-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PRJGaxD+vojT2mJWl9NKB+K6OoS8dxduJLeQlWgHLdp21lpZjHFtKyBbfCX1CQKH WRr6HGWJ/q+y5YFKiFbzGg== 0000898432-00-000284.txt : 20000414 0000898432-00-000284.hdr.sgml : 20000414 ACCESSION NUMBER: 0000898432-00-000284 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 DATE AS OF CHANGE: 20000413 FILER: COMPANY DATA: COMPANY CONFORMED NAME: V ONE CORP/ DE CENTRAL INDEX KEY: 0001008946 STANDARD INDUSTRIAL CLASSIFICATION: 5045 IRS NUMBER: 521953278 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21511 FILM NUMBER: 589295 BUSINESS ADDRESS: STREET 1: 20250 CENTURY BOULEVARD STREET 2: SUITE 300 CITY: GERMANTOWN STATE: MD ZIP: 20874 BUSINESS PHONE: 3015155200 MAIL ADDRESS: STREET 1: 20250 CENTURY BOULEVARD STREET 2: SUITE 300 CITY: GERMANTOWN STATE: MD ZIP: 20874 FORMER COMPANY: FORMER CONFORMED NAME: VIRTUAL OPEN NETWORK ENVIRONMENT CORP/ DATE OF NAME CHANGE: 19970122 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED: DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________ COMMISSION FILE NUMBER 0-21511 V-ONE CORPORATION ----------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 52-1953278 ------------------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 20250 CENTURY BLVD., SUITE 300,GERMANTOWN, MARYLAND 20874 --------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (301) 515-5200 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE PER SHARE (TITLE OF CLASS) TRADED ON THE NASDAQ SMALLCAP MARKET Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X ] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and non-voting equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of on March 1, 2000 was approximately $104,900,000. This calculation does not reflect a determination that persons are affiliates for any other purposes. Registrant had 18,243,530 shares of Common Stock outstanding as of March 1, 2000. DOCUMENTS INCORPORATED BY REFERENCE Part III -- Portions of the registrant's definitive proxy statement to be issued in conjunction with registrant's 2000 annual stockholder's meeting to be held on May 11, 2000. Forward-Looking Statements In addition to historical information, this Annual Report contains forward-looking statements that involve risks and uncertainties. These statements may differ in a material way from actual future events. For instance, factors that could cause results to differ from future events include rapid rates of technological change and intense competition, among others. Readers are cautioned not to place undue reliance on these forward-looking statements. V-ONE Corporation undertakes no obligation to publicly revise these forward-looking statements or to reflect events or circumstances that arise after the date hereof. PART I ITEM 1. BUSINESS V-ONE Corporation ("V-ONE" or the "Company") develops, markets and licenses a comprehensive suite of network security products that enable organizations to conduct secured electronic transactions and information exchange using public switched networks, such as the Internet. The Company's suite of products address network user authentication, perimeter security, access control and data integrity through the use of smart cards, tokens, digital certificates, firewalls and encryption technology. The Company's products interoperate seamlessly and can be combined to form a complete, integrated network security solution or can be used as independent components in customized security solutions. The Company's products have been designed with an open and flexible architecture to enhance application functionality and to support emerging network security standards. The products are most commonly used to establish very secure Virtual Private Networks (VPNs). In addition, the Company's products enable organizations to deploy and scale their solutions from small single-site networks to large multi-site environments, and can accommodate both wireline and wireless media. The Company was incorporated in Maryland in February 1993 and reincorporated in Delaware in February 1996. Effective July 2, 1996, the Company changed its name from "Virtual Open Network Environment Corporation" to "V-ONE Corporation." The Company's principal executive offices are located at 20250 Century Boulevard, Suite 300, Germantown, Maryland 20874. The Company's telephone number is (301) 515-5200. BACKGROUND OVERVIEW. Over the last decade, decentralized computing has emerged as a result of the widespread adoption of personal computers, local area networks and wide area networks. This emergence has enabled users to communicate with each other and share data throughout an entire organization. With the recent popularization of the Internet and increased performance capabilities offered by high-speed modems, xDSL and Cable modems, ISDN services and frame relay technology, the volume of data transferred over networks has increased dramatically. Fueling this expansion further, carriers and Internet service providers have dramatically reduced their tariffs for high-speed aggregation services running over T-1 and T-3 lines, which have data transfer rates that approximate local area network performance. In addition, leading hardware and software vendors have adopted and support TCP/IP, the Internet's non-proprietary communications protocol, for computer communications and information exchange. This open platform, along with the emergence of the Internet, allows increasing numbers of businesses to engage in business to business electronic commerce, such as supply chain management, customer relationship management and other extensions of corporate data resources to employees and business partners. The problem is that TCP/IP networks are unsecured. Utilizing the Company's technology, users can create "virtual" private networks at a fraction of the cost of actual private wide area networks. Organizations recognize the potential cost savings when using public networks, such as the Internet, as an extension of their existing enterprise networks. These users have begun connecting branch offices and remote and mobile users to mission critical applications and 2 corporate resources such as groupware, customer databases and inventory control systems. Also, the Internet can be used as a lower cost alternative to value-added networks as a means to link companies with customers, suppliers and trading partners. This instantiation is known in the industry as extranet architecture. The need for internal security continues to grow as businesses deploy extranets, Intranets, internal networks using TCP/IP protocols, and browser-based applications to facilitate geographically dispersed communications and the transmission of information throughout an enterprise in a cost-effective manner. Information becomes more vulnerable as organizations rely heavily on computer networks for the electronic transmission of data. With the increased use of the Internet and intranets, many organizations are discovering that network security is a key element in successfully implementing distributed applications and services, including electronic mail, electronic data interchange, electronic commerce and information exchange services. In the absence of comprehensive network security, individuals and organizations are able to exploit system weaknesses to gain unauthorized access to networks, network transmissions and individual network computers. These individuals and organizations use such access to alter or steal data or, in some cases, to launch destructive attacks on data and computers within a network. Each of the following elements is critical in creating a complete network security solution to protect an organization's data, network and computer systems: o DATA PRIVACY THROUGH ENCRYPTION. Preventing unauthorized users from viewing private data through the process of "scrambling" data before it is transmitted or placed into electronic storage. o USER IDENTIFICATION AND AUTHENTICATION. Verifying the user's identity to prevent unauthorized access to computer and network resources. o AUTHORIZATION. Controlling which systems, data and applications a user can access. o DATA INTEGRITY. Ensuring that data, whether in storage or transmission, has not been changed or compromised by any unauthorized manipulation. o NON-REPUDIATION. Verifying that data transmissions have been executed between specific parties so that neither party may legitimately claim that the transaction did not occur. Over the years, a number of network security products have been developed, including passwords, token-based access devices, firewalls, encryption products, biometrics devices, smart cards and digital certificates. Each of these products was designed with a specific function or objective; however, none were designed to meet all of the needs of enterprise-wide network security. Single function or "point" products that have been developed to address one, or a limited number of network security requirements, include the following: o PASSWORDS AND TOKENS. Until recently, passwords were the most common method of authentication. Static (non-changing) passwords were developed as the first attempt to address the need for authentication. Static passwords, however, are inadequate as they are susceptible to unauthorized viewing and to attacks using software designed to randomly generate and enter thousands of passwords. As a result, dynamic passwords, including single-use passwords, were created to provide a greater level of authentication. Dynamic password implementations include the use of time-varying and challenge-response passwords. Generally, dynamic passwords require the use of a hand-held, electronic device called a hardware token. Dynamic passwords were subsequently strengthened by incorporating two-factor identification, which provided a higher level of authentication in that two independent components were combined to identify a user (for example, a bank ATM card and a PIN code). However, dynamic passwords and two-factor identification provide only a limited level of security because the sessions they authenticate are still vulnerable to interception. o FIREWALLS. Firewalls are network access control devices that regulate the passage of information based on a set of administrator-defined rules. Generally, firewalls are based upon one of two technical architectures: 3 packet filters (customarily used in routers) or proxy-based application-level gateways. Packet filters screen network traffic and allow or prevent network access based upon source and destination Internet Protocol addresses. Proxy-based application-level gateways provide access to applications on the network only after the user has identified the desired application and submitted a valid password. o ENCRYPTION. Encryption products provide privacy for transmitted data. Encryption algorithms scramble data so only those users with the appropriate decoding key are able to view transmitted or stored data. Public-key encryption has recently gained additional credibility for managing the keys (codes) used to encrypt and subsequently decrypt user designated data. o SMART CARDS. Smart cards are similar in size to credit cards, but contain a small, tamper-proof microprocessor chip and are capable of storing data and processing complex encryption algorithms. Smart cards are advanced authentication tokens that are also capable of storing information, such as credit card or bank account numbers, medical records, photographic images or digital certificates. o DIGITAL CERTIFICATES. A digital certificate serves as an individual's electronic identification card. The certificates are digitally certified by a third party, called a certificate authority, who vouches for the identity of the certificate holder. Digital certificates are being standardized as a means of authenticating on-line users and are perceived to be a key technology for the expansion of secure transactions and electronic commerce. As organizations increase their dependence on the Internet and deploy intranets, the Company believes that there will be an increasing need for a comprehensive enterprise-wide network security solution. Many network security vendors, however, have focused on developing products that address only one or a limited number of specific security requirements. In addition, products developed by different vendors are often difficult to integrate with each other and pose interoperability problems. Consequently, the Company believes that organizations will increasingly demand comprehensive network security solutions that are easy to implement and transparent to the user. These solutions must have the ability to integrate with existing applications, networks and/or mainframe applications, while being flexible and powerful enough to address the needs created by newly developed technologies. The demand for computer network security is expected to grow significantly as a result of the increased use of the Internet and Intranets. The total market for Virtual Private Network products and services is projected to grow from $2.4 billion in 1999 to $32.2 billion by 2003. The VPN market that V-ONE addresses, for products alone, is anticipated to grow from $303 million in 1999 to $2.3 billion by 2003 according to a report by Infonetics Research, Inc. released in July 1999. This represents a compound annual growth rate of approximately 100% in the market for VPN products such as those offered by V-ONE. THE V-ONE SOLUTION The Company offers a comprehensive suite of network security products that address the need for identification and authentication, integrity, non-repudiation, authorization and encryption. This combination of network security products enables organizations to identify and authenticate network users while controlling access to specific network services. The Company's technology is designed to prevent unauthorized access to an organization's mission critical applications and internal data without impeding permitted uses of the organization's resources and information. The Company's products are compatible with many leading hardware platforms and operating systems, as well as many third-party security products. The Company's customers are able to integrate V-ONE's security products into their networks with minimal impact on existing systems and applications. The Company's current suite of products can be combined and configured to provide network perimeter security, secure remote access and intra/inter-enterprise security to facilitate secured electronic commerce and information exchange. The Company's principal products are SmartGate, a client/server product that offers identification and authentication, integrity, non-repudiation, authorization and encryption; and SmartWall, an 4 application-level firewall that incorporates SmartGate's functionality. The Company provides customers with two-factor identification, mutual authentication, fine-grained access control and encryption by combining smart card emulation technology with the SmartGate server. In addition, SmartGate users can access enterprise networks from remote locations using SmartPass technology incorporated in SmartGate. The Company's technology provides customers with the ability to create network security solutions designed to meet their specific network security requirements. V-ONE's customers can securely deploy a broad range of services and applications to engage in secured electronic transactions, information exchange and remote access to mission critical applications and corporate resources. The Company's technology is designed to be (i) modular, allowing organizations to utilize the security product or products best suited to address their immediate needs, with a seamless migration path to additional products as required, (ii) scaleable, ranging from a single system supporting several users to multiple systems potentially supporting hundreds of thousands of users, and (iii) portable, securing access independent of any particular user's machine or network entry point through the use of smart card technology. STRATEGY The Company's goal is to become the leading provider of comprehensive, open and interoperable network security products that are easy to install, convenient to use, and highly expandable. The Company's strategy to realize its goal contains the following elements: o PROVIDE AN INTEROPERABLE, SCALABLE AND OPEN SOLUTION. The Company intends to continue to provide network security products that operate on leading platforms and that are interoperable and compatible with other network security products. The flexible and open architecture of the Company's products enable the Company to deliver component technologies for a seamless and interoperable system. In addition, the Company's technology is expandable, application-independent and designed both to integrate with existing technologies as well as to support emerging standards and applications. o AUGMENT AND INTEGRATE WITH EXISTING SECURITY PRODUCTS. The Company intends to continue to offer products that interoperate with a wide variety of third-party security products, including multiple firewalls and tokens, allowing a customer to augment existing network security systems. The Company believes that its technology protects a customer's existing network security investments because the Company's products are designed to integrate easily with point products currently employed by its customers. The Company believes that this strategy will enable it to gain access to potential customers who have previously made network security investments but whose network security needs are continuing to evolve. o LEVERAGE KEY REFERENCE ACCOUNTS IN SELECTED VERTICAL MARKETS. The Company has identified strategic vertical markets that require sophisticated network security solutions and has targeted its marketing and direct sales efforts on key participants within these selected vertical markets. By successfully installing its products at key accounts, the Company intends to leverage positive references from its installed customer base to expand its market penetration within those information critical industries. The Company intends to increase its marketing and sales efforts through the use of value-added resellers ("VAR's"), original equipment manufacturers ("OEM's"), and Application Service Providers ("ASP's") to expand its customer base in additional vertical markets. Specific vertical markets focused on include Banking and Finance, Healthcare, and Government. o DEVELOP AND LEVERAGE STRATEGIC ALLIANCES AND PARTNERING RELATIONSHIPS. The Company has established strategic marketing and distribution alliances to increase the distribution and market acceptance of its network security products including alliances with a variety of major companies among which are Motorola, Sun Microsystems and Microsoft and Sharp. The Company intends to continue to strengthen its existing strategic alliances while forging new relationships with key industry participants. 5 In addition, the Company is exploring opportunities to develop new products and expand the functionality of its existing products through alliances with key vendors of complementary technologies. PRODUCTS The cornerstone of the Company's network security solution is its patented SmartGate client/server security technology. SmartGate enables two-factor authentication, mutual authentication and fine-grained access control for most TCP/IP-based client/server applications. Using SmartGate technology, organizations can employ two-factor authentication and mutual authentication to identify and authenticate a network user while fine-grained access control restricts each user's access to only those services to which the user is entitled. The Company's network security products are designed to protect an organization's information and networks from unauthorized access while allowing users of the network to conduct business securely over the Internet and Intranets. These products have been designed to interoperate seamlessly and enhance application functionality. The Company designs its products so that they can be combined in different configurations to provide customized solutions for its customers. The following table lists the Company's products including products scheduled for release in the second half of 1999 and first quarter of 2000: PRODUCT CATEGORY DESCRIPTION --------------- ------------------ ------------------------------- SmartGate Client/Server End-to-end, application level network Security data security providing two-factor identification, mutual authentication, encryption and access control SmartWall Network An applicant level firewall that Perimeter protects internal networks while Security enabling remote access to internal resources SmartGate Client/Server Extends SmartGate registration process with IPSec Security to intranet environments SmartGate VPN Client/Server A VPN product designed for the Windows for Windows CE Security CE operating system Air SmartGate Wireless Client/ A system that provides an end-to-end Server Security security system for 2-way pagers Instant Client/Server A secure, easily installed e-business Extranet Security gateway based on Linux operating system Server (IXS) o SMARTGATE is designed to interoperate easily with most TCP/IP-based applications and to allow the end user to securely use existing and future software applications over the Internet and Intranets. SmartGate employs two-factor authentication (two independent components are combined to authenticate a user) and mutual authentication (both the server and client determine that the other party to the transaction is authorized to participate in the transaction) through the use of virtual or physical smart cards or other authentication devices. SmartGate establishes a secured, encrypted link over an unsecured network once both parties to a communication have been identified and authenticated. The authorized user is then granted access only to those services and data for which the user has been approved. SmartGate supports secure remote administration, which can be accessed using a Web browser or telnet. o SMARTWALL, the Company's firewall product, provides a high level of protection against unauthorized access to a secured network from an unsecured network. SmartWall also allows transparent access from the secured network to services and applications on the unsecured network. SmartWall includes a 6 secured graphical user interface for firewall administration, strong mutual authentication to identify users and complete transparency for authorized traffic. In addition, SmartWall allows multiple sites to be administered from any location using a Web browser or Telnet. SmartWall supports multiple types of existing encryption products, authentication tokens, proxy services and secure transmission channels. SmartGate is bundled into every SmartWall. o SMARTGATE WITH IPSEC extends the client deployment and management advantages of V-ONE's patented online registration process to intranet environments. This enables V-ONE to compete for remote access VPN business (which offers secure connectivity for remote employees and satellite offices) with a solution that is standards-based yet offers unique ease of deployment features. o SMARTGATE VPN FOR WINDOWS CE is the industry's only VPN that works on the Windows CE operating system from Microsoft. Already over 1 million Windows CE devices, both handheld and palm-sized, have been deployed to meet the exploding demand for mobile PC companion devices. SmartGate VPN's security seamlessly operates whether the Windows CE-based device is connected through wireline or wireless media, transparently protecting sensitive data in any environment. o AIR SMARTGATE, working in a manner similar to SmartGate, allows for secure, encrypted, authenticated communication between two-way pagers and e-mail through a SmartGate server. Air SmartGate delivers communication privacy to pager-to-pager, email-to-pager and pager-to-email traffic and text messaging by providing two-factor authentication and strong data encryption capabilities. Air SmartGate is a `drop-in' security solution that interoperates seamlessly with advanced two-way messaging networks using Motorola's ReFlex communications technology and is scheduled for deployment by a number of leading providers in early 2000. o INSTANT EXTRANET SERVER (IXS) offers a secure, 30-minutes-to-install e-business gateway priced competitively as an entry level product for small to mid sized businesses. Based on the Linux operating system, IXS offers e-mail, FTP and Web services integrated with V-ONE security. With IXS, the ability to securely communicate with partners and employees is no longer only for larger companies with significant technical and financial resources. As a low cost, intuitively installed VPN, IXS targets small and mid-sized companies that are not currently served by the available VPN solutions. IXS provides VPN functionality to a large and rapidly growing market segment with a product that can readily be upgraded to V-ONE's full SmartGate product when the need arises. MARKETING AND BUSINESS DEVELOPMENT The Company distributes its network security products through a direct sales force and supplemental channel distribution programs that employ value added resellers (VAR), original equipment manufacturers (OEM), Internet Service Providers (ISP) and Application Service Providers (ASP), designed to accelerate the flow of V-ONE products to the end user customers. In addition to selling product directly to customers, V-ONE delivers product to the indirect channel partners on receipt of a purchase-order. Although V-ONE's channel partners may carry competing product lines, the Company is able to gain a preferred position with their sales force using the lead generation program described below. This is successful due, in part, to the support provided by the V-ONE direct sales team and, subsequently, allows the Company to maintain visibility to its customers. The development of these relationships with resellers, as well as with international distributors, enables V-ONE to achieve broad market penetration. An analysis of 1999 revenues shows that approximately 40% were from direct sales efforts and approximately 60% were from indirect (VAR, OEM and strategic partner) sales channels. DIRECT MARKETING AND SALES EFFORT V-ONE initially designed a direct sales strategy to introduce the Company's products to potential customers in specific market segments known to be early adopters of security products for electronic data transmission. The Company originally targeted financial services, telecommunications, information services and government agencies for this reason. During 1998 and 1999 the number of users of electronic data transmission started to grow significantly and the awareness of the need for security, and the functionality and