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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: DECEMBER 31, 1999
[ ] 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
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(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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(TITLE OF CLASS)
TRADED ON THE NASDAQ SMALLCAP MARKET
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X ] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of on March
1, 2000 was approximately $104,900,000. This calculation does not reflect a
determination that persons are affiliates for any other purposes.
Registrant had 18,243,530 shares of Common Stock outstanding as of March 1,
2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III -- Portions of the registrant's definitive proxy statement to be issued
in conjunction with registrant's 2000 annual stockholder's meeting to be held on
May 11, 2000.
Forward-Looking Statements
In addition to historical information, this Annual Report contains
forward-looking statements that involve risks and uncertainties. These
statements may differ in a material way from actual future events. For instance,
factors that could cause results to differ from future events include rapid
rates of technological change and intense competition, among others. Readers are
cautioned not to place undue reliance on these forward-looking statements. V-ONE
Corporation undertakes no obligation to publicly revise these forward-looking
statements or to reflect events or circumstances that arise after the date
hereof.
PART I
ITEM 1. BUSINESS
V-ONE Corporation ("V-ONE" or the "Company") develops, markets and licenses a
comprehensive suite of network security products that enable organizations to
conduct secured electronic transactions and information exchange using public
switched networks, such as the Internet. The Company's suite of products address
network user authentication, perimeter security, access control and data
integrity through the use of smart cards, tokens, digital certificates,
firewalls and encryption technology. The Company's products interoperate
seamlessly and can be combined to form a complete, integrated network security
solution or can be used as independent components in customized security
solutions. The Company's products have been designed with an open and flexible
architecture to enhance application functionality and to support emerging
network security standards. The products are most commonly used to establish
very secure Virtual Private Networks (VPNs). In addition, the Company's products
enable organizations to deploy and scale their solutions from small single-site
networks to large multi-site environments, and can accommodate both wireline and
wireless media.
The Company was incorporated in Maryland in February 1993 and reincorporated in
Delaware in February 1996. Effective July 2, 1996, the Company changed its name
from "Virtual Open Network Environment Corporation" to "V-ONE Corporation." The
Company's principal executive offices are located at 20250 Century Boulevard,
Suite 300, Germantown, Maryland 20874. The Company's telephone number is (301)
515-5200.
BACKGROUND
OVERVIEW. Over the last decade, decentralized computing has emerged as a result
of the widespread adoption of personal computers, local area networks and wide
area networks. This emergence has enabled users to communicate with each other
and share data throughout an entire organization. With the recent popularization
of the Internet and increased performance capabilities offered by high-speed
modems, xDSL and Cable modems, ISDN services and frame relay technology, the
volume of data transferred over networks has increased dramatically. Fueling
this expansion further, carriers and Internet service providers have
dramatically reduced their tariffs for high-speed aggregation services running
over T-1 and T-3 lines, which have data transfer rates that approximate local
area network performance. In addition, leading hardware and software vendors
have adopted and support TCP/IP, the Internet's non-proprietary communications
protocol, for computer communications and information exchange.
This open platform, along with the emergence of the Internet, allows increasing
numbers of businesses to engage in business to business electronic commerce,
such as supply chain management, customer relationship management and other
extensions of corporate data resources to employees and business partners. The
problem is that TCP/IP networks are unsecured. Utilizing the Company's
technology, users can create "virtual" private networks at a fraction of the
cost of actual private wide area networks. Organizations recognize the potential
cost savings when using public networks, such as the Internet, as an extension
of their existing enterprise networks. These users have begun connecting branch
offices and remote and mobile users to mission critical applications and
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corporate resources such as groupware, customer databases and inventory control
systems. Also, the Internet can be used as a lower cost alternative to
value-added networks as a means to link companies with customers, suppliers and
trading partners. This instantiation is known in the industry as extranet
architecture.
The need for internal security continues to grow as businesses deploy extranets,
Intranets, internal networks using TCP/IP protocols, and browser-based
applications to facilitate geographically dispersed communications and the
transmission of information throughout an enterprise in a cost-effective manner.
Information becomes more vulnerable as organizations rely heavily on computer
networks for the electronic transmission of data. With the increased use of the
Internet and intranets, many organizations are discovering that network security
is a key element in successfully implementing distributed applications and
services, including electronic mail, electronic data interchange, electronic
commerce and information exchange services. In the absence of comprehensive
network security, individuals and organizations are able to exploit system
weaknesses to gain unauthorized access to networks, network transmissions and
individual network computers. These individuals and organizations use such
access to alter or steal data or, in some cases, to launch destructive attacks
on data and computers within a network.
Each of the following elements is critical in creating a complete network
security solution to protect an organization's data, network and computer
systems:
o DATA PRIVACY THROUGH ENCRYPTION. Preventing unauthorized users from viewing
private data through the process of "scrambling" data before it is
transmitted or placed into electronic storage.
o USER IDENTIFICATION AND AUTHENTICATION. Verifying the user's identity to
prevent unauthorized access to computer and network resources.
o AUTHORIZATION. Controlling which systems, data and applications a user can
access.
o DATA INTEGRITY. Ensuring that data, whether in storage or transmission, has
not been changed or compromised by any unauthorized manipulation.
o NON-REPUDIATION. Verifying that data transmissions have been executed between
specific parties so that neither party may legitimately claim that the
transaction did not occur.
Over the years, a number of network security products have been developed,
including passwords, token-based access devices, firewalls, encryption products,
biometrics devices, smart cards and digital certificates. Each of these products
was designed with a specific function or objective; however, none were designed
to meet all of the needs of enterprise-wide network security. Single function or
"point" products that have been developed to address one, or a limited number of
network security requirements, include the following:
o PASSWORDS AND TOKENS. Until recently, passwords were the most common method
of authentication. Static (non-changing) passwords were developed as the
first attempt to address the need for authentication. Static passwords,
however, are inadequate as they are susceptible to unauthorized viewing and
to attacks using software designed to randomly generate and enter thousands
of passwords. As a result, dynamic passwords, including single-use passwords,
were created to provide a greater level of authentication. Dynamic password
implementations include the use of time-varying and challenge-response
passwords. Generally, dynamic passwords require the use of a hand-held,
electronic device called a hardware token. Dynamic passwords were
subsequently strengthened by incorporating two-factor identification, which
provided a higher level of authentication in that two independent components
were combined to identify a user (for example, a bank ATM card and a PIN
code). However, dynamic passwords and two-factor identification provide only
a limited level of security because the sessions they authenticate are still
vulnerable to interception.
o FIREWALLS. Firewalls are network access control devices that regulate the
passage of information based on a set of administrator-defined rules.
Generally, firewalls are based upon one of two technical architectures:
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packet filters (customarily used in routers) or proxy-based application-level
gateways. Packet filters screen network traffic and allow or prevent network
access based upon source and destination Internet Protocol addresses.
Proxy-based application-level gateways provide access to applications on the
network only after the user has identified the desired application and
submitted a valid password.
o ENCRYPTION. Encryption products provide privacy for transmitted data.
Encryption algorithms scramble data so only those users with the appropriate
decoding key are able to view transmitted or stored data. Public-key
encryption has recently gained additional credibility for managing the keys
(codes) used to encrypt and subsequently decrypt user designated data.
o SMART CARDS. Smart cards are similar in size to credit cards, but contain a
small, tamper-proof microprocessor chip and are capable of storing data and
processing complex encryption algorithms. Smart cards are advanced
authentication tokens that are also capable of storing information, such as
credit card or bank account numbers, medical records, photographic images or
digital certificates.
o DIGITAL CERTIFICATES. A digital certificate serves as an individual's
electronic identification card. The certificates are digitally certified by a
third party, called a certificate authority, who vouches for the identity of
the certificate holder. Digital certificates are being standardized as a
means of authenticating on-line users and are perceived to be a key
technology for the expansion of secure transactions and electronic commerce.
As organizations increase their dependence on the Internet and deploy intranets,
the Company believes that there will be an increasing need for a comprehensive
enterprise-wide network security solution. Many network security vendors,
however, have focused on developing products that address only one or a limited
number of specific security requirements. In addition, products developed by
different vendors are often difficult to integrate with each other and pose
interoperability problems. Consequently, the Company believes that organizations
will increasingly demand comprehensive network security solutions that are easy
to implement and transparent to the user. These solutions must have the ability
to integrate with existing applications, networks and/or mainframe applications,
while being flexible and powerful enough to address the needs created by newly
developed technologies.
The demand for computer network security is expected to grow significantly as a
result of the increased use of the Internet and Intranets. The total market for
Virtual Private Network products and services is projected to grow from $2.4
billion in 1999 to $32.2 billion by 2003. The VPN market that V-ONE addresses,
for products alone, is anticipated to grow from $303 million in 1999 to $2.3
billion by 2003 according to a report by Infonetics Research, Inc. released in
July 1999. This represents a compound annual growth rate of approximately 100%
in the market for VPN products such as those offered by V-ONE.
THE V-ONE SOLUTION
The Company offers a comprehensive suite of network security products that
address the need for identification and authentication, integrity,
non-repudiation, authorization and encryption. This combination of network
security products enables organizations to identify and authenticate network
users while controlling access to specific network services. The Company's
technology is designed to prevent unauthorized access to an organization's
mission critical applications and internal data without impeding permitted uses
of the organization's resources and information. The Company's products are
compatible with many leading hardware platforms and operating systems, as well
as many third-party security products. The Company's customers are able to
integrate V-ONE's security products into their networks with minimal impact on
existing systems and applications.
The Company's current suite of products can be combined and configured to
provide network perimeter security, secure remote access and
intra/inter-enterprise security to facilitate secured electronic commerce and
information exchange. The Company's principal products are SmartGate, a
client/server product that offers identification and authentication, integrity,
non-repudiation, authorization and encryption; and SmartWall, an
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application-level firewall that incorporates SmartGate's functionality. The
Company provides customers with two-factor identification, mutual
authentication, fine-grained access control and encryption by combining smart
card emulation technology with the SmartGate server. In addition, SmartGate
users can access enterprise networks from remote locations using SmartPass
technology incorporated in SmartGate.
The Company's technology provides customers with the ability to create network
security solutions designed to meet their specific network security
requirements. V-ONE's customers can securely deploy a broad range of services
and applications to engage in secured electronic transactions, information
exchange and remote access to mission critical applications and corporate
resources. The Company's technology is designed to be (i) modular, allowing
organizations to utilize the security product or products best suited to address
their immediate needs, with a seamless migration path to additional products as
required, (ii) scaleable, ranging from a single system supporting several users
to multiple systems potentially supporting hundreds of thousands of users, and
(iii) portable, securing access independent of any particular user's machine or
network entry point through the use of smart card technology.
STRATEGY
The Company's goal is to become the leading provider of comprehensive, open and
interoperable network security products that are easy to install, convenient to
use, and highly expandable. The Company's strategy to realize its goal contains
the following elements:
o PROVIDE AN INTEROPERABLE, SCALABLE AND OPEN SOLUTION. The Company intends to
continue to provide network security products that operate on leading
platforms and that are interoperable and compatible with other network
security products. The flexible and open architecture of the Company's
products enable the Company to deliver component technologies for a seamless
and interoperable system. In addition, the Company's technology is
expandable, application-independent and designed both to integrate with
existing technologies as well as to support emerging standards and
applications.
o AUGMENT AND INTEGRATE WITH EXISTING SECURITY PRODUCTS. The Company intends to
continue to offer products that interoperate with a wide variety of
third-party security products, including multiple firewalls and tokens,
allowing a customer to augment existing network security systems. The Company
believes that its technology protects a customer's existing network security
investments because the Company's products are designed to integrate easily
with point products currently employed by its customers. The Company believes
that this strategy will enable it to gain access to potential customers who
have previously made network security investments but whose network security
needs are continuing to evolve.
o LEVERAGE KEY REFERENCE ACCOUNTS IN SELECTED VERTICAL MARKETS. The Company has
identified strategic vertical markets that require sophisticated network
security solutions and has targeted its marketing and direct sales efforts on
key participants within these selected vertical markets. By successfully
installing its products at key accounts, the Company intends to leverage
positive references from its installed customer base to expand its market
penetration within those information critical industries. The Company intends
to increase its marketing and sales efforts through the use of value-added
resellers ("VAR's"), original equipment manufacturers ("OEM's"), and
Application Service Providers ("ASP's") to expand its customer base in
additional vertical markets. Specific vertical markets focused on include
Banking and Finance, Healthcare, and Government.
o DEVELOP AND LEVERAGE STRATEGIC ALLIANCES AND PARTNERING RELATIONSHIPS. The
Company has established strategic marketing and distribution alliances to
increase the distribution and market acceptance of its network security
products including alliances with a variety of major companies among which
are Motorola, Sun Microsystems and Microsoft and Sharp. The Company intends
to continue to strengthen its existing strategic alliances while forging new
relationships with key industry participants.
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In addition, the Company is exploring opportunities to develop new products and
expand the functionality of its existing products through alliances with key
vendors of complementary technologies.
PRODUCTS
The cornerstone of the Company's network security solution is its patented
SmartGate client/server security technology. SmartGate enables two-factor
authentication, mutual authentication and fine-grained access control for most
TCP/IP-based client/server applications. Using SmartGate technology,
organizations can employ two-factor authentication and mutual authentication to
identify and authenticate a network user while fine-grained access control
restricts each user's access to only those services to which the user is
entitled.
The Company's network security products are designed to protect an
organization's information and networks from unauthorized access while allowing
users of the network to conduct business securely over the Internet and
Intranets. These products have been designed to interoperate seamlessly and
enhance application functionality. The Company designs its products so that they
can be combined in different configurations to provide customized solutions for
its customers. The following table lists the Company's products including
products scheduled for release in the second half of 1999 and first quarter of
2000:
PRODUCT CATEGORY DESCRIPTION
--------------- ------------------ -------------------------------
SmartGate Client/Server End-to-end, application level network
Security data security providing two-factor
identification, mutual authentication,
encryption and access control
SmartWall Network An applicant level firewall that
Perimeter protects internal networks while
Security enabling remote access to internal
resources
SmartGate Client/Server Extends SmartGate registration process
with IPSec Security to intranet environments
SmartGate VPN Client/Server A VPN product designed for the Windows
for Windows CE Security CE operating system
Air SmartGate Wireless Client/ A system that provides an end-to-end
Server Security security system for 2-way pagers
Instant Client/Server A secure, easily installed e-business
Extranet Security gateway based on Linux operating system
Server (IXS)
o SMARTGATE is designed to interoperate easily with most TCP/IP-based
applications and to allow the end user to securely use existing and future
software applications over the Internet and Intranets. SmartGate employs
two-factor authentication (two independent components are combined to
authenticate a user) and mutual authentication (both the server and client
determine that the other party to the transaction is authorized to
participate in the transaction) through the use of virtual or physical smart
cards or other authentication devices. SmartGate establishes a secured,
encrypted link over an unsecured network once both parties to a communication
have been identified and authenticated. The authorized user is then granted
access only to those services and data for which the user has been approved.
SmartGate supports secure remote administration, which can be accessed using
a Web browser or telnet.
o SMARTWALL, the Company's firewall product, provides a high level of
protection against unauthorized access to a secured network from an unsecured
network. SmartWall also allows transparent access from the secured network to
services and applications on the unsecured network. SmartWall includes a
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secured graphical user interface for firewall administration, strong mutual
authentication to identify users and complete transparency for authorized
traffic. In addition, SmartWall allows multiple sites to be administered from
any location using a Web browser or Telnet. SmartWall supports multiple types
of existing encryption products, authentication tokens, proxy services and
secure transmission channels. SmartGate is bundled into every SmartWall.
o SMARTGATE WITH IPSEC extends the client deployment and management advantages
of V-ONE's patented online registration process to intranet environments.
