ONE with respect to current or future products. V-ONE also may desire or be required to obtain licenses from others. Failure to obtain those licenses could adversely effect V-ONE's ability to market its software security products. However, V-ONE may be unable to obtain these licenses on commercially reasonable terms, if at all. In addition, the patents underlying such licenses may not be valid or enforceable and the proprietary nature of the unpatented technology underlying such licenses may not remain proprietary. Any claims or litigation could be costly and could result in a diversion of management's attention. Adverse determinations in such claims or litigation could also adversely effect V-ONE. RISK OF ERRORS OR FAILURES. The complex nature of V-ONE's software products can make the detection of errors or failures difficult when products are introduced. If errors or failures are subsequently discovered, this may result in delays and lost revenues during the correction process. In addition, technology licensed by V-ONE for use in its products may contain errors that adversely effect such products. Despite testing by V-ONE and current and prospective customers, errors may still be discovered in new products or releases after commencement of commercial shipments. This might result in delay, adverse publicity, loss of market acceptance and claims against V-ONE. A malfunction or the inadequate design of V-ONE's products could result in tort or warranty claims. V-ONE generally attempts to reduce the risk of such losses to itself and to the companies from which V-ONE licenses technology through warranty disclaimers and liability limitation clauses in its license agreements. V-ONE may not have obtained adequate contractual protection in all instances or 18 where otherwise required under agreements V-ONE has entered into with others. In addition, these measures may not be effective in limiting V-ONE's liability to end users and to the companies from which V-ONE licenses technology. V-ONE'S PRODUCT LIABILITY RISK. V-ONE currently has product liability insurance. However, V-ONE's insurance coverage may not be adequate and any product liability claim against V-ONE for damages resulting from security breaches could be substantial. In addition, a well-publicized actual or perceived security breach could adversely effect the market's perception of security products in general or V-ONE's products in particular. This could result in a decline in demand for V-ONE's products. RISKS OF CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS AND 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 V-ONE's existing products to new and unexpected attacks and require accelerated development of new products or enhancements to existing products. V-ONE may be unable to counter challenges to its current products. V-ONE's future products may not keep pace with technological changes implemented by competitors or persons seeking to breach network security. Its products may not satisfy evolving consumer preferences and V-ONE may not be successful in developing and marketing products for any future technology. Failure to develop and introduce new products and improve current products in a timely fashion could adversely effect V-ONE. RISK OF DEFECTS AND DEVELOPMENT DELAYS. V-ONE 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, V-ONE'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 V-ONE-initiated changes. Changes in product specifications may delay completion of documentation, packaging or testing. This 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 V-ONE either to enhance or change a product's specifications to meet a customer's changing needs. All of these factors may cause a product to enter the market behind schedule, which may adversely effect 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. RISKS RELATING TO EVOLVING DISTRIBUTION CHANNELS. V-ONE relies on its direct sales force and its channel distribution strategy for the sale and marketing of its products. V-ONE's sales and marketing organization may be unable to successfully compete against the more extensive and well-funded sales and marketing operations of certain of its current and future competitors. V-ONE's distribution strategy involves the development of relationships with resellers and international distributors to enable V-ONE to achieve broad market penetration. However, V-ONE may be unable to continue to attract integrators and resellers that will be able to market V-ONE's products effectively and that will be qualified to provide timely and cost-effective customer support and service. V-ONE ships products to distributors, integrators and resellers on receipt of a purchase-order, and its distributors, integrators and resellers generally carry competing product lines. Current distributors, integrators and resellers may not 19 continue to represent V-ONE's products. The inability to recruit, or the loss of, important sales personnel, distributors, integrators or resellers could adversely effect V-ONE. RISKS RELATING TO COLLECTION OF RECEIVABLES. Due to certain worldwide economic factors, V-ONE has from time to time experienced and may continue to experience difficulty in collecting its receivables on a timely basis. V-ONE continues to focus on the collection of its receivables on a timely basis. However, if V-ONE is unable to collect its receivables on a timely basis, it could have an adverse effect on V-ONE's financial condition, results of operations and cash flows. RISKS ASSOCIATED WITH LONG SALES CYCLE AND SEASONALITY. Sales of V-ONE's products generally involve a significant commitment of capital by its customers. For sales by V-ONE's sales force directly to end users, V-ONE 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 V-ONE's products is likely to be lengthy and subject to a number of significant risks over which V-ONE has little or no control. As a result, V-ONE believes that its quarterly results are likely to vary significantly. V-ONE may be required to ship products shortly after it receives orders. 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 registered in that period. V-ONE 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, V-ONE's financial condition, results of operations and cash flows could be adversely effected. In addition, V-ONE may experience significant seasonality in its business, and V-ONE's financial condition and results of operations may be effected by such trends in the future. Such trends may include higher revenues in the third quarter of the year. V-ONE believes that revenues may tend to be higher in the third quarter due to the fiscal year end of the U.S. government. RISK OF SALES TO GOVERNMENTS. No government agency or department has an obligation to purchase products from V-ONE in the future. Accordingly, V-ONE believes that future government contracts and orders for its network security products will in part depend on the continued favorable reaction of government agencies and departments to the development capabilities of V-ONE and the reliability and perceived reliability of its products. V-ONE may be unable to sell its products to government departments and agencies and government contractors and such sales, if any, may not result in commercial acceptance of V-ONE's products. In addition, reductions or delays in funds available for projects V-ONE is performing or to purchase its products could adversely impact V-ONE'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. V-ONE 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 adversely effect V-ONE. In 1995, V-ONE 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, V-ONE's revenues were attributable, in part, to a contract with the National Security Agency. In 1997, approximately one-half of V-ONE's total sales were attributable to contracts with various agencies and departments 20 of the United States government and of state and local governments. This relationship increased to more than 60% through December 31, 1998. RISK OF EFFECT OF GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS. V-ONE currently sells its products abroad and intends to continue to expand its relationships with international distributors. V-ONE'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, V-ONE's information security products are subject to the export restrictions administered by the U.S. Department of Commerce. These restrictions, 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, V-ONE's distributors are required to secure licenses or formal permission before encryption products can be imported. V-ONE has obtained a license exception to export strong encryption from the U.S. Department of Commerce on a worldwide basis (except to the seven terrorist countries) as long as the end user agrees to use the KRAKit(TRADEMARK) session key recreation capability. Foreign competitors that face less stringent controls on their products may be able to compete more effectively than V-ONE in the global network security market. RISKS ASSOCIATED WITH YEAR 2000 ISSUE. The Year 2000 issue concerns the potential exposures related to the automated generation of business and financial misinformation resulting from the application of computer programs that have been written using six digits (E.G., 12/31/99), rather than eight (E.G., 12/31/1999), to define the applicable year of business transactions. V-ONE has completed the identification and assessment of most of its IT systems, and those systems have been modified by the suppliers of those systems to V-ONE to address Year 2000 problems. In addition to its internal systems, V-ONE has assessed the level of Year 2000 problems associated with most of its suppliers of software incorporated or bundled with its products, other suppliers, customers and creditors. V-ONE has also identified and assessed most of its non-IT systems, which include its telephone systems, heating and air-conditioning, elevators, and other business equipment. Almost all of these suppliers have indicated that their software and other products are Year 2000 compliant. In addition, most of V-ONE's non-IT systems appear to be Year 2000 compliant. V-ONE's own software products are Year 2000 compliant. V-ONE's costs to date for its Year 2000 compliance program, excluding the salaries of its employees, has not been material. In fact, most of V-ONE's IT systems have been modified by the suppliers of those systems and such modifications were included as part of normal upgrades of those systems. Although V-ONE has not completed its assessment, it does not currently believe that the future costs associated with its remaining IT systems or its non-IT systems will be material. V-ONE cannot determine currently its most likely worst case Year 2000 scenario, as it has not identified and assessed all of its systems, particularly its non-IT systems. As V-ONE completes its identification and assessment of internal and third party systems, it expects to develop contingency plans for various worst-case scenarios. V-ONE expects to complete such contingency planning by September 1999. A failure to address Year 2000 issues successfully could have a material adverse effect on V-ONE's business, financial condition, results of operations and cash flows. EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW. Certain provisions of V-ONE's Amended Certificate of Incorporation and of Delaware law could delay or make difficult a merger, tender offer or 21 proxy contest involving V-ONE. Among other things, these provisions include a classified board, prohibitions on removing directors except for cause, and other requirements. 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. 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, 2000. 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 Fairfax, Virginia, Burlington, Massachusetts, San Francisco, California, Columbus, Ohio, Rochelle Park, New Jersey, Chicago, Illinois and Podium Block, Singapore 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. 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, 1998. 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 124 record holders on March 24, 1999. 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 for each quarter during the two year period ended December 31, 1998. 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 22 1998 ---- High Sale Price Low Sale Price --------------- -------------- First Quarter $4.125 $2.250 Second Quarter $4.000 $2.500 Third Quarter $4.125 $1.375 Fourth Quarter $3.625 $1.875 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, unless in the form of Common Stock, may be paid under the terms of the Transamerica loan executed on February 24, 1999. On November 20, 1998, the Company sold 1,860,000 shares of its Common Stock, at $2.00 per share to a group of accredited investors pursuant to its Placement Agent Agreement dated October 9, 1998, as amended, between the Company and LaSalle St. Securities, Inc. ("LaSalle"). The shares of Common Stock were sold pursuant to Rule 506 of Regulation D promulgated under the Securities Act. The Company received $3,366,600 in net sale proceeds after payment of commissions of 8% of the gross sale proceeds and non-accountable expense allowance of 1.5% of the gross sale proceeds to LaSalle. LaSalle also received warrants in the aggregate to purchase 50,000 shares of Common Stock at an exercise price of $2.125 per share. These warrants were issued pursuant to Rule 506 of Regulation D promulgated under the Securities Act. On November 20, 1998, the Company also redeemed 2,462 shares of Series A Stock held by Advantage for $1,300 per share or $3,200,600 in the aggregate pursuant to the terms of the Waiver Agreement dated as of September 22, 1998 between the Company and Advantage. Advantage waived all accrued dividends on the Series A Stock. The redeemed shares of Series A Stock represented all of the shares of Series A Stock that were outstanding on the date of redemption. Between December 4, 1998 and December 9, 1998, the Company, sold 675,000 shares of its Common Stock at $2.00 per share to certain accredited investors pursuant to Rule 506 of Regulation D promulgated under the Securities Act. The Company received $1,308,000 in net sale proceeds after payment of commissions to LaSalle and Coldwater Capital LLC. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data set forth below with respect to the Company's Statements of Operations for the years ended December 31, 1996, 1997 and 1998 and balance sheets as of December 31, 1997 and 1998 are derived from the audited financial statements of the Company included elsewhere in this Annual Report. The following selected financial data as of December 31, 1994, 1995 and 1996 and for each of the years ended December 31, 1994 and 1995 are 23 derived from audited financial statements of the Company not included 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."