features of 7 security products, increased. V-ONE is now targeting other vertical market segments including healthcare and insurance. V-ONE, through its direct sales force and its channel distribution partners has developed its approach to the market based on the knowledge derived from its existing installed customer base and new requests generated through on-going sales and marketing programs. The Company has selected those vertical market segments in which it has successfully established itself and in which a significant increase in customer demand already is underway. To effectively market its products to key industry participants, the Company maintains a continuing relationship with its already established customer-base. The Company's direct sales force calls on the purchasing agents within the organizations of its existing customers to generate and close sales. Additionally, the direct sales force is responsible for developing the Company's channel partners by providing technical advice and support with respect to the Company's products as well as generating and providing the channel with prospective customer leads. INDIRECT MARKETING EFFORT The Company expanded its visibility in the growing VPN industry by developing an effective channel strategy for the distribution of its products. The Company's business model increases market penetration by growing and developing the number of its channel partners. Initially, channel partners existed only in international markets. Today, however, a domestic channel strategy has been developed and implemented. Implementation of a channel strategy, at the Company's present stage of development and awareness in the industry, allowed V-ONE to grow revenue without a directly proportional increase in sales expense by leveraging the channel sales force when full implementation of the channel strategy is complete approximately 95% of the Company's sales will result from VAR, OEM and strategic partner relationships. An important element of the Company's sales strategy is the support provided to the indirect sales channels through its internal lead generation program. The Company has initiated programs to target and sign up channel partners both domestically and internationally. Today, V-ONE has established relationships with 58 channel partners throughout the United States and with 21 international distributors serving the United Kingdom, Sweden, Germany, Belgium, Canada, China, Chile, Japan, Singapore, Ivory Coast, South Korea and Australia, Norway, Taiwan, Thailand, Turkey, Hong Kong, Malaysia and France. V-ONE expects to significantly expand it base of targeted channel partners throughout 2000. These channel partners will be expected to have an existing presence in V-ONE's markets and to have an established customer base in the vertical market segments that are important to V-ONE such as finance, healthcare, sales force automation and government. When the Company's program is fully implemented, specific horizontal resellers, including networking and security integrators, internet service providers, web hosting providers and managed service providers, will become V-ONE channel partners. The Company plans to further increase market penetration by developing and capitalizing on strategic alliances. The Company develops strategic relationships with partners that incorporate V-ONE technology into their own products. These alliances are intended to increase the distribution and market acceptance of V-ONE's network security products in the strategic partner's markets. In these instances, direct sales and traditional indirect sales efforts are made available to support the sales and distribution efforts of the strategic partner. The Company intends to continue efforts to strengthen its existing relationships while also forging new relationships with key industry participants. CUSTOMER SERVICE AND SUPPORT The Company provides one hour of installation and configuration support for each VPN purchase. The Company also offers, for a fee, on-site installation support and basic administrator training with each software product and bundled hardware product sale. Customers are encouraged to purchase software maintenance, which includes product updates/upgrades and telephone support. A one-year hardware warranty comes with each bundled hardware purchase. 8 The Company offers additional user or administrator training, on-site support, systems integration and system security architecture support as an optional service through its Customer Care staff. Additionally, the Company provides support services for those customers who have entered into an evaluation agreement with the Company. PRODUCT DEVELOPMENT The market for the Company's products is dynamic and rapidly changing. The Company believes that its future success will depend upon its ability to: (i) enhance its existing products, (ii) identify new opportunities to leverage existing technologies, and (iii) develop new technologies resulting in new products, markets and services. Accordingly, the Company expects to continue to make a significant investment in research and development, product market analysis and systems integration. The Company believes that its customer-driven development strategy will enable it to continue to broaden its product offerings. COMPETITION V-ONE competes in the market for network security products and services. This market is very competitive and the Company expects competition to intensify in the future. Currently, V-ONE offers products that compete in several segments of the network security market, including hardware assisted encryption devices, token authentication, smart card-based security applications and electronic commerce applications. The Company's SmartGate products compete in the VPN segment of the network security market, and also can be used in conjunction with many other security solutions in the broader network security market, including intrusion detection products, virus scanning products, token authentication products, biometric authentication products, digital certificate products and firewalls. The Company's competitors for Internet and intranet security and access control include Aventail Corporation, AXENT Technologies, Inc., Lucent Technologies, Northern Telecom Limited (NortelNetworks), Check Point Software Technology Ltd., Cisco Systems, Inc., Intel/Shiva, International Business Machines Corporation, Secure Computing Corporation, Sun Microsystems, Inc. and Network Associates, Inc. The Company competes to a lesser degree with token vendors because the Company's SmartGate product supports many vendor tokens. Token vendors include, AXENT Technologies, Inc., Leemah DataCom Security Corporation, National Semiconductor Inc., Racal-Guardata, Inc. and RSA Security, Inc. For smart card-based security applications, the Company principally competes with those token vendors listed above who offer smart card technology. In the VPN market place, which is the Company's primary market, there are three classes of products: 1. Products that provide secure remote access to a company's intranet and internal LAN-based information by a company's own employees, telecommuters, or mobile workers. In this market, V-ONE competes with companies such as Check Point. 2. Products that provide secure communication among business partners and customers that are not on the same intranet or LAN-based system, commonly referred to as extranet products. In the extranet market, V-ONE competes with companies such as Aventail and TimeStep. 3. Products that provide secure communication for office-to-office and LAN-to-LAN applications. These are referred to as intranet or site-to-site VPN products. In the site-to-site market, V-ONE competes with companies such as VP Net, TimeStep, and Radguard. The Company faces intense competition in all of its market segments, however, only V-ONE has a complete product offering that reaches all three product classes and, V-ONE is the only VPN provider for wireless pager and Windows CE devices today. 9 The market for network security products and services is intensely competitive. The Company expects competition to intensify in the future. Because of the rapid expansion of the network security market, the Company will face competition from existing and new entrants, possibly including the Company's customers, suppliers and/or resellers. There can be no assurance that the Company's competitors will not develop network security products that may be more effective than the Company's current or future products or that the Company's technologies and products would not be rendered obsolete by such developments. Many of the Company's current and potential competitors have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources than the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products, than the Company. There can be no assurance that the Company's customers will not perceive the products of such other companies as substitutes for the Company's products. The Company believes that the principal competitive factors affecting the market for network security products include effectiveness, scope of product offerings, technical features, ease of use, reliability, customer service and support, name recognition, distribution resources and price. Current and potential competitors have established, or may establish in the future, strategic alliances to increase their ability to compete for the Company's prospective customers. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, which would materially adversely affect the Company's business, financial condition and results of operations. BACKLOG The Company's customers order on an as-needed basis. The Company has typically been able to ship products within 30 days after the customer submits a firm purchase order. The Company does not generally maintain long-term contracts with its customers that require customers to purchase its products. Accordingly, the Company has not maintained and does not anticipate maintaining a backlog with the exception of long term service contracts. In 1998 and 1999, no customer accounted for more than 10% of product revenues, while in 1997, Government Technology Services, Inc. ("GTSI") accounted for approximately 12% of total revenues. In 1996, product revenues from MCI and the National Security Agency ("NSA") accounted for approximately 14% and 14%, respectively, of total revenues. SUPPLY SOURCES Components used in the Company's network security products consist primarily of computer diskettes and computer magnetic tapes and CD's purchased from commercial vendors. Components used in the Company's turnkey SmartWall and SmartGate server products consist primarily of off-the-shelf computers, memory, displays, power supplies and third-party peripherals (such as hard drives and network interface cards). The Company has agreements with at least two vendors for each of its parts and components. However, the Company orders most of each of its parts and components from a single vendor to maintain quality control and enhance working relationships. The Company uses smart card readers manufactured by two contract manufacturers based on the Company's design specifications. The Company has outsourced to hardware fulfillment companies its hardware and hardware integration requirements. While the Company believes that alternative sources of supply could be obtained, the Company's inability to develop alternative sources if and as required in the future could result in delays or reductions in product shipments that could have a material adverse effect on the Company's business, financial condition and results of operations. 10 REGULATION AND GOVERNMENT CONTRACTS The Company's information security products are subject to the export restrictions administered by the U.S. Department of Commerce, which permit the export of encryption products only with the required level of export license or through a license exception KMI (Key Management Infrastructure). U.S. export laws prohibit the export of encryption products to a number of hostile countries. Although to date the Company has been able to secure all required U.S. Export licenses, including the license exception KMI, there can be no assurance that the Company will continue to be able to secure such licenses in a timely manner in the future, or at all. In certain foreign countries, the Company's distributors are required to secure licenses or formal permission before encryption products can be imported. To date, except for certain limited cases, the Company's distributors have not been denied permission to import the Company's products. LICENSE AGREEMENTS RSA Security, Inc. Agreement. The Company's SmartGate and Wallet Technology software incorporate data encryption and authentication technology owned by RSA Security, Inc. ("RSA"). The Company has a perpetual license agreement with RSA, which became effective as of December 30, 1994. On May 23, 1996, RSA exercised an option granted under the agreement to convert its right to receive future royalties into 2% of the Company's outstanding voting securities, after giving effect to the issuance to RSA, until the date of the Company's IPO. Pursuant to a separate agreement between RSA and Massachusetts Institute of Technology ("MIT"), MIT is entitled to receive a portion of any royalties that RSA receives. As a result, the Company issued directly to MIT a portion of the shares of Common Stock to which RSA was entitled under the RSA Agreement. The Company issued 188,705 shares of Common Stock to RSA and MIT immediately prior to consummation of the IPO. RSA was acquired by Security Dynamics in 1996. On July 14, 1999 Security Dynamics changed its name to RSA Security, Inc. There can be no assurance that the Company will be able to maintain its license rights for the RSA data encryption and authentication technology, and the loss of such rights could have a material adverse effect on the Company's business, financial condition and results of operations. If either RSA terminates the license agreement or takes any other action that results in the loss of, or inability to maintain, such licensed technology, the Company may incur lost sales, delays in delivery of the Company's current products and services or delays in the introduction of new products and services, which could have a material adverse effect on the Company's business, financial condition and results of operations. PATENTS, PROPRIETARY TECHNOLOGY, TRADEMARKS AND LICENSES The Company relies on trademark, copyright, patent and trade secret laws, employee and third-party non-disclosure agreements and other methods to protect its proprietary rights. The Company has received four patents, which expire in 2013, 2014, and 2015 and has pending three patent applications with the United States Patent and Trademark Office that cover certain aspects of its technology. Prosecution of these patent applications and any other patent applications that the Company may subsequently determine to file may require the expenditure of substantial resources. The issuance of a patent from a patent application may require 24 months or longer. There can be no assurance that the Company's technology will not become obsolete while the Company's applications for patents are pending. There also can be no assurance that any pending or future patent application will be granted, that any future patents will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. The Company has pursued patent protection outside of the United States for the technology covered by the most recently filed patent applications although there can be no assurance that any such protection will be granted or, if granted, that it will adequately protect the technology covered thereby. The Company's success is also dependent in part upon its proprietary software technology. There can be no assurance that the Company's trade secrets or non-disclosure agreements will provide meaningful protection for its proprietary technology and other proprietary information. In addition, the Company relies on 11 "shrink wrap" license agreements that are not signed by the end user to license the Company's products and, therefore, may be unenforceable under the laws of certain jurisdictions. Further, there can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by the Company or that its technology will not infringe upon patents, copyrights or other intellectual property rights owned by others. Further, the Company may be subject to additional risk as it enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of the Company's rights may be ineffective in foreign markets, and technology manufactured or sold abroad may not be protectable in jurisdictions in circumstances where protection is ordinarily available in the United States. The Company believes that, due to the rapid pace of technological innovation for network security products, the Company's ability to establish and, if established, maintain a position of technology leadership in the industry is dependent more upon the skills of its development personnel than upon legal protections afforded its existing or future technology. As the number of security products in the industry increases and the functionality of these products further overlaps, software developers may become subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products. The Company also may desire or be required to obtain licenses from others to effectively develop, produce and market commercially viable products. Failure to obtain those licenses could have a material adverse effect on the Company's ability to market its software security products. There can be no assurance that such licenses will be obtainable on commercially reasonable terms, if at all, that the patents underlying such licenses will be valid and enforceable or that the proprietary nature of the unpatented technology underlying such licenses will remain proprietary. There has been, and the Company believes that there may be in the future, significant litigation in the industry regarding patent and other intellectual property rights. Although the Company is not currently the subject of any material intellectual property litigation, litigation involving other software developers, including companies from which the Company licenses certain technology, could have a material adverse affect on the Company's business, financial condition and results of operations. EMPLOYEES As of January 1, 2000, the Company had 72 full-time employees and 2 consultants. Of these individuals, 30 were in sales and marketing, 3 in business development, 25 were in research and product development, 2 were in wireless product development and 14 in administration. None of the Company's employees are represented by a labor union or are subject to a collective bargaining agreement. The Company has never experienced a work stoppage and believes that its employee relations are good. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF COMMON STOCK V-ONE operates in a rapidly changing environment that involves numerous risks, some of which are beyond V-ONE's control. The following discussion highlights some of the risks V-ONE faces. This Annual Report on Form 10-K contains "forward-looking statements." Such statements involve known and unknown risks and uncertainties that could cause V-ONE's actual performance or achievements to differ from any future performance or achievements expressed or implied by such statements. Readers should carefully consider the following risk factors before purchasing common stock of V-ONE. Readers are also referred to other documents to be filed by V-ONE with the SEC, which may identify important risk factors for V-ONE. 12 V-ONE'S LIMITED OPERATING HISTORY, ACCUMULATED DEFICIT AND FINANCING ACTIVITIES. As of December 31, 1999, V-ONE had an accumulated deficit of approximately $39,645,000. V-ONE currently expects to incur additional net losses over the next several quarters. V-ONE raised additional capital of $2,375,000 in March 2000. Because of V-ONE's limited operating history, V-ONE may not achieve or sustain profitability or significant revenues in the short run. To address these risks, V-ONE must, among other things, continue its emphasis on research and development, successfully execute and implement its marketing strategy, respond to competitive developments and seek to attract and retain talented personnel. V-ONE may be unable successfully to address these risks and the failure to do so could have a material adverse effect on V-ONE's business, financial condition, results of operations and cash flows. V-ONE was founded in February 1993 and introduced its first product in December 1994. Accordingly, V-ONE did not generate any significant revenues until 1995 when it commenced sales of its SmartWall firewall product and introduced its SmartGate client/server system. Revenues for 1995, 1996, 1997, 1998 and 1999 were approximately $1,104,000, $5,319,000, $5,973,000, $6,260,000, and $4,966,000, respectively. Losses attributable to holders of Common Stock for 1995, 1996, 1997, 1998 and 1999 were approximately $1,122,000, $7,813,000, $10,828,000, $9,407,000 and $9,952,000, respectively. V-ONE's results of operations in recent periods may not be an accurate indication of future results of operations in light of V-ONE's short operating history, the evolving nature of the network security market and the uncertainty of the demand for Internet and intranet products in general and V-ONE's products in particular. RISKS RELATING TO AVAILABILITY OF CAPITAL. It is anticipated that V-ONE will continue to expend significant amounts to fund its operations and research and development. V-ONE's cash and cash equivalents may not be sufficient to meet its requirements until it reaches profitability. In order to maintain V-ONE's operations and research and development at necessary levels, V-ONE may need to secure additional financing through the sale of equity securities. If such additional financing is not available to V-ONE, it will attempt to reduce its cash requirements through significant reductions in operating levels. V-ONE may be unable to place equity securities on favorable terms or in an amount required to meet its future cash requirements. In addition, V-ONE may not be successful in reducing operating levels or, if operating levels are reduced, V-ONE may not be able to maintain operations for any extended period of time. RISKS ASSOCIATED WITH THE EMERGING NETWORK SECURITY MARKET. The market for V-ONE's products, particularly its client/server VPN or virtual private network products, is in an early stage of development and the market's acceptance of these products has been slower than expected. The rapid development of Internet and intranet computing has increased the ability of users to access proprietary information and resources and has recently increased demand for network security products. Because the market for network security products is only beginning to develop and potential customers are only beginning to realize the benefits of VPN technology, it is difficult to assess the size of the market, the product features desired by the market, the best price structure for V-ONE's products, the best distribution strategy and the competitive environment that will develop in this market. The demand for V-ONE's products could decline as a result of competition, technological change, the public's perception of the need for security products, developments in the hardware and software environments in which these products operate, general economic conditions or other factors beyond V-ONE's control. Any such decline would adversely effect V-ONE. V-ONE'S DEPENDENCE ON KEY PERSONNEL. V-ONE's success depends, to a large extent, upon the performance of its senior management and its technical, sales and marketing personnel, many of whom have only recently joined V-ONE. There is intense competition in the software security industry to hire and retain qualified personnel. V-ONE is actively searching for additional qualified personnel. V-ONE's success will depend upon its ability to retain and hire additional key personnel. The loss of the services of key personnel or the 13 inability to attract additional qualified personnel could materially and adversely effect V-ONE's results of operations and product development efforts. V-ONE has entered into employment agreements with David D. Dawson, its Chairman of the Board, President and Chief Executive Officer and Margaret E. Grayson, its Senior Vice President and Chief Financial Officer, that provide for fixed terms of employment. However, V-ONE has not historically provided such types of employment agreements to its other employees. This may adversely impact V-ONE's ability to attract and retain the necessary technical, management and other key personnel. RISK OF V-ONE'S INABILITY TO MANAGE GROWTH. To manage growth effectively, V-ONE needs to continue to improve its operational, financial and management information systems and to hire, train, motivate and manage its employees. Competition is intense for qualified technical, marketing and management personnel. V-ONE may be unable to achieve or manage any future growth. Its failure to do so could delay V-ONE's product development cycles and marketing efforts. V-ONE has experienced and may experience future growth in the number of its employees and the scope of its operations, resulting in increased responsibilities for management and added pressure on V-ONE's operating and financial systems. As of January 1, 2000, V-ONE had 72 employees, as compared to 77, 83, and 77 employees on January 1, 1999, 1998, and 1997, respectively. RISK OF V-ONE'S DEPENDENCE ON SMARTGATE AND SMARTWALL. V-ONE currently generates most of its revenues from its SmartWall and SmartGate products. SmartWall and SmartGate have met with a favorable degree of market acceptance since sales of SmartWall commenced in the first quarter of 1995 and since SmartGate was introduced in the fourth quarter of 1995. However, SmartWall or SmartGate may not continue to be accepted in the future. In addition, any or all of V-ONE's other current or future products could fail to win market acceptance. V-ONE's success depends, in part, on V-ONE's ability to design, develop and introduce new products, services and enhancements on a timely basis to meet changing customer needs, technological developments and evolving industry standards. RISK OF INADEQUATE PROTECTION FOR V-ONE'S TECHNOLOGIES. V-ONE relies on trademark, copyright, patent and trade secret laws, employee and third-party non-disclosure agreements and other methods to protect the rights of V-ONE and the companies from which V-ONE licenses technology. V-ONE currently holds patents on its Wallet Technology, its SmartGate technology, its Smart Card Technology, and its On-Line Registration