As filed with the Securities and Exchange Commission on January 20, 1998
File No. 333-43795
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
V-ONE Corporation
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(Exact name of registrant as specified in its charter)
Delaware 52-1953278
- ---------------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
20250 Century Boulevard, Germantown, MD 20874 - (301) 515-5200
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Charles B. Griffis
Senior Vice President and Chief Financial Officer
V-ONE Corporation
20250 Century Boulevard
Germantown, MD 20874
(301) 515-5243
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Cary J. Meer, Esq.
Judith A. Caesar-Brown
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, DC 20036-1800
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of their Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. /_/
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. /_/ ____
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /_/ ____
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. /_/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------- ---------------- ----------------- ------------------- --------------
Proposed
Title of Each Class of Maximum Proposed Maximum Amount of
Securities To Be Amount To Offering Price Aggregate Registration
Registered Be Registered Per Share(1) Offering Price(1) Fee(1)
- -------------------------- ---------------- ----------------- ------------------- --------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par 2,000,000 $ 3.75 $ 7,500,000 $ 2,212.50
value per share (2)
- -------------------------- ---------------- ----------------- ------------------- --------------
Common Stock, $.001 par 250,000 $ 3.75 $ 937,500 $ 276.56
value per share (2)(3)
- -------------------------- ---------------- ----------------- ------------------- --------------
Common Stock, $.001 par 60,000 $ 3.75 $ 225,000 $ 66.38
value per share (4)
- -------------------------- ---------------- ----------------- ------------------- --------------
Common Stock, $.001 par 383,999 $ 3.75 $ 1,439,996 $ 424.80
value per share (5)
- -------------------------- ---------------- ----------------- ------------------- --------------
Common Stock, $.001 par 849,041(7) $ 3.75 $ 3,183,904 $ 939.25
value per share (6)
- -------------------------- ---------------- ----------------- ------------------- --------------
Total 3,543,040 $ 3.75 $ 13,286,400 $ 3,919.49*
- -------------------------- ---------------- ----------------- ------------------- --------------
</TABLE>
* $3,931.78 was previously paid.
(1) Estimated pursuant to Rule 457 for the purpose of calculating the
registration fee only; based upon the average of the high and low sales
prices for the Common Stock on December 31, 1997. Registration fee is
calculated pursuant to Rule 457(c).
(2) Includes shares of Common Stock issuable in connection with the Series A
Convertible Preferred Stock ("Series A Stock") of V-ONE Corporation
("V-ONE") and warrants to purchase Common Stock of V-ONE issuable to
Advantage Fund II Ltd. on conversion of the Series A Stock. Pursuant to
Rule 416, also includes such indeterminate number of additional shares
of Common Stock as may become issuable upon conversion of and in payment
of dividends on the Series A Stock and exercise of these warrants (a) to
prevent dilution resulting from stock splits, stock dividends or similar
transactions or (b) by reason of reductions in the conversion price of
the Series A Stock and the exercise price of the warrants in accordance
with the terms thereof, including the terms that cause reductions as the
sale price of the Common Stock of V-ONE decreases.
(3) Includes 250,000 shares of Common Stock that may be issued in payment of
dividends on the Series A Stock.
(4) Includes shares of Common Stock issuable in connection with warrants to
purchase Common Stock of V-ONE issued to Wharton Capital Partners, Ltd.
and Dennis Rush. Pursuant to Rule 416, also includes such indeterminate
number of additional shares of Common Stock as may become issuable upon
exercise of these warrants (a) to prevent dilution resulting from stock
splits, stock dividends or similar transactions or (b) by reason of
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reductions in the exercise price of the warrants in accordance with the
terms thereof.
(5) Includes shares of Common Stock issuable in connection with warrants to
purchase Common Stock of V-ONE issued to JMI Equity Fund II, L.P.
Pursuant to Rule 416, also includes such indeterminate number of
additional shares of Common Stock as may become issuable upon exercise
of these warrants (a) to prevent dilution resulting from stock splits,
stock dividends or similar transactions or (b) by reason of reductions
in the exercise price of the warrants in accordance with the terms
thereof.
(6) Includes 74,428 shares of Common Stock held by Bryan T. Vanas, 33,333
shares of Common Stock held by Stanley Shapiro, 12,151 shares of Common
Stock held by Burnett H. Moody, 9,488 shares of Common Stock held by
Norman D. Fine, 45,506 shares of Common Stock held by Golden Eagle
Partners, 54,540 shares of Common Stock held by the Shapiro Family
Trust, 39,854 shares of Common Stock held by Joseph and Rosa Lupo,
109,856 shares of Common Stock held by the Lee DeVisser Trusts, 253,920
shares of Common Stock held by Lewis M. Schott, 13,665 shares of Common
Stock held by John J. Egan, IV, 182,300 shares of Common Stock held by
Steven A. Cohen, and 20,000 shares of Common Stock held by Kenneth
Lissak.
(7) Reduced by 11,111 shares of Common Stock in Pre-Effective Amendment No.
1 to this Registration Statement.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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iii
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PROSPECTUS
SUBJECT TO COMPLETION, JANUARY 7, 1998
3,543,040 SHARES
V-ONE CORPORATION
COMMON STOCK
All of the 3,543,040 shares ("Shares" or Offered Shares") of Common
Stock, $0.001 par value per share ("Common Stock"), that V-ONE Corporation, a
Delaware corporation ("V-ONE" or the "Company"), offered hereby will be sold by
Advantage Fund II Ltd. ("Advantage"), Wharton Capital Partners, Ltd.
("Wharton"), Dennis Rush ("Rush"), JMI Equity Fund II, L.P. ("JMI"), Bryan T.
Vanas, Stanley Shapiro, Burnett H. Moody, Norman D. Fine, Golden Eagle Partners,
the Shapiro Family Trust, Joseph and Rosa Lupo, the Lee DeVisser Trusts, Lewis
M. Schott, John J. Egan IV, Steven A. Cohen and Kenneth Lissak (collectively,
Advantage, Wharton, Rush, JMI, Bryan T. Vanas, Stanley Shapiro, Burnett H.
Moody, Norman D. Fine, Golden Eagle Partners, the Shapiro Family Trust, Joseph
and Rosa Lupo, the Lee DeVisser Trusts, Lewis M. Schott, John J. Egan IV, Steven
A. Cohen and Kenneth Lissak are referred to as the "Selling Stockholders"), or
their respective pledgees, donees, transferees or other successors in interest.
Certain of the Shares are issuable on conversion of the Company's Series A
Convertible Preferred Stock ("Series A Stock") issued to Advantage, on exercise
of warrants issuable to Advantage on conversion of the Series A Stock, and on
exercise of warrants held by Wharton, Rush and JMI (all of such warrants are
collectively referred to as the "Warrants"). Certain of the Shares are currently
held by Bryan T. Vanas, Stanley Shapiro, Burnett H. Moody, Norman D. Fine,
Golden Eagle Partners, the Shapiro Family Trust, Joseph and Rosa Lupo, the Lee
DeVisser Trusts, Lewis M. Schott, John J. Egan IV, Steven A. Cohen and Kenneth
Lissak. This Prospectus covers the resale by the Selling Stockholders of up to
3,543,040 Shares, plus, in accordance with Rule 416 under the Securities Act of
1933, as amended ("Securities Act"), such presently indeterminate number of
additional Shares as may be issuable upon conversion of and in payment of
dividends on the Series A Stock or exercise of the Warrants, based upon
fluctuations in the conversion price of the shares of Series A Stock or the
exercise price of the Warrants. The shares of Series A Stock, the Warrants, and
the shares of Common Stock issuable upon conversion or exercise thereof, and in
payment of dividends on the Series A Stock, have been and will be issued in
transactions exempt from the registration requirements of the Securities Act.
See "Plan of Distribution" and "Selling Stockholders." The Company's Common
Stock is quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System ("Nasdaq") National Market. On January 5, 1998, the
last reported sale price for the Common Stock on the Nasdaq National Market was
$3.50 per share.
None of the proceeds from the sale of the Shares by the Selling
Stockholders will be received by the Company. However, the Company will receive
proceeds from the exercise of the Warrants if the Warrants are exercised. With
respect to Shares that may be issued in payment of dividends on the Series A
Stock, the Company will not be required to pay dividends on the Series A Stock
in cash. The Company will pay substantially all of the expenses with respect to
the offering and the sale of the Shares to the public, including the costs
<PAGE>
associated with registering the Shares under the Securities Act, and preparing
and printing this Prospectus. Normal underwriting commissions and broker fees,
however, as well as any applicable transfer taxes, are payable individually by
the Selling Stockholders.