This enables V-ONE to compete for remote access VPN business (which offers
secure connectivity for remote employees and satellite offices) with a
solution that is standards-based yet offers unique ease of deployment
features.
o SMARTGATE VPN FOR WINDOWS CE is the industry's only VPN that works on the
Windows CE operating system from Microsoft. Already over 1 million Windows CE
devices, both handheld and palm-sized, have been deployed to meet the
exploding demand for mobile PC companion devices. SmartGate VPN's security
seamlessly operates whether the Windows CE-based device is connected through
wireline or wireless media, transparently protecting sensitive data in any
environment.
o AIR SMARTGATE, working in a manner similar to SmartGate, allows for secure,
encrypted, authenticated communication between two-way pagers and e-mail
through a SmartGate server. Air SmartGate delivers communication privacy to
pager-to-pager, email-to-pager and pager-to-email traffic and text messaging
by providing two-factor authentication and strong data encryption
capabilities. Air SmartGate is a `drop-in' security solution that
interoperates seamlessly with advanced two-way messaging networks using
Motorola's ReFlex communications technology and is scheduled for deployment
by a number of leading providers in early 2000.
o INSTANT EXTRANET SERVER (IXS) offers a secure, 30-minutes-to-install
e-business gateway priced competitively as an entry level product for small
to mid sized businesses. Based on the Linux operating system, IXS offers
e-mail, FTP and Web services integrated with V-ONE security. With IXS, the
ability to securely communicate with partners and employees is no longer only
for larger companies with significant technical and financial resources. As a
low cost, intuitively installed VPN, IXS targets small and mid-sized
companies that are not currently served by the available VPN solutions. IXS
provides VPN functionality to a large and rapidly growing market segment with
a product that can readily be upgraded to V-ONE's full SmartGate product when
the need arises.
MARKETING AND BUSINESS DEVELOPMENT
The Company distributes its network security products through a direct sales
force and supplemental channel distribution programs that employ value added
resellers (VAR), original equipment manufacturers (OEM), Internet Service
Providers (ISP) and Application Service Providers (ASP), designed to accelerate
the flow of V-ONE products to the end user customers. In addition to selling
product directly to customers, V-ONE delivers product to the indirect channel
partners on receipt of a purchase-order. Although V-ONE's channel partners may
carry competing product lines, the Company is able to gain a preferred position
with their sales force using the lead generation program described below. This
is successful due, in part, to the support provided by the V-ONE direct sales
team and, subsequently, allows the Company to maintain visibility to its
customers. The development of these relationships with resellers, as well as
with international distributors, enables V-ONE to achieve broad market
penetration. An analysis of 1999 revenues shows that approximately 40% were from
direct sales efforts and approximately 60% were from indirect (VAR, OEM and
strategic partner) sales channels.
DIRECT MARKETING AND SALES EFFORT
V-ONE initially designed a direct sales strategy to introduce the Company's
products to potential customers in specific market segments known to be early
adopters of security products for electronic data transmission. The Company
originally targeted financial services, telecommunications, information services
and government agencies for this reason. During 1998 and 1999 the number of
users of electronic data transmission started to grow significantly and the
awareness of the need for security, and the functionality and features of
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security products, increased. V-ONE is now targeting other vertical market
segments including healthcare and insurance.
V-ONE, through its direct sales force and its channel distribution partners has
developed its approach to the market based on the knowledge derived from its
existing installed customer base and new requests generated through on-going
sales and marketing programs. The Company has selected those vertical market
segments in which it has successfully established itself and in which a
significant increase in customer demand already is underway.
To effectively market its products to key industry participants, the Company
maintains a continuing relationship with its already established customer-base.
The Company's direct sales force calls on the purchasing agents within the
organizations of its existing customers to generate and close sales.
Additionally, the direct sales force is responsible for developing the Company's
channel partners by providing technical advice and support with respect to the
Company's products as well as generating and providing the channel with
prospective customer leads.
INDIRECT MARKETING EFFORT
The Company expanded its visibility in the growing VPN industry by developing an
effective channel strategy for the distribution of its products. The Company's
business model increases market penetration by growing and developing the number
of its channel partners. Initially, channel partners existed only in
international markets. Today, however, a domestic channel strategy has been
developed and implemented. Implementation of a channel strategy, at the
Company's present stage of development and awareness in the industry, allowed
V-ONE to grow revenue without a directly proportional increase in sales expense
by leveraging the channel sales force when full implementation of the channel
strategy is complete approximately 95% of the Company's sales will result from
VAR, OEM and strategic partner relationships.
An important element of the Company's sales strategy is the support provided to
the indirect sales channels through its internal lead generation program. The
Company has initiated programs to target and sign up channel partners both
domestically and internationally. Today, V-ONE has established relationships
with 58 channel partners throughout the United States and with 21 international
distributors serving the United Kingdom, Sweden, Germany, Belgium, Canada,
China, Chile, Japan, Singapore, Ivory Coast, South Korea and Australia, Norway,
Taiwan, Thailand, Turkey, Hong Kong, Malaysia and France.
V-ONE expects to significantly expand it base of targeted channel partners
throughout 2000. These channel partners will be expected to have an existing
presence in V-ONE's markets and to have an established customer base in the
vertical market segments that are important to V-ONE such as finance,
healthcare, sales force automation and government. When the Company's program is
fully implemented, specific horizontal resellers, including networking and
security integrators, internet service providers, web hosting providers and
managed service providers, will become V-ONE channel partners.
The Company plans to further increase market penetration by developing and
capitalizing on strategic alliances. The Company develops strategic
relationships with partners that incorporate V-ONE technology into their own
products. These alliances are intended to increase the distribution and market
acceptance of V-ONE's network security products in the strategic partner's
markets. In these instances, direct sales and traditional indirect sales efforts
are made available to support the sales and distribution efforts of the
strategic partner. The Company intends to continue efforts to strengthen its
existing relationships while also forging new relationships with key industry
participants.
CUSTOMER SERVICE AND SUPPORT
The Company provides one hour of installation and configuration support for each
VPN purchase. The Company also offers, for a fee, on-site installation support
and basic administrator training with each software product and bundled hardware
product sale. Customers are encouraged to purchase software maintenance, which
includes product updates/upgrades and telephone support. A one-year hardware
warranty comes with each bundled hardware purchase.
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The Company offers additional user or administrator training, on-site support,
systems integration and system security architecture support as an optional
service through its Customer Care staff. Additionally, the Company provides
support services for those customers who have entered into an evaluation
agreement with the Company.
PRODUCT DEVELOPMENT
The market for the Company's products is dynamic and rapidly changing. The
Company believes that its future success will depend upon its ability to: (i)
enhance its existing products, (ii) identify new opportunities to leverage
existing technologies, and (iii) develop new technologies resulting in new
products, markets and services. Accordingly, the Company expects to continue to
make a significant investment in research and development, product market
analysis and systems integration. The Company believes that its customer-driven
development strategy will enable it to continue to broaden its product
offerings.
COMPETITION
V-ONE competes in the market for network security products and services. This
market is very competitive and the Company expects competition to intensify in
the future. Currently, V-ONE offers products that compete in several segments of
the network security market, including hardware assisted encryption devices,
token authentication, smart card-based security applications and electronic
commerce applications. The Company's SmartGate products compete in the VPN
segment of the network security market, and also can be used in conjunction with
many other security solutions in the broader network security market, including
intrusion detection products, virus scanning products, token authentication
products, biometric authentication products, digital certificate products and
firewalls.
The Company's competitors for Internet and intranet security and access control
include Aventail Corporation, AXENT Technologies, Inc., Lucent Technologies,
Northern Telecom Limited (NortelNetworks), Check Point Software Technology Ltd.,
Cisco Systems, Inc., Intel/Shiva, International Business Machines Corporation,
Secure Computing Corporation, Sun Microsystems, Inc. and Network Associates,
Inc. The Company competes to a lesser degree with token vendors because the
Company's SmartGate product supports many vendor tokens. Token vendors include,
AXENT Technologies, Inc., Leemah DataCom Security Corporation, National
Semiconductor Inc., Racal-Guardata, Inc. and RSA Security, Inc. For smart
card-based security applications, the Company principally competes with those
token vendors listed above who offer smart card technology.
In the VPN market place, which is the Company's primary market, there are three
classes of products:
1. Products that provide secure remote access to a company's intranet
and internal LAN-based information by a company's own employees,
telecommuters, or mobile workers. In this market, V-ONE competes with
companies such as Check Point.
2. Products that provide secure communication among business partners
and customers that are not on the same intranet or LAN-based system,
commonly referred to as extranet products. In the extranet market,
V-ONE competes with companies such as Aventail and TimeStep.
3. Products that provide secure communication for office-to-office and
LAN-to-LAN applications. These are referred to as intranet or
site-to-site VPN products. In the site-to-site market, V-ONE competes
with companies such as VP Net, TimeStep, and Radguard.
The Company faces intense competition in all of its market segments, however,
only V-ONE has a complete product offering that reaches all three product
classes and, V-ONE is the only VPN provider for wireless pager and Windows CE
devices today.
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The market for network security products and services is intensely competitive.
The Company expects competition to intensify in the future.
Because of the rapid expansion of the network security market, the Company will
face competition from existing and new entrants, possibly including the
Company's customers, suppliers and/or resellers. There can be no assurance that
the Company's competitors will not develop network security products that may be
more effective than the Company's current or future products or that the
Company's technologies and products would not be rendered obsolete by such
developments.
Many of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources than the
Company. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products, than the Company. There
can be no assurance that the Company's customers will not perceive the products
of such other companies as substitutes for the Company's products.
The Company believes that the principal competitive factors affecting the market
for network security products include effectiveness, scope of product offerings,
technical features, ease of use, reliability, customer service and support, name
recognition, distribution resources and price. Current and potential competitors
have established, or may establish in the future, strategic alliances to
increase their ability to compete for the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances may emerge and
rapidly acquire significant market share. Increased competition may result in
price reductions, reduced gross margins and loss of market share, which would
materially adversely affect the Company's business, financial condition and
results of operations.
BACKLOG
The Company's customers order on an as-needed basis. The Company has typically
been able to ship products within 30 days after the customer submits a firm
purchase order. The Company does not generally maintain long-term contracts with
its customers that require customers to purchase its products. Accordingly, the
Company has not maintained and does not anticipate maintaining a backlog with
the exception of long term service contracts.
In 1998 and 1999, no customer accounted for more than 10% of product revenues,
while in 1997, Government Technology Services, Inc. ("GTSI") accounted for
approximately 12% of total revenues. In 1996, product revenues from MCI and the
National Security Agency ("NSA") accounted for approximately 14% and 14%,
respectively, of total revenues.
SUPPLY SOURCES
Components used in the Company's network security products consist primarily of
computer diskettes and computer magnetic tapes and CD's purchased from
commercial vendors. Components used in the Company's turnkey SmartWall and
SmartGate server products consist primarily of off-the-shelf computers, memory,
displays, power supplies and third-party peripherals (such as hard drives and
network interface cards).
The Company has agreements with at least two vendors for each of its parts and
components. However, the Company orders most of each of its parts and components
from a single vendor to maintain quality control and enhance working
relationships. The Company uses smart card readers manufactured by two contract
manufacturers based on the Company's design specifications. The Company has
outsourced to hardware fulfillment companies its hardware and hardware
integration requirements.
While the Company believes that alternative sources of supply could be obtained,
the Company's inability to develop alternative sources if and as required in the
future could result in delays or reductions in product shipments that could have
a material adverse effect on the Company's business, financial condition and
results of operations.
10
REGULATION AND GOVERNMENT CONTRACTS
The Company's information security products are subject to the export
restrictions administered by the U.S. Department of Commerce, which permit the
export of encryption products only with the required level of export license or
through a license exception KMI (Key Management Infrastructure). U.S. export
laws prohibit the export of encryption products to a number of hostile
countries. Although to date the Company has been able to secure all required
U.S. Export licenses, including the license exception KMI, there can be no
assurance that the Company will continue to be able to secure such licenses in a
timely manner in the future, or at all.
In certain foreign countries, the Company's distributors are required to secure
licenses or formal permission before encryption products can be imported. To
date, except for certain limited cases, the Company's distributors have not been
denied permission to import the Company's products.
LICENSE AGREEMENTS
RSA Security, Inc. Agreement. The Company's SmartGate and Wallet Technology
software incorporate data encryption and authentication technology owned by RSA
Security, Inc. ("RSA"). The Company has a perpetual license agreement with RSA,
which became effective as of December 30, 1994. On May 23, 1996, RSA exercised
an option granted under the agreement to convert its right to receive future
royalties into 2% of the Company's outstanding voting securities, after giving
effect to the issuance to RSA, until the date of the Company's IPO. Pursuant to
a separate agreement between RSA and Massachusetts Institute of Technology
("MIT"), MIT is entitled to receive a portion of any royalties that RSA
receives. As a result, the Company issued directly to MIT a portion of the
shares of Common Stock to which RSA was entitled under the RSA Agreement. The
Company issued 188,705 shares of Common Stock to RSA and MIT immediately prior
to consummation of the IPO. RSA was acquired by Security Dynamics in 1996. On
July 14, 1999 Security Dynamics changed its name to RSA Security, Inc.
There can be no assurance that the Company will be able to maintain its license
rights for the RSA data encryption and authentication technology, and the loss
of such rights could have a material adverse effect on the Company's business,
financial condition and results of operations. If either RSA terminates the
license agreement or takes any other action that results in the loss of, or
inability to maintain, such licensed technology, the Company may incur lost
sales, delays in delivery of the Company's current products and services or
delays in the introduction of new products and services, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PATENTS, PROPRIETARY TECHNOLOGY, TRADEMARKS AND LICENSES
The Company relies on trademark, copyright, patent and trade secret laws,
employee and third-party non-disclosure agreements and other methods to protect
its proprietary rights. The Company has received four patents, which expire in
2013, 2014, and 2015 and has pending three patent applications with the United
States Patent and Trademark Office that cover certain aspects of its technology.
Prosecution of these patent applications and any other patent applications that
the Company may subsequently determine to file may require the expenditure of
substantial resources. The issuance of a patent from a patent application may
require 24 months or longer. There can be no assurance that the Company's
technology will not become obsolete while the Company's applications for patents
are pending. There also can be no assurance that any pending or future patent
application will be granted, that any future patents will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
competitive advantages to the Company. The Company has pursued patent protection
outside of the United States for the technology covered by the most recently
filed patent applications although there can be no assurance that any such
protection will be granted or, if granted, that it will adequately protect the
technology covered thereby.
The Company's success is also dependent in part upon its proprietary software
technology. There can be no assurance that the Company's trade secrets or
non-disclosure agreements will provide meaningful protection for its proprietary
technology and other proprietary information. In addition, the Company relies on
11
"shrink wrap" license agreements that are not signed by the end user to license
the Company's products and, therefore, may be unenforceable under the laws of
certain jurisdictions. Further, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by the Company or that its technology will not infringe upon patents, copyrights
or other intellectual property rights owned by others.
Further, the Company may be subject to additional risk as it enters into
transactions in countries where intellectual property laws are not well
developed or are poorly enforced. Legal protections of the Company's rights may
be ineffective in foreign markets, and technology manufactured or sold abroad
may not be protectable in jurisdictions in circumstances where protection is
ordinarily available in the United States.
The Company believes that, due to the rapid pace of technological innovation for
network security products, the Company's ability to establish and, if
established, maintain a position of technology leadership in the industry is
dependent more upon the skills of its development personnel than upon legal
protections afforded its existing or future technology.
As the number of security products in the industry increases and the
functionality of these products further overlaps, software developers may become
subject to infringement claims. There can be no assurance that third parties
will not assert infringement claims against the Company in the future with
respect to current or future products. The Company also may desire or be
required to obtain licenses from others to effectively develop, produce and
market commercially viable products. Failure to obtain those licenses could have
a material adverse effect on the Company's ability to market its software
security products. There can be no assurance that such licenses will be
obtainable on commercially reasonable terms, if at all, that the patents
underlying such licenses will be valid and enforceable or that the proprietary
nature of the unpatented technology underlying such licenses will remain
proprietary.
There has been, and the Company believes that there may be in the future,
significant litigation in the industry regarding patent and other intellectual
property rights. Although the Company is not currently the subject of any
material intellectual property litigation, litigation involving other software
developers, including companies from which the Company licenses certain
technology, could have a material adverse affect on the Company's business,
financial condition and results of operations.
EMPLOYEES
As of January 1, 2000, the Company had 72 full-time employees and 2 consultants.
Of these individuals, 30 were in sales and marketing, 3 in business development,
25 were in research and product development, 2 were in wireless product
development and 14 in administration. None of the Company's employees are
represented by a labor union or are subject to a collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its employee relations are good.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF COMMON STOCK
V-ONE operates in a rapidly changing environment that involves numerous risks,
some of which are beyond V-ONE's control. The following discussion highlights
some of the risks V-ONE faces. This Annual Report on Form 10-K contains
"forward-looking statements." Such statements involve known and unknown risks
and uncertainties that could cause V-ONE's actual performance or achievements to
differ from any future performance or achievements expressed or implied by such
statements. Readers should carefully consider the following risk factors before
purchasing common stock of V-ONE. Readers are also referred to other documents
to be filed by V-ONE with the SEC, which may identify important risk factors for
V-ONE.