Year ended December 31, --------------- ----------------------------------------------------------------- Statement of Operations Data: 1994 1995 1996 (1) 1997 (1) 1998 ---- ---- --------- --------- ---- Revenues: Products $ -- $ 1,101,418 $ 5,008,523 $ 5,470,230 $ 5,798,542 Consulting and services 59,716 2,083 310,557 502,771 461,263 ---------- ------------ ------------ ------------ ------------ Total revenues 59,716 1,103,501 5,319,080 5,973,001 6,259,805 ---------- ------------ ------------ ------------ ------------ Cost of revenues: Products -- 376,359 1,969,117 1,848,871 1,623,396 Consulting and services 35,114 800 56,502 96,949 68,060 ---------- ------------ ------------ ------------ ------------ Total cost of revenues 35,114 377,159 2,025,619 1,945,820 1,691,456 ---------- ------------ ------------ ------------ ------------ Gross profit 24,602 726,342 3,293,461 4,027,181 4,568,349 ---------- ------------ ------------ ------------ ------------ Operating expenses: Sales and marketing 36,212 130,917 3,914,630 7,717,640 6,071,919 General and administrative 315,192 1,350,361 4,879,940 3,699,278 3,896,210 Research and development 127,926 304,973 1,960,727 3,153,941 3,853,274 ---------- ------------ ------------ ------------ ------------- Total operating expenses 479,330 1,786,251 10,755,297 14,570,859 13,821,403 ---------- ------------ ------------ ------------ ------------- Operating loss (454,728) (1,059,909) (7,461,836) (10,543,678) (9,253,054) ---------- ------------ ------------ ------------ ------------- Other (expense) income: Interest expense (2,360) (66,615) (518,965) (13,130) (65,372) Interest income -- 4,513 168,176 341,469 125,030 --------- ----------- ------------ ------------ ------------- Total other expenses (2,360) (62,102) (350,789) 328,339 59,658 --------- ----------- ------------ ------------ ------------- Net loss (457,088) (1,122,011) (7,812,625) (10,215,339) (9,193,396) Dividend on preferred stock -- -- -- 12,600 110,879 Deemed dividend on preferred stock -- -- -- 600,000 102,755 Loss attributable to holder of common --------- ----------- ------------ ------------ ------------- stock $(457,088) $(1,122,011) $ (7,812,625) $(10,827,939) $ (9,407,030) ========= =========== ============ ============ ============= Basic loss per share attributable to holder of common stock $ (0.06) $ (0.14) $ (0.85) $ (0.84) $ (0.68) ========== =========== ============ ============ ============= Weighted average shares outstanding 8,046,766 8,099,223 9,245,305 12,858,859 13,898,450 ========== =========== ============ ============ =============
24
December 31, ------------------------------------------------------------------------------- 1994 1995 1996 (1) 1997 (1) 1998 ---- ----- --------- --------- ---- Balance Sheet Data: Working capital (deficit) $245,598 $(168,311) $ 11,526,091 $ 5,912,046 $ (1,277,368) Total assets 394,906 2,050,602 14,580,346 10,313,276 3,922,192 Long-term debt, less current portion -- 126,908 134,704 300,861 197,982 Series A Convertible Preferred Stock -- -- -- 3,766,297 -- Total shareholder's equity (deficit) 318,028 (139,938) 12,876,676 4,211,210 635,725 Cash dividends per common share -- -- -- -- --
(1) The Company's financial results for 1996 and 1997 have been restated. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 12 to the Company's Financial Statements included in Item 8. 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 option. 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 was 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. On November 20, 1998, the Company sold 1,860,000 shares of its Common Stock, at $2.00 per share to a group of accredited investors pursuant to its Placement Agent Agreement dated October 9, 1998, as amended, between the Company and LaSalle St. Securities, Inc. ("LaSalle"). The Company received $3,366,600 in net sale proceeds after payment of commissions of 8% of the gross sale proceeds and non-accountable expense allowance of 1.5% of the gross sale proceeds to LaSalle. LaSalle also received warrants in the aggregate to purchase 50,000 shares of Common Stock at an exercise price of $2.125 per share. On November 20, 1998, the Company also redeemed 2,462 shares of Series A Stock held by Advantage for $1,300 per share or $3,200,600 in the aggregate pursuant to the terms of the Waiver Agreement dated as of September 22, 1998 between the Company and Advantage. Advantage waived all accrued dividends on the Series A Stock. The redeemed Series A Stock represented all of the shares of Series A Stock that were outstanding on the date of redemption. Between December 4, 1998 and December 9, 1998, the Company, sold 675,000 shares of its Common Stock at $2.00 per share to certain accredited investors. The Company received $1,308,000 in net sale proceeds after payment of commissions to LaSalle and Coldwater Capital LLC. 25 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. The Company has revised its revenue recognition accounting from recognizing revenue upon the initial shipment of software to the distributor to recognizing the revenue when the software is deployed to an end-user. Accordingly, the Company has restated its financial results for calendar year 1996 and 1997 as well as the first three quarters of 1998. 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, 1998, the Company had an accumulated deficit of approximately $29,692,000. The Company currently expects to incur net losses over the next several quarters as a result of operating expenses and will therefore need to raise additional capital through various financing activities to fund its ongoing operations. V-ONE is presently exploring sources of such funding. To date, the Company has expensed all software 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, its future software development costs are likely to be expensed as incurred. In 1998, no customer accounted for 10% or more of total revenues. In 1997, product revenues from Government Technology Services, Inc. ("GTSI") accounted for approximately 12% of total revenues. In 1996, product revenues from MCI Telecommunications Corporation ("MCI") and the National Security Agency ("NSA") accounted for approximately 14% and 14%, 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:
Year ended December 31, 1996 1997 1998 ---- ---- ---- Revenues: Products 94.2 % 91.6 % 92.6 % Consulting and services 5.8 8.4 7.4 ------ ----- ----- Total revenues 100.0 100.0 100.0 ------ ----- ----- Cost of revenues: Products 37.0 31.0 25.9 Consulting and services 1.1 1.6 1.1 ------ ------ ----- Total cost of revenues 38.1 32.6 27.0 ------ ------ ----- Gross profit 61.9 67.4 73.0 ------ ------ ----- Operating expenses: Sales and marketing 73.6 129.2 97.0 26 General and administrative 91.7 61.9 62.2 Research and development 36.9 52.8 61.6 ------ ------ ----- Total operating expenses 202.2 243.9 220.8 ------ ------ ----- Operating loss (140.3) (176.5) (147.8) ------ ------ ----- Other (expense) income: Interest expense (9.8) (0.2) (1.0) Interest income 3.2 5.7 2.0 ------ ------ ----- Total other expenses (6.6) 5.5 1.0 ------ ------ ----- Net loss (146.9) (171.0) (146.9) Dividend on preferred stock -- 0.2 1.5 Deemed dividend on preferred stock -- 10.0 1.9 ------ ------ ----- Loss attributable to holder of common stock (146.9) % (181.3) % (150.3) % ====== ====== =====
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 REVENUES Total revenues increased from approximately $5,319,000 in 1996, to approximately $5,973,000 in 1997 and to approximately $6,260,000 in 1998. Product revenues are derived principally from software licenses and the sale of hardware products. Product revenues increased from approximately $5,009,000 in 1996 to approximately $5,470,000 in 1997 and to approximately $5,799,000 in 1998. The increase from 1996 to 1997 was due principally to increased sales of the Company's SmartWall and SmartGate products, which offset a small decline of sales of the Company's SmartWall product. The increase from 1997 to 1998 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 from approximately $311,000 in 1996, to approximately $503,000 in 1997 and declined to approximately $461,000 in 1998. Consulting and services revenues increased from 1996 to 1997 as the Company increased staffing to support consulting and services and product sale installations in 1997 but declined in 1998 as the Company's focus was more on support. COST OF REVENUES Total cost of revenues as a percentage of total revenues were 38.1%, 32.6% and 27.0% in 1996, 1997 and 1998, 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 decreased from approximately $1,969,000 in 1996, to approximately $1,849,000 in 1997 and to approximately $1,623,000 in 1998. Cost of product revenues as a percentage of product revenues was 39.3%, 33.8% and 28.0% for 1996, 1997 and 1998, respectively. The dollar and percentage decreases in 1997 and 1998 were 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 from approximately $57,000 in 1996, to approximately $97,000 in 1997 and decreased to $68,000 in 1998. Cost of consulting and services revenues as a percentage of consulting and services revenues was 18.2%, 19.3%, and 14.8% for 1996, 1997 and 1998, respectively. The dollar and percentage increases in 1997 over 1996 were attributable to increased staffing to support consulting and services. The 27 dollar and percentage decrease from 1997 to 1998 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 $3,915,000 in 1996, to approximately $7,718,000 in 1997 and decreased to approximately $6,072,000 in 1998. Sales and marketing expenses as a percentage of total revenues were 73.6%, 129.2% and 97.0% in 1996, 1997 and 1998, respectively. The dollar increase in 1997 over 1996 was principally due to increased personnel, higher levels of sales and marketing efforts associated with the sales of SmartWall and SmartGate. The large percentage increase was due to significantly higher expenses incurred during 1997. The dollar decrease in 1998 was principally due to reduced personnel and lower levels of advertising and promotion expenses. The percentage decrease in 1998 was due to lower expenses as compared to 1997. 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 this 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 decreased substantially from approximately $4,880,000 in 1996 to approximately $3,699,000 in 1997 and increased slightly to approximately $3,896,000 in 1998. General and administrative expenses as a percentage of total revenues were 91.7%, 61.9% and 62.2% in 1996, 1997 and 1998, 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. 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 increase in 1997 was principally attributable to these non-cash compensation charges partially offset by the additional hiring of management and administrative personnel and 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 Note 4 in the Notes to Financial Statements). The percentage decrease in 1997 was primarily due to the reduced level of expenditure and the allocation over a larger revenue base. 28 The small dollar and percentage increases in 1998 were primarily attributable to a total of $394,000 in non-cash charges stemming from the reset of the exercise price on certain warrants as discussed above. The Company anticipates that general and administrative expenses will decrease 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 this 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 $1,961,000 in 1996, to approximately $3,154,000 in 1997 and to approximately $3,853,000 in 1998. Research and development expenses as a percentage of total revenues were 36.9%, 52.8% and 61.6% in 1996, 1997 and 1998, respectively. The dollar and percentage increases in 1997 and 1998 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 continue 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 this Form 10-K. Interest Income and Expense -- Interest income represents interest earned on cash, cash equivalents and marketable securities. Interest income was approximately $168,000 in 1997 from interest earned on the net proceeds from the Company's IPO and private financings, approximately $341,000 in 1997 from interest earned on the net proceeds from the Company's IPO and the private placement and approximately $125,000 in 1998 from interest earned on the proceeds of the Company's private placement. Interest expense represents interest payable or accreted on promissory notes and capitalized lease obligations. Interest expense was approximately $519,000 in 1996, 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 expenses were approximately $13,000 in 1997 and $65,000 in 1998 and were attributable to interest accreted on promissory notes and capitalized lease obligations. Income Taxes -- The Company did not incur income tax expenses in December 31, 1996, 1997 and 1998 as a result of the net loss incurred during these periods. As of December 31, 1998, the Company had net operating loss carry forwards of approximately $23,532,000 as a result of net losses incurred since inception. Dividend on Series A Stock -- The Company provided approximately $13,000 for a dividend on Series A Stock in 1997 and $111,000 in 1998. Deemed Dividend on Series A 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 that is convertible at a discount to the market price for common stock. A further $103,000 was recorded as a deemed dividend in 1998 as a result of the redemption of the Series A Stock. 