technology. Others may independently develop similar technologies or duplicate any technology developed by V-ONE. Prosecution of patent applications and any other patent applications may require the expenditure of substantial resources. For example, the issuance of a patent may require 24 months or longer. During this period, V-ONE's technology may become obsolete. Pending or future patent applications may not be granted, future patents may be challenged, invalidated or circumvented and the rights granted may not provide competitive advantages to V-ONE. V-ONE currently intends to pursue patent protection outside of the United States for the technology covered by the most recently filed patent applications. This protection may not be granted. Even if it is granted, it may not adequately protect the covered technology. V-ONE's success also depends on its software technology and technology licensed from others. V-ONE's trade secrets, license agreements and non-disclosure agreements may not provide appropriate protection for V-ONE's technology or the technology it licenses from others. Further, V-ONE relies on license agreements that are not signed by the end user to license V-ONE's products. These license agreements may be unenforceable under the laws of certain jurisdictions. V-ONE may be subject to additional risk as V-ONE enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of V-ONE's rights may be ineffective in foreign 14 markets and technology developed by V-ONE may not be protectable in foreign jurisdictions. As the number of security products in the industry increases and the functionality of these products overlap, software developers may become subject to infringement claims. Third parties may in the future assert infringement claims against V-ONE with respect to current or future products. V-ONE also may desire or be required to obtain licenses from others. Failure to obtain those licenses could adversely effect V-ONE's ability to market its software security products. However, V-ONE may be unable to obtain these licenses on commercially reasonable terms, if at all. In addition, the patents underlying such licenses may not be valid or enforceable and the proprietary nature of the unpatented technology underlying such licenses may not remain proprietary. Any claims or litigation could be costly and could result in a diversion of management's attention. Adverse determinations in such claims or litigation could also adversely effect V-ONE. RISK OF ERRORS OR FAILURES. The complex nature of V-ONE's software products can make the detection of errors or failures difficult when products are introduced. If errors or failures are subsequently discovered, this may result in delays and lost revenues during the correction process. In addition, technology licensed by V-ONE for use in its products may contain errors that adversely effect such products. Despite testing by V-ONE and current and prospective customers, errors may still be discovered in new products or releases after commencement of commercial shipments. This might result in delay, adverse publicity, loss of market acceptance and claims against V-ONE. A malfunction or the inadequate design of V-ONE's products could result in tort or warranty claims. V-ONE generally attempts to reduce the risk of such losses to itself and to the companies from which V-ONE licenses technology through warranty disclaimers and liability limitation clauses in its license agreements. V-ONE may not have obtained adequate contractual protection in all instances or where otherwise required under agreements V-ONE has entered into with others. In addition, these measures may not be effective in limiting V-ONE's liability to end users and to the companies from which V-ONE licenses technology. V-ONE'S PRODUCT LIABILITY RISK. V-ONE currently has product liability insurance. However, V-ONE's insurance coverage may not be adequate and any product liability claim against V-ONE for damages resulting from security breaches could be substantial. In addition, a well-publicized actual or perceived security breach could adversely effect the market's perception of security products in general or V-ONE's products in particular. This could result in a decline in demand for V-ONE's products. RISKS OF CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS AND NEW PRODUCT INTRODUCTION. The network security industry is characterized by rapid changes, including evolving industry standards, frequent new product introductions, continuing advances in technology and changes in customer requirements and preferences. Advances in techniques by individuals and entities seeking to gain unauthorized access to networks could expose V-ONE's existing products to new and unexpected attacks and require accelerated development of new products or enhancements to existing products. V-ONE may be unable to counter challenges to its current products. V-ONE's future products may not keep pace with technological changes implemented by competitors or persons seeking to breach network security. Its products may not satisfy evolving consumer preferences and V-ONE may not be successful in developing and marketing products for any future technology. Failure to develop and introduce new products and improve current products in a timely fashion could adversely effect V-ONE. RISK OF DEFECTS AND DEVELOPMENT DELAYS. V-ONE may experience schedule overruns in software development triggered by factors such as insufficient staffing or the unavailability of development-related software, hardware or technologies. Further, when developing new software products, V-ONE's development schedules may be altered as a result of the discovery of software bugs, performance problems or changes to the product specification in response to customer requirements, market developments or V-ONE-initiated changes. 15 Changes in product specifications may delay completion of documentation, packaging or testing. This may, in turn, affect the release schedule of the product. When developing complex software products, the technology market may shift during the development cycle, requiring V-ONE either to enhance or change a product's specifications to meet a customer's changing needs. All of these factors may cause a product to enter the market behind schedule, which may adversely effect market acceptance of the product or place it at a disadvantage to a competitor's product that has already gained market share or market acceptance during the delay. RISKS RELATING TO EVOLVING DISTRIBUTION CHANNELS. V-ONE relies on its direct sales force and its channel distribution strategy for the sale and marketing of its products. V-ONE's sales and marketing organization may be unable to successfully compete against the more extensive and well-funded sales and marketing operations of certain of its current and future competitors. V-ONE's distribution strategy involves the development of relationships with resellers and international distributors to enable V-ONE to achieve broad market penetration. However, V-ONE may be unable to continue to attract integrators and resellers that will be able to market V-ONE's products effectively and that will be qualified to provide timely and cost-effective customer support and service. V-ONE ships products to distributors, integrators and resellers on receipt of a purchase-order, and its distributors, integrators and resellers generally carry competing product lines. Current distributors, integrators and resellers may not continue to represent V-ONE's products. The inability to recruit, or the loss of, important sales personnel, distributors, integrators or resellers could adversely effect V-ONE. RISKS RELATING TO COLLECTION OF RECEIVABLES. Due to certain worldwide economic factors, V-ONE has from time to time experienced and may continue to experience difficulty in collecting its receivables on a timely basis. V-ONE continues to focus on the collection of its receivables on a timely basis. However, if V-ONE is unable to collect its receivables on a timely basis, it could have an adverse effect on V-ONE's financial condition, results of operations and cash flows. Risks Associated with Long Sales Cycle and Seasonality. Sales of V-ONE's products generally involve a significant commitment of capital by its customers. For sales by V-ONE's sales force directly to end users, V-ONE often permits customers to evaluate products being considered for license, generally for a period of up to 30 days. For these and other reasons, the sales cycle associated with V-ONE's products is likely to be lengthy and subject to a number of significant risks over which V-ONE has little or no control. As a result, V-ONE believes that its quarterly results are likely to vary significantly. V-ONE may be required to ship products shortly after it receives orders. Consequently, order backlog, if any, at the beginning of any period may represent only a small portion of that period's expected revenues. As a result, product revenues in any period will be substantially dependent on orders booked and registered in that period. V-ONE plans its production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. If revenues fall significantly below anticipated levels, V-ONE's financial condition, results of operations and cash flows could be adversely effected. In addition, V-ONE may experience significant seasonality in its business, and V-ONE's financial condition and results of operations may be effected by such trends in the future. Such trends may include higher revenues in the third quarter of the year. V-ONE believes that revenues may tend to be higher in the third quarter due to the fiscal year end of the U.S. government. RISK OF SALES TO GOVERNMENTS. No government agency or department has an obligation to purchase products from V-ONE in the future. Accordingly, V-ONE believes that future government contracts and orders for its network security products will in part depend on the continued favorable reaction of government agencies and departments to the development capabilities of V-ONE and the reliability and perceived reliability of its products. 16 V-ONE may be unable to sell its products to government departments and agencies and government contractors and such sales, if any, may not result in commercial acceptance of V-ONE's products. In addition, reductions or delays in funds available for projects V-ONE is performing or to purchase its products could adversely impact V-ONE's government contracts business. Contracts involving the U.S. government are also subject to the risks of disallowance of costs upon audit, changes in government procurement policies, the necessity to participate in competitive bidding and, with respect to contracts involving prime contractors or government-designated subcontractors, the inability of such parties to perform under their contracts. V-ONE is also exposed to the risk of increased or unexpected costs, causing losses or reduced profits, under government and certain third-party contracts. Any of the foregoing events could adversely effect V-ONE. In 1997, approximately one-half of V-ONE's total sales were attributable to contracts with various agencies and departments of the United States government and of state and local governments. This relationship increased to more than 60% through December 31, 1998 and decreased to approximately 35% for 1999`. RISK OF EFFECT OF GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS. V-ONE currently sells its products abroad and intends to continue to expand its relationships with international distributors. V-ONE's international sales and operations could be subject to risks such as the imposition of governmental controls, export license requirements, restrictions on the export of critical technology, trade restrictions and changes in tariffs. In particular, V-ONE's information security products are subject to the export restrictions administered by the U.S. Department of Commerce. These restrictions, in the case of some products, permit the export of encryption products only with a specific export license. These export laws also prohibit the export of encryption products to a number of countries, individuals and entities and may restrict exports of some products to a narrow range of end-users. In certain foreign countries, V-ONE's distributors are required to secure licenses or formal permission before encryption products can be imported. V-ONE has obtained a license exception to export strong encryption from the U. S. Department of Commerce on a worldwide basis (except to the seven terrorist countries) as long as the end user agrees to use the KRAKit(TM) session key recreation capability. Foreign competitors that face less stringent controls on their products may be able to compete more effectively than V-ONE in the global network security market. EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW. Certain provisions of V-ONE's Amended Certificate of Incorporation and of Delaware law could delay or make difficult a merger, tender offer or proxy contest involving V-ONE. Among other things, these provisions include a classified board, prohibitions on removing directors except for cause, and other requirements. MARKET VOLATILITY. The market price of the Company's Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results and other factors, such as announcements of new products by the Company or its competitors and changes in financial estimates by securities analysts or other events. Moreover, the stock market has experienced extreme volatility that has particularly affected the market prices of equity securities of many technology companies and that has often been unrelated and disproportionate to the operating performance of such companies. Broad market fluctuations as well as economic conditions generally and in the software industry specifically, may adversely affect the market price of the Company's Common Stock. ITEM 2. PROPERTIES The Company leases approximately 28,312 square feet of office space in Germantown, Maryland under a lease agreement that will expire on July 1, 2003. The Company expects that this space will be sufficient for its needs through March 31, 2001. The Company also leases approximately 8,085 square feet, which is sublet in Rockville, Maryland under leases that will expire on April 17, 2001. 17 The Company also leases office space in Podium Block, Singapore under leases that will expire on January 15 , 2001. ITEM 3. LEGAL PROCEEDINGS On January 27, 2000, plaintiff George McMeen filed a Class Action Complaint in the U.S. District Court for the District of Maryland, Civil Action No. MJG-CV-263, against David D. Dawson, Steve Mogul and Margaret Grayson (collectively, "Individual Defendants") and the Company (collectively, "Defendants"), alleging claims for violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder by the Defendants, and violation of Section 20(a) of the Exchange Act by the Individual Defendants. On February 16, 20000, plaintiff Raj Patel filed a nearly identical Class Action Compliant in the U.S. District Court for the District Court of Maryland, Civil Action No. PJM-CV-469. Neither complaint specifies the amount of alleged damages. On February 18, 2000, the Court entered an Order extending the time for Defendants to file a responsive pleading in the McMeen matter until 45 days after the later of appointment of Lead Plaintiff(s) and Lead Counsel pursuant to 15 U.S.C. 78u-4(a)(3) or the filing of a consolidated amended compliant in the matter. The Court entered an identical Order in the Patel matter on March 3, 2000. Defendants deny all wrongdoing and intend to contest both cases vigorously. Both cases remain pending. 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the quarter ended December 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been traded in the Nasdaq National Market since the Company's IPO on October 24, 1996 through September 3, 1999 when it was transferred to the Nasdaq SmallCap market. According to records of the Company's transfer agent, the Company had approximately 143 record holders on March 22, 2000. Because brokers and other institutions hold many of such shares on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders. The following table sets forth the low and high sale prices as of the close of market of the Company's Common Stock for each quarter during the two year period ended December 31, 1999. 1998 ---- High Sale Price Low Sale Price --------------- -------------- First Quarter $4.125 $2.250 Second Quarter $4.000 $2.500 Third Quarter $4.125 $1.375 Fourth Quarter $3.625 $1.875 1999 ---- High Sale Price Low Sale Price --------------- -------------- First Quarter $4.688 $2.750 Second Quarter $3.313 $1.688 Third Quarter $5.625 $2.000 Fourth Quarter $15.500 $1.875 The Company has never declared or paid cash dividends on its Common Stock or other securities. The Company anticipates that all of its net earnings, if any, will be retained for use in its operations and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Payments of future cash dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results and current and anticipated cash needs. 19 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data set forth below with respect to the Company's Statements of Operations for the years ended December 31, 1997, 1998 and 1999 and balance sheets as of December 31, 1998 and 1999 are derived from the audited financial statements of the Company included elsewhere in this Annual Report. The following selected financial data as of December 31, 1995, 1996 and 1997 and for each of the years ended December 31, 1995 and 1996 are derived from audited financial statements of the Company not included in this Annual Report. The financial data set forth below should be read in conjunction with the Company's financial statements and the notes thereto included elsewhere in this Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year ended December 31, -------------------------------------------------------------------------- Statement of Operations Data: 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Revenues: Products $1,101,418 $5,008,523 $5,470,230 $5,798,542 $3,427,422 Consulting and services 2,083 310,557 502,771 461,263 1,538,258 ---------- ---------- ---------- ---------- ---------- Total revenues 1,103,501 5,319,080 5,973,001 6,259,805 4,965,680 ---------- ---------- ---------- ---------- ---------- Cost of revenues: Products 376,359 1,969,117 1,848,871 1,623,396 973,866 Consulting and services 800 56,502 96,949 68,060 137,281 ---------- ---------- ---------- ---------- ---------- Total cost of revenues 377,159 2,025,619 1,945,820 1,691,456 1,111,147 ---------- ---------- ---------- ---------- ---------- Gross profit 726,342 3,293,461 4,027,181 4,568,349 3,854,533 ---------- ---------- ---------- ---------- ---------- Operating expenses: Sales and marketing 130,917 3,914,630 7,717,640 6,071,919 5,456,173 General and administrative 1,350,361 4,879,940 3,699,278 3,896,210 3,380,227 Research and development 304,973 1,960,727 3,153,941 3,853,274 3,814,423 ---------- --------- ---------- ---------- ---------- Total operating expenses 1,786,251 10,755,291 4,570,859 13,821,401 2,650,823 ---------- ---------- ---------- ---------- ---------- Operating loss (1,059,909) (7,461,836) (10,543,678) (9,253,054) (8,796,290) ----------- ----------- ------------ ----------- ----------- Other (expense) income: Interest expense (66,615) (518,965) (13,130) (65,372) (676,443) Interest income 4,513 168,176 341,469 125,030 164,841 ----------- ----------- ------------ ----------- ----------- Total other expenses (62,102) (350,789) 328,339 59,658 (511,602) ----------- ----------- ------------ ----------- ----------- Loss before extraordinary item (1,122,011) (7,812,625) (10,215,339) (9,193,396) (9,307,892) ----------- ----------- ------------ ----------- ----------- Extraordinary item - early extinguishment of debt - - - - (372,052) ----------- ----------- ------------ ----------- ----------- Net loss (1,122,011) (7,812,625) (10,215,339) (9,193,396) (9,679,944) Dividend on preferred stock - - 12,600 110,879 272,245 Deemed dividend on preferred stock - - 600,000 102,755 - ----------- ----------- ------------ ----------- ----------- Loss attributable to holders of common stock $(1,122,011) $(7,812,625) $(10,827,9$9) $(9,407,030) $(9,952,189) BASIC AND DILUTED LOSS PER SHARE Loss before extraordinary item $ (0.14) $ (0.85) $ (0.84) $ (0.68) $ (0.57) ============ ============ ============= ============ =========== Net loss attributable $ (0.14) $ (0.85) $ (0.84) $ (0.68) $ (0.57) STOCK ============ ============ ============= ============ =========== Weighted average number of common 8,099,223 9,245,305 12,868,859 13,898,450 16,938,205 shares outstanding ============ ============ ============= ============ ===========
20
December 31, --------------------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- Balance Sheet Data: Working capital (deficit) $(168,311) $11,526,091 $ 5,912,046 $(1,277,368) $6,629,846 Total assets 2,050,602 14,580,346 10,313,276 3,922,192 9,775,436 Long-term debt, less current portion 126,908 134,704 300,861 197,982 119,746 Series A Convertible Preferred Stock --- --- 3,766,297 --- --- Series B Convertible Preferred Stock --- --- --- --- 1,288 Series C Redeemable Preferred Stock --- --- --- --- 335 Total shareholder's equity (deficit) (139,938) 12,876,676 4,211,210 635,725 7,841,603 Cash dividends per common share --- --- --- --- ---
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OVERVIEW The Company generates revenues primarily from software licenses and sale of hardware products and, to a lesser extent, consulting and related services. The Company anticipates that revenues from products will continue to be the principal source of the Company's total revenues. The Company often permits customers to evaluate products being considered for purchase, generally for a period of up to 30 days, in which event the Company does not recognize revenues until the customer has accepted the product. Accordingly, the Company's revenue recognition policy does not necessarily correlate with the signing of a contract or the shipment of a product. In 1998 and 1999, no customer accounted for 10% or more of total revenues. In 1997, product revenues from Government Technology Services, Inc. ("GTSI") accounted for approximately 12% of total revenues. 21 RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of revenues for the periods indicated: Year ended December 31, -------------------------------- 1997 1998 1999 ------- ------- ------- Revenues: Products 91.6 % 92.6 % 69.0 % Consulting and services 8.4 7.4 31.0 --- --- ---- Total revenues 100.0 100.0 100.0 ----- ----- ----- Cost of revenues: Products 31.0 25.9 19.6 Consulting and services 1.6 1.1 2.8 --- --- --- Total cost of revenues 32.6 27.0 22.4 ---- ---- ---- Gross profit 67.4 73.0 77.6 Operating expenses: Sales and marketing 129.2 97.0 109.9 General and administrative 61.9 62.2 68.0 Research and development 52.8 61.6 76.8 ---- ---- ---- Total operating expenses 243.9 220.8 254.7 ----- ----- ----- Operating loss (176.5) (147.8) (177.1) Other (expense) income: Interest expense (0.2) (1.1) (13.6) Interest income 5.7 2.0 3.3 --- --- --- Total other expenses 5.5 0.9 (10.3) ---- --- ------ Loss before extraordinary item (171.0) (146.9) (187.4) Extraordinary loss - early extinguishment of debt - - (7.5) ---- ---- ----- Net loss (171.0) (146.9) (194.9) Dividend on preferred stock 0.2 1.8 5.5 Deemed dividend on preferred stock 10.0 1.6 - ---- ---- ---- Loss attributable to holder of common stock (181.2) % (150.3) % (200.4) % ======= ======= ======= COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 REVENUES Total revenues increased from approximately $5,973,000 in 1997 to approximately $6,260,000 in 1998 and decreased to approximately $4,966,000 in 1999. Product revenues are derived principally from software licenses and the sale of hardware products. Product revenues increased from approximately $5,470,000 in 1997 to approximately $5,799,000 in 1998, but declined to approximately $3,427,000 in 1999. The increase from 1997 to 1998 was due principally to increased sales of 22 the Company's SmartWall and SmartGate products, which offset a decline of sales of hardware turnkey systems. The decrease from 1998 to 1999 was due principally to lower sales of the Company's SmartGate and Smartwall product, as well as a decline in sales of hardware turnkey systems. Consulting and services revenues are derived principally from fees for services complementary to the Company's products, including consulting, maintenance and training. Consulting and services revenues decreased slightly from approximately $503,000 in 1997 to approximately $461,000 in 1998, but increased to approximately $1,538,000 in 1999. In 1999, the Company implemented a major drive to focus on renewing maintenance contracts to allow customers to upgrade to current versions of software. This resulted in incremental revenue from the point of the lapse in service to the current period. In addition, resolution was reached on an agreement with a partner which included recognition of maintenance revenue of approximately $386,000 for services performed by the Company. COST OF REVENUES Total cost of revenues as a percentage of total revenues were 32.6%, 27.0% and 22.4% in 1997, 1998 and 1999, respectively. Cost of product revenues consists principally of the costs of computer hardware, licensed technology, manuals and labor associated with the distribution and support of the Company's products and shipping costs. Cost of product revenues decreased from approximately $1,849,000 in 1997 to approximately $1,623,000 in 1998 and to $974,000 in 1999. Cost of product revenues as a percentage of product revenues was 33.8%, 28.0% and 28.4% for 1997, 1998 and 1999, respectively. The dollar and percentage decreases in 1998 and 1999 were attributable to an increase in revenues combined with a higher mix of SmartGate software licenses to SmartWall turnkey hardware sales. Cost of consulting and services revenues consists principally of personnel and related costs incurred in providing consulting, support and training services to customers. Cost of consulting and services revenues decreased from approximately $97,000 in 1997 to $68,000 in 1998, and increased to approximately $137,000 in 1999. Cost of consulting and services revenues as a percentage of consulting and services revenues was 19.3%, 14.8% and 8.9% for 1997, 1998 and 1999, respectively. The dollar and percentage decrease from 1998 to 1999 was principally due to a reduced emphasis on consulting and a greater concentration on training and support. The increase from 1998 to 1999 relates to costs of support for third party product maintenance. OPERATING EXPENSES Sales and Marketing -- Sales and marketing expenses consist principally of the costs of sales and marketing personnel, advertising, promotions and trade shows. Sales and marketing expenses decreased from approximately $7,718,000 in 1997 to approximately $6,072,000 in 1998 and decreased further to approximately $5,456,000 in 1999. Sales and marketing expenses as a percentage of total revenues were 129.2%, 97.0% and 109.9% in 1997, 1998 and 1999, respectively. The dollar decreases in 1998 and 1999 were principally due to personnel turnover and lower levels of advertising and promotion expenses. The percentage decrease in 1998 was due to lower expenses as compared to 1997, and the percentage increase in 1999 is based on lower revenue. Sales and marketing expenses are expected to increase in the near term as a result of the Company's efforts to increase awareness of new product introductions and strategic alliances. This statement is based on current expectations. It is forward-looking, and the actual results could differ materially. For information about factors that could cause the actual results to differ materially, please refer to Item 1. "Business - Risk Factors that May Affect Future Results and Market Price of Common Stock" in this Form 10-K. General and Administrative -- General and administrative expenses consist principally of the costs of finance, management and administrative personnel and facilities expenses. General and administrative expenses increased slightly from approximately $3,699,000 in 1997 to approximately $3,896,000 in 1998, and decreased to approximately $3,380,000 in 1999. General and administrative expenses as a percentage of total revenues were 61.9%, 62.2% and 68.0% in 1997, 1998 and 1999, respectively. 