UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-21511
V-ONE CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1953278
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20300 CENTURY BLVD., SUITE 200, GERMANTOWN, MARYLAND 20874
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(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)
NAME OF EXCHANGE ON WHICH REGISTERED: NONE
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
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 June 28,
2002 was approximately $14,077,382. This calculation does not reflect a
determination that persons are affiliates for any other purposes.
Registrant had 26,749,301 shares of Common Stock outstanding as of February 28,
2003.
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EXPLANATORY NOTE
V-ONE Corporation's annual report on Form 10-K for the fiscal year ended
December 31, 2002 was previously filed with unaudited financial statements in
lieu of audited financial statements and without a Report of Independent
Auditors because the audit was not completed in time to include audited
financial statements and a Report of Independent Auditors. V-ONE Corporation's
2002 audit has been completed by Aronson & Company, independent public
accountants. V-ONE Corporation is amending its annual report on Form 10-K to
include audited financial statements as of and for the fiscal year ended
December 31, 2002 and a Report of Independent Auditors. The amended annual
report on Form 10-K includes certain revised financal information for the fiscal
year ended December 31, 2002, as well as additional financial statement footnote
disclosures.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be issued in conjunction with the
registrant's annual stockholder's meeting, to be held on June 5, 2003, are
incorporated by reference into Part II, Item 5 and Part III, Items 10, 11, 12
and 13 of this Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties that are
generally noted by terms such as "believe," "expectations," "foresee," "goals,"
"potential" and "prospects." These statements may differ in a material way from
actual future events and involve known and unknown risks and uncertainties that
could cause V-ONE Corporation's actual performance or achievements to differ
from any future performance or achievements expressed or implied by such
statements. Readers are also referred to the risk factors discussed on page 13
of this Annual Report on Form 10-K. 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 at a later date.
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 enables organizations to
conduct secured electronic transactions and information exchange using public
switched networks, such as the Internet. The Company's suite of products
addresses 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 20300 Century Boulevard,
Suite 200, Germantown, Maryland 20874. The Company's telephone number is (301)
515-5200.
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BACKGROUND
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 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.
Organizations are increasing their dependence on the Internet and private
enterprise networks using Internet protocols ("intranets") as a cost-effective
means to expand enterprise networks, engage in electronic commerce and increase
information exchange. This pervasive use of the Internet, intranets and
extranets (architecture linking companies with specific customers, suppliers and
trading partners) has increased the need for solutions that provide secure
communications because TCP/IP networks are not secure.
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 pervasive use of the
Internet and intranets, many organizations are discovering that network security
is a necessary 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 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. Through the adoption of VPN technology products, users can
create a so-called Virtual Private Network, which enables users to capitalize on
the inherently low cost of public networks in a highly secure manner, without
risk or compromise to their information assets.
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.
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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:
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. A third party digitally certifies the
certificates, called a certificate authority, which 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
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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 current demand for VPN products is being driven by the desire to transact
sensitive communications across an inherently unsecure Internet to solve
everyday business and individual communication needs; i.e. (i) the increasing
need for employees to remotely access data, (ii) corporate intranets linking
multiple geographic locations, (iii) corporate extranets linking a company's
partners, suppliers and customers and (iv) the increasing demand for security in
electronic commerce. The increasing reliance on the Internet by corporate and
individual users and the increasing awareness to the potential risk to their
private information is causing such users to focus on security concerns. High
percentage increases in adoptions of VPNs are expected to continue as Internet
technologies, such as electronic commerce, information sharing and electronic
collaboration become more accepted. In addition, the costs of operating a
network utilizing the public lines or Internet are substantially less than T1/T3
interchanges and continue to decline. With the advent of VPNs, corporations have
a practical, low-cost solution to their networking needs.
The events of September 11, 2001 accelerated the rate at which the Department of
Defense, civilian agencies, and federal, state and local law enforcement are
adopting security solutions. As a result of the terrorist attacks, many of the
U.S. law enforcement and intelligence agencies are collaborating to investigate
and prosecute terrorist activities and conspiracies. This joint effort requires
sharing information on an unprecedented scale using, among other services, the
Department of Justice's Regional Information Sharing Systems ("RISS") Program
and the FBI LEO (Law Enforcement Online) Program, both of which are secured by
V-ONE's technology. The RISS Secure Intranet is a nationwide law enforcement
network that allows secure communications among more than 5,700 federal, state
and local law enforcement agencies. The FBI LEO program, sponsored by the FBI
Criminal Justice Information Services Division and in operation since 1996, is
an online service provided to over 37,000 law enforcement and criminal justice
officials. Sharing information among law enforcement agencies using RISS, LEO
and other networks is a security challenge that requires strongly encrypted
communications and powerful access controls. Securing these expanding networks
creates additional opportunities for VPN providers.
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, data
integrity, non-repudiation, authorization and encryption, and SmartGuard
appliances. V-ONE's SmartGuard VPN appliances are built on high-speed Intel
processors. SmartGuard incorporates SmartGate security technology into a
"drop-in" suite of devices that are easy to install, deploy and manage. The
SmartGuard appliances use V-ONE's award-winning SmartGate VPN software solution
with a powerful user authentication system, access control database and strong
encryption capabilities. A robust stateful inspection firewall is integrated
with all SmartGuard appliances. SmartGuard's advanced VPN capabilities include
IPSec tunneling and application layer security that allows firewall traversal
without requiring end users to make network configuration changes. The Company
provides customers with two-factor identification, mutual authentication,
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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
V-ONE's objective is to capitalize on its application level technology to become
the security solution of choice for large enterprises, including government
agencies and public sector organizations, financial institutions, service
providers, and commercial enterprises worldwide. V-ONE's products now include
both application level technology and IPSec, enabling organizations to employ
the most cost-effective and efficient security solution without compromising
data integrity and ensuring that communications will be completed successfully
and securely.
Key elements of V-ONE's strategy are:
INCREASING MARKET SHARE IN THE GOVERNMENT SECTOR. V-ONE will serve its
established base of government customers through existing and new channel
partners. V-ONE has successfully secured confidential information for the
government since shipping its first products in 1995. V-ONE technologies use all
approved government encryption methods, including the government's "triple DES"
Data Encryption Standard, and meet the standards of the U.S. government for
broad scale deployments. The triple DES standard is the strongest encryption
method employed by the U.S. government, and is applied to verify the user's
identity and to protect the flow of data itself. In addition, in December 2001,
the National Institute of Standards and Technology approved the Advanced
Encryption Standard ("AES") and is developing implementation protocols. V-ONE
has added AES to its library of encryption methods and incorporated this
algorithm as an approved encryption method. V-ONE incorporated AES as the
default encryption method in the current release of the V-ONE SmartGate product,
SmartGate 4.4, released in April 2003. Government clients currently using
V-ONE's technology to secure information include the U.S. Department of the
Treasury, the Department of Defense, more than 5,700 federal, state and local
law enforcement agencies and over 37,000 law enforcement and criminal justice
officials who share data through the RISS and LEO programs, two out of the three
National Drug Intelligence Centers, more than 30 regional Drug Traffic Centers,
12 state governments and several other regional and local law enforcement
initiatives. V-ONE's product capabilities are well suited for the government's
secure information sharing demands.
ENHANCING PRODUCT TECHNOLOGY TO ADDRESS CUSTOMER NEEDS. V-ONE intends to enhance
its technology through continued internal development and strategic
partnerships. V-ONE believes its current technology, consisting of the SmartGate
client/server software featuring its patented On-Line Registration ("OLR")
capability, the SmartGuard family of VPN appliances featuring the Command Center
management system, and an IPSec client released in January 2002, delivers
superior security, performance and cost savings when compared to any other
security products available in the market. V-ONE will focus its development
efforts on customer driven requirements for its government and commercial users
to deliver specific functionality including a wider and more feature-rich set of
management tools, additional high availability performance capabilities, and
enhancements for the emerging mobile enterprise/wireless access segment.
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CAPITALIZING ON CHANNEL PARTNERS' MARKET PRESENCE TO INCREASE MARKET AWARENESS
OF V-ONE. V-ONE intends to use its OEM, Service Provider and Systems Integrator
partners' strong brand recognition and marketing resources to increase the
market's awareness of V-ONE's security products. This approach will allow V-ONE
to effectively maintain lower sales and marketing costs, preserving resources
for continuing product development. Although the Company has reduced its direct
marketing efforts, V-ONE will continue in its role as an active government
advisor.
SATELLITE MARKET. To address a critical enterprise need for secure VPN satellite
communication, V-ONE recently introduced SmartSAT, a program for users and
resellers of satellite IP data communications services. SmartSAT is built upon
SmartGate application layer security technology that can overcome standing
performance problems associated with satellite circuit propagation delays.
PRODUCTS
V-ONE's hardware and software security products deliver to users all the
essential features of a secure network: authentication, integrity, privacy and
non-repudiation. V-ONE's technology has met the tough standards of the U.S.
government for broad scale deployments and is FIPS (Federal Information
Processing Standards) validated, making it viable for the most demanding of
government or commercial environments. The Company's product portfolio offers
solutions for remote access, site-to-site, and extranet applications.
The cornerstone of V-ONE's network and application security solution is its
patented SmartGate client/server technology.
SMARTGATE ENTERPRISE SOLUTION
V-ONE's powerful SmartGate server software, available on Windows NT, Solaris,
BSD, and Red Hat Linux, allows a company to rapidly deploy a VPN solution
scalable to hundreds of thousands of concurrent users. It enables secure access
to TCP/IP based applications and other resources through the Internet by
providing a framework for mutual authentication, strong data encryption, access
control, audit logging and on-line registration. SmartGate works with all major
firewalls and supports a wide range of third-party authentication systems
including x.509 (PKI), LDAP, RSA SecurID, RADIUS, Entrust, and digital
certificates from multiple providers. Since SmartGate operates at the
application layer, it can be deployed into complex environments and overcome
Network Address Translation issues and other obstacles commonly encountered in
VPN implementations.
A patented OLR system enables VPN deployment to end users in a matter of
minutes. User IDs can be automatically generated without administrative
interaction.
SMARTPASS
V-ONE's SmartPass client product runs as a non-intrusive application on the
desktop or mobile device, or as a Java applet on a browser, to provide VPN
connection services to the SmartGate server. The client is extremely well suited
for user devices with minimal consumption of system resources such as memory and
storage space. Installation is fast, simple and designed to take the complexity
of VPN implementation out of the hands of end users. To securely connect, an end
user simply enters an access code that verifies ownership of his or her
authentication token that can reside on a hard drive, floppy disk or smart card.
Advanced security related functions are performed automatically and hidden from
the end user. SmartPass is available on a very broad range of computing
platforms including Windows 95/98/NT/2000/XP/CE/Pocket PC, Solaris, HP-UX, BSD
UNIX, Red Hat Linux, Mac and Palm OS.
SMARTADMIN
Management of a V-ONE VPN is handled by means of SmartAdmin, a powerful,
flexible tool that enables administration of one or more SmartGate servers and
allows full control of user access to specific resources. The controls are both
easy to implement and precise. Access permissions can be as broad or as granular
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as required, ranging from company-wide visibility down to an individual who can
access only a single file, application, service or URL. Access control
permissions can be created for groups and support a powerful hierarchy
capability (nested group) where groups inherit access permissions.
Administration can be centralized or distributed, and performed locally or
through a secure remote connection.
SMARTGUARD APPLIANCES
V-ONE's SmartGuard VPN appliances are built on high-speed Intel processors.
SmartGuard incorporates proven SmartGate security technology into a "drop-in"
suite of devices that are easy to install, deploy, and manage:
o SmartGuard 1000: a tabletop unit designed for branches and remote offices.
o SmartGuard 4000: a 1U rack mountable enterprise class device.
o SmartGuard 5000: a 2U high reliability enterprise system with redundant
components and a high availability option for the most demanding security
environments.
The SmartGuard appliances use V-ONE's award-winning SmartGate VPN software
solution with a powerful user authentication system, access control database and
strong encryption capabilities. A robust stateful inspection firewall is
integrated with all SmartGuard appliances.
SmartGuard's advanced VPN capabilities include IPSec tunneling and application
layer security that allow firewall traversal without requiring end users to make
network configuration changes. This innovative combination of network and
application level security allows site-to-site protection as well as the ability
to extend security to mobile users and business partners who require extranet
access. SmartGuard solutions are manageable from a single PC, directly or via
remote access.
The optional web accessible SmartGuard Command Center allows remote management
of a fully meshed network for large scale enterprise class solutions. The
ability to easily monitor, manage and control thousands of tunnels in a large
VPN network from a simple graphical interface is targeted for complex enterprise
and service provider implementations.
CUSTOMER SERVICE AND SUPPORT
V-ONE provides Tier 1 customer support service to direct customers and Tier 2
support service to its channel partners. V-ONE's Customer Care group provides
standard response services and optional enhanced services for large
implementations, including Extended Support and Rapid Response Support. Standard
service provides live telephone and on-line support between 8:30 A.M. and 5:00
P.M. Eastern Standard Time during V-ONE's normal business days. In addition,
V-ONE provides a toll-free callback system for customers who need service during
non-standard hours. On-call support engineers provide telephone support during
non-standard hours. Extended Support provides 24x7 coverage with standard
response times. Rapid Response is 24x7 with shorter response windows.
V-ONE's expert sales engineering group also provides critical customer support
throughout the pre-sales and implementation process, and is available for
assistance in support situations and enhancement engagements.
PRODUCT DEVELOPMENT
V-ONE has assembled a team of engineers with experience in the fields of
software development, network systems design, security standards, Internet
protocols and network management software. In addition to having the ability to
build complex software, V-ONE's engineering team has the skills and experience
to deliver turnkey appliance solutions.
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V-ONE believes that strong product development capabilities are essential to its
strategy of enhancing its core technology, developing and incorporating
additional functions and maintaining the competitiveness of its product
offerings. V-ONE's research and development process is driven by market demand,
availability of new technology, evolution of Internet and security standards and
customer feedback. V-ONE's technology is its primary strength and it is critical
that V-ONE's products continue to evolve to meet the needs of the market. V-ONE
continues to develop new releases of SmartGate, its enterprise class
client/server software, and the SmartGuard appliance product line, including the
Command Center management tool.
V-ONE also provides secure wireless communication solutions with its current
technology. The Company intends to continue to develop this capability to meet
the anticipated demand for wireless LAN security and the increasing
implementation of mobile devices in the enterprise and government sectors.
MARKETING AND BUSINESS DEVELOPMENT
The Company believes that the future success of the V-ONE product offerings will
depend on the Company's ability to execute a much more sharply focused sales and
marketing strategy. To date, the Company has had success in the government
sector and plans to focus sales and marketing efforts on existing and potential
customers in the federal, state and local government sectors.
