UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: DECEMBER 31, 2003
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 OF (I.R.S. EMPLOYER
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
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(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 30,
2003, was approximately $3,767,334. This calculation does not reflect a
determination that persons are affiliates for any other purposes.
Registrant had 30,220,293 shares of Common Stock outstanding as of February 27,
2004.
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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 May 13, 2004, are
incorporated by reference into 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 12
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.
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
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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.
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,
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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
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
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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 6,600 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 50,000 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 VPN software product that offers identification and
authentication, data integrity, non-repudiation, authorization and encryption,
and SmartGuard I and SmartGuard II 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 self-protecting firewall is
included with the SmartGuard I and a robust stateful inspection firewall is
integrated with all SmartGuard II 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, 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
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(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"). V-ONE added AES to its library of encryption
methods and incorporated this algorithm as an approved encryption method. V-ONE
first incorporated AES as the default encryption method in 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 and the Department of Justice. The programs sponsored by the
Department of Justice link more than 6,600 federal, state and local law
enforcement agencies and over 50,000 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 VPN 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/satellite access
segments.
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
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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
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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
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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 98/NT/2000/XP/CE/Pocket PC, Solaris, Red Hat Linux,
and Mac.
SmartAdmin
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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
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
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V-ONE's SmartGuard VPN appliances are built on high-speed Intel processors and
provide cost-effective solutions for information sharing.
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SmartGuards are offered in two lines to meet the needs of small businesses,
medium sized enterprises and large global organizations. SmartGuard Series I is
comprised of the 1500, 4500, and 5500 models, all of which include a
self-protecting firewall. SmartGuard Series II models 6000 and 9000 are both
enterprise class devices that integrate SmartGate application layer software
with certified stateful inspection firewall and IPSec functionality.
SmartGuard's advanced VPN capabilities include application layer security that
allows firewall traversal without requiring end users to make network
configuration changes and optional IPSec tunneling. This innovative combination
of application level and network 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.
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.
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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 sharply focused sales and marketing
strategy. To date, the Company has had success in the government sector and
plans to expand its marketing efforts in the government sector and to the
commercial sector.
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 Terrorist Task Force program, the Congressionally funded first responders
DMI-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
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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 DMI-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. DMI-Services, a Marine
Corp/FEMA initiative, was added to this growing network during 2002, with
expansion in 2003 under the 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 and other U.S. civil agencies has increased,
including maintenance orders and new product licenses for the General Services
Administration, U.S. Agency for International Development (USAID), National
Security Agency (NSA), Military Traffic Management Command (MTMC), Defense
Security Service (DSS), Office of Inspector General, U.S. Navy Undersea Warfare
Laboratory, Defense Threat Reduction Agency (DTRA), and others.
Commercial Markets
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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 working through a targeted group of
technologically sophisticated channel partners. V-ONE's products are generating
revenue through the Company's channel programs in North America and Europe. 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 introduced SmartSAT, a program for users and resellers of satellite IP
data communications services. SmartSAT is built upon SmartGate application layer
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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. In 2003, Hughes
Network Systems certified V-ONE VPN solutions as the first VPN solution approved
for secure communications over its satellite networks.
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 Juniper Networks,
Inc. (formerly 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 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 SmartGuard Appliance products and turnkey SmartWall products
consist primarily of off-the-shelf computers, memory, displays, power supplies
and third-party peripherals (such as hard drives and network interface cards).
The Company has agreements with at least two vendors for each of its parts and
components. However, the Company orders most of 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
10
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.
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
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.
11
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 27, 2004, the Company had 24 full-time employees, 1 part-time
employee and 1 consultant. Of these individuals, 11 were in sales and marketing,
8 were in research and product development, and 7 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.
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 LOSSES AND ACCUMULATED DEFICIT COULD AFFECT PROFITABILITY AND MARKET
ACCEPTANCE OF V-ONE'S PRODUCTS. As of December 31, 2003, V-ONE had an
accumulated deficit of approximately $66,514,000. V-ONE is implementing a
turnaround business plan, which management believes will enable V-ONE to achieve
profitable operating results in the future. V-ONE may not, however, achieve or
sustain profitability or significant revenues in the short run. To address these
risks, V-ONE must, among other things, continue its emphasis on research and
development, successfully execute and implement its marketing strategy, respond
to competitive developments and seek to attract and retain talented personnel.
V-ONE may be unable successfully to address these risks and the failure to do so
could affect V-ONE's ability to fully implement its marketing strategy and
achieve profitability and may have a material adverse effect on the market
acceptance of V-ONE's products. V-ONE was founded in February 1993 and
introduced its first product in December 1994. Accordingly, V-ONE did not
generate any significant revenues until 1995 when it commenced sales of its
firewall product and introduced its SmartGate client/server system. Revenues for
the years 1999, 2000, 2001, 2002 and 2003 were approximately $4,966,000,
$4,554,000, $4,990,000, $3,553,000 and $4,003,000, respectively. Losses
attributable to holders of Common Stock for the years 1999, 2000, 2001, 2002 and
12
2003 were approximately $9,952,000, $9,232,000, $9,911,000, $6,335,000 and
$1,392,000, 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 $29,000 in fiscal
2003, an average "burn rate" of approximately $2,400 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 2004, 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.
The Company's annual report on Form 10-K for the fiscal year ended December 31,
2002 was initially 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. In addition, the Company's quarterly reports on
Form 10-Q for the first three quarters of 2003 were initially filed with
financial statements that had not been reviewed by the Company's auditors. This
action caused the Company's stock to be transferred from the OTCBB to the "Pink
Sheets" as reported by the National Quotation Bureau, Inc. as of May 29, 2003
with no change in its ticker symbol. In January 2004, Aronson & Company
completed the 2002 audit and its review of the Company's financial statements
for the first three quarters of 2003. The Company promptly filed with the
Securities and Exchange Commission an amended annual report on Form 10-K for
2002 containing audited financial statements and amended quarterly reports on
Form 10-Q for the first three quarters of 2003 containing reviewed financial
statements.
In July 2002, the Company took steps to reduce expenses by implementing a
reduced work week designed to ensure that customers' requirements were met
without jeopardizing the Company's workforce. The Company effected additional
staff reductions in January 2003 and implemented a four day work week, further
reducing expenses. The Company returned its staff to a full work week effective
February 1, 2004 to meet engineering enhancements required for existing
customers and to introduce its products to a broader customer base. For the
immediate future, V-ONE will focus on existing and potential customers in the
government sector, targeted marketing operations to commercial accounts and
continued minimization of general and administrative expenditures. V-ONE may not
be successful in further reducing operating levels without jeopardizing the
ability to serve existing customers or grow its business base. In February 2004,
V-ONE completed a private placement of 7% Subordinated Convertible Notes with
detachable warrants for an aggregate of $1,200,000, which resulted in net
proceeds to V-ONE of $1,065,690. V-ONE believes that to maintain operations for
any extended period of time it must generate revenue from existing and new
customers, raise additional capital or undergo a significant strategic
transformative event. The Company's ability to reach and sustain profitability
is dependent on its ability to generate sufficient cash flow to meet its
obligations and needs 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 THAT
EXPOSE V-ONE TO FINANCIAL RISKS. No government agency or department has an
obligation to purchase products from V-ONE in the future and the government may
terminate its contracts without cause. 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,
13
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, 2003, sales to the U.S. government
constituted approximately 67% of its revenue. V-ONE expects to derive a
significant amount of its revenue in 2004 from sales to government agencies.
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 50.0% to 23.6% for 2001, 47.4% to 9.9% for 2002 and 59.6% to
2.0% for 2003. 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
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
14
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 SLOW GLOBAL ECONOMY COULD IMPAIR V-ONE'S REVENUES.
A slow global economy, as hampered by the events of September 11, 2001, has
created an uncertain international economic environment, and management cannot
predict the impact of 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, and consequently, V-ONE may not meet its
financial forecast..
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
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
15
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. Beginning March 1, 2003, the Company began paying $325,000 due for
unpaid rents during the term of occupancy, recorded as deferred rent, in equal
monthly installments over two years. 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
On March 20, 2003, BSA Sales, Inc. d/b/a BSA ("BSA") filed a complaint against
the Company in the Court of Common Pleas in the County of Greenville, South
Carolina, alleging breach of contract for failure to pay disputed fees and
seeking damages of a maximum of $75,000. The fees relate to the early
termination of a contract by the Company for BSA's non-performance under the
contract. The parties proceeded to arbitration as required by the state of North
Carolina, but were unsuccessful in settling the matter. Discovery is in the
early stages and the likelihood of an unfavorable outcome or the likely amount
associated therewith cannot be estimated. The Company intends to vigorously
defend its position in this matter.