23 The small dollar and percentage increases in 1998 were primarily attributable to a total of $394,000 in non-cash charges stemming from the reset of the exercise price on certain warrants. The decrease in expense in 1999 is due in part to lower fees for recruiting and relocation and the lack of non-cash compensation which occurred in 1998. The Company anticipates that general and administrative expenses, as a percent of revenue, will decrease in future periods. This statement is based on current expectations. It is forward-looking, and the actual results could differ materially. For information about factors that could cause the actual results to differ materially, please refer to Item 1. "Business - - - Risk Factors that May Affect Future Results and Market Price of Common Stock" in this Form 10-K. Research and Development -- Research and development expenses consist principally of the costs of research and development personnel and other expenses associated with the development of new products and enhancement of existing products. Research and development expenses increased from approximately $3,154,000 in 1997 to approximately $3,853,000 in 1998 and decreased slightly to approximately $3,814,000 in 1999. Research and development expenses as a percentage of total revenues were 52.8%, 61.6% and 76.8% in 1997, 1998 and 1999, respectively. The dollar and percentage increases in 1998 were primarily due to increases in the number of personnel associated with the Company's product development efforts. The percentage increase in 1999 was due to the decrease in revenue. The Company believes that a continuing commitment to research and development is required to remain competitive. Accordingly, the Company intends to continue to allocate substantial resources to research and development, but research and development expenses may vary as a percentage of total revenues. This statement is based on current expectations. It is forward-looking, and the actual results could differ materially. For information about factors that could cause the actual results to differ materially, please refer to Item 1. "Business - Risk Factors that May Affect Future Results and Market Price of Common Stock" in this Form 10-K. Interest Income and Expense -- Interest income represents interest earned on cash, cash equivalents and marketable securities. Interest income was approximately $341,000 in 1997 from interest earned on the net proceeds from the Company's IPO and the private placement and approximately $125,000 in 1998 and approximately $165,000 in 1999 from interest earned on the proceeds of the Company's private placements and stock option exercises. Interest expense represents interest payable or accreted on promissory notes and capitalized lease obligations. Interest expense was approximately $13,000, $65,000 and $676,000 in 1997, 1998 and 1999, respectively. The large increase of interest and related financing costs was attributable to the Company's secured loan (see Note 3 to the Financial Statements) to Transamerica Business Credit Corporation (TBCC). These interest costs were being amortized over the life of the loan, which was expected to be paid at the February 29, 2000 maturity date, and were in addition to the interest expense on the loan. The total costs including interest on the loan proceeds, transactions costs and the cost of warrants issued in conjunction with the Transamerica note amounted to approximately $1,000,000 in 1999. Income Taxes -- The Company did not incur income tax expenses in December 31, 1997, 1998 and 1999 as a result of the net loss incurred during these periods. As of December 31, 1999, the Company had net operating loss carry forwards of approximately $38,000,000 as a result of net losses incurred since inception. Dividend on Series C Stock -- The Company provided approximately $272,000 for a dividend on the Series C Stock during 1999, which compares to the approximately $111,000 provided for last year for the Series A Stock. All of the Series A Stock was retired in November 1998. The Series B Stock bears no dividend. Deemed Dividend on Series A Stock - In December 1997, the Company recorded a deemed dividend on the Series A Stock of $600,000, or $150 per share of Series A Stock, in accordance with the Securities and Exchange Commission's position on accounting for preferred stock that is convertible at a discount to the market price for common stock. A further $103,000 was recorded as a deemed dividend in 1998 as a result of the redemption of the Series A Stock. 24 LIQUIDITY AND CAPITAL RESOURCES Equity Transactions: - - ------------------- The Company offered 3,000,000 shares of Common Stock in an initial public offering ("IPO") on October 24, 1996 at $5.00 per share. On November 22, 1996, the Company's underwriters exercised their option to purchase an additional 200,000 shares of Common Stock from the Company and certain shareholders for $5.00 per share. On December 8, 1997, the Company, issued 4,000 shares of Series A Convertible Preferred Stock ("Series A Stock") to Advantage Fund II Ltd. ("Advantage") for $4 million in the aggregate. Each share of Series A Stock was convertible into shares of Common Stock and warrants to purchase shares of Common Stock ("Series A Warrants"). On September 22, 1998, the Company and Advantage entered into a waiver agreement ("Waiver Agreement") and Amendment No. 1 ("Amendment No. 1") to the Registration Rights Agreement dated as of December 3, 1997 by and between the Company and Advantage (as amended, "Registration Rights Agreement"). Pursuant to the Waiver Agreement, the Company redeemed 2,462 shares of Series A Stock for $3,200,000 in the aggregate on November 20, 1998. Advantage waived all accrued dividends on the Series A Stock. No shares of Series A Stock remain outstanding. Simultaneously with the execution of the Waiver Agreement, the Company granted to Advantage warrants to purchase 100,000 shares of Common Stock at an exercise price of $2.125 per share and warrants to purchase 389,441 shares of Common Stock at an exercise price of $4.77 per share, all of which expire on September 21, 2003 (collectively "Additional Warrants"). Pursuant to the terms of Amendment No. 1, the Company filed a registration statement on November 20, 1998 with respect to the shares of Common Stock underlying the Additional Warrants. On September 8, 1999 and December 6, 1999, Advantage exercised its warrants to purchase 100,000 and 533,576 shares, respectively, of Common Stock. On November 20, 1998, the Company sold 1,860,000 shares of Common Stock, at $2.00 per share to a group of accredited investors pursuant to a Placement Agent Agreement dated October 9, 1998, as amended, between the Company and LaSalle St. Securities, Inc. ("LaSalle"). The shares of Common Stock were sold pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended ("Securities Act"). The Company received $3,366,600 in net sale proceeds after payment of commissions of 8% of the gross sale proceeds and non-accountable expense allowance of 1.5% of the gross sale proceeds to LaSalle. LaSalle also received warrants in the aggregate to purchase 50,000 shares of Common Stock at an exercise price of $2.125 per share. These warrants were issued pursuant to Rule 506 of Regulation D promulgated under the Securities Act. LaSalle exercised its warrants to purchase 50,000 shares of Common Stock on December 9, 1999. Between December 4, 1998 and December 9, 1998, the Company, sold 675,000 shares of its Common Stock at $2.00 per share to certain accredited investors pursuant to Rule 506 of Regulation D promulgated under the Securities Act. The Company received $1,308,000 in net sale proceeds after payment of commissions to LaSalle and Coldwater Capital LLC. On June 11, 1999, the Company issued 1,287,554 shares of Series B Stock in the aggregate to two investors, in equal amounts, for $2.33 per share, or $3 million in the aggregate. Each share of Series B Stock is convertible into one share of Common Stock, $.001 par value per share, of the Company. For the terms and conditions of the Series B Stock refer to the Company's Form 8-K filed on June 23, 1999. On September 9, 1999, the Company issued 335,000 shares of Series C Stock and 3,350,000 non-detachable Warrants to purchase shares of Common Stock to certain accredited investors listed in the Purchase Agreement. Each share of Series C Stock was issued with ten Warrants for a price of $26.25 per Unit. The Warrants are immediately exercisable at a price of $2.625 per share and will remain outstanding until 90 days after all of the Series C Stock has been redeemed and the shares of the Common Stock underlying the Warrants have been registered for resale. The Series C Stock bears cumulative compounding dividends at an annual rate of 10% for the first five years, 12.5% for the sixth year and 15% in and after the seventh year. For the terms and conditions of the Series C Stock refer to the Company's Form 8-K filed on September 15, 1999. 25 Pursuant to the Purchase Agreement, the Company has granted registration rights to each of the purchasers of the Series B and Series C Stock whereby the Company is obligated, in certain instances, to register the resale of the shares of common stock issuable upon exercise of the Warrants. At December 31, 1998, the Company was in receipt of a "going concern" opinion from its independent auditors and the Company did not meet the $4 million net tangible assets and other requirements for continued listing on the Nasdaq National Market. The Company has completed three equity private placements in addition to exercise of options and warrants and has raised approximately $18.6 million after commission and costs of placements, in additional equity capital which the Company believes is sufficient to sustain operations. In a letter dated August 31, 1999, the Company was advised that a determination had been made by the Nasdaq Listing Qualifications Panel to transfer the listing of the Company's securities to the Nasdaq SmallCap Market effective with the opening of business on September 3, 1999. Additionally, the Company was advised that continued listing on the Nasdaq SmallCap Market was contingent upon making a public filing, on or before September 15, 1999 with the Securities and Exchange Commission (the "SEC") and Nasdaq evidencing a minimum of $6,350,000 in net tangible assets. The filing was to contain a July 31, 1999 pro forma balance sheet giving effect to completion of the financing for the Series C Stock. On September 15, 1999, the Company filed a Form 8-K evidencing compliance. On September 22, 1999, the Company received a letter from the Nasdaq Qualifications Panel stating that the Company had complied with the terms of its exception, that the Company would continue to be listed on The Nasdaq SmallCap Market and that the hearing file would be closed. During 1999, three warrants to purchase a total of 683,576 shares of common stock were exercised at various prices. Proceeds from these exercises totaled $2,863,908. Additionally during 1999, various employees exercised 848,629 options to purchase common stock. The Company received net proceeds from these exercises of $2,670,730. On March 24, 2000 the Company completed a private placement with Cranshire Capital, L.P. for 500,000 shares at a purchase price of $4.75 per share pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, to augment existing resources. The Company received net proceeds of $2,232,500 after commission to LaSalle and believes it now has sufficient working capital to sustain operations. Debt Transactions - - ------------------ On February 24, 1999, the Company entered into a Loan and Security Agreement ("Loan Agreement") with Transamerica. Under the terms of the Loan Agreement, the Company received $3.0 million under a term loan that bore interest at 12.53% per annum. On March 31, 1999, the Company and Transamerica entered into the First Amendment. Under the terms of the First Amendment, Transamerica waived the default created when the Company received a "going-concern" opinion from its independent auditors. The Company agreed to (i) grant to TBCC Funding Trust II, an affiliate of Transamerica, warrants to purchase 100,000 shares of Common Stock at an exercise price of $3.25 and (ii) accept the additional financial covenant that the Company's net worth would be $5 million at June 30, 1999 and September 30, 1999. The original warrants were valued at $224,000 using an option-pricing model and the following assumptions: dividend yield of 0%; expected volatility of 68%; risk-free interest rate of 5.35% and expected term of seven years. On June 30, 1999, the Company and Transamerica entered into the Second Amendment. Under the terms of the Second Amendment, Transamerica has (i) waived the requirement that the Company's net worth be $5 million on June 30, 1999, (ii) amended the promissory note issued by the Company in connection with the Loan Agreement to extend the maturity date of the term note to February 28, 2000 and removed the requirement that Transamerica convert the term loan to a revolving loan on February 28, 2000, and (iii) deleted the $360,000 acquisition fee. In consideration for the Second Amendment, the Company agreed to (i) grant additional seven-year warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $3.75 per share, (ii) pay a $150,000 fee to Transamerica on February 28, 2000, (iii) use 30% of any future equity raised by the Company after completion of the current round (approximately $10-12 million) of financing to prepay the term loan, (iv) repay $100,000 per month in principal of the term loan beginning on September 1, 1999, and (v) pay the balance of the principal and accrued and unpaid interest due on the term loan on February 28, 2000. The additional 50,000 warrants granted in the Second Amendment were valued 26 at $86,000 using a dividend yield of 0%; expected volatility of 68%; risk-free interest rate of 5.35% and expected term of seven years. The Loan Agreement contains certain covenants that restrict certain activities of the Company including sales of assets, loans to other persons, liens, dividends, stock redemption; investments in other persons, and creation of partnerships, subsidiaries, joint ventures or management contracts. In connection with this loan, the Company granted a security interest in all of its assets, including its intellectual property, to the lender. If the Company is unable to repay the loan or there is an event of default under the loan, the lender could foreclose on its security interest. The Transamerica term loan was repaid on September 30, 1999 and all indebtedness and obligations owed by the Company were terminated. As a result of an anti-dilution clause triggered upon the issuance of Series B Convertible Preferred Stock, the warrants to purchase 100,000 shares of Common Stock with an exercise price of $3.25 per share and 50,000 shares of Common Stock with an exercise price of $3.75 per share increased to warrants to purchase 139,485 shares and 80,472 shares, respectively, each with an exercise price of $2.33 per share. The Transamerica term loan was repaid on September 30, 1999 and all indebtedness and obligations owed by the Company were terminated. On September 30, 1999, the Company entered into a Revolving Credit Promissory Note (the "Note") with Citibank. Under the terms of the Note, the Company could be advanced funds up to an amount of $3.0 million under a revolving loan agreement with a maturity date of October 1, 2000 with the ability to renew for additional terms. The Note bore interest at a rate equal to the sum of the interest rate paid on the automatically renewable one-year certificate of deposit plus a margin of two percentage points. Interest was payable monthly in arrears. The initial rate of interest was 6.78%. Advances of $2,900,000 were made at September 30, 1999 which were used to pay off the remaining principal on the Transamerica note payable. On December 14, 1999, the Note was repaid with the certificate of deposit, which had been the collateral for the Note. As of December 31, 1999, the Company had nominal debt and had cash and cash equivalents of approximately $7,137,000 and positive working capital of approximately $6,630,000. The Company's operating activities used cash of approximately $9,020,000, $6,642,000 and $9,263,000 in 1997, 1998 and 1999, respectively. Cash used in operating activities was principally a result of net losses and changes in assets and liabilities, non-cash expenses related to depreciation and amortization, deferred financing costs and the issuance of certain stock options. The decrease in net cash used in operating activities from 1997 to 1998 was due in part to large increases in accounts payable and decreases in accounts receivable and inventory. The large increase in 1999 was due in part to a significant drop in accounts payable and deferred income. Capital expenditures for property and equipment were approximately $353,000, $322,000 and $176,000 in 1997, 1998 and 1999, respectively. These expenditures have generally been for computer workstations and personal computers, office furniture and equipment, and leasehold additions and improvements. The capital expenditures decreased in 1998 and again in 1999 as the Company was conservative in the use of cash for capital equipment. In 1997, the Company paid a security deposit of $370,000 as part of the six year operating lease agreement for its principal office in Germantown, Maryland and made an investment of $250,000 in Network Flight Recorder, Inc. Network Flight Recorder, Inc. develops software to provide network administrators with network audit capabilities and is headed by Marcus J. Ranum, the Company's former Chief Scientist. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is not exposed to a variety of market risks such as fluctuations in currency exchange rates or interest rates. All of the Company's products are invoiced in U.S. dollars. The Company does not hold any derivatives or marketable securities ITEM 7B. IMPACT OF YEAR 2000 UPDATE In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, 27 the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $25,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with our products, our internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28 V-ONE CORPORATION INDEX TO FINANCIAL STATEMENTS -------- Report of Ernst & Young LLP, Independent Auditors 30 Report of PricewaterhouseCoopers LLP, Independent Auditors 31 Balance Sheets 32 Statements of Operations 33 Statements of Stockholders' Equity 34 Statements of Cash Flows 35 Notes to Financial Statements 36 Schedule of Valuation and Qualifying Accounts for the years ended December 31, 1997, 1998 and 1999 53 29 Report of Independent Auditors Board of Directors and Stockholders V-One Corporation We have audited the accompanying balance sheet of V-One Corporation as of December 31, 1999, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended December 31, 1999 listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of V-One Corporation at December 31, 1999, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule for the year ended December 31, 1999, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP McLean, Virginia February 18, 2000, except Note 11, as to which the date is March 24, 2000 30 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of V-ONE Corporation In our opinion, the accompanying balance sheet and the related statements of operations, shareholder's equity and cash flows present fairly in all material respects, the financial position of V-ONE Corporation (the Company) at December 31, 1998 and the results of its operations and its cash flows for each of the two years in the period December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes, examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the financials statements of V-ONE Corporation for any period subsequent to December 31, 1998. The financial statements referred to above have been prepared assuming the Company will continue as a going concern. As shown in these financial statements during 1997 and 1998 the Company incurred significant losses of $10,215,339 and $9,193,396, respectively, and had a net working capital deficit position of $1,277,368 at December 31, 1998. These facts raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustment that might result from the outcome of this uncertainty. /s/ PricewaterhouseCoopers LLP McLean, VA March 11, 1999 except as to the third and fourth sentences of the first paragraph of Note 3 to which the date is March 31, 1999 31 V-ONE CORPORATION BALANCE SHEETS
December 31, ---------------------- ASSETS 1998 1999 ---- ---- Current assets: Cash and cash equivalents $635,959 $7,136,943 Accounts receivable, less allowances of $525,000 and $134,000, respectively. 513,221 854,853 Inventory, less allowances of $313,000 and $88,000, respectively 385,481 46,087 Prepaid expenses and other current assets 276,456 249,339 Total current assets ---------- ----------- 1,811,117 8,287,222 Property and equipment, net 874,553 585,708 Licensing fee, net of accumulated amortization of $636,876 and $892,254, respectively 255,378 - Other assets 981,144 902,506 ---------- ----------- Total assets $3,922,192 $9,775,436 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $2,124,156 $1,157,660 Deferred revenue 888,295 420,922 Notes payable - current 5,259 - Capital lease obligations - current 70,775 78,794 ---------- ----------- Total current liabilities 3,088,485 1,657,376 Deferred rent - 156,711 Capital lease obligations - noncurrent 197,982 119,746 ---------- ----------- Total liabilities 3,286,467 1,933,833 Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value;13,333,333 shares authorized Series B convertible preferred stock, 1,287,554 designated; zero and 1,287,554 shares issued and outstanding, respectively (liquidation preference of $3,000,000) - 1,288 Series C redeemable preferred stock, 500,000 designated, zero and 335,000 shares issued and outstanding, respectively (liquidation preference of $8,793,750). - 335 Common stock, $0.001 par value; 33,333,333 shares authorized; 16,478,046 and 18,233,780 shares issued and outstanding, respectively 16,478 18,233 Accrued dividends payable - 272,245 Additional paid-in capital 30,361,685 47,197,893 Subscriptions receivable (50,021) (3,785) Accumulated deficit (29,692,417) (39,644,606) ------------ ------------ Total stockholders' equity 635,725 7,841,603 ------------ ------------ $3,922,192 $9,775,436 ============ ============
The accompanying notes are an integral part of these financial statements. 32
V-ONE CORPORATION STATEMENTS OF OPERATIONS Year ended December 31, --------------------------------------------------------------- 1997 1998 1999 ---- ---- ---- Revenues: Products $ 5,470,230 $ 5,798,542 $ 3,427,422 Consulting and services 502,771 461,263 1,538,258 --------------------------------------------------------------- Total revenues 5,973,001 6,259,805 4,965,680 Cost of revenues: Products 1,848,871 1,623,396 973,866 Consulting and services 96,949 68,060 137,281 --------------------------------------------------------------- Total cost of revenues 1,945,820 1,691,456 1,111,147 --------------------------------------------------------------- Gross profit 4,027,181 4,568,349 3,854,533 Operating expenses: Sales and marketing 7,717,640 6,071,919 5,456,173 General and administrative 3,699,278 3,896,210 3,380,227 Research and development 3,153,941 3,853,274 3,814,423 --------------------------------------------------------------- Total operating expenses 14,570,859 13,821,403 12,650,823 --------------------------------------------------------------- Operating loss (10,543,678) (9,253,054) (8,796,290) Interest (expense) income: Interest expense (13,130) (65,372) (676,443) Interest income 341,469 125,030 164,841 --------------------------------------------------------------- Total interest (expense) 328,339 59,658 (511,602) --------------------------------------------------------------- Loss before extraordinary item (10,215,339) (9,193,396) (9,307,892) Extraordinary item - early extinguishment of debt - - (372,052) --------------------------------------------------------------- Net loss (10,215,339) (9,193,396) (9,679,944) Dividend on preferred stock 12,600 110,879 272,245 Deemed dividend on preferred stock 600,000 102,755 - --------------------------------------------------------------- Net loss attributable to holders of common stock $(10,827,939) $(9,407,030) $(9,952,189) =============================================================== Basic and diluted loss per share Loss before extraordinary item $ (0.84) $ (0.68) $ (0.57) =============================================================== Net loss attributable to holders of common stock $ (0.84) $ (0.68) $ (0.59) =============================================================== Weighted average number of common shares outstanding 12,868,859 13,898,450 16,938,205 =============================================================== The accompanying notes are an integral part of these financial statements.
