UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
For Fiscal Year Ended: December 31, 1996 Commission File No.0-21511
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V-ONE CORPORATION
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(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.)
1803 Research Blvd., Suite 305, Rockville, Maryland 20850
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(Address of principal executive offices) (Zip Code)
(301) 838-8900
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.001 par value per share
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(Title of class)
Traded on the Nasdaq National 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 Common Stock held by non-affiliates
of the registrant on February 28, 1997, based upon the closing sale price of the
Common Stock on the Nasdaq National Market on that date as reported in The Wall
Street Journal was approximately $85,486,880. This calculation does not reflect
a determination that persons are affiliates for any other purposes.
Registrant had 12,664,723 shares of Common Stock outstanding as of February 28,
1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III -- Portions of the registrant's definitive proxy statement to be issued
in conjunction with registrant's 1997 annual stockholder's meeting to be held on
May 15, 1997.
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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. Readers are also referred to the documents filed by V-ONE Corporation
with the Securities and Exchange Commission, specifically the Company's
registration statement as filed on Form S-1 and the last report on Form 10-Q,
which identify important risk factors for the Company.
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 private
enterprise networks and public 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, 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 future network security standards. In
addition, the Company's products enable organizations to deploy and scale their
solutions from small single-site networks to large multi-site environments.
The Company offered 3,000,000 shares of its Common Stock, par value $0.001
("Common Stock"), in an initial public offering (the "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.
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 1803 Research Boulevard,
Suite 305, Rockville, Maryland 20850. The Company's telephone number is (301)
838-8900.
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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, ISDN services and frame relay technology, the volume of data transferred
over networks has increased dramatically.
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 and consumers
to engage in electronic commerce, such as home banking, credit verification,
securities trading and home shopping.
Organizations are increasingly using public networks, such as the Internet, as
an extension of their enterprise networks. Public networks offer a
cost-effective means of connecting branch offices and remote and mobile users to
mission critical applications and 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. In addition, businesses are
deploying intranets, internal networks using TCP/IP protocols, to facilitate
geographically dispersed communications and the transmission of information
throughout an enterprise in a cost-effective manner.
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.
Information becomes more vulnerable as organizations rely heavily on computer
networks for the electronic transmission of data. 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.
NETWORK SECURITY ELEMENTS. Each of the following elements is critical in
creating a complete network security solution to protect an organization's data,
network and computer systems:
- - - Identification and Authentication -- Verifying the user's identity to prevent
unauthorized access to computer and network resources.
- - - Integrity -- Ensuring that network data, whether in storage or transmission,
has not been changed or compromised by any unauthorized manipulation.
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- - - 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.
- - - Authorization -- Controlling which systems, data and applications a user can
access.
- - - Encryption -- Preventing unauthorized users from viewing private data through
the process of "scrambling" data before it is transmitted or placed into
electronic storage.
NETWORK SECURITY PRODUCTS. Over the years, a number of network security products
have been developed, including passwords, token-based access devices, firewalls,
encryption products, smart cards and digital certificates. Each of these
products was designed with a specific function or objective; however, few 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:
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 "sniffing" (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 provides a higher level of authentication in that two
independent components are 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.
Firewalls -- Firewalls are network access control devices that regulate the
passage of information based on a set of user-defined rules. Generally,
firewalls are based upon one of two technical architectures: packet filters
(customarily used in routers) or proxy-based application-level gateways. Packet
filters screen network traffic and allow or prevent network access based upon
source and destination Internet protocol addresses. Proxy-based
application-level gateways provide access to applications on the network only
after the user has identified the desired application and submitted a valid
password.
Encryption -- Encryption products provide privacy for transmitted data.
Encryption algorithms scramble data so that only 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.
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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.
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 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 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 application-level firewall that incorporates
SmartGATE's functionality. The Company provides customers with two-factor
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identification, mutual authentication, fine-grained access control and
encryption by combining SmartCAT, V-ONE's smart card technology, with the
SmartGATE server. In addition, SmartGATE users can access enterprise networks
from remote locations using SmartCAT.
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 convenient to the end user. The
Company's strategy to realize its goal contains the following elements:
- - - Provide an Interoperable, Scaleable 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 scaleable, application-independent and
designed both to integrate with existing technologies as well as to support
emerging standards and applications.
- - - Augment and Integrate with Existing Security Products. The Company will
continue to offer products that interoperate with a wide variety of third-party
security products, including 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.
- - - Leverage Key Reference Accounts in Selected Vertical Markets. The Company has
identified strategic vertical markets that require sophisticated network
security solutions. The Company 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 to expand its customer base
in additional vertical markets.
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- - - Develop and Leverage Strategic Alliances. The Company has established
strategic alliances to increase the distribution and market acceptance of its
network security products including an alliance with MCI. The Company intends to
continue to strengthen its existing strategic alliances while forging new
relationships with key industry participants. 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 AND SERVICES
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 current products:
<TABLE>
<CAPTION>
DATE OF
PRODUCT CATEGORY DESCRIPTION INTRODUCTION
<S> <C> <C> <C>
DMSGATE(TM) X.400 Mail Guard A multi-platform security gateway Q4 1996
meeting the National Security Agency's DMS
Firewall Plus requirements
SmartGATE(TM) Client/server End-to-end, application level network data Q4 1995
security security system providing two-factor
identification, mutual authentication,
encryption and access control
SmartWall(R) Network perimeter An application level, dual-homed firewall Q4 1994
security (firewall) that protects internal networks while
enabling remote access to internal
resources
SmartCAT(R) Smart card Smart card client software that is Q2 1994
technology interoperable with third-party smart cards
and smart card readers
Online Client/server token A system that allows remote creation and Q2 1996
Registration distribution management of secure tokens and
Service(TM) workstation configuration files
Wallet Electronic commerce Electronic technology that enables secure Q3 1995
Technology(TM) payment transactions containing credit
card information
</TABLE>
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DMSGATE -- DMSGATE is a platform independent security gateway for flexible
deployment of defense messaging system (DMS) security services. DMSGATE meets
the National Security Agency's DMS Firewall Plus requirements and is available
as a software module hosted on leading vendor firewalls.
SmartGATE -- 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 identification (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.
SmartGATE establishes a secured, encrypted link over an unsecured network once
both parties to a communication over the unsecured network have been identified
and authenticated. The authorized user is then granted access to only 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. SmartGATE also supports the data encryption standard ("DES") (which, in
most forms, cannot be exported from the United States without the approval of
the Department of Commerce) and the RC4 encryption algorithm of RSA Data
Security, Inc. ("RSA") (which is exportable).
SmartGATE server software versions are available on a variety of leading
operating systems, including Berkeley Software Development, Inc.'s BSD/OS, Sun
Microsystems, Inc.'s SunOS and Solaris, and Hewlett-Packard Company's HP-UX.
SmartGATE client supports Microsoft Corporation's Windows versions 3.0 and 3.1,
Windows 95 and Windows NT. A turnkey version of SmartGATE server is available
for BSD/OS on an Intel Pentium hardware platform.
SmartWall -- 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 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 fully integrated into every SmartWall. The
SmartWall firewall incorporates Trusted Information Systems, Inc.'s Gauntlet(R)
kernel.
SmartWall software-only versions are currently available on a variety of leading
operating systems, including BSD/OS, SunOS, Solaris and HP-UX. A SmartWall
turnkey system is currently available for BSD/OS.
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SmartCAT -- The SmartCAT product, when used with the SmartGATE server, provides
two-factor identification and mutual authentication using physical smart card
technology. There are three key parts to the SmartCAT product: (i) a standard
smart card (ISO/IEC 7816-3, T=0 compliant), (ii) a smart card reader designed by
the Company, and (iii) the Company's proprietary SmartGATE client software.
Together these elements provide smart card-based encryption and authentication
services.
Online Registration Service -- A user must be registered to access an
authentication-based system. The Online Registration Service product is a system
for efficient on-line enrollment of large user communities. The Online
Registration Service completely automates the creation and exchange of the
user's keys and initializes the user's default access privileges. The Online
Registration Service either creates a virtual smart card or formats a physical
smart card that contains a shared secret key that is PIN code protected. Online
registration service is now incorporated in SmartGATE version 2.2.
Wallet Technology -- Wallet Technology enables secured electronic credit card
payment transactions over unsecured networks. Wallet Technology encrypts the
credit card information supplied by the purchaser and forwards that information
to the vendor. The vendor adds the purchase value to the encrypted credit card
information and sends all of this information to the credit card
issuer/processor. The issuer/processor decodes this information and either
authorizes or rejects the purchaser's request. The Company's design does not
allow the vendor to view the unencrypted credit card information supplied by the
purchaser.
Network Security Consulting -- The Company's consulting staff provides pre-and
post-sales support, vulnerability analysis, performance analysis, systems
integration and system security architecture support. The Company's consulting
staff also provides fee-based engineering services. The Company believes that
maintaining a staff of nationally recognized consultants greatly enhances its
position as an innovative supplier of network security products.
TECHNOLOGY
The cornerstone of the Company's network security solution is its patented
SmartGATE client/server security product. SmartGATE enables two-factor
identification, mutual authentication and fine-grained access control for most
TCP/IP-based client/server applications. Using SmartGATE technology,
organizations can employ two-factor identification 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.
Two-Factor Identification -- Two-factor identification employs two independent
components to identify a user using an identity token contained in a physical or
virtual smart card. The information in the physical or virtual smart card is
secured by a PIN code that is set by the user and is not known by anyone else.
SmartCAT provides the means for accessing and using smart cards via smart card
readers. SmartGATE client provides the means for using virtual smart cards. Both
physical and virtual smart cards store information about the user including the
user's keys, which are used for authentication. The keys also contain
information that allow the SmartGATE client to authenticate the SmartGATE server
with which it communicates.