Similar to many other companies in the security sector, recent softness in
commercial IT spending and delays in government spending have adversely affected
V-ONE's growth performance. However, the Company has gained market share in
federal, state and local law enforcement and vertical market segments that
require advanced security technology products to meet the needs of complex
distributed network environments that must share information among disparate
information assets.
V-ONE has a growing installed customer base in federal, state and local law
enforcement. Successful law enforcement installations include the Department of
Justice's RISS program, the FBI's LEO and InfraGard programs, the Gateway ISI
Joint Terriorist Task Force program, the congressionally funded first responders
CMI-Services program, as well as installations with the Department of Defense.
Through its channel partners, the Company is gaining access to new customer
accounts in both government and commercial enterprises.
GOVERNMENT MARKETS
V-ONE's strongest component of revenue growth is in the law enforcement sector
based in part upon homeland security requirements. V-ONE security products have
become the "de facto standard" for the Department of Justice "as is" network
architecture for the FBI LEO, RISS and CMI-Services programs. V-ONE secures the
backbone of the newly combined LEO/RISS information sharing networks that are
critical to meeting strategic homeland security needs. CMI-Services, a Marine
Corp/FEMA initiative, was added to this growing network during 2002, and
expansion is planned in 2003 under Department of Homeland Security. This network
provides secure access to proprietary databases across federal, state and local
government on a controlled "need to know" basis. In addition, order flow from
the U.S. Department of Defense has increased, including maintenance orders and
new product licenses for NAVAIR San Diego, JCS Pentagon, Bolling AFB, Hickham
AFB, Military Transport Management, DSSA (Defense Security System
Administration), Office of Inspector General, US Navy Undersea Warfare
Laboratory, Defense Threat Reduction Agency, and others.
COMMERCIAL MARKETS
V-ONE has identified financial services, healthcare and transportation as target
vertical markets, and is also pursuing the wireless and satellite segments
within these markets. V-ONE is carefully focused on a targeted group of
technologically sophisticated channel partners and is building additional
channels through a manufacturer representative initiative. V-ONE's products are
generating revenue through the Company's channel programs in North American and
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European commercial target markets. The expansion of the functionality of the
SmartGuard appliance portfolio plays an important role in building V-ONE's
channel program, allowing V-ONE to better address the enterprise market with
"drop in" solutions for remote offices, corporate campuses, WLAN gateways, and
high-availability requirements.
SATELLITE MARKET
To address a critical enterprise need for secure VPN satellite communication,
V-ONE recently introduced SmartSAT, a program for users and resellers of
satellite IP data communications services. SmartSAT is built upon SmartGate
application layer security technology that can overcome long-standing
performance problems associated with satellite circuit propagation delays.
Satellite communications are a significant potential opportunity for VPN
application; however, realizing acceptable performance from a VPN over satellite
is a long-standing problem for IPSec VPN implementations. V-ONE application
layer security technology overcomes performance problems experienced by IPSec
implementations.
COMPETITION
The market for network security products is highly competitive, and V-ONE
expects competition to intensify in the future. V-ONE competes principally on
the basis of product security, breadth of remote client support, speed of
implementation, scalability and cost-effectiveness. The Company believes that it
competes favorably on the basis of these factors.
V-ONE participates in the VPN appliance and software market segments.
Competitors in these markets include:
o site-to-site IPSec security appliance and network security systems suppliers
such as SonicWall, Inc., WatchGuard Technologies Inc. and NetScreen
Technologies, Inc.;
o firewall and VPN software vendors such as Check Point Software Technologies
Ltd.;
o network equipment manufacturers such as Cisco Systems, Inc., Nokia
Corporation and Nortel Networks Corporation;
o remote client vendors such as SafeNet, Inc. and Certicom Corporation;
o suppliers that provide secure extranet solutions such as KyberPass
Corporation, Aventail Corporation and Symantec Corporation; and
o VPN management vendors such as SmartPipes, Inc.
The Company believes it maintains a distinct competitive advantage over other
providers by securing networks at the application level with powerful yet
precise user access controls. This functionality enables V-ONE to serve the
complex requirements of the large enterprise market where secure information
sharing across organizational boundaries and partner extranet communications are
required.
BACKLOG AND CUSTOMERS
The Company's customers order on an as-needed basis. The Company has typically
been able to ship products within 30 days after a 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.
SUPPLY SOURCES
Components used in the Company's network security products consist primarily of
computer diskettes and CD's purchased from commercial vendors. Components used
in the Company's SmartGate server products, SmartGuard Appliance products and
turnkey SmartWall products consist primarily of off-the-shelf computers, memory,
10
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 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 ability to meet delivery schedules.
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.
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, 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
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.
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 ability to
develop and deliver its products. If 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's success and ability to compete are substantially dependent upon
internally developed technology and expertise. V-ONE has received eight patents
that expire over a period between 2014 and 2017. The patents cover critical
aspects of V-ONE technology, including ease of use advantages gained by quick
client deployment, expandability and management features. The Company's stylized
"V-ONE," the phrase "Security for a Connected World," and the Company's
"SmartGate" and "SmartGuard" products and certain other products are the subject
of U.S. and foreign tradename and trademark filings. 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 take 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
11
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. There
can be no assurance that any such protection will be granted or, if granted,
that it will adequately protect the covered technology.
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
"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 ability to
develop new technologies and deliver products in its current suite of network
security products.
EMPLOYEES
As of February 28, 2003, the Company had 26 full-time employees and 5
consultants. Of these individuals, 12 were in sales and marketing, 11 were in
research and product development, and 8 were in administration. None of the
Company's employees is represented by a labor union or is subject to a
collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its employee relations are good.
12
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 addresses
risks V-ONE believes to be material to its business and operations. Readers
should carefully consider the following risk factors before purchasing Common
Stock of V-ONE. Readers are also referred to other documents filed by V-ONE with
the Securities and Exchange Commission ("SEC"), which may identify important
risk factors for V-ONE.
V-ONE'S ACCUMULATED DEFICIT COULD AFFECT OVERALL OPERATIONS. As of December 31,
2002, V-ONE had an accumulated deficit of approximately $65,122,000. V-ONE
currently expects to incur additional net losses over the next several quarters.
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 to successfully 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.
Revenues for the years 1998, 1999, 2000, 2001 and 2002 were approximately
$6,260,000, $4,966,000, $4,554,000, $4,990,000 and $3,553,000, respectively.
Losses attributable to holders of Common Stock for the years 1998, 1999, 2000,
2001 and 2002 were approximately $9,407,000, $9,952,000, $9,232,000, $9,911,000
and $6,335,000, respectively. V-ONE's results of operations in recent periods
may not be an accurate indication of future results of operations in light of
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.
OPERATING LEVELS WILL BE AFFECTED BY V-ONE'S NEED FOR ADDITIONAL CAPITAL.
V-ONE's cash used in operating activities was approximately $3.4 million in
fiscal 2002, an average "burn rate" of approximately $283,000 a month.
Notwithstanding acceptance of V-ONE's security concepts and critical acclaim for
its products, there can be no assurance that the consummation of sales of
V-ONE's products to existing customers or proposed agreements with potential
customers will generate timely or sufficient revenue for V-ONE to cover its cost
of operations and meet its cash flow requirements. Accordingly, V-ONE may not
have the funds needed to sustain operations during 2003, and its audited
financial statements are presented subject to a "going concern" opinion. The
Company is seeking to expand its current banking relationships to explore
alternatives to preserve its operations and maximize stockholder value,
including potential strategic partnering relationships, a business combination
with a strategically placed partner, or a sale of the Company.
In addition, the Company was not able to satisfy the minimum listing
requirements for continued listing on the Nasdaq SmallCap Market and is now
trading on the OTC Bulletin Board ("OTCBB"). The transfer to the OTCBB was
effected without interruption in the trading market for the Company's securities
and the ticker symbol for the Company's securities has not changed.
In July 2002, the Company took steps to reduce expenses by implementing a
reduced workweek designed to ensure that customers' requirements are met without
jeopardizing the Company's workforce. The Company effected additional staff
reductions in January 2003, approximating 20% of its employees. For the
immediate future, V-ONE will focus on existing and potential customers in the
government sector, limited and targeted marketing operations to commercial
accounts, and minimizing general and administrative expenditures and all
possible capital expenditures. V-ONE may not be successful in further reducing
operating levels or, even at reduced operating levels, V-ONE may not be able to
maintain operations for any extended period of time without generating revenue
from existing and new customers, additional capital or a significant strategic
transformative event. The Company's ability to continue as a going concern is
13
dependent on its ability to generate sufficient cash flow to meet its
obligations on a timely basis or to obtain additional funding.
SALES TO GOVERNMENT AGENCIES CONSTITUTE A SIGNIFICANT PERCENTAGE OF V-ONE'S
REVENUE AND ARE SUBJECT TO VARIOUS POLICIES AND LENGTHY TESTING PERIODS.
Government contracts may be terminated by the government without cause and no
government agency or department has an obligation to purchase products from
V-ONE in the future. Moreover, sales to and contracts with government agencies
are subject to reductions or delays in funding, 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. In addition, product implementation in
government sales may be subject to extended periods of rigorous validation
testing and a lengthy approval process by government agencies and bureaus within
an agency. Such testing and approval may delay contract awards and payments to
V-ONE under such contracts. V-ONE estimates that for the fiscal year ended
December 31, 2002, sales to the U.S. government constituted approximately 60% of
its revenue.
CONTINUED MARKET ACCEPTANCE OF SMARTGATE, SMARTGUARD AND SMARTWALL IS NOT
GUARANTEED. V-ONE currently generates most of its product revenues from its
software, SmartGate, and hardware, SmartGuard and SmartWall, products.
SmartGate, SmartGuard and SmartWall have met with a favorable degree of market
acceptance. The percentage of total revenue for software and hardware,
respectively, was 56.3% to 17.4% for 2000, 50.0% to 23.6% for 2001 and 47.4% to
9.9% for 2002. However, SmartGate, SmartGuard or SmartWall 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.
RISKS OF COMPETITION COULD AFFECT V-ONE'S MARKET SHARE. V-ONE faces intense
competition in all of its market segments. The market for network security
products is very competitive and V-ONE expects competition to intensify in the
future. There can be no assurance that V-ONE's products will command a
significant share of the network security market. Many of V-ONE's competitors
have significantly greater resources, generate higher revenue and have greater
name recognition than V-ONE. There can be no assurance that V-ONE's competitors
will not develop products that are superior to those developed by V-ONE or adapt
more quickly than V-ONE to new technologies or evolving industry trends.
Increased competition may result in price reductions, reduced gross margins or
loss of market share, any of which could have a material adverse effect on
V-ONE's revenue stream. There is no assurance that V-ONE will be able to compete
effectively against current or future competitors.
RISK OF ERRORS, FAILURES AND PRODUCT LIABILITY COULD AFFECT MARKET ACCEPTANCE OF
V-ONE'S PRODUCTS. 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, lost
revenues, lost customers during the correction process, damage to V-ONE's
reputation and claims against it. 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 it 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 it 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 currently has 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 affect the market's perception of
security products in general or V-ONE's products in particular.
RISKS OF CHANGES IN TECHNOLOGY AND INDUSTRY COULD AFFECT DEMAND FOR V-ONE'S
PRODUCTS. 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
14
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 competitors may develop superior products and
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 result in a decrease in the demand for V-ONE's products and of V-ONE's
market share.
RISK OF DEVELOPMENT DELAYS COULD AFFECT V-ONE'S ABILITY TO MEET DELIVERY
SCHEDULES. V-ONE may experience delays 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 schedules may be altered as a result of changes to
the product specifications in response to customer requirements, market
developments, performance problems or V-ONE-initiated changes. 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. All of these factors may cause a product to enter the market
behind schedule, which may adversely affect market acceptance of the product or
place it at a disadvantage to a competitor's product that has already gained
market share or market acceptance during the delay.
RISKS ASSOCIATED WITH LONG SALES CYCLE MAKE IT DIFFICULT TO PREDICT RESULTS. The
sales cycle associated with V-ONE's products is likely to be lengthy due to a
number of significant risks over which V-ONE has little or no control. As a
result, V-ONE finds it difficult to predict quarterly results and order backlog,
if any, at the beginning of any period. As a result, product revenues in any
period will be substantially dependent on orders booked and registered in that
period.
ADVERSE ECONOMIC IMPACT OF A SLOWING GLOBAL ECONOMY COULD IMPAIR V-ONE'S
REVENUES. The slowing global economy, as further hampered by the events of
September 11, 2001, has created an uncertain international economic environment,
and management cannot predict the impact of the slowing global economy, any
future terrorist acts or any related military action on V-ONE's customers or
their businesses. In particular, V-ONE's commercial customers could be
negatively affected by the sluggish international economy. Although management
believes that spending on security products will increase as a result of these
events, if businesses curtail or eliminate capital spending on information
technology, or if downturns in the Internet infrastructure and related markets
continue, businesses may delay or cancel orders for security products which
could result in reduced or cancelled orders for V-ONE's products. In addition,
these uncertain economic times could cause longer sales cycles, payment delays
and price pressure.
MARKET VOLATILITY COULD AFFECT V-ONE'S STOCK PRICE. The market price of V-ONE'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 V-ONE 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 V-ONE's Common Stock.
V-ONE DEPENDS ON KEY PERSONNEL WHO WOULD BE DIFFICULT TO REPLACE. V-ONE's
success depends, to a large extent, upon the performance of its senior
management and its technical, sales and marketing personnel. The loss of key
personnel or the inability to attract additional qualified personnel could
materially and adversely affect V-ONE's results of operations and product
development efforts. V-ONE has entered into an employment agreement with
Margaret E. Grayson, its President and Chief Executive Officer, that provides
for fixed terms of employment. However, V-ONE has not historically provided such
15
types of employment agreements to its other employees. This practice may
adversely affect V-ONE's ability to attract and retain the necessary technical,
management and other key personnel.
ITEM 2. PROPERTIES
In 2002, the Company leased approximately 28,312 square feet of office space at
20250 Century Boulevard, Suite 300, Germantown, Maryland. The termination of
this lease in February 2003 included a full release of future occupancy
obligations of the Company for these premises from the date of the lease
termination. Amounts due for unpaid rents during the term of occupancy in the
amount of $325,000, recorded as accrued rent, will be paid in equal monthly
installments over two years beginning on March 1, 2003. The Company entered into
a new lease agreement effective March 1, 2003 for 9,635 square feet of office
space at 20300 Century Boulevard, Suite 200, Germantown, Maryland under a lease
agreement that terminates on February 28, 2008. The Company expects that this
space will be sufficient for its needs through expiration of the lease.
ITEM 3. LEGAL PROCEEDINGS
None.
