SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. __)
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
V-ONE Corporation
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(Name of Registrant as Specified In Its Charter)
V-ONE Corporation
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11:
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing is calculated and state how it was
determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
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1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement Number:
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3) Filing Party:
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4) Date Filed:
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V-ONE
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Security for a Connected World
April 2, 1998
Dear Shareholder:
On behalf of the Board of Directors, I cordially invite you to attend the
Annual Meeting of Shareholders of V-ONE Corporation ("Company"). The Annual
Meeting will be held at The Hampton Inn Germantown, 20260 Goldenrod Lane,
Germantown, Maryland 20876, on Thursday, May 14, 1998 at 10:00 a.m. Germantown,
Maryland time.
The shareholders will be asked at the Annual Meeting to vote on six
proposals. The first proposal relates to the reelection, with a term ending in
the year 2001, of two directors of the Company. The second proposal relates to
the ratification of the adoption of the Company's 1998 Incentive Stock Plan. The
third and fourth proposals relate to the ratification of the issuance, and the
approval of the issuance in the future, by the Company of certain convertible
securities and the shares of Common Stock issuable in connection therewith. The
fifth proposal relates to the ratification of the Board of Directors'
appointment of the Company's independent public accountants for the year ending
December 31, 1998. The Board of Directors unanimously recommends that the
Company's shareholders vote for all of these proposals.
Your vote is very important, regardless of the number of shares you own.
Please sign and return each proxy card that you receive in the postage-paid
return envelope, which is provided for your convenience. The return of your
proxy card will not prevent you from voting in person but will assure that your
vote is counted if you are unable to attend the Annual Meeting. We look forward
to seeing you on May 14.
Sincerely,
/s/ David D. Dawson
DAVID D. DAWSON
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
20250 Century Boulevard, Suite 300, Germantown, Maryland 20874/ (301) 515-5200
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V-ONE CORPORATION
20250 CENTURY BOULEVARD, SUITE 300 GERMANTOWN, MARYLAND 20874 (301) 515-5200
_______________________________
NOTICE
ANNUAL MEETING OF SHAREHOLDERS
APRIL 2, 1998
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Shareholders
("Annual Meeting") of V-ONE Corporation ("Company") will be held on Thursday,
May 14, 1998 at 10:00 a.m., Germantown, Maryland time, at The Hampton Inn
Germantown, 20260 Goldenrod Lane, Germantown, Maryland 20876, for the following
purposes:
1. To elect two directors, whose terms shall expire at the 2001 annual
meeting, or until their successors have been elected and qualified;
2. To ratify the adoption of the 1998 Incentive Stock Plan ("Plan");
3. To ratify, pursuant to Nasdaq Rule 4460(i), the issuance of (a)
shares of the Company's Series A Convertible Preferred Stock
("Series A Stock") to Advantage Fund II Ltd. ("Advantage"), (b)
warrants ("Consultant Warrants") to purchase Common Stock issued to
Wharton Capital Partners, Ltd. ("Wharton") and other persons
pursuant to the Company's engagement letter with Wharton dated
October 22, 1997 ("Engagement Letter"), and (c) the shares of Common
Stock issuable in connection with the Series A Stock, the warrants
issuable on conversion of the Series A Stock and the Consultant
Warrants;
4. To approve, pursuant to Nasdaq Rule 4460(i), the issuance pursuant
to the terms of the Commitment Letter dated December 8, 1997 between
the Company and Advantage of (a) shares of a new series of the
Company's preferred stock ("New Preferred Stock") to Advantage, (b)
warrants ("New Warrants") to purchase Common Stock to be issued to
Wharton and other persons pursuant to the Engagement Letter and (c)
the shares of Common Stock issuable in connection with the New
Preferred Stock, the warrants issuable on conversion of the New
Preferred Stock and the New Warrants;
5. To ratify the appointment of Coopers & Lybrand L.L.P., independent
public accountants, as the auditors of the Company for the year
ending December 31, 1998; and
6. To transact any other business as may properly come before the
Annual Meeting or any adjournment thereof.
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The Board of Directors has fixed the close of business on March 23, 1998
as the record date ("Record Date") for the determination of shareholders
entitled to notice of and to vote at the Annual Meeting and at any adjournment
thereof. A complete list of shareholders of record of the Company on the Record
Date will be available for examination by any shareholder, for any purpose
germane to the Annual Meeting, during ordinary business hours, for the 10-day
period prior to the Annual Meeting, at the executive offices of the Company,
20250 Century Boulevard, Suite 300, Germantown, Maryland 20874.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Joseph D. Gallagher
JOSEPH D. GALLAGHER
SECRETARY
Germantown, Maryland
April 2, 1998
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR
NOT YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE SELF-ADDRESSED,
POSTAGE-PAID ENVELOPE. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN WRITING, OR IN
PERSON, AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
<PAGE>
DC-221727.04
V-ONE CORPORATION
_________________________________
20250 Century Boulevard, Suite 300 Germantown, Maryland 20874 (301) 515-5200
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
The enclosed proxy is solicited by the Board of Directors ("Board") of
V-ONE Corporation, a Delaware corporation ("Company"), for use at the Annual
Meeting of Shareholders on Thursday, May 14, 1998 ("Annual Meeting"), and at any
adjournment thereof. The approximate date of mailing of this Proxy Statement is
April 2, 1998.
INFORMATION RELATING TO VOTING AT THE ANNUAL MEETING
The securities to be voted at the Annual Meeting consist of shares of
common stock of the Company, $0.001 par value per share ("Common Stock"), with
each share entitling its record owner to one vote on the Proposals and on all
other matters properly brought before the Annual Meeting. The close of business
on March 23, 1998 has been fixed by the Board as the record date ("Record Date")
for determination of shareholders entitled to notice of, and to vote at, the
Annual Meeting. There were 73 record holders of the Common Stock on the Record
Date and 13,163,817 shares of Common Stock were outstanding and eligible to be
voted at the Annual Meeting as of that date. The Company had no other class of
voting securities outstanding on the Record Date.
The presence, in person or by proxy, of at least a majority of the total
number of outstanding shares of the Common Stock entitled to vote at the Annual
Meeting is necessary to constitute a quorum at the Annual Meeting. In the event
that less than a majority of the outstanding shares are present at the Annual
Meeting, either in person or by proxy, a majority of the shares so represented
may vote to adjourn the Annual Meeting from time to time without further notice.
Directors receiving a plurality of votes will be elected in the order of the
number of votes received. There is no cumulative voting in the election of
directors. With respect to the other Proposals and any other matter properly
brought before the Annual Meeting or any adjournment thereof, the vote required
for approval shall be the affirmative vote of a majority of the total number of
votes that those present at the Annual Meeting, in person or by proxy, are
entitled to cast.
All shares entitled to vote represented by a properly executed and
unrevoked proxy received in time for the Annual Meeting will be voted at the
Annual Meeting in accordance with the instructions given; in the absence of
instructions to the contrary, such shares will be voted FOR the Proposal to
elect the designated nominees for director and FOR the other Proposals. If any
other matters properly come before the Annual Meeting, the persons named as
proxies will vote upon such matters as determined by a majority of the Board.
Under Delaware law, shares represented at the Annual Meeting (either by
properly executed proxy or in person) that reflect abstentions or "broker
non-votes" (I.E., shares held by a broker or nominee that are represented at the
Annual Meeting, but with respect to which such broker or nominee is not
empowered to vote on a particular proposal) will be counted as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum. Abstentions as to any Proposal will have the same effect as votes
against the Proposal. Broker non-votes, however, will be treated as unvoted for
purposes of determining approval of such Proposals (and therefore will reduce
the absolute number - although not the percentage - of votes needed for
approval) and will not be counted as votes for or against the Proposals. Under
applicable rules, brokers will not have discretionary voting authority to vote
on Proposals 2, 3 or 4, and may not vote for Proposals 2, 3 or 4, without
receiving instructions from the beneficial owners of shares.
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The cost of soliciting proxies will be borne by the Company. In addition
to use of the mails, proxies may be solicited personally or by telephone or
telegraph by officers, directors or employees of the Company who will not be
specially compensated for such solicitation activities. Arrangements will also
be made with brokerage houses and other custodians, nominees and fiduciaries for
forwarding solicitation materials to the beneficial owners of shares held of
record by such persons, and the Company will reimburse such persons for their
reasonable expenses incurred in that connection.
A shareholder may revoke his or her proxy at any time prior to its
exercise by (i) filing with Joseph D. Gallagher, Secretary, V-ONE Corporation,
20250 Century Boulevard, Suite 300, Germantown, Maryland 20874, written notice
thereof, (ii) submitting a duly executed proxy bearing a later date or (iii)
appearing at the Annual Meeting and giving the Secretary notice of his or her
intention to vote in person. Unless previously revoked or otherwise instructed
thereon, proxies will be voted at the Annual Meeting on the Proposals as
described above.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The number of shares of Common Stock held as of February 28, 1998, by each
holder, if any, of more than 5% of the outstanding Common Stock of the Company,
by each director of the Company, each nominee for reelection as a director, each
executive officer named in the "Summary Compensation Table," and by all
executive officers and directors of the Company is set forth below. All of the
shares shown in the following table are shares of Common Stock and are owned
both of record and beneficially by the person named; the person named possesses
sole voting and investment power, except as otherwise indicated in the footnotes
to the table.
This table does not include shares of Common Stock that may be issued to
Advantage Fund II Ltd. ("Advantage") because no holder of the Company's Series A
Convertible Preferred Stock ("Series A Stock") is entitled to receive shares of
Common Stock on conversion of its Series A Stock or on exercise of the warrants
issuable on exercise of the Series A Stock to the extent that the sum of (1) the
shares of Common Stock owned by such holder and its affiliates and (2) the
shares of Common Stock issuable on conversion of the Series A Stock and on
exercise of such warrants would result in beneficial ownership by such holder
and its affiliates of more than 4.9% of the outstanding shares of Common Stock.
Beneficial ownership for this purpose is determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
excluding shares of Common Stock so owned through ownership of unconverted
shares of Series A Stock and unexercised warrants. See "Ratification, Pursuant
to Nasdaq Rule 4460(i), of the Issuance of the Series A Stock, the Consultant
Warrants and the Shares of Common Stock Issuable in Connection with the Series A
Stock, the Warrants Issuable on Conversion of the Series A Stock and the
Consultant Warrants (Proposal 3) - Conversion Rights."
Name And Address (1) Shares Beneficially Owned(2) Percent Of Class(3)
---------------- ------------------------- ----------------
James F. Chen 4,025,152(4) 30.9%
Jieh-Shan Wang 391,492(5) 3.0%
Christopher T. Brook 13,750(6) *
Charles C. Chen** 195,000(7) 1.5%
Hai Hua Cheng 669,139 5.1%
David D. Dawson** 0(8) 0
Charles B. Griffis 39,800(9) *
Barnaby M. Page 109,650 *
2
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Name And Address(1) Shares Beneficially Owned(2) Percent Of Class(3)
---------------- ------------------------- ----------------
Harry S. Gruner 457,331(10) 3.4%
William E. Odom 9,066(11) *
Executive Officers and 5,131,591(12) 38.0%
Directors as a group
(8 persons)
Kern Capital Management, LLC 807,000 (13) 6.2%
Robert E. Kern Jr.
David G. Kern
114 West 47th Street, Suite 1926
New York, New York 10036
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* Less than 1%.
** Nominee.
(1) Unless otherwise indicated, the mailing address of each shareholder is c/o
V-ONE Corporation, 20250 Century Boulevard, Suite 300, Germantown, MD
20874.
(2) In accordance with Rule 13d-3 of the Exchange Act, a person is deemed to
be the beneficial owner of a security if he or she has or shares voting
power or investment power with respect to such security or has the right
to acquire such ownership within 60 days.
Each director and executive officer possesses sole voting and investment
power with respect to the shares listed, except as otherwise indicated.
The number of shares beneficially owned by each director or executive
officer is determined under rules promulgated by the Securities and
Exchange Commission ("SEC"), and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares as to which the individual
currently has sole or shared voting power or investment power, and also
any shares which the individual has the right to acquire within 60 days
after February 28, 1998.
(3) Number of shares deemed outstanding includes any shares subject to stock
options and warrants beneficially owned by the person in question that are
currently exercisable or become exercisable within 60 days after February
28, 1998.
(4) Includes: 600,000 shares of Common Stock held in a family limited
partnership, the general partner of which is a corporation controlled by
James F. Chen and his wife Mary S. Chen. Does not include (i) 71,110
shares of Common Stock registered in the name of Mary S. Chen as Trustee
under trusts for the benefit of Mr. Chen's children with respect to which
Mary S. Chen possesses voting and investment power and (ii) 279,100 shares
of Common Stock held by the Chen Foundation, Inc. with respect to which
Mary S. Chen possesses sole voting and dispositive power, for which shares
Mr. Chen disclaims beneficial ownership.
(5) Includes (i) 120,000 shares of Common Stock held in a family limited
partnership, the general partner of which is a corporation controlled by
Jieh-Shan Wang and his wife Shwu-Ru Wang, (ii) options to purchase 7,500
shares of Common Stock granted under the Company's 1996 Incentive Stock
Plan ("1996 Plan") and (iii) 129,474 shares of Common Stock subject to
restrictions on transferability under the terms of the Company's 1996
Non-Statutory Stock Option Plan.
3
<PAGE>
(6) Includes options to purchase 13,750 shares of Common Stock granted under
the Company's 1996 Plan.
(7) Owned jointly with Kathleen H. Chen, his wife.
(8) Does not include options and warrants to purchase 800,000 shares of Common
Stock, in the aggregate, that are not currently exercisable.
(9) Includes 2,400 shares held by his wife and options to purchase 35,000
shares of Common Stock granted under the 1996 Plan.
(10) Includes an option to purchase 6,666 shares of Common Stock granted under
the 1996 Plan and warrants to purchase 383,999 shares of Common Stock held
by JMI Equity Fund II, L.P. ("JMI"). These warrants are subject to further
adjustment as a result of the issuance of the Series A Stock. Also
includes 66,666 shares of Common Stock held by JMI. Mr. Gruner is a
general partner of JMI Partners II, L.P., the general partner of JMI. See
"Certain Transactions."
(11) Includes an option to purchase 6,666 shares of Common Stock granted under
the 1996 Plan.
(12) Includes 129,474 shares of Common Stock shares subject to restrictions on
transferability under the terms of the Company's 1996 Non-Statutory Stock
Option Plan, options to purchase 69,582 shares of Common Stock granted
under the 1996 Plan and warrants to purchase 383,999 shares of Common
Stock held by JMI that are currently exercisable.
(13) Based on a Schedule 13G dated February 13, 1998, Kern Capital Management,
LLC reports that it has sole voting and dispositive power with respect to
such shares and that Robert E. Kern, Jr. and David G. Kern are principals
and controlling members of Kern Capital Management, LLC.
ELECTION OF DIRECTORS
(PROPOSAL 1)
The Company's restated bylaws provide for a Board consisting of up to
seven members serving staggered terms. The terms of office of Charles C. Chen
and David D. Dawson on the Board will expire at the Annual Meeting. Charles C.
Chen and David D. Dawson have been nominated by the Board for reelection to the
Board to serve for a three-year term.
There are no arrangements or understandings between the Company and any
person pursuant to which such person has been elected as a director or selected
as a nominee, except that, under Mr. Dawson's employment agreement, the Board
was required to elect Mr. Dawson to fill a vacancy on the Board. Under his
employment agreement, Mr. Dawson also has the right to nominate a person to
serve as a director of the Company (in addition to himself) and the Company is
required to establish a committee of the Board (composed of Mr. Dawson, James F.
Chen and one other director chosen by Mr. Dawson and Mr. Chen) to make
recommendations for replacement of the members of the Board during the period
ending November 21, 1998. No such committee has yet been established.
If any nominee becomes unavailable for any reason, or if any other vacancy
in the class of directors to be elected at the Annual Meeting should occur
before the election, the shares represented by the proxy will be voted for the
person, if any, who is designated by the Board to replace the nominee or to fill
such other vacancy on the Board. The Board has no reason to believe that the
nominees will be unavailable or that any other vacancy on the Board will occur.
The nominees have consented to be named and have indicated their intent to serve
if elected.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE NOMINEES FOR
REELECTION AS DIRECTORS SET FORTH ABOVE.
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INFORMATION CONCERNING THE BOARD OF DIRECTORS
The directors of the Company are currently classified into three classes,
which are elected on a staggered basis. Each director serves for a three-year
term and until his successor is duly elected and qualified. The current members
of the Board are set forth below:
DIRECTOR
OF THE
COMPANY TERM POSITION(S) CURRENTLY
NAME SINCE EXPIRES HELD WITH THE COMPANY
---- ----- ------- ---------------------
James F. Chen (1).............. 1993 1999 Chairman of the
Board and Director
Charles C. Chen(1)(2)(3)....... 1993 1998 Director
David D. Dawson (3)............ 1997 1998 President, Chief
Executive Officer
and Director
Harry S. Gruner (2) ........... 1996 2000 Director
William E. Odom (2)............ 1996 1999 Director
- ---------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Nominee for election.
Biographical information regarding the directors of the Company is as
follows:
JAMES F. CHEN, 47, founded the Company in February 1993 and has since
served as a director. From inception until November 21, 1997, Mr. Chen served as
the Company's President and Chief Executive Officer. On November 21, 1997, Mr.
Chen was elected Chairman of the Board. From 1980 to 1990, Mr. Chen managed
INTELSAT's world-wide ground network engineering projects. From 1990 to January
1993, he managed the INTELSAT Ground Network Engineering Department and, from
March 1992 to January 1993, he also directed its Management Information Systems
Division. Mr. Chen holds an M.S. in Computer Science from George Washington
University and a B.S. in Electrical Engineering from Georgia Institute of
Technology. He is Charles C. Chen's brother.
CHARLES C. CHEN, D.D.S., 43, has served as a director of the Company since
February 1993 and as the Company's Secretary from December 12, 1995 until
February 2, 1998. Since July 1982, Dr. Chen has practiced periodontics with
Zupnik, Winson & Chen, D.D.S.P.A. Dr. Chen holds a D.D.S. from the Baltimore
College of Dental Surgery, University of Maryland, and a B.S. in Chemistry from
the University of Maryland. He is James F. Chen's brother.
DAVID D. DAWSON, 50, has served as the President and Chief Executive
Officer of the Company since November 21, 1997 and as a director since December
12, 1997. From March 1996 until November 1997, he served as General Manager of
Ascend Communications, Inc., a data communications hardware company. From April
1994 until March 1996, he served as Chief Operating Officer, and from November
1995 until March 1996, he served as Chief Executive Officer of Morning Star
Technologies, a firewall and communications company. From October 1992 until
April 1994, he was Vice President of Development for Net Express Systems, a data
communications hardware company. Mr. Dawson holds an M.S. in Computer Science
from Fairleigh Dickinson University, an M.S. in Operations Research from Air
Force Institute of Technology, and a B.S. in Electrical Engineering from the
United States Military Academy at West Point.
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HARRY S. GRUNER, 38, has served as a director of the Company since June
1996. Since November 1992, he has been a general partner of JMI Equity Fund, a
private equity investment partnership. From August 1986 to October 1992, Mr.
Gruner was with Alex. Brown & Sons Incorporated, most recently as a principal.
Mr. Gruner is also a director of the META Group, Inc., a syndicated information
technology research company, and Hyperion Software, Inc., a financial software
company, and numerous other privately held companies. Mr. Gruner holds an M.B.A.
from Harvard Business School and a B.A. in History from Yale University.
(RETIRED) LT. GEN. WILLIAM E. ODOM, 65, has served as a director of the
Company since June 1996. Since October 1988, General Odom has served as Director
of National Security Studies at the Hudson Institute. He has also served as an
adjunct professor at Yale University since January 1989. Prior to his retirement
from the military in 1988, General Odom held several military posts including,
Director of the National Security Agency, Assistant Chief of Staff for
Intelligence and Military Assistant to the National Security Advisor during the
Carter Administration. He is also a director of Nichols Research Corporation,
American Technologies Group and American Science & Engineering. General Odom
holds an M.A. and Ph.D. from Columbia University and a B.S. from the United
States Military Academy at West Point.
COMPENSATION OF DIRECTORS
The Company reimburses directors for travel expenses incurred in
connection with their attendance at meetings of the Board and its committees.
The two new non-employee directors elected at the June 1996 annual meeting of
shareholders (Messrs. Gruner and Odom) each received an option to purchase 6,666
shares of Common Stock under the 1996 Plan upon such election.
From March 1, 1996 through March 1, 1997, Mr. Odom has been providing
consulting services to the Company for a fee of $2,500 per quarter.