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Mutual Authentication -- Mutual authentication employs a dual set of challenges
and encrypted responses that interact to enable both the client and the server
to determine that the other party to the transaction is authorized to
participate in the transaction. SmartGATE's mutual authentication employs dual
challenges coupled with encrypted responses to ensure non-repudiation between
the two parties to an electronic transaction. When a client application attempts
to make a connection with an application service protected by a SmartGATE
server, the SmartGATE client performs a mutual authentication process with the
SmartGATE server protecting the application service. During the authentication
process, the SmartGATE server sends a challenge to the SmartGATE client, and the
SmartGATE client uses the secret keys on the physical or virtual smart card to
correctly respond to the challenge. In addition, the SmartGATE client sends a
challenge to the SmartGATE server, and the SmartGATE server must prove to the
SmartGATE client that the server is the issuer of the client's secret key.
Fine-Grained Access Control -- Fine-grained access control employs access
control lists to compare an identified user's request for services against a
list of entitlements to determine whether to grant the user access to the
requested service. SmartGATE employs an access control list to define the
specific Web content page, file or host application that identified users are
permitted to use. If SmartGATE determines that the user is permitted to access
the requested service, the connection is passed through the SmartGATE server to
the requested service; otherwise the connection is dropped.
In addition to providing identification, authentication and access control, the
SmartGATE client and server independently compute a session key for encrypting
the current TCP/IP data stream. The encryption key is computed based on
information exchanged during the authentication process and is never transmitted
over the network.
SALES AND MARKETING
The Company markets its network security products through its direct sales force
and, to a lesser extent, through systems integrators, value-added resellers
("VARs") and international distributors. The Company is currently seeking to
expand its sales and marketing staff and intends to devote additional resources
to marketing and business development activities in order to expand its
third-party distribution channels.
Direct Marketing Effort -- The Company has concentrated its initial marketing
and direct sales efforts on key industry participants within certain industry
and market segments, including financial services, telecommunications and
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information services companies and government agencies. The Company employs a
direct sales force to market its products to these key industry participants.
The Company's direct sales force solicits prospective customers and provides
technical advice and support with respect to the Company's products. The Company
anticipates hiring additional direct sales representatives and opening regional
sales offices in select cities. In July 1996, the Company opened regional sales
offices in New York, New York and San Francisco, California.
Indirect Marketing Effort -- An important component of the Company's sales
strategy is the development of indirect sales channels such as Internet Service
Providers ("ISPs"), systems integrators and value-added network service
providers. The Company utilizes indirect sales channels to leverage the efforts
of its direct sales force. The Company has initiated sales and marketing
programs to sign up integrators, value added resellers ("VARs") and original
equipment manufacturers within the United States. The Company has signed VAR
agreements with MCI Telecommunications Corporation ("MCI") and GE Information
Services, Inc. ("GEIS"). The Company has established relationships with
international distributors in the United Kingdom, Sweden, Germany, Belgium,
South Africa, Korea and Australia, including relationships with Internet
Solutions, Ltd. in the United Kingdom and Kexin in Korea.
Strategic Alliance Development -- The Company plans to increase market
penetration by developing and capitalizing upon strategic alliances. These
alliances are intended to increase the distribution and market acceptance of
V-ONE's network security products in markets where direct sales and traditional
indirect sales efforts are not cost-effective. 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 believes that customer support and product maintenance is critical
to retaining existing customers and attracting prospective customers. The
Company provides on-site installation support and basic administrator training
with each turnkey hardware product sale. Each turnkey product comes with 24
hours a day, seven days per week hardware and software support for 90 days. Upon
expiration of the 90-day period, customers may purchase an annual maintenance
plan. Purchasers of the Company's software products may also purchase annual
maintenance plans. The annual maintenance plan provides customers access to the
Company's customer service line, technical support personnel and software
upgrades.
The Company provides additional user or administrator training, on-site support,
vulnerability analysis, performance analysis, systems integration and system
security architecture support as an optional service through its consulting
staff. Additionally, the Company provides customer support services for those
customers who have entered into an evaluation agreement with the Company.
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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
The market for network security products and services is intensely competitive.
The Company expects competition to intensify in the future.
Currently, the Company competes in several different markets: Internet and
intranet perimeter security and access control (firewalls), token
authentication, smart card-based security applications and electronic commerce
applications. The Company's principal competitors for Internet and intranet
perimeter security and access control include Advanced Network and Services (a
subsidiary of America Online, Inc.), AXENT Technologies, Inc., Bay Networks,
Inc., Border Network Technologies, Inc., Check Point Software Technology Ltd.,
Cisco Systems, Inc., Digital Equipment Corporation, Harris Computer Systems
Corporation, International Business Machines Corporation, Milkyway Networks
Corporation, Morningstar Technologies, Inc., Network Systems Corporation, Raptor
Systems, Inc., Secure Computing Corporation, Sun Microsystems, Inc. and Trusted
Information Systems, Inc. ("TIS"), which owns the Gauntlet(R) kernel and
licenses it to the Company.
The Company competes to a lesser degree with token vendors because the Company's
SmartGATE product supports many vendor tokens. Token vendors include CRYPTOCard
Inc., AXENT Technologies, Inc., Leemah DataCom Security Corporation, National
Semiconductor Inc., Racal-Guardata, Inc. and Security Dynamics Technologies,
Inc. ("Security Dynamics"). Security Dynamics has acquired RSA. RSA's data
encryption and authentication technology is licensed to and incorporated within
certain products of the Company. As a result, Security Dynamics may become a
more substantial competitor of the Company.
For smart card-based security applications, the Company principally competes
with those token vendors listed above who offer smart card technology.
The Company's principal competitors in electronic commerce applications are
Netscape Communication's Secure Socket Layer, Open Market Inc.'s Secure HTTP and
Cylink Corporation's transaction software.
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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
Orders for the Company's products are usually placed by customers on an
as-needed basis and 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.
SUPPLY SOURCES
Components used in the Company's network security products consist primarily of
computer diskettes and computer magnetic tapes 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 a hardware fulfillment company its hardware and hardware
integration requirements.
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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.
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.
For example, there are two versions of the SmartGATE client. One supports DES
for bulk encryption and can only be exported from the United States for
financial transactions. The other supports RC4 (an encryption algorithm) for
bulk encryption and is exportable. In addition, these U.S. export laws prohibit
the export of encryption products to a number of hostile countries. Although to
date the Company has been able to secure all required U.S. export licenses,
there can be no assurance that the Company will continue to be able to secure
such licenses in a timely manner in the future, or at all.
In certain foreign countries, the Company's distributors are required to secure
licenses or formal permission before encryption products can be imported. To
date, except for certain limited cases, the Company's distributors have not been
denied permission to import the Company's products.
LICENSE AGREEMENTS
Trusted Information Systems, Inc. Agreement -- The Company's SmartWall
product incorporates TIS's Gauntlet(R) kernel under a license agreement with
TIS. The Company's license agreement with TIS requires the Company to pay a fee
(which varies based on the number of units licensed) for each unit of the
Gauntlet(R) product licensed for use in SmartWall. The license expires on
December 31, 1996; however, the agreement provides for the automatic renewal of
the Company's license rights for successive three year terms. Either party may
terminate the agreement upon the default of the other party if the defaulting
party has failed to cure the default within 30 days of the receipt of written
notice of default; however, the agreement also provides TIS with certain
accelerated termination rights in the event of a subsequent breach.
RSA Data Security, Inc. Agreement. The Company's SmartCAT and Wallet Technology
software incorporate data encryption and authentication technology owned by 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 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 has recently been acquired by Security Dynamics.
There is no assurance that the change in control of RSA will not adversely
affect the Company's business relationship with RSA.
There can be no assurance that the Company will be able to maintain its
license rights for the TIS Gauntlet(R) kernel or 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 TIS or RSA terminate or fail to renew the respective
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license agreement or take 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 two patents and has pending one
patent application 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. Further,
the Company has not pursued patent protection outside of the United States for
the technology covered by the pending patent application. The Company currently
intends to pursue patent protection outside of the United States for the
technology covered by the most recently filed patent application 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
"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.
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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 in order 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 February 28, 1997, the Company had 79 full-time employees and 3
consultants. Of these employees and consultants, 38 were in sales and marketing,
28 were in development and 16 were in finance and administration. None of the
Company's employees is represented by a labor union or is subject to a
collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its employee relations are good.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF COMMON STOCK
The Company operates in a rapidly changing environment that involves numerous
risks, some of which are beyond the Company's control. The following discussion
highlights some of the risks the Company faces. Readers are also referred to the
documents filed by V-ONE Corporation with the Securities and Exchange
Commission, specifically the Company's registration statement as filed on Form
S-1 and the last report on Form 10-Q which identify important risk factors for
the Company.
Limited Operating History; Accumulated Deficit.
The Company was founded in February 1993 and introduced its first product in
December 1994. Accordingly, the Company 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 and 1996
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were approximately $1,104,000 and $6,266,000. The Company's growth in recent
periods may not be an accurate indication of future results of operations in
light of the Company's short operating history, the evolving nature of the
network security market and the uncertainty of the demand for Internet and
intranet products in general and the Company's products in particular. As of
December 31, 1996, the Company had accumulated a deficit of approximately
$8,340,000. The Company currently expects to incur net losses over the next
several quarters as a result of greater operating expenses incurred to fund
research and development and to increase its sales and marketing efforts.
Because of the Company's limited operating history, there can be no assurance
that the Company will achieve or sustain profitability or significant revenues.
To address these risks, the Company 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. There can be no assurance that the Company will
successfully address these risks and the failure to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Key Personnel.
The Company's success will depend, 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 the Company. There is keen competition in the
software security industry to hire and retain qualified personnel and the
Company is actively searching for additional qualified personnel. The Company's
success will depend upon its ability to retain and hire additional key
personnel. The loss of the services of key personnel or the inability to attract
additional qualified personnel could have a material adverse effect upon the
Company's results of operations and product development efforts. The Company
currently has $1.0 million "key man" life insurance policies on the lives of
each of James F. Chen, its founder, President and Chief Executive Officer,
Jieh-Shan Wang, its Senior Vice President of Engineering, and Marcus J. Ranum,
its Chief Scientist (Mr. Ranum is no longer an employee of the Company, but is
serving in this capacity as a consultant). This coverage, however, may not be
sufficient to mitigate the impact that the loss of the services of Mr. Chen, Mr.