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, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was traded in the Nasdaq National Market from the
Company's IPO on October 24, 1996 through September 3, 1999 when it was
transferred to the Nasdaq SmallCap Market. In 2002, Nasdaq notified the Company
that it had questions concerning, among other things, the Company's ability to
maintain the minimum listing requirements for continued Nasdaq listing. The
Company was not able to satisfy the minimum listing requirements. As a result,
the Company's Common Stock was removed from the Nasdaq SmallCap Market and since
October 18, 2002 has been trading on the OTCBB. The transfer to the OTCBB was
effected without interruption in the trading market for the Company's securities
and the ticker symbol for the Company's securities remains VONE. The following
table sets forth the high and low prices of the Company's Common Stock for each
quarter during the two-year period ended December 31, 2002. OTCBB prices reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
2002
----
High Low
---- ---
First Quarter $ 1.47 $ 0.78
Second Quarter $ 0.93 $ 0.50
Third Quarter $ 0.33 $ 0.20
Fourth Quarter $ 0.40 $ 0.13
16
2001
----
High Low
---- ---
First Quarter $ 3.19 $ 0.53
Second Quarter $ 2.80 $ 0.94
Third Quarter $ 1.49 $ 0.85
Fourth Quarter $ 1.98 $ 0.89
According to records of the Company's transfer agent, the Company had
approximately 214 record holders on February 28, 2003. 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 Company has never declared or paid cash dividends on its Common Stock. 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, current and anticipated cash needs and restrictions on the
payment of dividends as required by the terms of the Company's 8% Secured
Convertible Notes and Series C and Series D Preferred Stock, as discussed in
Note 6 to the financial statements beginning on page 30 of this Annual Report on
Form 10-K.
The information regarding securities authorized for issuance under equity
compensation plans is incorporated by reference from the "Equity Compensation
Plans" section of the proxy statement for the Company's annual meeting of
stockholders to be held on June 5, 2003.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
Statements of Operations for the years ended December 31, 2000, 2001 and 2002
and balance sheets as of December 31, 2001 and 2002 are derived from the audited
financial statements of the Company included elsewhere in this Annual Report on
Form 10-K. The following financial data as of December 31, 1998 and 1999 and for
each of the years ended December 31, 1998 and 1999 are derived from audited
financial statements of the Company not included in this Annual Report on Form
10-K. 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."
17
Year ended December 31,
----------------------------------------------------------------------------------------
Statement of 1998 1999 2000 2001 2002
Operations Data: ---- ---- ---- ---- ----
Revenues:
Products $ 5,798,542 $ 3,427,422 $ 3,356,086 $ 3,669,817 $ 2,033,413
Consulting and
services 461,263 1,538,258 1,197,544 1,320,345 1,519,613
------------ ------------ ------------ ------------ ------------
Total revenues 6,259,805 4,965,680 4,553,630 4,990,162 3,553,026
------------ ------------ ------------ ------------ ------------
Cost of revenues:
Products 1,623,396 973,866 441,752 824,305 190,262
Consulting and
services 241,683 328,333 278,327 509,570 293,363
------------ ------------ ------------ ------------ ------------
Total cost of
revenues 1,865,079 1,302,199 720,079 1,333,875 483,625
------------ ------------ ------------ ------------ ------------
Gross profit 4,394,726 3,663,481 3,833,551 3,656,287 3,069,401
Operating expenses:
Research and
development 2,618,914 2,848,955 3,440,397 4,009,889 2,720,321
Sales and
marketing 7,132,656 6,491,987 6,041,926 4,891,170 3,028,590
General and
administrative 3,896,210 3,118,829 3,517,068 2,537,103 2,220,138
------------ ------------ ------------ ------------ ------------
Total operating
expenses 13,647,780 12,459,771 12,999,391 11,438,162 7,969,049
------------ ------------ ------------ ------------ ------------
Operating loss (9,253,054) (8,796,290) (9,165,840) (7,781,875) (4,899,648)
Interest (expense)
income:
Interest expense (65,372) (676,443) (25,945) (11,560) (744,818)
Interest income 125,030 164,841 329,770 249,575 16,833
Other (expense) income - - - 1,306,582 (7,558)
------------ ------------ ------------ ------------ ------------
Total interest
(expense)income 59,658 (511,602) 303,825 1,544,597 (735,543)
------------ ------------ ------------ ------------ ------------
Net loss before
extraordinary
item (9,193,396) (9,307,892) (8,862,015) (6,237,278) (5,635,191)
Extraordinary item
- early
extinguishment of
debt 110,879 (372,052) - - -
------------ ------------ ------------ ------------ ------------
Net loss (9,193,396) (9,679,944) (8,862,015) (6,237,278) (5,635,191)
Dividend on preferred
stock 110,879 272,245 369,979 741,245 699,901
Deemed dividend on
preferred stock 102,755 - - 2,932,023 -
------------ ------------ ------------ ------------ ------------
Loss attributable to
holders of common
stock $ (9,407,030) $ (9,952,189) $ (9,231,994) $ (9,910,546) $ (6,335,092)
============ ============ ============ ============ ============
Basic and diluted
loss per share
Loss before
extraordinary item $ (0.68) $ (0.57) $ (0.44) $ (0.44) $ (0.25)
============ ============ ============ ============ ============
Net loss attributable
to holders of
common stock $ (0.68) $ (0.59) $ (0.44) $ (0.44) $ (0.25)
============ ============ ============ ============ ============
Weighted average number
of common shares
outstanding 13,898,450 16,938,205 20,871,076 22,576,188 25,230,360
============ ============ ============ ============ ============
Year ended December 31,
----------------------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital
(deficit) ($ 1,277,368) $ 6,629,846 $ 1,591,967 $ 2,164,448 ($ 2,068,409)
Total assets 3,922,192 9,775,436 5,450,618 4,732,324 972,082
Long-term debt, less
current portion 197,982 119,746 47,803 - -
Series B Convertible
Preferred Stock - 1,288 1,288 - -
Series C Redeemable
Preferred Stock - 335 55 43 43
Series D Convertible
Preferred Stock - - - 3,675 3,021
Total shareholder's
equity 635,725 7,841,603 2,721,581 2,882,367 ($ 1,691,750)
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
All forward-looking information contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations is based on
management's current knowledge of factors affecting the Company's business. The
Company's actual results may differ materially if these assumptions prove
invalid. Significant factors, while not all inclusive, are:
o The possibility of increasing competition in the Company's market place.
o The potential for changes in technology and industry.
o The risks associated with long sales cycles and inability to predict
quarterly results.
See pages 13 through 16 for a more detailed discussion of the factors that may
affect the Company's business.
OVERVIEW
The Company generates revenues primarily from software licenses and the sale of
hardware products and, to a lesser extent, consulting and related services. The
Company anticipates that revenues from software and hardware products will
continue to be the principal source of the Company's total revenues. The Company
does not have any off balance sheet arrangements or significant transactions
with related parties.
CRITICAL ACCOUNTING POLICIES
V-ONE considers certain accounting policies related to revenue recognition,
capitalized software development costs and valuation of accounts receivable to
be critical policies due to the estimation processes involved in each.
REVENUE RECOGNITION
V-ONE's revenue recognition policy is critical because revenue is a key
component of the Company's results of operations. The Company follows very
specific and detailed guidelines in measuring revenue; however, certain
judgments affect the application of the Company's revenue policy. Revenue
results are difficult to predict, and any shortfall in revenue or delay in
recognizing revenue could cause operating results to vary significantly from
quarter to quarter and could result in future operating losses.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
V-ONE's policy on capitalized software costs determines the timing of the
Company's recognition of certain development costs. In addition, this policy
determines whether the cost is classified as development expense or cost of
license fees. Management is required to use professional judgment in determining
whether development costs meet the criteria for immediate expense or
capitalization.
VALUATION OF ACCOUNTS RECEIVABLE
V-ONE maintains allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial
condition of V-ONE's customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
19
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,
-----------------------------------
2000 2001 2002
------ ------ ------
Revenues:
Products 73.7% 73.5% 57.2%
Consulting and services 26.3 26.5 42.8
------ ------ ------
Total revenues 100.0 100.0 100.0
------ ------ ------
Cost of revenues:
Products 9.7 16.5 5.4
Consulting and services 6.1 10.2 8.2
------ ------ ------
Total cost of revenues 15.8 26.7 13.6
------ ------ ------
Gross profit 84.2 73.3 86.4
Operating expenses:
Research and development 75.6 80.4 76.6
Sales and marketing 132.7 98.1 85.2
General and administrative 77.2 50.8 62.5
------ ------ ------
Total operating expenses 285.5 229.3 224.3
------ ------ ------
Operating loss (201.3) (156.0) (137.9)
Other income (expense):
Interest expense (0.5) (0.2) (21.0)
Interest income 7.2 5.0 0.5
Other income - 26.2 (0.2)
------ ------ ------
Total other income (expense) 6.7 31.0 (20.7)
------ ------ ------
Loss before extraordinary item (194.6) (125.0) (158.6)
Extraordinary loss - early
extinguishment of debt - - -
Net loss (194.6) (125.0) (158.6)
Dividends on preferred stock 8.1 14.9 19.7
Deemed dividends on
preferred stock - 58.7 -
------ ------ ------
Loss attributable to
holders of Common Stock (202.7)% (198.6)% (178.3)%
====== ====== ======
20
COMPARISON OF FISCAL 2002 AND 2001
Revenues
--------
Total revenues decreased to approximately $3,553,000 in 2002 from approximately
$4,990,000 in 2001. Product revenues are derived principally from software
licenses and the sale of hardware products. Product revenues decreased to
approximately $2,033,000 in 2002 from approximately $3,670,000 in 2001. The
decrease in product revenues from 2001 to 2002 was due principally to
recognition of revenue in 2001 of approximately $1,236,000 under the Company's
Licensing and Distribution Agreement with Citrix Systems, Inc., recorded as
sales of the Company's SmartGate product.
Consulting and services revenues are derived principally from fees for services
complementary to the Company's products, including consulting, maintenance and
training. Consulting and services revenues increased to approximately $1,520,000
in 2002 from approximately $1,320,000 in 2001.
Costs of Revenues
-----------------
Total costs of revenues as a percentage of total revenues were 13.6% and 26.7%
in 2002 and 2001, respectively. The percentage decrease of 13.1% is comprised of
lower costs of product revenue, which decreased to 5.4% in 2002 from 16.5% in
2001 and lower costs of consulting and services revenue, which decreased to 8.2%
of total revenues in 2002 from 10.2% in 2001.
Costs of product revenue consist 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. Costs of product revenue
decreased to approximately $190,000 in 2002 from approximately $824,000 in 2001,
a decrease of $634,000. Costs of product revenue as a percentage of product
revenues were 9.4% and 22.5% for 2002 and 2001, respectively. The dollar and
percentage decreases in 2002 over 2001 were attributable primarily to a higher
mix of SmartGate software licenses and a lower proportion of turnkey systems and
third-party firewall sales (decreased $498,000 or 14.0% of total revenues),
which have higher costs of revenues when compared to SmartGate software
licenses.
Costs of consulting and services revenue consist principally of personnel and
related costs incurred in providing consulting, support and training services to
customers. Costs of consulting and services revenue decreased by $217,000 to
approximately $293,000 in 2002 from $510,000 in 2001, due primarily to a smaller
portion of third-party products with proportionately higher support costs
(decreased $171,000 or 4.8% of total revenues) and lower costs of training
(decreased $53,000 or 1.5% of total revenues). Costs of consulting and services
revenue as a percentage of consulting and services revenues were 19.3% and 38.6%
for 2002 and 2001, respectively.
Operating Expenses
------------------
Research and Development -- Research and development expenses consist
principally of the costs of research and development personnel and other
expenses associated with the development of new products and enhancement of
existing products. Research and development expenses decreased to approximately
$2,720,000 in 2002 from approximately $4,010,000 in 2001. Research and
development expenses as a percentage of total revenues were 76.6% and 80.4% in
2002 and 2001, respectively. The dollar and percentage decreases in 2002 over
2001 of approximately $1,290,000 and 32.2%, respectively, were primarily due to
decreases in the costs of personnel of approximately $484,000 and in consulting
services of approximately $465,000. The Company believes that a continuing
commitment to research and development is required to remain competitive.
Accordingly, if cash resources allow, the Company intends to allocate
substantial resources to research and development, but research and development
expenses may vary as a percentage of total revenues.
21
Sales and Marketing -- Sales and marketing expenses consist principally of the
costs of sales and marketing personnel, advertising, promotions and trade shows.
Sales and marketing expenses decreased to approximately $3,029,000 in 2002 from
approximately $4,891,000 in 2001. Sales and marketing expenses as a percentage
of total revenues were 85.2% and 98.1% in 2002 and 2001, respectively. The
dollar decrease of $1,862,000 and percentage decrease of 38.1% in 2002 from 2001
were principally due to lower costs of personnel (decreased $417,000 or 11.7% of
total revenues), lower levels of advertising and promotion expenses (decreased
$348,000 or 9.8% of total revenues), lower costs of travel (decreased $160,000
or 4.5% of total revenues), and lower costs of consulting (decreased $380,000 or
10.7% of total revenues) in 2002 over 2001.
General and Administrative -- General and administrative expenses consist
principally of the costs of finance, management and administrative personnel and
facilities expenses. General and administrative expenses decreased to
approximately $2,220,000 in 2002 from approximately $2,537,000 in 2001. General
and administrative expenses as a percentage of total revenues were 62.5% and
50.8% in 2002 and 2001, respectively. The decrease in expense in 2002 resulted
from lower costs of personnel (decreased $253,000 or 7.1% of total revenues),
lower costs of consulting (decreased $120,000 or 3.4% of total revenues),
partially offset by higher legal costs (increased $69,000 or 1.9% of total
revenues) and higher costs of directors and officers insurance (increased
$142,000 or 4.0% of total revenues) in 2002 compared with 2001. The increase in
percentage of revenues of 11.7% consists of lower expenses of 12.5% and lower
revenues of 28.8% for 2002.
Other Income (Expense) -- Other income (expense) represents interest income and
expense and other income. Interest income represents interest earned on cash,
cash equivalents and marketable securities. Interest income was approximately
$17,000 in 2002 compared to $250,000 in 2001. Interest income was derived
primarily from interest earned on the proceeds from the Company's private
placements of securities. Interest expense represents interest payable or
accreted on promissory notes and capitalized lease obligations. Interest expense
increased from approximately $12,000 in 2001 to approximately $745,000 in 2002,
of which approximately $102,000 was for recognition of a beneficial conversion
feature on the Company's 8% Secured Convertible Notes, discussed below, $354,000
for amortization of deferred financing costs and $261,000 for amortization of
the fair market value of warrants associated with the 8% Secured Convertible
Notes. Other income in 2001 of approximately $1,307,000 represents the gain on
the sale of its 6.8% holding in the stock of NFR Security, Inc. (formerly
Network Flight Recorder).