BOARD OF DIRECTORS AND COMMITTEES
Meetings of the Board are held regularly each month and as required.
During 1997, the Board held four meetings. The following are the committees of
the Board:
The Board has established an Audit Committee ("Audit Committee") to
recommend the firm to be appointed as independent accountants to audit the
Company's financial statements and to perform services related to the audit,
review the scope and results of the audit with the independent accountants,
review with management and the independent accountants the Company's year-end
operating results and consider the adequacy of the internal accounting
procedures. The Audit Committee consists of three directors, none of whom are
employees of the Company. The Audit Committee met once in 1997.
The Board has also established a Compensation Committee ("Compensation
Committee") and an Executive Committee ("Executive Committee"). The Compensation
Committee, which consisted of two directors until Hai Hua Cheng resigned on
November 7, 1997, reviewed and recommended the compensation arrangements for all
directors and officers, approved such arrangements for other senior level
employees and administered and took such other action as may have been required
in connection with certain compensation and incentive plans of the Company. The
Compensation Committee has not yet been reconstituted. The Compensation
Committee did not meet in 1997; however, the Committee has followed the practice
of taking action by written consent. The Executive Committee, which consists of
two directors, addresses significant corporate, operating and management matters
between meetings of the full Board. The Executive Committee did not meet during
1997.
The Company currently has no standing nominating committee. A director can
be nominated by a member of the Board or by written notice to the Board not less
than 120 calendar days in advance of the anniversary date of the Company's
previous year's annual meeting of shareholders.
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No current member of the Board attended fewer than seventy-five percent
(75%) of the meetings of the Board and committees of the Board on which he
served during 1997.
INFORMATION CONCERNING EXECUTIVE OFFICERS
The Company's executive officers are elected each year by the Board,
unless the Board determines, upon appointing an officer, that he or she shall
serve for a different term. Any executive officer may be removed at any time,
with or without cause, by the Board. Biographical information with respect to
James F. Chen is provided above. See "Information Concerning the Board of
Directors." Biographical information regarding the other executive officers of
the Company is as follows:
JIEH-SHAN WANG, PH.D., 43, has been with the Company since its inception
and has served as the Company's Senior Vice President and Chief Technical
Officer since January 1997. From April 1996 to December 1996, Dr. Wang served as
the Company's Senior Vice President and Chief Technical Officer, from August
1995 to April 1996, Dr. Wang served as the Company's Vice President of
Engineering and, from April 1994 to August 1995, he served as Chief Engineer.
Dr. Wang was with INTELSAT from June 1991 to April 1994, as Senior Systems
Engineer, where he led a team of engineers in the development of network
applications. Dr. Wang holds a Ph.D. in Physics from the University of Maryland
and a B.S. in Physics from National Taiwan University.
CHARLES B. GRIFFIS, 53, has served as the Company's Senior Vice President
and Chief Financial Officer since September 1996 and began serving as the
Company's Treasurer as of January 1, 1997. Prior to joining the Company, Mr.
Griffis served as Senior Vice President and Chief Financial Officer of Masstor
Systems Corporation, a company that filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code on September 8, 1994, from April
1990 to September 1996. From November 1983 to April 1990, Mr. Griffis served as
a General Partner of Griffis, Sandler & Co., a private venture capital firm, and
as President of Charles Griffis & Co., Inc., a business consulting firm. Mr.
Griffis holds an M.B.A. in Finance from Columbia University and a B.A. in
History from Yale University.
CHRISTOPHER T. BROOK, 58, has served as the Company's Vice President of
Product Development since February 1997. From September 1996 to February 1997,
Mr. Brook served as the Company's Director of Product Development. Mr. Brook was
with GE Information Services, Inc. for approximately 27 years prior to joining
the Company, holding a number of technology-related positions including Manager
of Directory Services and Network Architecture, Manager of Network Architecture
and most recently, Manager of Emerging Technology, where Mr. Brook was
responsible for investigating new information technologies. Mr. Brook graduated
from Clifton College (Bristol, England) with an emphasis in the Classics.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation paid to the Company's current
President and Chief Executive Officer and the four other most highly compensated
executive officers of the Company whose salary plus bonus exceeded $100,000
during the year ended December 31, 1997 and one former executive officer whose
annual salary and bonus would have exceeded $100,000 during the year ended
December 31, 1997 had he remained in office until the end of the year ("Named
Executives") and their compensation for services in 1997, 1996 and 1995.
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<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
LONG TERM
COMPENSATION
Name and Principal Other Annual AWARDS All Other
Position Year Salary($) Bonus($) Compensation($)(1) Options(#) Compensation($)
- ------------------ ---- --------- -------- ------------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James F. Chen 1997 $170,000 $ 0 -- -- $3,665(3)
Chairman of the Board(2) 1996 $123,385 $13,000 -- -- $4,350(3)
1995 -- $18,000 -- -- $5,273(4)
David D. Dawson 1997 $ 21,282 $ 0 -- 800,000(5) --
President and Chief 1996 -- -- -- -- --
Executive Officer 1995 -- -- -- -- --
Jieh-Shan Wang 1997 $140,000 $ 0 -- 30,000 $3,778(7)
Senior Vice President & 1996 $101,667 $ 3,000 -- 166,666(6) $4,633(7)
Chief Technical Officer 1995 $ 69,500 $ 2,000 -- -- $3,273(7)
Charles B. Griffis 1997 $142,500 $ 0 -- 45,000 --
Senior Vice President & 1996 $ 36,820 $10,000 -- 75,000 $3,240(8)
Chief Financial Officer 1995 -- -- -- -- --
Christopher T. Brook 1997 $118,333 $ 0 -- 15,000 --
Vice President of 1996 $ 27,273 $ 0 -- 60,000 --
Product Development 1995 -- -- -- -- --
Barnaby M. Page (9) 1997 $ 66,666 $16,026 -- -- --
Former Vice President 1996 $ 63,333 -- -- 112,474 --
of Financial Services 1995 $ 10,000 -- -- -- --
- ---------------------
(1) For 1997, 1996 and 1995, the aggregate amount of such Other Annual Compensation for each
Named Executive is not reportable under SEC rules because such amount is the lesser of
either $50,000 or 10% of total annual salary and bonus for each Named Executive.
(2) Mr. Chen served as President and Chief Executive Officer of the Company until November 21,
1997.
(3) Represents payments made by the Company to finance Mr. Chen's automobile.
(4) Represents payments made by the Company of $2,213 to finance Mr. Chen's automobile and
$3,060 for Mr. Chen's health insurance.
(5) Represents options to purchase 500,000 shares of Common Stock at an exercise price of
$3.125 per share granted under the 1996 Plan and warrants to purchase 300,000 shares of
Common Stock at an exercise price of $3.125 per share. These options and warrants vest as
to 25% of the shares on the first anniversary of the date of grant and as to an
additional 25% of the shares on the second, third and fourth anniversaries of the date of
grant. The options and warrants become fully vested in the event of a change in control
of the Company.
(6) Represents options granted under the Company's 1996 Non-Statutory Stock Option Plan
(expired on December 31, 1996), which, upon exercise, became shares of Common Stock
subject to restrictions on transferability.
(7) Represents payments made by the Company to finance Mr. Wang's automobile.
</TABLE>
8
<PAGE>
(8) Represents payments made by the Company for Mr. Griffis' relocation.
(9) Mr. Page resigned his position with the Company effective August 29, 1997.
STOCK OPTIONS
The following tables set forth further information regarding the grant of
options and warrants to the Named Executives of the Company in 1997. No stock
appreciation rights ("SARs") were granted to any Named Executive during 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------
% of Total
Number of Options
Securities Granted to Exercise Potential Realizable Value at
Underlying Employees or Base Assumed annual Rates of
Options in Fiscal Price Expiration Stock Price Appreciation for
Name Granted (#) Year (3) ($/Sh)(1) Date Oprtion Term
---- ----------- -------- --------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
James F. Chen -- -- -- -- -- --
Chairman of the Board
David D. Dawson 800,000(2) 33.4% $3.125 11/21/2007 $ 1,572,235 $3,984,356
President and Chief
Executive Officer
Jieh-Shan Wang 30,000(3) 2.0% $5.875 2/13/2007 $ 110,843 $ 280,897
Senior Vice President
and Chief Technical
Officer
Charles B. Griffis 25,000(3) 1.7% $5.875 2/13/2007 $ 92,369 $ 234,081
Senior Vice President 20,000(4) 1.3% $4.00 10/15/2007 $ 50,312 $ 127,499
and Chief Financial
Officer
Christopher T. Brook 15,000(3) 1.0% $5.875 2/13/2007 $ 55,421 $ 140,449
Vice President of
Product Development
Barnaby M. Page -- -- -- -- -- --
Former Vice President
of Financial Services
______________________________
</TABLE>
(1) Represents fair market value on date of grant.
(2) Represents options to purchase 500,000 shares of Common Stock at an
exercise price of $3.125 per share granted under the 1996 Plan and
warrants to purchase 300,000 shares of Common Stock. These options and
warrants vest as to 25% of the shares on the first anniversary of the date
9
<PAGE>
of grant and as to an additional 25% of the shares on the second, third
and fourth anniversaries of the date of grant. The options and warrants
become fully vested in the event of a change in control of the Company.
(3) These options vest as to 25% of the shares on the first anniversary of the
date of grant and as to an additional 25% of the shares on the second,
third and fourth anniversaries of the date of grant. These options were
granted under the 1996 Plan and become fully vested in the event of a
change in control of the Company.
(4) These options vested as to 10,000 shares on January 1, 1998 and vest as to
an additional 2,500 shares on each of October 15, 1998, 1999, 2000 and
2001. These options were granted under the 1996 Plan and become fully
vested in the event of a change in control of the Company.
The following table summarizes the value realized upon exercise of
outstanding stock options and the value of the outstanding options held by the
Named Executives at December 31, 1997.
<TABLE>
<CAPTION>
Value Of
Number Of Unexercised
Unexercised In-the-money
Options At Options At
December 31, December 31,
Shares 1997 (#) 1997 ($) (1)
Acquired ------------- -------------
On Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable
---- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
James F. Chen -- -- -- --
Chairman of the Board
David D. Dawson -- -- 0/800,000 $0/$300,000
President and
Chief Executive Officer
Jieh-Shan Wang -- -- 7,500/30,000 $0/$0
Senior Vice President
and Chief Technical
Officer
Charles B. Griffis -- -- 35,000/120,000 $0/$0
Senior Vice President
and Chief Financial
Officer
Christopher T. Brook -- -- 13,750/75,000 $0/$0
Vice President of
Product Development
Barnaby M. Page -- -- 109,650/0 $103,482/$0
Former Vice President
of Financial Services
- -----------------------------
</TABLE>
(1) Based on the closing sales price of $3.50 on December 31, 1997.
10
<PAGE>
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
In June 1996, the Board established the Compensation Committee, which made
recommendations concerning the compensation arrangements for all directors and
executive officers. From January 1 through November 7, 1997, the members of the
Compensation Committee were Hai Hua Cheng and William E. Odom. On November 7,
1997, Mr. Cheng resigned his position as a director of the Company. The
Compensation Committee has not yet been reconstituted by the Board.
Consistent with the Company's growth, in April 1997, the Compensation
Committee began to adjust the compensation paid to its executive officers to be
competitive within the high technology industry. As a result, compensation for
executive officers currently consists primarily of base salary, cash bonuses and
grants of stock options pursuant to the Company's plans. Base salaries were
initially determined by evaluating the responsibilities of the position and the
experience and knowledge of the individual. Bonuses and annual salary
adjustments, if any, were determined by evaluating performance taking into
account such factors as achievement of the Company's strategic goals, assumption
of additional responsibilities, attainment of specific individual objectives,
and the compensation paid to other senior executives in the Company's industry.
The Board believes that stock ownership by management is especially beneficial
in aligning the interest of management and shareholders in the Company.
From the inception of the Company until 1996, James F. Chen received a
significant number of shares of the Company in lieu of receiving a salary. In
June 1996, Mr. Chen entered into an employment agreement with the Company that
provided for a base salary of $125,000 per annum. In April 1997, the
Compensation Committee determined to increase Mr. Chen's base salary to $185,000
per annum in order to align his compensation with that paid to other senior
executives in the Company's industry. On November 21, 1997, Mr. Chen was
appointed Chairman of the Board of the Company and ceased to serve as its
President and Chief Executive Officer in connection with the Company's retention
of David D. Dawson. See "-- Employment Agreements" for more information
regarding Mr. Chen's employment agreement.
On November 21, 1997, the Company retained Mr. Dawson as its President and
Chief Executive Officer. On that date, the Company entered into an employment
agreement with Mr. Dawson, the terms of which were approved by the Board.
Pursuant to such employment agreement, Mr. Dawson's base salary was set at
$200,000 per annum and he received options and warrants to purchase 800,000
shares of Common Stock at an exercise price of $3.125 per share. The amount of
Mr. Dawson's initial annual salary and the number of options and warrants were
determined after consulting with the executive search firm retained by the
Company to attract candidates for the position of President and Chief Executive
Officer. See "-- Employment Agreements" for more information regarding Mr.
Dawson's employment agreement.
Also in June 1996, the Company entered into an employment agreement with
Jieh-Shan Wang, who holds the position of Senior Vice President and Chief
Technical Officer. Mr. Wang's agreement provided for a base salary of $100,000
per annum. In April 1997, the Compensation Committee determined to increase Mr.
Wang's base salary to $140,000 per annum in order to align his compensation with
that paid to other senior executives in the Company's industry. See "--
Employment Agreements" for more information regarding Mr. Wang's employment
agreement.
In April 1997, the Company determined to increase the salary of Charles B.
Griffis, its Senior Vice President and Chief Financial Officer, to $150,000 per
annum in order to align his compensation with that paid to other senior
executives in the Company's industry. See "-- Employment Agreements" for more
information regarding Mr. Griffis' employment agreement.
No bonuses were paid to any of the Named Executives for 1997 other
than $16,026 paid to Barnaby M. Page for meeting his sales quota. Mr. Page
left the Company's employ on August 29, 1997.
11
<PAGE>
Grants of Company stock options are intended to align the interest of
executives, key employees and others with the long-term interests of the
Company's shareholders and to encourage executives and key employees to remain
with the Company. The Board initially authorized the Compensation Committee to
grant stock options to key employees and others under the Company's stock option
plans. Currently, the Board is administering the Company's stock option plans.
In the past, Mr. Chen has recommended, and currently Mr. Dawson recommends, to
the Compensation Committee or the Board levels of stock option grants based upon
the same factors as used for bonus and salary adjustments. Mr. Chen does not
currently hold, nor has he ever been granted, options to purchase the Company's
Common Stock.
Section 162(m) of the Internal Revenue Code of 1986, as amended ("Code"),
imposes a limitation on the deductibility of nonperformance-based compensation
in excess of $1 million paid to the Named Executives. Currently, no executive
officer of the Company is paid compensation in excess of $1 million per year and
it is not anticipated that any executive officer will be paid in excess of $1
million in 1997. The Plan and the 1996 Plan provide for awards that can be made
in compliance with Section 162(m).
Charles C. Chen
James F. Chen
David D. Dawson
Harry S. Gruner
William E. Odom
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until November 7, 1997, the Compensation Committee was composed of
directors Hai Hua Cheng and William E. Odom. On November 7, 1997, Mr.
Cheng resigned as a director and the Compensation Committee has not yet
been reconstituted.
One of the Company's executive officers, Jieh-Shan Wang, paid for options
granted under the Company's 1995 Non-Statutory Stock Option Plan with a
promissory note. Mr. Wang borrowed $124,750 from the Company and executed a 6%
interest-bearing promissory note, due April 22, 2006, that was secured by the
shares of Common Stock issued on exercise of the option by Mr. Wang ("Pledged
Shares"). The terms of the note provided for payments of principal and interest
to be made annually, beginning on April 22, 1997. If, at any time, the fair
market value of the Pledged Shares securing the note was less than the amount
due under the note, Mr. Wang remained liable for the balance due. If Mr. Wang
sold the Pledged Shares at any time prior to April 22, 2006, then the proceeds
of the sale would have been applied to the balance of the note before payment
would be made to Mr. Wang. On February 11, 1998, Mr. Wang repaid the note by
tendering 37,192 shares of Common Stock to the Company, valued at $3.25 per
share. The largest amount of indebtedness outstanding on the note during 1997
was $120,080.
The Company has adopted a policy providing that all material transactions
(other than compensation arrangements that must be approved by the Compensation
Committee) between the Company and its officers, directors and other affiliates
(i) must be approved by a majority of the disinterested members of the Board or
a committee thereof (following disclosure to the Board of the material facts of
the relationship and the transaction), and (ii) must be on terms no less
favorable to the Company than can be obtained from unaffiliated third parties.
STOCK PERFORMANCE GRAPH
The following graph compares the change from the date of the Company's
Common Stock began trading on the Nasdaq National Market in the Company's total
return on its Common Stock with (a) the change in the total return on the stocks
included in the CRSP Total Return Index for the Nasdaq Stock Market (U.S.) and
(b) the change in the total return on the stocks included in the Company's peer
group (5 companies) assuming an initial investment of $100 on October 24, 1996,
12
<PAGE>
the date the Common Stock began trading on Nasdaq. All of these total returns
are computed assuming the reinvestment of dividends at the frequency with which
dividends were paid during the period. The Common Stock price performance shown
below should not be viewed as being indicative of future performance. The
companies currently in the peer group are Check Point Software Technologies
Ltd., Security Dynamics Technologies, Inc., Cylink Corp., Raptor Systems, Inc.,
and AXENT Technologies, Inc.
SOURCES: NASDAQ
October 24, 1996 December 31, 1996 December 31, 1997
V-ONE CORP 100.00 145.00 70.00
NASDAQ TOTAL RETURN 100.00 105.60 129.58
INDEX
PEER GROUP (5 COMPANIES) 100.00 83.26 95.59
TOTAL RETURN
[STOCK PERFORMANCE GRAPH SHOWING PLOT POINTS INDICATED ABOVE]
EMPLOYMENT AGREEMENTS
On June 12 and July 8, 1996, respectively, the Company entered into
employment agreements with James F. Chen and Jieh-Shan Wang (each an
"Executive") at initial annual base salaries of $125,000 and $100,000,
respectively. Each employment agreement has a two year term and is automatically
renewed for additional two year terms on each successive anniversary date,
commencing June 12 and July 8, 1997, respectively. However, either the Company
or the Executive may serve written notice of termination prior to June 12 or
July 8, 1997, respectively, or prior to June 12 or July 8 of each succeeding
year, as the case may be, in which case the respective employment agreement will
terminate at the end of the two year period that begins with June 12 or July 8
following the date of such written notice. On November 21, 1997, the Company's
employment agreement with James F. Chen was modified to provide that Mr. Chen
serves solely as Chairman of the Board of the Company.
Under each employment agreement, the Board (or a Board committee) is
obligated to review the Executive's base salary promptly following the
completion of the Company's initial public offering ("Offering") and thereafter
at least annually. As a result of such review, the Board or committee may, in
its discretion, increase, but generally may not decrease, the Executive's base
salary. After any adjustment following the Offering, the Board or committee may
not increase the Executive's base salary for any one year by an amount greater
than 50% of his then base salary. It is intended that the Board or committee
will consider in any such review factors relating to the Executive's
performance, duties and responsibilities and endeavor to maintain his
compensation at a level comparable to that of similarly situated executives in
the Company's industry. In April 1997, the annual salaries of Mr. Chen and Mr.
Wang were increased to $185,000 and $140,000, respectively. Each employment
13
<PAGE>
agreement also provides that the Executive may be paid such bonuses, if any, as
may be awarded from time to time by the Board or such committee, in its
discretion. Such bonuses shall be based on results of operations, special
contributions made by the Executive, seniority, competitive conditions in the
Company's industry and such other factors as the Board or such committee
considers relevant.
In the case of Mr. Chen's employment agreement, in the event that (i) Mr.
Chen terminates his employment with the Company (other than because of his
death) within two years following a change in control (as defined in the
employment agreement), (ii) the Company terminates Mr. Chen's employment for any
reason (other than because of death, disability or just cause) within two years
following a change in control, (iii) Mr. Chen terminates his employment with the
Company because of the Company's material breach of the employment agreement,
(iv) Mr. Chen's base salary is reduced unless such reduction is permitted by the
employment agreement or (v) the Company's principal executive offices are
relocated to a location outside Montgomery County, Maryland, or the Company
requires Mr. Chen to be based anywhere other than the Company's principal
executive offices, then the Company must make a lump sum severance payment to
Mr. Chen. The payment is equal to the sum of (a) the aggregate amount of the
future base salary payments Mr. Chen would have received if he continued in the
employ of the Company until 24 months (36 months if an event described in
clauses (i) or (ii) above occurs) following the termination date and (b) Mr.