The sale of the Shares may be effected by the Selling Stockholders from
time to time in transactions on the Nasdaq National Market, in privately
negotiated transactions or in a combination of such methods of sale, at fixed
prices that may be changed, at market prices prevailing at the time of sale, at
prices related to such prevailing prices or at negotiated prices. The Selling
Stockholders may effect such transactions by selling the Shares to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders and/or the
purchasers of the Shares for whom such broker-dealers may act as agents or to
whom they may sell as principals or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). See "Selling
Stockholders" and "Plan of Distribution."
The Selling Stockholders and any agents, broker-dealers or underwriters
that participate in the distribution of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any commission
received by them and any profit on the resale of the Common Stock purchased by
them may be deemed to be underwriting discounts or commissions under the
Securities Act. The Company has agreed to indemnify certain of the Selling
Stockholders and certain other persons against certain liabilities, including
liabilities under the Securities Act. See "Selling Stockholders" and "Plan of
Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE PURCHASE OF SECURITIES
HEREUNDER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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_______________, 1998
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AVAILABLE INFORMATION
A Registration Statement on Form S-3 (the "Registration Statement"),
under the Securities Act, relating to the securities offered hereby has been
filed by the Company with the Securities and Exchange Commission (the "SEC"),
Washington, D.C. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Certain financial and other information relating to the Company is contained in
the documents indicated below under "Incorporation of Certain Documents by
Reference," which are not presented herein or delivered herewith. For further
information with respect to the Company and the securities offered hereby,
reference is made to such Registration Statement, exhibits and schedules.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as
exhibits to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected without charge or may be obtained from the SEC upon the payment of
certain fees prescribed by the SEC at the public reference facilities maintained
by the SEC in Washington, D.C. at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's Regional Offices in New York at 7 World
Trade Center, 13th Floor, New York, New York 10048 and in Chicago at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
concerning the Company may be inspected or copied at the public reference
facilities at the SEC located at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the SEC's Regional Offices in New York, 7 World Trade Center,
13th Floor, New York, New York 10048, and in Chicago, Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such documents can be obtained at the public reference section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates or by
reference to the Company on the SEC's Worldwide Web page (http://www.sec.gov).
The Company's Common Stock is listed on the Nasdaq National Market.
Reports, proxy statements and other information concerning the Company can also
be inspected at Nasdaq, 1735 K Street, N.W., Washington, D.C. 20036
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
SEC, are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(2) The Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 1997;
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(3) The Company's Quarterly Report on Form 10-Q for the three months
ended June 30, 1997;
(4) The Company's Quarterly Report on Form 10-Q for the three months
ended September 30, 1997;
(5) The Company's Current Report on Form 8-K filed December 3, 1997;
(6) The Company's Current Report on Form 8-K filed December 15, 1997;
and
(7) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A filed on October 9,
1996, pursuant to Section 12(g) of the Exchange Act.
All reports and other documents subsequently filed by the Company
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to
the filing of a post-effective amendment that indicates that all securities
offered hereby have been sold or that deregisters all securities then remaining
unsold, shall be deemed to be incorporated by reference in and to be a part of
this Prospectus from the date of filing of such reports and documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in the
Registration Statement containing this Prospectus or in any other subsequently
filed document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the request of such person, a copy of any or all
of the foregoing documents referred to above that have been or may be
incorporated herein by reference, other than exhibits to such documents (unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates). Requests for such documents should be
directed to: V-ONE Corporation, 20250 Century Boulevard, Germantown, Maryland
20874, attention: Charles B. Griffis, Senior Vice President and Chief Financial
Officer. Mr.
Griffis' telephone number is (301) 515-5243.
THE COMPANY
The Company develops, markets, and licenses a comprehensive suite of
network security products that enables organizations to conduct secured
electronic transactions and information exchange using private enterprise
networks and public networks, such as the Internet. The Company's suite of
products address network user authentication, perimeter security, access
control, and data integrity through the use of smart cards, firewalls, and
encryption technology. The Company's products interoperate seamlessly and can be
combined to form a complete, integrated network security solution or can be used
as independent components in customized security solutions. The Company's
products have been designed with an open and flexible architecture to allow for
enhanced application functionality and to support future network security
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standards. In addition, the Company's products enable organizations to deploy
and scale their solutions from small, single-site networks to large, multi-site
environments.
The Company was incorporated in Maryland in February 1993 and
reincorporated in Delaware in February 1996. Effective July 2, 1996, the Company
changed its name from "Virtual Open Network Environment Corporation" to "V-ONE
Corporation." The Company's principal executive offices are located at 20250
Century Boulevard, Suite 300, Germantown, Maryland 20874. The Company's
telephone number is (301) 515-5200.
RISK FACTORS
The Company operates in a rapidly changing environment that involves
numerous risks, some of which are beyond the Company's control. The following
discussion highlights some of the risks the Company faces. Readers are also
referred to the documents filed by the Company with the SEC, specifically the
Company's Form 10-K for its most recent fiscal year, which identifies important
risk factors for the Company.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT
The Company was founded in February 1993 and introduced its first
product in December 1994. Accordingly, the Company did not generate any
significant revenues until 1995 when it commenced sales of its SmartWall
firewall product and introduced its SmartGate client/server system. Revenues for
1995 and 1996 were approximately $1,104,000 and $6,266,000 and for the nine
months ended September 30, 1997 were approximately $6,929,000. The Company's
growth in recent periods may not be an accurate indication of future results of
operations in light of the Company's short operating history, the evolving
nature of the network security market and the uncertainty of the demand for
Internet and intranet products in general and the Company's products in
particular. As of September 30, 1997, the Company had accumulated a deficit of
approximately $12,795,000. The Company currently expects to incur additional 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.
Because of the Company's limited operating history, there can be no
assurance that the Company will achieve or sustain profitability or significant
revenues. To address these risks, the Company must, among other things, continue
its emphasis on research and development, successfully execute and implement its
marketing strategy, respond to competitive developments and seek to attract and
retain talented personnel. There can be no assurance that the Company will
successfully address these risks and the failure to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend, to a large extent, upon the
performance of its senior management and its technical, sales and marketing
personnel, many of whom have only recently joined the Company. There is keen
competition in the software security industry to hire and retain qualified
personnel and the Company is actively searching for additional qualified
personnel. The Company's success will depend upon its ability to retain and hire
additional key personnel. The loss of the services of key personnel or the
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inability to attract additional qualified personnel could have a material
adverse effect upon the Company's results of operations and product development
efforts. The Company currently has $1.0 million "key man" life insurance
policies on the lives of each of James F. Chen, its Chairman and founder,
Jieh-Shan Wang, its Senior Vice President of Engineering, and Marcus J. Ranum,
its Chief Scientist (Mr. Ranum is no longer an employee of the Company, but is
serving in this capacity as a consultant). This coverage, however, may not be
sufficient to mitigate the impact that the loss of the services of Mr. Chen, Mr.
Wang or Mr. Ranum would have on the Company. Although the Company has entered
into employment agreements with Mr. Chen and Mr. Wang, as well as with David D.
Dawson, its President and Chief Executive Officer, and Charles B. Griffis, its
Senior Vice President and Chief Financial Officer, that provide for fixed terms
of employment, the Company has not historically provided such types of
employment agreements to its other employees, including its executive officers.
This may adversely impact the Company's ability to attract and retain the
necessary technical, management and other key personnel, which could have a
material adverse effect upon the Company's results of operations and product
development efforts.
MANAGEMENT OF GROWTH
The Company has recently experienced and may continue to experience
substantial growth in the number of its employees and the scope of its
operations, resulting in increased responsibilities for management and added
pressure on the Company's operating and financial systems. As of December 15,
1997, the Company had 77 employees, as compared to 79 employees on February 28,
1997, 34 employees on January 1, 1996 and 7 employees on January 1, 1995. To
manage growth effectively, the Company will need to continue to improve its
operational, financial and management information systems and will need to hire,
train, motivate and manage a growing number of employees. Competition is intense
for qualified technical, marketing and management personnel. There can be no
assurance that the Company will be able to achieve or manage any future growth,
and its failure to do so could delay product development cycles and marketing
efforts or otherwise have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company is not
currently involved in negotiations for any acquisitions, the Company may
undertake acquisitions in the future. Any such transaction would place
additional strains upon the Company's management resources.
