UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-21511
V-ONE CORPORATION
-----------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1953278
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20250 CENTURY BLVD., SUITE 300, GERMANTOWN, MARYLAND 20874
----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 515-5200
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 6, 1999
----- -----------------------------
COMMON STOCK, $0.001 PAR VALUE PER SHARE 16,781,075
<PAGE>
V-ONE Corporation
Quarterly Report on Form 10-Q
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Balance Sheets as of 3
June 30, 1999 (unaudited) and
December 31, 1998
Condensed Statements of Operations for 4
the Three and Six Months Ended June 30, 1999
(unaudited) and June 30, 1998 (unaudited)
Condensed Statements of Cash 5
Flows for the Six Months Ended
June 30, 1999 (unaudited) and
June 30, 1998 (unaudited)
Notes to the Condensed Financial 6
Statements (unaudited)
Item 2 Management's Discussion and 8
Analysis of Financial Condition
and Results of Operations
Item 3 Quantitative and Qualitative 11
Disclosures About
Market Risk
PART II. OTHER INFORMATION 12
Item 1 Legal Proceedings 12
Item 2 Changes in Securities and Use
of Proceeds 12
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of 13
Security Holders
Item 5 Other Information 13
Item 6 Exhibits and Reports in Form 8-K 13
Signatures 14
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
V-ONE CORPORATION
CONDENSED BALANCE SHEETS
June 30, December 31,
1999 1998
(unaudited)
------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 607,396 $ 635,959
Accounts receivable, net 591,216 513,221
Finished Goods Inventory, net 275,206 385,481
Prepaid expenses and other current assets 584,296 276,456
------------- --------------
Total current assets 2,058,114 1,811,117
Property and equipment, net 755,194 874,553
Licensing fee, net 113,850 255,378
Other assets 920,064 981,144
------------- --------------
Total assets $ 3,847,222 $ 3,922,192
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 2,310,141 $ 2,124,156
Deferred income 667,330 888,295
Notes payable - current 3,000,000 5,259
Capital lease obligations - current 74,632 70,775
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Total current liabilities 6,052,103 3,088,485
Capital lease obligations - noncurrent 160,275 197,982
------------- --------------
Total liabilities 6,212,378 3,286,467
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, $0.001 par value; 33,333,333 shares
authorized; 16,773,575 and 16,478,046 shares
issued and outstanding as of June 30, 1999
and December 31, 1998, respectively 16,773 16,478
Preferred Stock, Series B, $.001 par value;
13,333,333 authorized; 1,287,554 and zero
shares issued and outstanding as of June
30, 1999 and December 31, 1998, respectively. 1,287 -
Additional paid-in capital 33,734,777 30,361,685
Notes receivable from sales of stock (2,053,613) (50,021)
Accumulated deficit (34,064,380) (29,692,417)
------------- --------------
Total shareholders' equity (deficit) (2,365,156) 635,725
------------- --------------
Total liabilities and shareholders' $ 3,847,222 $ 3,922,192
equity (deficit) ============= ==============
The accompanying notes are an integral part of these financial statements.
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V-ONE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
(unaudited) (unaudited) (unaudited) (unaudited)
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Products $ 719,168 $1,033,907 $2,088,417 $2,241,380
Consulting and services 287,500 209,108 614,723 297,345
---------- ---------- ---------- ----------
Total revenues 1,006,668 1,243,015 2,703,140 2,538,725
---------- ---------- ---------- ----------
Cost of revenues:
Products 217,710 493,938 380,166 971,695
Consulting and Services 12,679 15,210 32,612 23,060
---------- ---------- ---------- ----------
Total cost of revenues 230,389 509,148 412,778 994,755
---------- ---------- ---------- ----------
Gross profit 776,279 733,867 2,290,362 1,543,970
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 1,465,898 1,616,055 2,873,594 3,097,238
General and administrative 556,962 824,888 1,592,799 2,022,900
Research and development 754,088 942,001 1,935,142 1,882,282
---------- ---------- ---------- ----------
Total operating expenses 2,776,948 3,382,944 6,401,535 7,002,420
---------- ---------- ---------- ----------
Operating loss (2,000,669) (2,649,077) (4,111,173) (5,458,450)
---------- ---------- ---------- ----------
Other (expense) income:
Interest expense (225,869) (30,686) (301,016) (43,465)
Interest income 33,869 40,436 40,226 107,990
---------- ---------- ---------- ----------
Total other (expense)
income (192,000) 9,750 (260,790) 64,525
---------- ---------- ---------- ----------
Net loss (2,192,669) (2,639,327) (4,371,963) (5,393,925)
Dividend on preferred stock --- 30,775 --- 80,104
---------- ---------- ---------- ----------
Loss attributable to holders
of common stock $(2,192,669) $(2,670,102) $(4,371,963) $(5,474,029)
========== ========== ========== ==========
Basic and diluted loss per
share attributable to
holders of common stock $ (0.13) $ (0.20) $ (0.26) $ (0.41)
========== ========== ========== ==========
Weighted average number of
common shares outstanding 16,773,553 13,674,308 16,741,757 13,382,382
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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V-ONE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
Six months Six months
ended ended
June 30, June 30,
1999 1998
(unaudited) (unaudited)
-------------- -------------
Cash flows from operating activities:
Net loss $ (4,371,963) $ (5,393,925)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 336,449 308,107
Amortization of deferred financing costs 155,424 -
Noncash charge related to issuance of warrants 394,000
Changes in assets and liabilities:
Accounts receivable (77,995) 22,079
Inventory 110,275 509,154
Prepaid expenses and other 152,816 23,417
Deferred income (220,965) 89,355
Deferred rent - (36,879)
Accounts payable and accrued expenses 35,985 680,556
-------------- -------------
Net cash used in operating activities (3,879,974) (3,404,136)
-------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (75,562) (120,954)
Collection of note receivable 678
-------------- -------------
Net cash used in investing activities (74,884) (120,954)
-------------- -------------
Cash flows from financing activities:
Exercise of options and warrants 197,174 116,892
Payment of debt financing costs (210,000) -
Issuance of preferred stock, net of
notes receivable 995,729 -
Payments of stock issuance costs (17,500) (39,413)
Payment of preferred stock dividends - (80,104)
Principal payments on capitalized
lease obligations (33,849) (27,741)
Repayment of note payable (5,259) (8,630)
Issuance of notes payable 3,000,000 -
-------------- ------------
Net cash provided by (used in)
financing activities 3,926,973 (38,996)
--------------- ------------
Net increase in cash and cash equivalents (28,563) (3,564,086)
Cash and cash equivalents at beginning of period 635,959 6,203,525
--------------- ------------
Cash and cash equivalents at end of period $ 607,396 $ 2,639,439
=============== ============
The accompanying notes are an integral part of these financial statements.
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V-ONE CORPORATION
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The condensed financial statements for the three and six months ended June 30,
1999 and June 30, 1998 are unaudited and reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management, necessary
to present fairly the results for the interim periods. These financial
statements should be read in conjunction with the audited financial statements
as of December 31, 1996, 1997 and 1998 and for the three years then ended, which
are included in the Company's 1998 Annual Report on Form 10-K ("Form 10-K").
The preparation of financial statements to be in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates and could impact future
results of operations and cash flows.
The results of operations for the three and six month periods ended June 30,
1999 are not necessarily indicative of the results expected for the full year
ending December 31, 1999.
2. Computation of Net Loss Per Common Share
Basic earnings (or loss) per share is computed by dividing net income (or loss)
by the weighted average number of shares of common stock outstanding. Diluted
earnings per share is computed by dividing net income (or loss) by the weighted
average common and potentially dilutive common equivalent shares outstanding.