Chen's projected bonus for the year in which the termination date occurs. The
payment required by clause (a) is calculated at the highest rate of base salary
paid to Mr. Chen at any time under the employment agreement, with such payments
discounted to present value at a discount rate equal to 1% above the per annum
one-year Treasury Bill rate. The bonus amount is computed assuming that Mr. Chen
had remained in the Company's employ until the end of that year and that all
performance goals or other performance measures have been met at the then
current level for the remainder of that year.
Under Mr. Wang's employment agreement, Mr. Wang receives a lump sum
severance payment under the circumstances described in clauses (ii), (iii), (iv)
and (v) in the preceding paragraph. Mr. Wang's severance payment is calculated
in the same manner as Mr. Chen's except that, for purposes of the calculation of
benefits payable under clause (a) of the preceding paragraph, Mr. Wang is
limited to 24 months of base salary in all circumstances, including the
circumstances described in clause (ii).
The Company may terminate the Executive's employment for "just cause" at
any time by giving him written notice, in which case the Company is only
obligated to pay him his base salary as then in effect through the termination
date. If the Executive fails to perform his duties under the employment
agreement on account of a disability, the Company may terminate the agreement on
a date not less than 30 days thereafter unless he resumes full performance of
his duties within such period. Each Executive is entitled to terminate his
employment with the Company on, or at any date after, a date on which he is at
least 65 years old. Each employment agreement also terminates in the event of
the Executive's death. In either such event, the Company must pay the Executive
or his legal representative the Executive's base salary as then in effect that
has accrued to the last day of the month in which the retirement date or the
date of death occurs.
On November 21, 1997, the Company entered into an employment agreement
with David D. Dawson, its President and Chief Executive Officer. The employment
agreement has a two year term and is automatically renewed for an additional one
year term on such second anniversary date and each successive anniversary date
thereafter. However, either the Company or Mr. Dawson may serve written notice
of its or his intention not to renew not less than 30 days prior to the then
current termination date of the agreement, in which case the employment
agreement terminates on such termination date.
Mr. Dawson's salary was initially set at $200,000 per year, subject to
increase by the Board. The employment agreement also provides that Mr. Dawson is
eligible for a cash bonus in the amount of 40% of his base salary if he meets
certain performance objectives; the bonus may be increased if the objectives are
exceeded.
14
<PAGE>
If the Company terminates Mr. Dawson's employment for cause, he is not
entitled to any severance payment. Mr. Dawson is deemed to be terminated for
cause if, in the reasonable determination of the Board, he, among other things,
is convicted of a felony or a crime involving moral turpitude, participates in a
fraud against the Company, or willfully discloses the Company's trade secrets or
other confidential information to any of its competitors. If the Company
terminates Mr. Dawson's employment other than for cause (or fails to renew the
employment agreement other than for cause), Mr. Dawson receives a severance
payment equal to one year's salary (or, if greater, base salary for the period
beginning on the termination date and ending on November 21, 1999. In the event
Mr. Dawson's employment with the Company terminates, he has agreed to resign as
a director.
On November 7, 1997, the Company entered into an amended employment
agreement with Charles B. Griffis, its Senior Vice President and Chief Financial
Officer. The amended employment agreement has no term; however, if Mr. Griffis
is employed by the Company on the date of a change of control (which term is
defined in the amended employment agreement), Mr. Griffis' employment is
extended for 12 months following the change of control.
Mr. Griffis salary was initially set at $150,000 per year. Mr. Griffis is
also eligible to receive a bonus. In the event Mr. Griffis' employment is
terminated as a result of his death or his retirement after age 65, he or his
legal representative receives his salary through the end of the month in which
his death or retirement occurs. If Mr. Griffis fails to perform his duties under
the employment agreement on account of a disability, the Company may terminate
the agreement on a date not less than 30 days thereafter unless he resumes full
performance of his duties within such period. The Company may terminate Mr.
Griffis' employment for "just cause" at any time by giving him written notice,
in which case the Company is only obligated to pay him his base salary as then
in effect through the termination date.
In the event that (i) Mr. Griffis' employment with the Company is
terminated (other than because of his death, disability or "just cause") within
one year following a change of control (as defined in the amended employment
agreement), (ii) Mr. Griffis terminates his employment with the Company because
of the Company's material breach of the employment agreement, (iii) Mr. Griffis'
base salary is reduced unless such reduction is permitted by the amended
employment agreement or (iv) the Company's principal executive offices are
relocated to a location outside Montgomery County, Maryland, or the Company
requires Mr. Griffis to be based anywhere other than the Company's principal
executive offices, then the Company must make a lump sum severance payment to
Mr. Griffis. The payment is equal to the sum of (a) the aggregate amount of the
future base salary payments Mr. Griffis would have received if he continued in
the employ of the Company until 12 months following the termination date and (b)
Mr. Griffis' projected bonus for the year in which the termination date occurs.
The payment required by clause (a) is calculated at the highest rate of base
salary paid to Mr. Griffis at any time under the employment agreement, with such
payments discounted to present value at a discount rate equal to 1% above the
per annum one-year Treasury Bill rate. The bonus amount is computed assuming
that Mr. Griffis had remained in the Company's employ until the end of that year
and that all performance goals or other performance measures have been met at
the then current level for the remainder of that year. In addition, all unvested
stock options provided for under the terms of the original employment letter
vest on the termination date and the exercise period of these options is
extended until the latest date they could have been exercised if Mr. Griffis had
remained employed by the Company until 12 months had elapsed following the
change of control.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than ten percent of the
Company's Common Stock, to file initial reports of ownership and reports of
changes in ownership with the SEC and the Nasdaq, the exchange on which the
Company's Common Stock is listed for trading. Executive officers, directors and
greater than ten-percent shareholders (collectively, the "Reporting Persons")
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.
15
<PAGE>
Based solely on review of the copies of such forms to the Company, and
written representations by the Reporting Persons, the Company believes that, for
the year ended December 31, 1997, all Section 16(a) filing requirements
applicable to the Reporting Persons were met, except that one Form 5, covering
one transaction, was not timely filed by William E. Odom, a director of the
Company, one Form 4, covering one transaction, was not timely filed by Harry S.
Gruner, a director of the Company, and one Form 4, covering one transaction, was
not timely filed by James F. Chen, Chairman of the Board and a director of the
Company.
RATIFICATION OF ADOPTION OF THE 1998 NON-QUALIFIED STOCK OPTION PLAN
(PROPOSAL 2)
The Board adopted the 1998 Non-Qualified Stock Option Plan ("1998 Plan")
on February 2, 1998. The Company is soliciting shareholder approval of the 1998
Plan so that, among other reasons, the 1998 Plan complies with the requirements
of Section 162(m) of the Code and the Company's ability to deduct compensation
paid to executive officers under the 1998 Plan is preserved. The 1998 Plan will
not be effective unless and until it is approved by the Company's shareholders.
PURPOSE
The purpose of the 1998 Plan is to advance the interest of the Company and
its subsidiaries by encouraging and providing for the acquisition of an equity
interest in the Company by non-employee directors, officers, key employees and
consultants through the grant of awards with respect to shares of Common Stock.
The 1998 Plan will enable the Company to retain the services of non-employee
directors, officers, key employees and consultants upon whose judgment,
interest, and special effort the successful conduct of its operations are
largely dependent and to complete effectively with other enterprises for the
services of non-employee directors, officers, key employees and consultants as
may be needed for the continued improvement of its business. The consideration
for issuance of the awards is the continued services of the non-employee
directors, officers, key employees and consultants to the Company and its
subsidiaries. The 1998 Plan is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
AWARDS AVAILABLE UNDER THE 1998 PLAN
Pursuant to the 1998 Plan, 2,500,000 shares of Common Stock were reserved
for future issuance by the Company to non-employee directors, officers, key
employees and consultants through the grant of incentive stock options and
non-qualified stock options to purchase Common Stock of the Company and
restricted share awards. Such shares of Common Stock may be newly issued or
Treasury shares and have an aggregate market value of approximately $6.875
million based on the price per share as of February 27, 1998 of $2.75. As of
March 31, 1998, no awards have been made under the 1998 Plan.
In the event the purchase price of an option is paid or tax or withholding
payments relating to an award are satisfied, in whole or in part through the
delivery of shares of Common Stock, a participant will be deemed to have
received an award with respect to those shares of Common Stock. The Common Stock
covered by any unexercised portions of terminated options, shares of Common
Stock forfeited and shares of Common Stock subject to awards that are otherwise
surrendered by a participant without receiving any payment or other benefit with
respect thereto may again be subject to new awards under the 1998 Plan.
Awards to officers, key employees and consultants under the 1998 Plan may
take the form of both stock options and restricted share awards; however, no
employee may receive awards with respect to more than 500,000 shares of Common
Stock under the 1998 Plan. As of February 28, 1998, approximately 71 officers
16
<PAGE>
and key employees and one consultant were eligible to receive awards under the
1998 Plan. Awards under the 1998 Plan may be granted alone or in combination
with other awards. Non-employee directors may only receive non-discretionary
stock option awards (described in more detail below) under the 1998 Plan. As of
February 28, 1998, none of the Company's non-employee directors were eligible to
receive options under the 1998 Plan.
1998 PLAN ADMINISTRATION
The 1998 Plan may be administered by a committee of the Board
("Committee") or the Board. If the Committee administers the 1998 Plan, the
Committee must be composed of at least two directors of the Company, each of
whom is a "non-employee director" as defined in Rule 16b-3, as promulgated by
the SEC under the Exchange Act, and an "outside director" within the meaning of
Section 162(m) of the Code. If, however, at least two of the Company's directors
are not both "non-employee directors" and "outside directors," the Plan is
administered by the Board. The 1998 Plan is currently administered by the Board.
The Committee or the Board determines, among other things, the officers,
key employees and consultants who are eligible for and granted awards,
determines the amount and type of awards, determines the duration of the options
(which may not exceed ten years), establishes rules and guidelines relating to
the 1998 Plan, establishes, modifies and terminates terms and conditions of
awards and takes such other action as may be necessary for the proper
administration of the 1998 Plan.
If a Committee administers the 1998 Plan, its members are appointed by the
Board. Directors may be removed at any time but only for cause and only by the
affirmative vote of the holders of 67% or more of the outstanding shares of the
Company's capital stock entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the shareholders
called for that purpose.
STOCK OPTIONS
Stock options ("Incentive Stock Options") meeting the requirements of
Section 422 of the Code and stock options that do not meet such requirements
("Non-Qualified Options") are both available for grant under the 1998 Plan. The
term of each option will be determined by the Committee or the Board, but no
option will be exercisable more than ten years after the date of grant. Options
will also be subject to restrictions on exercise, such as exercise in periodic
installments, as determined by the Committee or the Board. The exercise price
for an Incentive Stock Option must be at least 100% of the fair market value of
a share of Common Stock on the date of grant of such option (110% in the case of
Incentive Stock Options granted to a shareholder who owns in excess of 10% of
the Company's voting stock). There is no minimum exercise price for
Non-Qualified Options (other than par value per share). The exercise price is
payable in cash, in shares of Common Stock owned by a participant for at least
six months, with respect to Non-Qualified Options only, a promissory note
payable to the Company, or by cashless exercise with a participant's broker, as
determined by the Committee or the Board.
Stock options granted under the 1998 Plan are not transferable except by
will or the laws of descent and distribution. Unless otherwise provided in the
relevant option agreement, options will only be exercisable within three months
of any termination of employment (and then only to the extent the option was
exercisable on the date of termination of employment) other than termination for
"cause" or termination due to death or disability. Unless otherwise provided in
the relevant option agreement, options will be exercisable in full (unless
previously exercised) by a participant or beneficiary, as the case may be,
within one year of a termination of employment by reason of death or disability.
If a participant's employment is terminated for "cause," his or her options will
no longer be exercisable after the date of such termination of employment unless
the option agreement provides otherwise. In no event, however, may an option be
exercised after the end of its term.
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The Committee or the Board may provide that, if a participant surrenders
already owned shares of Common Stock in full or partial payment of an option,
then, concurrent with such surrender, the participant, subject to the
availability of shares of Common Stock under the 1998 Plan, will be granted a
new Non-Qualified Option (a "Reload Option") covering a number of shares of
Common Stock equal to the number so surrendered. A Reload Option may be granted
in connection with the exercise of an option that is itself a Reload Option.
Each Reload Option will have the same expiration date as the original option and
an exercise price equal to the fair market value of the Company's shares of
Common Stock on the date of grant of the Reload Option. A Reload Option is
exercisable immediately or at such time or times as the Committee or Board
determines and will be subject to such other terms and conditions as the
Committee or the Board may prescribe.
RESTRICTED SHARES
The Committee or the Board may award restricted shares to a participant.
Such a grant gives a participant the right to receive shares of Common Stock
subject to a risk of forfeiture based upon certain conditions. The forfeiture
restrictions on the shares of Common Stock may be based upon performance
standards, length of service, or other criteria as the Committee or the Board
may determine. Until all restrictions are satisfied, lapsed, or waived, the
Company will maintain control over the restricted shares but the participant
will be able to vote the shares of Common Stock and generally will be entitled
to dividends on the shares of Common Stock. Upon termination of employment, the
participant generally forfeits the right to the shares of Common Stock to the
extent the applicable performance standards, length of service requirements or
other measurement criteria have not been met.
NON-EMPLOYEE DIRECTOR OPTIONS
The 1998 Plan provides for the automatic grant of a Non-Qualified Option
to purchase 10,000 shares of Common Stock to each non-employee director on the
earlier of (a) the first date he or she is elected as such by the Company's
shareholders and (b) the date the 1998 Plan is approved by the holders of Common
Stock. However, directors Charles C. Chen, Harry S. Gruner and William E. Odom
each are not eligible to receive an option under the 1998 Plan. In addition, if
a non-employee director receives, after the effective date of the 1998 Plan, an
option ("1996 Plan Option") to purchase shares of Common Stock under the 1996
Plan, the number of shares subject to the option granted under the 1998 Plan
will be reduced by the number of shares covered by the 1996 Plan Option.
The option price of a non-employee director option granted under the 1998
Plan is the fair market value of a share of Common Stock on the date of grant of
such option. All such options have a five year term and are exercisable in full
on the date of grant.
If a non-employee director's service with the Company terminates by reason
of death, his or her option may be exercised for a period of one year from the
date of death or until the expiration of the option, whichever is shorter. If a
non-employee director's service with the Company terminates other than by reason
of death, his or her option may be exercised for a period of three months from
the date of such termination, or until the expiration of the stated term of the
option, whichever is shorter.
CHANGE IN CONTROL
Upon the occurrence of a change in control of the Company, all options
become immediately exercisable, to the extent not previously exercised, and all
restrictions on restricted shares lapse. A change in control includes:
(1) approval of the Company's shareholders of a consolidation or merger of
the Company with any third party, unless the Company is the entity surviving
such merger or consolidation;
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(2) approval of the Company's shareholders of a transfer of all or
substantially all of the assets of the Company to a third party or a complete
liquidation or dissolution of the Company;
(3) a third party (other than James F. Chen and his affiliates or
Advantage Fund Limited, Advantage Fund II Ltd. and/or their affiliates),
directly or indirectly, through one or more subsidiaries or transactions or
acting in concert with one or more persons or entities: (a) acquiring any
combination of beneficial ownership of the Company's voting stock and
irrevocable proxies representing more than 20% of the Company's voting stock,
(b) acquiring the ability to control in any manner the election of a majority of
the directors of the Company or (c) acquiring the ability to directly or
indirectly exercise a controlling influence over the management or policies of
the Company;
(4) any election has occurred of persons to the Board that causes a
majority of such Board to consist of persons other than (a) persons who were
members of the Board on February 2, 1998 ("Effective Date") and/or (b) persons
who were nominated for election as members of the Board by the Board (or a
committee of the Board) at a time when the majority of the Board (or of such
committee) consisted of persons who were members of the Board on the Effective
Date; or
(5) a determination made by the SEC or any similar agency having
regulatory control over the Company that a change in control, as defined in the
securities laws or regulations then applicable to the Company, has occurred.
TERMINATION AND AMENDMENT
The 1998 Plan will remain in effect until February 2, 2008 unless
terminated earlier by the Board. The Board may amend or terminate the 1998 Plan
and the Committee or the Board may amend or alter the terms of awards under the
1998 Plan but no such action shall affect or in any way impair the rights of a
participant under any award previously granted without such participant's
consent. No amendment may be made, without shareholder approval, that would
require shareholder approval under any applicable law or rule unless the Board
determines that compliance with such law or rule is no longer desired.
ANTIDILUTION PROVISIONS
The number of shares of Common Stock authorized to be issued under the
1998 Plan and subject to outstanding awards (and the purchase or exercise price
thereof), the number of non-employee director options and the per employee limit
on awards will be adjusted to prevent dilution or enlargement of rights in the
event of any stock dividend, stock split, combination or exchange of shares,
merger, consolidation or other change in capitalization with a similar
substantive effect upon the 1998 Plan or the awards.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the principal federal income tax
consequences of awards under the 1998 Plan based upon current federal income tax
laws.
A participant is not generally subject to federal income tax either at the
time of grant or at the time of exercise of an Incentive Stock Option. However,
upon exercise, the difference between the fair market value of the shares of
Common Stock and the exercise price may be includable in the participant's
alternative minimum taxable income. If a participant does not dispose of shares
of Common Stock acquired through the exercise of an Incentive Stock Option
within one year after their receipt and within two years after the date of the
option's grant, any gain or loss upon the disposition will be taxed as long-term
capital gain or loss.
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The Company will not receive any tax deduction on the exercise of an
Incentive Stock Option or, if the holding requirements are met, on the sale of
the underlying shares of Common Stock. If a disqualifying disposition occurs
(I.E., one of the holding requirements is not met), the participant will be
treated as receiving compensation subject to ordinary income tax in the year of
the disqualifying disposition, and the Company will be entitled to a deduction
for compensation expense in an amount equal to the amount the participant
includes in income. In such event, the amount includable in the participant's
income (and deductible by the Company) generally will be equal to the difference
between the fair market value of the shares of Common Stock at the time of
exercise and the exercise price or, if less, the gain the participant realized
on the sale of the shares. Any appreciation in value after the time of exercise
will be taxed as long-term or short-term capital gain (depending on how long the
shares are held after exercise) and will not result in any additional deduction
by the Company.
There are no federal income tax consequences to participants at the time
of grant of a Non-Qualified Option. Upon exercise of the option, the participant
must pay tax on ordinary income equal to the difference between the exercise
price and the fair market value of the underlying shares on the date of
exercise. The Company will receive a commensurate tax deduction at the time of
exercise. Any appreciation in value after the time of exercise will be taxed
upon the disposition of the shares as long-term or short-term capital gain
(depending on how long the shares are held after exercise), and will not result
in any additional deduction by the Company. Non-employee director options will
receive the same federal income tax treatment as other Non-Qualified Options.
Except as described below, a grant of restricted shares does not
constitute a taxable event for either a participant or the Company. However, the
participant will be subject to tax, at ordinary income rates, when any
restrictions on ownership of the shares of Common Stock lapse. The amount
subject to tax will be equal to the fair market value of the shares at the time
the restrictions lapse reduced by the amount (if any) paid for such shares by
the participant. The Company will be entitled to take a commensurate deduction
at that time.
A participant may elect to recognize taxable ordinary income at the time
restricted shares are awarded in an amount equal to the fair market value of the
shares of Common Stock at the time of grant, determined without regard to any
forfeiture restrictions. If such an election is made, the Company will be
entitled to a deduction at that time in the same amount. Future appreciation on
the shares of Common Stock will be taxed when the shares are sold as short-term
or long-term capital gain (depending on how long the shares are held after
exercise) and will not result in any additional deduction by the Company. If,
after making such an election, the shares of Common Stock are forfeited, the
participant will be unable to claim a deduction.
THE BOARD RECOMMENDS A VOTE FOR THE RATIFICATION OF THE ADOPTION OF THE
1998 PLAN.
RATIFICATION, PURSUANT TO NASDAQ RULE 4460(I), OF THE ISSUANCE OF THE
SERIES A STOCK, THE CONSULTANT WARRANTS AND THE SHARES OF COMMON STOCK
ISSUABLE IN CONNECTION WITH THE SERIES A STOCK, THE WARRANTS
ISSUABLE ON CONVERSION OF THE SERIES A STOCK AND THE CONSULTANT WARRANTS
(PROPOSAL 3)
On December 8, 1997, the Company issued 4,000 shares of Series A Stock to
Advantage for $4 million in the aggregate. Each share of Series A Stock is
convertible into shares of Common Stock and warrants to purchase Common Stock
("Series A Warrants"). The net proceeds of the offering ($3.8 million) have been
used for general working capital purposes.