ANTICIPATED FLUCTUATIONS IN QUARTERLY RESULTS
As a result of the Company's limited operating history, the Company does
not have historical financial data for a significant number of periods on which
to base planned operating expenses. Accordingly, the Company's expense levels
are based in part on its expectations as to future revenues. The Company's
quarterly sales and operating results generally depend on the volume and timing
of, and ability to fill, orders received within the quarter, which are difficult
to forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall of demand for the Company's products in relation to the Company's
expectations could have an immediate adverse impact on the Company's business,
financial condition and results of operations. In addition, the Company plans to
increase its operating expenses to fund the rapid growth of its sales and
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marketing operations, distribution channels, customer support capabilities and
research and development activities. To the extent that such expenses precede or
are not subsequently followed by increased revenues, the Company's business,
financial condition and results of operations may be materially adversely
affected.
The Company expects to experience significant fluctuations in future
quarterly operating results, which may be caused by a number of factors, such as
the pricing and mix of products and services sold, the introduction of new
products by the Company and its competitors, the timing of orders and the
shipment of products, market acceptance of the Company's products, the ability
of the Company's direct sales force and resellers to market its products
successfully, the mix of distribution channels used and other factors that may
be beyond the Company's control. Thus, the Company believes that comparisons of
quarterly operating results are not meaningful and should not be relied upon,
nor will they necessarily reflect the Company's future performance. Because of
the foregoing factors, it is likely that in some future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
DEPENDENCE ON THE INTERNET AND INTRANETS
The Company's success depends substantially upon the market acceptance
of the Internet and intranets as mediums for commerce and communication.
Although the Company believes that its software security products will
facilitate and fortify commerce and communication over the Internet and
intranets, there can be no assurance that commerce and communication over the
Internet and intranets will expand or that the Company's products will be
adopted for security purposes. In addition, the Internet may not prove to be a
viable commercial marketplace because of inadequate development of the necessary
infrastructure, such as a reliable network backbone or timely development of
complementary products and services. If the Internet and intranets do not
develop as mediums of commerce and communication or the Internet does not
develop as a viable commercial marketplace due to inadequate development of
infrastructure or complementary products and services, or for other reasons
beyond the Company's control, the Company's business, financial condition and
results of operations may be materially adversely affected.
RISKS ASSOCIATED WITH THE EMERGING NETWORK SECURITY MARKET
The market for the Company's products is in an early stage of
development. The rapid development of Internet and intranet computing has
increased the ability of users to access proprietary information and resources
and has recently increased demand for network security products. Because the
market for network security products is only beginning to develop, it is
difficult to assess the size of the market, the product features desired by the
market, the optimal price structure for the Company's products, the optimal
distribution strategy and the competitive environment that will develop in this
market. Declines in demand for the Company's products, whether as a result of
competition, technological change, the public's perception of the need for
security products, developments in the hardware and software environments in
which these products operate, general economic conditions or other factors
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beyond the Company's control, could have a material adverse effect on the
Company's business, financial condition or results of operations.
DEPENDENCE ON PRINCIPAL PRODUCTS; UNCERTAINTY OF PRODUCT ACCEPTANCE
The Company currently generates most of its revenues from its SmartWall
and SmartGate products. Accordingly, any factor that adversely affects sales of
these products could have a material adverse effect on the Company. While
SmartWall and SmartGate have met with a favorable degree of market acceptance
since sales of SmartWall commenced in the first quarter of 1995 and since
SmartGate was introduced in the fourth quarter of 1995, respectively, there can
be no assurance that SmartWall or SmartGate will continue to be accepted in the
future. In addition, there can be no assurance that there will be market
acceptance of any of the Company's products that may be introduced in the
future. The Company's success will, in part, depend upon the Company's ability
to design, develop and introduce new products, services and enhancements on a
timely basis to meet changing customer needs, technological developments and
evolving industry standards.
INTELLECTUAL PROPERTY RIGHTS; INFRINGEMENT CLAIMS
The Company relies on trademark, copyright, patent and trade secret
laws, employee and third-party non-disclosure agreements and other methods to
protect the proprietary rights of the Company and the companies from which the
Company licenses technology. Prosecution of patent applications and any other
patent applications that the Company may subsequently determine to file, may
require the expenditure of substantial resources. The issuance of a patent from
a patent application may require 24 months or longer. There can be no assurance
that the Company's technology will not become obsolete while the Company's
applications for patents are pending. There also can be no assurance that any
pending or future patent application will be granted, that any future patents
will not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company. The Company
currently intends to pursue patent protection outside of the United States for
the technology covered by the most recently filed patent application although
there can be no assurance that any such protection will be granted or, if
granted, that it will adequately protect the technology covered thereby. The
Company currently holds patents on its Wallet Technology, its SmartGate
technology, and its Smartcard Technology.
The Company's success is also dependent in part upon its proprietary
software technology and technology licensed from others. There can be no
assurance that the Company's trade secrets or license or non-disclosure
agreements will provide meaningful or contractually required protection for the
proprietary technology and other proprietary information of the Company and the
companies from which the Company licenses technology. Further, the Company
relies on "shrink wrap" license agreements that are not signed by the end user
to license the Company's products and, therefore, may be unenforceable under the
laws of certain jurisdictions. In addition, there can be no assurance that
others will not independently develop similar technologies or duplicate any
technology developed by the Company or that its technology will not infringe
upon patents, copyrights or other intellectual property rights owned by others.
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Further, the Company may be subject to additional risk as the Company
enters into transactions in countries where intellectual property laws are not
well developed or are poorly enforced. Legal protections of the Company's rights
may be ineffective in foreign markets and technology developed by the Company
may not be protectable in such foreign jurisdictions in circumstances where
protection is ordinarily available in the United States.
The Company believes that, due to the rapid pace of technological
innovation for network security products, the Company's ability to establish
and, if established, maintain a position of technology leadership in the
industry is dependent more upon the skills of its development personnel than
upon legal protections afforded its existing or future technology.
As the number of security products in the industry increases and the
functionality of these products further overlap, software developers may become
subject to infringement claims. There can be no assurance that third parties
will not assert infringement claims against the Company in the future with
respect to current or future products. The Company also may desire or be
required to obtain licenses from others in order to develop, produce and market
commercially viable products effectively. Failure to obtain those licenses could
have a material adverse effect on the Company's ability to market its software
security products. There can be no assurance that such licenses will be
obtainable on commercially reasonable terms, if at all, that the patents
underlying such licenses will be valid and enforceable or that the proprietary
nature of the unpatented technology underlying such licenses will remain
proprietary.
Any claims or litigation, with or without merit, could be costly and
could result in a diversion of management's attention, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Adverse determinations in such claims or litigation could
also have a material adverse effect on the Company's business, financial
condition and results of operations.
RISK OF ERRORS OR FAILURES; PRODUCT LIABILITY RISKS
The complex nature of the Company's products can make the detection of
errors or failures in certain of its software products difficult when such
products are introduced, which may result in delays and lost revenues during the
correction process. In addition, there can be no assurance that any technology
licensed by the Company for use in its products does not contain errors that
would adversely affect such products. Despite testing by the Company and current
and prospective customers, there can be no assurance that errors will not be
discovered in new products or releases after commencement of commercial
shipments, possibly resulting in delay, adverse publicity, loss of market
acceptance and claims against the Company.
A malfunction or the inadequate design of the Company's products could
result in tort or warranty claims. The Company generally attempts to reduce the
risk of such losses to itself and to the companies from which the Company
licenses technology through warranty disclaimers and liability limitation
clauses in its license agreements. There can be no assurance that the Company
has obtained adequate contractual protection in all instances or where otherwise
required under agreements the Company has entered into with others or that such
measures will be effective in limiting the Company's liability to end users and
9
<PAGE>
to the companies from which the Company licenses technology. The Company also
relies on "shrink wrap" license agreements that are not signed by the end user
and, therefore, may be unenforceable under the laws of certain jurisdictions.