29 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 option, 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 was convertible into shares of Common Stock and Series A Warrants. Net of fees and related expenses, the Company raised approximately $3,766,000. On November 20, 1998, the Company redeemed 2,462 shares of Series A Stock held by Advantage for $3,200,600 in the aggregate. The redeemed shares of Series A Stock represented all of the shares outstanding on the date of redemption. As of December 31, 1998, the Company had nominal debt and had cash and cash equivalents of approximately $636,000 and negative working capital of approximately $1,277,000. The Company's operating activities used cash of approximately $5,119,000, $9,020,000 and $6,642,000 in 1996, 1997 and 1998, 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 $562,000, $353,000 and $322,000 in 1996, 1997 and 1998, respectively. These expenditures have generally been for computer workstations and personal computers, office furniture and equipment, and leasehold additions and improvements. The capital expenditures were less in 1998 as the Company had completed its relocation to Germantown, Maryland in the previous year. In 1997, the Company paid a security deposit of $370,000 as part of the six year operating lease agreement for its principal 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 former 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 adjusted throughout 1997 and 1998 resulting in non-cash charges of $200,000 and $418,00, respectively, as a result of the issuance of warrants to David D. Dawson in 1997, the conversion of Series A Stock and the issuance of shares in the private placement in 1998. Ultimately, JMI became entitled to purchase 600,000 shares of Common Stock at an exercise price of $2.00 per share. On January 14, 1999, JMI elected to do a cashless exercise of all of the warrants and purchased 223,529 shares of Common Stock. 30 Financing activities include cash received of approximately $1,261,000 and $273,000 from the exercise of stock options during 1997 and 1998, respectively. The Company received 6,020 and 37,192 shares of Common Stock as payment for stock options issued under the 1996 Non-Statutory Stock Option Plan during 1997 and 1998, respectively. The Company retired all of these shares of Common Stock. On February 24, 1999, the Company entered into a Loan and Security Agreement ("Loan Agreement") with a lender. Under the terms of the Loan Agreement, the Company received $3.0 million under a term loan and bears interest at 12.53% per annum. The term loan matures on August 31, 1999. On the term loan maturity date, the term loan converts into a revolving loan in an amount not to exceed the lesser of $3.0 million or 80 per cent of the Company's eligible receivables. The revolving loan will bear interest at a rate equal to the lender's borrowing base plus 2.5% and matures August 31, 2000. In connection with this loan, the Company granted a security interest in all of its assets, including its intellectual property, to the lender. If the Company is unable to repay the loan or there is an event of default under the loan, the lender could foreclose on its security interest. Pursuant to the terms of the loan agreement relating to this term loan, receipt by the Company of an opinion from its independent auditors which expresses doubt with regard to the ability of the Company to continue as a going concern constitutes an event of default under the loan agreement and allows the lender to foreclose on its security interest. The Company has received such an opinion from its independent auditors in connection with their review of the Company's financial statements as of and for the year ended December 31, 1998. As of the date of such opinion, there was an event of default under the loan agreement; however, the lender has subsequently waived this event of default. In consideration for such waiver, the Company has agreed to (a) grant an affiliate of the lender warrants to purchase 100,000 shares of Common Stock at an exercise price of $3.25 per share and (b) accept an additional financial covenant that the Company's net worth will be $5,000,000 as of June 30, 9999 and September 30, 1999. There can be no assurance that the Company will be able to comply with the loan covenants. As a result of the $3 million term loan, 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 August 31, 1999. V-ONE is actively seeking additional capital through other financing activities in the short term to finance its ongoing operations and is presently exploring sources of such financing. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is not exposed to a variety of market risks such as fluctuations in currency exchange rates or interest rates. All of the Company's products are invoiced in U.S. dollars. The Company does not hold any derivatives or marketable securities 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA V-ONE CORPORATION INDEX TO FINANCIAL STATEMENTS -------- Report of Independent Accountants 33 Balance Sheets as of December 31, 1997 and 1998 34 Statements of Operations for the years ended December 31, 1996, 1997 and 1998 36 Statements of Shareholders' Equity for the years ended December 31, 1996, 1997 and 1998 37 Statements of Cash Flows for the years ended December 31, 1996 1997 and 1998 39 Notes to Financial Statements 41 Schedule of Valuation and Qualifying Accounts for the years ended December 31, 1996, 1997 and 1998 60 32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of V-ONE Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of V-ONE Corporation (the Company) at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 conducted our audits of these statements in accordance with generally accepted auditing standards, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 10 to the financial statements, the Company is experiencing difficulty in generating sufficient operating cash flow to meet its obligations and sustain its operations, which raises substantial doubt about its ability to continue as a going concern. Management's plans with regard to these matters are also described in Note 10 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 12 to the financial statements, the Company has restated the accompanying financial statements as of December 31, 1997 and for the years ended December 31, 1996 and 1997 to reflect a revision of certain revenue recognition policies. /s/ PricewaterhouseCoopers LLP McLean, VA March 11, 1999, except as to Note 14, which is as of March 31, 1999 33
V-ONE CORPORATION BALANCE SHEETS -------- ASSETS December 31 ----------- 1997 (as adjusted, NOTE 12) 1998 ------------ ---- Current assets: Cash and cash equivalents $ 6,203,525 $ 635,959 Accounts receivable, less allowances of $500,405 and $524,638 as of December 31, 1997 and 1998, respectively 794,395 513,221 Finished goods inventory, less allowances of $212,700 and $313,356 as of December 31, 1997 and 1998, respectively 583,894 385,481 Prepaid expenses and other current assets 328,261 276,456 ------------ ----------- Total current assets 7,910,075 1,811,117 Property and equipment, net 1,001,581 874,553 Licensing fee, net of accumulated amortization of $353,820 and $636,876 as ofDecember 31, 1997 and 1998, respectively 538,434 255,378 Other assets 863,186 981,144 ------------ ----------- Total assets $ 10,313,276 $ 3,922,192 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 1,151,589 $ 2,124,156 Deferred revenue 812,647 888,295 Notes payable - current 16,667 5,259 Capital lease obligations - current 17,126 70,775 ------------ ------------ Total current liabilities 1,998,029 3,088,485 Notes payable - noncurrent 5,555 - Deferred rent 36,879 - Capital lease obligations - noncurrent 295,306 197,982 ------------ ------------ Total liabilities 2,335,769 3,286,467 Commitments and contingencies Mandatorily redeemable series A convertible preferred stock, $0.001 par value; 13,333,333 shares authorized; 4,000 and 0 shares issued and outstanding as of December 31, 1997 and 1998, respectively 3,766,297 -- Shareholders' equity: 34 Common stock, $0.001 par value; 33,333,333 shares authorized; 13,070,235 and 16,478,046 shares issued and outstanding as of December 31, 1997 and 1998, respectively; 1,476,000 and no shares reserved for conversion, as of December 31, 1997 and 1998, respectively 13,070 16,478 Additional paid-in capital 24,649,538 30,361,685 Notes receivable from sales of common stock (166,011) (50,021) Accumulated deficit (20,285,387) (29,692,417) ----------- ----------- Total shareholders' equity 4,211,210 635,725 ----------- ----------- Total liabilities and shareholders' equity $10,313,276 $3,922,192 =========== ==========
The accompanying notes are an integral part of these financial statements. 35
V-ONE CORPORATION STATEMENTS OF OPERATIONS -------- Year Ended December 31, --------------------------------------------- 1996 1997 (as adjusted, (as adjusted, Note 12) Note 12) 1998 ----------- ------------ ---- Revenues: Products $ 5,008,523 $ 5,470,230 $ 5,798,542 Consulting and services 310,557 502,771 461,263 ----------- ------------ ------------- Total revenues 5,319,080 5,973,001 6,259,805 ----------- ------------ ------------- Cost of revenues: Products 1,969,117 1,848,871 1,623,396 Consulting and services 56,502 96,949 68,060 ----------- ------------ ------------- Total cost of revenues 2,025,619 1,945,820 1,691,456 ----------- ------------ ------------- Gross profit 3,293,461 4,027,181 4,568,349 ----------- ------------ ------------- Operating expenses: Sales and marketing 3,914,630 7,717,640 6,071,919 General and administrative 4,879,940 3,699,278 3,896,210 Research and development 1,960,727 3,153,941 3,853,274 ----------- ------------ ------------- Total operating expenses 10,755,297 14,570,859 13,821,403 Operating loss (7,461,836) (10,543,678) (9,253,054) ----------- ------------ ------------- Other (expense) income: Interest expense (518,965) (13,130) (65,372) Interest income 168,176 341,469 125,030 ----------- ------------ ------------- Total other (expense) income (350,789) 328,339 59,658 ----------- ------------ ------------- Net loss (7,812,625) (10,215,339) (9,193,396) Dividend on preferred stock -- 12,600 110,879 Deemed dividend on preferred stock -- 600,000 102,755 ----------- ------------ ------------- Loss attributable to holders of common stock $(7,812,625) $(10,827,939) $ (9,407,030) =========== ============ ============= Basic and diluted loss per share attributable to holders of common stock $ (0.85) $ (0.84) $ (0.68) =========== ============ ============= Weighted average number of common shares outstanding 9,245,305 12,868,859 13,898,450 =========== ============ =============
The accompanying notes are an integral part of these financial statements. 36
V-ONE CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY ---------- Notes Additional Receivable Common Stock Paid-in from Accumulated Shares Amount Capital Stock Sales Deficit Total ------ ------ ------- ----------- ------- ----- 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 Issuance of common stock, net of issuance costs 3,117,791 3,118 13,191,692 - - 13,194,810 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 Net loss, as adjusted (Note 12) - - - - (7,812,625) (7,812,625) ---------- --------- ----------- --------- ----------- ----------- Balance, December 31, 1996 as adjusted (Note 12) 12,658,347 12,658 22,608,866 (287,400) (9,457,448) 12,876,676 Exercise of common stock options 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 common stock warrants - - 200,000 - - 200,000 Deemed dividend on preferred stock - - 600,000 - - 600,000 Dividend on preferred stock - - 12,600 - - 12,600 Net loss, as adjusted (Note 12) - - - - (10,827,939) (10,827,939) ---------- --------- ----------- --------- ----------- ----------- 37 Balance, December 31, 1997, as adjusted (Note 12) 13,070,235 13,070 24,649,538 (166,011) (20,285,387) 4,211,210 Net loss (9,193,396) (9,193,396) Issuance of common stock, net of issuance costs 2,535,000 2,535 4,532,554 - - 4,535,089 Exercise of common stock options 189,333 189 273,228 - - 273,417 Conversion of mandatorily redeemable preferred stock to common stock 720,670 721 1,537,279 - - 1,538,000 Redemption of mandatorily redeemable preferred stock - - (1,011,716) - - (1,011,716) Retirement of common stock (37,192) (37) (115,953) 115,990 - - Deemed dividend on preferred Stock - - 102,755 - (102,755) - Dividend on preferred stock - - - - (110,879) (110,879) Issuance of common stock warrants - - 394,000 - - 394,000 ---------- -------- ----------- --------- ------------ ---------- Balance, December 31, 1998 16,478,046 $ 16,478 $30,361,685 $ (50,021) $(29,692,417) $ 635,725 ========== ======== =========== ========= ============ ==========
The accompanying notes are an integral part of these financial statements. 38