However, the computation of diluted loss per share was antidilutive in each of
the quarters presented; therefore, basic and diluted loss per share are the
same.
3. Note Payable
On February 24, 1999, the Company entered into a Loan and Security Agreement
("Loan Agreement") with Transamerica Business Credit Corporation
("Transamerica"). Under the terms of the Loan Agreement, the Company received
$3.0 million under a term loan that bears interest at 12.53% per annum. Interest
is payable monthly in arrears. On March 31, 1999, the Company and Transamerica
entered into an Amendment Agreement ("First Amendment") to the Loan Agreement.
Under the terms of the First Amendment, Transamerica waived the default created
when the Company received a "going-concern" opinion from its independent
auditors. The Company agreed to (i) grant to TBCC Funding Trust II, an affiliate
of Transamerica, warrants to purchase 100,000 shares of Common Stock at an
exercise price of $3.25 and (ii) accept the additional financial covenant that
the Company's net worth would be $5 million at June 30, 1999 and September 30,
1999. The original warrants were valued at $131,000 using an option-pricing
model and the following assumptions: dividend yield of 0%; expected volatility
of 68%; risk-free interest rate of 5.35% and expected term of two years. On June
30, 1999, the Company and Transamerica entered into a second Amendment Agreement
("Second Amendment"). Under the terms of the Second Amendment, Transamerica has
(i) waived the requirement that the Company's net worth be $5 million on June
30, 1999, (ii) amended the promissory note issued by the Company in connection
with the Loan Agreement to extend the maturity date of the term note to February
28, 2000 and removed the requirement that Transamerica convert the term loan to
a revolving loan on February 28, 2000, and (iii) deleted the $360,000
acquisition fee. In consideration for the Second Amendment, the Company has
agreed to issue seven-year warrants to purchase 50,000 shares of the Company's
common stock at an exercise price of $3.75 per share, (ii) pay a $150,000 fee to
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Transamerica on February 28, 2000, (iii) use 30% of any future equity raised by
the Company after completion of the current round (approximately $10-12 million)
of financing to prepay the term loan, and (iv) repay $100,000 per month in
principal of the term loan beginning on September 1, 1999, and (v) pay the
balance of the principal and accrued and unpaid interest due on the term loan on
February 28, 2000. The additional 50,000 warrants granted in the Second
Amendment were valued at $41,000 using a dividend yield of 0%; expected
volatility of 68%; risk-free interest rate of 5.35% and expected term of two
years. The Loan Agreement contains certain covenants that restrict certain
activities of the Company including sales of assets, loans to other persons,
liens, dividends, stock redemption; investments in other persons, and creation
of partnerships, subsidiaries, joint ventures or management contracts. In
connection with this loan, the Company granted a security interest in all of its
assets, including its intellectual property, to the lender. If the Company is
unable to repay the loan or there is an event of default under the loan, the
lender could foreclose on its security interest.
A condition included in the terms of the 100,000 warrants granted on March 31,
1999 provided that the Company adjust the exercise price to $2.33 per share,
down from the original exercise price of $3.25 per share. This decrease in the
exercise price, caused by the issuance of the preferred stock at a price below
the $3.25 exercise price of the original warrants, resulted in an additional
$23,000 of debt financing costs.
4. Preferred Stock
On June 11, 1999, the Company issued 1,287,554 shares of Series B Convertible
Preferred Stock ("Series B Stock") in the aggregate to two Taiwanese investors
(the "Purchasers"), in equal amounts, for $2.33 per share, or $3 million in the
aggregate. Each share of Series B Stock is convertible into one share of Common
stock, $.001 par value per share, of the Company. Under the Subscription
Agreement dated as of June 11, 1999 between the Company and the Purchasers, the
Company agreed to issue the Series B Stock to the Purchasers in exchange for $1
million in cash and a promissory note in the amount of $2 million. The principal
amount of the promissory note is payable in two installments of $1 million each,
plus accrued interest, on July 14 and August 13, 1999. For the terms and
conditions of the Series B Stock refer to the Company's Form 8-K filed on June
11, 1999.
5. Subsequent Events
At December 31, 1998, the Company was in receipt of a "going concern" opinion
from its independent auditors and the Company did not meet the $4 million net
tangible assets and other requirements for continued listing on the Nasdaq
National Market. The Company is currently in review with Nasdaq to evaluate the
Company's eligibility for continued listing on the Nasdaq National Market. The
company has completed an equity private placement described in Note 4 and
intends to raise additional equity capital which, when combined with the $3
million is expected to add between $10 - $12 million in new equity. As of July
15, 1999 V-ONE has received the first $2 million of that investment, with the
balance to be received on August 13, 1999. Although the Company believes it will
be successful in maintaining compliance with the Nasdaq National Market
requirements, there can be no assurance that it will do so on a timely basis,
that it will be able to comply with the additional financial covenants in its
secured financing described in Note 4 above and as amended on June 30, 1999, or
close on the second private placement.
On July 1, 1999 Margaret Grayson, formerly a financial consultant to the
Company, joined V-ONE as Senior Vice President and Chief Financial Officer.
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934. These statements may differ in a
material way from actual future events. For instance, factors that could cause
results to differ from future events include rapid rates of technological change
and intense competition, among others. The Company's total revenue and operating
results have varied substantially from quarter to quarter and should not be
relied upon as an indication of future results. Several factors may affect the
ability to forecast the Company's quarterly operating results, including the
size and timing of individual software and hardware sales; the length of the
Company's sales cycle; the level of sales and marketing, research and
development and administrative expenses; and general economic conditions.
Operating results for a given period could be disproportionately affected by any
shortfall in expected revenue. In addition, fluctuation in revenue from quarter
to quarter will likely have an increasingly significant impact on the Company's
results of operations. 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. Because the Company's operating expenses
are based on anticipated revenue levels, a small variation in the timing of
recognition of revenue can cause significant variations in operating results
from quarter to quarter.
Readers are also referred to the documents filed by the Company with the SEC,
specifically the Company's latest Annual Report on Form 10-K that identifies
important risk factors for the Company.
RESULTS OF OPERATIONS
REVENUE
Total revenue decreased 19.0% to approximately $1,007,000 for the three months
ended June 30, 1999 from approximately $1,243,000 for the three months ended
June 30, 1998. This decrease was principally attributable to lower sales of the
Company's network security products, offset in part by higher maintenance and
consulting revenue. For the six months ended June 30, 1999, total revenue
increased 6.5% to approximately $2,703,000 from $2,539,000 for the same period
in 1998. Product revenue is derived principally from software licenses and the
sale of hardware products. Product revenue was approximately $719,000 and
$2,088,000 for the three and six months ended June 30, 1999, respectively, a
decrease of 30.4% and 6.8% from the same periods in 1998. Consulting and
services revenue is derived principally from fees for services complementary to
the Company's products, including consulting, maintenance and training.
Consulting and services revenue increased to approximately $288,000 and $615,000
for the quarter and six months ended June 30, 1999, respectively, representing
an increase of 37.5% and 106.7% over the same periods in 1998.
COST OF REVENUE
Total cost of revenue decreased to approximately $230,000 for the second quarter
of 1999 from $509,000 for the same quarter last year. Total cost of revenue
decreased as a percentage of total revenue to 22.9% for the three months ended
June 30, 1999 from 41.0% for the second quarter of 1998. For the six months
ended June 30, 1999, total cost of revenue dropped to approximately $509,000 as
compared to approximately $995,000 for the same period last year, which
represents a decrease in percentage of revenue to 15.3% for 1999 from 39.2% for
1998. Total cost of revenue is comprised of cost of product revenue and cost of
consulting and services revenue. The dollar and percentage decreases were
primarily attributable to a higher proportion of software licenses of the
Company's principal product, SmartGate, as compared to turnkey hardware sales,
primarily of sales of SmartWall.