The Company currently has product liability insurance. However, there can be no
assurance that adequate insurance coverage was obtained by the Company and any
product liability claim against the Company for damages resulting from security
breaches could be substantial and could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
a well-publicized actual or perceived security breach could adversely affect the
market's perception of security products in general, or the Company's products
in particular, regardless of whether such breach is attributable to the
Company's products. This could result in a decline in demand for the Company's
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS; RISK OF NEW PRODUCT INTRODUCTION
The network security industry is characterized by rapid changes,
including evolving industry standards, frequent new product introductions,
continuing advances in technology and changes in customer requirements and
preferences. Advances in techniques by individuals and entities seeking to gain
unauthorized access to networks could expose the Company's existing products to
new and unexpected attacks and require accelerated development of new products
or enhancements to existing products. There can be no assurance that the Company
will be able to counter challenges to its current products, that the Company's
future product offerings will keep pace with technological changes implemented
by competitors or persons seeking to breach network security, that its products
will satisfy evolving consumer preferences or that the Company will be
successful in developing and marketing products for any future technology.
Failure to develop and introduce new products and product enhancements in a
timely fashion could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK OF DEFECTS AND DEVELOPMENT DELAYS
The Company may experience schedule overruns in software development
triggered by factors such as insufficient staffing or the unavailability of
development-related software, hardware or technologies. Further, when developing
new software products, the Company's development schedules may be altered as a
result of the discovery of software bugs, performance problems or changes to the
product specification in response to customer requirements, market developments
or Company initiated changes. Changes in product specifications may delay
completion of documentation, packaging or testing, which may, in turn, affect
the release schedule of the product. When developing complex software products,
the technology market may shift during the development cycle, requiring the
Company either to enhance or change a product's specifications to meet a
customer's changing needs. These factors may cause a product to enter the market
behind schedule, which may adversely affect market acceptance of the product or
place it at a disadvantage to a competitor's product that has already gained
market share or market acceptance during the delay.
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<PAGE>
EVOLVING DISTRIBUTION CHANNELS
The Company has previously relied primarily on its direct sales force
for the sale and marketing of its products, but is now focusing on a channel
distribution strategy. The Company has added to its internal sales and marketing
staff in order to increase this sales effort. There can be no assurance the cost
of such expansion will not exceed the revenues generated or that the Company's
sales and marketing organization will successfully compete against the more
extensive and well-funded sales and marketing operations of certain of its
current and future competitors.
The Company has developed a distribution strategy that involves the
development of strategic alliances with resellers and international distributors
to enable the Company to achieve broad market penetration. Although the Company
has begun to establish its reseller distribution channel, there can be no
assurance that the Company will be able to continue to attract integrators and
resellers that will be able to market the Company's products effectively and
will be qualified to provide timely and cost-effective customer support and
service. The Company generally ships products to distributors, integrators and
resellers on a purchase-order basis, and its distributors, integrators and
resellers generally carry competing product lines. Therefore, there can be no
assurance that any distributor, integrator or reseller will continue to
represent the Company's products. The inability to recruit, or the loss of,
important sales personnel, distributors, integrators or resellers could
materially adversely affect the Company's business, financial condition and
results of operations in the future.
In addition, the Company has experienced difficulty in collecting, on a
timely basis, receivables from these distributors. Although the Company has
begun to make efforts to collect these receivables on a timely basis, there can
be no assurance that the Company will be able to do so and the failure to
collect such receivables could have a material adverse effect on the Company's
financial condition and results of operations.
INTERNATIONAL SALES
The Company has increased its presence in overseas markets by expanding
international distribution relationships for its suite of network security
products, including SmartWall and SmartGate. There can be no assurance, however,
that the Company will be successful in expanding its relationships with
international distributors or in gaining commercial acceptance of its products
abroad. To the extent that the Company expands international sales, currency
fluctuations could make its products less competitive in foreign markets and
contribute to fluctuations in the Company's operating results. Political
instability, difficulties in staffing and managing international operations,
potential insolvency of international resellers, longer receivable collection
periods and difficulty in collecting accounts receivable also pose risks to the
development of international marketing efforts. Moreover, the laws of certain
countries, or the enforcement thereof, may not protect the Company's products
and intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that these factors will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
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<PAGE>
LONG SALES CYCLE; SEASONALITY
Sales of the Company's products generally involve a significant
commitment of capital by customers, with the attendant delays frequently
associated with large capital expenditures. Prior to such sales, the Company
often permits customers to evaluate products being considered for license,
generally for a period of up to 30 days. For these and other reasons, the sales
cycle associated with the Company's products is likely to be lengthy and subject
to a number of significant risks over which the Company has little or no control
and, as a result, the Company believes that its quarterly results are likely to
vary significantly in the future. The Company may be required to ship products
shortly after it receives orders and, consequently, order backlog, if any, at
the beginning of any period may represent only a small portion of that period's
expected revenues. As a result, product revenues in any period will be
substantially dependent on orders booked and shipped in that period. The Company
plans its production and inventory levels based on internal forecasts of
customer demand, which is highly unpredictable and can fluctuate substantially.
If revenues fall significantly below anticipated levels, the Company's financial
condition and results of operations could be materially and adversely affected.
In addition, the Company may experience significant seasonality in its business,
and the Company's financial condition and results of operations may be affected
by such trends in the future. Such trends may include higher revenues in the
third and fourth quarters of the year and lower revenues in the first and second
quarters. The Company believes that revenues may tend to be higher in the third
quarter due to the fiscal year end of the U.S. government and higher in the
fourth quarter due to year-end budgetary pressures on the Company's commercial
customers and the tendency of certain of its existing and prospective customers
to implement changes in computer or network security prior to the end of the
calendar year.
LIQUIDITY AND CAPITAL REQUIREMENTS; DEPENDENCE ON THE PUBLIC OFFERING
The Company anticipates that its existing capital resources will be
adequate to satisfy its capital requirements at least through March 31, 1999.
The Company's future capital requirements, however, will depend on many factors,
including its ability to successfully market and sell its products. To the
extent that the funds generated by the Company's initial public offering in
1996, the recent sale of 4,000 shares of Series A Stock (see "Description of
Capital Stock -- Series A Convertible Preferred Stock"), and from the Company's
on-going operations are insufficient to fund the Company's future operating
requirements, it may be necessary to raise additional funds through public or
private financings. Any equity or debt financings, if available at all, may be
on terms that are not favorable to the Company and, in the case of equity
financings, could result in dilution to the Company's shareholders. If adequate
capital is not available, the Company may be required to curtail its operations
significantly.
RISK OF SALES TO GOVERNMENTS
In 1995, the Company derived a substantial portion of its revenue from
the sale of SmartWall to departments and agencies of the U.S. government and
government contractors. In 1996, the Company's revenues were attributable, in
part, to a contract with the National Security Agency. In 1997, approximately
one-third of the Company's total sales were attributable to contracts with
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<PAGE>
various agencies and departments of the United States government and of state
and local governments. Because no government agency or department has an
obligation to award contracts to, or to purchase products from, the Company in
the future, the Company believes that future government contracts and orders for
its network security products will in part be dependent upon the continued
favorable reaction of government agencies and departments to the development
capabilities of the Company and the reliability and perception of its products.
There can be no assurance that the Company will be able to sell its products to
government departments and agencies and government contractors or that such
sales, if any, will result in commercial acceptance of the Company's products.
In addition, reductions or delays in funds available for projects the Company is
performing or to purchase its products could have an adverse impact on the
Company's government contracts business.
Contracts involving the U.S. government are also subject to the risks of
disallowance of costs upon audit, changes in government procurement policies,
the necessity to participate in competitive bidding and, with respect to
contracts involving prime contractors or government-designated subcontractors,
the inability of such parties to perform under their contracts. The Company is
also exposed to the risk of increased or unexpected costs, causing losses or
reduced profits, under government and certain third-party contracts. Any of the
foregoing events could have a material adverse effect on the Company's business,
financial condition and results of operations.
EFFECT OF GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS
The Company currently sells its products abroad and intends to continue
to expand its relationships with international distributors for the sale of its
products overseas. The Company's international sales and operations could be
subject to risks such as the imposition of governmental controls, export license
requirements, restrictions on the export of critical technology, trade
restrictions and changes in tariffs. In particular, the Company's information
security products are subject to the export restrictions administered by the
U.S. Department of Commerce, which, in the case of some products, permit the
export of encryption products only with a specific export license. These export
laws also prohibit the export of encryption products to a number of countries,
individuals and entities and may restrict exports of some products to a narrow
range of end-users. In certain foreign countries, the Company's distributors are
required to secure licenses or formal permission before encryption products can
be imported. While the Company has obtained a license exception to export strong
encryption from the U. S. Department of Commerce, there is no assurance that the
Company or its distributors will be able to secure required licenses in a timely
manner, if at all. As a result, foreign competitors that face less stringent
controls on their products may be able to compete more effectively than the
Company in the global network security market. There can be no assurance that
these factors will not have a material adverse effect on the Company's business,
financial condition and results of operations.