As a result of the issuance of the 4,000 shares of Series A Stock, the
Company issued to Wharton Capital Partners, Ltd. ("Wharton") for its services as
the Company's exclusive financial consultant, warrants ("Consultant Warrants")
to purchase 60,000 shares of Common Stock at an exercise price of $4.725 per
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share. As of January 5, 1998, Wharton assigned Consultant Warrants to purchase
12,000 shares of Common Stock to Dennis Rush. The number of shares issuable on
exercise of the Consultant Warrants and the exercise price per share is subject
to adjustment in certain circumstances. The Company also paid Wharton a fee of
$200,000. The Consultant Warrants expire on December 8, 2002. The terms of the
Series A Stock and the Consultant Warrants were determined by the Board.
On December 8, 1997, the Company and Advantage entered into a commitment
letter ("Commitment Letter") pursuant to which Advantage agreed to purchase for
$4 million shares of a new series of preferred stock on the same terms and
conditions as the Series A Stock, subject to certain conditions, some of which
are that (1) the Company obtain shareholder approval with respect to the
issuance of the Series A Stock and any new series of preferred stock pursuant to
certain rules of the Nasdaq National Market, (2) the Company's stockholders'
equity, including the Series A Stock, is at least $13.5 million, and (3) the
ratio of the Company's total liabilities to stockholders' equity, including the
Series A Stock, is not less than 1:4. The commitment becomes effective April 21,
1998 and expires on December 8, 1998. The Company may terminate the Commitment
Letter at any time, on ten days' prior notice. Advantage also has the right to
terminate the Commitment Letter in certain circumstances. The Company is
obligated to pay Advantage a non-refundable commitment fee of $3,333 per month.
Under the Subscription Agreement dated as of December 3, 1997 between the
Company and Advantage, (1) the Company agreed not to sell any equity securities
or securities convertible into equity securities entitling the holder to
purchase shares of the Company's Common Stock at a price below the market price
of the Common Stock on the date of such issuance or acquisition ("Discounted
Securities") until April 21, 1998 and (2) the Company granted Advantage a right
of first refusal on sales of Discounted Securities until December 8, 1998. Under
a letter dated October 22, 1997 between the Company and Wharton ("Wharton
Letter"), the Company retained Wharton as its exclusive financial consultant and
granted Wharton an exclusive on certain offshore or discounted financings for a
period that ended on March 22, 1998 and a right of first refusal on any offshore
or discounted financings until June 8, 1998. Wharton has agreed that its rights
as described in the preceding sentence are subject and secondary to the rights
of Advantage and do not apply to any sale of preferred stock pursuant to the
Commitment Letter.
Under the Wharton Letter, the Company is obligated to issue additional
warrants to Wharton to purchase 15,000 shares of Common Stock for each $1
million of additional financing provided by persons introduced by Wharton
(including the transaction contemplated by the Commitment Letter) at an exercise
price of $4.725 per share and to pay Wharton a consulting fee equal to 5% of the
amount raised.
On December 3, 1997, the Company entered into a registration rights
agreement with Advantage ("Advantage Registration Rights Agreement") and, on
December 8, 1997, the Company entered into a registration rights agreement with
Wharton ("Wharton Registration Rights Agreement" and, collectively with the
Advantage Registration Rights Agreement, the "Registration Rights Agreements").
As of January 5, 1998, Dennis Rush became a beneficiary of the Wharton
Registration Rights Agreement. Under the Registration Rights Agreements, the
Company was obligated to file a registration statement with the SEC by January
7, 1998 registering the shares of Common Stock issuable upon conversion of the
Series A Stock and the shares of Common Stock issuable on exercise of the Series
A Warrants and the Consultant Warrants. This registration statement was timely
filed and has been declared effective by the SEC. Advantage, Wharton and Dennis
Rush have also been granted certain piggy-back registration rights.
The following is a summary of the terms of the Series A Stock:
DIVIDENDS
Each share of Series A Stock is entitled to receive dividends at a rate of
$50.00 per annum, which are cumulative and accrue without interest (other than
with respect to dividends in arrears). Dividends are payable on March 1, June 1,
September 1 and December 1 of each year. Dividends not paid when due bear
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interest at 12% per annum. The Company may pay dividends on the Series A Stock
in shares of Common Stock valued at the "Computed Price" of the Common Stock.
The "Computed Price" of a share of Common Stock is the product of the applicable
"Conversion Percentage" (which term is described below) and the "Average Market
Price." The "Average Market Price" is the average of the lowest sale price on
the Nasdaq National Market on each of the five trading days having the lowest
sale price during the 25 consecutive trading days prior to the measurement date,
which in the case of a dividend paid in shares of Common Stock is the dividend
payment date.
No dividends may be paid on any parity dividend stock or junior dividend
stock (such as the Common Stock) until all accrued and unpaid dividends are paid
on the Series A Stock.
CONVERSION RIGHTS
Each share of Series A Stock is convertible at the option of the holder
into shares of Common Stock and Series A Warrants. The number of Series A
Warrants issuable on conversion of a share of Series A Stock is the number of
shares of Common Stock issued on conversion per share of Series A Stock divided
by 5. The exercise price per share of each Series A Warrant is $4.77 per share.
Each Series A Warrant is exercisable for 5 years from the date of conversion.
The number of shares of Common Stock issuable on exercise of the Series A
Warrants and the exercise price per share is subject to adjustment in certain
circumstances.
The number of shares of Common Stock issuable per share of Series A Stock
is determined by dividing the sum of (a) $1,000, (b) accrued and unpaid
dividends, and (c) interest on dividends in arrears ("Conversion Amount") by the
lesser of (1) $4.77 ("Ceiling Price") and (2) the product of the applicable
Conversion Percentage and the Average Market Price on the conversion date. The
"Conversion Percentage" is generally 85%; however, if (1) the registration
statement ceases to be available for use by any holder of Series Stock that is
named therein as a selling stockholder for any reason, or (2) a holder of Series
A Stock becomes unable to convert any shares of Series A Stock in accordance
with the Certificate of Designations of Series A Convertible Preferred Stock
("Series A Certificate") (other than by reason of the 4.9% limitation described
below)), then (A) the applicable Conversion Percentage is permanently reduced by
2% per month up to a maximum aggregate reduction in the Conversion Percentage of
10% and (B) the Ceiling Price is permanently reduced by $.0954 per month up to a
maximum aggregate reduction in the Ceiling Price of $.477. However, in lieu of
each such reduction, the Company can make cash payments equal to 2% of the
aggregate subscription price per share ($1,000 per share) of Series A Stock
(which amount is limited to 10% of the aggregate subscription price). The
Conversion Amount is adjusted in the event the Company issues certain rights or
warrants or distributes to the holders of securities junior to the Series A
Stock evidences of indebtedness or assets.
No holder of Series A Stock is entitled to receive shares of Common Stock
on conversion of its Series A Stock or on exercise of its Series A Warrants to
the extent that the sum of (1) the shares of Common Stock owned by such holder
and its affiliates and (2) the shares of Common Stock issuable on conversion of
the Series A Stock and on exercise of its Series A Warrants would result in
beneficial ownership by such holder and its affiliates of more than 4.9% of the
outstanding shares of Common Stock. Beneficial ownership for this purpose is
determined in accordance with Section 13(d) of the Exchange Act, excluding
shares of Common Stock so owned through ownership of unconverted shares of
Series A Stock and unexercised Series A Warrants.
If a holder tenders his or her shares of Series A Stock for conversion and
does not receive certificates for all of the shares of Common Stock and Series A
Warrants to which such holder is entitled when required, then, among other
things, the Ceiling Price otherwise applicable to such conversion is reduced by
$.0954 and the Conversion Percentage otherwise applicable to such conversion is
reduced by 2%.
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RANKING
The Series A Stock ranks (1) senior to the Common Stock, (2) on a parity
with any additional series of the class of preferred stock, which series the
Board may from time to time authorize, (3) on a parity with the shares of any
additional class of preferred stock (or series of preferred stock of such class)
that the Board or the shareholders may from time to time authorize, which class
(or series thereof) by its terms ranks on a parity with the shares of Series A
Stock and (4) senior to any other class or series of preferred stock (other than
as stated in the immediately preceding clauses (2) and (3)) of the Company.
STATED CAPITAL
Under the Series A Certificate, the amount to be represented in stated
capital at all times for each share of Series A Stock is required to be the
greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2)
to the extent legally available, the accrued but unpaid dividends on such share
of Series A Stock, and (3) an amount equal to the accrued and unpaid interest on
dividends in arrears through the date of determination by (b) the applicable
Conversion Percentage and (ii) an amount equal to the product obtained by
multiplying (x) the number of shares of Common Stock that would, at the time of
such determination, be issuable on conversion of one share of Series A Stock and
any accrued and unpaid dividends thereon and any accrued and unpaid interest on
dividends thereon in arrears (determined without regard to the 4.9% limitation)
times (y) the arithmetic average of the closing bid price of the Common Stock
for the five consecutive trading days ending one trading day prior to the date
of such determination. The Company is required to take such action as may be
required to maintain the required amount of stated capital not less frequently
than monthly.
VOTING RIGHTS
The Series A Stock generally has no voting rights except as otherwise
provided by the Delaware General Corporation Law. However, the affirmative vote
or consent of the holders of a majority of the outstanding shares of the Series
A Stock, voting separately as a class, will be required for (1) any amendment,
alteration or repeal, whether by merger or consolidation or otherwise, of the
Company's Certificate of Incorporation if the amendment, alteration or repeal
materially and adversely affects the powers, preferences or special rights of
the Series A Stock, or (2) the creation and issuance of any security of the
Company that is senior to the Series A Stock as to dividend rights or
liquidation preference; provided, however, that any increase in the authorized
preferred stock of the Company or the creation and issuance of any stock that is
both junior as to dividend rights and liquidation preference is not deemed to
affect materially and adversely such powers, preferences or special rights and
any such increase or creation and issuance may be made without any such vote by
the holders of Series A Stock except as otherwise required by law.
MANDATORY REDEMPTION
The Series A Certificate provides that the Company is not obligated to
issue, upon conversion of the Series A Stock, more than the number of shares of
Common Stock that the Company may issue pursuant to the rules of Nasdaq
("Maximum Share Amount"), less the aggregate number of shares of Common Stock
issued by the Company as dividends on the Series A Stock. Accordingly, the
Company is seeking approval from the holders of Common Stock to issue shares of
Common Stock in connection with the Series A Stock in excess of the amounts
permitted by Nasdaq Rule 4460(i).
If the Company would not be obligated to convert shares of Series A Stock
because of the Maximum Share Amount limitation, the Company is required to give
a notice to that effect to each holder of Series A Stock. In such event, a
holder may require the Company to redeem such portion of its Series A Stock that
cannot be converted as a result of this limitation at the "Share Limitation
Redemption Price" per share. The "Share Limitation Redemption Price" is the
greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2)
an amount equal to the accrued but unpaid dividends on the share of Series A
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Stock to be redeemed, and (3) an amount equal to the accrued and unpaid interest
on dividends in arrears on such share through the applicable redemption date by
(b) the applicable Conversion Percentage and (ii) an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock that would, but
for the redemption pursuant to this provision of the Series A Certificate, be
issuable on conversion of one share of Series A Stock and any accrued and unpaid
dividends thereon and any accrued and unpaid interest on dividends thereon in
arrears (determined without regard to the 4.9% limitation) times (y) the
arithmetic average of the closing bid price of the Common Stock for the five
consecutive trading days ending one trading day prior to the redemption date.
In addition, the Company is obligated to redeem all outstanding shares of
Series A Stock on December 8, 2000 at the "Redemption Price" per share. The
"Redemption Price" is the greater of (i) the quotient obtained by dividing (a)
the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends
on the share of Series A Stock to be redeemed, and (3) an amount equal to the
accrued and unpaid interest on dividends in arrears on such share through the
applicable redemption date by (b) the applicable Conversion Percentage and (ii)
an amount equal to the product obtained by multiplying (x) the number of shares
of Common Stock that would, but for the redemption pursuant to this provision of
the Series A Certificate, be issuable on conversion of one share of Series A
Stock and any accrued and unpaid dividends thereon and any accrued and unpaid
interest on dividends thereon in arrears (determined without regard to the 4.9%
limitation) times (y) the arithmetic average of the closing bid price of the
Common Stock for the five consecutive trading days ending one trading day prior
to the redemption date.
OPTIONAL REDEMPTION BY THE COMPANY
As long as the Company is in compliance in all material respects with its
obligations to the holders of Series A Stock under the Series A Certificate and
the Advantage Registration Rights Agreement, the Company may redeem all or, from
time to time, part of the outstanding shares of Series A Stock at the Redemption
Price per share.
OPTIONAL REDEMPTION BY THE HOLDERS OF SERIES A STOCK
In the event an "Optional Redemption Event" occurs, each holder of Series
A Stock has the right to require the Company to redeem all or a portion its
shares of Series A Stock at the "Optional Redemption Price" per share. "Optional
Redemption Event" means any one of the following: (1) for any period of five
consecutive trading days there is no closing bid price of the Common Stock on
any national securities exchange or the Nasdaq National Market; (2) the Common
Stock ceases to be listed for trading on the Nasdaq National Market, the New
York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX") or the Nasdaq
SmallCap Market; (3) the inability for 30 or more days (whether or not
consecutive) of any holder of shares of Series A Stock who is entitled to
optional redemption rights to sell such shares of Common Stock issued or
issuable on conversion of shares of Series A Stock pursuant to the registration
statement for any reason on each of such 30 days; (4) the Company fails or
defaults in the timely performance of any material obligation to a holder of
shares of Series A Stock under the terms of the Series A Certificate or under
the Advantage Registration Rights Agreement or any other agreements or documents
entered into in connection with the issuance of shares of Series A Stock; (5)
any consolidation or merger of the Company with or into another entity (other
than a merger or consolidation of a subsidiary of the Company into the Company
or a wholly owned subsidiary of the Company) where the shareholders of the
Company immediately prior to such transaction do not collectively own at least
51% of the outstanding voting securities of the surviving corporation of such
consolidation or merger immediately following such transaction or the common
stock of such surviving corporation is not listed for trading on the Nasdaq
National Market, the NYSE, the AMEX or the Nasdaq SmallCap Market; or (6) the
taking of any action, including any amendment to the Company's Certificate of
Incorporation, that materially and adversely affects the rights of any holder of
shares of Series A Stock.
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The "Optional Redemption Price" is the greater of (i) the quotient
obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to the
accrued but unpaid dividends on the share of Series A Stock to be redeemed, and
(3) an amount equal to the accrued and unpaid interest on dividends in arrears
on such share through the applicable redemption date by (b) the applicable
Conversion Percentage and (ii) an amount equal to the product obtained by
multiplying (x) the number of shares of Common Stock that would, but for the
redemption pursuant to this provision of the Series A Certificate, be issuable
on conversion of one share of Series A Stock and any accrued and unpaid
dividends thereon and any accrued and unpaid interest on dividends thereon in
arrears (determined without regard to the 4.9% limitation) times (y) the
arithmetic average of the closing bid price of the Common Stock for the five
consecutive trading days ending one trading day prior to the redemption date.
LIMITATIONS ON REDEMPTIONS AND TENDER OFFERS
Neither the Company nor any subsidiary of the Company may redeem,
repurchase or otherwise acquire any shares of Common Stock or other securities
of the Company junior to the Series A Stock in dividend rights or liquidation
preference ("Junior Stock") if the number of shares so repurchased, redeemed or
otherwise acquired in such transaction or series of related transactions
(excluding any shares surrendered to the Company in accordance with one of its
stock option plans) is more than either (x) 5% of the number of shares of Common
Stock or such Junior Stock, as the case may be, outstanding immediately prior to
such transaction or series of related transactions or (y) 1% of the number of
shares of Common Stock or Junior Stock, as the case may be, outstanding
immediately prior to such transaction or series of related transactions if such
transaction or series of related transactions is with any one person or group of
affiliated persons, unless the Company or such subsidiary offers to purchase for
cash from each holder of shares of Series A Stock at the time of such
redemption, repurchase or acquisition the same percentage of such holder's
shares of Series A Stock as the percentage of the number of outstanding shares
of Common Stock or Junior Stock, as the case may be, to be so redeemed,
repurchased or acquired at a purchase price per share of Series A Stock equal to
the greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000,
(2) an amount equal to the accrued but unpaid dividends on such share of Series
A Stock, plus (3) an amount equal to the accrued and unpaid interest on
dividends in arrears through the date of purchase by (b) the applicable
Conversion Percentage and (ii) an amount equal to the product obtained by
multiplying (x) the number of shares of Common Stock that would, but for this
purchase, be issuable on conversion of one share of Series A Stock and any
accrued and unpaid dividends thereon and any accrued and unpaid interest on
dividends thereon in arrears (determined without regard to the 4.9% limitation)
times (y) the arithmetic average of the closing bid price of the Common Stock
for the five consecutive trading days ending one trading day prior to the date
of purchase.
Neither the Company nor any subsidiary of the Company may (1) make any
tender offer or exchange offer ("Tender Offer") for outstanding shares of Common
Stock, unless the Company contemporaneously therewith makes an offer, or (2)
enter into an agreement regarding a Tender Offer for outstanding shares of
Common Stock by any person other than the Company or any subsidiary of the
Company, unless such person agrees with the Company to make an offer, in either
such case to each holder of outstanding shares of Series A Stock to purchase for
cash at the time of purchase in such Tender Offer the same percentage of shares
of Series A Stock held by such holder as the percentage of outstanding shares of
Common Stock offered to be purchased in such Tender Offer at a price per share
of Series A Stock equal to the greater of (i) the quotient obtained by dividing
(a) the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid
dividends on such share of Series A Stock, and (3) an amount equal to the
accrued and unpaid interest on dividends in arrears through the date of purchase
by (b) the applicable Conversion Percentage and (ii) an amount equal to the
product obtained by multiplying (x) the number of shares of Common Stock that
would, but for this purchase, be issuable on conversion of one share of Series A
Stock and any accrued and unpaid dividends thereon and any accrued and unpaid
interest on dividends thereon in arrears (determined without regard to the 4.9%
limitation) times (y) the highest price per share of Common Stock offered in
such Tender Offer.
25
<PAGE>
SINKING FUND
The shares of Series A Stock are not subject to the operation of a
purchase, retirement or sinking fund.
LIQUIDATION PREFERENCE
The holders of the Series A Stock are entitled to a liquidation preference
of $1,000 per share plus accrued and unpaid dividends plus interest on accrued
and unpaid dividends in arrears.
NASDAQ RULE
Rule 4460 of Nasdaq, which is applicable to the Company because the
Company's shares of Common Stock are presently included for quotation on the
Nasdaq National Market sets forth the corporate governance standards for such
securities. Section (i) of Rule 4460 provides:
(1) Each NNM [Nasdaq National Market] issuer shall require
shareholder approval of a plan or arrangement under subparagraph (A) below
or, prior to the issuance of designated securities under subparagraph (B),
(C) or (D) below:
. . . (D) in connection with a transaction other than a
public offering involving:
(i) the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock) at a
price less than the greater of book or market value which together
with sales by officers, directors or substantial shareholders of the
company equals 20% or more of common stock or 20% or more of the
voting power outstanding before the issuance; or
(ii) the sale or issuance by the company of common stock (or
securities convertible into or exercisable for common stock) equal
to 20% or more of the common stock or 20% or more of the voting
power outstanding before the issuance for less than the greater of
book or market value of the stock.
(2) Exceptions may be made upon application to the Association when:
. . (A) the delay in securing stockholder approval would
seriously jeopardize the financial viability of the
enterprise; and
. . (B) reliance by the company on this exception is
expressly approved by the Audit Committee of the Board or a
comparable body.
A company relying on this exception must mail to all shareholders
not later than ten days before issuance of the securities a letter
alerting them to its omission to seek the shareholder approval that would
otherwise be required and indicating that the Audit Committee of the Board
or a comparable body has expressly approved the exception.
Nasdaq Rule 4460(i)(1) provides that the limit set forth in subparagraph
(D) does not apply if a company's shareholders approve the issuance of the
securities subject to the rule. In the event shareholder approval is not
obtained, the Company will be required to redeem the excess shares of Series A
Stock as described above under " - Mandatory Redemption."