Wang or Mr. Ranum would have on the Company. Although the Company has entered
into employment agreements with Mr. Chen and Mr. Wang that provide for fixed
terms of employment, the Company has not historically provided such types of
employment agreements to its other employees, including its executive officers.
This may adversely impact the Company's ability to attract and retain the
necessary technical, management and other key personnel, which could have a
material adverse effect upon the Company's results of operations and product
development efforts.
Management of Growth.
The Company has recently experienced and may continue to experience substantial
growth in the number of its employees and the scope of its operations, resulting
in increased responsibilities for management and added pressure on the Company's
operating and financial systems. As of February 28, 1997, the Company had grown
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to 79 employees, from 34 employees on January 1, 1996 and 7 employees on January
1, 1995. To manage growth effectively, the Company will need to continue to
improve its operational, financial and management information systems and will
need to hire, train, motivate and manage a growing number of employees.
Competition is intense for qualified technical, marketing and management
personnel. There can be no assurance that the Company will be able to achieve or
manage any future growth, and its failure to do so could delay product
development cycles and marketing efforts or otherwise have a material adverse
effect on the Company's business, financial condition and results of operations.
Although the Company is not currently involved in negotiations for any
acquisitions, the Company may undertake acquisitions in the future. Any such
transaction would place additional strains upon the Company's management
resources.
Anticipated Fluctuations in Quarterly Results.
As a result of the Company's limited operating history, the Company does not
have historical financial data for a significant number of periods on which to
base planned operating expenses. Accordingly, the Company's expense levels are
based in part on its expectations as to future revenues. The Company's quarterly
sales and operating results generally depend on the volume and timing of, and
ability to fill, orders received within the quarter, which are difficult to
forecast. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall of demand for the Company's products in relation to the Company's
expectations could have an immediate adverse impact on the Company's business,
financial condition and results of operations. In addition, the Company plans to
increase its operating expenses to fund the rapid growth of its sales and
marketing operations, distribution channels, customer support capabilities and
research and development activities. To the extent that such expenses precede or
are not subsequently followed by increased revenues, the Company's business,
financial condition and results of operations may be materially adversely
affected.
The Company expects to experience significant fluctuations in future quarterly
operating results, which may be caused by a number of factors, such as the
pricing and mix of products and services sold, the introduction of new products
by the Company and its competitors, the timing of orders and the shipment of
products, market acceptance of the Company's products, the ability of the
Company's direct sales force and resellers to market its products successfully,
the mix of distribution channels used and other factors that may be beyond the
Company's control. Thus, the Company believes that comparisons of quarterly
operating results are not meaningful and should not be relied upon, nor will
they necessarily reflect the Company's future performance. Because of the
foregoing factors, it is likely that in some future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
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Dependence on the Internet and Intranets.
The Company's success depends substantially upon the market acceptance of the
Internet and intranets as mediums for commerce and communication. Although the
Company believes that its software security products will facilitate and fortify
commerce and communication over the Internet and intranets, there can be no
assurance that commerce and communication over the Internet and intranets will
expand or that the Company's products will be adopted for security purposes. In
addition, the Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, such as a
reliable network backbone or timely development of complementary products and
services. If the Internet and intranets do not develop as mediums of commerce
and communication or the Internet does not develop as a viable commercial
marketplace due to inadequate development of infrastructure or complementary
products and services, or for other reasons beyond the Company's control, the
Company's business, financial condition and results of operations may be
materially adversely affected. See "Business -- Background."
Risks Associated with the Emerging Network Security Market.
The market for the Company's products is in an early stage of development. 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, it is difficult to assess the
size of the market, the product features desired by the market, the optimal
price structure for the Company's products, the optimal distribution strategy
and the competitive environment that will develop in this market. Declines in
demand for the Company's products, whether 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 the Company's
control, could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business -- Background."
Dependence on Principal Products; Uncertainty of Product Acceptance.
The Company currently generates most of its revenues from its SmartWall and
SmartGATE products. Accordingly, any factor that adversely affects sales of
these products could have a material adverse effect on the Company. While
SmartWall has met with a favorable degree of market acceptance since sales
commenced in the first quarter of 1995, there can be no assurance that SmartWall
will continue to be accepted in the future. In addition, there can be no
assurance that there will be market acceptance of the Company's SmartGATE
product, which was introduced in the fourth quarter of 1995, or any of the
Company's products that may be introduced in the future. The Company's success
will, in part, depend upon the Company'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.
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Intellectual Property Rights; Infringement Claims.
The Company relies on trademark, copyright, patent and trade secret laws,
employee and third-party non-disclosure agreements and other methods to protect
the proprietary rights of the Company and the companies from which the Company
licenses technology. Prosecution of 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. Further, the Company has not
pursued patent protection outside of the United States for the technology
covered by two of the pending patent applications. The Company currently intends
to pursue patent protection outside of the United States for the technology
covered by the most recently filed patent application 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 currently holds
patents on its Wallet Technology and its SmartGATE technology.
The Company's success is also dependent in part upon its proprietary software
technology and technology licensed from others. There can be no assurance that
the Company's trade secrets or license or non-disclosure agreements will provide
meaningful or contractually required protection for the proprietary technology
and other proprietary information of the Company and the companies from which
the Company licenses technology. Further, the Company relies on "shrink wrap"
license agreements that are not signed by the end user to license the Company's
products and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, 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 the Company 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 developed by the Company may
not be protectable in such foreign 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.
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As the number of security products in the industry increases and the
functionality of these products further overlap, 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 in order to develop, produce and market
commercially viable products effectively. 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.
Any claims or litigation, with or without merit, could be costly and could
result in a diversion of management's attention, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Adverse determinations in such claims or litigation could also have
a material adverse effect on the Company's business, financial condition and
results of operations.
Risk of Errors or Failures; Product Liability Risks.
The complex nature of the Company's products can make the detection of errors or
failures in certain of its software products difficult when such products are
introduced, which may result in delays and lost revenues during the correction
process. In addition, there can be no assurance that any technology licensed by
the Company for use in its products does not contain errors that would adversely
affect such products. Despite testing by the Company and current and prospective
customers, there can be no assurance that errors will not be discovered in new
products or releases after commencement of commercial shipments, possibly
resulting in delay, adverse publicity, loss of market acceptance and claims
against the Company.
A malfunction or the inadequate design of the Company's products could result in
tort or warranty claims. The Company generally attempts to reduce the risk of
such losses to itself and to the companies from which the Company licenses
technology through warranty disclaimers and liability limitation clauses in its
license agreements. There can be no assurance that the Company has obtained
adequate contractual protection in all instances or where otherwise required
under agreements V-ONE has entered into with others or that such measures will
be effective in limiting the Company's liability to end users and to the
companies from which the Company licenses technology. The Company also relies on
"shrink wrap" license agreements that are not signed by the end user and,
therefore, may be unenforceable under the laws of certain jurisdictions. The
Company currently has product liability insurance. There can be no assurance
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that adequate insurance coverage was obtained by the Company. Any product
liability claim against the Company for damages resulting from security breaches
could be substantial and could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a
well-publicized actual or perceived security breach could adversely affect the
market's perception of security products in general, or the Company's products
in particular, regardless of whether such breach is attributable to the
Company's products. This could result in a decline in demand for the Company's
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Changes in Technology and Industry Standards; Risk of 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 the Company's existing products to new and
unexpected attacks and require accelerated development of new products or
enhancements to existing products. There can be no assurance that the Company
will be able to counter challenges to its current products, that the Company's
future product offerings will keep pace with technological changes implemented
by competitors or persons seeking to breach network security, that its products
will satisfy evolving consumer preferences or that the Company will be
successful in developing and marketing products for any future technology.
Failure to develop and introduce new products and product enhancements in a
timely fashion could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risk of Defects and Development Delays.
The Company 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, the Company'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 Company initiated changes. Changes in product specifications may delay
completion of documentation, packaging or testing, which 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 the
Company either to enhance or change a product's specifications to meet a
customer's changing needs. These factors may cause a product to enter the market
behind schedule, which may adversely affect market acceptance of the product or
place it at a disadvantage to a competitor's product that has already gained
market share or market acceptance during the delay.
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Evolving Distribution Channels.
Currently, the Company relies primarily on its direct sales force for the sale
and marketing of its products. The Company plans to add to its internal sales
and marketing staff in order to increase its direct sales effort. There can be
no assurance that such internal expansion will be successfully completed, that
the cost of such expansion will not exceed the revenues generated or that the
Company's sales and marketing organization will successfully compete against the
more extensive and well-funded sales and marketing operations of certain of its
current and future competitors.
The Company has developed a distribution strategy that involves the development
of strategic alliances with resellers and international distributors to enable
the Company to achieve broad market penetration. The Company is beginning to
establish its reseller distribution channel. There can be no assurance that the
Company will be able to attract integrators and resellers that will be able to
market the Company's products effectively and will be qualified to provide
timely and cost-effective customer support and service. The Company anticipates
that it will ship products to distributors, integrators and resellers on a
purchase-order basis, and its distributors, integrators and resellers will
likely carry competing product lines. Therefore, there can be no assurance that
any distributor, integrator or reseller will continue to represent the Company's
products. The inability to recruit, or the loss of, important sales personnel,
distributors, integrators or resellers could materially adversely affect the
Company's business, financial condition and results of operations in the future.
Long Sales Cycle; Seasonality.
Sales of the Company's products generally involve a significant commitment of
capital by customers, with the attendant delays frequently associated with large
capital expenditures. Prior to such sales, the Company 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 the
Company's products is likely to be lengthy and subject to a number of
significant risks over which the Company has little or no control and, as a
result, the Company believes that its quarterly results are likely to vary
significantly in the future. The Company may be required to ship products
shortly after it receives orders and, 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 shipped in that period. The Company
plans its production and inventory levels based on internal forecasts of
customer demand, which is highly unpredictable and can fluctuate substantially.