12
V-ONE'S LIMITED OPERATING HISTORY, ACCUMULATED DEFICIT AND FINANCING ACTIVITIES.
As of December 31, 1999, V-ONE had an accumulated deficit of approximately
$39,645,000. V-ONE currently expects to incur additional net losses over the
next several quarters. V-ONE raised additional capital of $2,375,000 in March
2000.
Because of V-ONE's limited operating history, V-ONE may not achieve or sustain
profitability or significant revenues in the short run. To address these risks,
V-ONE must, among other things, continue its emphasis on research and
development, successfully execute and implement its marketing strategy, respond
to competitive developments and seek to attract and retain talented personnel.
V-ONE may be unable successfully to address these risks and the failure to do so
could have a material adverse effect on V-ONE's business, financial condition,
results of operations and cash flows.
V-ONE was founded in February 1993 and introduced its first product in December
1994. Accordingly, V-ONE did not generate any significant revenues until 1995
when it commenced sales of its SmartWall firewall product and introduced its
SmartGate client/server system. Revenues for 1995, 1996, 1997, 1998 and 1999
were approximately $1,104,000, $5,319,000, $5,973,000, $6,260,000, and
$4,966,000, respectively.
Losses attributable to holders of Common Stock for 1995, 1996, 1997, 1998 and
1999 were approximately $1,122,000, $7,813,000, $10,828,000, $9,407,000 and
$9,952,000, respectively.
V-ONE's results of operations in recent periods may not be an accurate
indication of future results of operations in light of V-ONE's short operating
history, the evolving nature of the network security market and the uncertainty
of the demand for Internet and intranet products in general and V-ONE's products
in particular.
RISKS RELATING TO AVAILABILITY OF CAPITAL. It is anticipated that V-ONE will
continue to expend significant amounts to fund its operations and research and
development. V-ONE's cash and cash equivalents may not be sufficient to meet its
requirements until it reaches profitability. In order to maintain V-ONE's
operations and research and development at necessary levels, V-ONE may need to
secure additional financing through the sale of equity securities. If such
additional financing is not available to V-ONE, it will attempt to reduce its
cash requirements through significant reductions in operating levels. V-ONE may
be unable to place equity securities on favorable terms or in an amount required
to meet its future cash requirements. In addition, V-ONE may not be successful
in reducing operating levels or, if operating levels are reduced, V-ONE may not
be able to maintain operations for any extended period of time.
RISKS ASSOCIATED WITH THE EMERGING NETWORK SECURITY MARKET. The market for
V-ONE's products, particularly its client/server VPN or virtual private network
products, is in an early stage of development and the market's acceptance of
these products has been slower than expected. The rapid development of Internet
and intranet computing has increased the ability of users to access proprietary
information and resources and has recently increased demand for network security
products. Because the market for network security products is only beginning to
develop and potential customers are only beginning to realize the benefits of
VPN technology, it is difficult to assess the size of the market, the product
features desired by the market, the best price structure for V-ONE's products,
the best distribution strategy and the competitive environment that will develop
in this market.
The demand for V-ONE's products could decline as a result of competition,
technological change, the public's perception of the need for security products,
developments in the hardware and software environments in which these products
operate, general economic conditions or other factors beyond V-ONE's control.
Any such decline would adversely effect V-ONE.
V-ONE'S DEPENDENCE ON KEY PERSONNEL. V-ONE's success depends, to a large extent,
upon the performance of its senior management and its technical, sales and
marketing personnel, many of whom have only recently joined V-ONE. There is
intense competition in the software security industry to hire and retain
qualified personnel. V-ONE is actively searching for additional qualified
personnel. V-ONE's success will depend upon its ability to retain and hire
additional key personnel. The loss of the services of key personnel or the
13
inability to attract additional qualified personnel could materially and
adversely effect V-ONE's results of operations and product development efforts.
V-ONE has entered into employment agreements with David D. Dawson, its Chairman
of the Board, President and Chief Executive Officer and Margaret E. Grayson, its
Senior Vice President and Chief Financial Officer, that provide for fixed terms
of employment. However, V-ONE has not historically provided such types of
employment agreements to its other employees. This may adversely impact V-ONE's
ability to attract and retain the necessary technical, management and other key
personnel.
RISK OF V-ONE'S INABILITY TO MANAGE GROWTH. To manage growth effectively, V-ONE
needs to continue to improve its operational, financial and management
information systems and to hire, train, motivate and manage its employees.
Competition is intense for qualified technical, marketing and management
personnel. V-ONE may be unable to achieve or manage any future growth. Its
failure to do so could delay V-ONE's product development cycles and marketing
efforts.
V-ONE has experienced and may experience future growth in the number of its
employees and the scope of its operations, resulting in increased
responsibilities for management and added pressure on V-ONE's operating and
financial systems. As of January 1, 2000, V-ONE had 72 employees, as compared to
77, 83, and 77 employees on January 1, 1999, 1998, and 1997, respectively.
RISK OF V-ONE'S DEPENDENCE ON SMARTGATE AND SMARTWALL. V-ONE currently generates
most of its revenues from its SmartWall and SmartGate products. SmartWall and
SmartGate have met with a favorable degree of market acceptance since sales of
SmartWall commenced in the first quarter of 1995 and since SmartGate was
introduced in the fourth quarter of 1995. However, SmartWall or SmartGate may
not continue to be accepted in the future. In addition, any or all of V-ONE's
other current or future products could fail to win market acceptance.
V-ONE's success depends, in part, on V-ONE's ability to design, develop and
introduce new products, services and enhancements on a timely basis to meet
changing customer needs, technological developments and evolving industry
standards.
RISK OF INADEQUATE PROTECTION FOR V-ONE'S TECHNOLOGIES. V-ONE relies on
trademark, copyright, patent and trade secret laws, employee and third-party
non-disclosure agreements and other methods to protect the rights of V-ONE and
the companies from which V-ONE licenses technology. V-ONE currently holds
patents on its Wallet Technology, its SmartGate technology, its Smart Card
Technology, and its On-Line Registration technology. Others may independently
develop similar technologies or duplicate any technology developed by V-ONE.
Prosecution of patent applications and any other patent applications may require
the expenditure of substantial resources. For example, the issuance of a patent
may require 24 months or longer. During this period, V-ONE's technology may
become obsolete. Pending or future patent applications may not be granted,
future patents may be challenged, invalidated or circumvented and the rights
granted may not provide competitive advantages to V-ONE.
V-ONE currently intends to pursue patent protection outside of the United States
for the technology covered by the most recently filed patent applications. This
protection may not be granted. Even if it is granted, it may not adequately
protect the covered technology.
V-ONE's success also depends on its software technology and technology licensed
from others. V-ONE's trade secrets, license agreements and non-disclosure
agreements may not provide appropriate protection for V-ONE's technology or the
technology it licenses from others. Further, V-ONE relies on license agreements
that are not signed by the end user to license V-ONE's products. These license
agreements may be unenforceable under the laws of certain jurisdictions.
V-ONE may be subject to additional risk as V-ONE enters into transactions in
countries where intellectual property laws are not well developed or are poorly
enforced. Legal protections of V-ONE's rights may be ineffective in foreign
14
markets and technology developed by V-ONE may not be protectable in foreign
jurisdictions.
As the number of security products in the industry increases and the
functionality of these products overlap, software developers may become subject
to infringement claims. Third parties may in the future assert infringement
claims against V-ONE with respect to current or future products. V-ONE also may
desire or be required to obtain licenses from others. Failure to obtain those
licenses could adversely effect V-ONE's ability to market its software security
products. However, V-ONE may be unable to obtain these licenses on commercially
reasonable terms, if at all. In addition, the patents underlying such licenses
may not be valid or enforceable and the proprietary nature of the unpatented
technology underlying such licenses may not remain proprietary.
Any claims or litigation could be costly and could result in a diversion of
management's attention. Adverse determinations in such claims or litigation
could also adversely effect V-ONE.
RISK OF ERRORS OR FAILURES. The complex nature of V-ONE's software products can
make the detection of errors or failures difficult when products are introduced.
If errors or failures are subsequently discovered, this may result in delays and
lost revenues during the correction process. In addition, technology licensed by
V-ONE for use in its products may contain errors that adversely effect such
products. Despite testing by V-ONE and current and prospective customers, errors
may still be discovered in new products or releases after commencement of
commercial shipments. This might result in delay, adverse publicity, loss of
market acceptance and claims against V-ONE.
A malfunction or the inadequate design of V-ONE's products could result in tort
or warranty claims. V-ONE generally attempts to reduce the risk of such losses
to itself and to the companies from which V-ONE licenses technology through
warranty disclaimers and liability limitation clauses in its license agreements.
V-ONE may not have obtained adequate contractual protection in all instances or
where otherwise required under agreements V-ONE has entered into with others. In
addition, these measures may not be effective in limiting V-ONE's liability to
end users and to the companies from which V-ONE licenses technology.
V-ONE'S PRODUCT LIABILITY RISK. V-ONE currently has product liability insurance.
However, V-ONE's insurance coverage may not be adequate and any product
liability claim against V-ONE for damages resulting from security breaches could
be substantial. In addition, a well-publicized actual or perceived security
breach could adversely effect the market's perception of security products in
general or V-ONE's products in particular. This could result in a decline in
demand for V-ONE's products.
RISKS OF CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS AND NEW PRODUCT
INTRODUCTION. The network security industry is characterized by rapid changes,
including evolving industry standards, frequent new product introductions,
continuing advances in technology and changes in customer requirements and
preferences. Advances in techniques by individuals and entities seeking to gain
unauthorized access to networks could expose V-ONE's existing products to new
and unexpected attacks and require accelerated development of new products or
enhancements to existing products.
V-ONE may be unable to counter challenges to its current products. V-ONE's
future products may not keep pace with technological changes implemented by
competitors or persons seeking to breach network security. Its products may not
satisfy evolving consumer preferences and V-ONE may not be successful in
developing and marketing products for any future technology. Failure to develop
and introduce new products and improve current products in a timely fashion
could adversely effect V-ONE.
RISK OF DEFECTS AND DEVELOPMENT DELAYS. V-ONE may experience schedule overruns
in software development triggered by factors such as insufficient staffing or
the unavailability of development-related software, hardware or technologies.
Further, when developing new software products, V-ONE's development schedules
may be altered as a result of the discovery of software bugs, performance
problems or changes to the product specification in response to customer
requirements, market developments or V-ONE-initiated changes.
15
Changes in product specifications may delay completion of documentation,
packaging or testing. This may, in turn, affect the release schedule of the
product.
When developing complex software products, the technology market may shift
during the development cycle, requiring V-ONE either to enhance or change a
product's specifications to meet a customer's changing needs. All of these
factors may cause a product to enter the market behind schedule, which may
adversely effect market acceptance of the product or place it at a disadvantage
to a competitor's product that has already gained market share or market
acceptance during the delay.
RISKS RELATING TO EVOLVING DISTRIBUTION CHANNELS. V-ONE relies on its direct
sales force and its channel distribution strategy for the sale and marketing of
its products. V-ONE's sales and marketing organization may be unable to
successfully compete against the more extensive and well-funded sales and
marketing operations of certain of its current and future competitors.
V-ONE's distribution strategy involves the development of relationships with
resellers and international distributors to enable V-ONE to achieve broad market
penetration. However, V-ONE may be unable to continue to attract integrators and
resellers that will be able to market V-ONE's products effectively and that will
be qualified to provide timely and cost-effective customer support and service.
V-ONE ships products to distributors, integrators and resellers on receipt of a
purchase-order, and its distributors, integrators and resellers generally carry
competing product lines. Current distributors, integrators and resellers may not
continue to represent V-ONE's products. The inability to recruit, or the loss
of, important sales personnel, distributors, integrators or resellers could
adversely effect V-ONE.
RISKS RELATING TO COLLECTION OF RECEIVABLES. Due to certain worldwide economic
factors, V-ONE has from time to time experienced and may continue to experience
difficulty in collecting its receivables on a timely basis. V-ONE continues to
focus on the collection of its receivables on a timely basis. However, if V-ONE
is unable to collect its receivables on a timely basis, it could have an adverse
effect on V-ONE's financial condition, results of operations and cash flows.
Risks Associated with Long Sales Cycle and Seasonality. Sales of V-ONE's
products generally involve a significant commitment of capital by its customers.
For sales by V-ONE's sales force directly to end users, V-ONE often permits
customers to evaluate products being considered for license, generally for a
period of up to 30 days. For these and other reasons, the sales cycle associated
with V-ONE's products is likely to be lengthy and subject to a number of
significant risks over which V-ONE has little or no control. As a result, V-ONE
believes that its quarterly results are likely to vary significantly.
V-ONE may be required to ship products shortly after it receives orders.
Consequently, order backlog, if any, at the beginning of any period may
represent only a small portion of that period's expected revenues. As a result,
product revenues in any period will be substantially dependent on orders booked
and registered in that period.
V-ONE plans its production and inventory levels based on internal forecasts of
customer demand, which is highly unpredictable and can fluctuate substantially.
If revenues fall significantly below anticipated levels, V-ONE's financial
condition, results of operations and cash flows could be adversely effected. In
addition, V-ONE may experience significant seasonality in its business, and
V-ONE's financial condition and results of operations may be effected by such
trends in the future. Such trends may include higher revenues in the third
quarter of the year. V-ONE believes that revenues may tend to be higher in the
third quarter due to the fiscal year end of the U.S. government.
RISK OF SALES TO GOVERNMENTS. No government agency or department has an
obligation to purchase products from V-ONE in the future. Accordingly, V-ONE
believes that future government contracts and orders for its network security
products will in part depend on the continued favorable reaction of government
agencies and departments to the development capabilities of V-ONE and the
reliability and perceived reliability of its products.
16
V-ONE may be unable to sell its products to government departments and agencies
and government contractors and such sales, if any, may not result in commercial
acceptance of V-ONE's products. In addition, reductions or delays in funds
available for projects V-ONE is performing or to purchase its products could
adversely impact V-ONE's government contracts business.
Contracts involving the U.S. government are also subject to the risks of
disallowance of costs upon audit, changes in government procurement policies,
the necessity to participate in competitive bidding and, with respect to
contracts involving prime contractors or government-designated subcontractors,
the inability of such parties to perform under their contracts. V-ONE is also
exposed to the risk of increased or unexpected costs, causing losses or reduced
profits, under government and certain third-party contracts. Any of the
foregoing events could adversely effect V-ONE.
In 1997, approximately one-half of V-ONE's total sales were attributable to
contracts with various agencies and departments of the United States government
and of state and local governments. This relationship increased to more than 60%
through December 31, 1998 and decreased to approximately 35% for 1999`.
RISK OF EFFECT OF GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS. V-ONE currently
sells its products abroad and intends to continue to expand its relationships
with international distributors. V-ONE's international sales and operations
could be subject to risks such as the imposition of governmental controls,
export license requirements, restrictions on the export of critical technology,
trade restrictions and changes in tariffs. In particular, V-ONE's information
security products are subject to the export restrictions administered by the
U.S. Department of Commerce. These restrictions, in the case of some products,
permit the export of encryption products only with a specific export license.
These export laws also prohibit the export of encryption products to a number of
countries, individuals and entities and may restrict exports of some products to
a narrow range of end-users. In certain foreign countries, V-ONE's distributors
are required to secure licenses or formal permission before encryption products
can be imported.
V-ONE has obtained a license exception to export strong encryption from the U.
S. Department of Commerce on a worldwide basis (except to the seven terrorist
countries) as long as the end user agrees to use the KRAKit(TM) session key
recreation capability. Foreign competitors that face less stringent controls on
their products may be able to compete more effectively than V-ONE in the global
network security market.
EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW. Certain provisions of V-ONE's Amended Certificate of Incorporation
and of Delaware law could delay or make difficult a merger, tender offer or
proxy contest involving V-ONE. Among other things, these provisions include a
classified board, prohibitions on removing directors except for cause, and other
requirements.
MARKET VOLATILITY. The market price of the Company's Common Stock could be
subject to significant fluctuations in response to variations in quarterly
operating results and other factors, such as announcements of new products by
the Company or its competitors and changes in financial estimates by securities
analysts or other events. Moreover, the stock market has experienced extreme
volatility that has particularly affected the market prices of equity securities
of many technology companies and that has often been unrelated and
disproportionate to the operating performance of such companies. Broad market
fluctuations as well as economic conditions generally and in the software
industry specifically, may adversely affect the market price of the Company's
Common Stock.