26
<PAGE>
SHAREHOLDER APPROVAL
The Board desires to be able to issue shares of Common Stock in connection
with the Series A Stock and on exercise of the Consultant Warrants and the
Series A Warrants (including, without limitation, shares of Common Stock
issuable as dividends on the Series A Stock) without regard to the 20% limits of
Nasdaq Rule 4460(i)(1)(D). The Board believes it would be in the best interests
of the Company if the Company can issue such shares of Common Stock rather than
being required to redeem the Series A Stock as described above. See " -
Mandatory Redemption." The Board believes this provision could result in a
forced redemption at a time when the Company might not have, and could not
raise, the cash necessary to redeem the shares of Series A Stock. The Board
desires to have the ability to retain cash for the use of the Company for other
purposes. In addition, the Board believes it is in the best interests of the
Company to receive this approval so that it can issue additional securities
pursuant to the Commitment Letter. The actual number of shares of Common Stock
issuable upon conversion of and as dividends on the Series A Stock, and on
exercise of the Consultant Warrants and the Series A Warrants, cannot be
determined until the conversion or exercise takes place or the dividends are
paid.
THE BOARD RECOMMENDS A VOTE FOR THE RATIFICATION, PURSUANT TO NASDAQ RULE
4460(I), OF THE ISSUANCE OF THE SERIES A STOCK, THE CONSULTANT WARRANTS AND THE
SHARES OF COMMON STOCK ISSUABLE IN CONNECTION WITH THE SERIES A STOCK, THE
SERIES A WARRANTS AND THE CONSULTANT WARRANTS.
APPROVAL, PURSUANT TO NASDAQ RULE 4460(I), OF THE ISSUANCE PURSUANT TO THE
TERMS OF THE COMMITMENT LETTER OF SHARES OF A NEW SERIES OF PREFERRED STOCK,
NEW WARRANTS TO BE ISSUED TO WHARTON AND OTHERS, AND SHARES OF COMMON STOCK
ISSUABLE IN CONNECTION WITH THE NEW SERIES OF PREFERRED STOCK, THE WARRANTS
ISSUABLE ON CONVERSION OF THE NEW SERIES OF PREFERRED STOCK AND THE NEW
WARRANTS TO BE ISSUED TO WHARTON AND OTHERS
(PROPOSAL 4)
On December 8, 1997, the Company and Advantage entered into the Commitment
Letter pursuant to which Advantage agreed to purchase shares for $4 million of a
new series of preferred stock ("New Preferred Stock") on the same terms and
conditions as the Series A Stock, subject to certain conditions, some of which
are that (1) the Company obtain shareholder approval with respect to the
issuance of the Series A Stock and the New Preferred Stock pursuant to certain
rules of the Nasdaq National Market, (2) the Company's stockholders' equity,
including the Series A Stock, is at least $13.5 million, and (3) the ratio of
the Company's total liabilities to stockholders' equity, including the Series A
Stock, is not less than 1:4. The commitment becomes effective on April 21, 1998
and expires on December 8, 1998. The Company may terminate the Commitment Letter
at any time, on ten days' prior notice. Advantage also has the right to
terminate the Commitment Letter in certain circumstances. The Company is
obligated to pay Advantage a non-refundable commitment fee of $3,333 per month.
The net proceeds of any additional issuance of securities pursuant to the
Commitment Letter will be used for general working capital purposes.
Under the Wharton Letter, the Company is obligated to issue additional
warrants to Wharton to purchase 15,000 shares of Common Stock for each $1
million of additional financing provided by persons introduced by Wharton
(including the transaction contemplated by the Commitment Letter) at an exercise
price of $4.725 per share and to pay Wharton a consulting fee equal to 5% of the
amount raised.
NASDAQ RULE
Rule 4460 of Nasdaq, which is applicable to the Company because the
Company's shares of Common Stock are presently included for quotation on the
Nasdaq National Market, sets forth the corporate governance standards for such
securities. See "Nasdaq Rule" under Proposal 3.
27
<PAGE>
SHAREHOLDER APPROVAL
The Board desires to such be able to issue, pursuant to the terms of the
Commitment Letter, shares of the New Preferred Stock, new warrants to be issued
to Wharton and others ("New Warrants"), and shares of Common Stock issuable in
connection with the New Preferred Stock, the warrants issuable on conversion of
the New Preferred Stock ("New Preferred Warrants") and the New Warrants without
regard to the 20% limits of Nasdaq Rule 4460(i). The Board believes it is in the
best interests of the Company to receive this approval so that it retains the
ability to obtain additional financing for the Company when necessary and upon
such terms as the Board determines to be advisable. The actual number of shares
of Common Stock issuable upon conversion of and as dividends on the New
Preferred Stock, and on exercise of the New Preferred Warrants and the New
Warrants, cannot be determined until the conversion or exercise takes place or
the dividends are paid.
THE BOARD RECOMMENDS A VOTE FOR THE APPROVAL, PURSUANT TO NASDAQ RULE
4460(I), OF THE ISSUANCE, PURSUANT TO THE TERMS OF THE COMMITMENT LETTER, OF
SHARES OF THE NEW PREFERRED STOCK, THE NEW WARRANTS AND SHARES OF COMMON STOCK
ISSUABLE IN CONNECTION WITH THE NEW PREFERRED STOCK, THE NEW PREFERRED WARRANTS
AND THE NEW WARRANTS.
INDEPENDENT PUBLIC ACCOUNTANTS
(PROPOSAL 5)
The Company's Audit Committee and Board have recommended that the
Company's shareholders appoint Coopers & Lybrand L.L.P. to serve as the
Company's independent public accountants for the year ending December 31, 1998.
Coopers & Lybrand L.L.P. served as the Company's independent public accountants
for the year ended December 31, 1997. Representatives of Coopers & Lybrand
L.L.P. will be present at the Annual Meeting where they will have the
opportunity to make a statement if they desire to do so and where they will be
available to respond to any appropriate questions.
THE BOARD RECOMMENDS THAT YOU VOTE FOR THE APPOINTMENT OF COOPERS &
LYBRAND L.L.P. AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS.
ANNUAL REPORT
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, WITHOUT EXHIBITS, FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1997 ACCOMPANIES THIS PROXY STATEMENT. UPON
WRITTEN REQUEST, THE COMPANY WILL PROVIDE TO ANY SHAREHOLDER, FREE OF CHARGE, A
COPY OF ITS ANNUAL REPORT ON FORM 10-K, WITHOUT EXHIBITS, AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. REQUESTS FOR COPIES OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K SHOULD BE DIRECTED TO CHARLES B. GRIFFIS, SENIOR VICE
PRESIDENT AND CHIEF FINANCIAL OFFICER AND TREASURER, V-ONE CORPORATION, 20251
CENTURY BOULEVARD, SUITE 300, GERMANTOWN, MARYLAND 20874.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 1999 Annual
Meeting of Shareholders must be received by the Company no later than December
3, 1998 to be considered for inclusion in the Company's Proxy Statement and form
of proxy relating to such meeting.
28
<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement, the Company knows of no business
other than that described herein that will be presented for consideration at the
Annual Meeting. If, however, any other business shall properly come before the
Annual Meeting, the proxy holders intend to vote the proxies as determined by a
majority of the Board.
By Order of the Board of Directors
/s/ Joseph D. Gallagher
JOSEPH D. GALLAGHER
SECRETARY
April 2, 1998
APPENDIX A - FINANCIAL STATEMENTS
APPENDIX B - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
29
<PAGE>
APPENDIX A - FINANCIAL STATEMENTS
V-ONE CORPORATION
FINANCIAL STATEMENTS
--------
As of December 31, 1996 and 1997
and for the years ended December 31, 1995, 1996, and 1997
AND
REPORT THEREON
--------
A-1
<PAGE>
Coopers Coopers & Lybrand L.L.P.
& Lybrand a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of V-ONE Corporation
We have audited the accompanying balance sheets of V-ONE Corporation (the
Company) as of December 31, 1996 and 1997 and the related statements of
operations, shareholders' equity and cash flows for the years ended December 31,
1995, 1996, and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and 1997 and the results of its operations and its cash flows for the years
ended December 31, 1995, 1996, and 1997, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
McLean, Virginia
March 13, 1998
A-2
<PAGE>
V-ONE CORPORATION
BALANCE SHEETS
--------
ASSETS
December 31,
------------
1996 1997
---- ----
Current assets:
Cash and cash equivalents $10,894,375 $ 6,203,525
Accounts receivable, less allowances of
$252,395 and $1,500,405 as of December 31,
1996 and 1997, respectively 2,647,195 2,556,979
Finished goods inventory, less allowances of
$50,000 and $212,700 as of December 31, 1996
and 1997, respectively 418,870 368,120
Prepaid expenses and other current assets 173,411 328,261
Total current assets 14,133,851 9,456,885
Property and equipment:
Office and computer equipment 790,373 1,251,922
Furniture and fixtures 98,579 165,316
----------- -----------
888,952 1,417,238
Less accumulated depreciation (132,365) (415,657)
756,587 1,001,581
Licensing fee, net of accumulated amortization
of $70,764 and $353,820 as of December 31,
1996 and 1997, respectively 778,409 538,434
Other assets 28,568 863,186
----------- -----------
Total assets $15,697,415 $11,860,086
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,311,044 $ 1,151,589
Deferred revenue 97,748 412,647
Notes payable - current 16,667 16,667
Capital lease obligations - current 65,232 17,126
----------- -----------
Total current liabilities 1,490,691 1,598,029
Notes payable - noncurrent 22,222 5,555
Deferred rent 78,275 36,879
Capital lease obligations - noncurrent 112,482 295,306
----------- -----------
Total liabilities 1,703,670 1,935,769
A-3
<PAGE>
Commitments and contingencies
Mandatorily redeemable series A convertible preferred stock, $0.001
par value; 13,333,333 shares authorized; -0-
and 4,000 shares issued and outstanding as of
December 31, 1996 and 1997, respectively
(liquidation preference of $4,012,600) - 3,766,297
Shareholders' equity:
Common stock, $0.001 par value; 33,333,333 shares
authorized; 12,658,347 and 13,070,235 shares
issued and outstanding; -0- and 1,476,000
reserved for conversion, as of December 31,
1996 and 1997, respectively 12,658 13,070
Additional paid-in capital 22,608,866 24,649,538
Notes receivable from sales of common stock (287,400) (166,011)
Accumulated deficit (8,340,379) (18,338,577)
----------- -----------
Total shareholders' equity 13,993,745 6,158,020
----------- -----------
Total liabilities and shareholders' equity $15,697,415 $11,860,086
=========== ===========
The accompanying notes are an integral part of these financial statements.
A-4
<PAGE>
V-ONE CORPORATION
STATEMENTS OF OPERATIONS
--------
1995 1996 1997
---- ---- ----
Revenues:
Products $ 1,101,418 $ 5,955,592 $ 8,899,973
Consulting and services 2,083 310,557 502,771
Total revenues 1,103,501 6,266,149 9,402,744
----------- ----------- -----------
Cost of revenues:
Revenues:
Products 376,359 1,969,117 2,064,645
Consulting and services 800 56,502 96,949
----------- ----------- -----------
Total cost of revenues 377,159 2,025,619 2,161,594
----------- ----------- -----------
Gross profit 726,342 4,240,530 7,241,150
----------- ----------- -----------
Operating expenses:
Sales and marketing 130,917 3,744,630 9,341,208
General and administrative 1,350,361 4,879,940 3,801,828
Research and development 304,973 1,960,727 3,012,051
Restructuring costs - - 800,000
Total operating expenses 1,786,251 10,585,297 16,955,087
Operating loss (1,059,909) (6,344,767) (9,713,937)
----------- ----------- -----------
Other (expense) income:
Interest expense (66,615) (518,965) (13,130)
Interest income 4,513 168,176 341,469
----------- ----------- -----------
Total other (expense) income (62,102) (350,789) 328,339
----------- ----------- -----------
Net loss (1,122,011) (6,695,556) (9,385,598)
Dividend on preferred stock - - 12,600
Deemed dividend on
preferred stock - - 600,000
----------- ----------- -----------
Loss attributable to holders of
common stock $(1,122,011) $(6,695,556) $(9,998,198)
=========== =========== ===========
Basic loss per share attributable
to holder of common stock $ (0.14) $ (0.72) $ (0.78)
=========== =========== ===========
Weighted average number of
common shares outstanding 8,099,223 9,245,305 12,868,859
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
A-5
<PAGE>
V-ONE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
----------
<TABLE>
<CAPTION>
Notes
Additional Receivable
Common Stock Paid-in from Accumulated
Shares Amount Capital Stock Sales Deficit Total
------ ------ ---------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 7,863,139 $ 7,863 $ 832,937 $ - $ (522,772) $ 318,028
Sale of common stock 107,954 108 399,892 - - 400,000
Contribution capital in lieu of
cash compensation (132,666) (133) 133 - - -
Issuance of common stock in
accordance with anti-dilution
agreement 56,000 56 (56) - - -
Issuance of common stock as
payment for accrued interest 76,666 77 32,468 - - 32,545
Issuance of common stock as
payment for services 333,333 333 141,167 - - 141,500
Contributed capital in lieu of
cash compensation - - 90,000 - - 90,000
Net loss - - - - (1,122,011) (1,122,011)
---------- ------ --------- -------- ---------- -----------
Balance, December 31, 1995 8,304,426 8,304 1,496,541 - (1,644,783) (139,938)
Contribution of common stock
from related party (383,965) (384) 288,360 - - 287,976
Issuance of common stock
related to 1996 Non-Statutory
Stock Option Plan 383,965 384 1,727,459 (287,400) - 1,440,443
Issuance of common stock
as payment for services 11,111 11 49,989 - - 50,000
Issuance of non-qualified stock
options below fair market
value - - 487,796 - - 487,796
Issuance of warrants to purchase
common stock - - 299,000 - - 299,000
Exercise of warrants to purchase
common stock 66,666 67 933 - - 1,000
Issuance of common stock as
payment of a note 73,333 74 329,926 - - 330,000
Contribution of common stock
from related party (153,333) (153) 153 - - -
Issuance of common stock as
payment on accrued interest 153,333 153 64,937 - - 65,090
Repurchase of fractional shares
of common stock related to
the reverse stock split (9) - (41) - (40) (81)
Issuance of common stock as
payment of licensing fees 188,705 188 848,985 - - 849,173
A-6
<PAGE>
Public sale of common stock
at $5.00 per share, net of
issuance costs 3,000,000 3,000 12,641,755 - - 12,644,755
Contribution of common stock
from related party (52,885) (53) 264,531 - - 264,478
Conversion of preferred stock to
common stock at 1-to-1.2
ratio 949,209 949 3,558,605 - - 3,559,554
Issuance of common stock due
to exercise of overallotment
option 117,791 118 549,937 - - 550,055
Net loss - - - - (6,695,556) (6,695,556)
----------- ------- ----------- --------- ----------- -----------
Balance, December 31, 1996 12,658,347 12,658 22,608,866 (287,400) (8,340,379) 13,993,745
Issuance of common stock
related to 1995 and 1996 Stock
Option Plans 417,908 418 1,260,975 - - 1,261,393
Payments received in connection
with notes receivable for stock - - - 88,480 - 88,480
Retirement of common stock (6,020) (6) (32,903) 32,909 - -
Issuance of warrants to purchase
common stock - - 200,000 - - 200,000
Dividend and deemed dividend
on preferred stock - - 612,600 - - 612,600
Net loss - - - - (9,998,198) (9,998,198)
----------- ------- ----------- --------- ------------ -----------
Balance, December 31, 1997 $13,070,235 $13,070 $24,649,538 $(166,011) $(18,338,577) $ 6,158,020
=========== ======= =========== ========= ============ ===========
</TABLE>
A-7
<PAGE>
V-ONE CORPORATION
STATEMENTS OF CASH FLOWS
--------
<TABLE>
<CAPTION>
For the years ended
December 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss attributable to common stock $(1,122,011) $(6,695,556) $(9,998,198)
Adjustments to reconcile net loss to net
cash from used in operating activities:
Provision for doubtful accounts receivable 23,620 228,775 1,248,010
Provision for obsolete inventory 50,000 - 162,700
Depreciation and amortization 24,623 172,582 591,965
Loss on disposal of assets - - 101,354
Interest expense on accretion of note
payable - 299,000 -
Consulting expense satisfied by issuance
of common stock - 45,833 -
Compensation expense satisfied by
issuance of common stock 141,500 - -
Compensation expense for issuance of
non-qualified stock options - 487,796 -
Compensation expense recognized for
receipt of contributed capital 90,000 - -
Compensation expense for common stock
contributed to stock option plan - 287,976 -
Compensation expense for issuance of
common stock related to 1996 non-
statutory stock option plan - 1,440,443 -
Compensation expense recognized for
conversion of preferred stock to common - 264,425 -
Noncash charges for preferred stock
dividends and accretion of preferred
stock to common - - 612,600
Noncash charge related to issuance of
warrants of preferred stock to common - - 200,000
Accrued interest satisfied with common
stock 32,545 65,090 -
Accrued interest satisfied with preferred
stock - 59,554 -
Changes in assets and liabilities:
Accounts receivable (265,172) (2,633,578) (1,157,794)
Inventory (307,630) (161,240) (111,950)
Prepaid expenses and other (24,145) (173,667) (782,549)
Accounts payable and accrued expenses 235,919 1,194,035 114,048
---------- ---------- ----------
Net cash used in operating activities (1,120,751) (5,118,532) (9,019,814)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (19,840) (562,190) (353,110)
Investment in affiliate - - (250,000)
Collection of note receivable - - 88,480
---------- --------- ----------
Net cash used in investing activities (19,840) (562,190) (514,630)
---------- --------- ----------
A-8
<PAGE>
Cash flows from financing activities:
Issuance of common stock 400,000 - -
Issuance of common stock in public sale - 15,000,000 -
Payment of stock issuance costs - (2,355,245) (233,703)
Issuance of common stock due to exercise
of overallotment option - 550,055 -
Issuance of preferred stock - 1,000,000 4,000,000
Issuance of debt with detachable warrants - 1,500,000 -
Exercise of options and warrants - 1,000 1,261,393
Issuance of notes payable 1,300,000 1,250,000 -
Issuance of notes payable to related
parties 454,351 - -
Principal payments on capitalized lease
obligations (7,011) (43,843) (167,429)
Repayment of notes payable - (11,111) (16,667)
Repayment of notes payable to related
parties - (1,644,144) -
---------- ----------- -----------
Net cash provided by financing
activities 2,147,340 15,246,712 4,843,594
---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 1,006,749 9,565,990 (4,690,850)
Cash and cash equivalents at beginning
of period 321,636 1,328,385 10,894,375
---------- ----------- -----------
Cash and cash equivalents at end of
period $1,328,385 $10,894,375 $ 6,203,525
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-9
<PAGE>
V-ONE CORPORATION
STATEMENTS OF CASH FLOWS - (Continued)
--------
For the years ended
December 31,
---------------------------
1995 1996 1997
---- ---- ----
Noncash investing and financing activities:
Property and equipment acquired through
capital leases $123,392 $ 98,165 $302,147
======== ========== ========
Retirement of fully depreciated property
and equipment $ - $ 5,405 $ -
======== ========== ========
Retirement of common stock $ - $ - $ 32,909
======== ========== ========
Deemed dividend and dividend on preferred
stock $ - $ - $612,600
======== ========== ========
Issuance of common stock as compensation $141,500 $ - $ -
======== ========== ========
Issuance of stock purchase warrants $ - $ - $200,000
======== ========== ========
Accrued interest satisfied with common
stock $ 32,545 $ 65,090 $ -
======== ========== ========
Notes received for stock options
exercised $ - $ 287,400 $ -
======== ========== ========
Consulting expense recognized by issuance
of common stock $ - $ 50,000 $ -
======== ========== ========
Notes payable plus accrued interest
satisfied with preferred stock $ - $2,559,554 $ -
======== ========== ========
Issuance of common stock to satisfy note
payable to related party $ - $ 330,000 $ -
======== ========== ========
Issuance of common stock payment of
licensing fee $ - $ 849,173 $ -
======== ========== ========
Conversion of preferred stock to common
stock $ - $3,559,554 $ -
======== ========== ========
Repurchase of fractional shares of common
stock related to the reverse stock split $ - $ 81 $ -
======== ========== ========
Supplemental cash flow disclosure:
Cash paid for interest $ 182 $ 133,042 $ 13,130
======== ========== ========
The accompanying notes are an integral part of these financial statements.
A-10
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
1. NATURE OF BUSINESS
V-ONE Corporation ("V-ONE" or the "Company") develops, markets and
licenses a comprehensive suite of network security products that enable
organizations to conduct secured electronic transactions and information
exchange using private enterprise networks and public networks, such as
the Internet. The Company's principal market is the United States, with
headquarters in Maryland, and regional offices in New York and California;
and secondary markets located in Europe and Japan.
The Company was originally incorporated in the State of Maryland on
February 16, 1993 with the authorization to issue 5,666,666 shares of
Common Stock. The Board of Directors authorized and the shareholders
approved a stock split of the Company's Common Stock as of November 11,
1995 increasing authorized Common Stock to 13,333,333 shares. Effective
February 7, 1996, the Company merged with a pre-existing corporation
formed in Delaware. The Delaware corporation became the surviving
corporation.