Income Taxes -- The Company did not incur income tax expenses in fiscal years
ending December 31, 2002 and 2001 as a result of the net loss incurred during
those periods. As of December 31, 2002, the Company had net operating loss carry
forwards of approximately $58,600,000 as a result of net losses incurred since
inception. These net losses result in a future tax benefit of $22,913,000, which
can be used to offset future taxable income.
Dividends on Series C and D Preferred Stock -- The Company accrued approximately
$741,000 for dividends on the Series C and Series D Preferred Stock during 2001,
and approximately $700,000 for dividends on the Series C and Series D Preferred
Stock during 2002.
Deemed Dividends on Series D Preferred Stock -- In 2001, the Company recorded
deemed dividends of $2,932,000 on the Series D Preferred Stock, in accordance
with the accounting treatment for convertible preferred stock with a beneficial
conversion feature. The proceeds received in the transaction were first
allocated between the convertible instrument and the Series D detachable warrant
on a relative fair value basis. The difference between the fair market value of
the Common Stock on the commitment date and the effective conversion price was
recorded as a deemed dividend.
Recorded Debt Discount Relating to 8% Secured Convertible Notes -- In 2002, upon
the issuance of 8% Secured Convertible Notes ("Notes"), the Company recorded a
debt discount of approximately $185,000 in accordance with the accounting
requirements for a beneficial conversion feature on the Notes. During 2002, the
22
Company amortized approximately $173,000 of the discount to interest expense.
Additionally, the Company will record interest expense upon conversion of the
Notes as a result of the embedded conversion feature. The additional interest
expense is not recorded until conversion because the Notes contain a contingency
that does not permit the number of shares to be received upon conversion to be
calculated until conversion occurs. As of December 31, 2002, holders had
converted $585,000, or 49% of the principal of the Notes, into shares of Common
Stock. Upon such conversion, the Company recorded $102,000 in interest expense.
COMPARISON OF FISCAL 2001 AND 2000
Revenues
--------
Total revenues increased to approximately $4,990,000 in 2001 from approximately
$4,554,000 in 2000. Product revenues are derived principally from software
licenses and the sale of hardware products. Product revenues increased to
approximately $3,670,000 in 2001 from approximately $3,356,000 in 2000. The
increase in product revenues from 2000 to 2001 was due principally to revenue
derived from initial recognition of revenue under the Company's Licensing and
Distribution Agreement with Citrix Systems, Inc. that was initially executed in
2000, which amounted to approximately $1,236,000 in sales of the Company's
SmartGate product, offset by a decrease in revenues from other customers.
Consulting and services revenues are derived principally from fees for services
complementary to the Company's products, including consulting, maintenance and
training. Consulting and services revenues increased to approximately $1,320,000
in 2001 from approximately $1,198,000 in 2000.
Costs of Revenues
-----------------
Total costs of revenues as a percentage of total revenues were 26.7% and 15.8%
in 2001 and 2000, respectively. The percentage increase of 10.9% is comprised of
higher costs of product revenue, which increased to 16.5% in 2001 from 9.7% in
2000, and higher costs of consulting, and services revenue, which increased to
10.2% of total revenues in 2001 from 6.1% in 2000.
Costs of product revenue consist 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. Costs of product revenue
increased to approximately $824,000 in 2001 from approximately $442,000 in 2000,
an increase of $382,000. Costs of product revenue as a percentage of product
revenues were 22.5% and 13.2% for 2001 and 2000, respectively. The dollar and
percentage increases in 2001 over 2000 were attributable in part to a higher mix
of SmartGuard and SmartWall products and turnkey hardware sales (increased
$273,000 or 5.5% of total revenues), which have higher costs of revenues,
compared to SmartGate software licenses. An additional factor in the dollar and
percentage increase was the impact of the write-off of obsolete inventory in
2001 which amounted to an increase over 2000 of approximately $153,000 or 3.1%
of total revenues.
Costs of consulting and services revenue consist principally of personnel and
related costs incurred in providing consulting, support and training services to
customers. Costs of consulting and services revenue increased by $232,000 to
approximately $510,000 in 2001 from $278,000 in 2000, due partially to a larger
portion of third-party products with proportionately higher support costs
(increased $104,000 or 2.1% of total revenues), and higher costs of training
(increased $80,000 or 1.6% of total revenue). Costs of consulting and services
revenue as a percentage of consulting and services revenues were 38.6% and 23.2%
for 2001 and 2000, respectively.
23
Operating Expenses
------------------
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 to approximately
$4,010,000 in 2001 from approximately $3,440,000 in 2000. Research and
development expenses as a percentage of total revenues were 75.6% and 80.4% in
2000 and 2001, respectively. The dollar and percentage increases in 2001 over
2000 of approximately $570,000 and 4.8%, respectively, were primarily due to
increases in the costs of personnel, higher by approximately $262,000, and in
consulting services, higher by approximately $167,000, associated with the
Company's product development efforts.
Sales and Marketing -- Sales and marketing expenses consist principally of the
costs of sales and marketing personnel, advertising, promotions and trade shows.
Sales and marketing expenses decreased to approximately $4,891,000 in 2001 from
approximately $6,042,000 in 2000. Sales and marketing expenses as a percentage
of total revenues were 98.0% and 132.7% in 2001 and 2000, respectively. The
dollar decrease of $1,151,000 and percentage decrease of 34.7% in 2001 from 2000
were principally due to lower costs of personnel (decreased $774,000 or 15.5% of
total revenues), lower levels of advertising and promotion expenses (decreased
$294,000 or 5.9% of total revenues), and lower costs of travel (decreased
$287,000 or 5.8% of total revenues), offset in part by additional costs of
consulting (increased $448,000 or 9.0% of total revenues) in 2001 over 2000.
General and Administrative -- General and administrative expenses consist
principally of the costs of finance, management and administrative personnel and
facilities expenses. General and administrative expenses decreased to
approximately $2,537,000 in 2001 from approximately $3,517,000 in 2000. General
and administrative expenses as a percentage of total revenues were 50.8% and
77.2% in 2001 and 2000, respectively. The decrease in expense in 2001 resulted
from lower costs of personnel (decreased $610,000 or 12.2% of total revenues)
and lower legal costs (decreased $289,000 or 5.8% of total revenues) in 2001
compared with 2000. The decrease in percentage of revenues of 26.4% consists of
lower expenses of 21.5% and higher revenues of 4.9% for 2001.
Other Income (Expense) -- Other income (expense) represents interest income and
expense and other income. Interest income represents interest earned on cash,
cash equivalents and marketable securities. Interest income was approximately
$250,000 in 2001 compared to $330,000 in 2000. Interest income was derived
primarily from interest earned on the proceeds from the Company's private
placements of securities. Interest expense represents interest payable or
accreted on promissory notes and capitalized lease obligations. Interest expense
was approximately $12,000 and $26,000 in 2001 and 2000, respectively. Other
income in 2001 of approximately $1,307,000 represents the gain on the sale of
its 6.8% holding in the stock of NFR Security, Inc. (formerly Network Flight
Recorder).
Income Taxes -- The Company did not incur income tax expenses in fiscal years
ending December 31, 2001 and 2000 as a result of the net loss incurred during
those periods. As of December 31, 2001, the Company had net operating loss carry
forwards of approximately $48,600,000 as a result of net losses incurred since
inception. These net losses result in a future tax benefit of $19,019,000, which
can be used to offset future taxable income.
Dividends on Series C and D Preferred Stock -- The Company provided
approximately $370,000 for a dividend on the Series C Stock during 2000, and
approximately $741,000 for dividends on both the Series C and Series D Preferred
Stock during 2001.
Deemed Dividends on Series D Preferred Stock -- In 2001, the Company recorded
deemed dividends of $2,932,000 on the Series D Preferred Stock, in accordance
with the accounting treatment for convertible preferred stock with a beneficial
conversion feature. The proceeds received in the transaction were first
allocated between the convertible instrument and the Series D detachable warrant
24
on a relative fair value basis. The difference between the fair market value of
the Common Stock on the commitment date and the effective conversion price was
recorded as a deemed dividend.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's operating activities used cash of approximately $3,167,000,
$7,771,000, and $6,700,000 in 2002, 2001 and 2000, respectively. In 2002, cash
used in operating activities was principally a result of net losses. The
decrease in cash used in operating activities in 2002 includes a decrease of
$1,290,000 in engineering expenses, a reduction of approximately $2,180,000 in
sales, marketing and general and administrative expenses, a decrease in accounts
receivable of $622,000, a decrease in deferred revenue of $168,000 and an
increase in accounts payable of $243,000. The increase of $1,071,000 from 2000
to 2001 in cash used in operating activities is comprised of a use of $1,375,000
gain from the sale of stock of NFR Security, Inc. (formerly Network Flight
Recorder) and a decrease in accounts payable of $607,000 and in deferred revenue
of $161,000 and an increase of $614,000 in cost of sales offset by a decrease of
$1,586,000 in operating expenses.
Net capital expenditures for property and equipment were approximately $69,000,
$370,000 and $774,000 in 2002, 2001 and 2000 respectively. These expenditures
have generally been for computer workstations and personal computers, office
furniture and equipment, and leasehold additions and improvements. The capital
expenditures decrease of approximately $301,000 in 2002 was due in part to
conservation of funds. The Company's largest capital expenditures in 2002 were a
telephone system at a cost of approximately $52,000 and replacement of a capital
lease having an estimated annual cost of $77,000.
As of December 31, 2002, the Company's principal commitments consisted of
obligations outstanding under two operating leases for copier equipment and the
facility lease for its office space. In February 2003, the Company terminated
its lease for office space at 20250 Century Boulevard, Suite 300, Germantown,
Maryland. The termination included a full release of all occupancy obligations
of the Company for these premises from the date of the lease termination.
Amounts due for unpaid rents during the term of occupancy in the amount of
$375,000, recorded as accrued rent, will be paid in equal monthly installments
over two years beginning on March 1, 2003. The Company entered into a new lease
agreement effective March 1, 2003 for 9,635 square feet of office space at 20300
Century Boulevard, Suite 200, Germantown, Maryland under a lease agreement that
terminates on February 28, 2008. V-ONE's current aggregate annual rent
obligation is approximately $253,000 for 2003, $231,000 for 2004, $235,000 for
2005, $230,000 for 2006, $237,000 for 2007 and $40,000 for 2008.
In February 2001, the Company completed a private placement of equity securities
resulting in net proceeds of approximately $6.3 million and completed the sale
of its 6.8% holding in the stock of NFR Security, Inc. (formerly Network Flight
Recorder) in March 2001 for approximately $1.6 million in net proceeds.
In closings on July 23 and 26 and August 2, 2002, V-ONE issued 8% Secured
Convertible Notes with detachable warrants for an aggregate principal amount of
$1,188,000. The Notes mature 180 days after issuance with an additional 180-day
extension available at the option of the Company or the holders. The rate of
interest payable during such extension of the Notes is 10% per annum. The
holders may convert their Notes at any time into the Company's Common Stock at a
conversion price equal to the greater of $0.25 per share or 60% of the average
closing sales price of Common Stock for the five trading day period immediately
preceding the Company's receipt of the holders' notification of conversion.
Detachable five year warrants, exercisable at $0.50 per share, are included to
provide one warrant share for every dollar invested as warrant coverage to the
Note holders. As of December 31, 2002, a total of $585,000 in principal on the
Notes had been converted into Common Stock, with a total debt obligation of
$603,000 remaining. In January 2003, an additional $25,000 was converted into
shares of Common Stock, reducing the Company's debt obligation on the principal
of the Notes to $578,000. The Notes mature on July 23, July 26 and August 6,
2003, and unless the Notes are converted before those dates, the Company must
25
pay the outstanding Note obligations in cash. In January 2003, in connection
with its efforts to raise capital, V-ONE agreed to adjust the exercise price of
the warrants from $0.50 per share to $0.15 per share.
All of the proceeds received from the Note offering were used during fiscal 2002
for general working capital purposes, including funding of operations and cash
flow requirements. Notwithstanding acceptance of V-ONE's security concepts and
critical acclaim for its products, there can be no assurance that the
consummation of sales of V-ONE's products to existing customers or proposed
agreements with potential customers will generate timely or sufficient revenue
for V-ONE to cover future costs of operations and meet future cash flow
requirements. The Company has sought additional capital investments, thus far
without success. Accordingly, V-ONE may not have the funds needed to sustain
operations during 2003, and its audited financial statements are presented
subject to a "going concern" opinion. V-ONE is seeking to expand its current
banking relationships to explore other alternatives to preserve its operations
and maximize stockholder value, including potential strategic partnering
relationships, a business combination with a strategically placed partner, or a
sale of V-ONE.
In July 2002, the Company took steps to reduce expenses by implementing a
reduced workweek designed to ensure that customers' requirements are met without
jeopardizing the Company's workforce. The Company effected additional staff
reductions in January 2003, approximating 20% of its employees. For the
immediate future, V-ONE will focus on existing and potential customers in the
government sector, limited and targeted marketing operations to commercial
accounts, and minimizing general and administrative expenditures and all
possible capital expenditures. V-ONE may not be successful in further reducing
operating levels or, even at reduced operating levels, V-ONE may not be able to
maintain operations for any extended period of time without generating revenue
from existing and new customers, additional capital or a significant strategic
transformative event. The Company's ability to continue as a going concern is
dependent on its ability to generate sufficient cash flow to meet its
obligations on a timely basis or to obtain additional funding.
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.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
V-ONE CORPORATION
INDEX TO FINANCIAL STATEMENTS
--------
Report of Aronson & Company, Independent Auditors 28
Report of Ernst & Young, LLP, Independent Auditors 29
Balance Sheets 30
Statements of Operations 31
Statements of Stockholders' Equity (Deficiency) 32
Statements of Cash Flows 33
Notes to Financial Statements 34
Schedule of Valuation and Qualifying Accounts for
the years ended December 31, 2002, 2001 and 2000 56
27
Independent Auditor's Report
Board of Directors
V-ONE Corporation
Germantown, Maryland
We have audited the accompanying Balance Sheet of V-ONE Corporation as of
December 31, 2002 and the related Statements of Operations, Stockholders' Equity
(Deficiency) and Cash Flows for the year then ended. Our audit also included the
Schedule II - Valuation and Qualifying Accounts for the year ended December 31,
2002. 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 of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement and schedule 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 as of
December 31, 2002, 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 of America. Also, in our opinion, the related financial
statement schedule for the year ended December 31, 2002, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information ser forth therein.