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, 2003.
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. The Company was not able to satisfy
the minimum listing requirements for continued listing on the Nasdaq SmallCap
Market and on October 18, 2002, its stock was removed from the Nasdaq SmallCap
Market and began trading on the OTCBB. The transfer to the OTCBB was effected
without interruption in the trading market for the Company's securities.
On May 29, 2003, the Company's stock was transferred from the OTCBB to the "Pink
Sheets" as reported by the National Quotation Bureau, Inc. due to the Company's
inability to include audited financial statements with its annual report on Form
10-K for 2002 and reviewed financial statements with its quarterly reports on
Form 10-Q for 2003. This transfer resulted in no change to the Company's ticker
symbol, which remains VONE. In January 2004, Aronson & Company completed the
2002 audit and its review of the Company's financial statements for the first
three quarters of 2003. The Company promptly filed with the Securities and
Exchange Commission an amended annual report on Form 10-K for 2002 containing
audited financial statements and amended quarterly reports on Form 10-Q for the
first three quarters of 2003 containing reviewed financial statements.
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, 2003.
Prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
16
2003
----
HIGH LOW
---- ---
First Quarter $ 0.23 $ 0.08
Second Quarter $ 0.20 $ 0.11
Third Quarter $ 0.21 $ 0.10
Fourth Quarter $ 0.42 $ 0.15
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
According to records of the Company's transfer agent, the Company had
approximately 214 record holders on February 27, 2004. 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, 7% Subordinated 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 May 13, 2004.
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, 2001, 2002 and 2003
and balance sheets as of December 31, 2002 and 2003 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, 1999 and 2000 and for
each of the years ended December 31, 1999 and 2000 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 Operations Data: 1999 2000 2001 2002 2003
Revenues:
Products $ 3,427,422 $ 3,356,086 $ 3,669,817 $ 2,033,413 $ 2,466,178
Consulting and services 1,538,258 1,197,544 1,320,345 1,519,613 1,536,748
----------------- ----------------- ----------------- ----------------- --------------------
Total revenues 4,965,680 4,553,630 4,990,162 3,553,026 4,002,926
----------------- ----------------- ----------------- ----------------- --------------------
Cost of revenues:
Products 973,866 441,752 824,305 190,262 170,463
Consulting and services 328,333 278,327 509,570 293,363 94,545
----------------- ----------------- ----------------- ----------------- --------------------
Total cost of revenues 1,302,199 720,079 1,333,875 483,625 265,008
----------------- ----------------- ----------------- ----------------- --------------------
Gross profit 3,663,481 3,833,551 3,656,287 3,069,401 3,737,918
Operating expenses:
Research and development 2,848,955 3,440,397 4,009,889 2,720,321 1,065,020
Sales and marketing 6,491,987 6,041,926 4,891,170 3,028,590 1,407,160
General and administrative 3,118,829 3,517,068 2,537,103 2,220,138 1,493,822
----------------- ----------------- ----------------- ----------------- --------------------
Total operating expenses 12,459,771 12,999,391 11,438,162 7,969,049 3,966,002
----------------- ----------------- ----------------- ----------------- --------------------
Operating loss (8,796,290) (9,165,840) (7,781,875) (4,899,648) (228,084)
Other (expense) income:
Interest expense (676,443) (25,945) (11,560) (744,818) (217,669)
Interest income 164,841 329,770 249,575 16,833 5,256
Other (expense) income - - 1,306,582 (7,558) (9,153)
----------------- ----------------- ----------------- ----------------- --------------------
Total interest (511,602) 303,825 1,544,597 (735,543) (221,566)
(expense) income ----------------- ----------------- ----------------- ----------------- --------------------
Net loss before extraordinary item (9,307,892) (8,862,015) (6,237,278) (5,635,191) (449,650)
Extraordinary item - early
extinguishment of debt (372,052) - - - -
----------------- ----------------- ----------------- ----------------- --------------------
Net loss (9,679,944) (8,862,015) (6,237,278) (5,635,191) (449,650)
Dividend on preferred stock 272,245 369,979 741,245 699,901 942,056
Deemed dividend on preferred stock - - 2,932,023 - -
----------------- ----------------- ----------------- ----------------- --------------------
Loss attributable to holders
of common stock $ (9,952,189) $ (9,231,994) $ (9,910,546) $ (6,335,092) $ (1,391,706)
================= ================= ================= ================= ====================
Basic and diluted loss per share
Loss before extraordinary item $ (0.57) $ (0.44) $ (0.44) $ (0.25) $ (0.05)
================= ================= ================= ================= ====================
Net loss attributable to
holders of common stock $ (0.59) $ (0.44) $ (0.44) $ (0.25) $ (0.05)
================= ================= ================= ================= ====================
Weighted average number of
common shares outstanding 16,938,205 20,871,076 22,576,188 25,230,360 27,142,148
================= ================= ================= ================= ====================
The accompanying notes are an integral part of these financial statements.
-----------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
Balance Sheet Data:
Working capital (deficit) $6,629,846 $1,591,967 $2,164,448 ($2,068,409) ($1,931,331)
Total assets 9,775,436 5,450,618 4,732,324 972,082 885,471
Long-term debt, less current
portion 119,746 47,803 - 32,831 85,822
Series B Convertible Preferred
Stock 1,288 1,288 - - -
Series C Redeemable Preferred
Stock 335 55 43 43 43
Series D Convertible Preferred
Stock - - 3,675 3,021 3,021
Total shareholder's equity 7,841,603 2,721,581 2,882,367 ($1,691,750) ($1,857,874)
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 12 through 15 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,
---------------------------------------
2001 2002 2003
------------ ----------- -----------
Revenues:
Products 73.5% 57.2% 61.6 %
Consulting and services 26.5 42.8 38.4
------------ ----------- -----------
Total revenues 100.0 100.0 100.0
------------ ----------- -----------
Cost of revenues:
Products 16.5 5.4 4.2
Consulting and services 10.2 8.3 2.4
------------ ----------- -----------
Total cost of revenues 26.7 13.6 6.6
------------ ----------- -----------
Gross profit 73.3 86.4 93.4
Operating expenses:
Research and development 80.4 76.6 26.6
Sales and marketing 98.1 85.2 35.2
General and administrative 50.8 62.5 37.3
------------ ----------- -----------
Total operating expenses 229.3 224.3 99.1
------------ ----------- -----------
Operating loss (156.0) (137.9) (5.7)
Other income (expense):
Interest expense (0.2) (17.9) (5.4)
Interest income 5.0 0.5 0.1
Other income 26.2 (0.2) (0.2)
------------ ----------- -----------
Total other income (expense) 31.0 (17.7) (5.5)
------------ ----------- -----------
Net loss (125.0) (155.6) (11.2)
Dividends on preferred stock 14.9 19.7 23.5
Deemed dividends on preferred stock 58.7 - -
------------ ----------- -----------
Loss attributable to holders of
Common Stock (198.6)% (175.3)% (34.8)%
============ =========== ===========
20
COMPARISON OF FISCAL 2003 AND 2002
Revenues
--------
Total revenues increased to approximately $4,003,000 in 2003 from approximately
$3,553,000 in 2002. Product revenues are derived principally from software
licenses and the sale of hardware products. Product revenues increased to
approximately $2,466,000 in 2003 from approximately $2,033,000 in 2002. The
increase in product revenues from 2002 to 2003 was due principally to an
increase in the number of licenses sold 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 $1,537,000
in 2003 from approximately $1,520,000 in 2002.
Costs of Revenues
-----------------
Total costs of revenues as a percentage of total revenues were 6.6% and 13.6% in
2003 and 2002, respectively. The percentage decrease of 7.0% is comprised of
lower costs of product revenue, which decreased to 4.3% in 2003 from 5.4% in
2002 and lower costs of consulting and services revenue, which decreased to 2.4%
of total revenues in 2003 from 8.2% of total revenues in 2002.
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 $170,000 in 2003 from approximately $190,000 in 2002,
a decrease of $20,000. Costs of product revenue as a percentage of product
revenues were 6.9% and 9.4% for 2003 and 2002, respectively. The dollar and
percentage decreases in 2003 over 2002 were attributable primarily to a higher
mix of SmartGate software licenses (increased $668,000 or 11.2% of total
revenues), which have lower costs of revenues when compared to Smartwall and
turnkey hardware systems..