V-ONE CORPORATION STATEMENTS OF CASH FLOWS -------- Year ended December 31, -------------------------------------------- 1996 1997 (as adjusted, (as adjusted, Note 12) Note 12) 1998 --------- --------- ----- Cash flows from operating activities: Net loss $(7,812,625) $(10,215,339) $(9,193,396) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 172,582 591,965 637,243 Loss on disposal of assets - 101,354 95,228 Interest expense on accretion of note payable 299,000 - - Consulting expense satisfied by issuance of common stock 45,833 - - Compensation expense for issuance of non-qualified stock options 487,796 - - 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 charge related to issuance of warrants of preferred stock to common - 200,000 394,000 Accrued interest satisfied with common stock 65,090 - - Accrued interest satisfied with preferred stock 59,554 - - Changes in assets and liabilities: Accounts receivable, net (1,287,734) 735,731 281,174 Inventory, net (161,240) (165,024) 198,413 Prepaid expenses and other assets (173,695) (782,549) (66,153) Accounts payable and accrued expenses 1,083,499 (159,455) 972,567 Deferred revenue 85,248 714,899 75,648 Deferred rent 25,316 (41,396) (36,879) ----------- ------------ ----------- Net cash used in operating activities (5,118,532) (9,019,814) (6,642,155) ----------- ------------ ----------- Cash flows from investing activities: Purchase of property and equipment (562,190) (353,110) (322,387) Investment in affiliate - (250,000) - Collection of note receivable - 88,480 - Net cash used in investing activities (562,190) (514,630) (322,387) ------------- ----------- ------------ Cash flows from financing activities: Issuance of common stock 15,550,055 - 5,070,000 Issuance of preferred stock 1,000,000 4,000,000 - 39 Payment of common stock issuance costs (2,355,245) - (534,911) Payment of preferred stock dividends - - (110,879) Payment of preferred stock issuance costs - (233,703) (39,413) Redemption of preferred stock - - (3,200,600) Issuance of debt with detachable warrants 1,500,000 - - Exercise of stock options and warrants 1,000 1,261,393 273,417 Issuance of notes payable 1,250,000 - - Principal payments on capitalized lease obligations (43,843) (167,429) (43,675) Repayment of notes payable (11,111) (16,667) (16,963) Repayment of notes payable to related parties (1,644,144) - - ----------- ------------ ----------- Net cash provided by financing activities 15,246,712 4,843,594 1,396,976 ----------- ------------ ----------- Net increase (decrease) in cash and cash equivalents 9,565,990 (4,690,850) (5,567,566) Cash and cash equivalents, beginning of year 1,328,385 10,894,375 6,203,525 ----------- ------------ ----------- Cash and cash equivalents, end of year $10,894,375 $ 6,203,525 $ 635,959 =========== ============ ===========
The accompanying notes are an integral part of these financial statements. 40 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 secondary markets located in Europe and Asia. 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 The Company develops, markets, licenses and supports computer software products and provides related services. The Company conveys the rights to use the software products to customers under perpetual license agreements, and conveys the rights to product support and enhancements in annual maintenance agreements. The Company recognizes revenue upon deployment of the software directly to an end-user or a value-added reseller. (See Note 12.) The Company defers and recognizes maintenance and support services revenue over the term of the contract period, which is generally one year. The Company recognizes training and consulting services revenue as the services are provided. The Company generally expenses sales commissions as the related revenue is recognized and pays sales commissions upon receipt of payment from the customer. In addition to the direct sales effort, the Company licenses its products through a network of distributors. The Company generally does not record revenue until the distributor has delivered the licenses to end-user customers and the end-user customers have registered the software with the Company. (See Note 12.) The Company also records revenue when the software is deployed directly to the end-user customer on behalf of the distributor. In certain instances, as appropriate, 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. Continued 41 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 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. The Company's revenue recognition policies for the years ended December 31, 1996 and 1997 are in conformity with the Statement of Position 91-1, "Software Revenue Recognition," promulgated by the American Institute of Certified Public Accountants. The Company's revenue recognition policies for the year ended December 31, 1998 are in conformity with the Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2), promulgated by the American Institute of Certified Public Accountants. Management has assessed SOP 97-2 and believes that its adoption on January 1, 1998 will not have an effect on the Company's revenue recognition policy. 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 and other vendor's software licenses held for resale. Cost is determined based on specific identification. Continued 42 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 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 $101,818, $285,213 and $354,187 for the years ended December 31, 1996, 1997 and 1998, respectively. 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. 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 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. 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. The weighted average number of shares used in the computations was 9,245,305 in 1996, 12,868,859 in 1997 and 13,898,450 in 1998. 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 exceed federally insured amounts. The Company invests its cash primarily in money market funds with an international commercial bank. 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. Continued 43 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ In 1996, two customers accounted for approximately 28% of total revenues. In 1997 one customer comprised 12% of total revenues. As of December 31, 1998 and for the year then ended, no customer represented more than 10% of total revenues and one customer represented 15% of accounts receivable. The Company had significant purchases of product from one major supplier in the amount of approximately $307,000 during 1996 and approximately $1,201,000 from the same supplier and another major supplier during 1997, and approximately $524,000 from the same supplier and a different major supplier during 1998, representing 16%, 65% and 32% of total product cost of revenues for those periods, respectively. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 1998 presentation. These changes had no impact on previously reported results of operations. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective for fiscal years beginning after June 15, 1999 and cannot be applied retroactively. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company currently plans to adopt SFAS 133 effective January 1, 2000, and will determine both the method and impact of adoption prior to that date. 3. NOTES PAYABLE In October 1995, the Company entered into a $50,000 loan agreement with an international financial institution. The loan required 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 and 9.25% at December 31, 1998. The Company was required to repay the loan through 36 monthly payments commencing May 1996. The loan is collateralized by the assets of the Company. The balance outstanding at December 31, 1998 of $5,259 matured in 1999 and was repaid in full in February 1999. 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 of $59,554 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). 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 Continued 44 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 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 $40,681 during the year ended December 31, 1996. The Company's founder 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 during 1996, 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, 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 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 triggered upon 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. The remaining 383,999 detachable warrants with an exercise price of $3.125 outstanding at December 31, 1997, increased to 600,000 exercisable at $2.00, as a result of the anti-dilution clause triggered upon the issuance of Common Stock for $2.00 per share on November 20, 1998 and conversion ofshares of Series A Convertible Preferred Stock ("Series A Stock") with shares of Common Stock and Warrants and purchase shares of Common Stock ("Series A Warrants"). The Company recognized expense of $394,000 due to the increase and decrease in the number of the detachable warrants and exercise price, respectively. On January 14, 1999, these warrants were exercised in full pursuant to their cashless exercise provisions and the Company issued 223,529 shares of Common Stock to the holder. 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 Property and equipment consisted of the following at December 31: Continued 45 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 1997 1998 ------------ ------------ Office and computer equipment $ 1,251,922 $ 1,256,626 Leasehold improvements 54,869 62,332 Furniture and fixtures 110,447 120,811 ------------ ------------ 1,417,238 1,439,769 Less: accumulated depreciation 415,657 565,216 ------------ ------------ $ 1,001,581 $ 874,553 ============ ============ Other assets consisted of the following at December 31: 1997 1998 ------------- -------------- Deposits $ 613,186 $ 731,144 Investment in NFR 250,000 250,000 ------------- -------------- $ 863,186 $ 981,144 ============= ============== Accounts payable and accrued expenses consisted of the following at December 31: 1997 1998 ------------ ------------- Accounts payable $ 601,046 $ 1,820,812 Accrued compensation 473,507 234,638 Accrued marketing costs 48,193 15,000 Sales tax payable 28,843 28,904 Other accrued expenses - 24,802 ------------ ------------- $ 1,151,589 $ 2,124,156 ============ ============= Continued 46 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 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:
1997 1998 --------------- ---------------- Deferred tax assets (liabilities): Deferred revenue $ 313,844 $ 131,573 Inventory 82,145 121,018 Accounts receivable 193,256 202,615 Property and equipment - (78,178) Deferred rent 14,243 - Non-deductible accruals 59,071 65,739 Stock-based employee compensation 188,388 - Licensing fee (191,305) (81,989) Net operating loss carryforward 6,768,239 9,087,986 -------------- -------------- Total deferred tax asset 7,431,743 9,448,764 Valuation allowance (7,431,743) (9,448,764) -------------- -------------- Net deferred tax asset $ - $ - ============== ==============
The net change in the valuation allowance from 1997 to 1998 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, 1998, the Company had net operating loss carryforwards of approximately $23,531,814 for Federal and state income tax purposes available to offset future taxable income. The net operating loss carryforwards begin to expire in 2008. 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, 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 mandatorily redeemable Series A Convertible Preferred Stock ("Series A Stock") to Advantage Fund II Ltd. ("Advantage") for $4 million, less issuance costs of approximately $273,000. Each share of Series A Stock was convertible into shares of Common Stock and warrants to purchase shares of Common Stock ("Series A Warrants"). Continued 47 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ The holders of Series A Stock were entitled to receive, at the discretion of the Board of Directors, dividends at the rate of $50.00 per annum per share, which were fully cumulative, accrue without interest from the date of original issuance and were payable quarterly commencing March 1, 1998. During the years ended December 31, 1997 and 1998, the Company recorded dividends of $12,600 and $110,879. All dividends were paid by the Company in 1998. Due to the Maximum Share Amount limitation found in Section 7(a)(1) of the Certificate of Designations of the Series A Stock ("Certificate"), the Company was obligated to convert shares of Series A Stock held by Advantage. On September 21, 1998, the Company sent an inconvertibility notice to Advantage pursuant to Section 7(a)(2) of the Certificate indicating that, as of September 11, 1998, Advantage had the right to have some of its shares of Series A Stock redeemed by the Company for the Share Limitation Redemption Price (which term is defined in the Certificate). On September 22, 1998, the Company and Advantage entered into a waiver agreement ("Waiver Agreement") and Amendment No. 1 ("Amendment No. 1") to the Registration Rights Agreement dated as of December 3, 1997 by and between the Company and Advantage (as amended, "Registration Rights Agreement"). Pursuant to the Waiver Agreement, the Company redeemed 2,462 shares of Series A Stock for $3,200,000 in the aggregate on November 20, 1998. Advantage waived all accrued dividends on the Series A Stock. No shares of Series A Stock remain outstanding. Simultaneously with the execution of the Waiver Agreement, the Company granted to Advantage warrants to purchase 100,000 shares of the Company's Common Stock at an exercise price of $2.125 per share and warrants to purchase 389,441 shares of the Company's Common Stock at an exercise price of $4.77 per share, all of which expire on September 21, 2003 (collectively "Additional Warrants"). Pursuant to the terms of Amendment No. 1, the Company has agreed to file a registration statement with respect to the shares of Common Stock underlying the Additional Warrants. 