The accompanying financial statements have been prepared assuming that V-ONE
Corporation will continue as a going concern. As more fully described in Note 2,
the Company has incurred significant operating losses since inception. This
condition raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to this matter are also described in
Note 2. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
/s/ Aronson & Company
Rockville, Maryland
November 19, 2003
28
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, 2001, and the related statements of stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 2001. Our
audits also included the financial statement schedule for the years ended
December 31, 2001 and 2000 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of V-ONE Corporation at December
31, 2001, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also in our opinion, the
related financial statement schedule for the years ended December 31, 2001 and
2000 when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
The accompanying financial statements have been prepared assuming that V-ONE
Corporation will continue as a going concern. As more fully described in Note 2,
the Company has incurred significant operating losses since inception. This
condition raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to this matter are also described in
Note 2. The financial statements do no include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
/s/ Ernst & Young LLP
McLean, Virginia
January 29, 2002
29
V-ONE CORPORATION
BALANCE SHEETS
December 31,
----------------------------
ASSETS 2002 2001
---- ----
Current assets:
Cash and cash equivalents $ 93,985 $ 2,608,690
Certificate of deposit - restricted 35,000 -
Accounts receivable, less allowances of $97,135 and
$72,035 respectively 237,695 859,658
Inventory, less allowances of $44,738 and
$29,593 respectively 5,478 57,354
Deferred financing costs, net 68,974 -
Prepaid expenses and other assets 121,460 407,913
------------ ------------
Total current assets 562,592 3,933,615
Property and equipment, net 319,294 748,513
Deposits 90,196 50,196
------------ ------------
Total assets $ 972,082 $ 4,732,324
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,235,574 $ 769,319
Deferred revenue 784,185 952,044
Convertible notes payable, net 591,242 -
Note payable, other 20,000 -
Capital lease obligations - current - 47,804
------------ ------------
Total current liabilities 2,631,001 1,769,167
Deferred rent 32,831 80,790
------------ ------------
Total liabilities 2,663,832 1,849,957
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred Stock, $.001 par value,13,333,333 shares authorized
Series C redeemable preferred stock, 500,000 designated,
42,904 shares issued and outstanding
(liquidation preference of $1,126,000) 43 43
Series D redeemable preferred stock, 3,675,000 designated,
3,021,000 and 3,675,000 issued and outstanding, respectively
(liquidation preference of $5,770,110 and $7,019,250 respectively) 3,021 3,675
Common Stock, $0.001 par value; 50,000,000 shares authorized;
26,649,301 and 23,594,904 shares issued and outstanding,
respectively 26,649 23,595
Accrued dividends payable 1,575,709 875,808
Additional paid-in capital 61,825,066 60,766,392
Accumulated deficit (65,122,238) (58,787,146)
------------ ------------
Total stockholders' equity (deficiency) (1,691,750) 2,882,367
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 972,082 $ 4,732,324
============ ============
The accompanying notes are an integral part of these financial statements.
30
V-ONE CORPORATION
STATEMENTS OF OPERATIONS
Year ended December 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
Revenues:
Products $ 2,033,413 $ 3,669,817 $ 3,356,086
Consulting and services 1,519,613 1,320,345 1,197,544
------------ ------------ ------------
Total revenues 3,553,026 4,990,162 4,553,630
------------ ------------ ------------
Cost of revenues:
Products 190,262 824,305 441,752
Consulting and services 293,363 509,570 278,327
------------ ------------ ------------
Total cost of revenues 483,625 1,333,875 720,079
------------ ------------ ------------
Gross profit 3,069,401 3,656,287 3,833,551
------------ ------------ ------------
Operating expenses:
Research and development 2,720,321 4,009,889 3,440,397
Sales and marketing 3,028,590 4,891,170 6,041,926
General and administrative 2,220,138 2,537,103 3,517,068
------------ ------------ ------------
Total operating expenses 7,969,049 11,438,162 12,999,391
------------ ------------ ------------
Operating loss (4,899,648) (7,781,875) (9,165,840)
------------ ------------ ------------
Other (expense) income:
Interest expense (744,818) (11,560) (25,945)
Interest income 16,833 249,575 329,770
Other (expense) income (7,558) 1,306,582 -
------------ ------------ ------------
Total (735,543) 1,544,597 303,825
------------ ------------ ------------
Net loss (5,635,191) (6,237,278) (8,862,015)
Dividends on preferred stock 699,901 741,245 369,979
Deemed dividend on preferred stock - 2,932,023 -
------------ ------------ ------------
Loss attributable to holders
of common stock $ (6,335,092) $ (9,910,546) $ (9,231,994)
============ ============ ============
Basic and diluted loss per share
Net loss attributable to holders of
common stock $ (0.25) $ (0.44) $ (0.44)
============ ============ ============
Weighted average number of
common shares outstanding 25,230,360 22,576,188 20,871,076
============ ============ ============
The accompanying notes are an integral part of these financial statements
31
V-ONE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
Series B, C & D Accrued Additional
Common Stock Preferred Stock Dividend Paid-in Subscriptions Accumulated
Shares Amount Shares Amount Payable Capital Receivable Deficit Total
------ ------ ------ ------ ------- ------- ---------- ------- -----
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
Issuance of common
stock, net of
issuance costs 915,596 915 - - - 3,472,190 - - 3,473,105
Exercise of common
stock options,
net of issuance
costs 59,500 60 - - - 169,637 - - 169,697
Conversion of Series
C preferred stock
to common stock 2,900,309 2,901 (280,286) (280) (461,313) 458,676 - - (16)
Adjustment and
collection of
notes receivable
for stock - - - - - - 3,785 - 3,785
Dividend on
preferred stock - - - - 369,979 - - (369,979) -
Issuance of common
stock options
to consultants - - - - - 95,422 - - 95,422
Net loss - - - - - - - (8,862,015) (8,862,015)
------------------------------------------------------------------------------------------------------------
Balance, December 31,
2000 22,109,185 $ 22,109 1,342,268 $ 1,343 $ 180,911 $51,393,818 $ - $(48,876,600) $ 2,721,581
Employee stock
purchase plan net
of issuance costs 29,399 29 - - - 11,980 - - 12,009
Exercise of common
stock options,
net of issuance
costs 31,230 31 - - - 50,774 - - 50,805
Conversion of Series
B preferred stock
to common stock 1,287,554 1,288 (1,287,554) (1,288) - - - - -
Conversion of Series
C preferred stock
to common stock 137,536 138 (11,810) (12) (46,348) (38,482) - - (84,704)
Issuance of Series
D preferred stock,
net of issuance
costs - - 3,675,000 3,675 - 6,266,047 - - 6,269,722
Deemed Dividend on
Series D - - - - - 2,932,023 - (2,932,023) -
Dividend on
preferred stock - - - - 741,245 - - (741,245) -
Issuance of common
stock options
to consultants - - - - - 150,232 - - 150,232
Net loss - - - - - - - (6,237,278) (6,237,278)
-----------------------------------------------------------------------------------------------------------
Balance,
December 31, 23,594,904 $423,595 3,717,904 $ 3,718 $ 875,808 $60,766,392 $ - $(58,787,146) $ 2,882,367
2001 -----------------------------------------------------------------------------------------------------------
Employee stock
purchase plan
net of issuance
costs 60,397 60 - - - 19,089 - - 19,149
Conversion of Note
payable to common
stock 2,340,000 2,340 - - - 582,660 - - 585,000
Conversion of Series
D preferred stock
to common stock 654,000 654 (654,000) (654) - - - - -
Dividend on
preferred stock - - - - 699,901 - - (699,901) -
Issuance of common
stock options
to consultants - - - - - 82,545 - - 82,545
Beneficial conversion
feature on the
convertible notes
payable - - - - - 101,600 - - 101,600
Issuance of warrants - - - - - 272,780 - - 272,780
Net loss - - - - - - - (5,635,191) (5,635,191)
------------------------------------------------------------------------------------------------------------
Balance,
December 31, $ 26,649,301 $ 26,649 3,063,904 $ 3,064 $1,575,709 $61,825,066 $ - $(65,122,238) $(1,691,750)
2002 ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
32
V-ONE CORPORATION
STATEMENTS OF CASH FLOWS
Year ended December 31,
----------------------------------------
2002 2001 2000
Cash flows from operating
activities:
Net loss $ (5,635,191) $(6,237,278) $ (8,862,015)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation 431,225 514,354 429,939
Amortization 66,566 36,811 -
Gain on sale of investment - (1,375,000) -
Amortization of debt discount 173,222 - -
Interest expense - beneficial
conversion feature 101,600 - -
Amortization of deferred financing
costs 334,015 - -
Note payable related to financing
costs 20,000 - -
Noncash charge related to issuance
of warrants and options and stock
compensation 170,345 150,232 377,422
Changes in operating assets and
liabilities:
Accounts receivable, net 621,963 (82,813) 78,008
Inventory, net 51,876 114,823 (126,090)
Prepaid expenses, deposits and
other assets 246,453 (85,309) 529,045
Accounts payable and accrued
expenses 242,826 (606,620) 218,279
Deferred revenue (167,859) (161,158) 692,280
Deferred rent (47,959) (39,360) (36,561)
----------------------------------------
Net cash used in operating activities (3,390,918) (7,771,318) (6,699,693)
----------------------------------------
Cash flows from investing activities:
Net purchase of property and
equipment (68,572) (370,280) (773,629)
Purchase of certificate of deposit (35,000) - -
Collection of note receivable - - 3,785
Proceeds from sale of investment - 1,625,000 -
----------------------------------------
Net cash (used in) provided by
investing activities (103,572) 1,254,720 (769,844)
----------------------------------------
Cash flows from financing activities:
Issuance of common stock under
employee stock plans 19,149 23,949 -
Issuance of preferred stock, net
of subscriptions receivable - 7,019,250 3,375,000
Proceeds from notes payable 1,188,000 - -
Payment of preferred stock dividends - (259) (16)
Payment of notes payable and stock
issuance costs (179,560) (761,468) (183,895)
Redemption of preferred stock - (84,445) -
Exercise of stock options and
warrants - 50,805 169,697
Principal payments on capital
lease obligations (47,804) (71,942) (78,794)
----------------------------------------
Net cash provided by financing
activities 979,785 6,175,890 3,281,992
----------------------------------------
Net decrease in cash and cash
equivalents (2,514,705) (340,708) (4,187,545)
Cash and cash equivalents,
beginning of year 2,608,690 2,949,398 7,136,943
----------------------------------------
Cash and cash equivalents, end of year $ 93,985 $ 2,608,690 $ 2,949,398
========================================
The accompanying notes are an integral part of these financial statements.
33
1. NATURE OF BUSINESS
V-ONE Corporation ("V-ONE" or the "Company") was incorporated under the
laws of the state of Delaware on October 24, 1994. The Company develops,
markets and licenses a comprehensive suite of network security products
that enables organizations to conduct secured electronic transactions and
information exchange using private enterprise networks and public networks,
such as the Internet. The Company's principal market is the United States,
with headquarters in Maryland, with secondary markets located in Europe and
Asia.
2. MANAGEMENT'S PLANS
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company reported a net loss
of $5,635,191, $6,237,278 and $8,862,015 for the years ended December 31,
2002, 2001 and 2000, respectively. In addition, the Company expects to
continue to incur losses during 2003. As of December 31, 2002, the Company
has a deficiency in stockholders' equity of approximately $1,692,000 and a
working capital deficiency of approximately $2,068,000. In addition, while
the Company's 8% Secured Convertible Notes (see Note 6) have been extended
to January 2004, there are no assurances that continued extensions will be
granted.
The Company's cash used in operating activities was approximately $3.4
million in fiscal 2002, an average "burn rate" of approximately $283,000 a
month. Notwithstanding acceptance of V-ONE's security concepts and critical
acclaim for its products, there can be no assurance that the consummation
of sales of V-ONE's products to existing customers or proposed agreements
with potential customers will generate timely or sufficient revenue for
V-ONE to cover its cost of operations and meet its cash flow requirements.
In July 2002, the Company took steps to reduce expenses by implementing a
reduced workweek designed to ensure that customers' requirements are met
without jeopardizing the Company's workforce. The Company effected
additional staff reductions in January 2003, approximating 20% of its
employees. For the immediate future, V-ONE will focus on existing and
potential customers in the government sector, limited and targeted
marketing operations to commercial accounts, and minimizing general and
administrative expenditures and all possible capital expenditures. The
Company's ability to continue as a going concern is dependent on its
ability to generate sufficient cash flow to meet its obligations on a
timely basis or to obtain additional funding.
The Company may not be successful in further reducing operating levels or,
even at reduced operating levels, it may not be able to maintain operations
for any extended period of time without generating revenue from existing
and new customers, additional capital or a significant strategic
transformative event. The Company has sought additional capital
investments, thus far without success. Accordingly, V-ONE may not have the
funds needed to sustain operations during 2003. In addition to continuing
to pursue capital investment, the Company continues to explore other
alternatives to preserve V-ONE's operations and maximize stockholder value,
including potential strategic partnering relationships, a business
combination with a strategically placed partner, or a sale of V-ONE.
34
3. 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.
In addition to its direct sales efforts, 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 delivered directly to the
end-user customer on behalf of the distributor.
In 2000, the Company entered into a contract which contained multiple
elements, including specified upgrades. Because the Company had not
established vendor specific objective evidence for the specified upgrades,
all revenues under the contract were deferred until the upgrades were
delivered. At December 31, 2000, the Company had $500,000 in deferred
revenue related to this contract. On October 26, 2001, the Company executed
a new agreement which removed the specified upgrades. This completed the
Company's obligations for delivery of all specific product requirements
under the initial contract and allowed the Company to recognize
approximately $1.2 million of revenue in the fourth quarter of 2001. During
2002, the Company recognized revenue of approximately $136,000 related to
this agreement.
The Company's revenue recognition policies for the years ended December 31,
2002, 2001 and 2000 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.
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. All other
research and development costs are expensed as incurred.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
35
assumptions that affect the amounts reported in the financial statements
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 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 over 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 and amortization expense related to property and
equipment was $497,791, $551,165 and $429,939 for the years ended December
31, 2002, 2001 and 2000, respectively.
Advertising Costs
-----------------
The Company expenses all advertising costs as incurred. The Company
incurred approximately $30,000, $149,000 and $177,000 in advertising costs
for the years ended December 31, 2002, 2001 and 2000, respectively.
Stock-Based Compensation
------------------------
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), allows companies to account for
stock-based compensation either under the provisions of SFAS 123 or under
the provisions of Accounting Principles Bulletin No. 25, Accounting for
Stock Issued to Employees ("APB 25"), as amended by FASB Interpretation No.
44, Accounting for Certain Transactions Involving Stock Compensation (an
Interpretation of APB Opinion No. 25), 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 APB 25 (see
Note 6). The following table illustrates the effect on net income (loss)
and earning per share if the Company had applied the fair value recognition
provisions of SFAS 123:
Year ended December 31,
----------------------------------------------
2002 2001 2000
------------- ------------ ----------------
Loss attributable
to holders of
Common Stock:
As reported ($6,335,092) ($ 9,910,546) ($ 9,231,994)
Pro forma ($6,512,213) ($11,812,003) ($10,277,777)
Basic and diluted
loss per share
attributable to
holders of Common
Stock:
As reported ($0.25) ($0.44) ($0.44)
36
Pro forma ($0.26) ($0.52) ($0.49)
This disclosure is in accordance with Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, that the Company has adopted in these financial statements.