In connection with its reincorporation, the Company increased the number
of authorized shares of Common Stock from 13.3 million to 33.3 million and
authorized 13.3 million shares of Preferred Stock. On June 12 and June 28,
1996, respectively, the Board of Directors authorized and the shareholders
approved a two-for-three reverse stock split of the outstanding shares of
the Company's Preferred and Common Stock, which was effective July 2,
1996. All references to Common Stock, Preferred Stock, options and per
share data have been restated to give effect to both stock splits.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are generally recognized from the license of software upon the
signing of a contract and shipment of the product. The Company often
permits customers to evaluate products being considered for purchase,
generally for a period up to 30 days, in which event the Company does
not recognize revenues until the customer has accepted the product.
Accordingly, the Company's revenue recognition policy does not
necessarily correlate with the signing of a contract or the shipment of
a product. Allowances for estimated future returns, credits and
doubtful accounts are netted against accounts receivable. Service and
training revenues are recognized as the services are performed.
Maintenance and support revenues are recognized ratably over the
contract term, typically one year. Payments received in advance of
revenue recognition are included in deferred revenue.
In certain instances, the Company recognizes revenues from the sale of
systems using the percentage of completion method as the work is
performed, measured primarily by the ratio of labor hours incurred to
total estimated labor hours for each specific contract. When the total
estimated cost of a contract is expected to exceed the contract price,
the total estimated loss is charged to expense in the period when the
information becomes known.
A-11
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 (SOP 97-2) SOFTWARE REVENUE
RECOGNITION, which requires specific criteria be met prior to the
recognition of revenue from software arrangements consisting of
multiple elements. This statement becomes effective for fiscal years
beginning after December 15, 1997. The Company believes that future
adoption of this statement will not have a significant impact on its
results of operations or financial position.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Software development costs are included in research and development and
are expensed as incurred. Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Cost of Computer Software to be
Sold, Leased or Otherwise Marketed" requires the capitalization of
certain software development costs once technological feasibility is
established, which the Company generally defines as completion of a
working model. Capitalization ceases when the products are available
for general release to customers, at which time amortization of the
capitalized costs begins on a straight-line basis over the estimated
product life, or on the ratio of current revenues to total projected
product revenues, whichever is greater. To date, the period between
achieving technological feasibility and the general availability of
such software has been short, and software development costs qualifying
for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from these estimates and could impact future results of operations and
cash flows.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash and
cash equivalents include time deposits with commercial banks used for
temporary cash management purposes.
INVENTORIES
Inventories are valued at the lower of cost or market and consist
primarily of computer equipment for sale on orders received from
customers, items held for stock and training kits. Cost is determined
based on specific identification.
PROPERTY AND EQUIPMENT
Office and computer equipment and furniture and fixtures are recorded
at cost. Depreciation and amortization of property and equipment is
calculated using the straight-line method over a useful life of the
assets, generally three to seven years. Depreciation expense was
$24,623, $101,818 and $285,213 for the years ended December 31, 1995,
1996 and 1997, respectively.
A-12
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
Repairs and maintenance costs are charged to expense as incurred. Upon
sale or retirement of property and equipment, the costs and related
accumulated depreciation are eliminated from the accounts and any
resulting gain or loss on such disposition is included in the
determination of net income.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
by applying presently enacted statutory tax rates, which are applicable
to the future years in which deferred tax assets or liabilities are
expected to be settled or realized, to the differences between the
financial statement carrying amounts and the tax bases of existing
assets and liabilities. The effect of a change in tax rates on deferred
tax assets and liabilities is recognized in net income in the period
that the tax rate is enacted.
The Company provides a valuation allowance against net deferred tax
assets if, based upon available evidence, it is more likely that some
or all of the deferred tax assets may not be realized.
COMPUTATION OF NET LOSS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No.
128, EARNINGS PER SHARE ("SFAS 128") effective December 31, 1997. All
prior period net loss per share amounts have been restated to comply
with the provisions of SFAS 128. Basic earnings (or loss) per share is
computed by dividing net income or (loss) by the weighted average
number of shares of common stock outstanding. Diluted earnings per
share is computed by dividing net income by the weighted average common
and potentially dilutive common equivalent shares outstanding,
determined in the following table. However, the computation of diluted
loss per share was antidilutive in each of the years presented;
therefore, basic and diluted loss per share are the same.
1995 1996 1997
---- ---- ----
Weighted average shares outstanding
used to compute basic earnings per
share 8,099,223 9,245,305 12,868,859
Incremental shares issuable upon the
assumed conversion of convertible
preferred stock - - -
Incremental shares issuable upon the
assumed exercise of stock options and
warrants - - -
--------- --------- ----------
Shares used to compute diluted
earnings per share 8,099,223 9,245,305 12,868,859
========= ========= ==========
A-13
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
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
had cash invested in these funds of $1,175,279, $10,875,652, and
$5,981,688 as of December 31, 1995, 1996 and 1997, respectively. The
Company has not experienced any losses to date on its invested cash.
The Company sells its products to a wide variety of customers in a
variety of industries. The Company performs ongoing credit evaluations
of its customers but does not require collateral or other security to
support customer accounts receivable. In management's opinion, the
Company has provided sufficient provisions to prevent a significant
impact of credit losses to the financial statements.
In 1995, three customers accounted for approximately 39% of total
revenues. In 1996, two customers accounted for approximately 24% of
total revenues and, when combined with a third customer, aggregated 41%
of total accounts receivable at December 31, 1996. As of December 31,
1997 and for the year then ended, two customers comprised 34% and 56%
of total revenues and accounts receivable, respectively.
The Company had significant purchases of product from one major
supplier in the amount of approximately $307,000 during fiscal 1996 and
approximately $1,201,000 from the same supplier and another major
supplier during fiscal year 1997, representing 16% and 58% of total
product cost of revenues for those periods, respectively. No supplier
accounted for more than 10% of total product cost of revenues in 1995.
3. NOTES PAYABLE
In October 1995, the Company entered into a $50,000 loan agreement with an
international financial institution. The loan requires monthly payments of
interest at a rate equal to the institution's prime lending rate for the
first twelve months or 8.25% as of December 31, 1996. In October 1996, the
interest rate increased to 1.5% over prime or 10% as of December 31, 1997.
The Company is required to repay the loan through 36 monthly payments
commencing May 1996. The loan is collateralized by the assets of the
Company.
In both December 1995 and January 1996, the Company issued $1,250,000 in
7% uncollateralized promissory notes to fourteen individual investors.
During April 1996, the principal and accrued interest was converted into
shares of the Company's former Series A Convertible Preferred Stock ("Old
Series A Stock") which was, concurrent with the Company's initial public
offering ("IPO"), converted to Common Stock (See Note 7.)
A-14
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
Maturities of notes payable as of December 31, 1997 are as follows:
1998 $ 16,667
1999 5,555
--------
$ 22,222
========
4. RELATED PARTY TRANSACTIONS
On June 1, 1995, the Company borrowed $330,000 from Scientek Corporation
and issued a promissory note, bearing no interest, due June 1, 1996. The
note was assigned to Hai Hua Cheng (a former board member of the Company),
by Scientek Corporation. The terms of the note provided that, as further
consideration for the loan, the Company would issue 153,333 shares of
Common Stock to Mr. Cheng immediately after repayment of the loan. On June
12, 1996, in consideration for Mr. Cheng's agreement not to demand payment
of the note until May 31, 1997, the Board of Directors authorized the
Company to offer Mr. Cheng the option to receive Common Stock based on a
$4.50 per share conversion price in lieu of cash in payment of the note.
The Board reserved and authorized the issuance of 73,333 shares of Common
Stock for this purpose. On June 28, 1996, the Company repaid the loan by
issuing 226,666 shares of Common Stock to Mr. Cheng, inclusive of the
153,333 shares of Common Stock described above. In connection with this
loan, the Company recognized interest expense of $56,954 and $40,681
during the years ended December 31, 1995 and 1996, respectively.
The Company's founder, Chairman of the Board, and majority shareholder,
advanced the Company operating funds under three separate promissory
notes. The notes bore interest at 8% and were due on demand. Following the
consummation of the IPO, the Company repaid the outstanding balance of the
notes and all accrued interest.
During June 1996, the Company borrowed $1,500,000 and issued an 8%
uncollateralized senior subordinated note due June 18, 2000, with 333,332
detachable warrants to purchase Common Stock. Of the original 333,332
detachable warrants, 266,666 were exercisable at $4.50 per share, and
66,666 were exercisable at $0.015 per share. Because the initial offering
price per share of Common Stock in the IPO was less than $7.00, each share
of Old Series A Stock was automatically converted into 1.20 shares of
Common Stock and the 266,666 warrants were converted into 319,999 warrants
exercisable at $3.75 per share. James F. Chen, the Company's founder and
Chairman of the Board, contributed 13,333 shares of Common Stock due to
the increase in the Old Series A Stock's conversion ratio. The Company
allocated $1,201,000 and $299,000 to notes payable and additional paid-in
capital, respectively, based upon the pro-rata fair market value of the
instruments. As of December 31, 1996, the $299,000 allocated to additional
paid-in capital was fully amortized. Following the consummation of the
IPO, the Company repaid the outstanding balance of the note and all
accrued interest. The 66,666 detachable warrants with an exercise price of
$0.015 were exercised on June 28, 1996. The remaining 319,999 detachable
warrants with an exercise price of $3.75 outstanding at December 31, 1996,
increased to 383,999 exercisable at $3.125, as a result of the
anti-dilution clause arising from the issuance of 300,000 warrants with an
exercise price of $3.125 to David D. Dawson, President and Chief Executive
Officer, on November 21, 1997. The Company recognized expense of $200,000
due to the increase and decrease in the number of the detachable warrants
and exercise price, respectively. These warrants may be further adjusted
as a result of subsequent conversions of the Company's new Series A
Convertible Preferred Stock (see Note 7) and/or the issuance of options
under the Company's 1998 Incentive Stock Plan.
A-15
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
In January 1997, the Company made an investment of $250,000 in Network
Flight Recorder, Inc. ("NFR") in exchange for ten percent of NFR common
stock. NFR develops software to provide network administrators with
network audit capabilities. NFR is headed by the Company's former Chief
Scientist, who continues to work as a consultant for the Company.
5. SELECTED BALANCE SHEET INFORMATION
Other assets consist of the following at December 31:
1996 1997
-------- ---------
Deposits $ 28,568 $ 613,186
Investment in NFR -
250,000
-------- ---------
$ 28,568 $ 863,186
======== =========
Accounts payable and accrued expenses consist of the following at December
31:
1996 1997
---------- ----------
Accounts payable $ 645,602 $ 601,046
Accrued compensation 172,299 473,507
Accrued IPO costs 139,679 -
Accrued contract costs 155,000 -
Accrued marketing
costs 55,000 48,193
Sales tax payable 118,464 28,843
Other accrued expenses 25,000 -
---------- ----------
$1,311,044 $1,151,589
========== ==========
6. INCOME TAXES
The tax effect of temporary differences that give rise to significant
portions of the deferred income taxes are as follows at December 31:
1996 1997
------------ -----------
Deferred tax assets (liabilities):
Deferred revenue $ 37,750 $ -
Inventory allowance 19,310 82,145
Allowance for bad debts 97,475 579,456
Deferred rent 30,230 14,243
Non-deductible accruals 93,993 59,071
Stock-based employee compensation 188,388 188,388
Licensing fee (300,622) (123,980)
Net operating loss carryforward 2,894,848 5,698,817
----------- -----------
Total gross deferred tax asset 3,061,372 6,416,243
Valuation allowance (3,061,372) (6,416,243)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
A-16
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
The net change in the valuation allowance from 1996 to 1997 is due
principally to the increase in net operating losses. Valuation allowances
have been recognized due to the uncertainty of realizing the benefit of
net operating loss carryforwards. At December 31, 1997, the Company had
net operating loss carryforwards of approximately $15,395,000 for Federal
and state income tax purposes available to offset future taxable income.
The net operating loss carryforwards begin to expire in 2008.
7. SHAREHOLDERS' EQUITY
OLD SERIES A STOCK
During April and May, 1996, the Board of Directors authorized the
issuance of 791,011 shares of Old Series A Stock with a par value of
$0.001. On April 15, 1996, the Company repaid the full amount of the 7%
uncollateralized promissory notes outstanding, including accrued
interest, to seven of the investors who participated in the December
1995 and January 1996 note offering, by issuing shares of the Company's
Old Series A Stock, at a price of $4.50 per share. The Company paid
cash to each of these investors in an amount equal to the value of any
fractional shares of Old Series A Stock that would otherwise have been
transferred to such investors. In addition, the Company permitted the
seven investors to purchase an additional 222,222 shares of Old Series
A Stock at a price of $4.50 per share. Of the remaining seven
investors, two transferred their notes to one of the other remaining
investors. The remaining five investors exchanged their notes,
including the transferred notes, for shares of the Company's Old Series
A Stock on May 24, 1996, also at a price of $4.50 per share. A total of
791,011 shares of Old Series A Stock were issued on May 24, 1996.
In connection with the IPO, each share of Old Series A Stock
automatically converted into 1.20 shares of Common Stock. The 791,011
shares of Old Series A Stock were converted into 949,209 shares of
Common Stock. James F. Chen, the Company's founder and Chairman of the
Board, contributed 39,552 shares of Common Stock, to the Company due to
the increase in the Old Series A Stock's conversion ratio, because the
initial offering price per share of Common Stock in the IPO was less
that $7.00.
MANDATORILY REDEEMABLE PREFERRED STOCK
On December 8, 1997, the Company issued 4,000 shares of Series A Stock
to Advantage Fund II Ltd. ("Advantage") for $4 million, less issuance
costs of approximately $234,000. Each share of Series A Stock is
convertible into shares of Common Stock and warrants to purchase shares
of Common Stock ("Series A Warrants").
The holders of Series A Stock are entitled to receive, at the
discretion of the Board of Directors, dividends at the rate of $50.00
per annum per share, which are fully cumulative, accrue without
interest from the date of original issuance and are payable quarterly
commencing March 1, 1998. The amount of the dividends payable per share
of Series A Stock for each quarterly dividend is computed by dividing
A-17
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
the annual dividend amount by four. Dividends not paid on a payment
date, whether or not such dividends have been declared, will bear
interest at the rate of twelve percent per annum until paid. The
Company can elect to issue shares of the Company's Common Stock in
payment of dividends on the Series A Stock.
In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of Series A
Stock are entitled to receive out of the assets of the Company, an
amount per share of Series A Stock equal to the liquidation preference
before any payment shall be made to holders of any class of Common
Stock or any stock ranking on liquidation junior to the Series A Stock,
an amount equal to the sum of (1) all dividends accrued and unpaid
thereon to the date of final distribution to such holders, (2) accrued
and unpaid interest on dividends in arrears and (3) $1,000. The
liquidation preference of the Series A Stock is $4,012,600 as of
December 31, 1997. In the event, the assets of the Company are
insufficient to pay liquidation preference amounts, then all of the
assets available for distribution shall be distributed ratably among
the holders of Series A Stock.
CONVERSION RIGHTS. Each share of Series A Stock is convertible at the
option of the holder into shares of Common Stock and warrants to
purchase Common Stock ("Series A Warrants"). The number of Series A
Warrants issuable on conversion of a share of Series A Stock is the
number of shares of Common Stock issued on conversion per share of
Series A Stock divided by 5. The exercise price per share of each
Series A Warrant is $4.77 per share. Each Series A Warrant is
exercisable for 5 years from the date of conversion. The number of
shares of Common Stock issuable on exercise of the Series A Warrants
and the exercise price per share is subject to adjustment in certain
circumstances.
The number of shares of Common Stock issuable per share of Series A
Stock is determined by dividing the sum of (a) $1,000, (b) accrued and
unpaid dividends, and (c) interest on dividends in arrears ("Conversion
Amount") by the lesser of (1) $4.77 ("Ceiling Price") and (2) the
product of the applicable Conversion Percentage and the Average Market
Price on the conversion date. The "Conversion Percentage" is generally
85%; however, if (1) the registration statement ceases to be available
for use by any holder of Series Stock that is named therein as a
selling stockholder for any reason, or (2) a holder of Series A Stock
becomes unable to convert any shares of Series A Stock in accordance
with the Certificate of Designations of Series A Convertible Preferred
Stock ("Series A Certificate") (other than by reason of the 4.9%
limitation described below), then (A) the applicable Conversion
Percentage is permanently reduced by 2% per month up to a maximum
aggregate reduction in the Conversion Percentage of 10% and (B) the
Ceiling Price is permanently reduced by $.0954 per month up to a
maximum aggregate reduction in the Ceiling Price of $.477. However, in
lieu of each such reduction, the Company can make cash payments equal
to 2% of the aggregate subscription price per share ($1,000 per share)
of Series A Stock (which amount is limited to 10% of the aggregate
subscription price). The Conversion Amount is adjusted in the event the
Company issues certain rights or warrants or distributes to the holders
of securities junior to the Series A Stock evidences of indebtedness or
assets. The "Average Market Price" is the average of the lowest sale
price on the Nasdaq National Market on each of the five trading days
A-18
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
having the lowest sale price during the 25 consecutive trading days
prior to the measurement date, which in the case of a dividend paid in
shares of Common Stock is the dividend payment date.
No holder of Series A Stock is entitled to receive shares of Common
Stock on conversion of its Series A Stock or on exercise of its Series
A Warrants to the extent that the sum of (1) the shares of Common Stock
owned by such holder and its affiliates and (2) the shares of Common
Stock issuable on conversion of the Series A Stock and on exercise of
its Series A Warrants would result in beneficial ownership by such
holder and its affiliates of more than 4.9% of the outstanding shares
of Common Stock. Beneficial ownership for this purpose is determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934,
excluding shares of Common Stock so owned through ownership of
unconverted shares of Series A Stock and unexercised Series A Warrants.
If a holder tenders his or her shares of Series A Stock for conversion
and does not receive certificates for all of the shares of Common Stock
and Series A Warrants to which such holder is entitled when required,
then, among other things, the Ceiling Price otherwise applicable to
such conversion is reduced by $.0954 and the Conversion Percentage
otherwise applicable to such conversion is reduced by 2%.
MANDATORY REDEMPTION. The Series A Certificate provides that the
Company is not obligated to issue, upon conversion of the Series A
Stock, more than the number of shares of Common Stock that the Company
may issue pursuant to the rules of Nasdaq ("Maximum Share Amount"),
less the aggregate number of shares of Common Stock issued by the
Company as dividends on the Series A Stock. The Company is seeking
approval from the holders of Common Stock to issue shares of Common
Stock in connection with the Series A Stock in excess of the amounts
permitted by Nasdaq Rule 4460(i)(1)(D).
If the Company would not be obligated to convert shares of Series A
Stock because of the Maximum Share Amount limitation, the Company is
required to give a notice to that effect to each holder of Series A
Stock. In such event, a holder may require the Company to redeem such
portion of its Series A Stock that cannot be converted as a result of
this limitation at the "Share Limitation Redemption Price" per share.
The "Share Limitation Redemption Price" is the greater of (i) the
quotient obtained by dividing (a) the sum of (1) $1,000, (2) an amount
equal to the accrued but unpaid dividends on the share of Series A
Stock to be redeemed, and (3) an amount equal to the accrued and unpaid
interest on dividends in arrears on such share through the applicable
redemption date by (b) the applicable Conversion Percentage and (ii) an
amount equal to the product obtained by multiplying (x) the number of
shares of Common Stock that would, but for the redemption pursuant to
this provision of the Series A Certificate, be issuable on conversion
of one share of Series A Stock and any accrued and unpaid dividends
thereon and any accrued and unpaid interest on dividends thereon in
arrears (determined without regard to the 4.9% limitation) times (y)
the arithmetic average of the closing bid price of the Common Stock for
the five consecutive trading days ending one trading day prior to the
redemption date.
In addition, the Company is obligated to redeem all outstanding shares
of Series A Stock on December 8, 2000 at the "Redemption Price" per
share. The "Redemption Price" is the greater of (i) the quotient
obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to
A-19
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
the accrued but unpaid dividends on the share of Series A Stock to be
redeemed, and (3) an amount equal to the accrued and unpaid interest on
dividends in arrears on such share through the applicable redemption
date by (b) the applicable Conversion Percentage and (ii) an amount
equal to the product obtained by multiplying (x) the number of shares
of Common Stock that would, but for the redemption pursuant to this
provision of the Series A Certificate, be issuable on conversion of one
share of Series A Stock and any accrued and unpaid dividends thereon
and any accrued and unpaid interest on dividends thereon in arrears
(determined without regard to the 4.9% limitation) times (y) the
arithmetic average of the closing bid price of the Common Stock for the
five consecutive trading days ending one trading day prior to the
redemption date.