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. (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. In November and December 1998, the Company consummated a private placement of 1,860,000 and 675,000 shares, respectively, of its Common Stock at a price of $2.00 per share. The Company incurred issuance costs of approximately $546,000 and on November 20, 1998, granted 50,000 warrants to purchase one share of common stock to the underwriter of the private placement. The warrants have an exercise price of $2.125 and expire five years from the date of grant. WARRANTS In addition to the warrants discussed above and in Note 4, the Company has issued other warrants during the years ended December 31, 1997 and 1998. Continued 48 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 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 warrants to purchase 25,000 shares of Common Stock at an exercise price of $3.875 per share, exercisable as of November 4, 1997 and warrants to purchase 15,000 shares of Common Stock at an exercise price of $3.188 per share, exercisable as of April 22, 1998. On July 8, 1998, the Company granted warrants to purchase 10,000 shares of Common Stock each to two directors of the Company. The warrants have an exercise price of $2.688 and expire five years from the date of grant. Warrants to purchase shares of the Company's Common Stock outstanding at December 31, 1997 and 1998 were as follows: Warrants Outstanding AS OF DECEMBER 31, 1997 1998 EXERCISE PRICE ---- ---- -------------- - 600,000 $2.00 - 150,000 $2.13 - 20,000 $2.69 683,999 300,000 $3.13 - 15,000 $3.19 25,000 25,000 $3.88 60,000 60,000 $4.73 - 533,576 $4.77 ------ --------- 768,999 1,703,576 ======= ========= At December 31, 1998, all 1,703,576 warrants were exercisable at a weighted-average exercise price of $3.22 per share of Common Stock STOCK OPTIONS PLANS The Company has the following four stock options plans: the 1995 Non-Statutory Stock Option Plan, the 1996 Non-Statutory Stock Option Plan, the 1996 Incentive Stock Plan and the 1998 Incentive Stock Option 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"). Continued 49 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 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 under the 1995 Plan for the three years ended December 31, 1998 was as follows:
Shares Price ------ ----- Balance as of December 31, 1995 350,293 $0.425-$2.505 Granted 2,000 $4.50 Exercised - - Cancelled (2,000) $4.50 -------- Balance as of December 31, 1996 350,293 $0.425-$2.505 Granted - Exercised (119,070) $0.425-$2.505 Cancelled - -------- Balance as of December 31, 1997 231,223 $0.425-$2.505 Granted - $0.425-$2.505 Exercised (158,333) $0.425 Cancelled (8,888) $0.425-$2.505 -------- Balance as of December 31, 1998 64,002 $0.425-$2.505 ========
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, 1998, 64,002 options were granted and outstanding, of which 20,000 are exercisable at $0.425 per share and 40,002 are exercisable at $2.505 per share. All of the outstanding options are vested and exercisable at December 31, 1998. 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 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. All 383,965 options were granted with an exercise price of $0.75 and exercised during 1996. Continued 50 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ The options were exercised on April 22, 1996 at $0.75 per share in exchange for notes receivable from shareholders. 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. During 1997 and 1998, the shareholders repaid a portion of the notes receivable with cash and by returning shares of the Company's Common Stock. 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. On February 17, 1998, the Company's Board of Directors authorized an offer to reset the exercise price of all full-time employees' (other than the President and any Vice President) incentive stock options and non-qualified stock options granted under the 1996 Plan. If accepted by the option holder, such options were replaced with non-qualified options at the new exercise price of $2.625 per share. To have been eligible for repricing, a participant must: 1) have been a full-time employee on February 17, 1998; 2) have agreed to remain an employee of the Company until August 17, 1998, and 3) have accepted the offer by February 24, 1998. On May 1, 1998, the Company's Board of Directors authorized an offer to reset the exercise price of all options issued to the President and any Vice Presidents granted under the 1996 Plan. If accepted by the option holder, such options were replaced with non-qualified options at the new exercise price of $2.875 per share. To have been eligible for repricing, a participant must: 1) have been a full-time employee on May 1, 1998; 2) have agreed to remain an employee of the Company until November 1, 1998, and 3) have accepted the offer by May 8, 1998. Option activity under the 1996 Plan for the three years ended December 31, 1998 was as follows: Shares Price ------ ----- Balance as of December 31, 1995 - - Granted 1,224,213 $3.75-$9.00 Exercised Continued 51 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ Cancelled (70,242) $3.75-$9.00 --------- Balance as of December 31, 1996 1,153,671 $3.75-$9.00 Granted 1,315,501 $3.75-$5.88 Exercised (298,838) $3.75-$5.00 Cancelled (198,299) $3.75-$9.00 --------- Balance as of December 31, 1997 1,972,035 $3.75-$9.00 Granted 558,667 $2.625-$2.875 Granted (Repriced) 961,359 $2.625-$2.875 Cancelled (Repriced) (961,359) $3.75-$9.00 Cancelled (613,326) $2.625-$9.00 Exercised (35,000) $2.625 --------- Balance as of December 31, 1998 1,882,376 $2.625-$9.00 ========= Awards may be granted under the 1996 Plan with respect to a total of 2,333,333 shares of Common Stock. As of December 31, 1998, 796,876 options are vested and exercisable. As of December 31, 1998, the Company had 117,119 shares of Common Stock available for grant under the 1996 Plan. The 1,882,376 options outstanding at December 31, 1998 are exercisable at the following prices: OPTIONS OUTSTANDING EXERCISE PRICE 403,958 $2.625 550,000 $2.875 74,667 $3.031 500,000 $3.125 45,000 $3.250 87,048 $3.750 163,371 $4.500 20,000 $5.000 15,000 $5.500 10,000 $5.875 13,332 $9.000 ----------- 1,882,376 =========== 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"). The purpose of the 1998 Plan is to provide for the acquisition of an equity interest in the Company by non-employee directors, officers, key employees and consultants. The 1998 Plan will terminate February 2, 2008. 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 Continued 52 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ 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. Option activity under the 1998 Plan for the year ended December 31, 1998 was as follows: SHARES PRICE Balance as of December 31, 1997 - - Granted 712,000 $2.625-$2.875 Exercised - - Cancelled (101,000) $2.688 -------- Balance as of December 31, 1998 611,000 $2.625-$2.875 ======== Awards may be granted under the 1998 Plan with respect to a total of 2,500,000 shares of Common Stock. As of December 31, 1998, no options are vested and exercisable. As of December 31, 1998, the Company had 1,889,000 shares of stock available for grant under the 1998 Plan. As of December 31, 1998, 611,000 options were granted and outstanding, of which 236,500 have exercise prices of $2.625 per share, 322,500 have exercise prices of $2.688 per share and 52,000 have exercise prices of $2.875 per share. The Company measures compensation expense for its employee stock-based compensation using the intrinsic value method and provides pro forma disclosures of net loss as if the fair value method had been applied in measuring compensation expense. Under the intrinsic value method of accounting for stock-based compensation, when the exercise price of options granted to employees is less than the fair value of the underlying stock on the date of grant, compensation expense is to be recognized over the applicable vesting period.
1996 1997 1998 ------------ -------------- ----------- Loss attributable to holders of common stock: As reported $7,812,625 $10,827,939 $9,407,030 Pro forma $10,626,435 $11,142,262 $10,464,134 Basic and diluted loss per share attributable to holders of common stock: As reported $0.85 $0.84 $0.65 Pro forma $1.15 $0.87 $0.75
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, 1996, 1997 and 1998, respectively: dividend yield of 0% for all periods; expected volatility of 43%, 56%, and 68%; risk-free interest rate of 6.5%, 6.0%, and 5.3%; and expected terms of 3.4, 4.0, and 4.0 years, respectively. Continued 53 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ The weighted-average fair value of the options granted during the years ended December 31, 1996, 1997 and 1998 was $1.758, $2.039 and $1.10, respectively. The weighted average exercise price of the options outstanding at December 31, 1996, 1997 and 1998 was $2.433, $3.960 and $3.06, respectively. As of December 31, 1998, the weighted average remaining contractual life of the options outstanding is 8.9 years. As of December 31, 1996, 1997 and 1998, the pro forma tax effects under SFAS 109 would include an increase to both the deferred tax asset and the valuation allowance of approximately $1,087,000, $121,000 and $423,000, 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, 1998 are as follows: OPERATING CAPITAL 1999 $ 961,737 $ 102,959 2000 918,027 100,084 2001 621,357 83,498 2002 576,590 50,059 2003 341,199 - ----------- ---------- Total minimum payments $ 3,418,910 336,600 =========== Interest (67,843) ---------- Present value of capital lease obligations 268,757 Less: current portion (70,775) ---------- Capital lease obligations non-current $ 197,982 ========== Rent expense was $258,607, $550,693 and $701,133, for the years ended December 31, 1996, 1997 and 1998, respectively. At December 31, 1998, 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: 1999 $ 204,043 2000 214,489 2001 74,712 ---------- Total minimum payments $ 493,244 ========== Continued 54 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ The cost and accumulated depreciation of assets under capital leases were as follows as of December 31: 1997 1998 ----------- ---------- Furniture $ 8,752 $ - Computers and equipment 440,147 359,859 ----------- ---------- 448,899 359,859 Accumulated depreciation (86,428) (119,351) $ 362,471 $ 240,508 =========== ========== 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 and the Massachusetts Institute of Technology. The fair market value of the stock issued, approximately $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 of $135,779, $283,056 and $283,056 relating to these agreements in 1996, 1997 and 1998, 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 and 1998, the Company amended the standard employment agreements of the Chairman of the Board of Directors and certain senior executives of the Company. 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 four covered executives be terminated is approximately $630,000 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. Continued 55 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, 1998. 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. WORKING CAPITAL The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements during the years ended December 31, 1996, 1997 and 1998, the Company incurred significant losses of $7,812,625, $10,215,339 and $9,193,396, respectively, and had a net working capital deficit position of $1,277,368 at December 31, 1998. These factors among others may indicate that the Company may be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company has reached agreement with a lender on a $3 million loan, structured as senior secured debt, which converts to a receivables based facility on August 31, 1999. See Note 14 for a discussion of an event of default under this facility. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis and to obtain additional financing or refinancing as may be required, and ultimately to attain profitability. The Company is currently reviewing proposals regarding other sources of additional equity financing. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainties. 11. SUPPLEMENTAL CASH FLOW DISCLOSURE Selected cash payments and noncash activities were as follows:
Year Ended December 31, 1996 1997 1998 ---- ---- ---- Cash payments for interest $ 133,042 $ 13,130 $ - Continued 56 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ Noncash investing and financing activities: Capitalized lease obligations incurred 98,165 302,147 - Retirement of fully depreciated property and equipment 5,405 - - Notes repaid from return and retirement of common stock - 32,909 115,953 Deemed dividend on preferred stock - 600,000 102,755 Notes received from sales of common stock 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 - - Payment of licensing fee by issuance of common stock 849,173 - - Conversion of preferred stock to common Stock 3,559,554 - 1,538,000 Repurchase of fractional shares of common stock related to the reverse stock split 81 - -