ITEM 2. PROPERTIES
The Company leases approximately 28,312 square feet of office space in
Germantown, Maryland under a lease agreement that will expire on July 1, 2003.
The Company expects that this space will be sufficient for its needs through
March 31, 2001. The Company also leases approximately 8,085 square feet, which
is sublet in Rockville, Maryland under leases that will expire on April 17,
2001.
17
The Company also leases office space in Podium Block, Singapore under leases
that will expire on January 15 , 2001.
ITEM 3. LEGAL PROCEEDINGS
On January 27, 2000, plaintiff George McMeen filed a Class Action Complaint in
the U.S. District Court for the District of Maryland, Civil Action No.
MJG-CV-263, against David D. Dawson, Steve Mogul and Margaret Grayson
(collectively, "Individual Defendants") and the Company (collectively,
"Defendants"), alleging claims for violation of Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder by the
Defendants, and violation of Section 20(a) of the Exchange Act by the Individual
Defendants. On February 16, 20000, plaintiff Raj Patel filed a nearly identical
Class Action Compliant in the U.S. District Court for the District Court of
Maryland, Civil Action No. PJM-CV-469. Neither complaint specifies the amount of
alleged damages.
On February 18, 2000, the Court entered an Order extending the time for
Defendants to file a responsive pleading in the McMeen matter until 45 days
after the later of appointment of Lead Plaintiff(s) and Lead Counsel pursuant to
15 U.S.C. 78u-4(a)(3) or the filing of a consolidated amended compliant in the
matter. The Court entered an identical Order in the Patel matter on March 3,
2000.
Defendants deny all wrongdoing and intend to contest both cases vigorously. Both
cases remain pending.
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded in the Nasdaq National Market since
the Company's IPO on October 24, 1996 through September 3, 1999 when it was
transferred to the Nasdaq SmallCap market. According to records of the Company's
transfer agent, the Company had approximately 143 record holders on March 22,
2000. Because brokers and other institutions hold many of such shares on behalf
of stockholders, the Company is unable to estimate the total number of
stockholders represented by these record holders. The following table sets forth
the low and high sale prices as of the close of market of the Company's Common
Stock for each quarter during the two year period ended December 31, 1999.
1998
----
High Sale Price Low Sale Price
--------------- --------------
First Quarter $4.125 $2.250
Second Quarter $4.000 $2.500
Third Quarter $4.125 $1.375
Fourth Quarter $3.625 $1.875
1999
----
High Sale Price Low Sale Price
--------------- --------------
First Quarter $4.688 $2.750
Second Quarter $3.313 $1.688
Third Quarter $5.625 $2.000
Fourth Quarter $15.500 $1.875
The Company has never declared or paid cash dividends on its Common Stock or
other securities. The Company anticipates that all of its net earnings, if any,
will be retained for use in its operations and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. Payments of future cash
dividends, if any, will be at the discretion of the Company's Board of Directors
after taking into account various factors, including the Company's financial
condition, operating results and current and anticipated cash needs.
19
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data set forth below with respect to the
Company's Statements of Operations for the years ended December 31, 1997, 1998
and 1999 and balance sheets as of December 31, 1998 and 1999 are derived from
the audited financial statements of the Company included elsewhere in this
Annual Report. The following selected financial data as of December 31, 1995,
1996 and 1997 and for each of the years ended December 31, 1995 and 1996 are
derived from audited financial statements of the Company not included in this
Annual Report. The financial data set forth below should be read in conjunction
with the Company's financial statements and the notes thereto included elsewhere
in this Annual Report and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Year ended December 31,
--------------------------------------------------------------------------
Statement of Operations Data: 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Revenues:
Products $1,101,418 $5,008,523 $5,470,230 $5,798,542 $3,427,422
Consulting and services 2,083 310,557 502,771 461,263 1,538,258
---------- ---------- ---------- ---------- ----------
Total revenues 1,103,501 5,319,080 5,973,001 6,259,805 4,965,680
---------- ---------- ---------- ---------- ----------
Cost of revenues:
Products 376,359 1,969,117 1,848,871 1,623,396 973,866
Consulting and services 800 56,502 96,949 68,060 137,281
---------- ---------- ---------- ---------- ----------
Total cost of revenues 377,159 2,025,619 1,945,820 1,691,456 1,111,147
---------- ---------- ---------- ---------- ----------
Gross profit 726,342 3,293,461 4,027,181 4,568,349 3,854,533
---------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 130,917 3,914,630 7,717,640 6,071,919 5,456,173
General and administrative 1,350,361 4,879,940 3,699,278 3,896,210 3,380,227
Research and development 304,973 1,960,727 3,153,941 3,853,274 3,814,423
---------- --------- ---------- ---------- ----------
Total operating expenses 1,786,251 10,755,291 4,570,859 13,821,401 2,650,823
---------- ---------- ---------- ---------- ----------
Operating loss (1,059,909) (7,461,836) (10,543,678) (9,253,054) (8,796,290)
----------- ----------- ------------ ----------- -----------
Other (expense) income:
Interest expense (66,615) (518,965) (13,130) (65,372) (676,443)
Interest income 4,513 168,176 341,469 125,030 164,841
----------- ----------- ------------ ----------- -----------
Total other expenses (62,102) (350,789) 328,339 59,658 (511,602)
----------- ----------- ------------ ----------- -----------
Loss before extraordinary item (1,122,011) (7,812,625) (10,215,339) (9,193,396) (9,307,892)
----------- ----------- ------------ ----------- -----------
Extraordinary item - early
extinguishment of debt - - - - (372,052)
----------- ----------- ------------ ----------- -----------
Net loss (1,122,011) (7,812,625) (10,215,339) (9,193,396) (9,679,944)
Dividend on preferred stock - - 12,600 110,879 272,245
Deemed dividend on preferred stock - - 600,000 102,755 -
----------- ----------- ------------ ----------- -----------
Loss attributable to holders of
common stock $(1,122,011) $(7,812,625) $(10,827,9$9) $(9,407,030) $(9,952,189)
BASIC AND DILUTED LOSS PER SHARE
Loss before extraordinary item $ (0.14) $ (0.85) $ (0.84) $ (0.68) $ (0.57)
============ ============ ============= ============ ===========
Net loss attributable $ (0.14) $ (0.85) $ (0.84) $ (0.68) $ (0.57)
STOCK ============ ============ ============= ============ ===========
Weighted average number of common 8,099,223 9,245,305 12,868,859 13,898,450 16,938,205
shares outstanding ============ ============ ============= ============ ===========
20
December 31,
---------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit) $(168,311) $11,526,091 $ 5,912,046 $(1,277,368) $6,629,846
Total assets 2,050,602 14,580,346 10,313,276 3,922,192 9,775,436
Long-term debt, less current portion 126,908 134,704 300,861 197,982 119,746
Series A Convertible Preferred Stock --- --- 3,766,297 --- ---
Series B Convertible Preferred Stock --- --- --- --- 1,288
Series C Redeemable Preferred Stock --- --- --- --- 335
Total shareholder's equity (deficit) (139,938) 12,876,676 4,211,210 635,725 7,841,603
Cash dividends per common share --- --- --- --- ---
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
The Company generates revenues primarily from software licenses and sale of
hardware products and, to a lesser extent, consulting and related services. The
Company anticipates that revenues from products will continue to be the
principal source of the Company's total revenues. The Company often permits
customers to evaluate products being considered for purchase, generally for a
period of up to 30 days, in which event the Company does not recognize revenues
until the customer has accepted the product. Accordingly, the Company's revenue
recognition policy does not necessarily correlate with the signing of a contract
or the shipment of a product.
In 1998 and 1999, no customer accounted for 10% or more of total revenues. In
1997, product revenues from Government Technology Services, Inc. ("GTSI")
accounted for approximately 12% of total revenues.
21
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
Year ended December 31,
--------------------------------
1997 1998 1999
------- ------- -------
Revenues:
Products 91.6 % 92.6 % 69.0 %
Consulting and services 8.4 7.4 31.0
--- --- ----
Total revenues 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Products 31.0 25.9 19.6
Consulting and services 1.6 1.1 2.8
--- --- ---
Total cost of revenues 32.6 27.0 22.4
---- ---- ----
Gross profit
67.4 73.0 77.6
Operating expenses:
Sales and marketing 129.2 97.0 109.9
General and administrative 61.9 62.2 68.0
Research and development 52.8 61.6 76.8
---- ---- ----
Total operating expenses 243.9 220.8 254.7
----- ----- -----
Operating loss (176.5) (147.8) (177.1)
Other (expense) income:
Interest expense (0.2) (1.1) (13.6)
Interest income 5.7 2.0 3.3
--- --- ---
Total other expenses 5.5 0.9 (10.3)
---- --- ------
Loss before extraordinary item (171.0) (146.9) (187.4)
Extraordinary loss - early extinguishment of debt - - (7.5)
---- ---- -----
Net loss (171.0) (146.9) (194.9)
Dividend on preferred stock 0.2 1.8 5.5
Deemed dividend on preferred stock 10.0 1.6 -
---- ---- ----
Loss attributable to holder of common stock (181.2) % (150.3) % (200.4) %
======= ======= =======
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
REVENUES
Total revenues increased from approximately $5,973,000 in 1997 to approximately
$6,260,000 in 1998 and decreased to approximately $4,966,000 in 1999. Product
revenues are derived principally from software licenses and the sale of hardware
products. Product revenues increased from approximately $5,470,000 in 1997 to
approximately $5,799,000 in 1998, but declined to approximately $3,427,000 in
1999. The increase from 1997 to 1998 was due principally to increased sales of
22
the Company's SmartWall and SmartGate products, which offset a decline of sales
of hardware turnkey systems. The decrease from 1998 to 1999 was due principally
to lower sales of the Company's SmartGate and Smartwall product, as well as a
decline in sales of hardware turnkey systems.
Consulting and services revenues are derived principally from fees for services
complementary to the Company's products, including consulting, maintenance and
training. Consulting and services revenues decreased slightly from approximately
$503,000 in 1997 to approximately $461,000 in 1998, but increased to
approximately $1,538,000 in 1999. In 1999, the Company implemented a major drive
to focus on renewing maintenance contracts to allow customers to upgrade to
current versions of software. This resulted in incremental revenue from the
point of the lapse in service to the current period. In addition, resolution was
reached on an agreement with a partner which included recognition of maintenance
revenue of approximately $386,000 for services performed by the Company.
COST OF REVENUES
Total cost of revenues as a percentage of total revenues were 32.6%, 27.0% and
22.4% in 1997, 1998 and 1999, respectively.
Cost of product revenues consists principally of the costs of computer hardware,
licensed technology, manuals and labor associated with the distribution and
support of the Company's products and shipping costs. Cost of product revenues
decreased from approximately $1,849,000 in 1997 to approximately $1,623,000 in
1998 and to $974,000 in 1999. Cost of product revenues as a percentage of
product revenues was 33.8%, 28.0% and 28.4% for 1997, 1998 and 1999,
respectively. The dollar and percentage decreases in 1998 and 1999 were
attributable to an increase in revenues combined with a higher mix of SmartGate
software licenses to SmartWall turnkey hardware sales.
Cost of consulting and services revenues consists principally of personnel and
related costs incurred in providing consulting, support and training services to
customers. Cost of consulting and services revenues decreased from approximately
$97,000 in 1997 to $68,000 in 1998, and increased to approximately $137,000 in
1999. Cost of consulting and services revenues as a percentage of consulting and
services revenues was 19.3%, 14.8% and 8.9% for 1997, 1998 and 1999,
respectively. The dollar and percentage decrease from 1998 to 1999 was
principally due to a reduced emphasis on consulting and a greater concentration
on training and support. The increase from 1998 to 1999 relates to costs of
support for third party product maintenance.
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 from approximately $7,718,000 in 1997 to
approximately $6,072,000 in 1998 and decreased further to approximately
$5,456,000 in 1999. Sales and marketing expenses as a percentage of total
revenues were 129.2%, 97.0% and 109.9% in 1997, 1998 and 1999, respectively. The
dollar decreases in 1998 and 1999 were principally due to personnel turnover and
lower levels of advertising and promotion expenses. The percentage decrease in
1998 was due to lower expenses as compared to 1997, and the percentage increase
in 1999 is based on lower revenue. Sales and marketing expenses are expected to
increase in the near term as a result of the Company's efforts to increase
awareness of new product introductions and strategic alliances. This statement
is based on current expectations. It is forward-looking, and the actual results
could differ materially. For information about factors that could cause the
actual results to differ materially, please refer to Item 1. "Business - Risk
Factors that May Affect Future Results and Market Price of Common Stock" in this
Form 10-K.
General and Administrative -- General and administrative expenses consist
principally of the costs of finance, management and administrative personnel and
facilities expenses. General and administrative expenses increased slightly from
approximately $3,699,000 in 1997 to approximately $3,896,000 in 1998, and
decreased to approximately $3,380,000 in 1999. General and administrative
expenses as a percentage of total revenues were 61.9%, 62.2% and 68.0% in 1997,
1998 and 1999, respectively.
23
The small dollar and percentage increases in 1998 were primarily attributable to
a total of $394,000 in non-cash charges stemming from the reset of the exercise
price on certain warrants. The decrease in expense in 1999 is due in part to
lower fees for recruiting and relocation and the lack of non-cash compensation
which occurred in 1998. The Company anticipates that general and administrative
expenses, as a percent of revenue, will decrease in future periods. This
statement is based on current expectations. It is forward-looking, and the
actual results could differ materially. For information about factors that could
cause the actual results to differ materially, please refer to Item 1. "Business
- - - Risk Factors that May Affect Future Results and Market Price of Common Stock"
in this Form 10-K.
Research and Development -- Research and development expenses consist
principally of the costs of research and development personnel and other
expenses associated with the development of new products and enhancement of
existing products. Research and development expenses increased from
approximately $3,154,000 in 1997 to approximately $3,853,000 in 1998 and
decreased slightly to approximately $3,814,000 in 1999. Research and development
expenses as a percentage of total revenues were 52.8%, 61.6% and 76.8% in 1997,
1998 and 1999, respectively. The dollar and percentage increases in 1998 were
primarily due to increases in the number of personnel associated with the
Company's product development efforts. The percentage increase in 1999 was due
to the decrease in revenue. The Company believes that a continuing commitment to
research and development is required to remain competitive. Accordingly, the
Company intends to continue to allocate substantial resources to research and
development, but research and development expenses may vary as a percentage of
total revenues. This statement is based on current expectations. It is
forward-looking, and the actual results could differ materially. For information
about factors that could cause the actual results to differ materially, please
refer to Item 1. "Business - Risk Factors that May Affect Future Results and
Market Price of Common Stock" in this Form 10-K.
Interest Income and Expense -- Interest income represents interest earned on
cash, cash equivalents and marketable securities. Interest income was
approximately $341,000 in 1997 from interest earned on the net proceeds from the
Company's IPO and the private placement and approximately $125,000 in 1998 and
approximately $165,000 in 1999 from interest earned on the proceeds of the
Company's private placements and stock option exercises. Interest expense
represents interest payable or accreted on promissory notes and capitalized
lease obligations. Interest expense was approximately $13,000, $65,000 and
$676,000 in 1997, 1998 and 1999, respectively. The large increase of interest
and related financing costs was attributable to the Company's secured loan (see
Note 3 to the Financial Statements) to Transamerica Business Credit Corporation
(TBCC). These interest costs were being amortized over the life of the loan,
which was expected to be paid at the February 29, 2000 maturity date, and were
in addition to the interest expense on the loan. The total costs including
interest on the loan proceeds, transactions costs and the cost of warrants
issued in conjunction with the Transamerica note amounted to approximately
$1,000,000 in 1999.
Income Taxes -- The Company did not incur income tax expenses in December 31,
1997, 1998 and 1999 as a result of the net loss incurred during these periods.
As of December 31, 1999, the Company had net operating loss carry forwards of
approximately $38,000,000 as a result of net losses incurred since inception.
Dividend on Series C Stock -- The Company provided approximately $272,000 for a
dividend on the Series C Stock during 1999, which compares to the approximately
$111,000 provided for last year for the Series A Stock. All of the Series A
Stock was retired in November 1998. The Series B Stock bears no dividend.