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 $198,000 to
approximately $95,000 in 2003 from $293,000 in 2002, due primarily to product
enhancements enabling a reduction in staff hours needed to provide help desk and
onsite customer support and a lower proportion of support required for
third-party firewall maintenance contracts. Costs of consulting and services
revenue as a percentage of consulting and services revenues were 6.1% and 19.3%
for 2003 and 2002, 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
$1,065,000 in 2003 from approximately $2,720,000 in 2002. Research and
development expenses as a percentage of total revenues were 26.6% and 76.6% in
2003 and 2002, respectively. The dollar and percentage decreases in 2003 over
2002 of approximately $1,655,000 and 60.8%, respectively, were primarily due to
decreases in the costs of personnel of approximately $1,340,000 resulting from a
reduced work week and reduction in staff of 6 employees, in consulting services
of approximately $136,000, in lower rent expense of $79,000 and in depreciation
expense of $124,000, partially offset by an decrease in allocation to cost of
sales of $79,000. 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 $1,407,000 in 2003 from
approximately $3,029,000 in 2002. Sales and marketing expenses as a percentage
of total revenues were 35.2% and 85.2% in 2003 and 2002, respectively. The
dollar decrease of $1,622,000 and percentage decrease of 53.5% in 2003 from 2002
were principally due to lower costs of personnel (decreased $889,000 or 22.2% of
total revenues), lower levels of advertising and promotion expenses (decreased
$141,000 or 3.5% of total revenues), lower costs of travel (decreased $85,000 or
2.1% of total revenues), lower costs of consulting (decreased $189,000 or 40.7%
of total revenues), lower depreciation expense (decreased $84,000 or 2.1% of
total revenues), lower rent expense (decreased $60,000 or 1.5% of total
revenues) and lower bad debt expense (decreased $105,000 or 2.6%) in 2003 over
2002.
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 $1,494,000 in 2003 from approximately $2,220,000 in 2002. General
and administrative expenses as a percentage of total revenues were 37.3% and
62.5% in 2003 and 2002, respectively. The decrease in expense in 2003 resulted
from lower costs of personnel (decreased $427,000 or 10.7% of total revenues),
lower costs of directors and officers insurance (decreased $155,000 or 3.9% of
total revenues), lower bad debt expense (decreased $50,000 or 1.2% of total
revenues) and lower rent expense (decreased $47,000 or 1.0% of total revenues),
partially offset by higher costs of consulting (increased $42,000 or 1.0% of
total revenues) in 2003 compared with 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
$5,000 in 2003 compared to $17,000 in 2002. 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
decreased to $218,000 in 2003 from approximately $745,000 in 2002, of which
approximately $36,000 was for recognition of a beneficial conversion feature on
the Company's 8% Secured Convertible Notes, discussed below, $62,000 for accrued
interest on the 8% Secured Convertible Notes, $69,000 for amortization of
deferred financing costs and $51,000 for amortization of the fair market value
of warrants associated with the 8% Secured Convertible Notes.
Income Taxes -- The Company did not recognize income tax benefit in fiscal years
ending December 31, 2003 and 2002 from the net loss incurred during those
periods as the realization of such benefit is not likely. As of December 31,
2003, the Company had net operating loss carry forwards of approximately
$59,100,000 as a result of net losses incurred since inception. These net losses
result in a future tax benefit of $22,951,000 (which is not reflected in the
financial statements), which can be used to offset any future taxable income.
Dividends on Series C and D Preferred Stock -- The Company accrued approximately
$942,000 for dividends on the Series C and Series D Preferred Stock during 2003
and approximately $700,000 for dividends on the Series C and Series D Preferred
Stock during 2002.
Recorded Debt Discount Relating to 8% Secured Convertible Notes -- In 2002, upon
the issuance of 8% Secured Convertible Notes ("8% Notes"), the Company recorded
a debt discount of approximately $185,000 in accordance with the accounting
requirements for a beneficial conversion feature on the 8% Notes. The Company
will record interest expense upon conversion of the 8% Notes as a result of the
embedded conversion feature. The additional interest expense is not recorded
until conversion because the 8% Notes contain a contingency that does not permit
the number of shares to be received upon conversion to be calculated until
conversion occurs. During 2003, holders converted $110,000 in principal of the
8% Notes into shares of Common Stock. As of December 31, 2003, $695,000, or 59%
22
of the principal of the 8% Notes, had been converted into shares of Common
Stock. Upon such conversion, the Company recorded $161,000 in interest expense.
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.
23
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 the Company's 6.8% holding in the stock of NFR Security, Inc.
(formerly Network Flight Recorder).
Income Taxes -- The Company did not recognize income tax benefits in fiscal
years ending December 31, 2002 and 2001 from the net loss incurred during those
periods as the realization of such benefit is not likely. 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 is not reflected in the
financial statements), which can be used to offset any 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.
24
Recorded Debt Discount Relating to 8% Secured Convertible Notes -- In 2002, upon
the issuance of 8% Notes, the Company recorded a debt discount of approximately
$185,000 in accordance with the accounting requirements for a beneficial
conversion feature on the 8% Notes. During 2002, the Company amortized
approximately $173,000 of the discount to interest expense. Additionally, the
Company will record interest expense upon conversion of the 8% Notes as a result
of the embedded conversion feature. The additional interest expense is not
recorded until conversion because the 8% 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 8% Notes, into shares of Common Stock.
Upon such conversion, the Company recorded $102,000 in interest expense.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's operating activities used cash of approximately $29,000,
$3,167,000 and $7,771,000 in 2003, 2002 and 2001, respectively. In 2003, cash
used in operating activities was principally a result of net losses. The
decrease in cash used in operating activities in 2003 includes a decrease of
$1,655,000 in engineering expenses, a reduction of approximately $2,347,000 in
sales, marketing and general and administrative expenses, an increase in
accounts receivable of $583,000, a decrease in deferred revenue of $91,000 and
an increase in accounts payable of $85,000. 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.
Net capital expenditures for property and equipment were approximately ($3,000),
$69,000 and $370,000 in 2003, 2002 and 2001 respectively. These expenditures
have generally been for computer workstations and personal computers, office
furniture and equipment, and leasehold additions and improvements. The capital
expenditures decreases of approximately $76,000 and $301,000 in 2003 and 2002,
respectively, were due primarily to conservation of funds. The Company made no
capital expenditures in 2003. 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, 2003, 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.
Beginning March 1, 2003, the Company began paying $325,000 due for unpaid rents
during the term of occupancy, recorded as deferred rent, in equal monthly
installments over two years. 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 $231,000 for 2004, $235,000 for 2005, $230,000 for
2006, $237,000 for 2007 and $40,000 for 2008.
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 8% Notes matured 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 8% Notes is 10% per annum.
The holders may convert their 8% 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 8% Note holders. In January 2003, in connection with its efforts
25
to raise capital, V-ONE agreed to adjust the exercise price of the warrants from
$0.50 per share to $0.15 per share and to extend the 8% Notes for an additional
180 days. The Company paid the interest accrued under the initial term of the 8%
Notes. In July 2003, the Company requested and received an extension of the 8%
Notes for an additional 180 days and agreed to an increase in the interest rate
from 10% to 12% during the extension period.
All of the proceeds received from the 8% 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. Accordingly, V-ONE may not have the funds needed to sustain
operations during 2004, 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 work week designed to ensure that customers' requirements are met
without jeopardizing the Company's workforce. The Company effected additional
staff reductions in January 2003 and implemented a four day work week further
reducing expenses. The Company returned its staff to a full work week effective
February 1, 2004 to meet engineering enhancements required for existing
customers and to introduce its products to a broader customer base. For the
immediate future, V-ONE will focus on existing and potential customers in the
government sector, targeted marketing operations to commercial accounts and
continued minimization of general and administrative expenditures. V-ONE may not
be successful in further reducing operating levels without jeopardizing the
ability to serve existing customers or grow its business base.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company had no off-balance sheet arrangements during 2003.