OPTIONAL REDEMPTION BY THE COMPANY. As long as the Company is in
compliance in all material respects with its obligations to the holders
of Series A Stock under the Series A Certificate and the registration
rights agreement with Advantage, the Company may redeem all or, from
time to time, part of the outstanding shares of Series A Stock at the
Redemption Price per share.
OPTIONAL REDEMPTION BY THE HOLDERS OF SERIES A STOCK. In the event an
"Optional Redemption Event" occurs, each holder of Series A Stock has
the right to require the Company to redeem all or a portion its shares
of Series A Stock at the "Optional Redemption Price" per share.
"Optional Redemption Event" means any one of the following: (1) for any
period of five consecutive trading days there is no closing bid price
of the Common Stock on any national securities exchange or the Nasdaq
National Market; (2) the Common Stock ceases to be listed for trading
on the Nasdaq National Market, the New York Stock Exchange ("NYSE"),
the American Stock Exchange ("AMEX") or the Nasdaq SmallCap Market; (3)
the inability for 30 or more days (whether or not consecutive) of any
holder of shares of Series A Stock who is entitled to optional
redemption rights to sell such shares of Common Stock issued or
issuable on conversion of shares of Series A Stock pursuant to the
registration statement for any reason on each of such 30 days; (4) the
Company fails or defaults in the timely performance of any material
obligation to a holder of shares of Series A Stock under the terms of
the Series A Certificate or under the registration rights agreement
with Advantage or any other agreements or documents entered into in
connection with the issuance of shares of Series A Stock; (5) any
consolidation or merger of the Company with or into another entity
(other than a merger or consolidation of a subsidiary of the Company
into the Company or a wholly owned subsidiary of the Company) where the
shareholders of the Company immediately prior to such transaction do
not collectively own at least 51% of the outstanding voting securities
of the surviving corporation of such consolidation or merger
immediately following such transaction or the common stock of such
surviving corporation is not listed for trading on the Nasdaq National
Market, the NYSE, the AMEX or the Nasdaq SmallCap Market; or (6) the
taking of any action, including any amendment to the Company's
Certificate of Incorporation, that materially and adversely affects the
rights of any holder of shares of Series A Stock.
The "Optional Redemption Price" is the greater of (i) the quotient
obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to
the accrued but unpaid dividends on the share of Series A Stock to be
redeemed, and (3) an amount equal to the accrued and unpaid interest on
dividends in arrears on such share through the applicable redemption
date by (b) the applicable Conversion Percentage and (ii) an amount
equal to the product obtained by multiplying (x) the number of shares
A-20
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
of Common Stock that would, but for the redemption pursuant to this
provision of the Series A Certificate, be issuable on conversion of one
share of Series A Stock and any accrued and unpaid dividends thereon
and any accrued and unpaid interest on dividends thereon in arrears
(determined without regard to the 4.9% limitation) times (y) the
arithmetic average of the closing bid price of the Common Stock for the
five consecutive trading days ending one trading day prior to the
redemption date.
STOCK OFFERING
In October 1996, the Company completed an underwritten initial public
offering of 3,000,000 shares of its Common Stock, at a public offering
price of $5.00 per share (the "IPO"). The net proceeds from the IPO of
approximately $12,645,000 were used to repay indebtedness outstanding
under the Company's senior subordinated note and promissory notes due
to the Company's founder and Chairman of the Board. (See Note 4.) On
November 22, 1996, the Company's underwriters exercised their option to
purchase an additional 200,000 shares of Common Stock of which 117,791
shares were issued by the Company at $5.00 per share.
STOCK SPLITS
On November 11, 1995, the Board of Directors authorized and the
shareholders approved a ten-for-one stock split of the outstanding
shares of the Company's Common Stock. On June 12 and June 28, 1996,
respectively, the Board of Directors authorized and the shareholders
approved a two-for-three reverse stock split of the outstanding shares
of the Company's Preferred and Common Stock, which was effective July
2, 1996. All references to Common Stock, Preferred Stock, options and
per share data have been restated to give effect to both stock splits.
WARRANTS
In addition to the warrants discussed in Note 4, the Company has issued
other warrants during fiscal 1997.
On December 8, 1997, the Company issued warrants to purchase 60,000
shares of Common Stock at an exercise price of $4.725 to its
underwriter in consideration for services rendered in connection with
the private placement of its Series A Stock. Such warrants are due to
expire on December 8, 2002.
In connection with a marketing agreement, the Company issued to a
consultant 25,000 warrants to purchase Common Stock at an exercise
price of $3.875 per share, exercisable as of November 4, 1997.
As of December 31, 1997, warrants aggregating 768,999 remain
outstanding.
STOCK OPTIONS PLANS
The Company has the following three stock options plans: 1995
Non-Statutory Stock Option Plan, the 1996 Non-Statutory Stock Option
Plan and the 1996 Incentive Stock Plan ("Plans"). The Plans were
adopted to attract and retain key employees, directors, officers and
consultants. The Plans are administered by a committee appointed by the
Board of Directors ("Compensation Committee").
A-21
<PAGE>
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 for the period from the 1995 Plan's inception to
December 31, 1996 was as follows:
Shares Price
------ -----
Balance as of December 31, 1994 - -
Granted 350,293 $0.4245-$2.505
Exercised - -
Canceled - -
-------
Balance as of December 31, 1995 350,293 $0.4245-$2.505
Granted 2,000 $4.50
Exercised - -
Canceled (2,000) $4.50
-------
Balance as of December 31, 1996 350,293 $0.4245-$2.505
Granted -
Exercised (119,070) $0.4245-$2.505
Canceled -
-------
Balance as of December 31, 1997 231,223
=======
The Compensation Committee was authorized by the Board of Directors to
grant options for a total of 352,293 shares of Common Stock under the
1995 Plan. As of December 31, 1996, the Compensation Committee had
granted a total of 352,293 options with a ten year term, of which
213,331 are exercisable at $0.4245 per share, 136,962 are exercisable
at $2.505 per share and 2,000 are exercisable at $4.50 per share. As of
December 31, 1995, 1996 and 1997, 44,445, 229,087 and 231,223,
respectively, of the options were vested.
As of December 31, 1996 and 1997, the Company had no shares of Common
Stock available for grant under the 1995 Plan.
1996 NON-STATUTORY STOCK OPTION PLAN
The Compensation Committee, which administers the 1996 Non-Statutory
Stock Option Plan ("Non-Statutory Plan"), established the option price
to be the fair market value of the stock on the date of grant. The
options were not transferable, were subject to various restrictions
outlined in the Non-Statutory Plan and must have been exercised by
A-22
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
December 31, 1996. During April 1996, the Company's founder and
Chairman of the Board contributed 383,965 shares of Common Stock to the
Company and the Company issued those shares to employees in connection
with the exercise of stock options granted under the Non-Statutory
Plan. The Company recognized compensation expense of $287,976 with a
corresponding increase to additional paid-in capital to record this
transaction.
Option activity for the period from the Non-Statutory Plan's inception
to December 31, 1996 was as follows:
Shares Price
------ -----
Balance as of December 31, 1995 - -
Granted 383,965 $0.75
Exercised (383,965) $0.75
Canceled - -
-------
Balance as of December 31, 1996 - -
=======
The options were exercised on April 22, 1996 at $0.75 a share in
exchange for notes and par value in cash. No additional options are
available for grant under the Non-Statutory Plan. The Company
recognized $1,439,867 in compensation expense based upon the difference
between the fair market value of $4.50 at the date of grant and the
exercise price of $0.75 per share. The notes are full recourse
promissory notes bearing interest at 6% per annum and are
collateralized by the underlying Common Stock. Principal and interest
are payable in installments. Maturities range from April 1997 to April
2006. The Company has accounted for these notes as a reduction to
shareholders' equity as of December 31, 1996 and 1997.
1996 INCENTIVE STOCK PLAN
During June 1996, the Company adopted the 1996 Incentive Stock Plan
("1996 Plan"), under which incentive stock options, non-qualified stock
options and restricted share awards may be made to the Company's key
employees, directors, officers and consultants. Both incentive stock
options and options that are not qualified under Section 422 of the
Internal Revenue Code of 1986, as amended ("non-qualified options"),
are available under the 1996 Plan. The options are not transferable and
are subject to various restrictions outlined in the 1996 Plan. The
Compensation Committee or the Board of Directors determines the number
of options granted to a key employee, officer or consultant, the
vesting period and the exercise price provided that it is not below
market value. The 1996 Plan will terminate during June 2006 unless
terminated earlier by the Board of Directors.
The 1996 Plan also provides for the automatic grant of a non-qualified
option to purchase 6,666 shares of Common Stock to each new
non-employee director. All options have a five year term and are
exercisable on the date of grant. As of December 31, 1996, two of the
Company's directors were eligible to participate in the 1996 Plan and
each director was granted a non-qualified option to purchase 6,666
shares of Common Stock.
A-23
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
Option activity for the period from the 1996 Plan's inception to
December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Incentive Non-Qualified
Stock Options Stock Options
Shares Price Share Price
------ ----- ----- -----
<S> <C> <C> <C> <C>
Balance as of December 31, 1995 - - - -
Granted 386,310 $4.50-$9.00 837,903 $3.75-$9.00
Exercised - - - -
Canceled (41,476) $4.50-$9.00 (29,066) $3.75
------- ---------
Balance as of December 31, 1996 344,834 $4.50-$9.00 808,837 $3.75-$9.00
Granted 703,501 $4.50-$5.88 612,000 $3.75-$5.88
Exercised (28,196) $4.50-$5.00 (270,642) $3.75
Canceled (88,202) $4.50-$9.00 (110,097) $3.75-$9.00
------- ---------
Balance as of December 31, 1997 931,937 $4.50-$9.00 1,040,098 $3.75-$9.00
======= =========
</TABLE>
Awards may be granted under the 1996 Plan with respect to a total of
2,333,333 shares of Common Stock under the 1996 Plan. As of December
31, 1997, of the total 1,040,098 non-qualified options, 395,435 are
vested and exercisable as of December 31, 1997. As of December 31,
1997, the Company had 62,460 share of Common Stock available for grant
under the 1996 Plan.
The Company accounts for the fair value of its grants under the Plans
in accordance with the Accounting Principles Board Opinion 25 and
related Interpretations. Accordingly, no compensation expense has been
recognized for the Plans. Had compensation expense been determined
based on the fair value at the grant dates for awards under the Plans
consistent with the method of SFAS 123, the Company's net loss and loss
per common share would have been increased to the pro forma amounts
indicated below:
1995 1996 1997
---- ---- ----
Net loss
As reported $1,122,011 $6,695,556 $9,998,198
Pro forma $1,154,939 $9,509,366 $10,312,521
Loss per common share
As reported $0.14 $0.72 $0.78
Pro forma $0.14 $1.03 $0.80
The fair value of each option is estimated on the date of grant using a
type of Black-Scholes option pricing model with the following
weighted-average assumptions used for grants during the years ended
December 31, 1995, 1996 and 1997, respectively: dividend yield of 0% in
A-24
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
all periods; expected volatility of 43%, 43%, and 56%; risk-free
interest rate of 6.2%, 6.5%, and 6.0%; and expected terms of 3.0, 3.4,
and 4.0 years, respectively.
A summary of the status of the Plans is presented below:
<TABLE>
Year ended December 31,
<CAPTION>
1995 1996 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding beginning
of period - - 350,293 $1.238 1,503,964 $2.433
Options exercised - - (383,965) $0.750 (417,908) $3.018
Options canceled - - (72,542) $5.480 (198,299) $4.977
Options granted 350,293 $1.238 1,610,178 $2.438 1,315,501 $4.146
------- --------- ---------
Options outstanding end
of period 350,293 $1.238 1,503,964 $2.433 2,203,258 $3.960
Options exercisable at end
of period 44,445 $0.425 786,846 $3.118 746,858 $3.621
Weighted-average fair value
of options granted
during the period - $0.094 - $1.758 - $2.039
</TABLE>
As of December 31, 1997, the weighted average remaining contractual
life of the options that range from $3.75 to $9.00 is 9 years.
As of December 31, 1995, 1996 and 1997, the pro forma tax effects under
SFAS 109 would include an increase to both the deferred tax asset and
the valuation allowance of $12,700, $1,086,700 and $121,392,
respectively, and no impact to the statement of operations.
8. COMMITMENTS
LEASES
The Company is obligated under various operating and capital lease
agreements, primarily for office space and equipment through 2003. Future
minimum lease payments under these non-cancelable operating and capital
leases as of December 31, 1997 are as follows:
OPERATING CAPITAL
1998 $ 915,021 $ 96,188
1999 943,293 93,249
2000 886,197 91,188
2001 575,807 85,428
2002 818,547 69,345
---------- ---------
Total minimum payments $4,138,865 435,398
==========
A-25
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
Interest (122,966)
----------
Present value of capital lease
obligations 312,432
Less: current portion (17,126)
----------
Capital lease obligations non-current $ 295,306
==========
Rent expense was $92,785, $258,607, and $550,693, for the years ended
December 31, 1995, 1996 and 1997, respectively.
At December 31, 1997, the Company's future minimum sublease rental income
payments with respect to certain non-cancelable operating leases with
terms in excess of one year are as follows:
1998 $144,462
1999 204,043
2000 214,489
2001 74,712
--------
Total minimum payments $637,706
========
The cost and accumulated depreciation of assets under capital leases were
as follows as of December 31:
1996 1997
Furniture $ 8,752 $ 8,752
Computers and equipment 209,725 440,147
-------- --------
218,477 448,899
Accumulated depreciation (34,192) (86,428)
-------- --------
$ 184,256 $362,471
========= ========
LICENSE AGREEMENTS
In 1994, the Company entered into two licensing agreements whereby the
Company obtained the right to modify and sell certain technology used
in its product line. One of the agreements requires the Company to pay
fees based on product and subscription sales for any product using the
licensed technology. The other agreement provides for payment of fees
based upon gross revenues of the Company. This latter agreement also
gives the other party ("Licensor") the right to forfeit future
licensing fees in exchange for 2% of the Company's outstanding voting
stock, after giving effect to the issuance. The Licensor elected to
receive voting stock in May 1996. In October 1996, the Company issued
188,705 shares of Common Stock to the Licensor. The fair market value
of the stock issued, $944,000, is recorded as an asset by the Company
and is being amortized over the period of its estimated useful life, 3
years. The Company incurred amortization expense and fees totaling
$110,860, $135,779, and $775,356 relating to these agreements in 1995,
1996 and 1997, respectively.
A-26
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
EMPLOYMENT AGREEMENTS
Effective November 21, 1997, the Company entered into a three year
employment agreement with David D. Dawson, the President and Chief
Executive Officer. This agreement provides for severance payments if
Mr. Dawson is terminated without cause during the term of the
agreement, and includes one year renewal options. The agreement also
provides a relocation cost allowance; and an incentive compensation
package based on performance criteria, for each year of the contract
term. The relocation cost allowance and certain incentive compensation
have been reflected in the financial statements.
During 1997, the Company amended the Chairman of the Board of Directors
and certain senior executives of the Company's standing employment
agreements. Such agreements provide for minimum salary levels and
incentive bonuses payable if specified management goals are attained.
In the event of termination due to a change in control of the Company
or employment location, the aggregate commitment under these agreements
should all six covered executives be terminated is approximately
$662,000 to be discounted at a rate of 1% above the prevailing one-year
Treasury Bill rate. Additionally, all outstanding stock options become
fully vested with no change in term, and current year bonuses to the
extent earned will be payable upon termination.
9. EMPLOYEE 401(K) DEFERRED COMPENSATION PLAN
Effective January 1, 1997, the Company adopted the V-ONE 401(k) Plan (the
"401(k) Plan"). The 401(k) Plan is a contributory profit sharing plan
covering all eligible employees of the Company. An employee is eligible to
participate in the 401(k) Plan upon completing three months of service and
upon reaching age 21. The 401(k) Plan is subject to the regulations issued
by the United States Treasury Department and Department of Labor under the
Employee Retirement Income Security Act of 1974.
Under the provisions of the 401(k) Plan, eligible participants can
contribute in pretax dollars an amount up to 15% of their annual
compensation, not to exceed the maximum legal deferral. Employer
contributions are discretionary and are determined by the management of
the Company. There were no employer contributions for the year ended
December 31, 1997.
Vesting for Company contributions and actual earnings thereon is based on
the participant's number of years of continuous service with the Company.
A participant is fully vested after six years of continuous service.
Regardless of years of service, a participant is fully vested upon the
occurrence of: (a) normal retirement age; (b) death; (c) termination of
the 401(k) Plan; or (d) retirement due to disability.
10. FINANCING
The Company has incurred net losses of $1,122,011, $6,695,556, and
$9,998,198 for the years ended December 31, 1995, 1996 and 1997.
Management considers the Company's current working capital position
sufficient to cover operating losses over the next operating cycle.
Management has historically been successful in obtaining outside financing
to meet obligations and funding working capital requirements as they come
due.
A-27
<PAGE>
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
1995
Net revenues $150,257 $218,961 $356,021 $378,262
Gross profit 97,667 140,401 230,539 257,735
Net loss (154,791) (245,136) (60,536) (661,548)
Net loss per common share (0.02) (0.03) (0.01) (0.08)
1996
Net revenues 1,021,811 1,354,576 1,720,543 2,169,219
Gross profit 699,813 876,023 1,205,105 1,459,589
Net loss (994,660) (3,393,401) (977,514) (1,329,978)
Net loss per common share (0.12) (0.40) (0.11) (0.11)
1997
Net revenues 2,414,015 2,134,581 2,764,352 2,089,807
Gross profit 1,852,711 1,815,739 2,070,376 1,502,334
Net loss (871,219) (3,149,492) (433,643) (5,543,844)
Net loss per common share (0.07) (0.25) (0.03) (0.43)
12. SUBSEQUENT EVENTS
1998 INCENTIVE STOCK OPTION PLAN
On February 2, 1998, the Board of Directors authorized the adoption of the
1998 Incentive Stock Option Plan (the "1998 Plan"), subject to approval of
the shareholders at the annual shareholders meeting scheduled for May 14,
1998. The purpose of the 1998 Plan is to advance the interests of the
Company by providing for the acquisition of an equity interest in the
Company by non-employee directors, officers, key employees and
consultants. If approved, the 1998 Plan will become effective February 2,
1998 and terminate February 2, 2008. The Company has reserved 2,500,000
shares of Common Stock for awards granted under the 1998 Plan.
Incentive stock options may be granted to purchase shares of Common Stock
at a price not less than fair market value on the date of grant. Only
employees may receive incentive stock options; all other qualified
participants may receive non-qualified stock options with an exercise
price determined by a Committee or the Board. Options are generally
exercisable after one or more years and expire no later than ten years
from the date of grant. The 1998 Plan also provides for reload options and
restricted share awards to employee and consultant participants subject to
various terms.
On the effective date of the 1998 Plan, each non-employee director of the
Board (excluding Messrs. Charles Chen, Harry Gruner, and William Odom)
shall be granted non-qualified options to purchase 10,000 shares of Common
A-28
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
Stock, with an exercise price of fair market at date of grant. Such
options are fully vested at grant date and shall have a five year
expiration term.
REPRICING OF OUTSTANDING STOCK OPTIONS UNDER THE 1996 INCENTIVE STOCK
OPTION PLAN
On February 17, 1998, the Board authorized the offer to reset the exercise
price of all full-time employees' (exclusive of Vice Presidents and the
President) incentive stock options and non-qualified stock options granted
under the 1996 Incentive Stock Option Plan. If accepted by the option
holder, such options are to be replaced with non-qualified options at the
new exercise price of $2.625 per share. To be eligible for repricing, a
participant must: 1) be a full-time employee on February 17, 1998, 2)
agree to remain in the employ of the Company until August 17, 1998, and 3)
acceptance of this offer must have been exercised by February 24, 1998. At
the close of business on February 24, 1998, employees holding options to
purchase 451,736 shares of Common Stock in the aggregate had exercised
their right to reprice at the new exercise price of $2.625 per share.
CONVERSION OF SERIES A PREFERRED STOCK
During March 1998, holders of Series A Stock elected to convert 276 shares
into 130,774 shares of Common Stock at a conversion price of $2.1144 per
share, and received warrants to purchase 26,155 shares of Common Stock at
an exercise price of $4.77 per share. Had the preferred stock transaction
occurred on January 1, 1997, pro forma basic loss per share would have
been approximately $(0.77) per share for the year ended December 31, 1997.