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If revenues fall significantly below anticipated levels, the Company's financial
condition and results of operations could be materially and adversely affected.
In addition, the Company may experience significant seasonality in its business,
and the Company's financial condition and results of operations may be affected
by such trends in the future. Such trends may include higher revenues in the
third and fourth quarters of the year and lower revenues in the first and second
quarters. The Company believes that revenues may tend to be higher in the third
quarter due to the fiscal year end of the U.S. government and higher in the
fourth quarter due to year-end budgetary pressures on the Company's commercial
customers and the tendency of certain of its existing and prospective customers
to implement changes in computer or network security prior to the end of the
calendar year.
Liquidity and Capital Requirements; Dependence on the Public Offering.
The Company anticipates that its existing capital resources, including the net
proceeds of the sale of the shares of Common Stock offered hereby, will be
adequate to satisfy its capital requirements at least through March 31, 1998.
The Company's future capital requirements, however, will depend on many factors,
including its ability to successfully market and sell its products. To the
extent that the funds generated by the IPO and from the Company's on-going
operations are insufficient to fund the Company's future operating requirements,
it may be necessary to raise additional funds through public or private
financings. Any equity or debt financings, if available at all, may be on terms
that are not favorable to the Company and, in the case of equity financings,
could result in dilution to the Company's shareholders. If adequate capital is
not available, the Company may be required to curtail its operations
significantly.
Risk of Sales to U.S. Government.
In 1995, the Company derived a substantial portion of its revenue from the sale
of SmartWall to departments and agencies of the U.S. government and government
contractors. In 1996, the Company's revenues will be attributable, in part, to a
contract with NSA. Because no government agency has an obligation to award
contracts to, or to purchase products from, the Company in the future, the
Company believes that future government contracts and orders for its network
security products will in part be dependent upon the continued favorable
reaction of government agencies to the development capabilities of the Company
and the reliability and perception of its products. There can be no assurance
that the Company will be able to sell its products to departments and agencies
of the U.S. government and government contractors or that such sales, if any,
will result in commercial acceptance of the Company's products. There also is no
assurance that the Company will be able to procure an extension of its current
NSA contract when it expires in September 1996 or additional contracts of
similar magnitude in the future. In addition, reductions or delays in federal
funds available for projects the Company is performing or to purchase its
products could have an adverse impact on the Company's government contracts
business.
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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. The Company 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 have a material adverse effect on the Company's business,
financial condition and results of operations.
International Sales.
The Company plans to increase its presence in overseas markets by expanding
international distribution relationships for its suite of network security
products, including SmartWall and SmartGATE. There can be no assurance, however,
that the Company will be successful in expanding its relationships with
international distributors or in gaining commercial acceptance of its products
abroad. To the extent that the Company expands international sales, currency
fluctuations could make its products less competitive in foreign markets and
contribute to fluctuations in the Company's operating results. Political
instability, difficulties in staffing and managing international operations,
potential insolvency of international resellers, longer receivable collection
periods and difficulty in collecting accounts receivable also pose risks to the
development of international marketing efforts. Moreover, the laws of certain
countries, or the enforcement thereof, may not protect the Company's products
and intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that these factors will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Effect of Government Regulation of Technology Exports.
The Company currently sells its products abroad and intends to continue to
expand its relationships with international distributors for the sale of its
products overseas. The Company'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, the Company's information
security products are subject to the export restrictions administered by the
U.S. Department of Commerce, which, 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, the Company's distributors are
required to secure licenses or formal permission before encryption products can
be imported. There is no assurance
25
<PAGE>
that the Company or its distributors will be able to secure required licenses in
a timely manner, if at all. As a result, foreign competitors that face less
stringent controls on their products may be able to compete more effectively
than the Company in the global network security market. There can be no
assurance that these factors will not have a material adverse effect on the
Company's business, financial condition and results of operations.
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. There can be no
assurance that the market price of the Common Stock offered hereby will not
decline below the initial public offering price.
Item 2. PROPERTIES
The Company leases approximately 16,261 square feet of office space in
Rockville, Maryland under lease agreements that will expire on April 26, 1997
and April 17, 2001. The Company expects that this space will be sufficient for
its needs through April 26, 1997. In March 1997, the Company entered into an
operating lease agreement for new office space for approximately 28,312 square
feet in Germantown, Maryland that will expire on July 1, 2003. The Company
anticipates moving into this new office space in July 1997.
The Company also leases office space in New York, New York and in San Francisco,
California under leases that expired on January 14, 1997. These leases have been
extended on a month to month basis.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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, 1996.
26
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The executive officers and directors of the Company, and their respective ages
at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
James F. Chen........................ 46 President, Chief Executive Officer and Director
Jieh-Shan Wang....................... 42 Senior Vice President and Chief Technical Officer
William C. Wilson.................... 41 Vice President of Network Services
Barnaby M. Page...................... 33 Vice President of Financial Services
Charles B. Griffis................... 52 Senior Vice President, Chief Financial Officer and
Treasurer
Christopher T. Brook................. 57 Vice President of Product Development
Charles C. Chen...................... 42 Director
Hai Hua Cheng........................ 48 Director
Harry S. Gruner...................... 37 Director
William E. Odom...................... 64 Director
</TABLE>
JAMES F. CHEN founded the Company in February 1993 and has since served as its
President, Chief Executive Officer and a director. From 1980 to 1990, Mr. Chen
managed INTELSAT's world-wide ground network engineering projects. From 1990 to
January 1993, he managed the INTELSAT Ground Network Engineering Department and,
from March 1992 to January 1993, he also directed its Management Information
Systems Division. Mr. Chen holds an M.S. in Computer Science from George
Washington University and a B.S. in Electrical Engineering from Georgia
Institute of Technology. He is Charles C. Chen's brother.
JIEH-SHAN WANG, PH.D. has been with the Company since its inception and has
served as the Company's Senior Vice President of Engineering since April 1996.
From August 1995 to April 1996, Dr. Wang served as the Company's Vice President
of Engineering and, from April 1994 to August 1995, he served as Chief Engineer.
Dr. Wang was with INTELSAT from June 1991 to April 1994, as Senior Systems
Engineer, where he led a team of engineers in the development of network
applications. Dr. Wang holds a Ph.D. in Physics from the University of Maryland
and a B.S. in Physics from National Taiwan University.
WILLIAM C. WILSON has served as the Company's Vice President of Network Services
since January 1997. From May 1996 to December 1996 Mr. Wilson served as the
Company's Vice President of Business Development, from April 1995 to May 1996,
Mr. Wilson served as the Company's Vice President of Operations and, from
December 1994 to April 1995, he served as Director of Business Development.
Prior to joining the Company, Mr. Wilson provided consulting services to the
Company from August 1994 to December 1994 and served as an independent
consultant from August 1985 to November 1994. Mr. Wilson holds a B.S. in
Journalism and Economics from Ohio State University, School of Agriculture.
BARNABY M. PAGE has served as the Company's Vice President of Financial Services
since January 1997. From June 1996 to December 1996, Mr. Page served as the
Company's Vice President of Direct Sales, from October 1995 to June 1996, Mr.
Page served as the Company's Director of Sales and, and from August 1995 to
October 1995, he served as Manager of Commercial Sales. Prior to joining the
Company, Mr. Page served as Regional Sales Manager for DiBiasio & Edgington,
Inc. from January 1993 to August 1995 and as Regional Sales Representative for
Thompson Financial Services from July 1992 to December 1992. From July 1990 to
July 1992, Mr. Page was a Sales Representative with Bloomberg Financial Markets.
Mr. Page earned a Certificate in International Relations and Economics from the
University of Copenhagen, Denmark, and holds a B.A. in Political Science and
Journalism from the University of Massachusetts at Amherst.
CHARLES B. GRIFFIS has served as the Company's Senior Vice President and Chief
Financial Officer since September 1996 and began serving as the Company's
Treasurer as of January 1, 1997. Prior to joining the Company, Mr. Griffis
served as Senior Vice President and Chief Financial Officer of Masstor Systems
Corporation, a company that filed a petition for reorganization under Chapter 11
of the United States Bankruptcy Code on September 8, 1994, from April 1990 to
September 1996. From November 1983 to April 1990, Mr. Griffis served as a
General Partner of Griffis, Sandler & Co., a private venture capital firm, and
as President of Charles Griffis & Co., Inc., a business consulting firm. Mr.
Griffis holds an M.B.A. in Finance from Columbia University and a B.A. in
History from Yale University.
27
<PAGE>
CHRISTOPHER T. BROOK has served as the Company's Vice President of Product
Development since February 1997. From September 1996 to February 1997, Mr. Brook
served as the Company's Director of Product Development. Mr. Brook was with GEIS
for approximately 27 years prior to joining the Company, holding a number of
technology-related positions including Manager of Directory Services and Network
Architecture, Manager of Network Architecture and most recently, Manager of
Emerging Technology, where Mr. Brook was responsible for investigating new
information technologies. Mr. Brook graduated from Clifton College (Bristol,
England) with an emphasis in the Classics.
CHARLES C. CHEN, D.D.S., has served as a director of the Company since February
1993 and as the Company's Secretary since December 12, 1995. Since July 1982,
Dr. Chen has practiced periodontics with Zupnik, Winson & Chen, D.D.S.P.A. Dr.
Chen holds a D.D.S. from the Baltimore College of Dental Surgery, University of
Maryland, and a B.S. in Chemistry from the University of Maryland. He is James
F. Chen's brother.
HAI HUA CHENG has served as a director of the Company since September 1995. Mr.
Cheng is the majority owner of Scientek Corporation in Taiwan and since August
1979 has served as Vice President and a director of that company. Mr. Cheng is
also the principal owner of Scientek Private Venture Capital and has served as a
director of that company since March 1990. In addition, Mr. Cheng has served as
a director of United Test Center Inc. (Taiwan) since March 1995. Mr. Cheng holds
a B.S. in Computer and Control Engineering from National Chiao Tung University.