Deemed Dividend on Series A Stock - In December 1997, the Company recorded a
deemed dividend on the Series A Stock of $600,000, or $150 per share of Series A
Stock, in accordance with the Securities and Exchange Commission's position on
accounting for preferred stock that is convertible at a discount to the market
price for common stock. A further $103,000 was recorded as a deemed dividend in
1998 as a result of the redemption of the Series A Stock.
24
LIQUIDITY AND CAPITAL RESOURCES
Equity Transactions:
- - -------------------
The Company offered 3,000,000 shares of Common Stock in an initial public
offering ("IPO") on October 24, 1996 at $5.00 per share. On November 22, 1996,
the Company's underwriters exercised their option to purchase an additional
200,000 shares of Common Stock from the Company and certain shareholders for
$5.00 per share.
On December 8, 1997, the Company, issued 4,000 shares of Series A Convertible
Preferred Stock ("Series A Stock") to Advantage Fund II Ltd. ("Advantage") for
$4 million in the aggregate. Each share of Series A Stock was convertible into
shares of Common Stock and warrants to purchase shares of Common Stock ("Series
A Warrants").
On September 22, 1998, the Company and Advantage entered into a waiver agreement
("Waiver Agreement") and Amendment No. 1 ("Amendment No. 1") to the Registration
Rights Agreement dated as of December 3, 1997 by and between the Company and
Advantage (as amended, "Registration Rights Agreement"). Pursuant to the Waiver
Agreement, the Company redeemed 2,462 shares of Series A Stock for $3,200,000 in
the aggregate on November 20, 1998. Advantage waived all accrued dividends on
the Series A Stock. No shares of Series A Stock remain outstanding.
Simultaneously with the execution of the Waiver Agreement, the Company granted
to Advantage warrants to purchase 100,000 shares of Common Stock at an exercise
price of $2.125 per share and warrants to purchase 389,441 shares of Common
Stock at an exercise price of $4.77 per share, all of which expire on September
21, 2003 (collectively "Additional Warrants"). Pursuant to the terms of
Amendment No. 1, the Company filed a registration statement on November 20, 1998
with respect to the shares of Common Stock underlying the Additional Warrants.
On September 8, 1999 and December 6, 1999, Advantage exercised its warrants to
purchase 100,000 and 533,576 shares, respectively, of Common Stock.
On November 20, 1998, the Company sold 1,860,000 shares of Common Stock, at
$2.00 per share to a group of accredited investors pursuant to a Placement Agent
Agreement dated October 9, 1998, as amended, between the Company and LaSalle St.
Securities, Inc. ("LaSalle"). The shares of Common Stock were sold pursuant to
Rule 506 of Regulation D promulgated under the Securities Act of 1933, as
amended ("Securities Act"). The Company received $3,366,600 in net sale proceeds
after payment of commissions of 8% of the gross sale proceeds and
non-accountable expense allowance of 1.5% of the gross sale proceeds to LaSalle.
LaSalle also received warrants in the aggregate to purchase 50,000 shares of
Common Stock at an exercise price of $2.125 per share. These warrants were
issued pursuant to Rule 506 of Regulation D promulgated under the Securities
Act. LaSalle exercised its warrants to purchase 50,000 shares of Common Stock on
December 9, 1999. Between December 4, 1998 and December 9, 1998, the Company,
sold 675,000 shares of its Common Stock at $2.00 per share to certain accredited
investors pursuant to Rule 506 of Regulation D promulgated under the Securities
Act. The Company received $1,308,000 in net sale proceeds after payment of
commissions to LaSalle and Coldwater Capital LLC.
On June 11, 1999, the Company issued 1,287,554 shares of Series B Stock in the
aggregate to two investors, 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. For the terms and
conditions of the Series B Stock refer to the Company's Form 8-K filed on June
23, 1999.
On September 9, 1999, the Company issued 335,000 shares of Series C Stock and
3,350,000 non-detachable Warrants to purchase shares of Common Stock to certain
accredited investors listed in the Purchase Agreement. Each share of Series C
Stock was issued with ten Warrants for a price of $26.25 per Unit. The Warrants
are immediately exercisable at a price of $2.625 per share and will remain
outstanding until 90 days after all of the Series C Stock has been redeemed and
the shares of the Common Stock underlying the Warrants have been registered for
resale. The Series C Stock bears cumulative compounding dividends at an annual
rate of 10% for the first five years, 12.5% for the sixth year and 15% in and
after the seventh year. For the terms and conditions of the Series C Stock refer
to the Company's Form 8-K filed on September 15, 1999.
25
Pursuant to the Purchase Agreement, the Company has granted registration rights
to each of the purchasers of the Series B and Series C Stock whereby the Company
is obligated, in certain instances, to register the resale of the shares of
common stock issuable upon exercise of the Warrants.
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 has completed three equity private placements in
addition to exercise of options and warrants and has raised approximately $18.6
million after commission and costs of placements, in additional equity capital
which the Company believes is sufficient to sustain operations. In a letter
dated August 31, 1999, the Company was advised that a determination had been
made by the Nasdaq Listing Qualifications Panel to transfer the listing of the
Company's securities to the Nasdaq SmallCap Market effective with the opening of
business on September 3, 1999. Additionally, the Company was advised that
continued listing on the Nasdaq SmallCap Market was contingent upon making a
public filing, on or before September 15, 1999 with the Securities and Exchange
Commission (the "SEC") and Nasdaq evidencing a minimum of $6,350,000 in net
tangible assets. The filing was to contain a July 31, 1999 pro forma balance
sheet giving effect to completion of the financing for the Series C Stock. On
September 15, 1999, the Company filed a Form 8-K evidencing compliance. On
September 22, 1999, the Company received a letter from the Nasdaq Qualifications
Panel stating that the Company had complied with the terms of its exception,
that the Company would continue to be listed on The Nasdaq SmallCap Market and
that the hearing file would be closed.
During 1999, three warrants to purchase a total of 683,576 shares of common
stock were exercised at various prices. Proceeds from these exercises totaled
$2,863,908.
Additionally during 1999, various employees exercised 848,629 options to
purchase common stock. The Company received net proceeds from these exercises of
$2,670,730.
On March 24, 2000 the Company completed a private placement with Cranshire
Capital, L.P. for 500,000 shares at a purchase price of $4.75 per share pursuant
to Rule 506 of Regulation D promulgated under the Securities Act of 1933, to
augment existing resources. The Company received net proceeds of $2,232,500
after commission to LaSalle and believes it now has sufficient working capital
to sustain operations.
Debt Transactions
- - ------------------
On February 24, 1999, the Company entered into a Loan and Security Agreement
("Loan Agreement") with Transamerica. Under the terms of the Loan Agreement, the
Company received $3.0 million under a term loan that bore interest at 12.53% per
annum. On March 31, 1999, the Company and Transamerica entered into the First
Amendment. 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 $224,000 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 seven years. On June 30, 1999, the Company and Transamerica entered into the
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 agreed to (i) grant
additional 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
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, (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
26
at $86,000 using a dividend yield of 0%; expected volatility of 68%; risk-free
interest rate of 5.35% and expected term of seven 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. The Transamerica term loan was repaid on September 30,
1999 and all indebtedness and obligations owed by the Company were terminated.
As a result of an anti-dilution clause triggered upon the issuance of Series B
Convertible Preferred Stock, the warrants to purchase 100,000 shares of Common
Stock with an exercise price of $3.25 per share and 50,000 shares of Common
Stock with an exercise price of $3.75 per share increased to warrants to
purchase 139,485 shares and 80,472 shares, respectively, each with an exercise
price of $2.33 per share. The Transamerica term loan was repaid on September 30,
1999 and all indebtedness and obligations owed by the Company were terminated.
On September 30, 1999, the Company entered into a Revolving Credit Promissory
Note (the "Note") with Citibank. Under the terms of the Note, the Company could
be advanced funds up to an amount of $3.0 million under a revolving loan
agreement with a maturity date of October 1, 2000 with the ability to renew for
additional terms. The Note bore interest at a rate equal to the sum of the
interest rate paid on the automatically renewable one-year certificate of
deposit plus a margin of two percentage points. Interest was payable monthly in
arrears. The initial rate of interest was 6.78%. Advances of $2,900,000 were
made at September 30, 1999 which were used to pay off the remaining principal on
the Transamerica note payable. On December 14, 1999, the Note was repaid with
the certificate of deposit, which had been the collateral for the Note.
As of December 31, 1999, the Company had nominal debt and had cash and cash
equivalents of approximately $7,137,000 and positive working capital of
approximately $6,630,000.
The Company's operating activities used cash of approximately $9,020,000,
$6,642,000 and $9,263,000 in 1997, 1998 and 1999, respectively. Cash used in
operating activities was principally a result of net losses and changes in
assets and liabilities, non-cash expenses related to depreciation and
amortization, deferred financing costs and the issuance of certain stock
options. The decrease in net cash used in operating activities from 1997 to 1998
was due in part to large increases in accounts payable and decreases in accounts
receivable and inventory. The large increase in 1999 was due in part to a
significant drop in accounts payable and deferred income.
Capital expenditures for property and equipment were approximately $353,000,
$322,000 and $176,000 in 1997, 1998 and 1999, respectively. These expenditures
have generally been for computer workstations and personal computers, office
furniture and equipment, and leasehold additions and improvements. The capital
expenditures decreased in 1998 and again in 1999 as the Company was conservative
in the use of cash for capital equipment. In 1997, the Company paid a security
deposit of $370,000 as part of the six year operating lease agreement for its
principal office in Germantown, Maryland and made an investment of $250,000 in
Network Flight Recorder, Inc. Network Flight Recorder, Inc. develops software to
provide network administrators with network audit capabilities and is headed by
Marcus J. Ranum, the Company's former Chief Scientist.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is not exposed to a variety of market risks such as fluctuations
in currency exchange rates or interest rates. All of the Company's products
are invoiced in U.S. dollars. The Company does not hold any derivatives or
marketable securities
ITEM 7B. IMPACT OF YEAR 2000 UPDATE
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
27
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $25,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with our products, our internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
28
V-ONE CORPORATION
INDEX TO FINANCIAL STATEMENTS
--------
Report of Ernst & Young LLP, Independent Auditors 30
Report of PricewaterhouseCoopers LLP, Independent Auditors 31
Balance Sheets 32
Statements of Operations 33
Statements of Stockholders' Equity 34
Statements of Cash Flows 35
Notes to Financial Statements 36
Schedule of Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1998 and 1999 53
29
Report of Independent Auditors
Board of Directors and Stockholders
V-One Corporation
We have audited the accompanying balance sheet of V-One Corporation as of
December 31, 1999, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. Our audit also included the
financial statement schedule for the year ended December 31, 1999 listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of V-One Corporation at December
31, 1999, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule for the
year ended December 31, 1999, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
McLean, Virginia
February 18, 2000, except Note 11,
as to which the date is March 24, 2000
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of V-ONE Corporation
In our opinion, the accompanying balance sheet and the related statements
of operations, shareholder's equity and cash flows present fairly in all
material respects, the financial position of V-ONE Corporation (the
Company) at December 31, 1998 and the results of its operations and its
cash flows for each of the two years in the period December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes, examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above. We
have not audited the financials statements of V-ONE Corporation for any
period subsequent to December 31, 1998.
The financial statements referred to above have been prepared assuming the
Company will continue as a going concern. As shown in these financial
statements during 1997 and 1998 the Company incurred significant losses of
$10,215,339 and $9,193,396, respectively, and had a net working capital
deficit position of $1,277,368 at December 31, 1998. These facts raise
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustment that might
result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
McLean, VA
March 11, 1999
except as to the third and fourth
sentences of the first paragraph of
Note 3 to which the date is March 31, 1999
31
V-ONE CORPORATION
BALANCE SHEETS
December 31,
----------------------
ASSETS 1998 1999
---- ----
Current assets:
Cash and cash equivalents $635,959 $7,136,943
Accounts receivable, less allowances of $525,000 and $134,000,
respectively. 513,221 854,853
Inventory, less allowances of $313,000 and $88,000, respectively 385,481 46,087
Prepaid expenses and other current assets 276,456 249,339
Total current assets ---------- -----------
1,811,117 8,287,222
Property and equipment, net 874,553 585,708
Licensing fee, net of accumulated amortization of $636,876 and
$892,254, respectively 255,378 -
Other assets 981,144 902,506
---------- -----------
Total assets $3,922,192 $9,775,436
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $2,124,156 $1,157,660
Deferred revenue 888,295 420,922
Notes payable - current 5,259 -
Capital lease obligations - current 70,775 78,794
---------- -----------
Total current liabilities 3,088,485 1,657,376
Deferred rent - 156,711
Capital lease obligations - noncurrent 197,982 119,746
---------- -----------
Total liabilities 3,286,467 1,933,833
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value;13,333,333 shares authorized
Series B convertible preferred stock, 1,287,554 designated; zero
and 1,287,554 shares issued and outstanding, respectively
(liquidation preference of $3,000,000) - 1,288
Series C redeemable preferred stock, 500,000 designated,
zero and 335,000 shares issued and outstanding,
respectively (liquidation preference of $8,793,750). - 335
Common stock, $0.001 par value; 33,333,333 shares authorized;
16,478,046 and 18,233,780 shares issued and outstanding,
respectively 16,478 18,233
Accrued dividends payable - 272,245
Additional paid-in capital 30,361,685 47,197,893
Subscriptions receivable (50,021) (3,785)
Accumulated deficit (29,692,417) (39,644,606)
------------ ------------
Total stockholders' equity 635,725 7,841,603
------------ ------------
$3,922,192 $9,775,436
============ ============
The accompanying notes are an integral part of these financial statements.
32
V-ONE CORPORATION
STATEMENTS OF OPERATIONS
Year ended December 31,
---------------------------------------------------------------
1997 1998 1999
---- ---- ----
Revenues:
Products $ 5,470,230 $ 5,798,542 $ 3,427,422
Consulting and services 502,771 461,263 1,538,258
---------------------------------------------------------------
Total revenues 5,973,001 6,259,805 4,965,680
Cost of revenues:
Products 1,848,871 1,623,396 973,866
Consulting and services 96,949 68,060 137,281
---------------------------------------------------------------
Total cost of revenues 1,945,820 1,691,456 1,111,147
---------------------------------------------------------------
Gross profit 4,027,181 4,568,349 3,854,533
Operating expenses:
Sales and marketing 7,717,640 6,071,919 5,456,173
General and administrative 3,699,278 3,896,210 3,380,227
Research and development 3,153,941 3,853,274 3,814,423
---------------------------------------------------------------
Total operating expenses 14,570,859 13,821,403 12,650,823
---------------------------------------------------------------
Operating loss (10,543,678) (9,253,054) (8,796,290)
Interest (expense) income:
Interest expense (13,130) (65,372) (676,443)
Interest income 341,469 125,030 164,841
---------------------------------------------------------------
Total interest (expense) 328,339 59,658 (511,602)
---------------------------------------------------------------
Loss before extraordinary item (10,215,339) (9,193,396) (9,307,892)
Extraordinary item - early
extinguishment of debt - - (372,052)
---------------------------------------------------------------
Net loss (10,215,339) (9,193,396) (9,679,944)
Dividend on preferred stock
12,600 110,879 272,245
Deemed dividend on preferred stock
600,000 102,755 -
---------------------------------------------------------------
Net loss attributable to holders of
common stock $(10,827,939) $(9,407,030) $(9,952,189)
===============================================================
Basic and diluted loss per share
Loss before extraordinary item $ (0.84) $ (0.68) $ (0.57)
===============================================================
Net loss attributable to holders of
common stock $ (0.84) $ (0.68) $ (0.59)
===============================================================
Weighted average number of
common shares outstanding 12,868,859 13,898,450 16,938,205
===============================================================
The accompanying notes are an integral part of these financial statements.