MARKET VOLATILITY
The market price of the Company's Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results and other factors, such as announcements of new products by the Company
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or its competitors and changes in financial estimates by securities analysts or
other events. Moreover, the stock market has experienced extreme volatility that
has particularly affected the market prices of equity securities of many
technology companies and that has often been unrelated and disproportionate to
the operating performance of such companies. Broad market fluctuations, as well
as economic conditions generally and in the software industry specifically, may
adversely affect the market price of the Company's Common Stock.
USE OF PROCEEDS
There will be no proceeds to the Company from the sale of the Shares by
the Selling Stockholders. Any proceeds of sales of Common Stock received by the
Selling Stockholders will be retained by the Selling Stockholders. If all of the
Warrants issued and issuable to the Selling Stockholders are exercised, the
Company will receive gross proceeds of approximately $2.8 million (based on the
conversion price of the Series A Stock on January 5, 1998), which proceeds the
Company expects to use for general corporate purposes. There can be no assurance
that any of such Warrants will be exercised. In addition, with respect to Shares
that may be issued in payment of dividends on the Series A Stock, the Company
will not be required to pay dividends on the Series A Stock in cash. See
"Selling Stockholders."
SELLING STOCKHOLDERS
The following table sets forth the names of the Selling Stockholders,
the number of shares of Common Stock beneficially owned by each Selling
Stockholder as of January 5, 1998 and the number of Shares that may be offered
for sale pursuant to this Prospectus by each such Selling Stockholder. Except as
set forth below, none of the Selling Stockholders has held any position, office
or other material relationship with the Company or any of its affiliates within
the past three years other than as a result of the transaction that results in
its ownership of shares of Common Stock. The Shares may be offered from time to
time by the Selling Stockholders named below. However, such Selling Stockholders
are under no obligation to sell all or any portion of such Shares, nor are the
Selling Stockholders obligated to sell any such Shares immediately pursuant to
the Registration Statement of which this Prospectus forms a part. Because the
Selling Stockholders may sell all or part of their Shares, no estimate can be
given as to the number of shares of Common Stock that will be held by any
Selling Stockholder upon termination of any offering made hereby.
Pursuant to Rule 416 under the Securities Act, Advantage, Wharton, Rush
and JMI may also offer and sell an indeterminate number of additional shares of
Common Stock that may become issuable upon conversion of and in payment of
dividends on the Series A Stock and upon exercise of the Warrants (described
below) (whether owned as of the date of this Prospectus or hereafter acquired)
as a result of anti-dilution provisions contained as the Certificate of
Designations of Series A Convertible Preferred Stock ("Series A Certificate")
and the Warrants (including by reason of changes in the conversion price of the
Series A Stock in accordance with the terms of the Series A Certificate). Such
additional shares are not included in the following table.
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<PAGE>
<TABLE>
<CAPTION>
Common Stock Beneficially
Owned After Offering (1)
------------------------
Shares of Common
Name of Selling Stock Beneficially Common Stock Percent of
Stockholder Owned Prior to Offered Hereby Number Outstanding
Offering
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advantage Fund II Ltd. 1,608,678(2)(4)(5) 2,250,000(2)(4)
0 0
Wharton Capital
Partners, Ltd. 48,000(3) 48,000(3) 0 0
Dennis Rush 12,000(3) 12,000(3) 0 0
JMI Equity Fund II, L.P. 450,665(6) 383,999(6) 66,666 *
Bryan T. Vanas 74,428 74,428 0 0
Stanley Shapiro 68,583 33,333 35,250 *
Burnett H. Moody 53,262 12,151 41,111 *
Norman D. Fine 20,043 9,488 10,555 *
Golden Eagle Partners 50,506 45,506 5,000 *
Shapiro Family Trust (7) 82,318 54,540 27,778 *
Joseph and Rosa Lupo 39,854 39,854 0 0
Lee DeVisser Trusts 109,856 109,856 0 0
Lewis M. Schott 330,420 253,920 76,500 *
John J. Egan IV (8) 24,776 13,665 11,111 *
Steven A. Cohen 182,300 182,300 0 0
Kenneth Lissak 20,000 20,000 0 0
- --------------------------------------------
</TABLE>
* Less than 1%.
(1) Assumes the sale of all Shares.
(2) On December 8, 1997, the Company issued 4,000 shares of Series A Stock
to Advantage for $4 million in the aggregate. Each share of Series A
Stock is convertible into shares of Common Stock and warrants to
purchase shares of Common Stock ("Series A Warrants").
(3) As a result of the issuance of the 4,000 shares of Series A Stock, the
Company issued to Wharton for its services as financial consultant,
warrants to purchase 60,000 shares of Common Stock at an exercise price
of $4.725 per share ("Consultant Warrants"). 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 Consultant Warrants expire on
December 8, 2002.
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<PAGE>
(4) 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 Company fails to file the registration
statement when required under its registration rights agreement with
Advantage, (2) the registration statement is not ordered effective by
the SEC within 90 days after December 8, 1997 or the Company fails to
request acceleration of the effective date of such registration
statement when required under such registration rights agreement, (3)
the registration statement ceases to be available for use by any holder
of Series A Stock that is named therein as a selling stockholder for any
reason, or (4) a holder of Series A Stock becomes unable to convert any
shares of Series A Stock in accordance with the Series A Certificate
(other than by reason of the 4.9% limitation described below), then (A)
the applicable Conversion Percentage is permanently reduced by 2% per
month up to a maximum aggregate reduction in the Conversion Percentage
of 10% and (B) the Ceiling Price is permanently reduced by $.0954 per
month up to a maximum aggregate reduction in the Ceiling Price of $.477.
However, in lieu of each such reduction, the Company can make cash
payments equal to 2% of the aggregate subscription price per share
($1,000 per share) of Series A Stock (which amount is limited to 10% of
the aggregate subscription price). The Conversion Amount is adjusted in
the event the Company issues certain rights or warrants or distributes
to the holders of securities junior to the Series A Stock evidences of
indebtedness or assets. The "Average Market Price" is the average of the
lowest sale price on the Nasdaq National Market on each of the five
trading days having the lowest sale price during the 25 consecutive
trading days prior to the conversion 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
the 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
16
<PAGE>
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%.
Also includes 250,000 shares of Common Stock that may be issued in
payment of dividends on the Series A Stock. See "Description of Capital
Stock - Series A Convertible Preferred Stock."
(5) On December 8, 1997, the Company and Advantage entered into a commitment
letter pursuant to which Advantage agreed to purchase shares of a new
series of preferred stock for $4 million on the same terms and
conditions as the Series A Stock, subject to certain conditions. See
"Description of Capital Stock - Series A Convertible Preferred Stock."
(6) Includes 383,999 shares of Common Stock currently issuable on exercise
of a warrant issued by the Company to JMI at an exercise price of $3.125
per share. This warrant expires on June 18, 2006. The number of shares
of Common Stock issuable on exercise of this warrant and the exercise
price per share are subject to adjustment in certain circumstances. This
amount does not include 6,666 shares of Common Stock issuable on
exercise of an option issued by the Company to Harry S. Gruner, a
general partner of JMI Partners II, L.P. (the general partner of JMI).
Mr. Gruner is a director of the Company. The current exercise price of
this option is $9.00 per share.
(7) Charlyn M. Page, trustee of the Shapiro Family Trust, is the wife of a
former executive officer of the Company.
(8) John J. Egan IV served as a consultant to the Company from February,
1996 to February, 1997.
PLAN OF DISTRIBUTION
The Shares are being offered on behalf of the Selling Stockholders, and
the Company will not receive any proceeds from this offering. See "Use of
Proceeds." The Shares may be sold or distributed from time to time by the
Selling Stockholders, or by pledgees, donees or tranferees of, or other
successors in interest to, the Selling Stockholders, directly to one or more
purchasers (including pledgees) or through brokers, dealers or underwriters who
may act solely as agents or may acquire Shares as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices, or at fixed prices, which may be changed. The
distribution of the Shares may be effected in one or more of the following
methods: (1) ordinary brokers' transactions, which may include long or short
sales; (2) transactions involving cross or block trades or otherwise on the
Nasdaq National Market or on any other stock exchange or trading facility on
which the Common Stock may be trading; (3) purchases by brokers, dealers or
underwriters as principal and resale by such purchasers for their own accounts
pursuant to this Prospectus; (4) "at the market" to or through market makers or
into an existing market for the Common Stock; (5) in other ways not involving
market makers or established trading markets, including direct sales to
purchasers or sales effected through agents; (6) through transactions in
options, swaps or other derivatives (whether exchange-listed or otherwise), or
(7) any combination of the foregoing, or by any other legally available means.