Stock options and warrants granted to non-employees are accounted for in
accordance with SFAS 123 and the Emerging Issues Task Force Consensus No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services," which requires the value of the options to be periodically
re-measured as they vest over a performance period. The fair value of the
options and warrants is determined using the Black-Scholes model.
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of 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 operations 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 than not 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 11.
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. In addition, at times 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 2002, two suppliers exceeded 10% of purchases. The Company purchased SUN
equipment worth approximately $75,000 from Arrow MOCA, Incorporated and
37
computer hardware for the Company's SmartGuard product worth approximately
$17,000, representing 66% and 15% of total purchases, respectively. In
2001, three suppliers exceeded 10% of purchases. The Company purchased SUN
equipment worth approximately $162,000 from Ingram Micro and approximately
$180,000 from Arrow MOCA, Incorporated. The two resellers of SUN equipment
represented 33% and 37% of total purchases. In addition, the Company
purchased approximately $88,000 of computer hardware from SteelCloud
Corporation for the Company's SmartGuard product, which constituted
approximately 18% of total purchases. No suppliers exceeded 10% of
purchases in 2000.
During the years ended December 31, 2002, 2001 and 2000, approximately
$542,000, $550,000 and $956,000 of sales, respectively, related to sales to
international customers. During the years ended December 31, 2002, 2001 and
2000, sales related to government agencies were approximately $2,136,000,
$2,142,000 and $1,798,200, respectively.
Fair Value of Financial Instruments
-----------------------------------
At December 31, 2002 and 2001, the carrying value of current financial
instruments such as cash, accounts receivable, inventory, accounts payable,
accrued liabilities and capital lease obligation approximated their market
values, based on the short-term maturities of these instruments. Fair value
is determined based on expected cash flows, discounted at market rates, and
other appropriate valuation methodologies.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 2002
presentation.
New Accounting Standards
------------------------
Statement of Financial Accounting Standards No. 145, Recession of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections: The portion of this Statement applicable to FASB
Statement No. 4, applies to fiscal years beginning after May 15, 2002. The
other elements of the Statement became applicable during 2002. The portion
of the Statement applicable to Statement No. 4, Reporting Gains and Losses
from Extinguishment of Debt, has the effect of changing the accounting for
gains and losses from debt extinguishments from extraordinary to operating.
The Company does not believe that this Statement will have any impact on
the financial statements when adopted.
Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities: This Statement nullifies
Emerging Issues Task Force Issue No. 94-3, which required the recognition
of a liability for an exit cost at the date an entity made a commitment to
an exit plan. SFAS No. 146 concludes that mere commitment to a plan, by
itself, does not create an obligation to others that meets the definition
of a liability. This Statement describes the costs to exit an activity and
when a liability for those costs should be recognized. This Statement is
applicable to exit or disposal activities initiated after December 31,
2002. The Company does not believe that this Statement will have any impact
on the financial statements when adopted.
Statement of Financial Accounting Standards No. 147, Acquisitions of
Certain Financial Institutions: This Statement clarifies the accounting for
financial institutions as a result of the new standards issued for business
combinations. This Statement is not expected to have any effect on
accounting practices or financial reporting since the Company's activities
do not involve those of financial institutions.
38
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure - an amendment of FASB
Statement 123 (SFAS 123): For entities that change their accounting for
stock-based compensation from the intrinsic method to the fair value method
under SFAS 123, the fair value method is to be applied prospectively to
those awards granted after the beginning of the period of adoption (the
prospective method). The amendment permits two additional transition
methods for adoption of the fair value method. In addition to the
prospective method, the entity can choose to either (i) restate all periods
presented (retroactive restatement method) or (ii) recognize compensation
cost from the beginning of the fiscal year of adoption as if the fair value
method had been used to account for awards (modified prospective method).
For fiscal years beginning after December 15, 2003, the prospective method
will no longer be allowed. The Company currently accounts for its
stock-based compensation using the intrinsic value method as proscribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and plans to continue using this method to account for stock
options. Therefore, it does not intend to adopt the transition requirements
as specified in SFAS 148. The Company has adopted the new SFAS 148
disclosure requirements of SFAS 148 in these financial statements.
In April 2003, the Financial Accounting Standards Board issued Statement
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. This
Statement is effective for contracts entered into or modified after June
30, 2003, and for hedging relationships designated after June 30, 2003.
This pronouncement is not expected to have a material impact on the
Company's financial position or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement No.
150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. This Statement affects the classification,
measurement and disclosure requirements of certain freestanding financial
instruments, including mandatorily redeemable shares. SFAS No. 150 is
effective for all financial instruments entered into or modified after May
31, 2003, and otherwise is effective for the Company for the third quarter
of fiscal 2003. This pronouncement is not expected to have a material
impact on the Company's financial position or results of operations upon
adoption.
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others: This Interpretation supersedes FASB Interpretation No. 34 and
requires a guarantor to recognize a liability for a non-contingent
guarantee based upon the fair value of the guarantee. The Interpretation
requires specific disclosures for guarantees, including product warranties,
and indirect guarantees. This Interpretation is applicable to guarantees
issued or modified after December 31, 2002. The Company does not believe
that this Interpretation will have material impact on the financial
statements when adopted.
FASB Interpretation No. 46, Consolidation of Variable Interest Entities:
This Interpretation is not expected to have any effect on the Company's
accounting practices or financial reporting since its activities do not
include investments in or transactions with such entities.
39
4. SELECTED BALANCE SHEET INFORMATION
Property and equipment consisted of the following at December 31:
2002 2001
--------------------------
Office and computer equipment $ 1,329,617 $ 1,423,083
Office and computer
equipment under capital
leases - 299,497
Capitalized software 139,076 139,076
Leasehold improvements 186,467 177,664
Furniture and fixtures 308,008 257,978
----------- -----------
1,963,168 2,297,298
Less: accumulated
depreciation $(1,643,874) $(1,548,785)
----------- -----------
$ 319,294 $ 748,513
=========== ===========
Deferred financing costs consisted of the following at December 31:
2002 2001
------------ -----------
Deferred financing costs $ 1,113,044 $ 710,055
Accumulated amortization (1,044,070) (710,055)
----------- -----------
$ 68,974 $ -
=========== ===========
Accounts payable and accrued expenses consisted of the following at
December 31:
2002 2001
---------- -----------
Accounts payable $ 1,025,810 $ 375,883
Accrued compensation 140,941 260,036
Other accrued expenses 68,823 133,400
----------- -----------
$ 1,235,574 $ 769,319
=========== ===========
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:
2002 2001 2000
----------- ----------- -----------
Inventory $ 11,429 $ 11,574 $ 38,948
Accounts receivable 37,514 28,173 40,807
Property and equipment 106,440 (25,910) 18,203
Financing costs 41,632 - -
Deferred rent 31,201 31,598 46,402
Non-deductible accruals 69,159 83,235 52,631
Net operating loss carry forward 22,615,715 19,019,278 16,282,345
----------- ----------- -----------
Total deferred tax asset 22,913,090 19,147,948 16,479,336
Valuation allowance (22,913,090) (19,147,948) (16,479,336)
----------- ----------- -----------
Net deferred tax asset $ - $ - $ -
=========== =========== ===========
40
The net changes in the valuation allowance from 2001 to 2002 and from 2000
to 2001 are due principally to the increases 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,
2002, 2001 and 2000, the Company had net operating loss carryforwards of
approximately $58,600,000, $48,600,000 and $42,200,000 for federal and
state income tax purposes available to offset future taxable income. If not
previously utilized, the net operating loss carryforwards will expire on
various dates starting in 2013 through 2022.
A reconciliation between income taxes computed using the statutory federal
income tax rate and the effective rate for the years ended December 31,
2002, 2001 and 2000 is as follows:
2002 2001 2000
--------- --------- ---------
Federal income tax (benefit) at
statutory rate (34.0%) (34.0%) (34.0%)
State income taxes, net (4.6%) (4.6%) (4.6%)
Permanent items 0.1% 0.2% (0.1%)
Net change in valuation allowance 38.5% 38.4% 38.7%
--------- --------- ---------
Provision for Income Taxes 0.0% 0.0% 0.0%
========= ========= =========
6. COMPANY DEBT AND SHAREHOLDERS' EQUITY
8% Secured Convertible Notes
----------------------------
In closings on July 23 and 26 and August 2, 2002, V-ONE issued 8% Secured
Convertible Notes with detachable warrants for an aggregate principal
amount of $1,188,000. The Notes mature 180 days after issuance with an
additional 180-day extension available at the option of the Company or the
holders. The rate of interest payable during such extension of the Notes is
10% per annum.
The holders may convert the principal amount of their Notes plus accrued
interest at any time prior to maturity into (i) Common Stock at a
conversion price equal to the greater of $0.25 per share or 60% of the
average closing sales price of the Common Stock for the five trading day
period immediately preceding the Company's receipt of the holders'
notification of conversion or (ii) new V-ONE securities issued in any round
of financing, the gross proceeds of which are greater than $3,000,000 at a
conversion price based upon the price at which the new securities are
convertible into Common Stock.
Notwithstanding the previous paragraph, if, prior to maturity, V-ONE
receives gross proceeds of $3,000,000 or more from the sale of new
securities, then the holders must convert the principal amount of their
Notes plus accrued interest into (i) shares of Common Stock at the Common
Stock conversion price or (ii) shares of new securities at the new
securities conversion price. The holders, however, will have no mandatory
conversion obligation if V-ONE receives gross proceeds of $6,000,000 or
more from the sale of new securities.
An event of default will occur if V-ONE defaults in the payment of the
Notes and the default continues for five days, or upon the occurrence of
other typical default events, including, but not limited to, an assignment
for the benefit of creditors, an adjudication of bankruptcy, an application
for the appointment of a trustee or receiver or the dissolution of V-ONE.
If an event of default occurs, the Notes will bear interest at the fixed
rate of 15% from the date of acceleration resulting from the default. The
Notes are secured by all of V-ONE's assets, except for proprietary
technology, intellectual property and source code information.
41
For so long as any of the Notes remain outstanding, V-ONE shall not,
without the consent of the placement agent for the Note offering or of a
majority of the principal amount of the Notes outstanding, declare or pay
any cash dividend or purchase, retire or otherwise acquire for value any of
its capital stock.
In connection with the Notes offering, V-ONE issued detachable warrants to
purchase 1,188,000 shares of Common Stock. The exercise price of the
warrants is $0.50 per share and they are exercisable for a period beginning
six months after issuance and ending five years after issuance. In January
2003, in connection with its efforts to raise capital, V-ONE agreed to
adjust the exercise price of the warrants from $0.50 per share to $0.15 per
share. V-ONE will have the right to require the exercise of the warrants if
the closing sales price of Common Stock is equal to or greater than $3.00
per share for any consecutive 20 trading days and the shares of Common
Stock underlying the warrants have been registered under the Securities Act
of 1933, as amended.
The exercise price and number of shares of Common Stock to be issued upon
exercise of the warrants are subject to equitable adjustment in the event
of stock dividends, stock splits and similar events affecting the Common
Stock. In addition, if V-ONE issues any shares of Common Stock or
equivalents at a purchase price less than the then current market price of
the Common Stock or the warrant exercise price, the exercise price will be
equitably reduced, and number of shares of Common Stock to be issued upon
exercise of the warrants adjusted accordingly.
In connection with the notes offering, the Company recorded a debt discount
of $184,980 and recognized additional interest expense in accordance with
the accounting requirements for a beneficial conversion feature on the
convertible instruments. The proceeds received from the convertible notes
offering were first allocated between the convertible instrument and the
detachable warrants issued on the fair value basis. The Company used the
Black-Scholes model to determine the fair value of the warrants that was
recorded as a debt discount using the following assumptions: volatility of
100%, risk free interest rate of 4.7% and expected term of 5 years. The
debt discount resulting from this transaction is amortized over the initial
term of the underlying convertible instruments or through the date of the
conversion, whichever occurs sooner. During the year ended December 31,
2002, the Company recorded amortization expense of the debt discount of
$173,222.
A calculation was then performed to determine the difference between the
effective conversion price and the fair value of the Common Stock at the
commitment date. The Company will record interest expense upon conversion
of the Notes as a result of the embedded conversion feature. The additional
interest expense is not recorded until conversion because the Notes contain
a contingency that does not permit the number of shares to be received upon
conversion to be calculated until conversion occurs. Upon conversion of
$585,000 of Notes into 2,340,000 shares of Common Stock during the year
ended December 31, 2002, the Company recorded $101,600 of interest expense.
In January 2003, the Company elected to extend the notes for an additional
180 days and paid the interest accrued under the initial term of the notes.
In July 2003, the Company requested and received an extension of the notes
for an additional 180 days and agreed to an increase in the interest rate
from 10% to 12% during the extension period.
Series B Preferred Stock
------------------------
On June 11, 1999, the Company issued 1,287,554 shares of Series B
Convertible Preferred Stock (the "Series B Stock") at $2.33 per share to
two investors for $1.0 million in cash and a subscription agreement for
42
$2.0 million. Net proceeds to the Company after issuance costs of $17,500
were $2,982,500. The subscription receivable was received in two
installments of $1.0 million plus accrued interest in July and August 1999.
The holders of the Series B Stock are entitled to a liquidation preference
of $2.33 per share. During 2001, all shares of the Series B Stock were
converted into Common Stock.
Series C Preferred Stock
------------------------
On September 9, 1999, the Company issued 335,000 shares of Series C
Preferred Stock ("Series C Stock") and non-detachable warrants to purchase
3,350,000 shares of the Company's Common Stock ("Series C Warrants") to
certain accredited investors. The Series C Stock was sold in units, with
each unit consisting of one share of Series C Stock and a Series C Warrant
to purchase ten shares of Common for a price of $26.25 per unit. The
Company received $7,918,684 in proceeds net of issuance costs of
approximately $875,000. The Series C 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 Series C 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 as to payment of
dividends and priority on distribution 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
Series C 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 at the
Company's option in cash or in shares of Common Stock 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 Series C Warrants have been exercised by a
holder, that holder shall have the right to require the Company to redeem
all of its then outstanding shares 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.