33
V-ONE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Series B & C Accrued Additional
Common Stock Preferred Stock Dividend Paid-in Subscriptions Accumulated
Shares Amount Shares Amount Payable Capital Receivable Deficit Total
------ ------ ------ -------------- ------- ---------- ------- -----
Balance, December 31, 1996 12,658,347 $12,658 $22,608,866 $(287,400) $(9,457,448) $12,876,676
Exercise of common stock options 417,908 418 1,260,975 - - 1,261,393
Payments received in connection
with notes receivable for stock - - - 88,480 - 88,480
Retirement of common stock (6,020) (6) (32,903) 32,909 - -
Issuance of common stock
warrants - - 200,000 - - 200,000
Deemed dividend on preferred
stock - - 600,000 - - 600,000
Dividend on preferred stock - - 12,600 - - 12,600
Net loss - - - - (10,827,939) 10,827,939)
-------------------------------------------------------------------------------------------------
Balance, December 31, 1997 13,070,235 13,070 24,649,538 (166,011) (20,285,387) 4,211,210
Issuance of common stock, net 2,535,000 2,535 4,532,554 - - 4,535,089
of issuance costs
Exercise of common stock options 189,333 189 273,228 - - 273,417
Conversion of mandatorily
redeemable preferred
stock to common stock 720,670 721 1,537,279 - - 1,538,000
Redemption of mandatorily
redeemable preferred stock - - (1,011,716) - - (1,011,716)
Retirement of common stock (37,192) (37) (115,953) 115,990 - -
Deemed dividend on preferred
stock - - 102,755 - (102,755) -
Dividend on preferred stock - - - - (110,879) (110,879)
Issuance of common stock
warrants - - 394,000 - - 394,000
Net loss (9,193,396) (9,193,396)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1998 16,478,046 16,478 30,361,685 (50,021) (29,692,417) 635,725
Exercise of common stock options,
net of issuance costs 848,629 848 2,669,882 2,670,730
Exercise of warrants 907,105 907 2,863,001 2,863,908
Issuance of Series B preferred
stock, net issuance costs 1,287,554 $1,288 2,981,212 2,982,500
Issuance of Series C preferred
stock, net of issuance costs 335,000 335 7,918,349 7,918,684
Collection and forgiveness of
subscriptions receivable 46,236 46,236
Issuance of common stock
warrants 310,000 310,000
Dividend on preferred stock $272,245 (272,245) -
Issuance of common stock
options to consultants 93,764 93,764
Net loss 9,679,944) (9,679,944)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 18,233,780 $18,233 1,622,554 $1,623 $272,245 $47,197,893 $(3,785) $(39,644,606)$7,841,603
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
34
V-ONE CORPORATION
STATEMENT OF CASH FLOWS
Year ended December 31,
---------------------------------------------------
1997 1998 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,215,339) $ (9,193,396) $(9,679,944)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 285,213 354,187 464,879
Amortization 306,752 283,056 255,378
Loss on disposal of assets 101,354 95,228 -
Amortization of deferred financing costs
- - 730,000
Forgiven subscription receivable - - 46,114
Noncash charge related to issuance of warrants
and options 200,000 394,000 93,764
Changes in operating assets and liabilities:
Accounts receivable, net 735,731 281,174 (341,632)
Inventory, net (165,024) 198,413 339,394
Prepaid expenses and other assets (782,549) (66,153) 105,755
Accounts payable and accrued expenses (159,455) 972,567 (966,496)
Deferred revenue 714,899 75,648 (467,373)
Deferred rent (41,396) (36,879) 156,711
---------------------------------------------------
Net cash used in operating activities (9,019,814) (6,642,155) (9,263,450)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property and equipment (353,110) (322,387) (176,033)
Investment in affiliate (250,000) - -
Collection of note receivable 88,480 - 122
---------------------------------------------------
Net cash used in investing activities (514,630) (322,387) (175,911)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 5,070,000 -
Issuance of preferred stock, net of subscriptions
receivable 4,000,000 - 11,793,750
Payment of debt financing costs
- - (420,000)
Payment of preferred stock dividends - (110,879)
Payment of stock issuance costs (574,324)
(233,703) (941,875)
Redemption of preferred stock
- (3,200,600) -
Exercise of stock options and warrants
1,261,393 273,417 5,583,946
Principal payments on capital lease obligations (167,429) (43,675) (70,217)
Repayment of notes payable (16,667) (16,963) (5,259)
--------------------------------------------------
Net cash provided by financing activities 4,843,594 1,396,976 15,940,345
--------------------------------------------------
Net (decrease) increase in cash and cash equivalents (4,690,850) (5,567,566) 6,500,984
Cash and cash equivalents, beginning of year 10,894,375 6,203,525 635,959
--------------------------------------------------
Cash and cash equivalents, end of year $6,203,525 $635,959 $7,136,943
==================================================
The accompanying notes are an integral part of these financial statements.
35
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. NATURE OF BUSINESS
V-ONE Corporation ("V-ONE" or the "Company"), a Delaware corporation,
develops, markets and licenses a comprehensive suite of network security
products that enable organizations to conduct secured electronic
transactions and information exchange using private enterprise networks
and public networks, such as the Internet. The Company's principal
market is the United States, with headquarters in Maryland, with
secondary markets located in Europe and Asia.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company develops, markets, licenses and supports computer software
products and provides related services. The Company conveys the right to
use the software products to customers under perpetual license
agreements, and conveys the rights to product support and enhancements
in annual maintenance agreements. The Company recognizes revenue upon
deployment of the software directly to an end-user or a value-added
reseller. The Company defers and recognizes maintenance and support
services revenue over the term of the contract period, which is
generally one year. The Company recognizes training and consulting
services revenue as the services are provided. The Company generally
expenses sales commissions as the related revenue is recognized and pays
sales commissions upon receipt of payment from the customer.
In addition to its direct sales effort, the Company licenses its
products through a network of distributors. The Company does not record
revenue until the distributor has delivered the licenses to end-user
customers and the end-user customers have registered the software with
the Company. The Company also records revenue when the software is
deployed directly to the end-user customer on behalf of the distributor.
In certain instances, as appropriate, the Company recognizes revenues
from the sale of systems using the percentage of completion method as
the work is performed, measured primarily by the ratio of labor hours
incurred to total estimated labor hours for each specific contract. When
the total estimated cost of a contract is expected to exceed the
contract price, the total estimated loss is charged to expense in the
period when the information becomes known.
The Company's revenue recognition policies for the year ended December
31, 1997 are in conformity with the Statement of Position 91-1,
"Software Revenue Recognition," promulgated by the American Institute of
Certified Public Accountants. The Company's revenue recognition policies
for the years ended December 31, 1998 and 1999 are in conformity with
the Statement of Position 97-2, "Software Revenue Recognition" (SOP
97-2), promulgated by the American Institute of Certified Public
Accountants.
36
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Software development costs are included in research and development and
are expensed as incurred. Statement of Financial Accounting Standards
No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased
or Otherwise Marketed" requires the capitalization of certain software
development costs once technological feasibility is established, which
the Company generally defines as completion of a working model.
Capitalization ceases when the products are available for general
release to customers, at which time amortization of the capitalized
costs begins on a straight-line basis over the estimated product life,
or on the ratio of current revenues to total projected product revenues,
whichever is greater. To date, the period between achieving
technological feasibility and the general availability of such software
has been short, and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statement
and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Cash and cash equivalents include time deposits with commercial banks
used for temporary cash management purposes.
INVENTORIES
Inventories are valued at the lower of cost or market and consist
primarily of computer equipment for sale on orders received from
customers and other vendor's software licenses held for resale. Cost is
determined based on specific identification.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost and are depreciated
using the straight-line method the shorter of the assets' estimated
useful life or the lease term, ranging from three to seven years.
Capital leases are recorded at their net present value on the inception
of the lease. Depreciation expense was $285,213, $354,187 and $464,879
for the years ended December 31, 1997, 1998 and 1999, respectively.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. The Company
incurred $731,000, $196,000, and $98,400 in advertising costs for the
years ended December 31, 1997, 1998 and 1999, respectively.
36
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS"), allows companies to account for
stock-based compensation either under the new provisions of SFAS 123 or
under the provisions of Accounting Principles Bulletin No. 25,
"Accounting for Stock Issued to Employees" ("APB25"), but requires pro
forma disclosure in the footnotes to the financial statements as if the
measurement provisions of SFAS 123 had been adopted. The Company has
elected to account for its stock-based compensation in accordance with
the provisions of APB25 (see Note 6).
EXTRAORDINARY ITEM
On September 30, 1999, the Company paid in full the Transamerica term
loan prior to its maturity (see Note 3). In connection with the payment,
the Company recognized a $372,052 loss related to the early
extinguishment of debt.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured by applying
presently enacted statutory tax rates, which are applicable to the
future years in which deferred tax assets or liabilities are expected to
be settled or realized, to the differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in net income in the period that the tax
rate is enacted.
The Company provides a valuation allowance against net deferred tax
assets if, based upon available evidence, it is more likely that some or
all of the deferred tax assets may not be realized.
NET LOSS PER COMMON SHARE
The Company follows Financial Accounting Standards Board Statement No.
128, "Earnings Per Share," ("SFAS 128") for computing and presenting net
income per share information. Basic net loss per share was determined by
dividing net loss by the weighted average number of common shares
outstanding during each year. Diluted net loss per share excludes common
equivalent shares, unexercised stock options and warrants as the
computation would be anti-dilutive. A reconciliation of the net loss
available for common stockholders and the number of shares used in
computing basic and diluted net loss per share is in Note 10.
BUSINESS SEGMENTS
In 1998, the Company adopted FASB Statement No. 131, "Disclosure About
Segments of an Enterprise and Related Information," which establishes
standards for disclosures about products, geographics and major
customers. The Company's implementation of this standard does not have
any effect on its financial statements.
37
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
RISKS, UNCERTAINTIES AND CONCENTRATIONS
Financial instruments that potentially subject the Company to
significant concentration of credit risk consist primarily of cash
equivalents and accounts receivable. The Company's cash balances exceed
federally insured amounts. The Company invests its cash primarily in
money market funds with an international commercial bank. The Company
sells its products to a wide variety of customers in a variety of
industries. The Company performs ongoing credit evaluations of its
customers but does not require collateral or other security to support
customer accounts receivable. In management's opinion, the Company has
sufficiently provided for estimated credit losses.
In 1997 one customer comprised 12% of total revenues. For the years
ended December 31, 1998 and 1999, no customer represented more than 10%
of total revenues.
The Company had significant purchases of product from two major
suppliers of approximately $1,201,000 during 1997. During 1998
approximately $524,000 was purchased from two major suppliers,
representing 32% of total 1998 product cost of revenues. No suppliers
exceeded 10% of purchases in 1999.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1999
presentation. These changes had no impact on previously reported results
of operations.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective
for fiscal years beginning after June 15, 2000 and cannot be applied
retroactively. SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
The Company currently plans to adopt SFAS 133 effective January 1, 2001.
3. NOTES 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 a $3.0 million term loan that bears interest at 12.53%
per annum. Interest is payable monthly in arrears. On March 31, 1999,
the Company and Transamerica amended the Loan Agreement, whereby
Transamerica waived the event of default created when the Company
received a "going-concern" opinion from its independent auditors. The
Company agreed to (i) grant TBCC Funding Trust II, an affiliate of
Transamerica, a warrant to purchase 100,000 shares of Common Stock at an
exercise price of $3.25 per share and (ii) accept the additional
38
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
financial covenant that the Company's net worth would be $5.0 million at
June 30, 1999 and September 30, 1999. The warrant was valued at $224,000
using the Black-Scholes 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 seven years.
On June 30, 1999, the Company and Transamerica entered into a second
amendment, whereby Transamerica (i) waived the requirement that the
Company's net worth be $5.0 million on June 30, 1999, (ii) extended the
maturity date of the $3.0 million 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
(i) issued a seven-year warrant to purchase 50,000 shares of the
Company's Common Stock at an exercise price of $3.75 per share, (ii)
paid a $150,000 fee to Transamerica, (iii) agreed to use 30% of any
future equity raised by the Company after completion of its current
round of financing to prepay the term loan, (iv) agreed to pay $100,000
per month in principal on 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 warrant
to purchase 50,000 shares was valued at $86,000 using the Black-Scholes
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 seven years.
As a result of an anti-dilution clause triggered upon the issuance of
Series B Convertible Preferred Stock, the warrants to purchase 100,000
shares of Common Stock with an exercise price of $3.25 per share and
50,000 shares of Common Stock with an exercise price of $3.75 per share
increased to warrants to purchase 139,485 shares and 80,472 shares,
respectively, each with an exercise price of $2.33 per share. The
Transamerica term loan was repaid on September 30, 1999 and all
indebtedness and obligations owed by the Company were terminated.
On September 30, 1999, the Company entered into a Revolving Credit
Promissory Note (the "Note") with Citibank, F.S.B., ("Citibank"). Under
the terms of the Note, the Company may be advanced up to $3.0 million
under a revolving loan agreement with a maturity date of October 1, 2000
with the ability to renew for additional terms. The Note bears interest
at a rate equal to the sum of the interest rate paid on the
automatically renewable one-year certificate of deposit plus a margin of
two percentage points. Interest is payable monthly in arrears. The
initial rate of interest is 6.78%. Advances of $2,900,000 were made at
September 30, 1999 which were used to pay off the remaining principal on
the Transamerica note payable. On December 14, 1999, the Note was repaid
with the proceeds from a certificate of deposit, which had been the
collateral for the Note.
4. SELECTED BALANCE SHEET INFORMATION
Property and equipment consisted of the following at December 31:
1998 1999
--------- ----------
Office and computer equipment $ 896,767 $ 988,041
Office and computer equipment 359,859 359,859
under capital leases
39
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Leasehold improvements 62,332 62,332
Furniture and fixtures 120,811 120,811
------- -------
1,439,769 1,531,043
Less: accumulated depreciation (565,216) (945,335)
$ 874,553 $ 585,708
========== ==========
The Company had two licensing agreements whereby the Company obtained
the right to modify and sell certain technology used in its product
line. All amounts are fully amortized as of December 31, 1999. The
Company incurred amortization expense of $283,056 $283,056 and $255,378
relating to these agreements in 1997, 1998 and 1999, respectively.
Other assets consisted of the following at December 31:
1998 1999
------- -------
Deposits $ 731,144 $ 652,506
Investment in Network Flight Recorder 250,000 250,000
------- -------
$ 981,144 $ 902,506
======= =======
In January 1997, the Company made an investment of $250,000 in Network
Flight Recorder, Inc. ("NFR") in exchange for ten percent of NFR's
common stock. NFR develops software to provide network administrators
with network audit capabilities. NFR is headed by the Company's former
chief scientist, who continues to work as a consultant for the Company.
The Company's investment in these equity securities was recorded at the
fair market value on the date of the transaction and is accounted for
using the cost method.
Accounts payable and accrued expenses consisted of the following at
December 31:
1998 1999
-------- --------
Accounts payable $ 1,820,812 $ 847,267
Accrued compensation 234,638 270,072
Accrued marketing costs 15,000 -
Sales tax payable 28,904 1,936
Other accrued expenses 24,802 38,385
------------ -----------
$ 2,124,156 $61,157,660
============ ===========
5. INCOME TAXES
The tax effect of temporary differences that give rise to significant
portions of the deferred income taxes are as follows at December 31:
(liabilities):
1998 1999
Deferred tax assets ------ ------
Deferred revenue $ 131,573 $ -
Inventory 121,018 33,867
Accounts receivable 202,615 51,845
Property and equipment (78,178) (60,343)
Deferred rent - 60,522
40
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Non-deductible accruals 65,739 61,320
Options and warrants - 155,991
Licensing fee (81,989) -
Net operating loss carry forward 9,087,986 14,556,026
----------- ----------
Total deferred tax asset 9,448,764 14,859,228
Valuation allowance (9,448,764) (14,859,228)
-------- ----------
$ - $ -
Net deferred tax asset ========== ==========
The net change in the valuation allowance from 1998 to 1999 is due
principally to the increase in net operating losses. Valuation
allowances have been recognized due to the uncertainty of realizing the
benefit of net operating loss carryforwards. At December 31, 1998 and
1999, the Company had net operating loss carryforwards of approximately
$23,756,029 and $37,690,384 for Federal and state income tax purposes
available to offset future taxable income. The net operating loss
carryforwards begin to expire in 2008. Approximately $4,279,000 of the
net operating loss carryforwards is attributable to exercised stock
options, the benefit of which, when realized, will directly increase
additional paid-in capital.
A reconciliation between income taxes computed using the statutory
federal income tax rate and the effective rate for the years ended
December 31, 1999 and 1998 is as follows:
1998 1999
--------- ---------
Federal income tax
(benefit) at statutory (34.0%) (34.0%)
Rate
State income taxes, net (4.6%) (6.6%)
Permanent items 0.1% (14.6%)
Net change in valuation allowance 38.5% 55.2%
Provision for Income Taxes --------- ---------
0% 0%
========= =========
6. SHAREHOLDERS' EQUITY
SERIES A PREFERRED STOCK
On December 8, 1997, the Company issued 4,000 shares of mandatorily
redeemable Series A Convertible Preferred Stock ("the Series A Stock")
to Advantage Fund II Ltd. ("Advantage") for $4.0 million, less issuance
costs of approximately $273,000. Each share of Series A Stock was
convertible into shares of Common Stock and warrants to purchase shares
of Common Stock ("Series A Warrants").