8
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Cost of product revenue consists principally of the costs of computer hardware,
licensed technology, manuals and labor associated with the distribution and
support of the Company's products. Cost of product revenue decreased to
approximately $218,000 for the three months ended June 30, 1999 from
approximately $494,000 for the three months ended June 30, 1998. Cost of product
revenue as a percentage of product revenue was approximately 30.3% and 47.8% for
the three months ended June 30, 1999 and 1998, respectively. Cost of product
revenue decreased to approximately $380,000 for the six months ended June 30,
1999 from $972,000 for the same period last year. Total cost of product revenue
as a percentage of total product revenue decreased to 18.2% for the six months
of 1999 from 43.3% for the same period last year.
Cost of consulting and services revenue consists principally of personnel and
related costs incurred in providing consulting, support and training services to
customers. Cost of consulting and services revenue decreased slightly to
approximately $13,000 for the three months ended June 30, 1999 from
approximately $15,000 for the three months ended June 30, 1998. Cost of
consulting and services revenue increased slightly to approximately $33,000 for
the six months ended June 30, 1999 from approximately $23,000 for the six months
ended June 30, 1998. Cost of consulting and services revenue as a percentage of
consulting and services revenue was approximately 4.4% for the second quarter of
1999 and 7.3% for the three months ended June 30, 1998. For the six months
ending June 30, 1999, costs of consulting and services revenue was 5.3%, down
from 7.7% for the same period last year. The dollar increase for the three and
six months of 1999 was principally due to the increased number of maintenance
contracts provided to customers and the percentage decrease reflects the fact
that this amount was spread over a larger revenue base.
OPERATING EXPENSES
Sales and Marketing - Sales and marketing expenses consist principally of the
costs of sales and marketing personnel, advertising, promotions and trade shows.
Sales and marketing expenses decreased to approximately $1,466,000 for the three
months ended June 30, 1999 from approximately $1,616,000 for the three months
ended June 30, 1998. Expenses for the six months of 1999 decreased to $2,874,000
from $3,097,000 for the same period last year. Sales and marketing expenses as a
percentage of total revenue were approximately 145.6% for the three months ended
June 30, 1999 compared to 130.0% for the second quarter of 1998, while the six
months of 1999 dropped to 106.3% from 122.0% for the same period last year.
Sales and marketing expenses during the second quarter of 1999 decreased when
compared to the second quarter of 1998, but increased as a percentage of
revenue.
General and Administrative - General and administrative expenses consist
principally of the costs of finance, management and administrative personnel and
facilities expenses. General and administrative expenses decreased to
approximately $557,000 for the three months ended June 30, 1999 from
approximately $825,000 for the same period last year. For the six months ended
June 30, 1999, general and administrative expenses were down to approximately
$1,593,000 when compared to $2,023,000 for the six months ended June 30, 1998.
The six months ended June 30, 1998 included a noncash charge of $394,000
attributable to an anti-dilution adjustment to the terms of the warrants issued
to JMI Equity Fund II, L.P., which was triggered by the conversion of the
Company's Series A Convertible Preferred Stock ("Series A Stock"). General and
administrative expenses as a percentage of total revenue were approximately
55.3% and 66.4% for the three months ended June 30, 1999 and 1998, respectively.
Similarly, for the six months ended June 30, 1999, General and administrative
expenses as a percentage of revenue was 58.9%, down from 79.7% for the six month
period last year. The dollar and percentage decreases in 1999 were principally
due to the noncash charge in 1998 partially offset by increased professional
service fees.
Research and Development - Research and development expenses consist principally
of the costs of research and development personnel and other expenses associated
with the development of new products and enhancement of existing products.
Research and development expenses decreased to approximately $754,000 for the
current quarter from approximately $942,000 for the same period last year, while
the six months expense increased slightly to approximately $1,935,000 for 1999
from $1,882,000 for the six months ended June 30, 1998. Research and development
expenses as a percentage of total revenue were approximately 74.9% for the three
months ended June 30, 1999 compared to 75.8% for the same period last year. This
compares to the six months of 1999 at 71.6% down from 74.1% for the six months
ended June 30, 1998. The dollar decrease in the quarter and increase for the six
months are in part due to large consulting expenses in the first quarter of
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1999. In addition, personnel related expenses decreased in both quarters of this
year, a result of new product features being completed. The percentage decreases
were primarily due to reductions in spending. The Company is preparing to
release several new products and believes that a continuing commitment to
research and development is required to remain competitive. Accordingly, the
Company intends to allocate significant resources to research and development,
but research and development expenses may vary as a percentage of total revenue.
This statement is based on current expectations. It is forward-looking, and the
actual results could differ materially. For information about factors that could
cause the actual results to differ materially, please refer to Item 1. "Business
- - Risk Factors That May Affect Future Results and Market Price of Common Stock"
in the Company's Form 10-K.
Interest Income and Expenses - Interest income represents interest earned on
cash and cash equivalents. Interest income decreased to approximately $34,000
for the three months ended June 30, 1999 from $40,000 for the same period last
year. For the six months ended June 30, 1999 interest income dropped to
approximately $40,000 from $108,000 for the same period last year. The decrease
was attributable to reduced levels of cash and cash equivalents. Interest
expense represents interest paid or payable on the Company's secured loan (see
Note 4 to the Condensed Financial Statements) and capitalized lease obligations.
Interest expense increased to approximately $226,000 from approximately $31,000
for the three months ended June 30, 1999 and 1998, respectively, and similarly,
interest expense for the six months ending June 30, 1999 was approximately
$301,000 compared to $43,000 and for the same period last year. The increase was
due to the Company's secured loan and the amortization of deferred financing
costs.
Income Taxes -- The Company did not incur income tax expenses as a result of the
net loss incurred during the three and six months ended June 30, 1999 and 1998,
respectively.
Dividend on Preferred Stock -- The Company provided approximately $49,000 and
$31,000 for a dividend on the Series A Stock during the first and second
quarter, respectively, of 1998. All of the Series A Stock was retired in
November 1998. The Series B Stock bears no dividend.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of approximately $3,880,000 and
$3,404,000 for the six months ended June 30, 1999 and 1998, respectively. Cash
used in operating activities for the six months ended June 30, 1999 resulted
principally from net losses and a reduction in deferred revenue, partially
offset by depreciation and amortization expense, a decrease in inventory and an
increase in accounts payable. The Company believes that its current cash and
cash equivalents and funds that may be generated from on-going operations will
not be sufficient to finance the Company's continuing operations for the second
half of the year.
The Company's financing activities provided cash of approximately $3,926,000
during the six months ended June 30, 1999. The cash was provided primarily by
the issuance of a $3.0 million note to a lender and issuance of $3,000,000 of
preferred stock, reduced by a note receivable of $2,000,000 for the preferred
stock. The terms of the term loan are described in Note 4 to the Condensed
Financial Statements.