12. RESTATEMENT OF FINANCIAL STATEMENTS The Company has revised its revenue recognition accounting from recognizing revenue upon the initial shipment of software to the distributor to recognizing revenue when the software is deployed to an end-user customer. In addition, certain costs originally classified as restructuring costs during the year ended December 31, 1997, have been reclassified as sales and marketing, general and administrative and research and development expenses in the period in which the costs were incurred. The effect of the restatement as of December 31, 1997 and the years ended December 31, 1996 and 1997 is: Increase (Decrease) Year Ended December 31, ----------------------- 1996 1997 ---- ---- Effect on: Revenue $(947,069) $(3,429,743) Gross Profit (947,069) (3,213,969) Operating Expenses 170,000 (2,384,228) Loss attributable to holders of common stock 1,117,069 829,741 Basic and diluted loss per share 0.12 0.06 Continued 57 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ Increase (Decrease) December 31, 1997 ---------------------------- Accounts receivable $(1,762,584) Finished goods inventory 215,775 Deferred revenue 400,000 Accumulated deficit 1,946,810 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) At the Company's board of directors meeting on March 4, 1999, the Company revised its revenue recognition policy. The Company had previously used a "sell-in" model with distributors, where revenue is recognized when product is sold to the distributor. The Company is now using a "sell-through" model, where revenue is recognized when the distributor has delivered the licenses to end-user customers and the end-user customers have registered the software with the Company. The Company is applying the new revenue recognition policy to its financial statements for the year ended December 31, 1998. In addition, the Company has restated its financial statements for the years ended December 31, 1997 and 1996 and for the quarters ended September 30, 1998, 1997 and 1996, June 30, 1998 and 1997 and March 31, 1998 and 1997 for consistency of presentation. Quarterly financial information for 1996, 1997 and 1998 is as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1996 Total revenues $ 1,021,811 $ 1,354,576 $ 1,693,961 $ 1,248,732 Gross profit 699,813 876,023 1,178,523 539,102 Net loss (994,660) (3,393,401) (1,004,099) (2,420,465) Basic and diluted loss per share (0.12) (0.40) (0.12) (0.21) 1997 Total revenues $ 1,397,156 $ 1,167,031 $ 2,181,708 $ 1,227,106 Gross profit 835,852 848,189 1,487,732 855,408 Loss attributable to holders of common stock (1,888,078) (3,254,445) (1,303,085) (4,382,331) Basic and diluted loss per share (0.15) (0.25) (0.10) (0.34) 1998 Total revenues $ 1,295,710 $ 1,243,015 $ 1,999,470 $ 1,721,610 Gross profit 810,103 733,867 1,669,330 1,355,049 Loss attributable to holders of common stock (2,803,927) (2,670,102) (1,560,577) (2,372,424) Basic and diluted loss per share (0.21) (0.20) (0.11) (0.16)
The effect of the restatement (see Note 12) on the Company's previously reported quarterly results of operations for the years ended December 31, 1996, 1997 and 1998 is as follows: Continued 58 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------
Increase (Decrease) First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Effect on: 1996 Total revenues $ - $ - $ (26,582) $ (920,487) Gross profit - - (26,582) (920,487) Net loss - - (26,582) 1,090,485 Basic and diluted loss per share - - - 0.09 1997 Total revenues $ (1,016,859) $ (967,550) $ (582,644) $ (862,690) Gross profit (1,016,859) (967,550) (582,644) (862,690) Loss attributable to holders of common stock 1,016,859 104,953 869,442 (1,161,513) Basic and diluted loss per share 0.08 0.01 0.07 (0.09) 1998 Total revenues $ (1,207,170) $ (2,161,382) $ (398,335)$ - Gross profit (1,269,452) (2,314,874) (398,335) - Loss attributable to holders of common stock 1,269,452 2,338,003 102,204 - Basic and diluted loss per share 0.10 0.17 0.01 -
14. SUBSEQUENT EVENTS NOTE PAYABLE On February 24, 1999, the Company entered into a Loan and Security Agreement ("Loan Agreement") with a lender. Under the terms of the Loan Agreement, the Company received $3.0 million under a term loan and bears interest at 12.53% per annum. Interest is payable monthly in arrears. The term loan matures on August 31, 1999. On the term loan maturity date, the term loan converts into a revolving loan in an amount not to exceed the lesser of $3.0 million or 80 per cent of the Company's Eligible Receivables, as defined in the Loan Agreement. The revolving loan bears interest at a rate equal to the lender's base rate plus 2.5% and matures August 31, 2000. The Company incurred loan fees of $150,000 related to the Loan Agreement and is required to pay an additional $360,000 fee if the Company is acquired during the term of the term loan or the revolving loan. The Loan Agreement contains certain covenants that restrict the activities of the Company including sales of assets, loans to other persons, liens, dividends, stock redemption; investments in other persons, and creation of partnerships, subsidiaries, joint ventures or management contracts. Continued 59 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS ------------------ In connection with this loan, the Company granted a security interest in all of its assets, including its intellectual property, to the lender. If the Company is unable to repay the loan or there is an event of default under the loan, the lender could foreclose on its security interest. Pursuant to the terms of the Loan Agreement, receipt by the Company of an opinion from its independent auditors which expresses doubt with regard to the ability of the Company to continue as a going concern constitutes an event of default under the Loan Agreement and allows the lender to foreclose on its security interest. The Company has received such an opinion from its independent auditors in connection with their review of the Company's financial statements as of and for the year ended December 31, 1998. As of the date of such opinion, there was an event of default under the Loan Agreement; however, the lender has subsequently waived this event of default. In consideration for such waiver, the Company has agreed to (a) grant an affiliate of the lender warrants to purchase 100,000 shares of Common Stock at an exercise price of $3.25 per share and (b) accept an additional financial covenant that the Company's net worth will be $5,000,000 as of June 30, 1999 and September 30, 1999. There can be no assurance that the Company will be able to comply with the loan covenants. Valuation and Qualifying Accounts and Reserves
V-ONE CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1996, 1997 and 1998 Additions Balance at Charged to Balance at Beginning of Costs and End of Period Description Period Expenses Deductions ALLOWANCE FOR DOUBTFUL ACCOUNTS December 31, 1996 $ 23,620 $ 228,775 $ --- $ 252,395 December 31, 1997 252,395 248,010 --- 500,405 December 31, 1998 500,405 24,233 --- 524,638 DEFERRED TAX ASSET VALUATION ALLOWANCE December 31, 1996 506,293 2,986,491 --- 3,492,784 December 31, 1997 3,492,784 3,938,959 --- 7,431,743 December 31, 1998 7,431,743 2,431,359 --- 9,863,102 ALLOWANCE FOR NON-SALABLE INVENTORY December 31, 1996 50,000 --- --- 50,000 December 31, 1997 50,000 162,700 --- 212,700 December 31, 1998 212,700 100,656 --- 313,356
Continued 60 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 13, 1999. 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 13, 1999. 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 13, 1999. 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 13, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 61 (a) Financial Statement Schedules. See index to Financial Statement on page 32. All required financial statement schedules of the Registrant are set forth under Item 8 of this Annual Report on Form 10-K. 62 (b) 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 (4) 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) 3.6 Certificate of Elimination of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock, dated March 4, 1999 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) 63 Number Description - - ------ ----------- 10.25 V-ONE 1998 Incentive Stock Plan (4) 10.26 Warrants dated November 21, 1997 to Purchase 300,000 shares of Common Stock granted to David D. Dawson (4) 10.27 Employment Agreement dated November 21, 1997 between V-ONE and David D. Dawson (4) 10.28 Amendment to Employment Agreement dated November 7, 1997 between V-ONE and Charles B. Griffis (4) 10.29 Amendment to Section 2.08 of 1996 Incentive Stock Plan (4) 10.30 Lease Agreement dated March 24, 1997 between Bellemead Development Corporation and V-ONE (3) 10.31 Inconvertibility Notice dated September 21, 1998 (5) 10.32 Waiver Agreement, dated as of September 22, 1998, between the Company and Advantage Fund II Ltd. (5) 10.33 Amendment No. 1 dated as of September 22, 1998 to the Registration Rights Agreement between the Company and Advantage Fund II Ltd. (5) 10.34 Warrant to purchase 100,000 shares of Common Stock issued on September 22, 1998 by V-ONE to Advantage Fund II Ltd. (5) 10.35 Warrant to purchase 389,441 shares of Common Stock issued on September 22, 1998 by V-ONE to Advantage Fund II Ltd. (5) 10.36 Waiver Letter, dated November 5, 1998 between the Company and Advantage Fund II Ltd. (6) 10.37 Placement Agent Agreement, dated October 9, 1998, between the Company and LaSalle St. Securities, Inc. (6) 10.38 Amendment No. 1 to Placement Agent Agreement, dated November 9, 1998, between the Company and LaSalle St. Securities, Inc. (6) 10.39 Escrow Agreement, dated October 9, 1998, among the Company, LaSalle St. Securities, Inc. and LaSalle National Bank (6) 10.40 Amendment No. 1 to Escrow Agreement, dated November 9, 1998, among the Company, LaSalle St. Securities, Inc. and LaSalle National Bank (6) 10.41 Form of Subscription Documents (6) 10.42 Form of Addendum #1 to Subscription Documents (6) 10.43 Form of Addendum #2 to Subscription Documents (6) 10.44 Form of Warrant granted to A.L. Giannopoulos to purchase 10,000 shares of the Company's Common Stock (6) 10.45 Form of Warrant granted to William E. Odom to purchase 10,000 shares of the Company's Common Stock (6) 10.46 Amendment No. 1 to Placement Agent Agreement, dated November 16, 1998, between the Company and LaSalle St. Securities, Inc. (7) 10.47 Waiver Letter dated November 18, 1998 between the Company and LaSalle St. Securities, Inc. (7) 10.48 Form of Second Version of Subscription Documents (7) 10.49 Form of Addendum #1 to Second Version of Subscription Documents (7) 10.50 Form of Addendum #2 to Second Version of Subscription Documents (7) 10.51 Warrant dated November 20, 1998 to purchase 50,000 shares of Common Stock issued to LaSalle St. Securities, Inc. (7) 10.52 Employment Agreement dated November 6, 1998 between V-ONE and Charles B. Griffis 10.53 Employment Agreement dated August 1, 1998 between V-ONE and Robert F. Kelly 10.54 Loan and Security Agreement dated February 24, 1999 between V-ONE and Transamerica Business Credit Corporation ("Transamerica") (8) 10.55 Patent and Trademark Security Agreement dated February 24, 1999 between V-ONE and Transamerica (8) 64 Number Description - - ------ ----------- 10.56 Security Agreement in Copyrighted Works dated as of February 24, 1999 between V-ONE and Transamerica (8) 10.57 Amendment to Employment Agreement dated as of August 1, 1998 by and between the Company and Jieh-Shan Wang 10.58 Amendment to Employment Agreement dated as of January 1, 1999 by and between the Company and James F. Chen 23.1 Consent of PricewaterhouseCoopers LLP 27.1 Revised Financial Data Schedule for the Quarter Ended September 30, 1996 27.2 Revised Financial Data Schedule for the Quarter Ended March 31, 1997 27.3 Revised Financial Data Schedule for the Quarter Ended June 30, 1997 27.4 Revised Financial Data Schedule for the Quarter Ended September 30, 1997 27.5 Revised Financial Data Schedule for the Year Ended December 31, 1996 27.6 Revised Financial Data Schedule for the Year Ended December 31, 1997 27.7 Financial Data Schedule for the Year Ended December 31, 1998 - - ------------------------------ (1) The information required by this exhibit is incorporated herein by reference to V-ONE's Registration Statement on 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. (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. (4) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 10-K for the twelve months ended December 31, 1997. (5) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 8-K dated September 22, 1998. (6) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 10-Q for the nine months ended September 30, 1998. (7) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 8-K dated November 20, 1998. (8) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 8-K dated March 11, 1999. (c) Reports on Form 8-K (i) Form 8-K dated November 9, 1998 reporting, under Item 5, the release of the Company's financial results for the third quarter ended September 30, 1998. A press release containing the financial results for the quarter was attached as an exhibit. 