HARRY S. GRUNER has served as a director of the Company since June 1996. Since
November 1992, he has been a general partner of JMI Equity Fund, a private
equity investment partnership. From August 1986 to October 1992, Mr. Gruner was
a principal with Alex. Brown & Sons Incorporated. Mr. Gruner is also a director
of Brock International, Inc., a developer, marketer and supporter of software
systems, Jackson Hewitt, Inc., an income tax processing company, the META Group,
Inc., a syndicated information technology research company, and Hyperion
Software, Inc., a financial software company, and numerous other privately held
companies. Mr. Gruner holds an M.B.A. from Harvard Business School and a B.A. in
History from Yale University.
(RETIRED) LT. GEN. WILLIAM E. ODOM has served as a director of the Company since
June 1996. Since October 1988, General Odom has served as Director of National
Security Studies at the Hudson Institute. He has also served as an adjunct
professor at Yale University since January 1989. Prior to his retirement from
the military in 1988, General Odom held several military posts including,
Director of the National Security Agency, Assistant Chief of Staff for
Intelligence and Military Assistant to the National Security Advisor during the
Carter Administration. He is also a director of Nichols Research Corporation.
General Odom holds an M.A. and Ph.D. from Columbia University and a B.S. from
the United States Military Academy at West Point.
28
<PAGE>
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. According to records of the Company's
transfer agent, the Company had approximately 1,291 stockholders of record on
March 18, 1997. Because many of such shares are held by brokers and other
institutions 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 from the time of the Company's IPO for the quarter ending
December 31, 1996.
Fiscal 1996:
<TABLE>
<CAPTION>
Low Sale Price High Sale Price
<S> <C> <C>
Fourth Quarter.............$4.875 $7.75
</TABLE>
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.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data set forth below with respect to the
Company's statement of operations from February 16, 1993 (date of inception) to
December 31, 1993 and for the years ended December 31, 1994, 1995 and 1996 and
balance sheets as of December 31, 1993, 1994, 1995 and 1996 are derived from the
financial statements of the Company included elsewhere 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."
29
<PAGE>
<TABLE>
<CAPTION>
For the
Period Period ended December 31,
February 16,
1993 (date
of
inception)
to December
31,
1993 1994 1995 1996
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Products $ --- $ -- $ 1,101,418 $5,955,592
Consulting and services 76,183 59,716 2,083 310,557
Total revenues 76,183 59,716 1,103,501 6,266,149
Cost of revenues:
Products --- --- 376,359 1,969,117
Consulting and services 38,090 35,114 800 56,502
Total cost of revenues 38,090 35,114 377,159 2,025,619
Gross profit 38,093 24,602 726,342 4,240,530
Operating expenses:
Sales and marketing 6,652 36,212 130,917 3,744,630
General and administrative 74,212 315,192 1,350,361 4,879,940
Research and development 21,000 127,926 304,973 1,960,727
Total operating expenses 101,864 479,330 1,786,251 10,585,297
Operating loss (63,771) (454,728) (1,059,909) (6,344,767)
Other (expense) income:
Interest expense (1,913) (2,360) (66,615) (518,965)
Interest income --- --- 4,513 168,176
Total other expens es (1,913) (2,360) (62,102) (350,789)
Net loss $ (65,684) $ (457,088) $(1,112,011) $(6,695,556)
Net loss per share $ (.01) $ (0.06) $ (0.12) $ (0.66)
Weighted average shares outstanding 6,186,978 8,046,766 9,567,509 10,209,340
December 31,
1993 1994 1995 1996
Balance Sheet Data:
Working capital (deficit) $ (19,436) $ 245,598 $ (168,311) $ 12,643,160
Total assets 28,182 394,906 2,050,602 15,697,415
Long-term debt, less current portion --- --- 126,908 134,704
Total shareholder's equity (11,523) 318,028 (139,938) 13,993,745
</TABLE>
30
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company offered 3,000,000 shares of Common Stock, par value $0.001, in an
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, par value $0.001, from the Company and certain shareholders for
$5.00 per share. Net of the underwriting discount and related expenses, the
Company raised approximately $12,645,000.
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.
Under the Company's revenue recognition policy, revenues are generally
recognized from the license of software upon shipment, net of allowances,
provided that no significant vendor obligations remain. In addition, 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.
As of December 31, 1996, the Company had an accumulated deficit of approximately
$8,340,000. The Company currently expects to incur net losses over the next
several quarters as a result of greater operating expenses incurred to fund
research and development and to increase its senior management and sales and
marketing efforts. To date, the Company has expensed all development costs as
incurred in compliance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed." The Company believes that it will be able to continue to expense all
development costs as incurred.
The Company recently has hired and intends to continue to hire additional senior
level personnel. In addition, general and administrative costs have increased
significantly since the Company's date of inception and the Company expects such
costs to continue to increase in the future.
31
<PAGE>
In 1996, product revenues from MCI and the National Security Agency ("NSA")
accounted for approximately 12% and 12%, respectively, of total revenues. In
1995, product revenues from GEIS, NCTS Washington, a division of the Department
of the Navy, and the U.S. Defense Information Systems Agency accounted for
approximately 19%, 10%, and 10%, respectively, of total revenues. In 1994,
consulting and services revenues from the U.S. Department of Energy and MacTec
accounted for approximately 37% and 29%, respectively, of total revenues.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
For the Period Ended
Dec. 31, Dec. 31, Dec. 31,
1994 1995 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Products ---% 99.8% 95.0%
Consulting and services 100.0 0.2 5.0
Total revenues 100.0 100.0 100.0
Cost of revenues:
Products --- 34.1 31.4
Consulting and services 58.8 0.1 0.9
Total cost of revenues 58.8 34.2 32.3
Gross profit 41.2 65.8 67.7
Operating expenses:
Sales and marketing 60.6 11.9 59.8
General and administrative 527.8 122.4 77.9
Research and development 214.2 27.6 31.3
Total operating expenses 802.6 161.9 169.0
Operating loss (761.4) (96.1) (101.3)
Other (expense) income:
Interest expense (4.0) (6.0) (8.3)
Interest income --- 0.4 2.7
Total other expenses (4.0) (5.6) (5.6)
Net loss (765.4)% (101.7)% (106.9)%
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
REVENUES
Total revenues increased from approximately $60,000 in 1994 to approximately
$1,104,000 in 1995 and increased to approximately $6,266,000 in 1996.
32
<PAGE>
Product revenues are derived principally from software licenses and the sale of
hardware products. The Company had no revenues from products in 1994. Product
revenues increased significantly from approximately $1,101,000 in 1995 to
approximately $5,956,000 in 1996. The increase was due principally to increased
sales of the Company's SmartWall product and the introduction of its SmartGATE
product in December 1995, along with increased sales and marketing efforts.
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 from approximately $60,000
in 1994 to approximately $2,000 in 1995 and increased significantly to
approximately $311,000 in 1996. Revenues from consulting and services declined
from 1994 to 1995 due to the Company's focus on product development and
subsequent sales and marketing efforts. Consulting and services revenues
increased from 1995 to 1996 as the Company increased staffing to support
consulting and services and product sales.
COST OF REVENUES
Total cost of revenues as a percentage of total revenues were 58.8%, 34.2% and
32.3% in 1994, 1995 and 1996, 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. The Company had no product revenue in 1994.
Cost of product revenues increased from approximately $376,000 in 1995 to
approximately $1,969,000 in 1996. Cost of product revenues as a percentage of
product revenues was 34.2% and 33.1% for 1995 and 1996, respectively. The dollar
increase and percentage decrease in 1996 were primarily attributable to an
increase in revenues from increased sales and marketing efforts and from the
introduction of SmartGATE, combined with a higher product mix of software
licenses to 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
$35,000 in 1994 to approximately $800 in 1995 and increased significantly to
approximately $57,000 in 1996. Cost of consulting and services revenues as a
percentage of consulting and services revenues was 58.8%, 38.4% and 18.2% for
1994, 1995 and 1996, respectively. The dollar increase in 1996 was attributable
to increased staffing to support consulting and services. The percentage
decrease was principally due to allocation over a larger revenue base.
OPERATING EXPENSES
Sales and Marketing -- Sales and marketing expenses consist principally of the
costs of sales and marketing personnel, advertising, promotions and trade shows.
Sales and marketing expenses increased from approximately $36,000 in 1994 to
approximately $131,000 in 1995 and increased to approximately $3,745,000 in
33
<PAGE>
1996. Sales and marketing expenses as a percentage of total revenues were 60.6%,
11.9% and 59.8% in 1994, 1995 and 1996, respectively. The dollar increase in
1995 was principally due to increased personnel and marketing efforts and costs
associated with the sales of SmartWall. The percentage decrease in 1995 was
principally due to allocation over a larger revenue base. The dollar increase in
1996 was principally due to increased personnel, higher levels of sales and
marketing efforts and sales associated with the sales of SmartWall and
SmartGATE. The percentage increase was due to significantly higher expenses.
Sales and marketing expenses can be expected to increase both in the aggregate
and as a percentage of total revenues in the near term as a result of the
Company's increased sales and marketing efforts.
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 substantially
from approximately $315,000 in 1994 to approximately $1,350,000 and increased
significantly to approximately $4,880,000 in 1996. General and administrative
expenses as a percentage of total revenues were 527.8%, 122.4% and 77.9% in
1994, 1995 and 1996, respectively. The dollar increase in 1995 was primarily due
to increased staffing levels, leasing of additional office space, additional
travel expense, establishing an allowance for potentially uncollectible and
non-saleable inventory and increased professional fees. In 1996, the Company
recorded non-cash compensation expense of approximately $2,515,000 in
conjunction with the grant of options to purchase 590,394 shares of Common Stock
at an exercise price of $3.75 per share and options to purchase 10,000 shares of
Common Stock at an exercise price of $4.50 per share, each granted pursuant to
the Company's 1996 Incentive Stock Plan, and the grant of options to purchase
383,965 shares of Common Stock at an exercise price of $0.75 per share pursuant
to the Company's 1996 Non-Statutory Stock Option Plan, the underlying shares of
which were funded by a contribution of 383,965 shares of Common Stock by James
F. Chen, the Company's founder, President and Chief Executive Officer. The
non-cash compensation expense was recognized in the second quarter of 1996. In
the fourth quarter of 1996, the Company recognized a non-cash compensation
expense of approximately $264,000 in conjunction with a contribution to the
Company of 52,885 shares of Common Stock by James F. Chen. The remainder of the
dollar increase was principally attributable to additional hiring of management
and administrative personnel and professional and legal fees. The percentage
decrease was primarily due to allocation over a larger revenue base. The Company
anticipates that general and administrative expenses will increase in future
periods.