At December 31, 1998, the Company was in receipt of a "going concern" opinion
from its independent auditors and the Company did not meet the $4 million net
tangible assets and other requirements for continued listing on the Nasdaq
National Market. The Company is in review with Nasdaq to evaluate the Company's
eligibility for continued listing on the Nasdaq National Market. On May 14,
1999, the Company requested a hearing to present relevant information about the
Company's on-going financing initiatives and its ability to generate cash flow
from operations. On July 9, 1999 the Company made a presentation to the Nasdaq
Listings Qualification Panel to present significant developments in V-ONE's
capital raising efforts and to address concerns raised in the Staff's Hearing
memorandum to the Panel dated June 29, 1999. The Company requested that the
Panel use its discretion to allow continued listing for an additional 60 days
for the Company to complete its private placement activities to bring itself
into compliance with the Nasdaq National Market listing requirements. The
company has completed an equity private placement described in Note 4 to the
Condensed Financial Statements and intends to raise additional equity capital
which, when combined with the $3 million is expected to add between $10 - $12
million in new equity. As of July 15, 1999 V-ONE has received the first $2
million of that investment, with the balance to be received on August 13, 1999.
Although the Company believes it will be successful in
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maintaining compliance with the Nasdaq National Market requirements, there can
be no assurance that it will do so on a timely basis, that it will be able to
comply with the additional financial covenants in its secured financing
described in Note 4 above and as amended on June 30, 1999, or close on the
second private placement.
As of June 30, 1999, the Company had an accumulated deficit of approximately
$34,064,000. The Company currently expects to incur net losses through the third
quarter of fiscal year 1999. This statement is based on current expectations. It
is forward-looking, and the actual results could differ materially. For
information about factors that could cause the actual results to differ
materially, please refer to Item 1. "Business - Risk Factors That May Affect
Future Results and Market Price of Common Stock" in the Company's Form 10-K.
YEAR 2000 ISSUE
The Year 2000 issue concerns the potential exposures related to the automated
generation of business and financial misinformation resulting from the
application of computer programs that have been written using six digits (e.g.
12/31/99), rather than eight (e.g., 12/31/1999), to define the applicable year
of business transactions.
The Company has completed the identification and assessment of most of its
information technology ("IT") systems, and those systems have been modified by
the suppliers of those systems to the Company to address Year 2000 problems. In
addition to its internal systems, the Company has assessed the level of Year
2000 problems associated with most of its suppliers of software incorporated or
bundled with its products, other suppliers, customers and creditors. The Company
also has identified and assessed most of its non-IT systems, which include its
telephone systems, heating and air-conditioning, elevators, and other business
equipment. All of these suppliers have indicated that their software and other
products are Year 2000 compliant. In addition, most of the Company's non-IT
systems appear to be Year 2000 compliant.
The Company's own software products are Year 2000 compliant.
The Company's costs to date for its Year 2000 compliance program, excluding the
salaries of its employees, has not been material. In fact, most of the Company's
IT systems have been modified by the suppliers of those systems and such
modifications were included as part of normal upgrades of those systems.
Although the Company has not completed its assessment it does not currently
believe that the future costs associated with its remaining IT systems or its
non-IT systems will be material.
The Company cannot determine currently its most likely worst case Year 2000
scenario, as it has not identified and assessed all of its systems, particularly
its non-IT systems. As the Company completes its identification and assessment
of internal and third party systems, it expects to develop contingency plans for
various worst-case scenarios. The Company expects to complete such contingency
planning by September 1999. A failure to address Year 2000 issues successfully
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is not materially exposed to fluctuations in currency exchange rates
as all of its products are invoiced in U.S. dollars. The Company does not hold
any derivatives or marketable securities. However, the Company is exposed to
interest rate risk. The Company's term loan has a fixed interest rate and the
fair value of this instrument is affected by changes in market interest rates.
The Company believes that the market risk arising from holdings of its financial
instruments is not material.
11
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
On February 24, 1999, the Company obtained a $3,000,000 term loan from
Transamerica Business Credit Corporation ("Transamerica") pursuant to that
certain Loan and Security Agreement dated as of February 24, 1999, as amended
("Loan Agreement"). The term loan is due on February 28, 2000. Thereafter, the
term loan may be converted into a revolving credit facility at the option of
Transamerica. The maximum amount that can be borrowed by the Company under the
revolving credit facility is the lesser of $3,000,000 and 80% of eligible
receivables. In connection with this loan, the Company granted a security
interest in all of its assets, including its intellectual property, to
Transamerica.
Pursuant to the terms of the Loan Agreement, receipt by the Company of an
opinion from its independent auditors that expresses doubt with regard to the
ability of the Company to continue as a going concern constitutes an event of
default under the Loan Agreement and allows Transamerica to foreclose on its
security interest. The Company received such an opinion from its independent
auditors in connection with their audit of the Company's financial statements as
of and for the year ended December 31, 1998. Therefore, as of the date of such
opinion, there was an event of default under the Loan Agreement.
On March 31, 1999, the Company and Transamerica entered into an Amendment
Agreement ("Amendment") to the Loan Agreement. Under the terms of the Amendment,
Transamerica has waived this event of default. In consideration for such waiver,
the Company (a) granted TBCC Funding Trust II ("TBCC Trust"), an affiliate of
Transamerica, warrants to purchase 100,000 shares of common stock of the Company
at an exercise price of $3.25 per share and (b) accepted an additional financial
covenant that the Company's net worth will be $5,000,000 as of June 30, 1999 and
September 30, 1999. The warrants were issued on March 31, 1999 pursuant to Rule
506 of Regulation D promulgated under the Securities Act of 1933 ("Rule 506")
and have a term of seven years. As a result of the issuance of the Series B
Stock, as defined below, and pursuant to the anti-dilution provisions of the
warrants, the exercise price was adjusted from $3.25 to $2.33 on June 11, 1999.
On June 11, 1999, pursuant to Rule 506 the Company issued 1,287,554 shares of
Series B Convertible Preferred Stock ("Series B Stock") in the aggregate to Mr.
Hai Hua Cheng and Mr. Wen Dar Wu (together "Purchasers"), in equal amounts, for
$2.33 per share or $3 million in the aggregate. Each share of Series B Stock is
initially convertible into one share of common stock.
Under the Subscription Agreement dated as of June 11, 1999 between the Company
and the Purchasers, the Company agreed to issue the Series B Stock to the
Purchasers in exchange for $1 million in cash and a promissory note in the
amount of $2 million. The principal amount of the promissory note is payable in
two installments of $1 million each, plus accrued interest. The first
installment was paid on July 14, 1999 and the second installment is due August
13, 1999.
Each share of Series B Stock is convertible at any time at the option of the
holder into shares of common stock, subject to adjustment for dilution. The
number of shares of common stock issuable per share of Series B Stock is
determined by dividing the initial purchase price of $2.33 per share by the
conversion price, which has been initially set at $2.33 per share. The
conversion price is subject to adjustment in the event the company pays
dividends or makes distributions on, splits or reverse splits its common stock.
On June 30, 1999, the Company and Transamerica entered into a second Amendment
Agreement ("Second Amendment"). Under the terms of the Second Amendment,
Transamerica has (i) waived the requirement that the Company's net worth be $5
million on June 30, 1999, (ii) amended the promissory note issued by the Company
in connection with the Loan Agreement to extend the maturity date of the term
note to February 28, 2000 and granted Transamerica the option to convert the
12
<PAGE>
term loan to a revolving loan on February 28, 2000, and (iii) deleted the
$360,000 acquisition fee. In consideration for the Second Amendment, the Company
(i) issued warrants to purchase 50,000 shares of the Company's common stock at
an exercise price of $3.75 per share, (ii) agreed to pay a $150,000 fee to
Transamerica on February 28, 2000 and use 30% of any future equity raised by the
Company after completion of the current round (approximately $10-12 million) of
financing to prepay the term loan, (iv) agreed to amortize $100,000 in principal
of the term loan beginning on September 1, 1999, and (v) agreed to pay the
balance of the principal and accrued and unpaid interest due on the term loan on
February 28, 2000. The warrants were issued on June 30, 1999 pursuant to Rule
506 and have a term of seven years.