The holders of Series A Stock were entitled to receive, at the
discretion of the Board of Directors, dividends at the rate of $50.00
per annum per share, which were fully cumulative, accrued without
interest from the date of original issuance and were payable quarterly
commencing March 1, 1998. During the years ended December 31, 1997 and
41
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1998, the Company recorded dividends of $12,600 and $110,879. All
dividends were paid by the Company in 1998.
Due to the Maximum Share Amount limitation found in Section 7(a)(1) of
the Certificate of Designations of the Series A Stock ("the
Certificate"), the Company was obligated to convert shares of Series A
Stock held by Advantage. On September 21, 1998, the Company sent an
inconvertibility notice to Advantage indicating that, as of September
11, 1998, Advantage had the right to have some of its shares of Series A
Stock redeemed by the Company for the Share Limitation Redemption Price
(which term is defined in the Certificate).
On September 22, 1998, the Company and Advantage entered into a waiver
agreement and an amendment to their original agreement. Pursuant to the
waiver agreement, the Company redeemed 2,462 shares of Series A Stock
for $3,200,000 in the aggregate on November 20, 1998. Advantage waived
all accrued dividends on the Series A Stock. No shares of Series A Stock
remain outstanding.
Simultaneously with the execution of the waiver agreement, the Company
granted warrants to Advantage to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $2.125 per share and
warrants to purchase 389,441 shares of the Company's Common Stock at an
exercise price of $4.77 per share. Pursuant to the terms of the
amendments the Company has agreed to file a registration statement with
respect to the shares of Common Stock underlying the warrants. Advantage
exercised all of these warrants in 1999 in addition to warrants to
purchase 144,123 shares of Common Stock at $4.77 per share which
Advantage had received in prior private placements. The warrants to
purchase a total of 633,576 shares of Common Stock were exercised for
$2,757,881.
SERIES B PREFERRED STOCK
On June 11, 1999, the Company issued 1,287,554 shares at $2.33 per share
of Series B Convertible Preferred Stock (the "Series B Stock") to two
investors for $1.0 million in cash and a subscription agreement for $2.0
million. Net proceeds to the Company after issuance costs of $17,500
were $2,982,500. The subscription receivable was repaid in two
installments of $1.0 million plus accrued interest in July and August
1999. The Series B Stock ranks senior to the Common Stock as to
distributions of assets upon liquidation, dissolution or winding up of
the Company. The Series B Stock is not redeemable, does not bear
dividends and generally has no voting rights. Each share of Series B
Stock is convertible at the option of the holder at any time into one
share of Common Stock based upon an initial conversion price of $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. The holders of the Series B Stock are entitled
to a liquidation preference of $2.33 per share.
SERIES C PREFERRED STOCK
On September 9, 1999, the Company issued 335,000 shares of Series C
Preferred Stock (the "Series C Stock") and 3,350,000 non-detachable
warrants to purchase shares of the Company's Common Stock (the
"Warrants") to certain accredited investors. Each share of Series C
Stock was issued with ten Warrants (collectively a "Unit") for a price
of $26.25 per Unit. The Company received $7,918,684 in proceeds net of
42
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
issuance costs of approximately $875,000. The Warrants are immediately
exercisable at a price of $2.625 per share and will remain exercisable
until 90 days after all of the Series C Stock has been redeemed and the
shares of the Common Stock underlying the Warrants have been registered
for resale.
The Series C Stock bears cumulative compounding dividends at an annual
rate of 10% for the first five years, 12.5% for the sixth year and 15%
in and after the seventh year. The dividends may be paid in cash, or at
the option of the Company, in shares of registered common stock. The
Series C Stock is not convertible and ranks senior to the Common Stock
and to the Series B Stock as to payment of dividends, and ranks senior
to the Common Stock and in parity with the Series B Stock as to
distributions of assets upon liquidation, dissolution or winding up of
the Company. Holders of the Series C Stock are entitled to a liquidation
preference of $26.25 per share.
At least 51% of the outstanding shares of Series C Stock must vote
affirmatively as a separate class for (i) the voluntary liquidation,
dissolution or winding up of the Company, (ii) the issuance of any
securities senior to the Series C Stock and (iii) the declaration or
payment of a cash dividend on all junior stocks and certain amendments
to the Company's certificate of incorporation. Prior to the exercise of
the Warrants, the holders shall also be entitled to ten common votes for
each share of Series C Stock on all matters on which common stockholders
are entitled to vote, except in connection with the election of the
Board of Directors. As long as at least 51% of the Series C Stock is
outstanding, the holders shall have the right to elect one director to
the Company's Board of Directors.
The Company has the right to redeem the outstanding shares of Series C
Stock in whole (i) at any time after the third anniversary of the
issuance date, (ii) upon the closing of an underwritten public offering
in excess of $20 million and at a price in excess of $6.50 per share or
(iii) prior to the third anniversary of the issuance date if the average
closing bid price of the Common Stock for any 20 trading days during any
30 trading days ending within 5 trading days prior to the date of notice
of redemption is at least $3.9375 per share. The redemption price would
be paid in cash in full and would be equal to the greater of the $26.25
per share purchase price or the fair market value of each Series C share
plus all unpaid dividends.
At any time after all of the Warrants have been exercised by a holder,
that holder shall have the right to require the Company to redeem all of
its then outstanding share of Series C Stock. The redemption price for
each share of Series C Stock shall be the $26.25 per share purchase
price plus all unpaid dividends and is payable at the option of the
Company in either cash or shares of common stock.
The Company has granted registration rights to the investors whereby the
Company is obligated, in certain instances, to register the shares of
Common Stock issuable upon conversion of the Series B Stock and exercise
of the Warrants attached to the Series C Stock.
COMMON STOCK
In fourth quarter of 1998, the Company completed a private placement of
2,535,00 shares of its Common Stock at a price of $2.00 per share. The
Company incurred issuance costs of approximately $546,000 and on
43
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
November 20, 1998, granted a warrant to purchase 50,000 shares of Common
Stock to the underwriter of the private placement. The warrant has an
exercise price of $2.125 and expires five years from the date of grant.
On January 14, 1999, a warrant to purchase 600,000 shares of Common
Stock was exercised in full pursuant to its cashless exercise provision
and the Company issued 223,529 shares of its common stock to the holder.
In addition to the exercise of warrants for 633,576 shares of Common
Stock by Advantage for $2,757,658, a warrant to purchase a total of
50,000 shares of Common Stock was exercised at $2.125 per share.
Proceeds from this exercise totaled $106,250. Additionally during 1999,
various employees exercised 848,629 options to purchase common stock.
The Company received net proceeds from these exercises of $2,670,730.
WARRANTS
In addition to the warrants issued in connection with the Transamerica
debt for 219,957 shares of Common Stock at $2.33 per share and the
warrants attached to the Series C Stock for 3,350,000 shares of Common
Stock at $2.625 per share discussed above, the Company issued the
following warrants to purchase Common Stock during the year ended
December 31, 1997, 1998, and 1999:
On November 21, 1997, the Company issued a warrant to purchase 300,000
shares of Common Stock with an exercise price of $3.125 to the President
and Chief Executive Officer. The warrant vests evenly on the four
anniversaries following the date of grant.
This warrant expires on November 21, 2007.
In connection with a marketing agreement in 1997, the Company issued a
warrant to a consultant to purchase 25,000 shares of Common Stock at an
exercise price of $3.875 per share, exercisable as of November 4, 1997.
This warrant expires on November 4, 2002.
On December 8, 1997, the Company issued warrants to purchase 60,000
shares of Common Stock at an exercise price of $4.725 to its underwriter
in consideration for services rendered in connection with a private
placement. Such warrants expire on December 8, 2002.
On July 8, 1998, the Company granted warrants to purchase 10,000 shares
of Common Stock each to two directors of the Company. The warrants have
an exercise price of $2.688 and expire five years from the date of
grant.
Warrants to purchase shares of the Company's Common Stock outstanding at
December 31, 1998 and 1999 were as follows:
1998 1999 Exercise Price
---- ---- --------------
600,000 - $2.00
150,000 - $2.13
- 219,957 $2.33
- 3,350,000 $2.63
20,000 20,000 $2.69
300,000 300,000 $3.13
25,000 25,000 $3.88
60,000 60,000 $4.73
44
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
533,576 - $4.77
---------- ---------
1,688,576 3,974,957
At December 31, 1999, warrants to purchase 3,824,957 shares of common
stock were exercisable. The weighted average grant date fair value of
the warrants issued during 1999 was estimated at $2.24 for warrants
granted at fair market value and $1.72 for warrants granted below fair
market value. The fair value was determined using the Black-Scholes
option-pricing model with the following assumptions: dividend yield 0%,
volatility of 67%, risk-free interest rate of 5.35% and expected lives
of 7 years.
STOCK OPTIONS PLANS
The Company has the following active stock options plans: the 1995
Non-Statutory Stock Option Plan, the 1996 Incentive Stock Plan and the
1998 Incentive Stock Option Plan. These plan were adopted to attract and
retain key employees, directors, officers and consultants and are
administered by the Compensation Committee appointed by the Board of
Directors.
1995 NON-STATUTORY STOCK OPTION PLAN
The Compensation Committee determined the number of options granted to
key employees, the vesting period and the exercise price provided they
were not below market value on the date of the grant for the 1995
Non-Statutory Stock Option Plan ("the 1995 Plan"). In most cases, the
options vest over a two-year period and terminate ten years from the
date of grant. The 1995 Plan will terminate during May 2005 unless
terminated earlier within the provisions of the 1995 Plan. On June 12,
1996, the Board of Directors determined that no further options would be
granted under the 1995 Plan.
Option activity under the 1995 Plan for the three years ended December
31, 1999 was as follows:
Weighted Average
Shares Exercise Price
------ --------------
Balance as of December 31, 1996 350,293 $1.238
Exercised (119,070) $1.001
Cancelled - $0.425
----------
Balance as of December 31, 1997 231,223 $1.398
Exercised (158,333) $1.213
Cancelled (8,888) $0.425
----------
Balance as of December 31, 1998 64,002 $1.855
Exercised (53,400) $1.726
Balance as of December 31, 1999 10,602 $2.505
==========
1996 INCENTIVE STOCK PLAN
During June 1996, the Company adopted the 1996 Incentive Stock Plan
("the 1996 Plan"), under which incentive stock options, non-qualified
stock options and restricted share awards may be made to the Company's
key employees, directors, officers and consultants. Both incentive stock
options and options that are not qualified under Section 422 of the
45
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Internal Revenue Code of 1986, as amended ("non-qualified options"), are
available under the 1996 Plan. The options are not transferable and are
subject to various restrictions outlined in the 1996 Plan. The
Compensation Committee or the Board of Directors determines the number
of options granted to key employees, officers or consultants, the
vesting period and the exercise price provided that they are not below
fair market value. The 1996 Plan will terminate during June 2006 unless
terminated earlier by the Board of Directors.
On February 17, 1998, the Company's Board of Directors authorized an
offer to reset the exercise price of all full-time employees' (other
than the President and any vice presidents) incentive stock options and
non-qualified stock options granted under the 1996 Plan. If accepted by
the option holder, such options were replaced with non-qualified options
at the new exercise price of $2.625 per share. To have been eligible for
repricing, a participant must: 1) have been a full-time employee on
February 17, 1998; 2) have agreed to remain an employee of the Company
until August 17, 1998, and 3) have accepted the offer by February 24,
1998.
On May 1, 1998, the Company's Board of Directors authorized an offer to
reset the exercise price of all options issued to the President and any
vice presidents granted under the 1996 Plan. If accepted by the option
holder, such options were replaced with non-qualified options at the new
exercise price of $2.875 per share. To have been eligible for repricing,
a participant must: 1) have been a full-time employee on May 1, 1998; 2)
have agreed to remain an employee of the Company until November 1, 1998,
and 3) have accepted the offer by May 8, 1998.
46
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Option activity under the 1996 Plan for the three years ended December
31, 1999 was as follows:
Weighted Average
Shares Exercise Price
------ --------------
Balance as of December 31, 1996 1,153,671 $4.312
Granted 1,315,501 $4.272
Exercised (298,838) $3.818
Cancelled (198,299) $5.106
----------
Balance as of December 31, 1997 1,972,035 $4.243
Granted 558,667 $2.78
Exercised (35,000) $2.625
Cancelled (613,326) $4.28
----------
Balance as of December 31, 1998 1,882,376 $3.221
Granted -
Exercised (677,479) $3.438
Cancelled (290,666) $2.787
Expired (99,250) $2.785
----------
Balance as of December 31, 1999 814,981 $3.268
==========
1998 INCENTIVE STOCK OPTION PLAN
On February 2, 1998, the Board of Directors authorized the adoption of
the 1998 Incentive Stock Option Plan (the "1998 Plan"). The purpose of
the 1998 Plan is to provide for the acquisition of an equity interest in
the Company by non-employee directors, officers, key employees and
consultants. The 1998 Plan will terminate February 2, 2008.
Incentive stock options may be granted to purchase shares of Common
Stock at a price not less than fair market value on the date of grant.
Only employees may receive incentive stock options; all other qualified
participants may receive non-qualified stock options with an exercise
price determined by a Committee or the Board. Options are generally
exercisable after one or more years and expire no later than ten years
from the date of grant. The 1998 Plan also provides for reload options
and restricted share awards to employee and consultant participants
subject to various terms.
Option activity under the 1998 Plan for the two years ended December 31,
1999 was as follows:
Weighted Average
Shares Exercise Price
------ --------------
Balance as of December 31, 1997 - -
Granted 712,000 $2.694
Exercised - -
Cancelled (101,000) $2.688
---------
Balance as of December 31, 1998 611,000 $2.695
Granted 1,641,500 $2.328
47
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Exercised (117,750) $2.53
Cancelled (437,000) $2.507
Expired (7,500) $2.688
----------
Balance as of December 31, 1999 1,690,250 $2.40
=========
Awards may be granted under the 1998 Plan with respect to a total of
2,500,000 shares of Common Stock.
For all of its plans, the Company measures compensation expense for its
employee stock-based compensation using the intrinsic value method and
provides pro forma disclosures of net loss as if the fair value method
had been applied in measuring compensation expense. Under the intrinsic
value method of accounting for stock-based compensation, when the
exercise price of options granted to employees is less than the fair
value of the underlying stock on the date of grant, compensation expense
is to be recognized over the applicable vesting period. The effect of
applying SFAS 123's fair value method to the Company's stock based
awards is not necessarily representative of the effects on reported net
income for future years, due to, among other things, the vesting period
of the stock options and the fair value of additional stock options in
future years.
Year ended December 31,
-----------------------
1997 1998 1999
----- ----- -----
Loss attributable to holders of common
stock:
As reported $10,827,939 $9,407,030 $9,952,189
Pro forma $11,142,262 $10,464,134 $10,895,072
Basic and diluted loss per share
attributable to holders of common stock:
As reported $0.84 $0.68 $0.59
Pro forma $0.87 $0.75 $0.64
The fair value of each option is estimated on the date of grant using a
type of Black-Scholes option pricing model with the following
weighted-average assumptions used for grants during the years ended
December 31, 1997, 1998 and 1999, respectively: dividend yield of 0% for
all periods; expected volatility of 56%, 68% and 92%; risk-free interest
rate of 6.0%, 5.3%, and 5.5%; and expected term of 4.0 years for all
periods. The weighted-average fair value of the options granted under
all of the Company's plans during the years ended December 31, 1997,
1998 and 1999 was $2.039, $1.10 and $1.60, respectively. The weighted
average exercise price of the options outstanding under all of the
Company's plans at December 31, 1997, 1998 and 1999 was $3.96, $3.06 and
$2.68, respectively. As of December 31, 1999, the weighted average
remaining contractual life of the options outstanding under all of the
Company's plans is 8.9 years and the number of options exercisable is
403,457.
48
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company is obligated under various operating and capital lease
agreements, primarily for office space and equipment through 2003.