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
34
<PAGE>
approximately $128,000 in 1994 to approximately $305,000 in 1995 and increased
to approximately $1,961,000 in 1996. Research and development expenses as a
percentage of total revenues were 214.2%, 27.6% and 31.3% in 1994, 1995 and
1996, respectively. The dollar and percentage increases in 1995 and 1996 were
primarily due to increases in the number of personnel associated with the
Company's product development efforts. The Company believes that a continuing
commitment to research and development is required to remain competitive.
Accordingly, the Company intends to allocate substantial resources to research
and development, but research and development expenses may vary as a percentage
of total revenues.
Interest Income and Expense -- Interest income represents interest earned on
cash, cash equivalents and marketable securities. There was no interest income
in 1994. Interest income in 1995 was approximately $5,000 from interest earned
on the net proceeds from the Company's private financings and approximately
$168,000 in 1996 from interest earned on the net proceeds from the Company's IPO
and private financings. Interest expense represents interest payable or accreted
on promissory notes and capitalized lease obligations. Interest expense was
approximately $2,000 in 1994 and was approximately $67,000 in 1995. The increase
was primarily due to the Company's issuance of $1,250,000 in promissory notes in
1995. Interest expense increased substantially to $519,000 in 1996. The increase
was primarily due to the Company's issuance of $1,250,000 in promissory notes in
1995, the issuance of approximately $1,250,000 promissory notes in 1996 and the
issuance of the JMI note of $1,500,000 in 1996.
Income Taxes -- The Company did not incur income tax expenses in December 31,
1994, 1995 and 1996 as a result of the net loss incurred during these periods.
As of December 31, 1996, the Company had net operating loss carry forwards of
approximately $7,496,000 as a result of net losses incurred since inception.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected financial data for the periods
indicated. This information (other than the three months ended March 31, 1996)
has been derived from the Company's unaudited financial statements, which, in
management's opinion, reflect all adjustments necessary to fairly present this
information when read in conjunction with the financial statements and notes
thereto included elsewhere in this Annual Report.
35
<PAGE>
<TABLE>
<CAPTION>
Mar. 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Products $ 150,257 $ 218,961 $ 356,021 $ 376,179
Consulting and services --- --- --- 2,083
Total revenues 150,257 218,961 356,021 378,262
Cost of revenues:
Products 52,590 78,560 125,482 119,727
Consulting and services --- --- --- 800
Total cost of revenues 52,590 78,560 125,482 120,527
Gross profit 97,667 140,401 230,539 257,735
Operating expenses:
Sales and marketing 40,730 25,312 24,030 40,845
General and administrative 163,282 297,881 176,903 712,295
Research and development 48,446 62,344 90,142 104,041
Total operating expenses 252,458 385,537 291,075 857,181
Operating loss (154,791) (245,136) (60,536) (599,446)
Other (expense) income:
Interest expense --- --- --- (66,615)
Interest income --- --- --- 4,513
Total other expenses --- --- --- (62,102)
Net loss $ (154,791) $ (245,136) $ (60,536) $ (661,548)
June 30, Sept. 30, Dec. 31,
Mar. 31, 1996 1996 1996
1996 (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------
Revenues:
Products $ 981,642 $ 1,302,402 $ 1,578,620 $ 2,092,928
Consulting and services 40,169 52,174 141,923 76,291
Total revenues 1,021,811 1,354,576 1,720,543 2,169,219
Cost of revenues:
Products 310,693 462,636 503,484 692,304
Consulting and services 11,305 15,917 11,954 17,326
Total cost of revenues 321,998 478,553 515,438 709,630
Gross profit 699,813 876,023 1,205,105 1,459,589
Operating expenses:
Sales and marketing 709,111 963,326 898,543 1,173,650
General and administrative 592,967 2,756,546 507,079 1,023,348
Research and development 310,952 393,357 607,305 649,113
Total operating expenses 1,613,030 4,113,229 2,012,927 2,846,111
Operating loss (913,217) (3,237,206) (807,822) (1,386,522)
Other (expense) income:
Interest expense (104,934) (176,092) (191,723) (46,216)
Interest income 23,491 19,897 22,031 102,757
Total other expenses (81,443) (156,195) (169,692) 56,541
Net loss $ (994,660) $(3,393,401) $ (977,514) $ (1,329,981)
</TABLE>
36
<PAGE>
The Company's total revenues and operating results have varied substantially
from quarter to quarter and should not be relied upon as an indication of future
results. Several factors may affect the ability to forecast the Company's
quarterly operating results, including the size and timing of individual
transactions; the length of the Company's sales cycle; changes in the Company's
budget authorizations; the level of sales and marketing, research and
development and administrative expenses; and general economic conditions. For
example, the Company made significant sales during the latter part of the second
quarter of 1996, and a significant portion of those sales were not collected
until the third quarter of 1996. As a result, the Company's accounts receivable
during the second quarter of 1996 increased to an amount greater than its
revenues for that period. This pattern has been followed in subsequent quarters
of 1996 and may continue in subsequent quarters of 1997.
Operating results for a given period could be disproportionately affected by any
shortfall in expected revenues. In addition, fluctuation in revenues from
quarter to quarter will likely have an increasingly significant impact on the
Company's results of operations. The Company's growth in recent periods may not
be an accurate indication of future results of operations in light of the
Company's short operating history, the evolving nature of the network security
market and the uncertainty of the demand for Internet and intranet products in
general and the Company's products in particular.
The Company may experience significant seasonality in its business, and the
Company's financial condition and results of operations may be affected by such
trends in the future. Such trends may include higher revenues in the third and
fourth quarters of the year and lower revenues in the first and second quarters.
The Company believes that revenues may be higher in the third quarter due to the
fiscal year end of the U.S. government and higher in the fourth quarter due to
year end budgetary pressures on the Company's commercial customers and the
tendency of certain of the Company's existing or prospective customers to
implement changes in computer or network security prior to the end of the
calendar year. Because the Company's operating expenses are based on anticipated
revenue levels, a small variation in the time of recognition of revenues can
cause significant variations in operating results from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
On October 24, 1996, the Company commenced an IPO of its Common Stock which
provided the Company with net proceeds of approximately $12,645,000. As of
December 31, 1996, the Company had nominal debt and had cash and cash
equivalents of approximately $10,894,000 and working capital of approximately
$12,643,000.
37
<PAGE>
Prior to its IPO, the Company had financed its operations through the private
sale of equity securities, notes to shareholders and short-term borrowings. In
1994 and 1995, the Company raised approximately $750,000 and $400,000,
respectively, through the sale of Common Stock. In addition, in December 1995
and January 1996, the Company raised $2,500,000 from the sale of 7% unsecured
promissory notes scheduled to mature on June 30, 1996. In addition, in April
1996, the Company raised approximately $1,000,000 by selling an additional
222,222 shares of Series A Convertible Preferred Stock ("Series A Stock) at
$4.50 per share. In April and May of 1996, the Company exchanged all of the 7%
unsecured promissory notes for Series A Stock. Upon consummation of the IPO,
each share of Series A Stock automatically converted into 1.20 shares of Common
Stock. In June 1996, the Company raised an additional $1,500,000 by issuing to
JMI an 8% unsecured senior subordinated note with detachable warrants to
purchase 333,332 shares of Common Stock of which 266,666 were exercisable at
$4.50 per share ("$4.50 Warrants") and 66,666 were exercisable at $0.015 per
share ("$0.015 Warrants"). The note was redeemed upon consummation of the IPO
and the $0.015 Warrants were exercised on June 28, 1996. Pursuant to the terms
of the $4.50 Warrants, upon consummation of the IPO at a price per share of
$5.00, the $4.50 Warrants were adjusted to entitle JMI to purchase 319,999
shares of Common Stock at $3.75 per share.
The Company's operating activities used cash of approximately $353,000,
$1,121,000 and $5,119,000 in 1994, 1995 and 1996, respectively. Cash used in
operating activities was principally a result of net losses and increases in
accounts receivable and inventory, which were partially offset by increases in
accounts payable, the establishment of an allowance for potentially
uncollectible accounts receivable and non-saleable inventory and non-cash
expenses related to the issuance of certain stock options.
Capital expenditures for property and equipment were approximately $13,000,
$20,000 and $562,000 in 1994, 1995 and 1996, respectively. These expenditures
have generally been for computer workstations and personal computers, office
furniture and equipment, and leasehold additions and improvements. The Company
expects to purchase additional computer equipment, office furniture and
leasehold improvements in 1997.
The Company believes that its current cash and cash equivalents and funds that
may be generated from on-going operations will be sufficient to finance the
Company's operations at least through March 31, 1998.