The following table discloses aggregate information about the Company's
contractual obligations as of December 31, 2003 and the periods in which
payments are due:
Payments Due By Period
------------------------------------------------------------------
2004 2005 2007 Thereafter Total
and 2006 and 2008
------------------------------------------------------------------
Long-term debt obligations $151,248 $45,287 0 0 $196,535
Convertible Debt 493,000 0 0 0 493,000
------------ ------------ ---------- ----------- -----------
Operating leases 231,072 465,069 296,275 0 992,416
------------ ------------ ---------- ----------- -----------
$875,320 $510,356 $296,275 0 $1,681,951
============ ============ ========== =========== ===========
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 Registered Public
Accounting Firm 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 55
December 31, 2003, 2002, and 2001
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
V-ONE Corporation
Germantown, Maryland
We have audited the accompanying Balance Sheets of V-ONE Corporation as of
December 31, 2003 and 2002 and the related Statements of Operations,
Stockholders' Deficiency and Cash Flows for the years then ended. Our audits
also included the Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 2003 and 2002. These financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.
We conducted our audits 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 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 as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedules for the years ended December 31, 2003 and 2002,
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 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
February 20, 2004, except for Notes 2 and 13,
As to which the date is March 19, 2004
28
Report of Independent Auditors
Board of Directors and Stockholders
V-ONE Corporation
We have audited the accompanying statements of operations, stockholders' equity
(deficiency), and cash flows for the year ended December 31, 2001. Our audit
also included the financial statement schedule for the year ended December 31,
2001 in the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of the operations of V-ONE Corporation and
its cash flows for the year 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 year ended December
31, 2001 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 2003 2002
Current assets:
Cash and cash equivalents $ 27,755 $ 93,985
Certificate of deposit - restricted 26,500 35,000
Accounts receivable, less allowances of
$15,500 and $97,135 respectively 606,426 237,695
Inventory, less allowances of $8,901 and
$44,738 respectively 3,636 5,478
Deferred financing costs, net - 68,974
Prepaid expenses and other assets 61,875 121,460
--------------- ---------------
Total current assets 726,192 562,592
Property and equipment, net 64,138 319,294
Deposits 95,141 90,196
--------------- ---------------
Total assets $ 885,471 $ 972,082
=============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 1,320,361 $ 1,235,574
Deferred revenue 692,914 784,185
Convertible notes payable, net 493,000 591,242
Notes payable,other 151,248 20,000
--------------- ---------------
Total current liabilities 2,657,523 2,631,001
Notes payable, other - noncurrent 45,287 -
Deferred rent 40,535 32,831
--------------- ---------------
Total liabilities 2,743,345 2,663,832
Commitments and contingencies
Stockholders' 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 shares issued and outstanding,
(liquidation preference of $5,770,110) 3,021 3,021
Common stock, $0.001 par value, 75,000,000 and 50,000,000
shares authorized, respectively;
27,900,568 and 26,649,301 shares issued and outstanding,
respectively 27,901 26,649
Accrued dividends payable 2,517,765 1,575,709
Additional paid-in capital 62,107,340 61,825,066
Accumulated deficit (66,513,944) (65,122,238)
--------------- ---------------
Total stockholders' deficiency (1,857,874) (1,691,750)
--------------- ---------------
Total liabilities and stockholders' deficiency $ 885,471 $ 972,082
=============== ===============
The accompanying notes are an integral part of these financial statements.
30
V-ONE CORPORATION
STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------------------------------------------
2003 2002 2001
---- ---- ----
Revenues:
Products $ 2,466,178 $ 2,033,413 $ 3,669,817
Consulting and services 1,536,748 1,519,613 1,320,345
-----------------------------------------------------------
Total revenues 4,002,926 3,553,026 4,990,162
-----------------------------------------------------------
Cost of revenues:
Products 170,463 190,262 824,305
Consulting and services 94,545 293,363 509,570
-----------------------------------------------------------
Total cost of revenues 265,008 483,625 1,333,875
-----------------------------------------------------------
Gross profit 3,737,918 3,069,401 3,656,287
Operating expenses:
Research and development 1,065,020 2,720,321 4,009,889
Sales and marketing 1,407,160 3,028,590 4,891,170
General and administrative 1,493,822 2,220,138 2,537,103
-----------------------------------------------------------
Total operating expenses 3,966,002 7,969,049 11,438,162
-----------------------------------------------------------
Operating loss (228,084) (4,899,648) (7,781,875)
Other (expense) income:
Interest expense (217,669) (744,818) (11,560)
Interest income 5,256 16,833 249,575
Other (expense) income (9,153) (7,558) 1,306,582
-----------------------------------------------------------
Total (221,566) (735,543) 1,544,597
-----------------------------------------------------------
Net loss (449,650) (5,635,191) (6,237,278)
Dividends on preferred stock 942,056 699,901 741,245
Deemed dividend on preferred stock - - 2,932,023
-----------------------------------------------------------
Loss attributable to holders
of common stock $ (1,391,706) $ (6,335,092) $ (9,910,546)
===========================================================
Basic and diluted loss per share
Net loss attributable to holders
of common stock $ (0.05) $ (0.25) $ (0.44)
===========================================================
Weighted average number of
common shares outstanding 27,142,148 25,230,360 22,576,188
===========================================================
The accompanying notes are an integral part of these financial statements.
31
V-ONE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Series B, C & D Accrued Additional
Common Stock Preferred Stock Dividend Paid-in
Shares Amount Shares Amount Payable Capital
-------------------------------------------------------------------------------------
Balance, December 31, 2000 22,109,185 $ 22,109 1,342,268 $ 1,343 $ 180,911 $ 51,393,818
Employee stock purchase plan
net of issuance costs 29,399 29 - - - 11,980
Exercise of common stock options,
net of issuance costs 31,230 31 - - - 50,774
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)
Issuance of Series D preferred stock,
net of issuance costs - - 3,675,000 3,675 - 6,266,047
Deemed Dividend on Series D - - - - - 2,932,023
Dividend on preferred stock - - - - 741,245 -
Issuance of common stock options
to consultants - - - - - 150,232
Net loss - - - - - -
-------------------------------------------------------------------------------------
Balance, December 31, 2001 23,594,904 $ 23,595 3,717,904 $ 3,718 $ 875,808 $ 60,766,392
-------------------------------------------------------------------------------------
Employee stock purchase plan
net of issuance costs 60,397 60 - - - 19,089
Conversion of Note payable
to common stock 2,340,000 2,340 - - - 582,660
Conversion of Series D preferred
stock to common stock 654,000 654 (654,000) (654) - -
Dividend on preferred stock - - - - 699,901 -
Issuance of common stock options
to consultants - - - - - 82,545
Beneficial Conversion Note payable - - - - - 101,600
Issuance of Warrants - - - - - 272,780
Net loss - - - - - -
-------------------------------------------------------------------------------------
Balance, December 31, 2002 26,649,301 $ 26,649 3,063,904 $ 3,064 $ 1,575,709 $ 61,825,066
-------------------------------------------------------------------------------------
Employee stock purchase plan
net of issuance costs 54,522 55 - - - 6,472
Exercise of warrants 299,506 300 - - - 28,950
Conversion of Note payable
into common stock 440,000 440 - - - 109,560
Conversion of accrued interest on
Note payable into common stock 3,525 4 - - - 1,353
Dividend on preferred stock - - - - 942,056 -
Issuance of common stock options
to consultants - - - - - 4,902
Issuance of common stock
to consultants 453,714 453 - - - 79,547
Beneficial Conversion Note payable - - - - - 27,600
Repricing of Warrants - - - - - 23,890
Net loss - - - - - -
-------------------------------------------------------------------------------------
Balance, December 31, 2003 27,900,568 $ 27,901 3,063,904 $ 3,064 $ 2,517,765 $ 62,107,340
-------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
V-ONE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Accumulated
Deficit Total
---------------------------------
Balance, December 31, 2000 $ (48,876,600) 2,721,581
Employee stock purchase plan
net of issuance costs - 12,009
Exercise of common stock options,
net of issuance costs - 50,805
Conversion of Series B preferred
stock to common stock - -
Conversion of Series C preferred
stock to common stock - (84,704)
Issuance of Series D preferred stock,
net of issuance costs - 6,269,722
Deemed Dividend on Series D (2,932,023) -
Dividend on preferred stock (741,245) -
Issuance of common stock options
to consultants - 150,232
Net loss (6,237,278) (6,237,278)
---------------------------------
Balance, December 31, 2001 $ (58,787,146) $ 2,882,367
---------------------------------
Employee stock purchase plan
net of issuance costs - 19,149
Conversion of Note payable
to common stock - 585,000
Conversion of Series D preferred
stock to common stock - -
Dividend on preferred stock (699,901) -
Issuance of common stock options
to consultants - 82,545
Beneficial Conversion Note payable - 101,600
Issuance of Warrants - 272,780
Net loss (5,635,191) (5,635,191)
---------------------------------
Balance, December 31, 2002 $ (65,122,238) $ (1,691,750)
---------------------------------
Employee stock purchase plan
net of issuance costs - 6,527
Exercise of warrants - 29,250
Conversion of Note payable
into common stock - 110,000
Conversion of accrued interest on
Note payable into common stock - 1,357
Dividend on preferred stock (942,056) -
Issuance of common stock options
to consultants - 4,902
Issuance of common stock
to consultants - 80,000
Beneficial Conversion Note payable - 27,600
Repricing of Warrants - 23,890
Net loss (449,650) (449,650)
---------------------------------
Balance, December 31, 2003 $ (66,513,944) $ (1,857,874)
---------------------------------
The accompanying notes are an integral part of these financial statements.