Future minimum lease payments under these non-cancelable operating and
capital leases as of December 31, 1999 are as follows:
Operating Capital
2000
2001 $881,668 $100,739
2002 612,385 83,499
2003 576,590 50,059
2004 341,199 -
- -
-------- --------
Total minimum payments
$2,411,842 $234,297
========== ========
Interest (35,757)
--------
Present value of capital lease obligations 198,540
Less: current portion (78,794)
Capital lease obligations non-current $ 119,746
==========
Rent expense was $550,693, $701,133 and $919,550 for the years ended
December 31, 1997, 1998 and 1999, respectively.
At December 31, 1999, the Company's future minimum sublease rental
income payments with respect to certain non-cancelable operating leases
with terms in excess of one year are as follows:
2000 $ 206,081
2001 61,573
----------
Total minimum payments $ 267,654
==========
CONTINGENCIES
On January 27, 2000, a class action lawsuit alleging violations of the
federal securities laws was filed in the U.S. District Court of Maryland
on behalf of purchasers of the Company's common stock on November 30,
1999. The lawsuit seeks unspecified monetary damages. The Company
believes the lawsuit is without merit and intends to defend against it
vigorously.
In the fourth quarter of 1999, the Company agreed to settlement terms
with Network Associates, Inc. relating to disputed amounts owed between
the two parties. The Company accrued the net settlement costs of
$515,000 as of December 31, 1999 and recorded revenues of approximately
$386,000 in the fourth quarter.
49
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. EMPLOYEE 401(K) DEFERRED COMPENSATION PLAN
The Company has a 401(K) plan (the "Plan") for all employees over the
age of 21. Contributions are made through voluntary employee salary
reductions, up to 15% of their annual compensation, and discretionary
matching by the Company. Employer contributions vest based on the
participant's number of years of continuos service. A participant is
fully vested after six years of continuous service. There were no
employer contributions for the years ended December 31, 1998 or 1999.
9. SUPPLEMENTAL CASH FLOW DISCLOSURE
Selected cash payments and noncash activities were as follows:
Year ended December 31,
-------------------------
1997 1998 1999
---- ------ ------
Cash paid for interest $ 13,130 $ - $728,221
Noncash investing and financing activities:
Capital lease obligations incurred 302,147 - -
Notes repaid from return and retirement of
common stock 32,909 115,953 -
Deemed dividend on preferred stock 600,000 102,755 -
Issuance of stock options to consultants - - 93,764
Collection and forgiveness of subscriptions
receivable - - 46,236
Conversion of Preferred Stock to
Common Stock - 1,538,000
50
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
10. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1998 1999
----------- ------------ ------------
Numerator:
Loss before extraordinary item $(10,215,339) $(9,193,396) $(9,307,892)
Less: Dividend on preferred stock (12,600) (110,879) (272,245)
Deemed dividend on preferred
stock (600,000) (102,755) -
------------- ------------ --------------
Net loss before extraordinary item (10,827,939) (9,407,030) (9,580,137)
Extraordinary item - early
extinguishment of debt - - (372,052)
------------- ------------ --------------
Net loss attributable to holders of
common stock $(10,827,939) $(9,407,030) $(9,952,189)
============= ============ ==============
Denominator:
Denominator for basic net loss per share
- weighted average shares 12,868,859 13,898,450 16,938,205
Effect of dilutive securities:
Preferred stock - - -
Stock options - - -
Warrants - - -
------------- ------------ --------------
Dilutive potential common shares - - -
Denominator for diluted net loss per
share - adjusted weighted average
shares 12,868,859 13,898,450 16,938,205
============= ============ ==============
BASIC AND DILUTED LOSS PER SHARE
Loss before extraordinary item $ (0.84) $ (0.68) $ (0.57)
Extraordinary item - early - - (0.02)
extinguishment of debt ------------- ------------ --------------
Net loss attributable to holders of
common stock $ (0.84) $ (0.68) $ (0.59)
============= ============ ==============
51
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The following equity instruments were not included in the diluted net loss per
share calculation because their effect would be anti-dilutive:
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
-------- -------- ---------
Preferred stock:
Series A 4,000 - -
Series B - - 1,287,554
Series C - - 335,000
Stock options 2,203,258 2,557,378 2,515,833
Warrants 768,999 1,688,576 3,974,957
11. SUBSEQUENT EVENTS
In March 2000, the Company issued 500,000 shares of Common Stock at a
purchase price of $4.75 per share to an investor in exchange for
$2,375,000.
52
V-ONE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, 1998 and 1999
Additions
Balance at Charge to Balance at
Beginning of Cost and End of
Description Period Expenses Deductions Period
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
December 31, 1997 $252,395 248,010 --- $500,405
December 31, 1998 500,405 24,233 --- 524,638
December 31, 1999 $524,638 (220,912) 169,482 $134,244
DEFERRED TAX ASSET VALUATION
ALLOWANCE
December 31, 1997 $3,492,784 3,938,959 --- $ 7,431,743
December 31, 1998 7,431,743 2,017,021 --- 9,448,764
December 31, 1999 $9,448,764 5,410,464 --- $14,859,228
ALLOWANCE FOR NON-SALABLE
INVENTORY
December 31, 1997 $50,000 162,700 --- $212,700
December 31, 1998 212,700 100,656 --- 313,356
December 31, 1999 $313,356 --- 225,662 $87,694
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 7, 1999, V-ONE Corporation filed a Form 8-K, "Changes in Registrant's
Certifying Public Accountant" in which it noted that the Company dismissed the
accounting firm of PricewaterhouseCoopers LLP ("PWC") and appointed the
accounting firm of Ernst & Young LLP to succeed PWC as its certifying public
accountant and to act as its auditors for the fiscal year ended December 31,
1999. The description of the change in auditors is qualified in its entirety by
reference to the Company's Form 8-K dated October 7, 1999 and the exhibits filed
therewith.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning directors and executive
officers is incorporated herein by reference to the Company's definitive proxy
statement for its annual stockholders' meeting to be held on May 11, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item concerning executive compensation is
incorporated herein by reference to the Company's definitive proxy statement for
its annual stockholders' meeting to be held on May 11, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item concerning security ownership of certain
beneficial owners and management is incorporated herein by reference to the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 11, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item concerning certain relationships and
related transactions is incorporated herein by reference to the Company's
definitive proxy statement for its annual stockholders' meeting to be held on
May 11, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
54
(a) Financial Statement Schedule.
See index to Financial Statements on page 29. All required financial statement
schedules of the Company are set forth under Item 8 of this Annual Report on
Form 10-K.
55
(b) Exhibits
Number Description
- - ------ -----------
3.1 Amended and Restated Certificate of Incorporation as of
July 2, 1996 (1)
3.2 Amended and Restated Bylaws dated as of February 2, 1998
(4)
3.3 Certificate of Amendment to Certificate of Designation,
Preferences, and Rights of Series A Convertible Preferred
Stock dated September 9, 1996 (1)
3.4 Certificate of Elimination of Certificate of
Designation, Preferences and Rights of Series A
Convertible Preferred Stock (2)
3.5 Certificate of Designations of Series A Convertible
Preferred Stock (2)
3.6 Certificate of Elimination of Certificate of
Designation, Preferences and Rights of Series A
Convertible Preferred Stock, dated March 4, 1999(9)
3.7 Certificate of Designations of Series B Convertible
Preferred Stock, dated June 11, 1999 (10)
3.8 Certificate of Designations of Series C Preferred Stock,
dated September 9, 1999 (11)
9.1 Voting Trust Agreement between Hai Hua Cheng and James
F. Chen, Trustee (1)
9.2 Voting Trust Agreement between Robert Zupnik and James
F. Chen, Trustee (1)
9.3 Voting Trust Agreement between Dennis Winson and James
F. Chen, Trustee (1)
10.1 Employment Agreement between V-ONE Corporation ("V-ONE")
and James F. Chen dated as of June 12, 1996 (1)
10.2 V-ONE 1995 Non-Statutory Stock Option Plan (1)
10.3 V-ONE 1996 Non-Statutory Stock Option Plan (1)
10.4 V-ONE 1996 Incentive Stock Plan (1)
10.5 Software License Agreement between Trusted Information
Systems, Inc. ("TIS") and V-ONE executed October 6, 1994
(1)
10.6 First Amendment to the Software License Agreement
between TIS and V-ONE (1)
10.7 Second Amendment to the Software License Agreement
between TIS and V-ONE (1)
10.8 Third Amendment to the Software License Agreement
between TIS and V-ONE (1)
10.9 Fourth Amendment to the Software License Agreement
between TIS and V-ONE (1)
10.10 OEM Master License Agreement between RSA Data Security,
Inc. ("RSA") and V-ONE dated December 30, 1994 and
Amendment Number One to the OEM Master License Agreement
between RSA and V-ONE (1)
10.11 Amendment Number Two to the OEM Master License Agreement
between RSA and V-ONE and Conversion Agreement dated May
23, 1996 (1)
10.12 Promissory Note for Hai Hua Cheng with Allonge and
Amendment dated June 12, 1996 (1)
10.13 Form of Exchange and Purchase Agreement dated April 1996
(1)
10.14 Registration Rights Agreement Between V-ONE and JMI
Equity Fund II, L.P. ("JMI") (1)
10.15 8% Senior Subordinated Note due June 18, 2000 Issued by
V-ONE to JMI (1)
10.16 Warrant to Purchase 100,000 shares of Common Stock
Issued by V-ONE to JMI (1)
10.17 Warrant to Purchase 400,000 shares of Common Stock
Issued by V-ONE to JMI (1)
10.18 Employment Agreement between V-ONE and Jieh-Shan Wang
dated as of July 8, 1996 (1)
10.19 Subscription Agreement dated as of December 3, 1997
between V-ONE and Advantage Fund II Ltd. (2)
10.20 Registration Rights Agreement dated as of December 3,
1997 between V-ONE and Advantage Fund II Ltd. (2)
10.21 Commitment Letter dated December 8, 1997 between V-ONE
and Advantage Fund II Ltd. (2)
10.22 Registration Rights Agreement dated as of December 8,
1997 between V-ONE and Wharton Capital Partners, Ltd. (2)
10.23 Warrant to Purchase 60,000 shares of Common Stock Issued
on December 8, 1997 by V-ONE to Wharton Capital
Partners, Ltd. (2)
56
Number Description
- - ------ -----------
10.24 Letter Agreement between V-ONE and Wharton Capital
Partners, Ltd. dated October 22, 1997 (2)
10.25 V-ONE 1998 Incentive Stock Plan (4)
10.26 Warrants dated November 21, 1997 to Purchase 300,000
shares of Common Stock granted to David D. Dawson (4)
10.27 Employment Agreement dated November 21, 1997 between
V-ONE and David D. Dawson (4)
10.28 Amendment to Employment Agreement dated November 7, 1997
between V-ONE and Charles B. Griffis (4)
10.29 Amendment to Section 2.08 of 1996 Incentive Stock Plan
(4)
10.30 Lease Agreement dated March 24, 1997 between Bellemead
Development Corporation and V-ONE (3)
10.31 Inconvertibility Notice dated September 21, 1998 (5)
10.32 Waiver Agreement, dated as of September 22, 1998,
between the Company and Advantage Fund II Ltd. (5)
10.33 Amendment No. 1 dated as of September 22, 1998 to the
Registration Rights Agreement between the Company and
Advantage Fund II Ltd. (5)
10.34 Warrant to purchase 100,000 shares of Common Stock
issued on September 22, 1998 by V-ONE to Advantage Fund
II Ltd. (5)
10.35 Warrant to purchase 389,441 shares of Common Stock
issued on September 22, 1998 by V-ONE to Advantage Fund
II Ltd. (5)
10.36 Waiver Letter, dated November 5, 1998 between the
Company and Advantage Fund II Ltd. (6)
10.37 Placement Agent Agreement, dated October 9, 1998,
between the Company and LaSalle St. Securities, Inc. (6)
10.38 Amendment No. 1 to Placement Agent Agreement, dated
November 9, 1998, between the Company and LaSalle St.
Securities, Inc. (6)
10.39 Escrow Agreement, dated October 9, 1998, among the
Company, LaSalle St. Securities, Inc. and LaSalle
National Bank (6)
10.40 Amendment No. 1 to Escrow Agreement, dated November 9,
1998, among the Company, LaSalle St. Securities, Inc.
and LaSalle National Bank (6)
10.41 Form of Subscription Documents (6)
10.42 Form of Addendum #1 to Subscription Documents (6)
10.43 Form of Addendum #2 to Subscription Documents (6)
10.44 Form of Warrant granted to A.L. Giannopoulos to purchase
10,000 shares of the Company's Common Stock (6)
10.45 Form of Warrant granted to William E. Odom to purchase
10,000 shares of the Company's Common Stock (6)
10.46 Amendment No. 1 to Placement Agent Agreement, dated
November 16, 1998, between the Company and LaSalle St.
Securities, Inc. (7)
10.47 Waiver Letter dated November 18, 1998 between the
Company and LaSalle St. Securities, Inc. (7)
10.48 Form of Second Version of Subscription Documents (7)
10.49 Form of Addendum #1 to Second Version of Subscription
Documents (7)
10.50 Form of Addendum #2 to Second Version of Subscription
Documents (7)
10.51 Warrant dated November 20, 1998 to purchase 50,000
shares of Common Stock issued to LaSalle St. Securities,
Inc. (7)
10.52 Employment Agreement dated November 6, 1998 between
V-ONE and Charles B. Griffis (9)
10.53 Employment Agreement dated August 1, 1998 between V-ONE
and Robert F. Kelly (9)
10.54 Loan and Security Agreement dated February 24, 1999
between V-ONE and Transamerica Business Credit
Corporation ("Transamerica") (8)
57
Number Description
- - ------ -----------
10.55 Patent and Trademark Security Agreement dated February
24, 1999 between V-ONE and Transamerica (8)
10.56 Security Agreement in Copyrighted Works dated as of
February 24, 1999 between V-ONE and Transamerica (8)
10.57 Amendment to Employment Agreement dated as of August 1,
1998 by and between the Company and Jieh-Shan Wang (9)
10.58 Amendment to Employment Agreement dated as of January 1,
1999 by and between the Company and James F. Chen (9)
10.59 Subscription Agreement for Series B Convertible
Preferred Stock, dated June 11, 1999 (10)
10.60 Registration Rights Agreement, dated June 11, 1999 (10)
10.61 Non-Negotiable Promissory Note, dated June 11, 1999 (10)
10.62 Form of Series C Preferred Stock Purchase Agreement (11)
10.63 Employment Agreement dated July 1, 1999 by and between
the Company and Margaret E. Grayson (12)
10.64 Employment Agreement dated July 1, 1999 by and between
the Company and David D. Dawson
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule for the Year Ended December 31,
1999
- - ------------------------------
(1) The information required by this exhibit is incorporated herein by reference
to V-ONE's Registration Statement on Form S-1 (No. 333-06535).
(2) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 8-K dated December 8, 1997.
(3) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 10-Q for the three months ended June 30, 1997.
(4) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 10-K for the twelve months ended December 31, 1997.
(5) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 8-K dated September 22, 1998.
(6) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 10-Q for the nine months ended September 30, 1998.
(7) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 8-K dated November 20, 1998.
(8) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 8-K dated March 11, 1999.
(9) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 10-K for the twelve months ended December 31, 1998.
(10) The information required by this exhibit is incorporated herein by
reference to V-ONE's Form 8-K dated June 23, 1999.
58
(11) The information required by this exhibit is incorporated herein by
reference to V-ONE's Form 8-K dated September 15, 1999.
(12) The information required by this exhibit is incorporated herein by
reference to V-ONE's Form 10-Q for the three months ended June 30, 1999.
(c) Reports on Form 8-K
(i) Form 8-K dated October 7, 1999 reporting, under Item 4, the
change in the Company's Certifying Accountant.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
V-ONE Corporation
Date: March 29, 2000 By: /s/ David D. Dawson
------------------------
David D. Dawson
President and Chief Executive Officer
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated.
Signature Title Date
/s/ David D. Dawson President, Chief Executive March 29, 2000
- - ------------------------- Officer and Director
David D. Dawson
/s/ Margaret E. Grayson Senior Vice President, Chief March 29, 2000
- - ------------------------ Financial Officer and Treasurer
Margaret E. Grayson (Principal Financial Officer)
/s/ John F. Nesline Controller (Principal March 29, 2000
- - ------------------------ Accounting Officer)
John F. Nesline
/s/ James F. Chen Director March 29, 2000
- - -------------------------
James F. Chen
/s/ A. L. Giannopoulos Director March 29, 2000
- - -------------------------
A. L. Giannopoulos
/s/ William E. Odom Director March 29, 2000
- - -------------------------
William E. Odom
60