The description of the above agreements are qualified in their entirety by
reference to the exhibits filed with the Company's Form 8-K dated March 12, 1999
and the Company's Form 8-K dated April 2, 1999.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 13, 1999, the following items were voted on at the Annual Meeting of
stockholders:
<TABLE>
<CAPTION>
Broker
Proposal For Against Abstain Non-Votes
-------- --- ------- ------- ---------
<S> <C> <C> <C> <C>
1. Proposal One:
Election of:
James F. Chen 14,434,834 114,775 N/A N/A
William E. Odom 14,434,834 114,775 N/A N/A
as a director for a term ending 2002.
The following director terms continued
following the Annual Meeting: Charles
C. Chen, David D. Dawson and
A.L. Giannopoulos
</TABLE>
Item 5. Other Information
As of July 1, 1999 Margaret E. Grayson was hired as Chief Financial Officer.
Also hired as Controller and Chief Accounting Officer was John F. Nesline as
of May 24, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this quarterly report on Form
10-Q for the period ended June 30, 1999:
Exhibit Index:
Exhibit Description
- ------- -----------
10.1 Employment Agreement dated July 1, 1999 between V-ONE Corporation and
Margaret E. Grayson
10.2 Amendment Agreement dated March 31, 1999 to the Loan and Security
Agreement dated February 24, 1999 between V-ONE Corporation and
Transamerica Business Credit Corporation (1)
10.3 Stock Subscription Warrant dated March 31, 1999 issued to TBCC Funding
Trust II (1)
10.4 Certificate of Designations of Series B Convertible Preferred Stock (2)
10.5 Subscription Agreement dated June 11, 1999 between V-ONE Corporation,
Mr. Hai Hua Cheng and Mr. Wen Dar Wu (2)
10.6 Registration Rights Agreement dated June 11, 1999 between V-ONE
Corporation, Mr. Hai HuaCheng and Mr. Wen Dar Wu (2)
10.7 Non-Negotiable Promissory Note dated June 11, 1999 (2)
10.8 Amendment Agreement dated June 30, 1999 to the Loan and Security
Agreement dated February 24, 1999 between V-ONE Corporation and
Transamerica Business Credit Corporation (3)
10.9 Stock Subscription Warrant dated June 30, 1999 issued to TBCC Funding
Trust II (3)
27 Financial data schedule for the six months ended June 30, 1999.
- ------------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
April 2, 1999
(2) Incorporated by reference to the Company's Current Report on Form 8-K
dated June 23, 1999
(3) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 2, 1999
13
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
V-ONE CORPORATION
Registrant
Date: August 13, 1999 By: /s/ David D. Dawson
------------------------
Name: David D. Dawson
Title: Chairman of the Board, President,
and Chief Executive Officer
(Duly authorized officer)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, made and entered as of this 1st day of July,
1999 ("Effective Date"), by and between V-ONE Corporation, a Delaware
corporation with its principal executive offices at 20250 Century Blvd, Suite
300, Germantown, Maryland 20874 ("Company"), and Margaret E. Grayson, an
individual residing at 207 Little Quarry Road Gaithersburg, MD 20878
"Employee");
WHEREAS, the Company wishes to assure itself of the future services of
Employee for the Company, and Employee is willing to serve in the employ of the
Company upon the terms and conditions set forth in this agreement, on a
full-time basis; and
WHEREAS, the Company and Employee desire to set forth the amounts
payable and benefits to be provided by the Company to Employee in the event of a
termination of Employee's employment with the Company under the circumstances
set forth herein, including after the happening of a Change in Control (as
defined herein); and
WHEREAS, the Company wishes to secure Executive's non-interference upon
the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto, intending to be legally bound hereby, agree as
follows:
1. EMPLOYMENT. The Company agrees to continue Employee in its employ,
and Employee agrees to remain in the employ of the Company, for the period
stated in Section 3 hereof and upon the other terms and conditions herein
provided.
2. POSITION AND RESPONSIBILITIES.
The Company employs Employee, and Employee agrees to serve, as Sr. Vice
President & Chief Financial Officer of the Company reporting to the Chief
Executive Officer, on the conditions hereinafter set forth. Employee agrees to
perform such services consistent with her position as Sr. Vice President & Chief
Financial Officer as shall from time to time be assigned to her by the Company's
Board of Directors ("Board") or by an executive designated by the Board.
3. TERM AND DUTIES.
(a) Term. The term of this employment agreement shall commence on July
1, 1999 and terminate on July 1, 2000, subject to automatic renewal for
<PAGE>
successive one-year terms unless either party shall have notified the other in
writing not less than 90 days prior to the then current expiration date of this
Agreement of such party's determination not to renew this Agreement.
(b) The Company shall have the right, on written notice to you,
(i) to terminate your employment immediately at any time for Just
Cause, as defined in Paragraph 6e.
(ii) to terminate your employment at any time on or after July
1, 1999, or to not renew the Agreement at any time, without cause provided the
Company shall be obligated in either case to pay to you severance pay as
specified in Paragraph 7.
(c) Duties. During the period of her employment hereunder by the Company
and except for illness, reasonable vacation periods having an aggregate duration
of not less than that provided pursuant to the Company's practices in effect on
the Effective Date, and reasonable leaves of absence, Employee shall devote her
business time, attention, skill, and efforts as may be reasonably necessary to
the faithful performance of her duties hereunder except as defined in Annex A to
this agreement.
(d) Headquarters Location. The Company agrees to maintain Employee's
offices within Montgomery County in the State of Maryland ("Base Employment
Area").
4. COMPENSATION, STOCK OPTIONS, REIMBURSEMENT OF EXPENSES, AND
RELOCATION.
(a) Compensation. The Company shall pay to you for the services to be
rendered hereunder a base salary at an annual rate of $150,000, subject to
increase, in accordance with the policies of the Company from time to time,
payable in installments in accordance with Company policy, but in no event less
frequently than monthly.
(i) The Company will review the base salary from time to time, no
less frequently than annually, and may in its sole discretion adjust the base
salary upward but not downward, to reflect performance, appropriate industry
guideline data and other factors.
(ii) If certain performance goals reasonably established from
time to time by the Company are met, you will be entitled to a cash performance
bonus of 40% of base salary, with respect to each fiscal year. The amount of
such bonus percentage may be increased but not decreased by the Company.
Performance in excess of 100% of plan objectives will be rewarded at an
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<PAGE>
incrementally higher percentage. Metrics will also be reasonably established to
measure and compensate appropriately for performance below the plan goals.
(b) Stock Options. On June 17th 1999 the Company granted to, Margaret E.
Grayson, pursuant to this Employment Agreement, an incentive stock option to
purchase 220,000 shares of V-ONE common stock at the grant price of $2.156, fair
market value on the date of grant, and subject to on the following vesting
schedule:
April 23,2000 - 55,000
April 23,2001 - 55,000
April 23,2002 - 55,000
April 23,2003 - 55,000
(c) Reimbursement of Expenses. The Company shall pay or reimburse
Employee, in accordance with such polices and procedures as the Board may
establish from time to time, for all reasonable travel and other expenses
incurred by Employee in the performance of her obligations under this Agreement.
(d) Member of the Board of Directors. Upon acceptance of this offer, Mr.