The above transaction triggers a change in the 383,999 detachable warrants
with an exercise price of $3.125, outstanding at December 31, 1997 as a
result of the anti-dilution clause. Such detachable warrants are now
exercisable for 567,535 shares of Common Stock at an exercise price of
$2.1144 per share and will result in a noncash charge to income of
approximately $388,000 in the first quarter of fiscal 1998.
A-29
<PAGE>
APPENDIX B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
The Company offered 3,000,000 shares of Common Stock, par value $0.001 ("Common
Stock"), in its initial public offering ("IPO") on October 24, 1996 at $5.00 per
share. On November 22, 1996, the Company's underwriters exercised their option
to purchase an additional 200,000 shares of Common Stock from the Company
(117,791 shares) and certain shareholders (82,209 shares) for $5.00 per share.
Net of the underwriting discount and related expenses, the Company raised
approximately $13,195,000 from the IPO and the underwriter's exercise of the
overallotment.
On December 8, 1997, the Company issued 4,000 shares of Series A Stock to
Advantage for $4 million in the aggregate. Each share of Series A Stock is
convertible into shares of Common Stock and Series A Warrants to purchase Common
Stock. Net of fees and related expenses, the Company raised approximately
$3,766,000.
The Company generates revenues primarily from software licenses and sale of
hardware products and, to a lesser extent, consulting and related services. The
Company anticipates that revenues from products will continue to be the
principal source of the Company's total revenues.
Under the Company's revenue recognition policy, revenues are generally
recognized from the license of software upon the signing of a contract and the
product shipment. The Company often permits customers to evaluate products being
considered for purchase, generally for a period of up to 30 days, in which event
the Company does not recognize revenues until the customer has accepted the
product. Accordingly, the Company's revenue recognition policy does not
necessarily correlate with the signing of a contract or the shipment of a
product.
As of December 31, 1997, the Company had an accumulated deficit of approximately
$18,339,000. The Company currently expects to incur net losses over the next
several quarters as a result of greater operating expenses incurred to fund
research and development and to increase its sales and marketing efforts. To
date, the Company has expensed all development costs as incurred in compliance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased or Otherwise Marketed." The
Company believes that with its current development cycle, it will be able to
continue to expense all development costs as incurred.
The Company recently has hired and intends to continue to hire additional senior
level personnel. In addition, general and administrative costs have increased
significantly since the Company's date of inception and the Company expects such
costs to continue to increase in the future.
In 1997, product revenues from Internet Solutions Ltd. and Government Technology
Services, Inc. ("GTSI") accounted for approximately 23% and 11%, respectively,
of total revenues. In 1996, product revenues from MCI Telecommunications
Corporation ("MCI") and the National Security Agency ("NSA") accounted for
approximately 12% and 12%, respectively, of total revenues. In 1995, product
revenues from GEIS, NCTS Washington, a division of the Department of the Navy,
and the U.S. Defense Information Systems Agency accounted for approximately 19%,
10%, and 10%, respectively, of total revenues.
RESULTS OF OPERATIONS
The following table sets forth-certain statement of operations data as a
percentage of revenues for the periods indicated:
B-1
<PAGE>
For the Period Ended
Dec. 31, Dec. 31, Dec. 31,
1995 1996 1997
-------- --------- --------
Revenues:
Products 99.8% 95.0% 94.7%
Consulting and services 0.2 5.0 5.3
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Products 34.1 31.4 22.0
----- ----- -----
Consulting and services 0.1 0.9 1.0
----- ----- -----
Total cost of revenues 34.2 32.3 23.0
----- ----- -----
Gross profit 65.8 67.7 77.0
----- ----- -----
Operating expenses:
Sales and marketing 11.9 59.8 99.3
General and administrative 122.4 77.9 40.4
Research and development 27.6 31.3 32.0
Restructuring costs - - 8.5
----- ----- -----
Total operating expenses 161.9 169.0 180.3
----- ----- -----
Operating loss (96.1) (101.3) (103.3)
----- ----- -----
Other (expense) income:
Interest expense (6.0) (8.3) (0.1)
Interest income 0.4 2.7 3.6
----- ----- -----
Total other expense (5.6) (5.6) 3.5
----- ----- -----
Net loss (101.7) (106.9) (99.8)
Dividend on preferred stock - - (0.1)
Deemed dividend on
preferred stock - - (6.4)
----- ----- -----
Loss attributable to
holders of common stock (101.7)% (106.9)% (106.3)%
===== ===== =====
B-2
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
REVENUES
Total revenues increased from approximately $1,104,000 in 1995, to approximately
$6,266,000 in 1996 and to approximately $9,403,000 in 1997. Product revenues are
derived principally from software licenses and the sale of hardware products.
Product revenues increased significantly from approximately $1,101,000 in 1995,
to approximately $5,956,000 in 1996 and to approximately $8,900,000 in 1997. The
increase from 1995 to 1996 was due principally to increased sales of the
Company's SmartWall product and the introduction of its SmartGate product in
December 1995, along with increased sales and marketing efforts. The increase
from 1996 to 1997 was due principally to increased sales of the Company's
SmartGate product.
Consulting and services revenues are derived principally from fees for services
complementary to the Company's products, including consulting, maintenance and
training. Consulting and services revenues increased substantially from
approximately $2,000 in 1995, to approximately $311,000 in 1996 and to
approximately $503,000 in 1997. Consulting and services revenues increased from
1995 to 1996 and from 1996 to 1997 as the Company increased staffing to support
consulting and services and product sale installations.
COST OF REVENUES
Total cost of revenues as a percentage of total revenues were 34.2%, 32.3% and
23% in 1995, 1996 and 1997, respectively.
Cost of product revenues consists principally of the costs of computer hardware,
licensed technology, manuals and labor associated with the distribution and
support of the Company's products and shipping costs. Cost of product revenues
increased from approximately $376,000 in 1995, to approximately $1,969,000 in
1996 and to approximately $2,065,000 in 1997. Cost of product revenues as a
percentage of product revenues was 34.2%, 33.0% and 23.2% for 1995, 1996 and
1997, respectively. The dollar increase and percentage decrease in 1996 were
primarily attributable to an increase in revenues from increased sales and
marketing efforts and from the introduction of SmartGate, combined with a higher
product mix of software licenses to turnkey hardware sales. The dollar increase
and substantial percentage decrease in 1997 were primarily attributable to an
increase in revenues combined with a higher mix of SmartGate software licenses
to SmartWall turnkey hardware sales.
Cost of consulting and services revenues consists principally of personnel and
related costs incurred in providing consulting, support and training services to
customers. Cost of consulting and services revenues increased significantly from
approximately $800 in 1995, to approximately $57,000 in 1996 and to $97,000 in
1997. Cost of consulting and services revenues as a percentage of consulting and
services revenues was 38.4%, 18.2%, and 19.3% for 1995, 1996 and 1997,
respectively. The dollar increases in 1996 over 1995 and in 1997 over 1996 were
attributable to increased staffing to support consulting and services. The
percentage decrease from 1995 to 1996 was principally due to allocation over a
larger revenue base. The percentage increase from 1996 to 1997 was principally
due to a reduced emphasis on consulting and a greater concentration on training
and support.
OPERATING EXPENSES
Sales and Marketing -- Sales and marketing expenses consist principally of the
costs of sales and marketing personnel, advertising, promotions and trade shows.
Sales and marketing expenses increased from approximately $131,000 in 1995, to
approximately $3,745,000 in 1996 and to approximately $9,341,000 in 1997. Sales
and marketing expenses as a percentage of total revenues were 11.9%, 59.8% and
B-3
<PAGE>
99.3% in 1995, 1996 and 1997, respectively. The dollar increase in 1996 was
principally due to increased personnel, higher levels of sales and marketing
efforts and sales associated with the sales of SmartWall and SmartGate. The
percentage increase was due to significantly higher expenses. The dollar
increase in 1997 was principally due to increased personnel, higher levels of
sales and marketing efforts, the recognition of approximately $1,332,000 for bad
debt expenses and an increase of approximately $1,248,000 in allowances for
accounts receivable. The percentage increase was due to significantly higher
expenses. Sales and marketing expenses are expected to decrease both in the
aggregate and as a percentage of total revenues in the near term as a result of
the Company's efforts to reduce expense. This statement is based on current
expectations. It is forward-looking, and the actual results could differ
materially. For information about factors that could cause the actual results to
differ materially, please refer to Item 1. "Business - Risk Factors that May
Affect Future Results and Market Price of Common Stock" in the Company's Form
10-K.
General and Administrative -- General and administrative expenses consist
principally of the costs of finance, management and administrative personnel and
facilities expenses. General and administrative expenses increased substantially
from approximately $1,350,000 in 1995 to approximately $4,880,000 in 1996 and
decreased significantly to approximately $3,802,000 in 1997. General and
administrative expenses as a percentage of total revenues were 122.4%, 77.9% and
40.4% in 1995, 1996 and 1997, respectively. In 1996, the Company recorded
non-cash compensation expense of approximately $2,515,000 in conjunction with
the grant of options to purchase 590,394 shares of Common Stock at an exercise
price of $3.75 per share and options to purchase 10,000 shares of Common Stock
at an exercise price of $4.50 per share, each granted pursuant to the Company's
1996 Incentive Stock Plan, and the grant of options to purchase 383,965 shares
of Common Stock at an exercise price of $0.75 per share pursuant to the
Company's 1996 Non-Statutory Stock Option Plan, the underlying shares of which
were funded by a contribution of 383,965 shares of Common Stock by James F.
Chen, the Company's founder and Chairman of the Board. The non-cash compensation
expense was recognized in the second quarter of 1996. In the fourth quarter of
1996, the Company recognized a non-cash compensation expense of approximately
$264,000 in conjunction with a contribution to the Company of 52,885 shares of
Common Stock by James F. Chen. The remainder of the dollar increase in 1996 was
principally attributable to additional hiring of management and administrative
personnel and professional and legal fees. The percentage decrease was primarily
due to allocation over a larger revenue base. The dollar decrease in 1997 was
due to the absence of non-cash compensation expenses, partially offset by higher
costs for the recruitment of senior management, professional and legal fees, and
a $200,000 non-cash charge attributable to the resetting of the exercise price
on certain warrants in the fourth quarter of 1997 (see "4. Related Party
Transactions" in the Notes to Financial Statements). The percentage decrease was
primarily due to the reduced level of expenditure and the allocation over a
larger revenue base. The Company anticipates that general and administrative
expenses will increase in future periods. This statement is based on current
expectations. It is forward-looking, and the actual results could differ
materially. For information about factors that could cause the actual results to
differ materially, please refer to Item 1. "Business - Risk Factors that May
Affect Future Results and Market Price of Common Stock" in the Company's Form
10-K.
Research and Development -- Research and development expenses consist
principally of the costs of research and development personnel and other
expenses associated with the development of new products and enhancement of
existing products. Research and development expenses increased from
approximately $305,000 in 1995, to approximately $1,961,000 in 1996 and to
approximately $3,012,000 in 1997. Research and development expenses as a
percentage of total revenues were 27.6%, 31.3% and 32.0% in 1995, 1996 and 1997,
respectively. The dollar and percentage increases in 1996 and 1997 were
primarily due to increases in the number of personnel associated with the
Company's product development efforts. The Company believes that a continuing
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<PAGE>
commitment to research and development is required to remain competitive.
Accordingly, the Company intends to allocate substantial resources to research
and development, but research and development expenses may vary as a percentage
of total revenues. This statement is based on current expectations. It is
forward-looking, and the actual results could differ materially. For information
about factors that could cause the actual results to differ materially, please
refer to Item 1. "Business - Risk Factors that May Affect Future Results and
Market Price of Common Stock" in the Company's Form 10-K.
Restructuring Charge -- Restructuring charge expense consist of the costs
associated with the Company's shift in its sales and marketing efforts toward a
channel distribution strategy. Accordingly, the Company recognized in the second
quarter of 1997 a restructuring charge of $800,000, comprised of $400,000
relating to certain marketing expenses and $400,000 relating to reductions in
the Company's workforce. The restructuring and its associated expenses were
completed by the end of 1997.
Interest Income and Expense -- Interest income represents interest earned on
cash, cash equivalents and marketable securities. Interest income in 1995 was
approximately $5,000 from interest earned on the net proceeds from the Company's
private financings, approximately $168,000 in 1996 from interest earned on the
net proceeds from the Company's IPO and private financings and approximately
$341,000 in 1997 from interest earned on the net proceeds from the Company's IPO
and the private placement. Interest expense represents interest payable or
accreted on promissory notes and capitalized lease obligations. Interest expense
was approximately $67,000 in 1995. Interest expense increased substantially to
approximately $519,000 in 1996. The increase was primarily due to the Company's
issuance of $1,250,000 in promissory notes in 1995, the issuance of
approximately $1,250,000 promissory notes in 1996 and the issuance of a
promissory note in the amount of $1,500,000 in 1996. Interest expense was
approximately $13,000 in 1997 was attributable to interest accreted on
promissory notes and capitalized lease obligations.
Income Taxes -- The Company did not incur income tax expenses in December 31,
1995, 1996 and 1997 as a result of the net loss incurred during these periods.
As of December 31, 1997, the Company had net operating loss carry forwards of
approximately $15,395,000 as a result of net losses incurred since inception.
Dividend on Preferred Stock -- The Company provided approximately $13,000 for a
dividend on preferred stock.
Deemed Dividend on Preferred Stock - In December 1997, the Company recorded a
deemed dividend on the Series A Stock of $600,000, or $150 per share of Series A
Stock, in accordance with the Securities and Exchange Commission's position on
accounting for preferred stock which is convertible at a discount to the market
price for common stock.
LIQUIDITY AND CAPITAL RESOURCES
On October 24, 1996, the Company commenced an IPO of its Common Stock, which
ultimately provided the Company with net proceeds, inclusive of the
underwriter's exercise of the overallotment, of approximately $13,195,000. On
December 8, 1997, the Company issued 4,000 shares of Series A Stock to Advantage
for $4 million in the aggregate. Each share of Series A Stock is convertible
into shares of Common Stock and Series A Warrants. Net of fees and related
expenses, the Company raised approximately $3,766,000. As of December 31, 1997,
the Company had nominal debt and had cash and cash equivalents of approximately
$6,203,000 and working capital of approximately $7,858,000.
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<PAGE>
The Company's operating activities used cash of approximately $1,121,000,
$5,119,000, and $8,823,000 in 1995, 1996 and 1997, respectively. Cash used in
operating activities was principally a result of net losses and increases in
accounts receivable, prepaid expenses and inventory, which were partially offset
by increases in accounts payable, the establishment of allowances for
potentially uncollectible accounts receivable and non-saleable inventory,
non-cash expenses related to the issuance of certain stock options and non-cash
charges for preferred stock dividends.
Capital expenditures for property and equipment were approximately $20,000,
$562,000 and $669,000 in 1995, 1996 and 1997, respectively. These expenditures
have generally been for computer workstations and personal computers, office
furniture and equipment, and leasehold additions and improvements. The Company
expects capital expenditures to be less in 1998, as it has completed its
relocation to Germantown, Maryland and intends primarily to lease computer
equipment and office furniture in the future. In 1997, the Company paid a
security deposit of $370,000 as part of the six year operating lease agreement
for its principle office in Germantown, Maryland and made an investment of
$250,000 in Network Flight Recorder, Inc. Network Flight Recorder, Inc. develops
software to provide network administrators with network audit capabilities and
is headed by Marcus J. Ranum, the Company's Chief Scientist.
Prior to its IPO, the Company had financed its operations through the private
sale of equity securities, notes to shareholders and short-term borrowings. In
1995, the Company raised approximately $400,000 through the sale of Common
Stock. In addition, in December 1995 and January 1996, the Company raised
$2,500,000 from the sale of 7% unsecured promissory notes scheduled to mature on
June 30, 1996. In addition, in April 1996, the Company raised approximately
$1,000,000 by selling an additional 222,222 shares of its former Series A
Convertible Preferred Stock ("Old Series A Stock) at $4.50 per share. In April
and May of 1996, the Company exchanged all of the 7% unsecured promissory notes
for Old Series A Stock. Upon consummation of the IPO, each share of Old Series A
Stock automatically converted into 1.20 shares of Common Stock and the Old
Series A Stock was retired.
In June 1996, the Company raised an additional $1,500,000 by issuing to JMI
Equity Fund II, L.P. ("JMI") an 8% unsecured senior subordinated note with
detachable warrants to purchase 333,332 shares of Common Stock of which 266,666
were exercisable at $4.50 per share ("$4.50 Warrants") and 66,666 were
exercisable at $0.015 per share ("$0.015 Warrants"). The note was redeemed upon
consummation of the IPO and the $0.015 Warrants were exercised on June 28, 1996.
Pursuant to the terms of the $4.50 Warrants, upon consummation of the IPO at a
price per share of $5.00, the $4.50 Warrants were adjusted to entitle JMI to
purchase 319,999 shares of Common Stock at $3.75 per share. The $4.50 Warrants
were further adjusted on November 21, 1997 to entitle JMI to purchase 383,999
shares of Common Stock at $3.125 per share as a result of the issuance of
warrants to David D. Dawson to purchase 300,000 shares of Common Stock at an
exercise price of $3.125 per share. As of March 18, 1998, 276 shares of Series A
Stock had been converted at an exercise price of $2.1144, which will result in a
further adjustment of the $4.50 Warrants and a further non-cash expense during
the first quarter of 1998. The $4.50 Warrants may be further adjusted as a
result of subsequent conversions of the Series A Stock and/or the issuance of
options under the Company's proposed 1998 Incentive Stock Plan.
Financing activities include cash received of approximately $1,261,000 from the
exercise of stock options during 1997. Also in the second quarter of 1997, the
Company received 6,020 shares of Common Stock as payment for stock options
issued under the 1996 Non-Statutory Stock Option Plan. The Company retired the
6,020 shares of Common Stock.
The Company believes that its current cash and cash equivalents and funds that
may be generated from on-going operations will be sufficient to finance the
Company's operations at least through March 31, 1999.
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<PAGE>
REVOCABLE PROXY
V-ONE CORPORATION
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints James F. Chen, David D. Dawson and Charles
B. Griffis, or any of them, each with full power of substitution, as the lawful
proxies of the undersigned and hereby authorizes them to represent and to vote
as designated below all shares of common stock of V-ONE Corporation ("Company")
that the undersigned would be entitled to vote if personally present at the
Annual Meeting of Shareholders of the Company to be held on May 14, 1998, and at
any adjournment thereof.
V-ONE CORPORATION
20250 CENTURY BOULEVARD
SUITE 300
GERMANTOWN, MD 20874
1. Proposal One: Election of two directors for a term ending in 2001. Nominees:
Charles C. Chen and David D. Dawson.
FOR [ ] WITHHOLD AUTHORITY [ ] ABSTAIN [ ]
FOR, except vote withheld from the following nominees(s):
----------------------------------------------------------------------
2. Proposal Two: Ratification of the adoption of the 1998 Incentive Stock Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Proposal Three: Ratification, pursuant to Nasdaq Rule 4460(i), of the
issuance of (a) shares of the Company's Series A Convertible Preferred Stock
("Series A Stock") to Advantage Fund II Ltd. ("Advantage"), (b) warrants
("Consultant Warrants") to purchase Common Stock issued to Wharton Capital
Partners, Ltd. ("Wharton") and other persons pursuant to the Company's
engagement letter with Wharton dated October 22, 1997 ("Engagement Letter"),
and (c) the shares of Common Stock issuable in connection with the Series A
Stock, the warrants issuable on conversion of the Series A Stock and the
Consultant Warrants.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Proposal Four: Approval, pursuant to Nasdaq Rule 4460(i), of the issuance
pursuant to the terms of the Commitment Letter dated December 8, 1997
between the Company and Advantage of (a) shares of a new series of the
Company's preferred stock ("New Preferred Stock") to Advantage, (b) warrants
("New Warrants") to purchase Common Stock to be issued to Wharton and other
persons pursuant to the Engagement Letter and (c) the shares of Common Stock
issuable in connection with the New Preferred Stock, the warrants issuable
on conversion of the New Preferred Stock and the New Warrants.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. Proposal Five: Ratification of the election of Coopers & Lybrand L.L.P. as
independent auditors for fiscal year ending December 31, 1998.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
6. In their discretion on such other business as may properly come before the
meeting or any adjournment thereof.
<PAGE>
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is given, this proxy will
be voted FOR the matters listed above.
Whether or not you plan to attend the meeting, you are urged to execute
and return this proxy, which may be revoked at any time prior to its use.
Change of Address or [ ]
Comments Mark Here
Please sign your name exactly as it
appears hereon. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as such.
If a corporation, please sign in full
corporate name by President or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
Date: , 1998
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Signature of Shareholder
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Signature of Additional Shareholder(s)