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<PAGE>
In addition, the Selling Stockholders or their successors in interest may enter
into hedging transactions with broker-dealers who may engage in short sales of
shares of Common Stock in the course of hedging the positions they assume with
the Selling Stockholders. The Selling Stockholders or their successors in
interest may also enter into option or other transactions with broker-dealers
that require the delivery by such broker-dealers of the Shares, which Shares may
be resold thereafter pursuant to this Prospectus.
In addition, the Selling Stockholders may, from time to time, sell short
the Common Stock of the Company, and in such instances, this Prospectus may be
delivered in connection with such short sales and the Shares offered hereby may
be used to cover such short sales. Any or all of the sales or other transactions
involving the Shares described above, whether effected by the Selling
Stockholders, any broker-dealer or others, may be made pursuant to this
Prospectus. In addition, any Shares that qualify for sale pursuant to Rule 144
under the Securities Act may be sold under Rule 144 rather than pursuant to this
Prospectus. The Shares may also be offered in one or more underwritten
offerings, on a firm commitment or best efforts basis.
From time to time the Selling Stockholders may transfer, pledge, donate
or assign their Shares to lenders, family members and others and each of such
persons upon acquiring the Shares will be deemed to be a "Selling Stockholder"
for purposes of this Prospectus. The number of Shares beneficially owned by the
Selling Stockholders who so transfer, pledge, donate or assign Shares will
decrease as and when they take such actions. The plan of distribution for Shares
sold hereunder will otherwise remain unchanged, except that the transferees,
pledgees, donees or other successors will be Selling Stockholders hereunder.
Brokers, dealers, underwriters or agents participating in the
distribution of the Shares as agents may receive compensation in the form of
commissions, discounts or concessions from the Selling Stockholders and/or
purchasers of the Shares for whom such broker-dealers may act as agent, or to
whom they may sell as principal, or both (which compensation as to a particular
broker-dealer may be less than or in excess of customary commissions). The
Selling Stockholders and any broker-dealers who act in connection with the sale
of Shares hereunder may be deemed to be "underwriters" within the meaning of the
Securities Act, and any commissions they receive and proceeds of any sale of
Shares may be deemed to be underwriting discounts and commissions under the
Securities Act. Neither the Company nor any Selling Stockholder can presently
estimate the amount of such compensation. The Company knows of no existing
arrangements between any Selling Stockholder and any other stockholder, broker,
dealer, underwriter or agent relating to the sale or distribution of the Shares.
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Shares may not simultaneously engage
in market making activities with respect to the Company's Common Stock for a
period of one business day prior to the commencement of such distribution and
ending upon such person's completion of participation in the distribution,
subject to certain exceptions for passive market making transactions. In
addition and without limiting the foregoing, the Selling Stockholders will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M, which
provisions may limit the timing of purchases and sales of shares of Common Stock
by the Selling Stockholders.
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<PAGE>
At the time a particular offer of Shares is made, to the extent
required, a supplemental prospectus will be distributed that will set forth the
number of shares being offered and the terms of the offering including the name
or names of any underwriters, dealers or agents, the purchase price paid by an
underwriter for the Shares purchased from the Selling Stockholders and any
discounts, concessions or commissions allowed or reallowed or paid to dealers.
In order to comply with the securities laws of certain states, if
applicable, the Shares may be sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain states the Shares may
not be sold unless the Shares have been registered or qualified for sale or an
exemption from registration or qualification requirements is available and is
complied with.
The Company will pay substantially all of the expenses incident to the
registration, offering and sale of the Shares to the public other than
commissions or discounts of underwriters, broker-dealers or agents and the
expenses of counsel to the Selling Stockholders. Such expenses are estimated to
be $60,000. The Company has also agreed to indemnify Advantage, Wharton, Rush,
JMI and certain related persons against certain liabilities, including
liabilities under the Securities Act.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue up to 33,333,333 shares of Common
Stock, $0.001 par value, and 13,333,333 shares of Preferred Stock, $0.001 par
value.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Restated Certificate of
Incorporation and Restated Bylaws, and by the provisions of applicable law.
COMMON STOCK
As of December 31, 1997, there were 13,070,235 shares of Common Stock
outstanding that were held of record by approximately 79 shareholders.
The holders of Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of shareholders. The holders of
Common Stock are not entitled to receive dividends until all accrued and unpaid
dividends are paid on the Series A Stock. Dividends, if any, may be declared by
the Board of Directors out of funds legally available for the payment of
dividends. Dividends may be paid in cash, in property or in shares of capital
stock. In the event of any voluntary or involuntary liquidation, sale, or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and liquidation
preferences of any outstanding shares of Preferred Stock. Holders of Common
Stock have no preemptive rights to subscribe for any of the Company's securities
or rights to convert their Common Stock into any other securities. There are no
redemption or sinking fund provisions applicable to the Common Stock.
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<PAGE>
PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to
13,333,333 shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without any further vote or action by shareholders. The issuance
of preferred stock may have the effect of delaying or preventing a change in
control of the Company.
SERIES A CONVERTIBLE PREFERRED STOCK
On December 8, 1997, the Company issued 4,000 shares of Series A Stock
to Advantage for $4 million in the aggregate. Each share of Series A Stock is
convertible into shares of Common Stock and Series A Warrants.
As a result of the issuance of the 4,000 shares of Series A Stock, the
Company issued to Wharton for its services as the Company's exclusive financial
consultant, Consultant Warrants to purchase 60,000 shares of Common Stock at an
exercise price of $4.725 per share. As of January 5, 1998, Wharton assigned
Consultant Warrants to purchase 12,000 shares of Common Stock to Dennis Rush.
The number of shares issuable on exercise of the Consultant Warrants and the
exercise price per share is subject to adjustment in certain circumstances. The
Company also paid Wharton a fee of $200,000. The Consultant Warrants expire on
December 8, 2002. The terms of the Series A Stock and the Consultant Warrants
were determined by the Company's Board of Directors.
On December 8, 1997, the Company and Advantage entered into a commitment
letter ("Commitment Letter") pursuant to which Advantage agreed to purchase
shares of a new series of preferred stock for $4 million on the same terms and
conditions as the Series A Stock, subject to certain conditions, some of which
are that (1) the Company obtain shareholder approval with respect to the
issuance of the Series A Stock and any new series of preferred stock pursuant to
certain rules of the Nasdaq National Market, (2) the Company's stockholders'
equity, including the Series A Stock, is at least $13.5 million, and (3) the
ratio of the Company's total liabilities to stockholders' equity, including the
Series A Stock, is not less than 1:4. The commitment becomes effective 90 days
after the Registration Statement of which this Prospectus forms a part (the
"Registration Statement") has been declared effective by the SEC, 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 90 days have elapsed since the Registration
Statement has been declared effective by the SEC 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
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<PAGE>
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 ending on the 60th day following the date the
Registration Statement is declared effective by the SEC and a right of first
refusal on any offshore or discounted financings until June 8, 1998. Wharton has
agreed that its rights as described in the preceding sentence are subject and
secondary to the rights of Advantage and do not apply to any sale of preferred
stock pursuant to the Commitment Letter.
Under the Wharton Letter, the Company is obligated to issue additional
warrants to Wharton to purchase 15,000 shares of Common Stock for each $1
million of additional financing provided by persons introduced by Wharton
(including the transaction contemplated by the Commitment Letter) at an exercise
price of $4.725 per share and to pay Wharton a consulting fee equal to 5% of the
amount raised.
The net proceeds of the offering ($3.8 million) have been, and the net
proceeds of any additional issuance of pursuant to the Commitment Letter will
be, used for general working capital purposes.
On December 3, 1997, the Company entered into a registration rights
agreement with Advantage ("Advantage Registration Rights Agreement") and, on
December 8, 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 is obligated to file the 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. Advantage, Wharton and 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 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.