33
V-ONE CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY Series B & C Accrued Additional Common Stock Preferred Stock Dividend Paid-in Subscriptions Accumulated Shares Amount Shares Amount Payable Capital Receivable Deficit Total ------ ------ ------ -------------- ------- ---------- ------- ----- Balance, December 31, 1996 12,658,347 $12,658 $22,608,866 $(287,400) $(9,457,448) $12,876,676 Exercise of common stock options 417,908 418 1,260,975 - - 1,261,393 Payments received in connection with notes receivable for stock - - - 88,480 - 88,480 Retirement of common stock (6,020) (6) (32,903) 32,909 - - Issuance of common stock warrants - - 200,000 - - 200,000 Deemed dividend on preferred stock - - 600,000 - - 600,000 Dividend on preferred stock - - 12,600 - - 12,600 Net loss - - - - (10,827,939) 10,827,939) ------------------------------------------------------------------------------------------------- Balance, December 31, 1997 13,070,235 13,070 24,649,538 (166,011) (20,285,387) 4,211,210 Issuance of common stock, net 2,535,000 2,535 4,532,554 - - 4,535,089 of issuance costs Exercise of common stock options 189,333 189 273,228 - - 273,417 Conversion of mandatorily redeemable preferred stock to common stock 720,670 721 1,537,279 - - 1,538,000 Redemption of mandatorily redeemable preferred stock - - (1,011,716) - - (1,011,716) Retirement of common stock (37,192) (37) (115,953) 115,990 - - Deemed dividend on preferred stock - - 102,755 - (102,755) - Dividend on preferred stock - - - - (110,879) (110,879) Issuance of common stock warrants - - 394,000 - - 394,000 Net loss (9,193,396) (9,193,396) -------------------------------------------------------------------------------------------------- Balance, December 31, 1998 16,478,046 16,478 30,361,685 (50,021) (29,692,417) 635,725 Exercise of common stock options, net of issuance costs 848,629 848 2,669,882 2,670,730 Exercise of warrants 907,105 907 2,863,001 2,863,908 Issuance of Series B preferred stock, net issuance costs 1,287,554 $1,288 2,981,212 2,982,500 Issuance of Series C preferred stock, net of issuance costs 335,000 335 7,918,349 7,918,684 Collection and forgiveness of subscriptions receivable 46,236 46,236 Issuance of common stock warrants 310,000 310,000 Dividend on preferred stock $272,245 (272,245) - Issuance of common stock options to consultants 93,764 93,764 Net loss 9,679,944) (9,679,944) - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 18,233,780 $18,233 1,622,554 $1,623 $272,245 $47,197,893 $(3,785) $(39,644,606)$7,841,603 ==================================================================================================================================== The accompanying notes are an integral part of these financial statements.
34
V-ONE CORPORATION STATEMENT OF CASH FLOWS Year ended December 31, --------------------------------------------------- 1997 1998 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(10,215,339) $ (9,193,396) $(9,679,944) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 285,213 354,187 464,879 Amortization 306,752 283,056 255,378 Loss on disposal of assets 101,354 95,228 - Amortization of deferred financing costs - - 730,000 Forgiven subscription receivable - - 46,114 Noncash charge related to issuance of warrants and options 200,000 394,000 93,764 Changes in operating assets and liabilities: Accounts receivable, net 735,731 281,174 (341,632) Inventory, net (165,024) 198,413 339,394 Prepaid expenses and other assets (782,549) (66,153) 105,755 Accounts payable and accrued expenses (159,455) 972,567 (966,496) Deferred revenue 714,899 75,648 (467,373) Deferred rent (41,396) (36,879) 156,711 --------------------------------------------------- Net cash used in operating activities (9,019,814) (6,642,155) (9,263,450) CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property and equipment (353,110) (322,387) (176,033) Investment in affiliate (250,000) - - Collection of note receivable 88,480 - 122 --------------------------------------------------- Net cash used in investing activities (514,630) (322,387) (175,911) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock - 5,070,000 - Issuance of preferred stock, net of subscriptions receivable 4,000,000 - 11,793,750 Payment of debt financing costs - - (420,000) Payment of preferred stock dividends - (110,879) Payment of stock issuance costs (574,324) (233,703) (941,875) Redemption of preferred stock - (3,200,600) - Exercise of stock options and warrants 1,261,393 273,417 5,583,946 Principal payments on capital lease obligations (167,429) (43,675) (70,217) Repayment of notes payable (16,667) (16,963) (5,259) -------------------------------------------------- Net cash provided by financing activities 4,843,594 1,396,976 15,940,345 -------------------------------------------------- Net (decrease) increase in cash and cash equivalents (4,690,850) (5,567,566) 6,500,984 Cash and cash equivalents, beginning of year 10,894,375 6,203,525 635,959 -------------------------------------------------- Cash and cash equivalents, end of year $6,203,525 $635,959 $7,136,943 ================================================== The accompanying notes are an integral part of these financial statements.
35 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 1. NATURE OF BUSINESS V-ONE Corporation ("V-ONE" or the "Company"), a Delaware corporation, develops, markets and licenses a comprehensive suite of network security products that enable organizations to conduct secured electronic transactions and information exchange using private enterprise networks and public networks, such as the Internet. The Company's principal market is the United States, with headquarters in Maryland, with secondary markets located in Europe and Asia. 2. SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION The Company develops, markets, licenses and supports computer software products and provides related services. The Company conveys the right to use the software products to customers under perpetual license agreements, and conveys the rights to product support and enhancements in annual maintenance agreements. The Company recognizes revenue upon deployment of the software directly to an end-user or a value-added reseller. The Company defers and recognizes maintenance and support services revenue over the term of the contract period, which is generally one year. The Company recognizes training and consulting services revenue as the services are provided. The Company generally expenses sales commissions as the related revenue is recognized and pays sales commissions upon receipt of payment from the customer. In addition to its direct sales effort, the Company licenses its products through a network of distributors. The Company does not record revenue until the distributor has delivered the licenses to end-user customers and the end-user customers have registered the software with the Company. The Company also records revenue when the software is deployed directly to the end-user customer on behalf of the distributor. In certain instances, as appropriate, the Company recognizes revenues from the sale of systems using the percentage of completion method as the work is performed, measured primarily by the ratio of labor hours incurred to total estimated labor hours for each specific contract. When the total estimated cost of a contract is expected to exceed the contract price, the total estimated loss is charged to expense in the period when the information becomes known. The Company's revenue recognition policies for the year ended December 31, 1997 are in conformity with the Statement of Position 91-1, "Software Revenue Recognition," promulgated by the American Institute of Certified Public Accountants. The Company's revenue recognition policies for the years ended December 31, 1998 and 1999 are in conformity with the Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2), promulgated by the American Institute of Certified Public Accountants. 36 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed" requires the capitalization of certain software development costs once technological feasibility is established, which the Company generally defines as completion of a working model. Capitalization ceases when the products are available for general release to customers, at which time amortization of the capitalized costs begins on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. To date, the period between achieving technological feasibility and the general availability of such software has been short, and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statement and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents include time deposits with commercial banks used for temporary cash management purposes. INVENTORIES Inventories are valued at the lower of cost or market and consist primarily of computer equipment for sale on orders received from customers and other vendor's software licenses held for resale. Cost is determined based on specific identification. PROPERTY AND EQUIPMENT Property and equipment are stated at historical cost and are depreciated using the straight-line method the shorter of the assets' estimated useful life or the lease term, ranging from three to seven years. Capital leases are recorded at their net present value on the inception of the lease. Depreciation expense was $285,213, $354,187 and $464,879 for the years ended December 31, 1997, 1998 and 1999, respectively. ADVERTISING COSTS The Company expenses all advertising costs as incurred. The Company incurred $731,000, $196,000, and $98,400 in advertising costs for the years ended December 31, 1997, 1998 and 1999, respectively. 36 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS"), allows companies to account for stock-based compensation either under the new provisions of SFAS 123 or under the provisions of Accounting Principles Bulletin No. 25, "Accounting for Stock Issued to Employees" ("APB25"), but requires pro forma disclosure in the footnotes to the financial statements as if the measurement provisions of SFAS 123 had been adopted. The Company has elected to account for its stock-based compensation in accordance with the provisions of APB25 (see Note 6). EXTRAORDINARY ITEM On September 30, 1999, the Company paid in full the Transamerica term loan prior to its maturity (see Note 3). In connection with the payment, the Company recognized a $372,052 loss related to the early extinguishment of debt. INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured by applying presently enacted statutory tax rates, which are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized, to the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in net income in the period that the tax rate is enacted. The Company provides a valuation allowance against net deferred tax assets if, based upon available evidence, it is more likely that some or all of the deferred tax assets may not be realized. NET LOSS PER COMMON SHARE The Company follows Financial Accounting Standards Board Statement No. 128, "Earnings Per Share," ("SFAS 128") for computing and presenting net income per share information. Basic net loss per share was determined by dividing net loss by the weighted average number of common shares outstanding during each year. Diluted net loss per share excludes common equivalent shares, unexercised stock options and warrants as the computation would be anti-dilutive. A reconciliation of the net loss available for common stockholders and the number of shares used in computing basic and diluted net loss per share is in Note 10. BUSINESS SEGMENTS In 1998, the Company adopted FASB Statement No. 131, "Disclosure About Segments of an Enterprise and Related Information," which establishes standards for disclosures about products, geographics and major customers. The Company's implementation of this standard does not have any effect on its financial statements. 37 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS RISKS, UNCERTAINTIES AND CONCENTRATIONS Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash equivalents and accounts receivable. The Company's cash balances exceed federally insured amounts. The Company invests its cash primarily in money market funds with an international commercial bank. The Company sells its products to a wide variety of customers in a variety of industries. The Company performs ongoing credit evaluations of its customers but does not require collateral or other security to support customer accounts receivable. In management's opinion, the Company has sufficiently provided for estimated credit losses. In 1997 one customer comprised 12% of total revenues. For the years ended December 31, 1998 and 1999, no customer represented more than 10% of total revenues. The Company had significant purchases of product from two major suppliers of approximately $1,201,000 during 1997. During 1998 approximately $524,000 was purchased from two major suppliers, representing 32% of total 1998 product cost of revenues. No suppliers exceeded 10% of purchases in 1999. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 1999 presentation. These changes had no impact on previously reported results of operations. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective for fiscal years beginning after June 15, 2000 and cannot be applied retroactively. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company currently plans to adopt SFAS 133 effective January 1, 2001. 3. NOTES PAYABLE On February 24, 1999, the Company entered into a Loan and Security Agreement ("Loan Agreement") with Transamerica Business Credit Corporation ("Transamerica"). Under the terms of the Loan Agreement, the Company received a $3.0 million term loan that bears interest at 12.53% per annum. Interest is payable monthly in arrears. On March 31, 1999, the Company and Transamerica amended the Loan Agreement, whereby Transamerica waived the event of default created when the Company received a "going-concern" opinion from its independent auditors. The Company agreed to (i) grant TBCC Funding Trust II, an affiliate of Transamerica, a warrant to purchase 100,000 shares of Common Stock at an exercise price of $3.25 per share and (ii) accept the additional 38 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS financial covenant that the Company's net worth would be $5.0 million at June 30, 1999 and September 30, 1999. The warrant was valued at $224,000 using the Black-Scholes option-pricing model and the following assumptions: dividend yield of 0%; expected volatility of 68%; risk-free interest rate of 5.35% and expected term of seven years. On June 30, 1999, the Company and Transamerica entered into a second amendment, whereby Transamerica (i) waived the requirement that the Company's net worth be $5.0 million on June 30, 1999, (ii) extended the maturity date of the $3.0 million term note to February 28, 2000 and removed the requirement that Transamerica convert the term loan to a revolving loan on February 28, 2000, and (iii) deleted the $360,000 acquisition fee. In consideration for the second amendment, the Company (i) issued a seven-year warrant to purchase 50,000 shares of the Company's Common Stock at an exercise price of $3.75 per share, (ii) paid a $150,000 fee to Transamerica, (iii) agreed to use 30% of any future equity raised by the Company after completion of its current round of financing to prepay the term loan, (iv) agreed to pay $100,000 per month in principal on the term loan beginning on September 1, 1999, and (v) agreed to pay the balance of the principal and accrued and unpaid interest due on the term loan on February 28, 2000. The warrant to purchase 50,000 shares was valued at $86,000 using the Black-Scholes option-pricing model and the following assumptions: dividend yield of 0%; expected volatility of 68%; risk-free interest rate of 5.35% and expected term of seven years. As a result of an anti-dilution clause triggered upon the issuance of Series B Convertible Preferred Stock, the warrants to purchase 100,000 shares of Common Stock with an exercise price of $3.25 per share and 50,000 shares of Common Stock with an exercise price of $3.75 per share increased to warrants to purchase 139,485 shares and 80,472 shares, respectively, each with an exercise price of $2.33 per share. The Transamerica term loan was repaid on September 30, 1999 and all indebtedness and obligations owed by the Company were terminated. On September 30, 1999, the Company entered into a Revolving Credit Promissory Note (the "Note") with Citibank, F.S.B., ("Citibank"). Under the terms of the Note, the Company may be advanced up to $3.0 million under a revolving loan agreement with a maturity date of October 1, 2000 with the ability to renew for additional terms. The Note bears interest at a rate equal to the sum of the interest rate paid on the automatically renewable one-year certificate of deposit plus a margin of two percentage points. Interest is payable monthly in arrears. The initial rate of interest is 6.78%. Advances of $2,900,000 were made at September 30, 1999 which were used to pay off the remaining principal on the Transamerica note payable. On December 14, 1999, the Note was repaid with the proceeds from a certificate of deposit, which had been the collateral for the Note. 4. SELECTED BALANCE SHEET INFORMATION Property and equipment consisted of the following at December 31: 1998 1999 --------- ---------- Office and computer equipment $ 896,767 $ 988,041 Office and computer equipment 359,859 359,859 under capital leases 39 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS Leasehold improvements 62,332 62,332 Furniture and fixtures 120,811 120,811 ------- ------- 1,439,769 1,531,043 Less: accumulated depreciation (565,216) (945,335) $ 874,553 $ 585,708 ========== ========== The Company had two licensing agreements whereby the Company obtained the right to modify and sell certain technology used in its product line. All amounts are fully amortized as of December 31, 1999. The Company incurred amortization expense of $283,056 $283,056 and $255,378 relating to these agreements in 1997, 1998 and 1999, respectively. Other assets consisted of the following at December 31: 1998 1999 ------- ------- Deposits $ 731,144 $ 652,506 Investment in Network Flight Recorder 250,000 250,000 ------- ------- $ 981,144 $ 902,506 ======= ======= In January 1997, the Company made an investment of $250,000 in Network Flight Recorder, Inc. ("NFR") in exchange for ten percent of NFR's common stock. NFR develops software to provide network administrators with network audit capabilities. NFR is headed by the Company's former chief scientist, who continues to work as a consultant for the Company. The Company's investment in these equity securities was recorded at the fair market value on the date of the transaction and is accounted for using the cost method. Accounts payable and accrued expenses consisted of the following at December 31: 1998 1999 -------- -------- Accounts payable $ 1,820,812 $ 847,267 Accrued compensation 234,638 270,072 Accrued marketing costs 15,000 - Sales tax payable 28,904 1,936 Other accrued expenses 24,802 38,385 ------------ ----------- $ 2,124,156 $61,157,660 ============ =========== 5. INCOME TAXES The tax effect of temporary differences that give rise to significant portions of the deferred income taxes are as follows at December 31: (liabilities): 1998 1999 Deferred tax assets ------ ------ Deferred revenue $ 131,573 $ - Inventory 121,018 33,867 Accounts receivable 202,615 51,845 Property and equipment (78,178) (60,343) Deferred rent - 60,522 40 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS Non-deductible accruals 65,739 61,320 Options and warrants - 155,991 Licensing fee (81,989) - Net operating loss carry forward 9,087,986 14,556,026 ----------- ---------- Total deferred tax asset 9,448,764 14,859,228 Valuation allowance (9,448,764) (14,859,228) -------- ---------- $ - $ - Net deferred tax asset ========== ========== The net change in the valuation allowance from 1998 to 1999 is due principally to the increase in net operating losses. Valuation allowances have been recognized due to the uncertainty of realizing the benefit of net operating loss carryforwards. At December 31, 1998 and 1999, the Company had net operating loss carryforwards of approximately $23,756,029 and $37,690,384 for Federal and state income tax purposes available to offset future taxable income. The net operating loss carryforwards begin to expire in 2008. Approximately $4,279,000 of the net operating loss carryforwards is attributable to exercised stock options, the benefit of which, when realized, will directly increase additional paid-in capital. A reconciliation between income taxes computed using the statutory federal income tax rate and the effective rate for the years ended December 31, 1999 and 1998 is as follows: 1998 1999 --------- --------- Federal income tax (benefit) at statutory (34.0%) (34.0%) Rate State income taxes, net (4.6%) (6.6%) Permanent items 0.1% (14.6%) Net change in valuation allowance 38.5% 55.2% Provision for Income Taxes --------- --------- 0% 0% ========= ========= 6. SHAREHOLDERS' EQUITY SERIES A PREFERRED STOCK On December 8, 1997, the Company issued 4,000 shares of mandatorily redeemable Series A Convertible Preferred Stock ("the Series A Stock") to Advantage Fund II Ltd. ("Advantage") for $4.0 million, less issuance costs of approximately $273,000. Each share of Series A Stock was convertible into shares of Common Stock and warrants to purchase shares of Common Stock ("Series A Warrants"). The holders of Series A Stock were entitled to receive, at the discretion of the Board of Directors, dividends at the rate of $50.00 per annum per share, which were fully cumulative, accrued without interest from the date of original issuance and were payable quarterly commencing March 1, 1998. During the years ended December 31, 1997 and 41 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS 1998, the Company recorded dividends of $12,600 and $110,879. All dividends were paid by the Company in 1998. Due to the Maximum Share Amount limitation found in Section 7(a)(1) of the Certificate of Designations of the Series A Stock ("the Certificate"), the Company was obligated to convert shares of Series A Stock held by Advantage. On September 21, 1998, the Company sent an inconvertibility notice to Advantage indicating that, as of September 11, 1998, Advantage had the right to have some of its shares of Series A Stock redeemed by the Company for the Share Limitation Redemption Price (which term is defined in the Certificate). On September 22, 1998, the Company and Advantage entered into a waiver agreement and an amendment to their original agreement. Pursuant to the waiver agreement, the Company redeemed 2,462 shares of Series A Stock for $3,200,000 in the aggregate on November 20, 1998. Advantage waived all accrued dividends on the Series A Stock. No shares of Series A Stock remain outstanding. Simultaneously with the execution of the waiver agreement, the Company granted warrants to Advantage to purchase 100,000 shares of the Company's Common Stock at an exercise price of $2.125 per share and warrants to purchase 389,441 shares of the Company's Common Stock at an exercise price of $4.77 per share. Pursuant to the terms of the amendments the Company has agreed to file a registration statement with respect to the shares of Common Stock underlying the warrants. Advantage exercised all of these warrants in 1999 in addition to warrants to purchase 144,123 shares of Common Stock at $4.77 per share which Advantage had received in prior private placements. The warrants to purchase a total