32
V-ONE CORPORATION
STATEMENTS OF CASH FLOWS
Year ended December 31,
----------------------------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net loss $ (449,650) $ (5,635,191) $ (6,237,278)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 204,846 431,225 514,354
Amortization 43,725 66,566 36,811
Loss on disposal of property and equipment 9,908 - -
Gain on sale of investment - - (1,375,000)
Amortization of debt discount 11,758 173,222 -
Interest expense - beneficial conversion feature 27,600 101,600 -
Interest expense on repricing of warrants 23,890 - -
Amortization of deferred financing costs 68,974 334,015 -
Note payable related to financing costs - 20,000 -
Noncash charge related to issuance of warrants,
options and stock as compensation 84,902 170,345 150,232
Conversion of accrued interest on notes payable 1,357 - -
Changes in operating assets and liabilities:
Accounts receivable, net (368,731) 621,963 (82,813)
Inventory, net 1,842 51,876 114,823
Prepaid expenses, deposits and other assets 54,640 246,453 (85,309)
Accounts payable and accrued expenses 335,270 242,826 (606,620)
Accrued interest on note payable related to
financing costs 4,068 - -
Deferred revenue (91,271) (167,859) (161,158)
Deferred rent 7,704 (47,959) (39,360)
----------------------------------------------------
Net cash used in operating activities (29,168) (3,390,918) (7,771,318)
Cash flows from investing activities:
Net purchase of property and equipment (3,323) (68,572) (370,280)
Purchase of cerfiticate of deposit 8,500 (35,000) -
Collection of note receivable - - -
Proceeds from sale of investment - - 1,625,000
----------------------------------------------------
Net cash provided (used) in investing activities 5,177 (103,572) 1,254,720
Cash flows from financing activities:
Issuance of common stock under employee stock plans 6,527 19,149 23,949
Issuance of preferred stock, net of
subscriptions receivable - - 7,019,250
Proceeds of notes payable - 1,188,000 -
Payment of preferred stock dividends - - (259)
Payment of notes payable and stock issuance costs - (179,560) (761,468)
Redemption of preferred stock - - (84,445)
Exercise of stock options and warrants 29,250 - 50,805
Principal payments on notes payable-other (78,016) - -
Principal payments on capital lease obligations - (47,804) (71,942)
----------------------------------------------------
Net cash (used) provided by financing activities (42,239) 979,785 6,175,890
----------------------------------------------------
Net decrease in cash and cash equivalents (66,230) (2,514,705) (340,708)
Cash and cash equivalents, beginning of year 93,985 2,608,690 2,949,398
----------------------------------------------------
Cash and cash equivalents, end of year $ 27,755 $ 93,985 $ 2,608,690
====================================================
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 $449,650, $5,635,191 and $6,237,278 for the years ended December 31,
2003, 2002 and 2001, respectively. As of December 31, 2003, the Company
has a deficiency in stockholders' equity of approximately $1,858,000 and a
working capital deficiency of approximately $1,931,000.
The Company's cash used in operating activities was approximately $29,000
in fiscal 2003, an average "burn rate" of approximately $2,400 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 and implemented a four-day
work week further reducing expenses. The Company returned its staff to a
full work week effective February 1, 2004 to meet engineering enhancements
required for existing customers and to introduce its products to a broader
customer base. For the immediate future, V-ONE will focus on existing and
potential customers in the government sector, targeted marketing
operations to commercial accounts and continued minimization of general
and administrative expenditures. V-ONE may not be successful in further
reducing operating levels without jeopardizing the ability to serve
existing customers or grow its business base. In February 2004, the
Company completed a private placement of 7% Subordinated Convertible Notes
with detachable warrants for an aggregate of $1,200,000, which resulted in
net proceeds to the Company of $1,065,690. The Company believes that to
maintain operations for any extended period of time it must generate
revenue from existing and new customers, raise additional capital or
undergo a significant strategic transformative event. The Company's
ability to reach sustainable profitability is dependent on its ability to
generate sufficient cash flow to meet its obligations and needs on a
timely basis or to obtain additional funding.
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
34
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 that 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 that 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. During 2003, the Company recognized
additional revenue of approximately $49,000 related to this agreement.
The Company's revenue recognition policies for the years ended December
31, 2003, 2002 and 2001 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 have been expensed as incurred.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
35
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.
Depreciation and amortization expense related to property and equipment
was $248,571, $497,791 and $551,165 for the years ended December 31, 2003,
2002 and 2001, respectively.
Advertising Costs
-----------------
The Company expenses all advertising costs as incurred. The Company
incurred approximately $4,000, $30,000, and $149,000 in advertising costs
for the years ended December 31, 2003, 2002 and 2001, 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,
2003 2002 2001
Loss attributable to holders of
Common Stock:
As reported ($1,391,706) ($6,335,092) ($9,910,546)
Stock-based employee compensation
net of related tax effects
included in the determination of $ 0 $ 0 $ 0
net income as reported:
Stock-based employee compensation
net of related tax effects that
would have been included in the
determination of net income if the
fair value method had been applied
to all awards: $ 245,405 $ 177,121 $1,901,457
------------- ------------- --------------
36
Loss attributable to holders of
Common Stock:
Pro forma ($1,637,111) ($6,512,213) ($11,812,003)
Basic and diluted loss per share
attributable to holders of Common
Stock:
As reported ($0.05) ($0.25) ($0.44)
Pro forma ($0.06) ($0.26) ($0.52)
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
37
customer accounts receivable. In management's opinion, the Company has
sufficiently provided for estimated credit losses.
In 2003, two suppliers exceeded 10% of purchases. The Company purchased
SUN equipment worth approximately $49,000 from Electronics Systems of
Richmond and computer hardware for the Company's SmartGuard product worth
approximately $52,000, representing 29% and 30% of total purchases
respectively. In 2002, two suppliers exceeded 10% of purchases. The
Company purchased SUN equipment from Arrow MOCA, Incorporated and computer
hardware for the Company's SmartGuard product worth approximately $75,000
and $17,000, or 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.
During the years ended December 31, 2003, 2002, and 2001, approximately
$637,000, $542,000, and $550,000, of sales, respectively, related to sales
to international customers. During the years ended December 31, 2003, 2002
and 2001, sales related to government agencies were approximately
$2,670,000, $2,136,000, and $2,142,000, respectively.
Fair Value of Financial Instruments
-----------------------------------
At December 31, 2003 and 2002, the carrying value of current financial
instruments such as cash, accounts receivable, inventory, accounts
payable, convertible notes payable and accrued liabilities 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.