43
Throughout 2000, certain holders of the Series C Stock chose to
exercise their warrants through a cashless exercise provision. The
cashless exercise provision allowed the holders to remit each share of
Series C Stock in exchange for 10 shares of Common Stock. A total of
280,286 shares of Series C Stock were remitted for 2,802,860 shares of
Common Stock. An additional 97,449 Common Stock shares were issued as a
result of dividends earned on the Series C Stock. For the year ended
December 31, 2001 a total of 11,810 shares of Series C Stock were
remitted for 118,100 shares of Common Stock, and an additional 19,436
Common Stock shares were issued as a result of dividends earned on the
Series C Stock. At December 31, 2002 and 2001, 42,904 shares of Series
C Stock remained outstanding. The dividend payable on these shares at
December 31, 2002 and 2001 was $373,044 and $260,422, respectively,
payable in cash or equivalent shares of Common Stock at fair market
value at the conversion date.
Series D Convertible Preferred Stock
------------------------------------
On February 14, 2001, V-ONE issued 3,675,000 shares of Series D stock
("Series D Stock") with warrants to purchase 735,000 shares of Common
Stock ("Series D Warrants"). The Series D Stock was sold in units, with
each unit consisting of five shares of Series D Stock and a Series D
Warrant to purchase one share of Common Stock. The Series D Warrants
are immediately exercisable at a price of $2.29 per share and will
remain exercisable until February 14, 2004.
The Series D Stock bears cumulative compounding dividends at an annual
rate of 10.0% for the first five years, 12.5% for the sixth year and
15.0% in and after the seventh year. The dividends may be paid in cash,
or at the option of V-ONE, in shares of registered Common Stock. The
Series D Stock is convertible at any time into shares of Common Stock
at the initial conversion price of $1.91 and the initial conversion
ratio of one share of Series D Stock for one share of Common Stock.
Both the conversion price and conversion ratio are subject to equitable
adjustment for stock spits, stock dividends, combinations, and similar
transactions, and in the event V-ONE issues shares of Common Stock at a
purchase price less than the then current conversion price. The Series
D Stock will be automatically converted into Common Stock upon the
closing of an underwritten public offering in excess of $20.0 million
and at a price in excess of $3.00 per share.
The Series D Stock ranks senior to the Common Stock and junior to the
Series C Stock as to payment of dividends and priority on distribution
of assets upon liquidation, dissolution, or winding up of V-ONE.
Holders of the Series D Stock are entitled to a liquidation preference
equal to the greater of (i) $1.91 plus any unpaid accrued preferred
dividends, and (ii) the dollar value per share for the Series D Stock
that a holder of such shares would have been entitled to receive had
such shares been converted into Common Stock immediately prior to the
liquidation, dissolution or winding up of V-ONE. There are no sinking
fund provisions applicable to the Series D Stock.
Except as to matters addressed in the next sentence, the holders of the
Series D Stock have the right to vote that number of shares equal to
the number of shares of Common Stock issuable upon the conversion of
their Series D Stock and vote together with the holders of Common Stock
as a single class. For so long as at least 51.0% of the number of
shares of Series D Stock outstanding on February 14, 2001 remains
outstanding, the affirmative vote or consent of the holders of at least
51.0% of the then outstanding number of shares of Series D Stock,
voting separately as a class, is required for (i) the voluntary
liquidation, dissolution or winding up of V-ONE, (ii) the issuance of
any securities senior to or on parity with the Series D Stock, (iii)
the declaration or payment of a cash dividend on all junior stocks, and
(iv) certain amendments to V-ONE's certificate of incorporation and
bylaws.
44
V-ONE has the right to redeem the outstanding Series D Stock in whole
at any time after February 14, 2004, and on or prior to February 14,
2004 (i) upon the closing of an underwritten public offering in excess
of $20.0 million and at a price in excess of $3.00 per share, or (ii)
if the average closing bid price of the Common Stock for any 20 trading
days during any 30 trading days ending within five trading days prior
to the date of notice of redemption is at least $5.75 per share,
subject in either case to the right of any holder of Series D Stock to
convert his, hers, or its Series D Stock into Common Stock. The
redemption price will be paid in cash in full and be the greater of
$1.91 per share or the fair market value of each share of Series D
Stock plus all unpaid dividends.
Beginning on February 14, 2007, and for each of the next three years
thereafter, the holders of Series D Stock will have the cumulative
right to require V-ONE to redeem annually up to one-fourth of the
Series D Stock issued by V-ONE to each such holder. The redemption
right can be settled through the issuance of Common Stock, at the
option of V-ONE. The redemption price for each share of Series D Stock
is $1.91 per share plus all unpaid dividends.
In 2001, the Company recorded a deemed dividend of approximately
$2,932,000 in accordance with the accounting requirements for a
beneficial conversion feature on the Series D Stock. The proceeds
received in the Series D offering were first allocated between the
convertible instrument and the Series D Warrant on a relative fair
value basis. A calculation was then performed to determine the
difference between the effective conversion price and the fair market
value of the Common Stock at the commitment date.
In 2002, a holder of Series D Stock chose to convert its Series D Stock
to Common Stock at the conversion ratio of one share of Series D Stock
for one share of Common Stock. A total of 654,000 shares of Series D
Stock were remitted for 654,000 shares of Common Stock. At December 31,
2002 and 2001, 3,021,000 and 3,675,000 shares of Series D Stock
remained outstanding. The dividend payable on these shares at December
31, 2002 and 2001 equaled $1,202,665 and $615,386, respectively,
payable in cash or equivalent shares of Common Stock at fair market
value at the conversion date.
V-ONE has granted registration rights to the purchasers of the Notes
and the Series C and Series D Stock whereby V-ONE is obligated, in
certain instances, to register the shares of Common Stock issuable upon
conversion of the Notes and Series D Stock and exercise of the warrants
attached to the Notes and the Series C and Series D Stock.
Common Stock
------------
In March 2000, the Company issued 500,000 shares of Common Stock at a
purchase price of $4.75 per share to Cranshire Capital L.P. in exchange
for $2,375,000.
Restricted Common Stock amounting to 158,316 shares was issued to
certain selected employees as compensation in the second quarter of
2000, 25% of which vested immediately, with the remaining shares
vesting over the next three quarters. Upon termination of certain
employees, 17,687 of these shares were cancelled. The shares were
recorded at the fair market value on the date of grant, $2.375, with
the compensation expense of $376,000 being recognized over the vesting
period.
In May 2000, the stockholders approved an increase in the number of
shares of authorized Common Stock to 50,000,000.
45
In June 2000, the Company issued 274,967 shares of Common Stock at a
purchase price of $3.64 per share to Citrix Systems, Inc. in exchange
for $1,000,000.
Warrants
--------
In addition to the warrants attached to the Notes and the Series C and
Series D Stock discussed above, the Company issued the following
warrants to purchase Common Stock during the years ended December 31,
2000, 2001, and 2002:
On November 21, 1997, the Company issued a warrant to purchase 300,000
shares of Common Stock with an exercise price of $3.125 per share to
the Company's President and Chief Executive Officer. On November 27,
2000, upon the resignation of the former officer, an agreement was
reached whereby one half of these warrants were cancelled and the other
half were extended to a new expiration date of November 27, 2005.
Because the stock price on the new measurement date was less than the
exercise price of the warrant, no compensation expense was recorded.
On November 27, 2000, the Company granted fully vested warrants to
purchase 100,000 shares of Common Stock to MindSquared, LLC, a related
party, as part of a consulting agreement. The warrants have an exercise
price of $1.188 per share and expire five years from the date of grant.
The Company valued these warrants using the Black-Scholes model with
the following assumptions: volatility of 123%, risk free interest rate
of 6% and expected term of 5 years. The value of the warrants,
$101,000, was recognized ratably over the four-month term of the
consulting agreement.
On January 9, 2001, the Company granted fully vested warrants to
purchase an additional 30,000 shares of Common Stock to MindSquared,
LLC, as part of the consulting agreement. The warrants have an exercise
price of $0.625 per share and expire five years from the date of grant.
The Company valued these warrants using the Black-Scholes model with
the following assumptions: volatility of 123%, risk free interest rate
of 6% and expected term of 5 years. The value of the warrants, $15,307,
was recognized ratably over the four-month term of the consulting
agreement.
During the years ended December 31, 2001 and 2000, warrants to purchase
shares of Common Stock that were attached to the Series C Stock were
exercised for an equal number of shares of Common Stock. Of the
original warrants issued in the Series C offering, 429,040 remain at an
exercise price of $1.91 per share.
During 2001, in connection with the issuance of the Series D
Convertible Preferred Stock, the Company granted fully vested warrants
to purchase 735,000 shares of Common Stock. The Series D warrants are
exercisable at a price of $2.29 and will remain exercisable until
February 14, 2004. Pursuant to the terms of the warrants issued in
connection with a debt transaction in 1999, a price adjustment was
created by the issuance of the Series D Stock. The warrants to purchase
210,914 shares of Common Stock were reduced in price to $1.91, and
additional warrants to purchase 57,411 shares of Common Stock were
issued to increase the number of warrants for Transamerica to 268,325
at February 14, 2001.
In 2002, V-ONE granted warrants to purchase a total of 336,750 shares
of Common Stock to Joseph Gunnar & Co., LLC and LaSalle St. Securities,
LLC, placement agent and subagent, respectively, for the Notes
offering. The terms of the placement agent warrants mirror those of the
detachable warrants granted in connection with the Notes offering. The
Company used the Black-Scholes model to determine the fair value of
these warrants with the following assumptions: volatility of 100%, risk
free interest rate of 4.7% and expected term of 5 years. The value of
the warrants of $87,800 was recognized during the year ended December
31, 2002.
46
Warrants to purchase shares of the Company's Common Stock outstanding
at December 31, 2001 and 2002 were as follows:
2002 2001 Exercise Price
---- ---- --------------
1,524,750 - $0.50
30,000 30,000 $0.63
100,000 100,000 $1.19
697,365 697,365 $1.91
735,000 735,000 $2.29
10,000 10,000 $2.69
150,000 150,000 $3.13
54,000 54,000 $4.73
----------------------------------
3,301,115 1,776,365
==================================
At December 31, 2002, warrants to purchase 1,776,365 shares of Common
Stock were exercisable.
Employee Stock Purchase Plan
----------------------------
The Company's Board of Directors adopted the 2001 Employee Stock
Purchase Plan ("Purchase Plan") on February 26, 2001 and the Company's
stockholders approved of the Purchase Plan at the Annual Meeting of
Stockholders on May 10, 2001. The Purchase Plan became effective upon
adoption by the Board, however, the first Offering Period (defined
below) under the Purchase Plan began on the first trading day on or
after July 1, 2001. Pursuant to the Purchase Plan, 2,500,000 shares of
Common Stock were reserved for future issuance by the Company to
employees through the grant of stock options to purchase Common Stock.
Shares acquired under the Purchase Plan may be authorized and unissued
shares or treasury shares.
The purpose of the Purchase Plan is to provide employees of the Company
with an opportunity to purchase Common Stock through payroll
deductions. Under the Purchase Plan, a participating employee is
granted an option to purchase Common Stock that is exercised
automatically at a specified date set forth in the Purchase Plan. The
purchase price for shares of Common Stock received upon exercise of the
option is paid through the employee's payroll deductions and may not be
less than 85% of fair market value at the date of the grant. It is the
Company's intention to have the Purchase Plan qualify as an "Employee
Stock Purchase Plan" under Section 423 of the Internal Revenue Code of
1986, as amended ("Code"). The Purchase Plan shall be construed so as
to extend and limit participation in a manner consistent with Section
423 of the Code. The Purchase Plan is NOT subject to the provisions of
the Employee Retirement Income Security Act of 1974 or Section 401(a)
of the Code.
During the years ended December 31, 2002 and December 31, 2001, 60,397
and 29,399 shares, respectively, were purchased by employees at various
prices in accordance with the provisions of the Purchase Plan. For the
years ended December 31, 2002 and December 31, 2001, the
weighted-average prices of the shares purchased were $0.32 and $0.41,
respectively.
47
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 plans 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 and the vesting period and exercise price of the options
provided it was not below market value on the date of the grant for the
1995 Non-Statutory Stock Option Plan ("1995 Plan"). In most cases, the
options vested over a two-year period and will terminate ten years from
the date of grant. The 1995 Plan will terminate in 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.
At December 31, 2002, 2001 and 2000 there were 10,602 stock options
outstanding under the 1995 Plan with a weighted average exercise price
of $2.50. There was no activity under the 1995 Plan during the three
year period ended December 31, 2002.
1996 INCENTIVE STOCK PLAN
In June 1996, the Company adopted the 1996 Incentive Stock Plan ("1996
Plan"), under which incentive stock options, non-qualified stock
options and restricted share awards may be made to the Company's key
employees, directors, officers and consultants. Both incentive stock
options and options that are not qualified under Section 422 of the
Internal Revenue Code of 1986, as amended ("non-qualified options"),
are available under the 1996 Plan. The options are not transferable and
are subject to various restrictions outlined in the 1996 Plan. The
Compensation Committee or the Board of Directors determines the number
of options granted to key employees, officers or consultants and the
vesting period and exercise price of the options provided that it is
not below fair market value of the Company's Common Stock. The 1996
Plan will terminate in June 2006 unless terminated earlier by the Board
of Directors.
Awards may be granted under the 1996 Plan with respect to a total of
2,333,333 shares of Common Stock. As of December 31, 2002, 988,415
options are outstanding of which 200,590 are vested, and a total of
320,684 options are available for grant under the 1996 Plan.
48
Option activity under the 1996 Plan for the three years ended December 31, 2002
was as follows:
Weighted Average
Shares Exercise Price
------------ ---------------
Balance as of December 31, 1999 814,981 $3.268
Exercised (21,000) $2.714
Cancelled (560,750) $3.077
Expired (6,676) $2.657
------------ ---------------
Balance as of December 31, 2000 226,555 $3.833
Granted 455,400 $1.389
Exercised (1,750) $2.625
Cancelled (47,300) $1.383
Expired (99,740) $4.479
------------ ---------------
Balance as of December 31, 2001 533,165 $1.845
Granted 678,500 $0.284
Cancelled (208,625) $0.881
Expired (14,625) $2.451
------------ ---------------
Balance as of December 31, 2002 988,415 $0.980
============ ===============
1998 INCENTIVE STOCK PLAN
On February 2, 1998, the Board of Directors authorized the adoption of
the 1998 Incentive Stock Plan ("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 the Board of Directors or a committee of the Board
of Directors. 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.
Awards may be granted under the 1998 Plan with respect to a total of
5,000,000 shares of Common Stock. As of December 31, 2002, 3,527,840
options are outstanding, of which 2,209,380 are vested, and a total of
1,134,115 options are available for grant under the 1998 Plan.