of 633,576 shares of Common Stock were exercised for $2,757,881. SERIES B PREFERRED STOCK On June 11, 1999, the Company issued 1,287,554 shares at $2.33 per share of Series B Convertible Preferred Stock (the "Series B Stock") to two investors for $1.0 million in cash and a subscription agreement for $2.0 million. Net proceeds to the Company after issuance costs of $17,500 were $2,982,500. The subscription receivable was repaid in two installments of $1.0 million plus accrued interest in July and August 1999. The Series B Stock ranks senior to the Common Stock as to distributions of assets upon liquidation, dissolution or winding up of the Company. The Series B Stock is not redeemable, does not bear dividends and generally has no voting rights. Each share of Series B Stock is convertible at the option of the holder at any time into one share of Common Stock based upon an initial conversion price of $2.33 per share. The conversion price is subject to adjustment in the event the Company pays dividends or makes distributions on, splits or reverse splits its Common Stock. The holders of the Series B Stock are entitled to a liquidation preference of $2.33 per share. SERIES C PREFERRED STOCK On September 9, 1999, the Company issued 335,000 shares of Series C Preferred Stock (the "Series C Stock") and 3,350,000 non-detachable warrants to purchase shares of the Company's Common Stock (the "Warrants") to certain accredited investors. Each share of Series C Stock was issued with ten Warrants (collectively a "Unit") for a price of $26.25 per Unit. The Company received $7,918,684 in proceeds net of 42 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS issuance costs of approximately $875,000. The Warrants are immediately exercisable at a price of $2.625 per share and will remain exercisable until 90 days after all of the Series C Stock has been redeemed and the shares of the Common Stock underlying the Warrants have been registered for resale. The Series C Stock bears cumulative compounding dividends at an annual rate of 10% for the first five years, 12.5% for the sixth year and 15% in and after the seventh year. The dividends may be paid in cash, or at the option of the Company, in shares of registered common stock. The Series C Stock is not convertible and ranks senior to the Common Stock and to the Series B Stock as to payment of dividends, and ranks senior to the Common Stock and in parity with the Series B Stock as to distributions of assets upon liquidation, dissolution or winding up of the Company. Holders of the Series C Stock are entitled to a liquidation preference of $26.25 per share. At least 51% of the outstanding shares of Series C Stock must vote affirmatively as a separate class for (i) the voluntary liquidation, dissolution or winding up of the Company, (ii) the issuance of any securities senior to the Series C Stock and (iii) the declaration or payment of a cash dividend on all junior stocks and certain amendments to the Company's certificate of incorporation. Prior to the exercise of the Warrants, the holders shall also be entitled to ten common votes for each share of Series C Stock on all matters on which common stockholders are entitled to vote, except in connection with the election of the Board of Directors. As long as at least 51% of the Series C Stock is outstanding, the holders shall have the right to elect one director to the Company's Board of Directors. The Company has the right to redeem the outstanding shares of Series C Stock in whole (i) at any time after the third anniversary of the issuance date, (ii) upon the closing of an underwritten public offering in excess of $20 million and at a price in excess of $6.50 per share or (iii) prior to the third anniversary of the issuance date if the average closing bid price of the Common Stock for any 20 trading days during any 30 trading days ending within 5 trading days prior to the date of notice of redemption is at least $3.9375 per share. The redemption price would be paid in cash in full and would be equal to the greater of the $26.25 per share purchase price or the fair market value of each Series C share plus all unpaid dividends. At any time after all of the Warrants have been exercised by a holder, that holder shall have the right to require the Company to redeem all of its then outstanding share of Series C Stock. The redemption price for each share of Series C Stock shall be the $26.25 per share purchase price plus all unpaid dividends and is payable at the option of the Company in either cash or shares of common stock. The Company has granted registration rights to the investors whereby the Company is obligated, in certain instances, to register the shares of Common Stock issuable upon conversion of the Series B Stock and exercise of the Warrants attached to the Series C Stock. COMMON STOCK In fourth quarter of 1998, the Company completed a private placement of 2,535,00 shares of its Common Stock at a price of $2.00 per share. The Company incurred issuance costs of approximately $546,000 and on 43 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS November 20, 1998, granted a warrant to purchase 50,000 shares of Common Stock to the underwriter of the private placement. The warrant has an exercise price of $2.125 and expires five years from the date of grant. On January 14, 1999, a warrant to purchase 600,000 shares of Common Stock was exercised in full pursuant to its cashless exercise provision and the Company issued 223,529 shares of its common stock to the holder. In addition to the exercise of warrants for 633,576 shares of Common Stock by Advantage for $2,757,658, a warrant to purchase a total of 50,000 shares of Common Stock was exercised at $2.125 per share. Proceeds from this exercise totaled $106,250. Additionally during 1999, various employees exercised 848,629 options to purchase common stock. The Company received net proceeds from these exercises of $2,670,730. WARRANTS In addition to the warrants issued in connection with the Transamerica debt for 219,957 shares of Common Stock at $2.33 per share and the warrants attached to the Series C Stock for 3,350,000 shares of Common Stock at $2.625 per share discussed above, the Company issued the following warrants to purchase Common Stock during the year ended December 31, 1997, 1998, and 1999: On November 21, 1997, the Company issued a warrant to purchase 300,000 shares of Common Stock with an exercise price of $3.125 to the President and Chief Executive Officer. The warrant vests evenly on the four anniversaries following the date of grant. This warrant expires on November 21, 2007. In connection with a marketing agreement in 1997, the Company issued a warrant to a consultant to purchase 25,000 shares of Common Stock at an exercise price of $3.875 per share, exercisable as of November 4, 1997. This warrant expires on November 4, 2002. On December 8, 1997, the Company issued warrants to purchase 60,000 shares of Common Stock at an exercise price of $4.725 to its underwriter in consideration for services rendered in connection with a private placement. Such warrants expire on December 8, 2002. On July 8, 1998, the Company granted warrants to purchase 10,000 shares of Common Stock each to two directors of the Company. The warrants have an exercise price of $2.688 and expire five years from the date of grant. Warrants to purchase shares of the Company's Common Stock outstanding at December 31, 1998 and 1999 were as follows: 1998 1999 Exercise Price ---- ---- -------------- 600,000 - $2.00 150,000 - $2.13 - 219,957 $2.33 - 3,350,000 $2.63 20,000 20,000 $2.69 300,000 300,000 $3.13 25,000 25,000 $3.88 60,000 60,000 $4.73 44 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS 533,576 - $4.77 ---------- --------- 1,688,576 3,974,957 At December 31, 1999, warrants to purchase 3,824,957 shares of common stock were exercisable. The weighted average grant date fair value of the warrants issued during 1999 was estimated at $2.24 for warrants granted at fair market value and $1.72 for warrants granted below fair market value. The fair value was determined using the Black-Scholes option-pricing model with the following assumptions: dividend yield 0%, volatility of 67%, risk-free interest rate of 5.35% and expected lives of 7 years. STOCK OPTIONS PLANS The Company has the following active stock options plans: the 1995 Non-Statutory Stock Option Plan, the 1996 Incentive Stock Plan and the 1998 Incentive Stock Option Plan. These plan were adopted to attract and retain key employees, directors, officers and consultants and are administered by the Compensation Committee appointed by the Board of Directors. 1995 NON-STATUTORY STOCK OPTION PLAN The Compensation Committee determined the number of options granted to key employees, the vesting period and the exercise price provided they were not below market value on the date of the grant for the 1995 Non-Statutory Stock Option Plan ("the 1995 Plan"). In most cases, the options vest over a two-year period and terminate ten years from the date of grant. The 1995 Plan will terminate during May 2005 unless terminated earlier within the provisions of the 1995 Plan. On June 12, 1996, the Board of Directors determined that no further options would be granted under the 1995 Plan. Option activity under the 1995 Plan for the three years ended December 31, 1999 was as follows:
Weighted Average Shares Exercise Price ------ -------------- Balance as of December 31, 1996 350,293 $1.238 Exercised (119,070) $1.001 Cancelled - $0.425 ---------- Balance as of December 31, 1997 231,223 $1.398 Exercised (158,333) $1.213 Cancelled (8,888) $0.425 ---------- Balance as of December 31, 1998 64,002 $1.855 Exercised (53,400) $1.726 Balance as of December 31, 1999 10,602 $2.505 ==========
1996 INCENTIVE STOCK PLAN During June 1996, the Company adopted the 1996 Incentive Stock Plan ("the 1996 Plan"), under which incentive stock options, non-qualified stock options and restricted share awards may be made to the Company's key employees, directors, officers and consultants. Both incentive stock options and options that are not qualified under Section 422 of the 45 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS Internal Revenue Code of 1986, as amended ("non-qualified options"), are available under the 1996 Plan. The options are not transferable and are subject to various restrictions outlined in the 1996 Plan. The Compensation Committee or the Board of Directors determines the number of options granted to key employees, officers or consultants, the vesting period and the exercise price provided that they are not below fair market value. The 1996 Plan will terminate during June 2006 unless terminated earlier by the Board of Directors. On February 17, 1998, the Company's Board of Directors authorized an offer to reset the exercise price of all full-time employees' (other than the President and any vice presidents) incentive stock options and non-qualified stock options granted under the 1996 Plan. If accepted by the option holder, such options were replaced with non-qualified options at the new exercise price of $2.625 per share. To have been eligible for repricing, a participant must: 1) have been a full-time employee on February 17, 1998; 2) have agreed to remain an employee of the Company until August 17, 1998, and 3) have accepted the offer by February 24, 1998. On May 1, 1998, the Company's Board of Directors authorized an offer to reset the exercise price of all options issued to the President and any vice presidents granted under the 1996 Plan. If accepted by the option holder, such options were replaced with non-qualified options at the new exercise price of $2.875 per share. To have been eligible for repricing, a participant must: 1) have been a full-time employee on May 1, 1998; 2) have agreed to remain an employee of the Company until November 1, 1998, and 3) have accepted the offer by May 8, 1998. 46 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS Option activity under the 1996 Plan for the three years ended December 31, 1999 was as follows: Weighted Average Shares Exercise Price ------ -------------- Balance as of December 31, 1996 1,153,671 $4.312 Granted 1,315,501 $4.272 Exercised (298,838) $3.818 Cancelled (198,299) $5.106 ---------- Balance as of December 31, 1997 1,972,035 $4.243 Granted 558,667 $2.78 Exercised (35,000) $2.625 Cancelled (613,326) $4.28 ---------- Balance as of December 31, 1998 1,882,376 $3.221 Granted - Exercised (677,479) $3.438 Cancelled (290,666) $2.787 Expired (99,250) $2.785 ---------- Balance as of December 31, 1999 814,981 $3.268 ========== 1998 INCENTIVE STOCK OPTION PLAN On February 2, 1998, the Board of Directors authorized the adoption of the 1998 Incentive Stock Option Plan (the "1998 Plan"). The purpose of the 1998 Plan is to provide for the acquisition of an equity interest in the Company by non-employee directors, officers, key employees and consultants. The 1998 Plan will terminate February 2, 2008. Incentive stock options may be granted to purchase shares of Common Stock at a price not less than fair market value on the date of grant. Only employees may receive incentive stock options; all other qualified participants may receive non-qualified stock options with an exercise price determined by a Committee or the Board. Options are generally exercisable after one or more years and expire no later than ten years from the date of grant. The 1998 Plan also provides for reload options and restricted share awards to employee and consultant participants subject to various terms. Option activity under the 1998 Plan for the two years ended December 31, 1999 was as follows: Weighted Average Shares Exercise Price ------ -------------- Balance as of December 31, 1997 - - Granted 712,000 $2.694 Exercised - - Cancelled (101,000) $2.688 --------- Balance as of December 31, 1998 611,000 $2.695 Granted 1,641,500 $2.328 47 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS Exercised (117,750) $2.53 Cancelled (437,000) $2.507 Expired (7,500) $2.688 ---------- Balance as of December 31, 1999 1,690,250 $2.40 ========= Awards may be granted under the 1998 Plan with respect to a total of 2,500,000 shares of Common Stock. For all of its plans, the Company measures compensation expense for its employee stock-based compensation using the intrinsic value method and provides pro forma disclosures of net loss as if the fair value method had been applied in measuring compensation expense. Under the intrinsic value method of accounting for stock-based compensation, when the exercise price of options granted to employees is less than the fair value of the underlying stock on the date of grant, compensation expense is to be recognized over the applicable vesting period. The effect of applying SFAS 123's fair value method to the Company's stock based awards is not necessarily representative of the effects on reported net income for future years, due to, among other things, the vesting period of the stock options and the fair value of additional stock options in future years.
Year ended December 31, ----------------------- 1997 1998 1999 ----- ----- ----- Loss attributable to holders of common stock: As reported $10,827,939 $9,407,030 $9,952,189 Pro forma $11,142,262 $10,464,134 $10,895,072 Basic and diluted loss per share attributable to holders of common stock: As reported $0.84 $0.68 $0.59 Pro forma $0.87 $0.75 $0.64
The fair value of each option is estimated on the date of grant using a type of Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the years ended December 31, 1997, 1998 and 1999, respectively: dividend yield of 0% for all periods; expected volatility of 56%, 68% and 92%; risk-free interest rate of 6.0%, 5.3%, and 5.5%; and expected term of 4.0 years for all periods. The weighted-average fair value of the options granted under all of the Company's plans during the years ended December 31, 1997, 1998 and 1999 was $2.039, $1.10 and $1.60, respectively. The weighted average exercise price of the options outstanding under all of the Company's plans at December 31, 1997, 1998 and 1999 was $3.96, $3.06 and $2.68, respectively. As of December 31, 1999, the weighted average remaining contractual life of the options outstanding under all of the Company's plans is 8.9 years and the number of options exercisable is 403,457. 48 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS 7. COMMITMENTS AND CONTINGENCIES LEASES The Company is obligated under various operating and capital lease agreements, primarily for office space and equipment through 2003. Future minimum lease payments under these non-cancelable operating and capital leases as of December 31, 1999 are as follows: Operating Capital 2000 2001 $881,668 $100,739 2002 612,385 83,499 2003 576,590 50,059 2004 341,199 - - - -------- -------- Total minimum payments $2,411,842 $234,297 ========== ======== Interest (35,757) -------- Present value of capital lease obligations 198,540 Less: current portion (78,794) Capital lease obligations non-current $ 119,746 ========== Rent expense was $550,693, $701,133 and $919,550 for the years ended December 31, 1997, 1998 and 1999, respectively. At December 31, 1999, the Company's future minimum sublease rental income payments with respect to certain non-cancelable operating leases with terms in excess of one year are as follows: 2000 $ 206,081 2001 61,573 ---------- Total minimum payments $ 267,654 ========== CONTINGENCIES On January 27, 2000, a class action lawsuit alleging violations of the federal securities laws was filed in the U.S. District Court of Maryland on behalf of purchasers of the Company's common stock on November 30, 1999. The lawsuit seeks unspecified monetary damages. The Company believes the lawsuit is without merit and intends to defend against it vigorously. In the fourth quarter of 1999, the Company agreed to settlement terms with Network Associates, Inc. relating to disputed amounts owed between the two parties. The Company accrued the net settlement costs of $515,000 as of December 31, 1999 and recorded revenues of approximately $386,000 in the fourth quarter. 49 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS 8. EMPLOYEE 401(K) DEFERRED COMPENSATION PLAN The Company has a 401(K) plan (the "Plan") for all employees over the age of 21. Contributions are made through voluntary employee salary reductions, up to 15% of their annual compensation, and discretionary matching by the Company. Employer contributions vest based on the participant's number of years of continuos service. A participant is fully vested after six years of continuous service. There were no employer contributions for the years ended December 31, 1998 or 1999. 9. SUPPLEMENTAL CASH FLOW DISCLOSURE Selected cash payments and noncash activities were as follows:
Year ended December 31, ------------------------- 1997 1998 1999 ---- ------ ------ Cash paid for interest $ 13,130 $ - $728,221 Noncash investing and financing activities: Capital lease obligations incurred 302,147 - - Notes repaid from return and retirement of common stock 32,909 115,953 - Deemed dividend on preferred stock 600,000 102,755 - Issuance of stock options to consultants - - 93,764 Collection and forgiveness of subscriptions receivable - - 46,236 Conversion of Preferred Stock to Common Stock - 1,538,000
50 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS 10. NET LOSS PER SHARE The following table sets forth the computation of basic and diluted net loss per share:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1997 1998 1999 ----------- ------------ ------------ Numerator: Loss before extraordinary item $(10,215,339) $(9,193,396) $(9,307,892) Less: Dividend on preferred stock (12,600) (110,879) (272,245) Deemed dividend on preferred stock (600,000) (102,755) - ------------- ------------ -------------- Net loss before extraordinary item (10,827,939) (9,407,030) (9,580,137) Extraordinary item - early extinguishment of debt - - (372,052) ------------- ------------ -------------- Net loss attributable to holders of common stock $(10,827,939) $(9,407,030) $(9,952,189) ============= ============ ============== Denominator: Denominator for basic net loss per share - weighted average shares 12,868,859 13,898,450 16,938,205 Effect of dilutive securities: Preferred stock - - - Stock options - - - Warrants - - - ------------- ------------ -------------- Dilutive potential common shares - - - Denominator for diluted net loss per share - adjusted weighted average shares 12,868,859 13,898,450 16,938,205 ============= ============ ============== BASIC AND DILUTED LOSS PER SHARE Loss before extraordinary item $ (0.84) $ (0.68) $ (0.57) Extraordinary item - early - - (0.02) extinguishment of debt ------------- ------------ -------------- Net loss attributable to holders of common stock $ (0.84) $ (0.68) $ (0.59) ============= ============ ==============
51 V-ONE CORPORATION NOTES TO FINANCIAL STATEMENTS The following equity instruments were not included in the diluted net loss per share calculation because their effect would be anti-dilutive: YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 -------- -------- --------- Preferred stock: Series A 4,000 - - Series B - - 1,287,554 Series C - - 335,000 Stock options 2,203,258 2,557,378 2,515,833 Warrants 768,999 1,688,576 3,974,957 11. SUBSEQUENT EVENTS In March 2000, the Company issued 500,000 shares of Common Stock at a purchase price of $4.75 per share to an investor in exchange for $2,375,000. 52 V-ONE CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1997, 1998 and 1999
Additions Balance at Charge to Balance at Beginning of Cost and End of Description Period Expenses Deductions Period ALLOWANCE FOR DOUBTFUL ACCOUNTS December 31, 1997 $252,395 248,010 --- $500,405 December 31, 1998 500,405 24,233 --- 524,638 December 31, 1999 $524,638 (220,912) 169,482 $134,244 DEFERRED TAX ASSET VALUATION ALLOWANCE December 31, 1997 $3,492,784 3,938,959 --- $ 7,431,743 December 31, 1998 7,431,743 2,017,021 --- 9,448,764 December 31, 1999 $9,448,764 5,410,464 --- $14,859,228 ALLOWANCE FOR NON-SALABLE INVENTORY December 31, 1997 $50,000 162,700 --- $212,700 December 31, 1998 212,700 100,656 --- 313,356 December 31, 1999 $313,356 --- 225,662 $87,694