4. SELECTED BALANCE SHEET INFORMATION
Property and equipment consisted of the following at December 31:
2003 2002
------------ ------------
Office and computer equipment $ 1,040,641 $ 1,329,617
Capitalized software 139,076 139,076
Leasehold improvements - 186,467
Furniture and fixtures 177,715 308,008
------------ ------------
1,357,432 1,963,168
Less: accumulated depreciation (1,293,294) (1,643,874)
------------ ------------
$ 64,138 $ 319,294
============ ============
Deferred financing costs consisted of the following at December 31:
2003 2002
----------- -----------
Deferred financing costs $ 1,113,044 $ 1,113,044
Accumulated amortization (1,113,044) (1,044,070)
----------- -----------
$ - $ 68,974
=========== ===========
38
Accounts payable and accrued expenses consisted of the following at
December 31:
2003 2002
------------ ------------
Accounts payable $ 945,933 $ 1,025,810
Accrued compensation 245,655 140,941
Other accrued expenses 128,773 68,823
------------ ------------
$ 1,320,361 $ 1,235,574
============ ============
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:
2003 2002 2001
--------------- ------------- -------------
Inventory $ 3,438 $ 11,429 $ 11,574
Accounts receivable 5,986 37,514 28,173
Property and equipment 82,769 106,440 (25,910)
Financing costs - 41,632 -
Deferred rent 15,655 31,201 31,598
Non-deductible accruals 30,227 69,159 83,235
Net operating loss carry forward 22,813,052 22,615,715 19,019,278
--------------- ------------- -------------
Total deferred tax asset 22,951,127 22,913,090 19,147,948
Valuation allowance (22,951,127) (22,913,090) (19,147,948)
--------------- ------------- -------------
Net deferred tax asset $ - $ - $ -
=============== ============= =============
The net changes in the valuation allowance from 2002 to 2003 and from 2001
to 2002 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,
2003, 2002 and 2001, the Company had net operating loss carryforwards of
approximately $59,100,000, $58,600,000 and $48,600,000, respectively, 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 2023.
A reconciliation between income taxes computed using the statutory federal
income tax rate and the effective rate for the years ended December 31,
2003, 2002 and 2001 is as follows:
2003 2002 2001
--------- ---------- ------------
Federal income tax (benefit) at
statutory rate (34.0%) (34.0%) (34.0%)
State income taxes, net (4.6%) (4.6%) (4.6%)
Equity valuation difference 23.6% - -
Other permanent items 6.5% (0.1%) (0.2%)
Net change in valuation allowance 8.5% 38.5% 38.4%
--------- ---------- ------------
Provision for Income Taxes 0.0% 0.0% 0.0%
========= ========== ============
39
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 8% Notes matured 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 8%
Notes was 10% per annum.
The holders could convert the principal amount of their 8% 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
received gross proceeds of $3,000,000 or more from the sale of new
securities, then the holders were required to convert the principal amount
of their 8% 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, would have no
mandatory conversion obligation if V-ONE received gross proceeds of
$6,000,000 or more from the sale of new securities.
An event of default would occur if V-ONE defaulted in the payment of the
8% Notes and the default continued 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 occurred, the 8% Notes would
bear interest at the fixed rate of 15% from the date of acceleration
resulting from the default. The 8% Notes are secured by all of V-ONE's
assets, except for proprietary technology, intellectual property and
source code information.
For so long as any of the 8% Notes remain outstanding, V-ONE shall not,
without the consent of the placement agent for the 8% Note offering or of
a majority of the principal amount of the 8% 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 8% 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. During the year ended December 31, 2003, 8% Note
holders exercised warrants to purchase 170,000 shares of Common Stock. In
connection with repricing of the warrants during the year ended December
31, 2003, the Company recorded interest expense of $23,890.
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
40
exercise of the warrants adjusted accordingly. 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.
In connection with the 8% 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 8% 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. During the
year ended December 31, 2003, the Company recorded additional amortization
expense of the debt discount of $11,758.
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 8% Notes as a result of the embedded conversion feature. The
additional interest expense is not recorded until conversion because the
8% 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 8% Notes into 2,340,000 shares of Common
Stock during the year ended December 31, 2002, the Company recorded
$101,600 of interest expense. During the year ended December 31, 2003,
$110,000 of 8% Notes were converted into 440,000 shares of Common Stock
and the Company recorded $27,600 of interest expense.
In January 2003, the Company elected to extend the 8% Notes for an
additional 180 days and paid the interest accrued under the initial term
of the 8% Notes. In July 2003, the Company requested and received an
extension of the 8% Notes for an additional 180 days and agreed to an
increase in the interest rate from 10% to 12% during the extension period.
In connection with a restructuring of the 8% Notes, the Company agreed in
January 2004 to adjust the conversion price of certain 8% Notes
constituting $150,000 in principal to $.18 per share in exchange for an
extension of the term of such 8% Notes to July 15, 2004 at an interest
rate of 10%. Also in connection with the January 2004 restructuring, the
Company adjusted the conversion price of the remaining 8% Notes
outstanding, which constituted $343,000 in principal, to $.15 per share
and the holders of such 8% Notes converted them into 2,286,667 shares of
Common Stock.
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
$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.
41
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. There are no sinking fund provisions applicable to the Series C
Shares.
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.
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 shares of Common Stock 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
42
shares of Common Stock, and an additional 19,436 shares of Common Stock
were issued as a result of dividends earned on the Series C Stock. At
December 31, 2003 and 2002, 42,904 shares of Series C Stock remained
outstanding. The dividend payable on these shares at December 31, 2003 and
2002 was $574,155 and $373,044, 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 were
exercisable at a price of $2.29 per share through 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.
V-ONE has the right to redeem the outstanding Series D Stock in whole at
any time after February 14, 2004. 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
43
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, 2003 and
2002, 3,021,000 shares of Series D Stock remained outstanding. The
dividend payable on these shares at December 31, 2003 and 2002 equaled
$1,943,610 and $1,202,665, 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 Series C
and Series D Stock and the 7% and 8% Notes whereby V-ONE is obligated, in
certain instances, to register the shares of Common Stock issuable upon
conversion of the Series D Stock and 7% and 8% Notes and exercise of the
warrants attached to the Series C and Series D Stock and 7% and 8% Notes.
Common Stock
------------
In June 2003, the stockholders voted to amend the Company's certificate of
incorporation, as amended and restated, to increase the number of
authorized shares of Common Stock of the Company from 50,000,000 to
75,000,000 shares.
During the year ended December 31, 2003, the Company issued 453,714 shares
of Common Stock in exchange for governmental consulting services valued at
$80,000.
Warrants
--------
In addition to the warrants attached to the 7% and 8% 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,
2001, 2002, and 2003:
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 year ended December 31, 2001, 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 outstanding at December 31, 2003
at an exercise price of $1.91 per share.
44
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
$2.29 per share and expired unexercised at 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 Business Credit Corporation to 268,325 at February 14, 2001
pursuant to the Loan and Security Agreement dated February 24, 1999.
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 8% Notes offering. The
terms of the placement agent warrants mirror those of the detachable
warrants granted in connection with the 8% 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. 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. During the year ended December 31, 2003, Joseph Gunnar & Co.,
LLC exercised warrants to purchase 139,146 shares of Common Stock.
Warrants to purchase shares of the Company's Common Stock outstanding at
December 31, 2003 and 2002 were as follows:
2003 2002 Exercise Price
---- ---- --------------
1,155,954 - $0.15
- 1,524,750 $0.50
30,000 30,000 $0.63
100,000 100,000 $1.19
639,954 697,365 $1.91
735,000 735,000 $2.29
- 10,000 $2.69
150,000 150,000 $3.13
- 54,000 $4.73
------------------------------
2,810,908 3,301,115
==============================
At December 31, 2003, warrants to purchase 2,810,908 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 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
45
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, 2003 and 2002, 54,522 and 60,397
shares, respectively, were purchased by employees at various prices in
accordance with the provisions of the Purchase Plan. For the years ended
December 31, 2003 and December 31, 2002, the weighted-average prices of
the shares purchased were $0.12 and $0.32, respectively.
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 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, 2003, 2002 and 2001 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, 2003.
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, 2003, 838,465 options
are outstanding of which 392,848 are vested, and a total of 470,634
options are available for grant under the 1996 Plan.
46
Option activity under the 1996 Plan for the three years ended December 31,
2003 was as follows:
Weighted Average
Shares Exercise Price
---------- -----------------
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
Cancelled (127,700) $0.539
Expired (22,250) $0.884
---------- -----------------
Balance as of December 31, 2003 838,465 $1.050
========== =================
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, 2003, 4,051,465
options are outstanding, of which 2,608,799 are vested, and a total of
610,490 options are available for grant under the 1998 Plan.
Option activity under the 1998 Plan for the three years ended December 31,
2003 was as follows:
Weighted
Average
Shares Exercise Price
---------- ---------------
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
47
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
Granted 909,500 $0.081
Cancelled (211,875) $1.135
Expired (174,000) $1.120
---------- ---------------
Balance as of December 31, 2003 4,051,465 $1.143
========== ===============
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,
2003, 2002 and 2001, respectively: dividend yield of 0% and expected
volatility of 100% for all periods; risk-free interest rate of 4.7%; 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, 2003, 2002 and 2001 was $0.06, $.32 and $.74,
respectively. The weighted average exercise price of the options
outstanding under all of the Company's plans at December 31, 2003, 2002
and 2001 was $1.13, $1.33 and $1.70, respectively. As of December 31,
2003, the weighted average remaining contractual life of the options
outstanding under all of the Company's plans is 6.7 years and the number
of options exercisable is 3,012,249.