Dawson will recommend to the Board of Directors to vote to elect you to become a
member of the Board.
3
<PAGE>
5. PARTICIPATION IN BENEFIT PLANS. The payments provided for in this
Agreement, except where specifically provided otherwise, are in addition to any
other benefits to which Employee may be, or may become, entitled under any of
the Company's group hospitalization, health, dental, care, and/or sick-leave
plans; life, other insurance and/or death benefit plans; travel and/or accident
insurance plans; deferred compensation plans; capital accumulation programs;
restricted income and/or stock purchase plans; stock option plans; retirement
income and/or pension plans; supplemental pension plans; excess benefit plans;
short- and long-term disability programs; and other present and future group
employee benefit plans and programs for which Company executives are or shall
become eligible. Employee shall be eligible to receive, during the period of her
employment under this Agreement and during any subsequent period for which she
shall be entitled to receive payments from the Company under Section 6, all of
the foregoing benefits and emoluments for which employees are eligible under
every such plan and program to the extent permissible under the general terms
and provisions of such plans and programs and in accordance with the provisions
thereof. Nothing contained in this Agreement shall prevent the Board from
amending or otherwise altering any such plan, program, or arrangement as long as
such amendment or alteration equitably affects all the Company's employees of
the level of vice president or above.
6. TERMINATION OF EMPLOYMENT. Subject to the payments contemplated by
Section 7 Employee's employment under this Agreement may be terminated by the
Company or Employee as follows:
(a) DISABILITY.
(i) If Employee fails to perform her duties under this Agreement
on account of Disability (as hereinafter defined), the Company may give notice
to Employee to terminate this Agreement on a date not less than thirty (30) days
thereafter ("Notice Period") and, if Employee has not resumed full performance
of her duties under this Agreement within such Notice Period, then Employee's
employment under this Agreement will terminate on the date provided in the
notice ("Disability Termination Date").
(ii) As used in this Agreement, the term "Disability" shall mean
the complete inability of Employee to perform her duties under this Agreement by
reason of her total and permanent disability, as determined by an independent
physician selected with the approval of the Board and Employee. The
determination of total and permanent disability will not be made until after all
4
<PAGE>
leave of absence time specified in the Federal Family and Medical Leave Act
("FMLA") has been exhausted.
(b) DEATH. If Employee dies while employed under this Agreement, her
employment under this Agreement will terminate as of the date of her death
("Date of Death"). Within thirty (30) days after the Date of Death, the Company
shall pay amounts due under this Agreement to the Employee's legal
representative.
(c) TERMINATION BY EMPLOYEE OR COMPANY. In the event that
(i) the Company terminates Employee's employment for any reason
other than for "just cause","material breach"(as hereinafter defined); or
(ii) Employee terminates her employment with the Company because
of the Company's material breach of this Agreement, or
(iii) Employee's Base Salary, as in effect on the Effective Date
or as the same may be increased from time to time, is reduced, or there is a
reduction in Employee's authority, perquisites, position, title or
responsibilities; or
(iv) The Company's principal executive offices are relocated to a
location outside the Base Employment Area or the Company requires Employee to be
based anywhere other than the Company's principal executive offices or such
other location that is mutually agreed upon between Company and Employee (except
for required travel on the Company's business); or
(v) The Company undergoes a Change in Control, then:
The Company will pay severance compensation as defined in Paragraph 7 and all
options granted to employee and not yet vested, will vest immediately upon
termination.
No termination of employment pursuant to this Section 6(c) shall operate to
prohibit Employee from negotiating and entering into a new employment contract
with the Company or such entity as survives the Change in Control.
(d) RETIREMENT. Employee shall be entitled to terminate her employment
with the Company on, or at any date after, a date on which he is at least
sixty-five (65) years old. Any date on which Employee elects to retire shall be
referred to as the "Retirement Termination Date." The Company shall pay to
Employee her Base Salary and Bonus Salary as then in effect that has accrued to
the last day of the month in which the Retirement Termination Date occurs. All
vested stock options will be exercisable for their originally defined time
period, typically 10 years from date of issue, after retirement.
(e) TERMINATION BY THE COMPANY FOR JUST CAUSE.
(i) The Company may terminate Employee's employment for "just
cause" at any time by giving written notice thereof to Employee. (Except as
provided below, the date of such notice is the "Just Cause Termination Date"
unless otherwise provided in the notice). Within thirty (30) days after the Just
5
<PAGE>
Cause Termination Date, the Company shall pay to Employee her Base Salary as
then in effect that has accrued to the Just Cause Termination Date. For the
purposes of this subparagraph, "just cause" shall mean any of the following: (I)
Employee's conviction of any crime or criminal offense involving the unlawful
theft or conversion of substantial monies or other property or any other felony
(other than a criminal offense arising solely under a statutory provision
imposing criminal liability on the Employee on a per se basis due to the offices
held by the Employee); or (ii) Employee's conviction of fraud or embezzlement.
(ii) Notwithstanding the foregoing, Employee shall not be deemed
to have been terminated for just cause pursuant to this Section 6(e) unless and
until he shall have received a copy of a resolution duly adopted by the
affirmative vote of a majority of the Board, at a meeting held for that purpose,
declaring that in the good faith opinion of the Board one or more of the
conditions set forth in clause (i) of this Section 6 (e) has occurred and
specifying the particulars thereof, or
(f) MATERIAL BREACH. Shall mean any of the following: (i) Employee's
breach of any of her fiduciary duties to the Company or its stockholders or
making of a willful misrepresentation or omission which breach,
misrepresentation or omission would reasonably by expected to materially
adversely affect the business, properties, assets, condition (financial or
other) or prospects of the Company; (ii) Employee's willful, continual and
material neglect or failure to discharge her duties, responsibilities or
obligations prescribed by Sections 1, 2 and 3 (other than arising solely due to
physical or mental disability); (iii) Employee's habitual drunkenness or
substance abuse which materially interferes with Sections 1, 2 and 3; (iv)
Employee's willful, continual and material breach of any non-competition or
confidentiality agreement with the Company, including without limitation, those
set forth in Sections 10 and 11 of the Agreement; and (v) Employee's gross
neglect of her duties and responsibilities, as determined by the Company's Board
of Directors; in each case, after the Company or the Board of Directors; has
provided Employee with 30 days' written notice of such circumstances and the
possibility of a Material Breach, and Employee fails to cure such circumstances
and Material Breach with those 30 days.
(g) RESIGNATION BY EMPLOYEE. Employee can resign at any time, giving 60
days notice, terminating her employment under this Agreement ("Effective
Resignation Date"). All Base Salary and Bonus Salary earned through the
Effective Resignation Date including notice period, will be paid to Employee.
All vested stock options will be exercisable for a period of 90 days following
the effective resignation date.
7. SEVERANCE. If Severance Compensation is triggered under conditions
specified in Paragraph 6, the compensation will include the following.
6
<PAGE>
(a) the Company shall pay Employee (or her estate or representative)
within ten (10) days following the date her employment with the company is so
terminated ("Employee Termination Date") as severance pay a lump sum payment
equal to the sum of (A) the aggregate amount of the future Base Salary payments
Employee would have received if she continued in the employ of the Company until
twelve (12) months following the Employee Termination Date and (B) Employee's
projected bonus for the twelve months in which the Employee Termination Date
occurs, which shall be computed assuming that Employee had remained in the
Company's employ for the next twelve months and that all performance goals or
other performance measures have been met at the then current level for the time
period. The payment required by clause (A) shall be calculated at the highest
rate of Base Salary paid to Employee at any time under this Agreement with such
payments discounted to present value at a discount rate equal to one percent
(1%) above the per annum one-year Treasury Bill rate, as published in the
Eastern Edition of the Wall Street Journal, on the Employee Termination Date (or
the next preceding date on which such rate is published), applied to each such
future payment from the time it would have become payable to the date Employee
receives payment.