65 (ii) Form 8-K dated November 24, 1998 reporting, under Item 5, the sale by the Company of 1,860,000 shares of its Common Stock pursuant to Regulation D promulgated under the Securities Act and the issuance to LaSalle of warrants to purchase 50,000 shares of Common Stock. (iii) Form 8-K dated December 8, 1997 reporting, under Item 5, the sale by the Company of 675,000 shares of its Common Stock pursuant to Regulation D promulgated under the Securities Act. 66 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 26, 1999 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/ David D. Dawson President, Chief Executive March 26, 1999 - - ------------------------- Officer and Director David D. Dawson /s/ Charles B. Griffis Senior Vice President, Chief March 26, 1999 - - ------------------------ Financial Officer and Treasurer Charles B. Griffis (Principal Financial Officer) /s/ Mark R. Fields Controller (Principal March 26, 1999 - - ------------------------ Accounting Officer) Mark R. Fields /s/ James F. Chen Director March 26, 1999 - - ------------------------- James F. Chen /s/ Charles C. Chen Director March 26, 1999 - - ------------------------ Charles C. Chen /s/ A. L. Giannopoulos Director March 26, 1999 - - ------------------------- A. L. Giannopoulos /s/ William E. Odom Director March 26, 1999 - - ------------------------- William E. Odom 67 EX-3.6 2 V-ONE CORPORATION CERTIFICATE OF ELIMINATION OF CERTIFICATE OF DESIGNATION, PREFERENCES, AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK (Pursuant to Section 151 of the Delaware General Corporation Law) We, David D. Dawson and Joseph D. Gallagher, the President and Secretary, respectively, of V-ONE Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Company"), in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That pursuant to the authority vested in the Board of Directors by the Certificate of Incorporation of the Company and Section 151(g) of the Delaware General Corporation Law, the Board of Directors on March 4, 1999 adopted the following resolutions for the purpose of eliminating the Certificate of Designation, Preferences and Rights of the Company's Series A Convertible Preferred Stock from the Certificate of Incorporation: WHEREAS, the Board of Directors of V-ONE Corporation, a Delaware corporation ("Company"), initially authorized the issuance of an aggregate of 4,000 shares of Series A Convertible Preferred Stock ("Series A Stock") by unanimous written consent dated November 21, 1997; WHEREAS, the designations, preferences and rights of the Series A Stock were originally set forth in Certificate of Designations filed with the Secretary of State of Delaware on December 8, 1997 ("Certificate"); WHEREAS, there are no longer any outstanding shares of the Series A Stock as a result of conversions and redemptions of the Series A Stock; WHEREAS, Section 13 of the Certificate provides that shares of Series A Stock that have been converted or redeemed shall return to the status of authorized but unissued Preferred Stock of no designated series; and WHEREAS, the Board of Directors of the Company has determined that no further shares of Series A Stock will be issued pursuant to the Certificate; it is RESOLVED, that all authorized shares of the Series A Stock be, and they hereby are, cancelled and that all such shares be, and they hereby are, returned to the status of authorized but unissued Preferred Stock of no designated series; and it is FURTHER RESOLVED, that the officers of the Company be, and each acting alone hereby is, authorized and directed on behalf of the Company to prepare, execute and file documents, to amend or modify the same, to pay such fees, and to take such other actions as may be necessary or appropriate for purposes of eliminating from the Certificate of Incorporation of the Company all reference to Series A Stock. IN WITNESS WHEREOF, V-ONE Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by David D. Dawson, its President, and attested by Joseph D. Gallagher, its Secretary, this 4th day of March 1999. V-ONE CORPORATION By: /s/ David D. Dawson -------------------------- David D. Dawson President Attest: By: /s/ Joseph D. Gallagher ---------------------------- Joseph D. Gallagher Secretary EX-10.52 3 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made and entered as of this 6TH day of NOVEMBER, 1998 ("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, MARYLAND 20854 ("Employee"); WHEREAS, the Company wishes to assure itself of the services of Employee, and Employee is willing to serve in the employ of the Company on a full-time basis; 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 Board of Directors ("Board") or by an executive designated by the Board. 3. TERM AND DUTIES. (a) TERM. The term of this employment agreement shall commence on November 1, 1998 and terminate on October 31, 1999, subject to automatic renewal for successive one-year terms unless either party shall have notified the other in writing not less than 180 days prior to the then current expiration date of this Agreement of such party's determination not to renew this Agreement. (b) The Company shall have the right, on written notice to you, (i) to terminate your employment immediately at any time for Just Cause, as defined in Paragraph 6e. (ii) to terminate your employment at any time on or after November 1, 1999, or to not renew the Agreement at any time, without cause provided the Company shall be obligated in either case to pay to you severance pay as specified in Paragraph 7. (c) 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. (d) HEADQUARTERS LOCATION. The Company agrees to maintain Employee's offices within Montgomery County in the State of Maryland ("Base Employment Area"). 4. COMPENSATION, STOCK OPTIONS, REIMBURSEMENT OF EXPENSES, AND RELOCATION. (a) COMPENSATION. The Company shall pay to you for the services to be rendered hereunder a base salary at an annual rate of $150,000, subject to increase, in accordance with the policies of the Company from time to time, payable in installments in accordance with Company policy, but in no event less frequently than monthly. (i) The Company 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. (ii) If certain performance goals reasonably established from time to time by the Company are met, you will be entitled to a cash performance bonus of 50% of base salary, with respect to each fiscal year. The amount of such bonus percentage may be increased but not decreased by 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. (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. 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 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; 2 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. The determination of total and permanent disability will not be made until after all leave of absence time specified in the Federal Family and Medical Leave Act ("FMLA") has been exhausted. (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 in effect that has accrued to the last day of the month in which the Date of Death occurs. (c) TERMINATION BY EMPLOYEE OR COMPANY. 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)), 3 (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, 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: The Company will pay severance compensation as defined in Paragraph 7. 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 and Bonus Salary as then in effect that has accrued to the last day of the month in which the Retirement Termination Date occurs. All vested stock options will be exercisable for their originally defined time period, typically 10 years from date of issue, after retirement. (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 provided 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 a material breach involving Employee's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, 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 4 the conditions set forth in clause (i) of this Section 6 (e) has occurred and specifying the particulars thereof. (f) RESIGNATION BY EMPLOYEE. Employee can resign at any time, giving customary two (2) weeks notice, terminating his employment under this Agreement ("Effective Resignation Date"). All Base Salary and Bonus Salary earned through the Effective Resignation Date will be paid to Employee. All vested stock options will be exercisable for a period of 90 days following the effective resignation date. 7. SEVERANCE. If Severance Compensation is triggered under conditions specified in Paragraph 6, the compensation will include the following. (a) 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 twelve months in which the Employee Termination Date occurs, which shall be computed assuming that Employee had remained in the Company's employ for the next twelve months and that all performance goals or other performance measures have been met at the then current level for the time period. 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. (b) All vested stock options as specified in Paragraph 4c, including the options that would vest as part of the termination, would be exercisable within 90 days of such termination. 8. 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 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, directly or indirectly, through one or more subsidiaries or transactions or acting in concert with one or more persons or entities: 5 (A) acquires beneficial ownership of more than 50% 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 50% of the Voting Stock; (C) acquires any combination of beneficial ownership of Voting Stock and irrevocable proxies representing more than 50% of the Voting Stock; (D) acquires the ability to directly or indirectly exercise a controlling influence over the management or policies of the Company; (iv) 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 combination of both for 50% 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 50% or more of the Voting Stock. 9. 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 6 income tax due from and payable by Employee as the result of his receipt of any payment hereunder or otherwise. 10. 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 six (6) months beyond the Effective Resignation Date, 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. 11. 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, 7 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. (e) The Company and Employee agree that the provisions of this Section 10 shall survive the termination of this Agreement for any reason whatsoever. 12. 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 12 (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. 8 (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. (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. Subject to (iv) below, 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 9 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 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 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. 10 (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/ David Dawson By: /s/ David Dawson - - ----------------------------- --------------------------------- (Corporate Seal) WITNESS: Employee: Charles B. Griffis /s/ Lisa Albrecht /s/ Charles B. Griffis - - ----------------------------- --------------------------------- 11 EX-10.53 4 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made and entered as of this 1ST day of AUGUST, 1998 ("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 ROBERT KELLEY, an individual residing at 3536 MARK TWAIN DRIVE HILLIARD, OHIO 43026 ("Employee"); WHEREAS, the Company wishes to assure itself of the services of Employee, and Employee is willing to serve in the employ of the Company on a full-time basis; 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 VICE PRESIDENT, ENGINEERING of the Company on the conditions hereinafter set forth. Employee agrees to perform such services consistent with his position as VICE PRESIDENT, ENGINEERING as shall from time to time be assigned to him by the Company's Board of Directors ("Board") or by an executive designated by the Board. 3. TERM AND DUTIES. (a) TERM. The term of this employment agreement shall commence on August 1, 1998 and terminate on July 31, 2000, 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. (b) The Company shall have the right, on written notice to you, (i) to terminate your employment immediately at any time for Just Cause, as defined in Paragraph 6e. (ii) to terminate your employment at any time on or after August 1, 2000, or to not renew the Agreement at any time, without cause provided the Company shall be obligated in either case to pay to you severance pay as specified in Paragraph 7. (c) 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. (d) HEADQUARTERS LOCATION. The Company agrees to maintain Employee's offices within Montgomery County in the State of Maryland ("Base Employment Area"). 