49
Option activity under the 1998 Plan for the three years ended December 31, 2002
was as follows:
Weighted Average
Shares Exercise Price
------------ ---------------
Balance as of December 31, 1999 1,690,250 $2.400
Granted 1,783,780 $2.224
Exercised (32,500) $2.595
Cancelled (818,975) $2.723
Expired (8,500) $2.283
------------ ---------------
Balance as of December 31, 2000 2,614,055 $2.178
Granted 1,287,000 $0.917
Exercised (29,480) $1.568
Cancelled (313,685) $2.131
Expired (247,200) $2.377
------------ ---------------
Balance as of December 31, 2001 3,310,690 $1.683
Granted 1,027,000 $0.658
Cancelled (596,663) $1.518
Expired (213,187) $1.592
------------ ---------------
Balance as of December 31, 2002 3,527,840 $1.418
============ ===============
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.
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,
2002, 2001 and 2000, respectively: dividend yield of 0% and expected
volatility of 100% for all periods; risk-free interest rate of 4.7%,
4.7% 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, 2002, 2001 and 2000
was $.51, $.74 and $1.54, respectively. The weighted average exercise
price of the options outstanding under all of the Company's plans at
December 31, 2002, 2001 and 2000 was $1.33, $1.70 and $2.31,
respectively. As of December 31, 2002, the weighted average remaining
contractual life of the options outstanding under all of the Company's
plans is 7.4 years and the number of options exercisable is 2,420,572.
During the year ended December 31, 2002, the Company issued options to
purchase 200,000 shares of common stock to various consultants for
financial advisory, lobbying, investigative and marketing sales related
services provided. The Company used the Black-Scholes model to
determine the fair value of these options with the following
assumptions: volatility of 100%, risk free interest rate of 5.0% and
50
expected term of 10 years. Compensation expense of $82,545 related to
the options was recognized during the year ended December 31, 2002.
Reserve for Issuance
--------------------
At December 31, 2002, the Company has authorized the following shares
of Common Stock for issuance upon conversion of the 8% Secured
Convertible Notes, Series C Preferred Stock, Series D Preferred Stock,
and upon exercise of options and warrants:
Series D Preferred Stock 3,021,000
Common Stock options outstanding 4,526,857
Common Stock options available for grant 3,103,541
Common Stock reserved for Employee Stock Purchase
Plan 2,500,000
Common Stock underlying 8% Convertible Notes 2,412,000
Common Stock warrants 2,586,204
-------------
Total shares of authorized Common Stock reserved 18,149,602
=============
7. NOTE PAYABLE - OTHER
In addition to the aforementioned warrants, the Company issued a
$20,000 note payable to Joseph Gunnar & Co., LLC for the payment of
finance costs incurred with the 8% Convertible Notes offering. The note
is non-interest bearing if paid by the maturity date of August 23,
2003. If the Company defaults on the note, it becomes payable with
interest at 15% per annum from the date of the note.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under various operating lease agreements,
primarily for office space and equipment through 2005. The office lease
provides for fixed rent escalations which under the generally accepted
accounting principles are expensed on a pro rata basis over the term of
the lease. The difference between expense recognized and the required
lease payments at the balance sheet date is recorded as deferred rent
in the accompanying Balance Sheets.
Future minimum lease payments under these non-cancelable operating
leases as of December 31, 2002 are as follows:
Operating
---------
2003 $ 355,576
2004 14,377
2005 11,981
----------
Total minimum payments $ 381,934
==========
Rent expense was $428,801, $464,483 and $583,582 for the years ended
December 31, 2002, 2001 and 2000, respectively.
51
At December 31, 2002, the Company expects to receive $23,786 in future
minimum sublease rental income payments in 2003.
Effective February 28, 2003, the Company entered into a new
non-cancelable operating lease for its office space that expires on
March 31, 2008. The lease payments under the new lease are
approximately $17,600 per month and are subject to annual escalation
clauses.
CAPITAL LEASE
At December 31, 2001, the Company had a lease for office and computer
equipment that was classified as capital lease. The lease was repaid in
2002.
The net present value of the minimum lease payments and other balances
related to the capital lease are included in the accompanying financial
statements as of and for the year ended December 31, 2001, as follows:
Total minimum payments - capital lease obligation $ 50, 059
Interest (2,255)
------------
Present value of capital lease obligations - current portion $ 47,804
============
At December 31, 2002, the Company had no outstanding leases classified
as capital leases. Total amortization expense related to the equipment
under capital lease for the year ended December 31, 2002 was $27,131.
LETTER OF CREDIT
A bank has issued an irrevocable standby letter of credit on the
Company's behalf for a maximum amount of $35,000 expiring April 23,
2003, unless extended. As of December 31, 2002, a $35,000 certificate
of deposit has been pledged as collateral for the letter of credit.
9. EMPLOYEE 401(K) DEFERRED COMPENSATION PLAN
The Company has a 401(k) 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 continuous service. A participant is fully vested after six
years of continuous service. There were no employer contributions for
the years ended December 31, 2002, 2001 or 2000.
52
10. SUPPLEMENTAL CASH FLOW DISCLOSURE
Selected cash payments and noncash activities were as follows:
Year ended December 31,
-----------------------------------------
2002 2001 2000
----------- ------------ -------------
Cash paid for interest $ 6,647 $ 11,560 $ 21,982
Cash paid for dividends - $ 259 $ 16
Noncash investing and financing activities:
Dividends paid with stock - $ 46,348 $ 461,313
Deemed dividend on preferred stock - $2,932,023 -
Notes converted to common stock $ 585,000 - -
Debt discount on 8% Convertible Notes $ 184,980 - -
Issuance of stock options to consultants $ 82,545 $ 98,232 $ 95,422
Issuance of restricted stock - $ 52,000 $ 282,000
11. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
Year ended December 31,
------------------------------------------
2002 2001 2000
----------- ------------- --------------
Numerator:
Net loss $ (5,635,191) $ (6,237,278) $ (8,862,015)
Less: Dividend on preferred stock (699,901) (741,245) (369,979)
Deemed dividend on preferred stock - (2,932,023) -
------------ ----------- -----------
Net loss attributable to holders of Common Stock $ (6,335,092) $ (9,910,546) $ (9,231,994)
============ =========== ===========
Denominator:
Denominator for basic net loss per share-weighted
average shares 25,230,360 22,576,188 20,871,076
Effect of dilutive securities:
Preferred Stock - - -
Stock Options - - -
Warrants - - -
------------ ----------- -----------
Dilutive potential common shares - - -
------------ ----------- -----------
Denominator for diluted net loss per share-adjusted
weighted average shares 25,230,360 22,576,188 20,871,076
============ =========== ===========
Basic and diluted loss per share
------------ ----------- -----------
attributable to holders of Common Stock $ (0.25) $ (0.44) $ (0.44)
============ =========== ===========
53
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,
----------------------------------------------
2002 2001 2000
----------------------------------------------
Preferred stock:
Series B - - 1,287,554
Series D 3,021,000 3,675,000 -
Stock options 4,526,857 3,854,457 2,851,212
Warrants 2,586,204 1,776,365 1,072,054
12. GAIN ON SALE OF INVESTMENT
The Company sold its stock in NFR Security, Inc. (formerly Network Flight
Recorder) in February 2001 for $1,625,000, resulting in a net gain of
$1,375,000, which was included in other (expense) income during the year
ended December 31, 2001.
13. SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
The following table presents the quarterly results for V-ONE Corporation
and its subsidiaries for the years ending December 31, 2001 and 2002:
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2002 (restated)
Revenue $ 852,219 $ 886,999 $ 1,151,943 $ 661,865
Gross profit 686,486 760,053 1,014,259 608,603
Net loss $ 2,013,619 $ 1,430,459 $ 1,186,638 $1,004,475
Net loss per
share, basic
and diluted $ (0.09) (0.07) (0.05) (0.04)
2001 (restated)
Revenue $ 790,181 $ 922,366 $ 1,099,998 $2,177,617
Gross profit 485,282 650,838 676,047 1,844,120
Net loss $ (993,21) $(2,321,670) $(2,148,562) $ (773,831)
=========== =========== =========== ==========
Net loss per
share, basic
and diluted $ (0.18) $ (0.11) $ (0.10) $ (0.04)
=========== =========== =========== ==========
The Company restated the results of the first quarter of 2001 to account
for the allocation of the fair market value to the detachable warrants
issued in connection with the Series D Preferred Stock. The result of the
restatement was to record an additional deemed dividend of $1,107,335 for
the beneficial conversion feature related to the issuance of the warrants.
54
The Company restated the results of the third quarter of 2002 to account
for the allocation of the fair value of a warrant and a note payable that
were issued in connection with the 8% secured convertible notes. The
result of the restatement was to record additional interest expense of
$107,800.
55
V-ONE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2002, 2001 and 2000
Additions
Balance at Additions
Beginning of Charged to
Description Period Costs and Balance at End
of Period Expenses Deductions of Period
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
December 31, 2000 $ 134,244 68,490 97,070 $ 105,664
December 31, 2001 $ 105,664 --- 33,629 $ 72,035
December 31, 2002 $ 72,305 155,000 129,900 $ 97,135
DEFERRED TAX ASSET
VALUATION ALLOWANCE
December 31, 2000 $ 14,859,228 1,620,108 --- $ 16,479,336
December 31, 2001 $ 16,479,336 2,668,612 --- $ 19,147,948
December 31, 2002 $ 19,147,948 3,765,142 --- $ 22,913,090
ALLOWANCE FOR
NON-SALABLE INVENTORY
December 31, 2000 $ 87,694 32,699 41,737 78,656
December 31, 2001 $ 78,656 120,000 169,063 $ 29,593
December 31, 2002 $ 29,593 42,148 27,003 $ 44,738
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning directors and executive
officers is incorporated herein by reference to the Company's definitive proxy
statement for its annual stockholders' meeting to be held on June 5, 2003.
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 June 5, 2003.
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item concerning security ownership of certain
beneficial owners and management and related stockholder matters is incorporated
herein by reference to the Company's definitive proxy statement for its annual
stockholders' meeting to be held on June 5, 2003.
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
June 5, 2003.
ITEM 14. CONTROLS AND PROCEDURES
Within the ninety-day day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's President, Chief Executive
Officer and Principal Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to Rule
13a-14 promulgated under the Securities Exchange Act of 1934, as amended. Based
upon that evaluation, the Company's President, Chief Executive Officer and
Principal Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting management to material information
relating to the Company required to be included in the Company's periodic
filings with the SEC. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
57
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K
(a)(1), (a)(2) and (d) Financial Statements and Financial Statement Schedule.
See Index to Financial Statements on page 27. All required financial statements
and financial statement schedules of the Company are set forth under Item 8 of
this Annual Report on Form 10-K/A.
(a)(3) 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 (3)
3.5 Certificate of Designations of Series A Convertible Preferred
Stock (3)
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)
3.9 Certificate of Designations of Series D Convertible Preferred Stock,
dated February 14, 2001(14)
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 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)
58
NUMBER DESCRIPTION
------ -----------
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. (3)
10.20 Registration Rights Agreement dated as of December 3, 1997 between
V-ONE and Advantage Fund II Ltd. (3)
10.21 Commitment Letter dated December 8, 1997 between V-ONE and Advantage
Fund II Ltd. (3)
10.22 Registration Rights Agreement dated as of December 8, 1997 between
V-ONE and Wharton Capital Partners, Ltd. (3)
10.23 Warrant to Purchase 60,000 shares of Common Stock Issued on December
8, 1997 by V-ONE to Wharton Capital Partners, Ltd. (3)
10.24 Letter Agreement between V-ONE and Wharton Capital Partners, Ltd.
dated October 22, 1997 (3)
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 (2)
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)
59
NUMBER DESCRIPTION
------ -----------
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)
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 (13)
10.65 Series D Convertible Preferred Stock and Non-Detachable Warrant
Purchase Agreement dated February 14, 2001 (14)
10.66 Form of Warrant Granted to Holders of Series D Convertible Preferred
Stock, dated February 14, 2001 (14)
10.67 2001 Employee Stock Purchase Plan (14)
10.68 Form of Subscription Agreement between the Company and Employees
under the 2001 Employee Stock Purchase Plan (14)
10.69 Agreement for Purchase and Sale of Stock between the Company and NFR
Security, Inc., dated March 13, 2001 (14)
10.70 Form of Note Purchase Agreement dated July 23, 2002 (15)
10.71 Form of Promissory Note dated July 23, 2002 (15)
10.72 Form of Warrant dated July 23, 2002 (15)
10.73 Company Disclosures (15)
10.74 Term Sheet for Proposed Offering (15)
10.75 Company Disclosures (15)
10.76 Company Disclosures (15)
10.77 Form of Placement Agency Agreement dated July 23, 2002 (15)
10.78 Form of Legal Opinion dated July 23, 2002 (15)
10.79 Form of Note Purchase Agreement dated July 26, 2002 (15)
10.80 Form of Promissory Note dated July 26, 2002 (15)
10.81 Form of Warrant dated July 26, 2002 (15)
10.82 Company Disclosures (15)
10.83 Term Sheet for Proposed Offering (15)
10.84 Company Disclosures (15)
10.85 Company Disclosures (15)
10.86 Form of Placement Agency Agreement dated July 23, 2002 (15)
10.87 Form of Legal Opinion dated July 26, 2002 (15)
10.88 Form of Note Purchase Agreement dated August 2, 2002 (15)
60
NUMBER DESCRIPTION
------ -----------
10.89 Form of Promissory Note dated August 2, 2002 (15)
10.90 Form of Warrant dated August 2, 2002 (15)
10.91 Company Disclosures (15)
10.92 Term Sheet for Proposed Offering (15)
10.93 Company Disclosures (15)
10.94 Company Disclosures (15)
10.95 Form of Placement Agency Agreement dated July 23, 2002 (15)
10.96 Form of Legal Opinion dated August 2, 2002 (15)
23.1 Consent of Aronson & Company
23.2 Consent of Ernst & Young LLP
31 Certification of Chief Executive Officer and Principal Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Principal Financial
Officer Pursuant to Title 18, United States Code, Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
------------------------------
(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 10-Q for the three months ended June 30, 1997.
(3) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 8-K dated December 8, 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.
61
(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.
(13) 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, 1999.
(14) The information required by this exhibit is incorporated by reference to
V-ONE's Form 10-K for the twelve months ended December 31, 2000.
(15) The information required by this exhibit is incorporated by reference to
V-ONE's Registration Statement on Form S-2 (No. 333-98521).
(b) Reports on Form 8-K
None.
62
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: January 9, 2004
By: /s/ Margaret E. Grayson
-------------------------------------
Margaret E. Grayson
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/ Margaret E. Grayson President, Chief Executive January 9, 2004
-------------------------- Officer, Principal Financial
Margaret E. Grayson Officer and Director
/s/ Molly G. Bayley Director January 9, 2004
--------------------------
Molly G. Bayley
/s/ Heidi B. Heiden Director January 9, 2004
--------------------------
Heidi B. Heiden
/s/ Michael D. O'Dell Director January 9, 2004
--------------------------
Michael D. O'Dell
/s/ William E. Odom Director January 9, 2004
--------------------------
William E. Odom