(b) All vested stock options as specified in Paragraph 4b, including the
options that would vest as part of the termination, would be exercisable within
90 days of such termination, or, if allowable under the Company's stock option
plan, Employee may elect to exchange incentive stock options to non-qualified
stock options and extend the allowable period to exercise such non-qualified
stock options to five years.
8. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean the occurrence, after the Effective Date, of any of the
following events, directly or indirectly or in one or more series of
transactions:
(i) A consolidation or merger of the Company with any third party
(which includes a single person or entity or a group of persons or entities
acting in concert) not wholly owned directly or indirectly by the Company (a
"Third Party"), unless the Company is the entity surviving such merger or
consolidation;
(ii) A transfer of all or substantially all of the assets of the
Company to a Third Party or a complete liquidation or dissolution of the
Company;
(iii) A Third Party, directly or indirectly, through one or more
subsidiaries or transactions or acting in concert with one or more persons or
entities:
(A) acquires beneficial ownership of more than 50% of the
classes of stock of the Company entitled to vote generally in the election of
directors of the Company ("Voting Stock");
7
<PAGE>
(B) acquires irrevocable proxies representing more than
50% of the Voting Stock;
(C) acquires any combination of beneficial ownership of
Voting Stock and irrevocable proxies representing more than 50% of the Voting
Stock;
(D) acquires the ability to directly or indirectly
exercise a controlling influence over the management or policies of the Company;
(iv) A determination is made by the Securities and Exchange
Commission ("SEC") or any similar agency having regulatory control over the
Company that a change in control, as defined in the securities laws or
regulations then applicable to the Company, has occurred.
Notwithstanding any provision contained herein, a Change in Control shall not
include any of the above described events if they are the result of a Third
Party's inadvertently acquiring beneficial ownership or irrevocable proxies or a
combination of both for 50% or more the Voting Stock, and the Third Party as
promptly as practicable thereafter divests itself of beneficial ownership or
irrevocable proxies for a sufficient number of shares so that the Third Party no
longer has beneficial ownership or irrevocable proxies or a combination of both
for 50% or more of the Voting Stock.
9. EXCISE TAX.
(a) EXCESS PARACHUTE PAYMENT. Notwithstanding anything to the contrary
in this Agreement, if tax counsel selected by the Company and acceptable to
Employee determines that any portion of any payment by the Company to Employee
under this Agreement or otherwise would constitute an "excess parachute
payment," then the payments to be made to Employee by the Company shall be
reduced such that the value of the aggregate payments that Employee is entitled
to receive under this Agreement and any other agreement, plan or program of the
Company shall be one dollar ($1.00) less than the maximum amount of payments
that Employee may receive without becoming subject to the tax imposed by Section
4999 of the Code; provided, however, that the foregoing limitation shall not
apply in the event that such tax counsel determines that the benefits to
Employee on an after-tax basis (i.e., after federal, state, and local income and
excise taxes) if such limitation is not applied would exceed the after-tax
benefits to Employee if such limitation is applied.
(b) THE COMPANY NOT RESPONSIBLE FOR EXCISE TAX. If the Internal Revenue
Service assesses an excise tax against Employee pursuant to Sections 280G and
8
<PAGE>
4999 of the Code, the Company shall be under no obligation to Employee with
respect to the amount of (i) the excise tax or (ii) any additional federal
income tax due from and payable by Employee as the result of her receipt of any
payment hereunder or otherwise.
10. COVENANT NOT TO COMPETE. Employee covenants and agrees that, in
consideration of the amounts to be paid Employee hereunder and other good and
valuable consideration, for a period of six (6) months beyond the Effective
Resignation Date, Retirement Termination Date or the Just Cause Termination Date
(each a "Termination Date"), Employee shall not be employed as an executive
officer of, control, manage, or otherwise participate in the management of the
business of a "significant competitor" of the Company. The term "significant
competitor" shall mean any company or division of a company that, on the date of
its employment of Employee, derives more than 50% of its gross revenues from
network security products and/or services, or a company that owns or controls a
majority of the voting securities of any such company. The Company and Employee
agree that the terms and conditions of this Section 9 shall survive the
termination of this Agreement following the Termination Date.
11. CONFIDENTIAL INFORMATION.
(a) Employee shall not, directly or indirectly, during the term of her
employment hereunder and at any time after a termination of her employment for
any reason, to the detriment of the Company, knowingly divulge, disclose,
disseminate, publish, reveal or otherwise communicate to any unauthorized person
any Confidential Information relating to the Company, the Company's subsidiaries
or affiliates, or to any of the businesses operated by any of them.
(b) Employee confirms that Confidential Information constitutes the
exclusive property of the Company and the Company's subsidiaries and affiliates.
Upon a termination of her employment hereunder, Employee will promptly return to
the Company all Materials (whether prepared by Employee or others) containing,
constituting, embodying or illustrating Confidential Information, and all other
property of the Company or of the Company's subsidiaries and affiliates then in
her possession or custody.
(c) As used in this Section 10 the following terms shall have the
following meanings:
(i) the term "Confidential Information" means information
disclosed to Employee or known to Employee as a consequence of or through her
employment by the Company and not generally known in the Company's industry.
Such information includes, but is not limited to, information relating to the
Company's products, research, development, accounting, finances, marketing,
merchandising and selling, and specifically includes future business plans,
9
<PAGE>
client lists, lists of current and prospective employees and consultants,
potential acquisition candidates, and training and operating methods and
techniques. The term "Confidential Information" does not include information
that (A) at the time it was received by Employee was generally available to the
public; (B) prior to its use by Employee, becomes generally available to the
public through no act or failure of Employee; or (C) is received by Employee
from a person who is not a party to this Agreement and who is not under an
obligation of confidence with respect to such information.
(ii) "Materials" includes, but is not limited to, books,
notebooks, documents, records, photographs, films, video tapes, audio tape
recordings, computer disks, diskettes or other electronic or optical storage
media, software and support materials, and similar or other materials.
(d) Employee shall not otherwise knowingly act or conduct himself (i) to
the material detriment of the Company or the Company's subsidiaries or
affiliates, or (ii) in a manner that is inimical or contrary to the interests
thereof.
(e) The Company and Employee agree that the provisions of this Section
10 shall survive the termination of this Agreement for any reason whatsoever.
12. GENERAL PROVISIONS.
(a) ENTIRE AGREEMENT. This Agreement, together with the employment
agreement existing between the parties immediately prior to the Effective Date,
if any, (as amended herein), contains the entire understanding between the
parties hereto with respect to the employment of Employee.
(b) CONSOLIDATION, MERGER, OR SALE OF ASSETS. Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation or
corporations; provided, however, that such consolidation, merger or transfer
shall not affect Employee's rights under Section 6(c) hereof. Upon such a
consolidation, merger, or transfer of assets and assumption, the term "the
Company", as used herein, shall mean such other corporation or corporations, and
this Agreement shall continue in full force and effect and such other
corporation or corporations shall be liable for all payments to Employee under
the Agreement.
(c) NO DUTY TO MITIGATE. Employee shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, nor shall any amounts received from other employment or otherwise
by Employee offset in any manner the obligations of the Company hereunder.