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 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 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, 2003, 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 (in thousands):
Series D Preferred Stock 3,021
Common Stock options outstanding 4,900
48
Common Stock options available for grant 1,081
Common Stock reserved for Employee Stock 2,500
Purchase Plan
Common Stock underlying 8% Convertible Notes 1,972
Common Stock warrants 2,811
-------------
Total shares of authorized Common Stock reserved 16,285
=============
7. NOTES PAYABLE - OTHER
At December 31, 2003 and 2002, notes payable - other consisted of the
following:
2003 2002
---- ----
Note payable to Joseph Gunnar & Co., LLC,
unsecured, due August 2003. Beginning at the
maturity date, the note became payable with
interest at 15% per annum from the date of the
note. Note balance at December 31, 2003 includes $ 24,068 $ 20,000
accrued interest of $4,068.
Note payable to landlord, unsecured, bearing
interest at 10% per annum, payable in monthly
installments of $11,559 including principal and 172,467 -
interest. Note matures in April 2005. ----------- ----------
Total 196,535 20,000
Less: current portion of notes payable - other (151,248) (20,000)
----------- ----------
Notes payable - other, net of current portion $ 45,287 $ -
=========== ==========
Future minimum payments under the notes payable - other are as follows:
Year Ending
December 31, Amount
------------ ------
2004 $ 151,248
2005 45,287
-----------------
Total $ 196,535
=================
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under various operating lease agreements,
primarily for office space and equipment through 2008. The office lease
provides for monthly payments of approximately $17,600 subject to 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.
49
Future minimum lease payments under these non-cancelable operating leases
as of December 31, 2003 are as follows:
Year Ending
December 31, Operating
------------ ---------
2004 $ 231,072
2005 235,177
2006 229,892
2007 236,789
2008 59,486
---- ------
Total minimum payments $ 992,416
==========
Rent expense was $241,786, $428,801 and $464,483 for the years ended
December 31, 2003, 2002 and 2001, respectively.
LETTER OF CREDIT
A bank issued an irrevocable standby letter of credit in 2002 on the
Company's behalf for a maximum amount of $35,000, originally expiring on
April 23, 2003. The letter of credit was extended until April 23, 2004. At
December 31, 2002, a $35,000 certificate of deposit was pledged as
collateral for the letter of credit. As of December 31, 2003, the
certificate of deposit was reduced to $26,500.
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
20% 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, 2003, 2002, or 2001.
10. SUPPLEMENTAL CASH FLOW DISCLOSURE
Selected cash payments and noncash activities were as follows:
Year ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Cash paid for interest $ 71,813 $ 6,647 $ 11,560
Cash paid for dividends - - $ 259
Noncash investing and financing activities:
Dividends paid with stock - - $ 46,348
Deemed dividend on preferred stock - - $2,932,023
Notes converted to common stock $110,000 $ 585,000 -
Debt discount on 8% Convertible Notes - $ 184,980 -
Issuance of stock options to consultants $ 4,902 $ 82,545 $ 98,232
Issuance of restricted stock - - $ 52,000
Accounts payable converted to note
payable-other $250,483 - -
50
Accrued interest on 8% Convertible Notes
converted to Common Stock $ 1,357 - -
Common Stock issued to consultants $ 80,000 - -
11. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
Year Ended December 31,
----------------------------------------
2003 2002 2001
----------------------------------------
Numerator:
Net loss $ (449,650) (5,635,191) $ (6,237,278)
Less: Dividend on preferred stock (942,056) (699,901) (741,245)
Deemed dividend on preferred stock - - (2,932,023)
---------- ----------- ----------
Net loss attributable to holders of
Common Stock $ (1,391,706) (6,335,092) $ (9,910,546)
========== =========== ==========
Denominator:
Denominator for basic net loss per
share-weighted average shares 27,142,148 25,230,360 22,576,188
Effect of dilutive securities:
Preferred Stock - - -
Stock Options - - -
Warrants - - -
---------- ----------- ----------
Dilutive potential common shares - - -
---------- ----------- ----------
Denominator for diluted net loss per
share-adjusted weighted average shares 27,142,148 25,230,360 22,576,188
========== =========== ==========
Basic and diluted loss per share ---------- ----------- ----------
attributable to holders of Common Stock $ (0.05) $ (0.25) $ (0.44)
========== =========== ==========
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,
-----------------------------------------
2003 2002 2001
------------ ------------ -------------
Preferred stock:
Series D 3,021,000 3,021,000 3,675,000
Stock options 4,900,532 4,526,857 3,854,457
Warrants 2,810,908 2,586,204 1,776,365
51
12. SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
The following table presents the quarterly results for V-ONE Corporation
for the years ended December 31, 2003 and 2002:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2003
Revenue $ 1,005,270 $ 1,155,220 $ 878,766 $ 963,670
Gross profit 964,090 1,012,874 842,039 918,915
Net income (loss) ($ 352,598) ($ 26,235) ($ 80,113) $ 9,296
Net loss per
share, basic and $ (0.02) $ (0.01) $ (0.01) $ -
diluted
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)
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.
13. SUBSEQUENT EVENTS
In connection with a restructuring of the 8% Notes, the Company agreed in
January 2004 to adjust the conversion price of certain 8% Notes
constituting $150,000 in principal to $.18 per share in exchange for an
extension of the term of such 8% Notes to July 15, 2004 at an interest
rate of 10%. Also in connection with the January 2004 restructuring, the
Company adjusted the conversion price of the remaining 8% Notes
outstanding, which constituted $343,000 in principal, to $.15 per share
and the holders of such 8% Notes converted them into 2,286,667 shares of
Common Stock and granted a warrant to purchase a total of 250,000 shares
of Common Stock at an exercise price of $0.18 per share to Joseph Gunnar &
Co., LLC, placement agent for the 8% Notes offering. In February 2004,
Joseph Gunnar & Co., LLC exercised the warrant to purchase 61,191 shares
of Common Stock.
7% Subordinated Convertible Notes
---------------------------------
In a closing on February 27, 2004, V-ONE issued 7% Subordinated
Convertible Notes ("7% Notes") with warrants for an aggregate principal
amount of $1,200,000, resulting in net proceeds to V-ONE of $1,065,690.
The 7% Notes mature on February 27, 2009. Interest at the rate of 7% per
annum is payable semi-annually at the option of V-ONE in cash or in shares
of Common Stock. The 7% Notes rank senior to the Common Stock and junior
to the Series C Shares and Series D Shares as to the payment of dividends
and as to distribution of assets upon liquidation, dissolution or winding
up of V-ONE. So long as at least $500,000 of the principal amount of the
52
7% Notes is outstanding, the affirmative vote of the holders of at least
75% of the principal amount of the 7% Notes outstanding is required to
issue any securities that rank senior to or on parity with the 7% Notes.
The holders may convert the principal amount of their 7% Notes, in whole
or in part, at any time into shares of Common Stock at a conversion price
of $.20 per share. In addition, subject to certain terms, the principal
amount of the 7% Notes plus all accrued and unpaid interest shall
automatically convert into shares of Common Stock at the then current
conversion price on the earlier of (i) February 27, 2009 and (ii) the
first date which is at least 180 days following the effective date of the
Registration Statement providing for the resale of the shares of Common
Stock issuable upon conversion of the 7% Notes that the closing bid price
of V-ONE Common Stock exceeds $1.00 for a period of 20 consecutive trading
days.
An event of default will occur if V-ONE fails to make any principal
payment under the 7% Notes, V-ONE fails to make any interest payment for a
period of five days after such payment is due, V-ONE fails to timely file
the Registration Statement providing for the resale of the shares of
Common Stock issuable upon conversion of the 7% Notes or the Registration
Statement is not declared effective by the SEC within 180 days of February
27, 2004, the effectiveness of the Registration Statement lapses for a
period of 20 consecutive trading days, or upon the occurrence of other
default events, including, but not limited to, an assignment for the
benefit of creditors, an application for the appointment of a trustee or
receiver or the commencement of a bankruptcy proceeding. If an event of
default occurs, the Notes will bear interest at the lesser of 12% and the
maximum applicable legal rate per annum from the date of the event of
default until such default is cured.