38
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
V-ONE CORPORATION
FINANCIAL STATEMENTS
--------
As of December 31, 1995 and 1996 and
and for the years ended December 31, 1994, 1995, and 1996
AND
REPORT THEREON
--------
39
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of V-ONE Corporation:
We have audited the accompanying balance sheets of V-ONE Corporation (the
"Company") as of December 31, 1995 and 1996, and the related statements of
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. We have also audited the financial
statement schedules listed in the index on page F-1 of this Form 10-K. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of V-ONE Corporation as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
McLean, Virginia
March 24, 1997
40
<PAGE>
<TABLE>
<CAPTION>
V-ONE CORPORATION
BALANCE SHEETS
--------
ASSETS
December 31,
-------------------------------
1995 1996
-------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,328,385 $ 10,894,375
Accounts receivable, less allowances of $23,620 and $252,395 as of
December 31, 1995 and 1996, respectively 242,392 2,647,195
Inventory 257,630 418,870
Prepaid expenses and other current assets 13,955 173,411
----------- ------------
Total current assets 1,842,362 14,133,851
----------- ------------
Property and equipment:
Office and computer equipment 219,044 790,373
Furniture and fixtures 14,958 98,579
----------- ------------
234,002 888,952
Less accumulated depreciation (35,952) (132,365)
----------- ------------
198,050 756,587
Licensing fee, net of accumulated amortization of $0 and $70,764 as of - 778,409
December 31, 1995 and 1996, respectively
Other assets 10,190 28,568
----------- ------------
Total assets $ 2,050,602 $ 15,697,415
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 227,545 $ 1,311,044
Deferred income 12,500 97,748
Notes payable - current 1,255,556 16,667
Notes payable to related parties 474,144 -
Capital lease obligations - current 40,928 65,232
----------- -----------
Total current liabilities 2,010,673 1,490,691
Notes payable - noncurrent 44,444 22,222
Deferred rent 52,959 78,275
Capital lease obligations - noncurrent 82,464 112,482
----------- -----------
Total liabilities 2,190,540 1,703,670
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit)
Common stock, $0.001 par value; 33,333,333 shares
authorized; 8,304,426 and 12,658,347 shares
issued and outstanding, as of December 31, 1995
and 1996, respectively 8,304 12,658
Additional paid-in capital 1,496,541 22,608,866
Notes receivable from sales of Common Stock - (287,400)
Accumulated deficit (1,644,783) (8,340,379)
----------- -------------
Total shareholders' equity (deficit) (139,938) 13,993,745
----------- -------------
Total liabilities and shareholders' equity (deficit) $ 2,050,602 $ 15,697,415
============ =============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
41
<PAGE>
<TABLE>
<CAPTION>
V-ONE CORPORATION
STATEMENTS OF OPERATIONS
--------
For the years ended
December 31,
--------------------------------------------------
1994 1995 1996
-------------- ------------- ------------------
<S> <C> <C> <C>
Revenues:
Products $ - $ 1,101,418 $ 5,955,592
Consulting and services 59,716 2,083 310,557
----------- ----------- -------------
Total revenues $ 59,716 1,103,501 6,266,149
---------- ----------- -------------
Cost of revenues:
Products - 376,359 1,969,117
Consulting and services 35,114 800 56,502
--------- ----------- -------------
Total cost of revenues 35,114 377,159 2,025,169
-------------- ------------- ------------------
Gross profit 24,602 726,342 4,240,530
-------------- ------------- ------------------
Operating expenses:
Sales and marketing 36,212 103,917 3,744,630
General and administrative 315,192 1,350,361 4,879,940
Research and development 127,926 304,973 1,960,727
-------------- ------------- ------------------
Total operating expenses 479,330 1,786,251 10,585,297
-------------- ------------- ------------------
Operating loss (454,728) (1,059,909) (6,344,767)
-------------- ------------- ------------------
Other (expense) income:
Interest expense (2,360) (66,615) (518,965)
Interest income - 4,513 168,176
-------------- ------------- ------------------
Total other expenses (2,360) (62,102) (350,789)
-------------- ------------- ------------------
Net loss $ (457,088) $ (1,122,011) $ (6,695,556)
============== ============= ==================
Net loss per common share $ (0.06) $ (0.12) $ (0.66)
============== ============= ==================
Weighted average shares
outstanding 8,046,766 9,567,509 10,209,340
============== ============= ==================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
42
<PAGE>
<TABLE>
<CAPTION>
V-ONE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
--------
Notes
Additional Receivable
Common Stock Paid-in from Accumulated
Shares Amount Capital Stock Sales Deficit Total
------------- ---------- --------------------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 5,666,666 $ 5,667 $ 34,333 $ - $ (65,684) $ (25,684)
Sale of common stock 2,176,473 2,176 747,824 - - 750,000
Contribution of common stock
from related party (333,333) (333) 333 - - -
Issuance of common stock as
payment for services 353,333 353 447 - - 800
Contributed capital in lieu in
cash compensation - - 50,000 - - 50,000
Net loss - - - - (457,088) (457,088)
------------- ---------- --------------------------- -------------- --------------
Balance, December 31, 1994 7,863,139 7,863 832,937 - (522,772) 318,028
Sale of common stock 107,954 108 399,892 - - 400,000
Contribution capital in lieu of
cash compensation (132,666) (133) 133 - - -
Issuance of common stock in
accordance with anti-dilution
agreement 56,000 56 (56) - - -
Issuance of common stock as
payment for accrued interest 76,666 77 32,468 - - 32,545
Issuance of common stock as
payment for services 333,333 333 141,167 - - 141,500
Contributed capital in lieu of
cash compensation - - 90,000 - - 90,000
Net loss - - - - (1,122,011) (1,122,011)
--------------- ---------- --------------------------- -------------- --------------
Balance, December 31, 1995 8,304,426 8,304 1,496,541 - (1,644,783) (139,938)
Contribution of common stock
from related party (383,965) (384) 288,360 - - 287,976
Issuance of common stock
related to 1996 Non-Statutory
Stock Option Plan 383,965 384 1,727,459 (287,400) - 1,440,443
43
<PAGE>
Issuance of common stock
as payment for services 11,111 11 49,989 - - 50,000
Issuance of non-qualified stock
options below fair market
value - - 487,796 - - 487,796
Issuance of warrants to purchase
common stock - - 299,000 - - 299,000
Exercise of warrants to purchase
common stock 66,666 67 933 - - 1,000
Issuance of common stock as
payment of a note 73,333 74 329,926 - - 330,000
Contribution of common stock
from related party (153,333) (153) 153 - - -
Issuance of common stock as
payment on accrued interest 153,333 153 64,937 - - 65,090
Repurchase of fractional shares
of common stock related to
the reverse stock split (9) - (41) - (40) (81)
Issuance of common stock as
payment of licensing fees 188,705 188 848,985 - - 849,173
Public sale of common stock
at $5.00 per share, net of
issuance costs 3,000,000 3,000 12,641,755 - - 12,644,755
Contribution of common stock
from related party (52,885) (53) 264,531 - - 264,478
Conversion of preferred stock to
common stock at 1-to-1.2
ratio 949,209 949 3,558,605 - - 3,559,554
Issuance of common stock due
to exercise of overallotment
option 117,791 118 540,937 - - 550,055
Net loss - - - - (6,695,556) (6,695,556)
------------- ---------- --------------------------- -------------- --------------
Balance, December 31, 1996 12,658,347 $ 12,658 $ 22,608,866 $ (287,400) $ (8,340,379) $ 13,993,745
============= ========== ============= ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
44
<PAGE>
<TABLE>
<CAPTION>
V-ONE CORPORATION
STATEMENTS OF CASH FLOWS
--------
For the years ended
December 31
------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (457,088) $ (1,122,011) $ (6,695,556)
Adjustments to reconcile net loss to net cash from
used in operating activities:
Provision for doubtful accounts receivable - 23,620 228,775
Provision for obsolete inventory - 50,000 -
Depreciation and amortization 10,307 24,623 172,582
Interest expense on accretion of note payable - - 299,000
Consulting expense satisfied by issuance of
common stock - - 45,833
Compensation expense satisfied by issuance of
common stock 800 141,500 487,796
Compensation expense recognized for receipt
of contributed capital 50,000 90,000 -
Compensation expense for common stock
contributed to stock option plan - - 287,976
Compensation expense for issuance of common
stock related to 1996 non-statutory stock
option plan - - 1,440,443
Compensation expense recognized for conversion
of preferred stock to common - - 264,425
Accrued interest satisfied with common stock - 32,545 65,090
Accrued interest satisfied with preferred stock - - 59,554
Changes in assets and liabilities:
Accounts receivable (840) (265,172) (2,633,578)
Inventory - (307,630) (161,240)
Prepaid expenses and other - (24,145) (173,667)
Accounts payable and accrued expenses 43,424 235,919 1,194,035
-------------- -------------- --------------
Net cash used in operating activities (353,397) (1,120,751) (5,118,532)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (13,300) (19,840) (562,190)
-------------- -------------- --------------
(13,200
Net cash used in investing activities (13,300) (19,840) (562,190)
-------------- -------------- --------------
45
<PAGE>
Cash flows from financing activities:
Issuance of common stock 700,000 400,000 -
Issuance of common stock in public sale - - 15,000,000
Payment of stock issuance costs - - (2,355,245)
Issuance of common stock due to exercise
of overallotment option - - 550,055
Issuance of preferred stock - - 1,000,000
Issuance of debt with detachable warrants - - 1,500,000
Exercise of options and warrants - - 1,000
Issuance of notes payable - 1,300,000 1,250,000
Issuance of notes payable to related parties - 454,351 -
Principal payments on capitalized lease obligations - (7,011) (43,843)
Repayment of notes payable - - (11,111)
Repayment of notes payable to related parties (20,412) - (1,644,144)
-------------- -------------- --------------
Net cash provided by financing activities 679,588 2,147,340 15,246,712
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 312,891 1,006,749 9,565,990
Cash and cash equivalents at end of period 8,745 321,636 1,328,385
-------------- -------------- --------------
Cash and cash equivalents at beginning of period $ 321,636 $ 1,328,385 $ 10,894,375
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
46
<PAGE>
<TABLE>
<CAPTION>
V-ONE CORPORATION
STATEMENTS OF CASH FLOWS - (Continued)
--------
Year ended December 31,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Noncash investing and financing activities:
Property and equipment acquired through capital leases $ - $ 123,392 $ 98,165
============== ============== ==============
Property and equipment acquired through the
issuance of common stock $ 50,000 $ - $ -
============== ============== ==============
Retirement of fully depreciated property and equipment $ - $ - $ 5,405
============== ============== ==============
Issuance of common stock as compensation $ 800 $ 141,500 $ -
============== ============== ==============
Accrued interest satisfied with common stock $ - $ 32,545 $ 65,090
============== ============== ==============
Notes received for stock options exercised $ - $ - $ 287,400
============== ============== ==============
Consulting expense recognized by issuance of
common stock $ - $ - $ 50,000
============== ============== ==============
Notes payable plus accrued interest satisfied with
preferred stock $ - $ - $ 2,559,554
============== ============== ==============
Issuance of common stock to satisfy note payable
to related party $ - $ - $ 330,000
============== ============== ==============
Issuance of common stock payment of licensing fee $ - $ - $ 849,173
============== ============== ==============
Conversion of preferred stock to common stock $ - $ - $ 3,559,554
============== ============== ==============
Repurchase of fractional shares of common
stock related to the reverse stock split $ - $ - $ 81
============== ============== ==============
Supplemental cash flow disclosure:
Cash paid for interest $ - $ 182 $ 133,042
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
47
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF 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 private enterprise networks and public
networks, such as the Internet.