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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 Company fails to
file the Registration Statement when required under the Advantage Registration
Rights Agreement, (2) the Registration Statement is not ordered effective by the
SEC within 90 days after December 8, 1997 or the Company fails to request
acceleration of the effective date of the Registration Statement when required
under the Advantage Registration Rights Agreement, (3) 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 (4) a holder of Series
A Stock becomes unable to convert any shares of Series A Stock in accordance
with the 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 of Directors may from time to time authorize, (3) on a parity
with the shares of any additional class of preferred stock (or series of
preferred stock of such class) that the Board of Directors or the stockholders
may from time to time authorize, which class (or series thereof) by its terms
ranks on a parity with the shares of Series A Stock and (4) senior to any other
class or series of preferred stock (other than as stated in the immediately
preceding clauses (2) and (3)) of the Company.
STATED CAPITAL. Under the Series A Certificate, the amount to be
represented in stated capital at all times for each share of Series A Stock is
required to be the greater of (i) the quotient obtained by dividing (a) the sum
of (1) $1,000, (2) to the extent legally available, the accrued but unpaid
dividends on such share of Series A Stock, and (3) an amount equal to the
accrued and unpaid interest on dividends in arrears through the date of
determination by (b) the applicable Conversion Percentage and (ii) an amount
equal to the product obtained by multiplying (x) the number of shares of Common
Stock that would, at the time of such determination, be issuable on conversion
of one share of Series A Stock and any accrued and unpaid dividends thereon and
any accrued and unpaid interest on dividends thereon in arrears (determined
without regard to the 4.9% limitation) times (y) the arithmetic average of the
closing bid price of the Common Stock for the five consecutive trading days
ending one trading day prior to the date of such determination. The Company is
required to take such action as may be required to maintain the required amount
of stated capital not less frequently than monthly.
VOTING RIGHTS. The Series A Stock generally has no voting rights except
as otherwise provided by the Delaware General Corporation Law. However, the
affirmative vote or consent of the holders of a majority of the outstanding
shares of the Series A Stock, voting separately as a class, will be required for
(1) any amendment, alteration or repeal, whether by merger or consolidation or
otherwise, of the Company's Certificate of Incorporation if the amendment,
alteration or repeal materially and adversely affects the powers, preferences or
special rights of the Series A Stock, or (2) the creation and issuance of any
security of the Company that is senior to the Series A Stock as to dividend
rights or liquidation preference; provided, however, that any increase in the
authorized preferred stock of the Company or the creation and issuance of any
stock that is both junior as to dividend rights and liquidation preference is
not deemed to affect materially and adversely such powers, preferences or
special rights and any such increase or creation and issuance may be made
without any such vote by the holders of Series A Stock except as otherwise
required by law.
MANDATORY REDEMPTION. The Series A Certificate provides that the Company
is not obligated to issue, upon conversion of the Series A Stock, more than the
number of shares of Common Stock that the Company may issue pursuant to the
rules of Nasdaq ("Maximum Share Amount"), less the aggregate number of shares of
Common Stock issued by the Company as dividends on the Series A Stock. The
Company will seek 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
23
<PAGE>
holder may require the Company to redeem such portion of its Series A Stock that
cannot be converted as a result of this limitation at the "Share Limitation
Redemption Price" per share. The "Share Limitation Redemption Price" is the
greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000, (2)
an amount equal to the accrued but unpaid dividends on the share of Series A
Stock to be redeemed, and (3) an amount equal to the accrued and unpaid interest
on dividends in arrears on such share through the applicable redemption date by
(b) the applicable Conversion Percentage and (ii) an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock that would, but
for the redemption pursuant to this provision of the Series A Certificate, be
issuable on conversion of one share of Series A Stock and any accrued and unpaid
dividends thereon and any accrued and unpaid interest on dividends thereon in
arrears (determined without regard to the 4.9% limitation) times (y) the
arithmetic average of the closing bid price of the Common Stock for the five
consecutive trading days ending one trading day prior to the redemption date.
In addition, the Company is obligated to redeem all outstanding shares
of Series A Stock on December 8, 2000 at the "Redemption Price" per share. The
"Redemption Price" is the greater of (i) the quotient obtained by dividing (a)
the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends
on the share of Series A Stock to be redeemed, and (3) an amount equal to the
accrued and unpaid interest on dividends in arrears on such share through the
applicable redemption date by (b) the applicable Conversion Percentage and (ii)
an amount equal to the product obtained by multiplying (x) the number of shares
of Common Stock that would, but for the redemption pursuant to this provision of
the Series A Certificate, be issuable on conversion of one share of Series A
Stock and any accrued and unpaid dividends thereon and any accrued and unpaid
interest on dividends thereon in arrears (determined without regard to the 4.9%
limitation) times (y) the arithmetic average of the closing bid price of the
Common Stock for the five consecutive trading days ending one trading day prior
to the redemption date.
OPTIONAL REDEMPTION BY THE COMPANY. As long as the Company is in
compliance in all material respects with its obligations to the holders of
Series A Stock under the Series A Certificate and the Advantage Registration
Rights Agreement, the Company may redeem all or, from time to time, part of the
outstanding shares of Series A Stock at the Redemption Price per share.
OPTIONAL REDEMPTION BY THE HOLDERS OF SERIES A STOCK. In the event an
"Optional Redemption Event" occurs, each holder of Series A Stock has the right
to require the Company to redeem all or a portion its shares of Series A Stock
at the "Optional Redemption Price" per share. "Optional Redemption Event" means
any one of the following: (1) for any period of five consecutive trading days
there is no closing bid price of the Common Stock on any national securities
exchange or the Nasdaq National Market; (2) the Common Stock ceases to be listed
for trading on the Nasdaq National Market, the New York Stock Exchange ("NYSE"),
the American Stock Exchange ("AMEX") or the Nasdaq SmallCap Market; (3) the
inability for 30 or more days (whether or not consecutive) of any holder of
shares of Series A Stock who is entitled to optional redemption rights to sell
such shares of Common Stock issued or issuable on conversion of shares of Series
A Stock pursuant to the Registration Statement for any reason on each of such 30
days; (4) the Company fails or defaults in the timely performance of any
material obligation to a holder of shares of Series A Stock under the terms of
the Series A Certificate or under the Advantage Registration Rights Agreement or
any other agreements or documents entered into in connection with the issuance
of shares of Series A Stock; (5) any consolidation or merger of the Company with
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or into another entity (other than a merger or consolidation of a subsidiary of
the Company into the Company or a wholly owned subsidiary of the Company) where
the shareholders of the Company immediately prior to such transaction do not
collectively own at least 51% of the outstanding voting securities of the
surviving corporation of such consolidation or merger immediately following such
transaction or the common stock of such surviving corporation is not listed for
trading on the Nasdaq National Market, the NYSE, the AMEX or the Nasdaq SmallCap
Market; or (6) the taking of any action, including any amendment to the
Company's Certificate of Incorporation, that materially and adversely affects
the rights of any holder of shares of Series A Stock.
The "Optional Redemption Price" is the greater of (i) the quotient
obtained by dividing (a) the sum of (1) $1,000, (2) an amount equal to the
accrued but unpaid dividends on the share of Series A Stock to be redeemed, and
(3) an amount equal to the accrued and unpaid interest on dividends in arrears
on such share through the applicable redemption date by (b) the applicable
Conversion Percentage and (ii) an amount equal to the product obtained by
multiplying (x) the number of shares of Common Stock that would, but for the
redemption pursuant to this provision of the Series A Certificate, be issuable
on conversion of one share of Series A Stock and any accrued and unpaid
dividends thereon and any accrued and unpaid interest on dividends thereon in
arrears (determined without regard to the 4.9% limitation) times (y) the
arithmetic average of the closing bid price of the Common Stock for the five
consecutive trading days ending one trading day prior to the redemption date.
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.
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<PAGE>
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.
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.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the shares of
Common Stock offered hereby will be passed upon for the Company by Kirkpatrick &
Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington, D.C. 20036.
EXPERTS
The balance sheets as of December 31, 1995 and 1996 and the statements
of operations, shareholders' equity (deficit) and cash flows for the period from
and for each of the three years in the period ended December 31, 1996
incorporated by reference in this Prospectus have been incorporated by reference
herein in reliance upon the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
26
<PAGE>
No dealer, salesperson or any
other person is authorized to give any
information or to make any
representations in connection with this
Prospectus and, if given or made, such 3,543,040 Shares
information or representations must not
be relied upon as having been authorized
by the Company. This Prospectus does not
constitute an offer to sell or a
solicitation of an offer to buy any
security other than the securities V-ONE CORPORATION
offered by this Prospectus, or an offer
to sell or a solicitation of an offer to
buy any securities by anyone in any
jurisdiction in which such offer or
solicitation is not authorized or is
unlawful. The delivery of this
Prospectus shall not, under any
circumstances, create any implication
that the information herein is correct
as of any time subsequent to the date of
the Prospectus.