53 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On October 7, 1999, V-ONE Corporation filed a Form 8-K, "Changes in Registrant's Certifying Public Accountant" in which it noted that the Company dismissed the accounting firm of PricewaterhouseCoopers LLP ("PWC") and appointed the accounting firm of Ernst & Young LLP to succeed PWC as its certifying public accountant and to act as its auditors for the fiscal year ended December 31, 1999. The description of the change in auditors is qualified in its entirety by reference to the Company's Form 8-K dated October 7, 1999 and the exhibits filed therewith. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item concerning directors and executive officers is incorporated herein by reference to the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 11, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item concerning executive compensation is incorporated herein by reference to the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 11, 2000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item concerning security ownership of certain beneficial owners and management is incorporated herein by reference to the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 11, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item concerning certain relationships and related transactions is incorporated herein by reference to the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 11, 2000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K 54 (a) Financial Statement Schedule. See index to Financial Statements on page 29. All required financial statement schedules of the Company are set forth under Item 8 of this Annual Report on Form 10-K. 55 (b) Exhibits Number Description - - ------ ----------- 3.1 Amended and Restated Certificate of Incorporation as of July 2, 1996 (1) 3.2 Amended and Restated Bylaws dated as of February 2, 1998 (4) 3.3 Certificate of Amendment to Certificate of Designation, Preferences, and Rights of Series A Convertible Preferred Stock dated September 9, 1996 (1) 3.4 Certificate of Elimination of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock (2) 3.5 Certificate of Designations of Series A Convertible Preferred Stock (2) 3.6 Certificate of Elimination of Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock, dated March 4, 1999(9) 3.7 Certificate of Designations of Series B Convertible Preferred Stock, dated June 11, 1999 (10) 3.8 Certificate of Designations of Series C Preferred Stock, dated September 9, 1999 (11) 9.1 Voting Trust Agreement between Hai Hua Cheng and James F. Chen, Trustee (1) 9.2 Voting Trust Agreement between Robert Zupnik and James F. Chen, Trustee (1) 9.3 Voting Trust Agreement between Dennis Winson and James F. Chen, Trustee (1) 10.1 Employment Agreement between V-ONE Corporation ("V-ONE") and James F. Chen dated as of June 12, 1996 (1) 10.2 V-ONE 1995 Non-Statutory Stock Option Plan (1) 10.3 V-ONE 1996 Non-Statutory Stock Option Plan (1) 10.4 V-ONE 1996 Incentive Stock Plan (1) 10.5 Software License Agreement between Trusted Information Systems, Inc. ("TIS") and V-ONE executed October 6, 1994 (1) 10.6 First Amendment to the Software License Agreement between TIS and V-ONE (1) 10.7 Second Amendment to the Software License Agreement between TIS and V-ONE (1) 10.8 Third Amendment to the Software License Agreement between TIS and V-ONE (1) 10.9 Fourth Amendment to the Software License Agreement between TIS and V-ONE (1) 10.10 OEM Master License Agreement between RSA Data Security, Inc. ("RSA") and V-ONE dated December 30, 1994 and Amendment Number One to the OEM Master License Agreement between RSA and V-ONE (1) 10.11 Amendment Number Two to the OEM Master License Agreement between RSA and V-ONE and Conversion Agreement dated May 23, 1996 (1) 10.12 Promissory Note for Hai Hua Cheng with Allonge and Amendment dated June 12, 1996 (1) 10.13 Form of Exchange and Purchase Agreement dated April 1996 (1) 10.14 Registration Rights Agreement Between V-ONE and JMI Equity Fund II, L.P. ("JMI") (1) 10.15 8% Senior Subordinated Note due June 18, 2000 Issued by V-ONE to JMI (1) 10.16 Warrant to Purchase 100,000 shares of Common Stock Issued by V-ONE to JMI (1) 10.17 Warrant to Purchase 400,000 shares of Common Stock Issued by V-ONE to JMI (1) 10.18 Employment Agreement between V-ONE and Jieh-Shan Wang dated as of July 8, 1996 (1) 10.19 Subscription Agreement dated as of December 3, 1997 between V-ONE and Advantage Fund II Ltd. (2) 10.20 Registration Rights Agreement dated as of December 3, 1997 between V-ONE and Advantage Fund II Ltd. (2) 10.21 Commitment Letter dated December 8, 1997 between V-ONE and Advantage Fund II Ltd. (2) 10.22 Registration Rights Agreement dated as of December 8, 1997 between V-ONE and Wharton Capital Partners, Ltd. (2) 10.23 Warrant to Purchase 60,000 shares of Common Stock Issued on December 8, 1997 by V-ONE to Wharton Capital Partners, Ltd. (2) 56 Number Description - - ------ ----------- 10.24 Letter Agreement between V-ONE and Wharton Capital Partners, Ltd. dated October 22, 1997 (2) 10.25 V-ONE 1998 Incentive Stock Plan (4) 10.26 Warrants dated November 21, 1997 to Purchase 300,000 shares of Common Stock granted to David D. Dawson (4) 10.27 Employment Agreement dated November 21, 1997 between V-ONE and David D. Dawson (4) 10.28 Amendment to Employment Agreement dated November 7, 1997 between V-ONE and Charles B. Griffis (4) 10.29 Amendment to Section 2.08 of 1996 Incentive Stock Plan (4) 10.30 Lease Agreement dated March 24, 1997 between Bellemead Development Corporation and V-ONE (3) 10.31 Inconvertibility Notice dated September 21, 1998 (5) 10.32 Waiver Agreement, dated as of September 22, 1998, between the Company and Advantage Fund II Ltd. (5) 10.33 Amendment No. 1 dated as of September 22, 1998 to the Registration Rights Agreement between the Company and Advantage Fund II Ltd. (5) 10.34 Warrant to purchase 100,000 shares of Common Stock issued on September 22, 1998 by V-ONE to Advantage Fund II Ltd. (5) 10.35 Warrant to purchase 389,441 shares of Common Stock issued on September 22, 1998 by V-ONE to Advantage Fund II Ltd. (5) 10.36 Waiver Letter, dated November 5, 1998 between the Company and Advantage Fund II Ltd. (6) 10.37 Placement Agent Agreement, dated October 9, 1998, between the Company and LaSalle St. Securities, Inc. (6) 10.38 Amendment No. 1 to Placement Agent Agreement, dated November 9, 1998, between the Company and LaSalle St. Securities, Inc. (6) 10.39 Escrow Agreement, dated October 9, 1998, among the Company, LaSalle St. Securities, Inc. and LaSalle National Bank (6) 10.40 Amendment No. 1 to Escrow Agreement, dated November 9, 1998, among the Company, LaSalle St. Securities, Inc. and LaSalle National Bank (6) 10.41 Form of Subscription Documents (6) 10.42 Form of Addendum #1 to Subscription Documents (6) 10.43 Form of Addendum #2 to Subscription Documents (6) 10.44 Form of Warrant granted to A.L. Giannopoulos to purchase 10,000 shares of the Company's Common Stock (6) 10.45 Form of Warrant granted to William E. Odom to purchase 10,000 shares of the Company's Common Stock (6) 10.46 Amendment No. 1 to Placement Agent Agreement, dated November 16, 1998, between the Company and LaSalle St. Securities, Inc. (7) 10.47 Waiver Letter dated November 18, 1998 between the Company and LaSalle St. Securities, Inc. (7) 10.48 Form of Second Version of Subscription Documents (7) 10.49 Form of Addendum #1 to Second Version of Subscription Documents (7) 10.50 Form of Addendum #2 to Second Version of Subscription Documents (7) 10.51 Warrant dated November 20, 1998 to purchase 50,000 shares of Common Stock issued to LaSalle St. Securities, Inc. (7) 10.52 Employment Agreement dated November 6, 1998 between V-ONE and Charles B. Griffis (9) 10.53 Employment Agreement dated August 1, 1998 between V-ONE and Robert F. Kelly (9) 10.54 Loan and Security Agreement dated February 24, 1999 between V-ONE and Transamerica Business Credit Corporation ("Transamerica") (8) 57 Number Description - - ------ ----------- 10.55 Patent and Trademark Security Agreement dated February 24, 1999 between V-ONE and Transamerica (8) 10.56 Security Agreement in Copyrighted Works dated as of February 24, 1999 between V-ONE and Transamerica (8) 10.57 Amendment to Employment Agreement dated as of August 1, 1998 by and between the Company and Jieh-Shan Wang (9) 10.58 Amendment to Employment Agreement dated as of January 1, 1999 by and between the Company and James F. Chen (9) 10.59 Subscription Agreement for Series B Convertible Preferred Stock, dated June 11, 1999 (10) 10.60 Registration Rights Agreement, dated June 11, 1999 (10) 10.61 Non-Negotiable Promissory Note, dated June 11, 1999 (10) 10.62 Form of Series C Preferred Stock Purchase Agreement (11) 10.63 Employment Agreement dated July 1, 1999 by and between the Company and Margaret E. Grayson (12) 10.64 Employment Agreement dated July 1, 1999 by and between the Company and David D. Dawson 23.1 Consent of Ernst & Young LLP, independent auditors 23.2 Consent of PricewaterhouseCoopers LLP 27 Financial Data Schedule for the Year Ended December 31, 1999 - - ------------------------------ (1) The information required by this exhibit is incorporated herein by reference to V-ONE's Registration Statement on Form S-1 (No. 333-06535). (2) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 8-K dated December 8, 1997. (3) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 10-Q for the three months ended June 30, 1997. (4) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 10-K for the twelve months ended December 31, 1997. (5) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 8-K dated September 22, 1998. (6) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 10-Q for the nine months ended September 30, 1998. (7) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 8-K dated November 20, 1998. (8) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 8-K dated March 11, 1999. (9) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 10-K for the twelve months ended December 31, 1998. (10) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 8-K dated June 23, 1999. 58 (11) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 8-K dated September 15, 1999. (12) The information required by this exhibit is incorporated herein by reference to V-ONE's Form 10-Q for the three months ended June 30, 1999. (c) Reports on Form 8-K (i) Form 8-K dated October 7, 1999 reporting, under Item 4, the change in the Company's Certifying Accountant. 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. V-ONE Corporation Date: March 29, 2000 By: /s/ David D. Dawson ------------------------ David D. Dawson President and Chief Executive Officer Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. Signature Title Date /s/ David D. Dawson President, Chief Executive March 29, 2000 - - ------------------------- Officer and Director David D. Dawson /s/ Margaret E. Grayson Senior Vice President, Chief March 29, 2000 - - ------------------------ Financial Officer and Treasurer Margaret E. Grayson (Principal Financial Officer) /s/ John F. Nesline Controller (Principal March 29, 2000 - - ------------------------ Accounting Officer) John F. Nesline /s/ James F. Chen Director March 29, 2000 - - ------------------------- James F. Chen /s/ A. L. Giannopoulos Director March 29, 2000 - - ------------------------- A. L. Giannopoulos /s/ William E. Odom Director March 29, 2000 - - ------------------------- William E. Odom 60 EX-10.64 2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made and entered as of this 1ST day of JULY, 1999 ("Effective Date"), by and between V-ONE Corporation, a Delaware corporation with its principal executive offices at 20250 Century Blvd, Suite 300, Germantown, Maryland 20874 ("Company") , and DAVID D. DAWSON, an individual residing at 119A RECORD STREET FREDERICK, MD 21701 "Employee"); WHEREAS, the Company wishes to assure itself of the future services of Employee for the Company, and Employee is willing to serve in the employ of the Company upon the terms and conditions set forth in this agreement, on a full-time basis; and WHEREAS, the Company and Employee desire to set forth the amounts payable and benefits to be provided by the Company to Employee in the event of a termination of Employee's employment with the Company under the circumstances set forth herein, including after the happening of a Change in Control (as defined herein); and WHEREAS, the Company wishes to secure Executive's noninterference upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto, intending to be legally bound hereby, agree as follows: 1. EMPLOYMENT. The Company agrees to continue Employee in its employ, and Employee agrees to remain in the employ of the Company, for the period stated in Section 3 hereof and upon the other terms and conditions herein provided. 2. POSITION AND RESPONSIBILITIES. The Company employs Employee, and Employee agrees to serve, as PRESIDENT AND CHIEF EXECUTIVE OFFICER of the Company reporting to the Chief Executive officer, on the conditions hereinafter set forth. Employee agrees to perform such services consistent with her position as PRESIDENT AND CHIEF EXECUTIVE OFFICER as shall from time to time be assigned to her by the Company's Board of Directors ("Board") or by an executive designated by the Board. 3. TERM AND DUTIES. (a) TERM. The term of this employment agreement shall commence on NOVEMBER 21, 1997 and terminate on NOVEMBER 21, 1999, subject to automatic renewal for successive one-year terms unless either party shall have notified the other in writing not less than 90 days prior to the then current expiration date of this Agreement of such party's determination not to renew this Agreement. (b) The Company shall have the right, on written notice to you, (i) to terminate your employment immediately at any time for Just Cause, as defined in Paragraph 6e. (ii) to terminate your employment at any time on or after NOVEMBER 21, 1997, or to not renew the Agreement at any time, without cause provided the Company shall be obligated in either case to pay to you severance pay as specified in Paragraph 7. (c) DUTIES. During the period of her employment hereunder by the Company and except for illness, reasonable vacation periods having an aggregate duration of not less than that provided pursuant to the Company's practices in effect on the Effective Date, and reasonable leaves of absence, Employee shall devote her business time, attention, skill, and efforts as may be reasonably necessary to the faithful performance of her duties hereunder except as defined in Annex A to this agreement. (d) HEADQUARTERS LOCATION. The Company agrees to maintain Employee's offices within Montgomery County in the State of Maryland ("Base Employment Area"). 4. COMPENSATION, STOCK OPTIONS, REIMBURSEMENT OF EXPENSES, AND RELOCATION. (a) COMPENSATION. The Company shall pay to you for the services to be rendered hereunder a base salary at an annual rate of $200,000, subject to increase, in accordance with the policies of the Company from time to time, payable in installments in accordance with Company policy, but in no event less frequently than monthly. (i) The Compensation Committee of the Board of Directors will review the base salary from time to time, no less frequently than annually, and may in its sole discretion adjust the base salary upward but not downward, to reflect performance, appropriate industry guideline data and other factors. (ii) If certain performance goals reasonably established from time to time by the Company are met, you will be entitled to a cash performance bonus of 40% of base salary, with respect to each fiscal year. The amount of such bonus percentage may be increased but not decreased by the Company. Performance in excess of 100% of plan objectives will be rewarded at an incrementally higher percentage. Metrics will also be reasonably established to measure and compensate appropriately for performance below the plan goals. (b) STOCK OPTIONS. You shall also be entitled to all rights and benefits for which you shall be eligible under deferred bonus, pension, group insurance, profit-sharing or other Company benefits which may be in force from time to time and provided for the Company's executives generally. You have been granted warrants to purchase 300,000 shares and options to purchase 500,000 shares of V-ONE Corporation Common Stock. The purchase price per share is $3.125. The option vests over four years at a rate of one-fourth per year on each of November 21st 1998, 1999, 2000 and 2001. In the event that the Company should terminate you without cause, then the option for the year in which such termination occurs shall fully vest and shall be exercisable within 90 days. All unvested options will also immediately vest in full upon the declaration of an "Change in Control" as set forth in Paragraph 2.06 of the V-ONE 1996 Incentive Stock Plan. The options granted will be ISO's as defined by the Internal Revenue Code to the maximum extent possible. Options above that limit will issued as non-qualified stock options Unvested warrants/options will expire in the event your employment is terminated voluntarily by you, or in the event your employment is terminated by the Company for cause. (c) REIMBURSEMENT OF EXPENSES. The Company shall pay or reimburse Employee, in accordance with such polices and procedures as the Board may establish from time to time, for all reasonable travel and other expenses incurred by Employee in the performance of her obligations under this Agreement. The Company shall pay for your direct relocation expenses, including the reasonable and customary cost of moving your household goods and reasonable and customary closing costs for the sale of your present home and the purchase of a new home, such as real estate brokers' commissions, together with an additional amount of cash sufficient to pay any personal income taxes payable as a result of the Company's payment of your direct relocation expenses. In the interim, the Company will also provide you a furnished apartment, or suitable living quarters, in the general vicinity of the Company's corporate headquarters. The total amount of moving and living expenses associated with your relocation will be limited to $60,000. (d) MEMBER OF THE BOARD OF DIRECTORS. Subject to confirmation by the present Board of Directors, in accordance with the Charter and Bylaws of the Company, you will be elected as a director to fill a term expiring at the annual meeting of shareholders in the year 2000; provided, however that in the event your employment as CEO should terminate for any reason, you hereby irrevocably agree to resign as a director effective upon such termination. Subject to the provisions of the Company's charter and bylaws, one directorship (in addition to your own) shall be reserved for election of a person nominated by you and approved by a majority of the directors, and one other director agreed upon by you and James F. Chen will be formed to make recommendations for replacement of members of the Board of Directors during the first twelve months of your tenure. Notwithstanding the foregoing, however, it is understood and agreed that no action concerning the composition of the Board of Directors shall be taken except in strict conformity with the charter and bylaws of the Company. It is further understood that the charter presently provides a vote of at least 67% of the outstanding shares of the capital stock of the Company entitled to vote generally in the elections of directors cast at a meeting called for that purpose. 5. PARTICIPATION IN BENEFIT PLANS. The payments provided for in this Agreement, except where specifically provided otherwise, are in addition to any other benefits to which Employee may be, or may become, entitled under any of the Company's group hospitalization, health, dental, care, and/or sick-leave plans; life, other insurance and/or death benefit plans; travel and/or accident insurance plans; deferred compensation plans; capital accumulation programs; restricted income and/or stock purchase plans; stock option plans; retirement income and/or pension plans; supplemental pension plans; excess benefit plans; short- and long-term disability programs; and other present and future group employee benefit plans and programs for which Company executives are or shall become eligible. Employee shall be eligible to receive, during the period of her employment under this Agreement and during any subsequent period for which he shall be entitled to receive payments from the Company under Section 6, all of the foregoing benefits and emoluments for which employees are eligible under every such plan and program to the extent permissible under the general terms and provisions of such plans and programs and in accordance with the provisions thereof. Nothing contained in this Agreement shall prevent the Board from amending or otherwise altering any such plan, program, or arrangement as long as such amendment or alteration equitably affects all the Company's employees of the level of vice president or above. 6. TERMINATION OF EMPLOYMENT. Subject to the payments contemplated by Section 7 Employee's employment under this Agreement may be terminated by the Company or Employee as follows: (a) DISABILITY. (i) If Employee fails to perform her duties under this Agreement on account of Disability (as hereinafter defined), the Company may give notice to Employee to terminate this Agreement on a date not less than thirty (30) days thereafter ("Notice Period") and, if Employee has not resumed full performance of her duties under this Agreement within such Notice Period, then Employee's employment under this Agreement will terminate on the date provided in the notice ("Disability Termination Date"). (ii) As used in this Agreement, the term "Disability" shall mean the complete inability of Employee to perform her duties under this Agreement by reason of her total and permanent disability, as determined by an independent physician selected with the approval of the Board and Employee. The determination of total and permanent disability will not be made until after all leave of absence time specified in the Federal Family and Medical Leave Act ("FMLA") has been exhausted. (b) DEATH. If Employee dies while employed under this Agreement, her employment under this Agreement will terminate as of the date of her death ("Date of Death"). Within thirty (30) days after the Date of Death, the Company shall pay amounts due under this Agreement to the Employee's legal representative. (c) TERMINATION BY EMPLOYEE OR COMPANY. In the event that (i) the Company terminates Employee's employment for any reason other than for "just cause", "material breach" (as hereinafter defined); or (ii) Employee terminates her employment with the Company because of the Company's material breach of this Agreement, or (iii) Employee's Base Salary, as in effect on the Effective Date or as the same may be increased from time to time, is reduced, or there is a reduction in Employee's authority, perquisites, position, title or responsibilities; or (iv) The Company's principal executive offices are relocated to a location outside the Base Employment Area or the Company requires Employee to be based anywhere other than the Company's principal executive offices or such other location that is mutually agreed upon between Company and Employee (except for required travel on the Company's business); or (v) The Company undergoes a Change in Control, then: The Company will pay severance compensation as defined in Paragraph 7 and all options granted to employee and not yet vested, will vest immediately upon termination. No termination of employment pursuant to this Section 6(c) shall operate to prohibit Employee from negotiating and entering into a new employment contract with the Company or such entity as survives the Change in Control. (d) RETIREMENT. Employee shall be entitled to terminate her employment with the Company on, or at any date after, a date on which he is at least sixty-five (65) years old. Any date on which Employee elects to retire shall be referred to as the "Retirement Termination Date." The Company shall pay to Employee her Base Salary and Bonus Salary as then in effect that has accrued to the last day of the month in which the Retirement Termination Date occurs. A11 vested stock options will be exercisable for their originally defined time period, typically 10 years from date of issue, after retirement. (e) TERMINATION BY THE COMPANY FOR JUST CAUSE. (i) The Company may terminate Employee's employment for "just cause" at any time by giving written notice thereof to Employee. (Except as provided below, the date of such notice is the "Just Cause Termination Date" unless otherwise provided in the notice). Within thirty (30) days after the Just Cause Termination Date, the Company shall pay to Employee her Base Salary as then in effect that has accrued to the Just Cause Termination Date. For the purposes of this subparagraph, "just cause" shall mean any of the following: (I) Employee's conviction of any crime or criminal offense involving the unlawful