(d) NONASSIGNABILITY. Neither this Agreement nor any right, remedy,
obligation or liability arising hereunder or by reason hereof is assignable by
10
<PAGE>
Employee, her beneficiaries, or legal representatives without the Company's
prior written consent; PROVIDED, HOWEVER, that nothing in this Section 12 (d)
shall preclude (i) Employee from designating a beneficiary to receive any
benefit payable hereunder upon her death or disability, or (ii) the executors,
administrators, or other legal representatives of Employee or her estate from
assigning any rights hereunder to the person or persons entitled thereto.
(e) NO ATTACHMENT. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
the execution, attachment, levy, or similar process or assignment by operation
of law. Any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.
(f) NOTICES. All notices and other communications required or permitted
to be given under this Agreement shall be in writing and shall be deemed to have
been duly given if delivered personally or sent by certified mail, return
receipt requested, first-class postage prepaid, to the parties to this Agreement
at the following addresses:
(i) if to the Company at:
V-ONE CORPORATION
20250 Century Boulevard
Suite 300
Germantown, Maryland 20874
and
(ii) if to Employee at the address set forth at the end of this
Agreement
or to such other address as either party to this Agreement shall have last
designated by notice to the other party. All such notices and communications
shall be deemed to have been received on the earlier of the date of receipt or
the third business day after the date of mailing thereof.
(h) BINDING EFFECT; BENEFITS. This Agreement shall be binding upon and
inure to the benefit of the parties to this Agreement and their respective
successors and permitted assigns. Nothing in this Agreement, express or implied,
is intended or shall be construed to give any person, other than the parties to
this Agreement or their respective successors or permitted assigns, any legal or
equitable right, remedy, or claim under or in respect of any agreement or any
provision contained herein.
(i) DISPUTE RESOLUTION. Subject to (iv) below, any controversy or claim
arising out of or relating to this Agreement or the breach thereof shall be
settled by arbitration in accordance with the then existing Commercial
Arbitration Rules of the American Arbitration Association ("AAA"). A request for
11
<PAGE>
arbitration shall be filed in the AAA office closest to the Company and the
arbitration shall be conducted in Montgomery County, Maryland.
(ii) The parties irrevocably consent to the jurisdiction of the
Federal and state courts located in the State of Maryland for any purpose
relating to this agreement.
(iii) The arbitrator(s) may, in the course of the proceedings,
order any provisional remedy or conservatory measure (including, without
limitation, attachment, preliminary injunction, or the deposit of specified
security) that the arbitrator(s) consider to be necessary, just, and equitable.
The failure of a party to comply with such an interim order may, after due
notice and opportunity to cure such noncompliance, be treated by the
arbitrator(s) as a default, and some or all of the claims or defenses of the
defaulting party may be stricken and partial or final award entered against such
party, or the arbitrator(s) may impose such lesser sanctions as may be deemed
appropriate. A request for interim or provisional relief by a party to a court
shall not be deemed incompatible with the agreement to arbitrate or a waiver of
that agreement.
(iv) The parties acknowledge that any remedy at law for breach of
this Agreement may be inadequate, and that, in the event of a breach of Sections
9 and 10 by Employee, any remedy at law would be inadequate in that any such
breach would cause irreparable competitive harm to the Company. Consequently, in
addition to any other relief that may be available, either party may seek
temporary and permanent injunctive relief, including, without limitation,
specific performance, without the necessity of the prevailing party proving
actual damages and without regard to the adequacy of any remedy at law.
(v) In the event Employee is the prevailing party in any
arbitration or court proceeding, then Employee shall be entitled to
reimbursement by the Company for all reasonable legal and other professional
fees and expenses incurred by Employee in such proceeding or in enforcing any
award, including reasonable attorneys' fees.
(j) AMENDMENT. This Agreement may be terminated, amended, modified, or
supplemented only by a written instrument executed by Employee and the Company.
(k) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the law of the State of Maryland, regardless of the law that
might be applied under principles of conflict of laws; provided, however, that
any arbitration under Section 11(i) hereof shall be conducted in accordance with
the United States Arbitration Act as then in force.
(l) SECTION AND OTHER HEADINGS. The section and other headings contained
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation of this Agreement.
12
<PAGE>
(m) WITHHOLDING OF TAXES. The Company may withhold from amounts required
to be paid to Employee hereunder any applicable federal, state, local, and other
taxes with respect thereto; provided, however, that the Company shall promptly
pay over the amounts so withheld to the appropriate taxing bodies and provide to
executive appropriate statements on forms proscribed for such purposes on the
amounts so withheld.
(n) SEVERABILITY. If, for any reason, any provision of this Agreement is
held invalid, such invalidity shall not affect any other provision of this
Agreement not held so invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in no way
affect the rest of such provisions not held so invalid, and the rest of such
provision, together with all other provisions of this Agreement, shall to the
full extent consistent with law continue in full force and effect.
(o) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and its seal to be affixed hereunto by its officers thereunto duly authorized,
and Employee has signed this Agreement, all as of the Effective Date.
ATTEST: V-ONE CORPORATION
/s/ Susan Werner By: /s/ David D. Dawson
- ----------------------------- -----------------------------
(Corporate Seal)
WITNESS: Employee: Margaret E. Grayson
/s/ Susan Werner /s/ Margaret E. Grayson
- ----------------------------- -----------------------------
<PAGE>
ANNEX A
V-ONE recognizes that Employee is the sole shareholder and CEO of Grayson
Financial Services, LLC, providing financial consulting and advisory services
and investor relations services to small and mid-cap companies;
that V-ONE and employee are currently doing business under a Consulting
Services Agreement dated April 23, 1999; that V-ONE and employee agree that such
Consulting Agreement will terminate as of the effective date of this Employment
Agreement, and,
the obligation of the Company to pay fees due pursuant to the Consulting
Agreement including the success fee of 30,000 fully vested options to purchase
shares of V-ONE stock upon completion of an initial financing; and a 2%
Financial Advisory Fee due upon completion of an investment by MCI WorldCom
and/or MCI WorldCom Venture Fund, shall survive the termination of the
Consulting Services Agreement; and
such fees will be paid to Grayson Financial Services, LLC upon
completion of the financing activities as defined; and
Grayson Financial Services, LLC, as an entity will continue in
existence, however, employee agrees to wind down the operations that require
professional consulting services; to transfer such work efforts as are currently
ongoing to colleagues as soon as can be practically accomplished, and not to
take on new clients requiring a direct commitment of her time during the term of
employment under this agreement; and
time commitments to this business, by employee, will be limited to the
duties as a member of the Board of Directors and minimal administrative duties
as required.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE
COMPANY'S FORM 10-Q FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001008946
<NAME> V-ONE CORPORATION
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<CASH> 607,396
<SECURITIES> 0
<RECEIVABLES> 851,758
<ALLOWANCES> 260,542
<INVENTORY> 275,206
<CURRENT-ASSETS> 2,058,114
<PP&E> 1,496,062
<DEPRECIATION> 740,868
<TOTAL-ASSETS> 3,847,222
<CURRENT-LIABILITIES> 6,052,103
<BONDS> 0
0
1,287
<COMMON> 16,773
<OTHER-SE> (2,323,597)
<TOTAL-LIABILITY-AND-EQUITY> 3,847,222
<SALES> 2,703,140
<TOTAL-REVENUES> 2,703,140
<CGS> 412,778
<TOTAL-COSTS> 6,401,535
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (301,016)
<INCOME-PRETAX> (4,371,963)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,371,963)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,371,963)
<EPS-BASIC> (.26)
<EPS-DILUTED> (.26)
</TABLE>