Upon the occurrence of certain events of default and other triggering
events, a 7% Note holder shall have the right to require V-ONE to prepay
in cash all or a portion of the holder's 7% Note at 120% of the aggregate
principal amount of the 7% Note, plus all accrued and unpaid interest.
Similar provisions apply if V-ONE cannot fully convert a 7% Note into
shares of registered Common Stock upon the receipt of a proper conversion
notice from the holder. In addition, in the event of a major corporate
transaction such as the consolidation, merger or other business
combination of V-ONE into another entity or a sale or transfer of more
than 50% of V-ONE's assets, the 7% Note holder shall have the right to
require V-ONE to prepay in cash all or a portion of the holder's 7% Note
at 100% of the aggregate principal amount of the 7% Note, plus all accrued
and unpaid interest. If the major corporate transaction is consummated
within six months of the issuance of the 7% Note, then the prepayment
shall be at 110% of the aggregate principal amount of the 7% Note, plus
all accrued and unpaid interest. Also, beginning one year after the
issuance of the 7% Notes, V-ONE may prepay any portion or all of the
outstanding principal balance of the 7% Notes together with all accrued
and unpaid interest at 110% of the aggregate principal amount of the 7%
Notes plus any accrued and unpaid interest.
For twelve months after the issuance of the 7% Notes, each holder shall
have a right of first refusal to purchase its pro rata portion of V-ONE
Common Stock (or any securities convertible, exercisable or exchangeable
into Common Stock) offered to a third party in a private transaction on
the same terms as those offered to the third party, other than in certain
permitted financings. If a holder elects not to exercise its right of
first refusal, the other holders may participate on a pro rata basis. If
the holders do not participate, V-ONE may proceed with the transaction
with the third party.
In connection with the 7% Notes offering, V-ONE issued detachable warrants
to purchase 6,000,000 shares of Common Stock to the holders of the 7%
Notes. The warrants are exercisable beginning on August 27, 2004 at an
53
exercise price of $0.25 per share and expire on August 27, 2008. Beginning
180 days after the effective date of a Registration Statement providing
for the resale of the shares of Common Stock issuable upon conversion of
the 7% Notes and exercise of the warrants, V-ONE may call up to 100% of
the warrants if the per share market value of its Common Stock has been
greater than $.75 for a period of 20 consecutive trading days by issuing a
call notice to the warrant holders. The rights and privileges granted to a
warrant holder with respect to the shares subject to the call notice shall
expire on the twentieth day after the holder receives the call notice if
the holder does not exercise the warrant. If the holder does not exercise
the warrant, V-ONE shall remit to the warrant holder (i) $.01 per share
subject to the call notice and (ii) a new warrant representing the number
of shares of Common Stock, if any, which were not subject to the call
notice.
The exercise price and number of shares of Common Stock to be issued upon
conversion of the 7% Notes and 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 conversion price for the 7% Notes or warrant exercise
price, the conversion price and warrant exercise price will be equitably
reduced, and number of shares of Common Stock to be issued upon conversion
of the 7% Notes and exercise of the warrants adjusted accordingly.
However, in no event shall the conversion price, or exercise price in the
event of the issuance of V-ONE securities at less than the current warrant
exercise price, be less than $.15 per share.
In connection with the 7% Notes offering, V-ONE granted a warrant to
purchase up to a total of 1,260,000 shares of Common Stock to H.C.
Wainwright & Co., Inc., placement agent for the 7% Notes offering. The
terms of the placement agent warrant mirror those of the warrants granted
in connection with the 7% Notes offering.
54
V-ONE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2003, 2002 and 2001
Additions
Balance at Charged Balance at
Beginning to Costs End of Period
Description of Period and Deductions
Expenses
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
December 31, 2001 $ 105,664 --- 33,629 $ 72,035
December 31, 2002 $ 72,035 155,000 129,900 $ 97,135
December 31, 2003 $ 97,135 --- 81,635 $ 15,500
DEFERRED TAX ASSET
VALUATION ALLOWANCE
December 31, 2001 $ 16,479,336 $ 2,668,612 --- 19,147,948
December 31, 2002 $ 19,147,948 3,765,142 --- $22,913,090
December 31, 2003 $ 22,913,090 38,037 --- $22,951,127
ALLOWANCE FOR
NON-SALABLE INVENTORY
December 31, 2001 $ 78,656 120,000 169,063 $ 29,593
December 31, 2002 $ 29,593 42,148 27,003 $ 44,738
December 31, 2003 $ 44,738 1,035 36,872 $ 8,901
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 2, 2003, the Company determined to dismiss its independent auditors,
Ernst & Young LLP, and to engage the services of Aronson & Company as its new
independent auditors. This determination followed the Company's efforts to
contain costs and seek an independent public accounting firm better suited to
its size, and was approved by the Company's Board of Directors upon the
recommendation of its Audit Committee. Aronson & Company audited the Company's
financial statements for the fiscal years ended December 31, 2002 and 2003.
During the fiscal year ended December 31, 2001 and the fiscal year ended
December 31, 2002 (which was not audited by Ernst & Young LLP), and the
subsequent interim period through October 2, 2003, there were no disagreements
between the Company and Ernst & Young LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to Ernst & Young LLP's satisfaction, would
have caused Ernst & Young LLP to make reference to the subject matter of the
disagreement in connection with its reports on the financial statements of the
Company for the year ended December 31, 2001. There were no "reportable events"
as that term is described in Item 304(a)(1)(v) of Regulation S-K.
55
The audit reports of Ernst & Young LLP on the financial statements of the
Company as of and for the fiscal years ended December 31, 2000 and 2001 did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles.
During the two fiscal years of the Company ended December 31, 2002, and the
subsequent interim period through October 2, 2003, the Company did not consult
with Aronson & Company regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning directors and executive
officers is incorporated herein by reference to the Company's definitive proxy
statement for its annual stockholders' meeting to be held on May 13, 2004.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item concerning executive compensation is
incorporated herein by reference to the Company's definitive proxy statement for
its annual stockholders' meeting to be held on May 13, 2004.
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 May 13, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item concerning certain relationships and
related transactions is incorporated herein by reference to the Company's
definitive proxy statement for its annual stockholders' meeting to be held on
May 13, 2004.
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.
56
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
----------
Audit fees for the fiscal years ended December 31, 2002 and 2003 were $95,000
and approximately $45,000, respectively.
Audit Related Fees
------------------
Audit related fees for the fiscal years ended December 31, 2002 and 2003 were
$27,050 and $24,000, respectively. Audit related services generally include fees
for pension and statutory audits, business acquisitions, accounting
consultations, internal audits and SEC reporting obligations.
Tax Fees
--------
Tax fees for the fiscal years ended December 31, 2002 and 2003 were $0.
All Other Fees
--------------
All other fees for products and services provided by Aronson & Company, the
Company's principal accountant, for the fiscal years ended December 31, 2002 and
2003 were $0.
All audit related services were pre-approved by the Audit Committee, which
concluded that the provision of such services by Aronson & Company was
compatible with the maintenance of that firm's independence in the conduct of
its auditing functions.
57
PART IV
ITEM 16. 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)(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)
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)
58
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)
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)
59
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)
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)
60
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)
10.97 Note and Warrant Purchase Agreement dated as of February 27, 2004
(16)
10.98 Registration Rights Agreement dated as of February 27, 2004 (16)
10.99 Form of Subordinated Convertible Note dated February 27, 2004
10.100 Form of Warrant to Purchase Shares of Common Stock dated February 27,
2004
16 Letter on change in certifying accountants from Ernst & Young LLP,
dated October 7, 2003 (17)
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).
(16) The information required by this exhibit is incorporated by reference to
V-ONE's Form 8-K dated March 5, 2004.
(17) The information required by this exhibit is incorporated by reference to
V-ONE's Form 8-K dated October 8, 2003.
(b) Reports on Form 8-K
Form 8-K filed October 8, 2003, reporting under Items 4 and 7.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
V-ONE Corporation
Date: March 25, 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 March 25, 2004
------------------------ Executive Officer,
Margaret E. Grayson Principal Financial
Officer and Director
/s/ Molly G. Bayley Director March 24, 2004
------------------------
Molly G. Bayley
/s/ Heidi B. Heiden Director March 25, 2004
------------------------
Heidi B. Heiden
/s/ William E. Odom Director March 25, 2004
-------------------------------
William E. Odom
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