theft or conversion of substantial monies or other property or any other felony (other than a criminal offense arising solely under a statutory provision imposing criminal liability on the Employee on a PER SE basis due to the offices held by the Employee); or (ii) Employee's conviction of fraud or embezzlement. (ii) Notwithstanding the foregoing, Employee shall not be deemed to have been terminated for just cause pursuant to this Section 6(e) unless and until he shall have received a copy of a resolution duly adopted by the affirmative vote of a majority of the Board, at a meeting held for that purpose, declaring that in the good faith opinion of the Board one or more of the conditions set forth in clause (i) of this Section 6(e) has occurred and specifying the particulars thereof, or (f) MATERIAL BREACH. shall mean any of the following: (i) Employee's breach of any of her fiduciary duties to the Company or its stockholders or making of a willful misrepresentation or omission which breach, misrepresentation or omission would reasonably by expected to materially adversely affect the business, properties, assets, condition (financial or other) or prospects of the Company; (ii) Employee's willful, continual and material neglect or failure to discharge her duties, responsibilities or obligations prescribed by Sections 1, 2 and 3 (other than arising solely due to physical or mental disability); (iii) Employee's habitual drunkenness or substance abuse which materially interferes with Sections 1, 2 and 3; (iv) Employee's willful, continual and material breach of any non-competition or confidentiality agreement with the Company, including without limitation, those set forth in Sections 10 and 11 of the Agreement; and (v) Employee's gross neglect of her duties and responsibilities, as determined by the Company's Board of Directors; in each case, after the Company or the Board of Directors; has provided Employee with 30 days' written notice of such circumstances and the possibility of a Material Breach, and Employee fails to cure such circumstances and Material Breach with those 30 days. (g) RESIGNATION BY EMPLOYEE. Employee can resign at any time, giving 60 days notice, terminating her employment under this Agreement ("Effective Resignation Date" ). All Base Salary and Bonus Salary earned through the Effective Resignation Date including notice period, will be paid to Employee. All vested stock options will be exercisable for a period of 90 days following the effective resignation date. 7. SEVERANCE. If Severance Compensation is triggered under conditions specified in Paragraph 6, the compensation will include the following. (a) the Company shall pay Employee (or her estate or representative) within ten (10) days following the date her employment with the company is so terminated ("Employee Termination Date") as severance pay a lump sum payment equal to the sum of (A) the aggregate amount of the future Base Salary payments Employee would have received if he continued in the employ of the Company until twelve (12) months following the Employee Termination Date and (B) Employee's projected bonus for the twelve months in which the Employee Termination Date occurs, which shall be computed assuming that Employee had remained in the Company's employ for the next twelve months and that all performance goals or other performance measures have been met at the then current level for the time period. The payment required by clause (A) shall be calculated at the highest rate of Base Salary paid to Employee at any time under this Agreement with such payments discounted to present value at a discount rate equal to one percent (1%) above the per annum one-year Treasury Bill rate, as published in the Eastern Edition of the Wall Street Journal, on the Employee Termination Date (or the next preceding date on which such rate is published), applied to each such future payment from the time it would have become payable to the date Employee receives payment. (b) All vested stock options as specified in Paragraph 4b, including the options that would vest as part of the termination, would be exercisable within 90 days of such termination, or, if allowable under the Company's stock option plan, Employee may elect to exchange incentive stock options to non-qualified stock options and extend the allowable period to exercise such non-qualified stock options to five years. 8. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control" shall mean the occurrence, after the Effective Date, of any of the following events, directly or indirectly or in one or more series of transactions: (i) A consolidation or merger of the Company with any third party (which includes a single person or entity or a group of persons or entities acting in concert) not wholly owned directly or indirectly by the Company (a "Third Party"), unless the Company is the entity surviving such merger or consolidation; (ii) A transfer of all or substantially all of the assets of the Company to a Third Party or a complete liquidation or dissolution of the Company; (iii) A Third Party, directly or indirectly, through one or more subsidiaries or transactions or acting in concert with one or more persons or entities; (A) acquires beneficial ownership of more than 50% of the classes of stock of the Company entitled to vote generally in the election of directors of the Company ("Voting Stock"); (B) acquires irrevocable proxies representing more than 50% of the Voting Stock; (C) acquires any combination of beneficial ownership of Voting Stock and irrevocable proxies representing more than 50% of the Voting Stock; (D) acquires the ability to directly or indirectly exercise a controlling influence over the management or policies of the Company; (iv) A determination is made by the Securities and Exchange Commission ("SEC") or any similar agency having regulatory control over the Company that a change in control, as defined in the securities laws or regulations then applicable to the Company, has occurred. Notwithstanding any provision contained herein, a Change in Control shall not include any of the above described events if they are the result of a Third Party's inadvertently acquiring beneficial ownership or irrevocable proxies or a combination of both for 50% or more the Voting Stock, and the Third Party as promptly as practicable thereafter divests itself of beneficial ownership or irrevocable proxies for a sufficient number of shares so that the Third Party no longer has beneficial ownership or irrevocable proxies or a combination of both for 50% or more of the Voting Stock. 9. EXCISE TAX. (a) EXCESS PARACHUTE PAYMENT. Notwithstanding anything to the contrary in this Agreement, if tax counsel selected by the Company and acceptable to Employee determines that any portion of any payment by the Company to Employee under this Agreement or otherwise would constitute an "excess parachute payment," then the payments to be made to Employee by the Company shall be reduced such that the value of the aggregate payments that Employee is entitled to receive under this Agreement and any other agreement, plan or program of the Company shall be one dollar ($1.00) less than the maximum amount of payments that Employee may receive without becoming subject to the tax imposed by Section 4999 of the Code; PROVIDED, HOWEVER, that the foregoing limitation shall not apply in the event that such tax counsel determines that the benefits to Employee on an after-tax basis (i.e., after federal, state, and local income and excise taxes) if such limitation is not applied would exceed the after-tax benefits to Employee if such limitation is applied. (b) THE COMPANY NOT RESPONSIBLE FOR EXCISE TAX. If the Internal Revenue Service assesses an excise tax against Employee pursuant to Sections 280G and 4999 of the Code, the Company shall be under no obligation to Employee with respect to the amount of (i) the excise tax or (ii) any additional federal income tax due from and payable by Employee as the result of her receipt of any payment hereunder or otherwise. 10. COVENANT NOT TO COMPETE. Employee covenants and agrees that, in consideration of the amounts to be paid Employee hereunder and other good and valuable consideration, for a period of six (6) months beyond the Effective Resignation Date, Retirement Termination Date or the Just Cause Termination Date (each a "Termination Date"), Employee shall not be employed as an executive officer of, control, manage, or otherwise participate in the management of the business of a "significant competitor" of the Company. The term "significant competitor" shall mean any Company or division of a Company that, on the date of its employment of Employee, derives more than 50% of its gross revenues from network security products and/or services, or a Company that owns or controls a majority of the voting securities of any such Company. The Company and Employee agree that the terms and conditions of this Section 9 shall survive the termination of this Agreement following the Termination Date. 11. CONFIDENTIAL INFORMATION. (a) Employee shall not, directly or indirectly, during the term of her employment hereunder and at any time after a termination of her employment for any reason, to the detriment of the Company, knowingly divulge, disclose, disseminate, publish, reveal or otherwise communicate to any unauthorized person any Confidential Information relating to the Company, the Company's subsidiaries or affiliates, or to any of the businesses operated by any of them. (b) Employee confirms that Confidential Information constitutes the exclusive property of the Company and the Company's subsidiaries and affiliates. Upon a termination of her employment hereunder, Employee will promptly return to the Company all Materials (whether prepared by Employee or others) containing, constituting, embodying or illustrating Confidential Information, and all other property of the Company or of the Company's subsidiaries and affiliates then in her possession or custody. (c) As used in this Section 10 the following terms shall have the following meanings: (i) the term "Confidential Information" means information disclosed to Employee or known to Employee as a consequence of or through her employment by the Company and not generally known in the Company's industry. Such information includes, but is not limited to, information relating to the Company's products, research, development, accounting, finances, marketing, merchandising and selling, and specifically includes future business plans, client lists, lists of current and prospective employees and consultants, potential acquisition candidates, and training and operating methods and techniques. The term "Confidential Information" does not include information that (A) at the time it was received by Employee was generally available to the public; (B) prior to its use by Employee, becomes generally available to the public through no act or failure of Employee; or (C) is received by Employee from a person who is not a party to this Agreement and who is not under an obligation of confidence with respect to such information. (ii) "Materials" includes, but is not limited to, books, notebooks, documents, records, photographs, films, video tapes, audio tape recordings, computer disks, diskettes or other electronic or optical storage media, software and support materials, and similar or other materials. (d) Employee shall not otherwise knowingly act or conduct himself (i) to the material detriment of the Company or the Company's subsidiaries or affiliates, or (ii) in a manner that is inimical or contrary to the interests thereof. (e) The Company and Employee agree that the provisions of this Section 10 shall survive the termination of this Agreement for any reason whatsoever. 12. GENERAL PROVISIONS. (a) ENTIRE AGREEMENT. This Agreement, together with the employment agreement existing between the parties immediately prior to the Effective Date, if any, (as amended herein), contains the entire understanding between the parties hereto with respect to the employment of Employee. (b) CONSOLIDATION, MERGER, OR SALE OF ASSETS. Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation or corporations; PROVIDED, HOWEVER, that such consolidation, merger or transfer shall not affect Employee's rights under Section 6(c) hereof. Upon such a consolidation, merger, or transfer of assets and assumption, the term "the Company", as used herein, shall mean such other corporation or corporations, and this Agreement shall continue in full force and effect and such other corporation or corporations shall be liable for all payments to Employee under the Agreement. (c) NO DUTY TO MITIGATE. Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any amounts received from other employment or otherwise by Employee offset in any manner the obligations of the Company hereunder. (d) NONASSIGNABILITY. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof is assignable by Employee, her beneficiaries, or legal representatives without the Company's prior written consent; PROVIDED, HOWEVER, that nothing in this Section 12 (d) shall preclude (i) Employee from designating a beneficiary to receive any benefit payable hereunder upon her death or disability, or (ii) the executors, administrators, or other legal representatives of Employee or her estate from assigning any rights hereunder to the person or persons entitled thereto. (e) NO ATTACHMENT. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or the execution, attachment, levy, or similar process or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. (f) NOTICES. All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or sent by certified mail, return receipt requested, first-class postage prepaid, to the parties to this Agreement at the following addresses: (i) if to the Company at: V-ONE CORPORATION 20250 Century Boulevard Suite 300 Germantown, Maryland 20874 and (ii) if to Employee at the address set forth at the end of this Agreement or to such other address as either party to this Agreement shall have last designated by notice to the other party. All such notices and communications shall be deemed to have been received on the earlier of the date of receipt or the third business day after the date of mailing thereof. (h) BINDING EFFECT; BENEFITS. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any person, other than the parties to this Agreement or their respective successors or permitted assigns, any legal or equitable right, remedy, or claim under or in respect of any agreement or any provision contained herein. (i) DISPUTE RESOLUTION. Subject to (iv) below, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the then existing Commercial Arbitration Rules of the American Arbitration Association ("AAA"). A request for arbitration shall be filed in the AAA office closest to the Company and the arbitration shall be conducted in Montgomery County, Maryland. (ii) The parties irrevocably consent to the jurisdiction of the Federal and state courts located in the State of Maryland for any purpose relating to this agreement. (iii) The arbitrator(s) may, in the course of the proceedings, order any provisional remedy or conservatory measure (including, without limitation, attachment, preliminary injunction, or the deposit of specified security) that the arbitrator(s) consider to be necessary, just, and equitable. The failure of a party to comply with such an interim order may, after due notice and opportunity to cure such noncompliance, be treated by the arbitrator(s) as a default, and some or all of the claims or defenses of the defaulting party may be stricken and partial or final award entered against such party, or the arbitrator(s) may impose such lesser sanctions as may be deemed appropriate. A request for interim or provisional relief by a party to a court shall not be deemed incompatible with the agreement to arbitrate or a waiver of that agreement. (iv) The parties acknowledge that any remedy at law for breach of this Agreement may be inadequate, and that, in the event of a breach of Sections 9 and 10 by Employee, any remedy at law would be inadequate in that any such breach would cause irreparable competitive harm to the Company. Consequently, in addition to any other relief that may be available, either party may seek temporary and permanent injunctive relief, including, without limitation, specific performance, without the necessity of the prevailing party proving actual damages and without regard to the adequacy of any remedy at law. (v) In the event Employee is the prevailing party in any arbitration or court proceeding, then Employee shall be entitled to reimbursement by the Company for all reasonable legal and other professional fees and expenses incurred by Employee in such proceeding or in enforcing any award, including reasonable attorneys' fees. (j) AMENDMENT. This Agreement may be terminated, amended, modified, or supplemented only by a written instrument executed by Employee and the Company. (k) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the law of the State of Maryland, regardless of the law that might be applied under principles of conflict of laws; PROVIDED, HOWEVER, that any arbitration under Section 11(i) hereof shall be conducted in accordance with the United States Arbitration Act as then in force. (1) SECTION AND OTHER HEADINGS. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. (m) WITHHOLDING OF TAXES. The Company may withhold from amounts required to be paid to Employee hereunder any applicable federal, state, local, and other taxes with respect thereto; PROVIDED, HOWEVER, that the Company shall promptly pay over the amounts so withheld to the appropriate taxing bodies and provide to executive appropriate statements on forms proscribed for such purposes on the amounts so withheld. (n) SEVERABILITY. If, for any reason, any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held so invalid, and each such other provision shall, to the full extent consistent with law, continue in full force and effect. If any provision of this Agreement shall be held invalid in part, such invalidity shall in no way affect the rest of such provisions not held so invalid, and the rest of such provision, together with all other provisions of this Agreement, shall to the full extent consistent with law continue in full force and effect. (o) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and its seal to be affixed hereunto by its officers thereunto duly authorized, and Employee has signed this Agreement, all as of the Effective Date. ATTEST: V-ONE CORPORATION By /s/ Margaret E. Grayson -------------------------- (Corporate Seal) WITNESS: Employee: David D. Dawson /s/ Lisa M. Albrecht /s/ David D. Dawson - - ------------------------ ----------------------------- ANNEX A Except as stated herein or with the prior written consent of the Company's Board of Directors, you will not during the term of this Agreement undertake or engage in any other employment, occupation or business enterprise other than ones in which you are a passive investor. Except as permitted by Section 5.3, you will not acquire, assume or participate in, directly or indirectly, any position, investment or interest adverse or antagonistic to the Company, its business or prospects, financial or otherwise, or take any action toward or looking toward any of the foregoing. During the term of your employment by the Company except on behalf of the Company or its subsidiaries, you will not directly or indirectly, whether as an officer, director, stockholder, partner, proprietor, associate, representative, consultant, or otherwise become or be interested in any other person, Corporation, firm, partnership or other entity whatsoever which manufactures, markets, sells, distributes or provides consulting services concerning products or services which copete with those of the Company or any of its subsidiaries. However, nothing in this Section shall preclude you from holding less than ten percent of the outstanding capital sotkc of any corporation required to file periodic reports with the Securities and Exchange Commission under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the securities of which are listed on any Securities exchange, quoted on the National Association of Securities Dealers Automated Quotation System or traded in the over-the counter market. During the term of your employment with the Company you will also not directly or indirectly intentionally solicit, endeavor to entice away from the Company, or any of its subsidiaries, or otherwise interfere with the relationship of the Company, or any of its subsidiaries (including but not limited to, any person who is employed by or otherwise engaged to perform services for the independent sales representatives or organizations), or any person or entity who is, or was within the ten most recent 12-month period, a customer or client of the Company, or any of its subsidiaries, whether for your own account or for the account of any other person, corporation, firm, partnership or other entity whatsoever. You represent and warrant that your employment by the Company will not conflict with and will not be constrained by any prior employment or consulting agreement or relationship, you represent and warrant that you do not possess confidential information arising out of prior employment which, in your best judgment, could be utilized in connection with your employment by the Company in the absence of the following paragraph. If, in spite of the second sentence of the previous paragraph, you should find that confidential information belonging to any former employer might be usable in connection with the Company's business, you will not intentionally disclose to the Company or use on behalf of the Company any confidential information belonging to any other former employers; but during your employment by the Company you will use in the performance of your duties all information which is generally known and used by persons with training and experience comparable to your own and all information which is common knowledge in the industry or otherwise legally in the public domain. EX-23.1 3 Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in the Registration Statements on Form S-3 (Registration Nos. 333-69047, 333-67625 and 333-43795) of V-One Corporation and on Form S-8 (Registration Nos. 333-61909, 333-52909 and 333-17749) of our report dated February 18, 2000 (except Note 11, as to which the date is March 24, 2000), with respect to the financial statements and schedule of V-ONE Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP McLean, VA March 28, 2000 61 EX-23.2 4 Consent of Independent Accountants We consent to the incorporation by reference in the registration statements of V-ONE Corporation on Form S-3 (Registration Nos. 333-69047, 333-67625 and 333-43795) and on Form S-8 (Registration Nos. 333-61909, 333-52909 and 333-17749) of our report dated March 11, 1999, except as to the third and fourth sentences of the first paragraph of Note 3 to which the date is March 31, 1999, on our audits of the financial statements of V-ONE Corporation as of December 31, 1997 and 1998 and for the three years in the period ended December 31, 1998, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP McLean, VA March 30, 2000 62 EX-27 5 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 7,136,943 0 854,853 134,000 46,087 8,287,222 1,531,043 945,335 9,775,436 1,657,376 0 0 1,623 18,233 7,821,747 9,775,436 4,965,680 4,965,680 1,111,147 12,650,823 0 0 (676,443) (9,307,892) 0 (9,307,892) 0 (372,052) 0 (9,952,189) (.59) (.59)
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