4. COMPENSATION, STOCK OPTIONS, REIMBURSEMENT OF EXPENSES, AND RELOCATION. (a) COMPENSATION. The Company shall pay to you for the services to be rendered hereunder a base salary at an annual rate of $140,000, subject to increase, in accordance with the policies of the Company from time to time, payable in installments in accordance with Company policy, but in no event less frequently than monthly. (i) The Company 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. (ii) If certain performance goals reasonably established from time to time by the Company are met, you will be entitled to a cash performance bonus of 20% of base salary, with respect to each fiscal year. The amount of such bonus percentage may be increased but not decreased by 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. (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) STOCK OPTIONS. You will be granted the option to purchase 90,000 shares of V-One Corporation Common Stock. The purchase price per share will be the fair market value price on the date the Compensation Committee grants the options, such date to be no later than September 5th, 1998. The options vest over four years at a rate of one-fourth per year on each of August 5th 1999, 2000, 2001 and 2002. In the event that the Company should terminate you without cause, then the option for the year in which such termination occurs shall fully vest. All unvested options will also immediately vest in full upon the declaration of a Change in Control (as hereinafter defined). The options granted 2 will be ISO's as defined by the Internal Revenue Code to the maximum extent possible. Options above that limit will be 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. (d) 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 $40,000. (e) INITIAL SIGN-ON BONUS. The Company will pay you a sum of $20,000, less applicable taxes, on the first day you report to work. 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 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 3 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. The determination of total and permanent disability will not be made until after all leave of absence time specified in the Federal Family and Medical Leave Act ("FMLA") has been exhausted. (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 in effect that has accrued to the last day of the month in which the Date of Death occurs. (c) TERMINATION BY EMPLOYEE OR COMPANY. 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)), (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, 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: The Company will pay severance compensation as defined in Paragraph 7. 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 4 referred to as the "Retirement Termination Date." The Company shall pay to Employee his Base Salary and Bonus Salary as then in effect that has accrued to the last day of the month in which the Retirement Termination Date occurs. All vested stock options will be exercisable for their originally defined time period, typically 10 years from date of issue, after retirement. (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 provided 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 a material breach involving Employee's personal dishonesty, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any government 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. (f) RESIGNATION BY EMPLOYEE. Employee can resign at any time, giving customary two (2) weeks notice, terminating his employment under this Agreement ("Effective Resignation Date"). All Base Salary and Bonus Salary earned through the Effective Resignation Date will be paid to Employee. All vested stock options will be exercisable for a period of 90 days following the effective resignation date. 7. SEVERANCE. If Severance Compensation is triggered under conditions specified in Paragraph 6, the compensation will include the following. (a) 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 six (6) months following the Employee Termination Date and (B) Employee's projected bonus for the six months in which the Employee Termination Date occurs, which shall be computed assuming that Employee had remained in the Company's employ for the next six months and that all performance goals or other performance measures have been met at the then current level for the time period. The payment required by clause (A) shall be calculated at the highest rate of Base Salary paid to Employee at any time 5 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. (b) All vested stock options as specified in Paragraph 4c, including the options that would vest as part of the termination, would be exercisable within 90 days of such termination. 8. 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 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, 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 50% 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 50% of the Voting Stock; (C) acquires any combination of beneficial ownership of Voting Stock and irrevocable proxies representing more than 50% of the Voting Stock; (D) acquires the ability to directly or indirectly exercise a controlling influence over the management or policies of the Company; (iv) 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 6 Party's inadvertently acquiring beneficial ownership or irrevocable proxies or a combination of both for 50% 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 50% or more of the Voting Stock. 9. 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. 10. 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 six (6) months beyond the Effective Resignation Date, 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. 11. 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 7 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. (e) The Company and Employee agree that the provisions of this Section 10 shall survive the termination of this Agreement for any reason whatsoever. 12. 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 8 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 12 (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. (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 9 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. Subject to (iv) below, 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 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. 10 (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 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. 11 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/ Charles Griffis By: /s/ David Dawson - - ------------------------------- --------------------------------- (Corporate Seal) WITNESS: Employee: Robert Kelley /s/ Charles Griffis /s/ Robert Kelley - - ------------------------------- ----------------------------------- 12 EX-10.57 5 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT ("Amendment") dated as of August 1, 1998 amends that certain Employment Agreement ("Agreement") dated as of July 8, 1996 by and between V-ONE Corporation, a Delaware corporation ("Company"), and Jieh-Shan Wang ("Executive"). 1. Each capitalized term used but not otherwise defined herein shall have the meaning assigned to it in the Agreement. 2. The first sentence of Section 2(a) of the Agreement is hereby amended to read in its entirety as follows: The Company employs Executive, and Executive agrees to serve, as the Company's Chief Technical Officer on the conditions hereinafter set forth. 3. All references to the term "Senior Vice President, Engineering" in the Agreement shall be amended to read "Chief Technical Officer." 4. The Company and Executive agree that Executive is no longer an executive officer of the Company. 5. The Company and Executive agree that Executive may take leave without pay during the period October 1 through December 31, 1998. 6. Except as modified by this Amendment, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the date first above written. /s/ Jieh-Shan Wang V-ONE CORPORATION - - --------------------------- Jieh-Shan Wang By: /s/ Charles B. Griffis ----------------------------- Charles B. Griffis, Senior Vice President and Chief Financial Officer EX-10.58 6 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT ("Amendment") dated as of January 1, 1999 amends that certain Employment Agreement ("Agreement") dated as of June 12, 1996 as amended on November 21, 1997 by and between V-ONE Corporation, a Delaware corporation and formerly known as Virtual Open Network Environment Corporation ("Company"), and James F. Chen ("Executive"). 1. Each capitalized term used but not otherwise defined herein shall have the meaning assigned to it in the Agreement. 2. Effective January 1, 1999, the Company and the Executive agree to terminate the provisions of Sections 1, 2, 3, 4, 5, 6, 7 and 8 of the Agreement without any payment as might otherwise have been required under the terms of the Agreement to Executive. 3. Effective January 1, 1999, the Company agrees to engage Executive's services, and Executive agrees to serve, as a consultant to the Company for a fee of $5,000 per month for the period January 1 through December 31, 1999, but may be extended annually by mutual agreement. During such period, Executive agrees to perform such services for the Company as he may from time to time be requested to provide by the Company's Board of Directors or the Company's President and Chief Executive Officer; provided, however, that Executive shall not be required to provide more than 40 hours of service in any month. 4. The Company shall be required to reimburse Executive for expenses incurred by him in connection with his performance of services to the Company only upon prior approval of the Company's President and Chief Executive Officer or the Company's Senior Vice President and Chief Financial Officer. 5. The Company and Executive agree that Executive ceased serving as an executive officer of the Company on November 21, 1997. 6. Except as modified by this Amendment, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the date first above written. /S/ James F. Chen V-ONE CORPORATION - - ------------------------ James F. Chen By: /s/ Charles B. Griffis ------------------------- Charles B. Griffis, Senior Vice President and Chief Financial Officer EX-23.1 7 Consent of Independent Accountants We consent to the incorporation by reference in the registration statements of V-ONE Corporation on Form S-3 (Registration Nos. 333-69047, 333-67625 and 333-43795) and on Form S-8 (Registration Nos. 333-61909, 333-52909 and 333-17749) of our report dated March 11, 1999, except as to Note 14 which is as of March 31, 1999, on our audits of the financial statements of V-ONE Corporation as of December 31, 1997 and 1998 and for the three years in the period ended December 31, 1998, which report is included in the Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP McLean, VA March 31, 1999 EX-27.1 8
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 9-MOS DEC-31-1996 JAN-1-1996 SEP-30-1996 964,761 0 1,913,229 (252,305) 293,920 3,057,792 757,713 (91,653) 4,991,584 3,755,011 0 3,559,554 0 8,456 (2,579,328) 4,991,584 4,070,348 4,070,348 1,315,989 7,739,188 0 0 (472,749) (5,392,160) 0 (5,392,160) 0 0 0 (5,392,160) (.64) (.64)
EX-27.2 9
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 3-MOS DEC-31-1997 JAN-1-1997 MAR-31-1997 7,989,356 0 1,569,218 (252,305) 397,345 10,095,533 1,030,223 (185,092) 12,339,958 1,069,787 0 0 0 12,665 11,064,406 12,339,958 1,397,156 1,397,156 561,304 2,839,180 0 0 (792) (1,888,078) 0 (1,888,078) 0 0 0 (1,888,078) (.15) (.15)
EX-27.3 10
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 6-MOS DEC-31-1997 JAN-1-1997 JUN-30-1997 6,379,520 0 1,200,625 (252,305) 390,793 7,919,565 1,401,131 (259,805) 10,389,421 1,949,589 0 0 0 12,884 8,026,956 10,389,421 2,564,187 2,564,187 880,146 7,039,699 0 0 (4,506) (5,142,523) 0 (5,142,523) 0 0 0 (5,142,523) (.40) (.40)
EX-27.4 11
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 9-MOS DEC-31-1997 JAN-1-1997 SEP-30-1997 3,972,323 0 2,445,337 (266,405) 341,542 6,634,398 1,581,471 (325,440) 9,140,317 1,215,357 0 0 0 13,005 7,564,231 9,140,317 4,745,895 4,745,895 1,574,122 9,903,436 0 0 (5,248) (6,445,608) 0 (6,445,608) 0 0 0 (6,445,608) (.50) (.50)
EX-27.5 12
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 12-MOS DEC-31-1996 JAN-1-1996 DEC-31-1996 10,894,375 0 1,782,431 (252,305) 418,870 13,016,782 888,952 (132,365) 14,580,346 1,490,691 0 0 0 12,658 12,864,018 14,580,346 5,319,080 5,319,080 2,025,619 10,755,297 0 0 (518,965) (7,812,625) 0 (7,812,625) 0 0 0 (7,812,625) (.85) (.85)
EX-27.6 13
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 12-MOS DEC-31-1997 JAN-1-1997 DEC-31-1997 6,203,525 0 1,294,800 (500,405) 583,894 7,910,075 1,417,238 (415,657) 10,313,276 1,998,029 0 3,766,297 0 13,070 4,198,140 10,313,276 5,973,001 5,973,001 1,945,820 14,570,859 0 0 (13,130) (10,215,339) 0 (10,215,339) 0 0 (612,600) (10,827,939) (.84) (.84)
EX-27.7 14
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 12-MOS DEC-31-1998 JAN-1-1998 DEC-31-1998 635,959 0 1,037,859 (524,638) 385,481 1,811,117 1,015,672 (141,119) 3,922,192 3,088,485 0 0 0 16,478 619,247 3,922,192 6,259,805 6,259,805 1,691,456 13,821,403 0 0 (65,372) (9,193,396) 0 (9,193,396) 0 0 0 (9,407,030) (.68) (.68)
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