------------------------ COMMON STOCK
TABLE OF CONTENTS
Page
----
Available Information................. 3
Incorporation of Certain
Documents by Reference............. 3
The Company........................... 4
Risk Factors.......................... 5 _____________
Use of Proceeds.......................14
Selling Stockholders..................14 PROSPECTUS
Plan of Distribution..................17 _____________
Description of Capital Stock..........19
Legal Matters.........................26
Experts...............................26 __________, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses expected to be incurred by
the Company in connection with the sale and distribution of the shares of Common
Stock being registered. With the exception of the registration fee, all amounts
shown are estimates.
SEC registration fee.............................. $ 3,931.78
Listing fees...................................... 18,700.00
Printing and engraving expenses................... 5,000.00
Legal fees and expenses .......................... 20,000.00
Accounting fees and expenses...................... 5,000.00
Miscellaneous fees and expenses................... 5,000.00
-----------
Total..................................... $ 57,631.78
===========
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law, as amended
("DGCL"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding, if
the person acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. Section 145 further provides that a corporation
similarly may indemnify any such person serving in any such capacity who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, against expenses actually and reasonably incurred in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
II-1
<PAGE>
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses that the Court of Chancery or such other court shall deem proper.
Article Ninth of the Company's Amended and Restated Certificate of
Incorporation provides that the Company shall indemnify, to the fullest extent
now or hereafter permitted by law, each director, officer, employee or agent
(including each former director, officer, employee or agent) of the Company who
was or is made party to or a witness in or is threatened to be made a party to
or a witness in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was an authorized representative of the Company, against all
expenses (including attorneys' fees and disbursements), judgments, fines
(including excise taxes and penalties) and amounts paid in settlement actually
and reasonably incurred by him in connection with such action, suit or
proceeding.
Article VI, Section 6.1 of the Company's Amended Bylaws provides that
each person who was or is made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding") by reason of the fact that he/she is
or was a Director, officer, agent or employee of the Company, shall be
indemnified and held harmless by the Company to the fullest extent authorized by
the General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended, against any expenses (including attorneys fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by such person in connection therewith. Notwithstanding the foregoing,
no Director shall be indemnified nor held harmless in violation of the
provisions set forth in the Company's Amended and Restated Certificate of
Incorporation; and no Director, officer, agent or employee shall be indemnified
nor held harmless by the Company unless:
(i) In the case of conduct in his/her official capacity with the
Company, he/she acted in good faith and in a manner he/she
reasonably believed to be in the best interest of the Company;
(ii) In all other cases, his/her conduct was at least not opposed to
the best interests of the Company nor in violation of the Amended
and Restated Certificate of Incorporation, Bylaws or any
agreement entered into by the Company; and
(iii) In the case of any criminal proceeding, he/she had no reasonable
cause to believe that his/her conduct was unlawful.
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Exhibit 16. Exhibits.
Number Description of Exhibit
------ ----------------------
5 Opinion of Kirkpatrick & Lockhart LLP
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Kirkpatrick & Lockhart LLP (included in Exhibit 5)
24 Power of Attorney (see page II-5)*
- -------------------------
* Filed previously.
Exhibit 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement;
(iii)To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement is
on Form S-3 or Form S-8 and the information required to be
included in a post effective amendment by those paragraphs
is contained in periodic reports filed by the registrant
pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in
the registration statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Germantown, State of Maryland, on this
20th day of January, 1998.
V-ONE CORPORATION
By: /s/ David D. Dawson
-------------------------------------
David D. Dawson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ David D. Dawson
- ------------------------
David D. Dawson President, Chief Executive Officer January 20, 1998
and Director
/s/ Charles B. Griffis
- ------------------------
Charles B. Griffis Senior Vice President and January 20, 1998
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ James F. Chen*
- ------------------------
James F. Chen Chairman of the Board January 20, 1998
and Director
/s/ Charles C. Chen*
- ------------------------
Charles C. Chen Director January 20, 1998
/s/ Harry S. Gruner*
- ------------------------
Harry S. Gruner Director January 20, 1998
/s/ William E. Odom*
- ------------------------
William E. Odom Director January 20, 1998
</TABLE>
*By: /s/ Charles B. Griffis
-----------------------
Charles B. Griffis
Attorney-in-fact
II-5
-------------------------------
KIRKPATRICK & LOCKHART LLP
------------------------------
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone (202) 778-9000
Facsimile (202) 778-9100
January 16, 1998
V-ONE Corporation
20250 Century Boulevard, Suite 300
Germantown, MD 20874
Re: V-ONE Corporation
Registration Statement on Form S-3
Registration Number 333-43795
Ladies/Gentlemen:
We have acted as counsel to V-ONE Corporation, a Delaware corporation
("Corporation"), in connection with the preparation and filing of the
above-captioned Registration Statement on Form S-3, Registration Number
333-43795 ("Registration Statement"), under the Securities Act of 1933, as
amended, covering the resale of 3,543,040 shares of Common Stock, $0.001 par
value per share ("Common Stock"), of the Corporation issuable in connection with
the Corporation's Series A Convertible Preferred Stock and warrants to purchase
Common Stock issued and to be issued to Advantage Fund II Ltd.; Common Stock
issuable in connection with warrants to purchase Common Stock issued to Wharton
Capital Partners, Ltd., Dennis Rush and JMI Equity Fund II, L.P. and 849,041
shares of Common Stock held by Bryan T. Vanas, Stanley Shapiro, Burnett H.
Moody, Norman D. Fine, Golden Eagle Partners, the Shapiro Family Trust, Joseph
and Rosa Lupo, the Lee DeVisser Trusts, Lewis M. Schott, John J. Egan IV, Steven
A. Cohen and Kenneth Lissak (collectively, Bryan T. Vanas, Stanley Shapiro,
Burnett H. Moody, Norman D. Fine, Golden Eagle Partners, the Shapiro Family
Trust, Joseph and Rosa Lupo, the Lee DeVisser Trusts, Lewis M. Schott, John J.
Egan IV, Steven A. Cohen and Kenneth Lissak are referred to herein as the
"Holders").
We have examined copies of the Registration Statement, the Prospectus
forming a part thereof, the Certificate of Incorporation and Bylaws of the
Corporation, each as amended to date, the minutes of various meetings and
unanimous written consents of the Board of Directors and the shareholders of the
Corporation, and original, reproduced or certified copies of such records of the
Corporation and such agreements, certificates of public officials, certificates
of officers and representatives of the Corporation and others, and such other
documents, papers, statutes and authorities as we deem necessary to form the
basis of the opinions hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures and the conformity to original
documents of all documents supplied to us as copies. As to various questions of
fact material to
<PAGE>
V-ONE Corporation
January 16, 1998
Page 2
such opinions, we have relied upon statements and certificates of officers and
representatives of the Corporation and others.
Based on the foregoing, we are of the opinion that each of the 2,693,999
shares of Common Stock, when issued in accordance with the terms of (i) the
Certificate of Designations of Series A Convertible Preferred Stock of V-ONE
Corporation, (ii) the Common Stock Purchase Warrant dated January 5, 1998 to
purchase 48,000 shares of Common Stock issued by the Corporation to Wharton
Capital Partners, Ltd., (iii) the Common Stock Purchase Warrant dated January 5,
1998 to purchase 12,000 shares of Common Stock issued by the Corporation to
Dennis Rush, (iv) the Common Stock Purchase Warrant dated as of June 18, 1996
issued by the Corporation to JMI Equity Fund, II, L.P. ("JMI"), which originally
entitled JMI to purchase 400,000 shares of Common Stock, as the case may be,
will be, and the 849,041 shares of Common Stock held by the Holders are, duly
and validly issued, fully paid and nonassessable.
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the Prospectus forming part of the Registration Statement and to
your filing a copy of this Opinion as an exhibit to said Registration Statement.
Sincerely,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
V-ONE Corporation on Form S-3 (File No. 333-43795) of our report dated March 24,
1997, on our audits of the financial statements and financial statement
schedules of V-ONE Corporation as of December 31, 1996 and 1995, and for the
years ended December 31, 1996, 1995 and 1994, which report is included in V-ONE
Corporation's Annual Report on Form 10-K for the year ended December 31, 1996.
We also consent to the references to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
McLean, VA
January 20, 1998