The Company was originally incorporated in the State of Maryland on
February 16, 1993 with the authorization to issue 5,666,666 shares of
Common Stock. The Board of Directors authorized and the shareholders
approved a ten-for-one stock split of the Company's Common Stock as of
November 11, 1995 increasing authorized Common Stock to 13,333,333
shares. Effective February 7, 1996, the Company merged with a
pre-existing corporation formed in Delaware. The Delaware corporation
became the surviving corporation.
In connection with its reincorporation, the Company increased the
number of authorized shares of Common Stock from 13.3 million to 33.3
million and authorized 13.3 million shares of Preferred Stock. On June
12 and June 28, 1996, respectively, the Board of Directors authorized
and the shareholders approved a two-for-three reverse stock split of
the outstanding shares of the Company's Preferred and Common Stock,
which was effective July 2, 1996. All references to Common Stock,
Preferred Stock, options and per share data have been restated to give
effect to both stock splits.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are generally recognized from the license of software
upon shipment, net of allowances, provided that no significant
vendor obligations remain. In addition, the Company often permits
customers to evaluate products being considered for purchase,
generally for a period up to 30 days, in which event the Company
does not recognize revenues until the customer has accepted the
48
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
product. Accordingly, the Company's revenue recognition policy
does not necessarily correlate with the signing of a contract or
the shipment of a product. Allowances for estimated future
returns, credits and doubtful accounts are netted against accounts
receivable. Service and training revenues are recognized as the
services are performed.
Maintenance and support revenues are recognized ratably over the
contract term, typically one year. Payments received in advance of
revenue recognition are included in deferred income.
In some instances, 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.
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 ("SFAS") 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.
49
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates and could
impact future results of operations and cash flows.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less 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, items held for stock and training kits. Cost is
determined based on specific identification.
PROPERTY AND EQUIPMENT
Office and computer equipment and furniture and fixtures are
recorded at cost. Depreciation and amortization of property and
equipment is calculated using the straight-line method over a
useful life of the assets, generally three to seven years.
Depreciation expense was $10,307, $24,623 and $101,818 for the
years ended December 31, 1994, 1995 and 1996, respectively.
Repairs and maintenance costs are charged to expense as incurred.
Upon sale or retirement of property and equipment, the costs and
related accumulated depreciation are eliminated from the accounts
and any resulting gain or loss on such disposition is included in
the determination of net income.
50
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
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
than not that some or all of the deferred tax assets may not be
realized.
COMPUTATION OF NET LOSS PER COMMON SHARE
Primary net loss per common share has been computed based upon the
weighted average number of common stock and common stock
equivalents outstanding during each period. Common stock
equivalents recognize the potential dilutive effects of future
exercise of common stock options. Pursuant to the rules of the
Securities and Exchange Commission, common and common equivalent
shares issued during the 12 months immediately preceding the date
of the initial filing of the registration statement relating to
the Company's initial public offering ("IPO") have been included
in the calculation of common and common equivalent shares as if
they were outstanding for the periods prior to the date of the
initial public offering (using the treasury stock method and the
public offering price of $5.00 per share).
RISKS, UNCERTAINTIES AND CONCENTRATIONS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
51
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates and could
impact future results of operations and cash flows.
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 had a balance in these funds of $1,175,279 and
$10,875,652 as of December 31, 1995 and 1996, respectively. The
Company has not experienced any losses to date on its invested
cash.
The Company sells its product 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 provided sufficient
provisions to prevent a significant impact of credit losses to the
financial statements.
In 1994, two customers accounted for approximately 65% of total
revenues, respectively. In 1995, three customers accounted for
approximately 39% of total revenues. In 1996, two customers
accounted for approximately 24% of total revenues.
One customer accounted for 36% of total accounts receivable as of
December 31, 1995. Three customers accounted for approximately 41%
of total accounts receivable as of December 31, 1996.
Fair Value of Financial Instruments:
The carrying amounts of the Company's assets and liabilities
approximate fair value due to either the short-term maturity of
those financial instruments or their negotiated market terms.
52
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
Accounting for Stock-Based Compensation, which is effective for
the Company's financial statements for fiscal years beginning
after December 15, 1995. SFAS 123 allows companies to either
account for stock-based compensation under the new provisions of
SFAS 123 or under the provisions of Accounting Principles Board
Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees, 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 continued to account for its
stock-based compensation in accordance with the provisions of APB
25.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years'
financial statements to conform to the classifications used in the
current period.
3. INVENTORY
The Company has provided an allowance for potentially
non-salable inventory in the amounts of $50,000 at December 31, 1995
and 1996.
4. NOTES PAYABLE
In October 1995, the Company entered into a $50,000 loan
agreement with an international financial institution. The loan
requires monthly payments of interest at a rate equal to the
institution's prime lending rate for the first twelve months (8.25% as
of December 31, 1996). In October 1996, the interest rate increased to
1.5% over prime (9.75% as of December 31, 1996). The Company is
required to repay the loan through 36 monthly payments commencing May
1996. The loan is collateralized by the assets of the Company.
53
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
In both December 1995 and January 1996, the Company issued
$1,250,000 in 7% uncollateralized promissory notes to fourteen
individual investors. During April 1996, the principal and accrued
interest was converted into shares of the Company's Series A
Convertible Preferred Stock. (See Note 8.)
Maturities of notes payable as of December 31, 1996 are as
follows:
1997 $16,667
1998 16,667
1999 5,555
--------
$38,889
=======
5. NOTES PAYABLE TO RELATED PARTIES
On May 15, 1995, Scientek Corporation, through Hai Hua
Cheng, a director of the Company, invested $500,000 in the Company in
consideration for ownership of 15% of the Company's outstanding Common
Stock after giving effect to this issuance.
On June 1, 1995, the Company borrowed $330,000 from
Scientek Corporation and issued a promissory note, bearing no interest,
due June 1, 1996. The note was assigned to Hai Hua Cheng by Scientek
Corporation. The terms of the note provided that, as further
consideration for the loan, the Company would issue 153,333 shares of
Common Stock to Mr. Cheng immediately after repayment of the loan. On
June 12, 1996, in consideration for Mr. Cheng's agreement not to demand
payment of the note until May 31, 1997, the Board of Directors
authorized the Company to offer Mr. Cheng the option to receive Common
Stock based on a $4.50 per share conversion price in lieu of cash in
payment of the note. The Board reserved and authorized the issuance of
73,333 shares of Common Stock for this purpose. On June 28, 1996, the
Company repaid the loan made by Mr. Cheng by issuing 226,666 shares of
Common Stock to Mr. Cheng in full repayment of the note, including the
153,333 shares of Common Stock described above. In connection with this
loan, the Company recognized interest expense of $56,954 and $40,681
during the years ended December 31, 1995 and 1996, respectively.
54
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
During December 1995, the Company's founder, President and
Chief Executive Officer contributed 132,666 shares of the Company's
Common Stock, of which 56,000 shares related to an anti-dilution
agreement with Mr. Cheng. The remaining 76,666 shares were issued to
Mr. Cheng in lieu of a portion of the accrued interest on the $330,000
note for the period from June 1, 1995 through December 31, 1995.
The Company's President and Chief Executive Officer, who
is the majority shareholder, advanced the Company operating funds under
three separate promissory notes which are updated on an annual basis.
The notes bear interest at 8% and are due on demand. Following the
consummation of the IPO, the Company repaid the outstanding balance of
the notes and all accrued interest. The amount outstanding was $143,644
as of December 31, 1995.
During June 1996, the Company borrowed $1,500,000 and
issued an 8% uncollateralized senior subordinated note due June 18,
2000, with 333,332 detachable warrants to purchase Common Stock. Of the
original 333,332 detachable warrants, 266,666 were exercisable at $4.50
per share, and 66,666 were exercisable at $0.015 per share. Because the
initial offering price per share of Common Stock in the IPO was less
than $7.00, each share of Series A Stock was automatically converted
into 1.20 shares of Common Stock and the 266,666 warrants were
converted into 319,999 warrants exercisable at $3.75 per share. James
F. Chen, the Company's founder, President, and Chief Executive Officer
contributed 13,333 shares of Common Stock due to the increase in the
Series A Stock's conversion ratio. The Company has allocated $1,201,000
and $299,000 to notes payable and additional paid-in capital,
respectively, based upon the pro-rata fair market value of the
instruments. As of December 31, 1996, the Company has amortized the
entire $299,000 allocated to additional paid-in capital. Following the
consummation of the IPO, the Company repaid the outstanding balance of
the note and all accrued interest. The 66,666 detachable warrants with
an exercise price of $0.015 were exercised on June 28, 1996, and the
319,999 detachable warrants with an exercise price of $3.75 remain
outstanding at December 31, 1996.
55
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
December 31:
1995 1996
---- ----
Accounts payable $ 179,384 $ 645,602
Accrued payroll and vacation 10,000 172,299
Accrued interest 38,161 -
Accrued IPO costs 139,679
Accrued contract costs 155,000
Accrued marketing costs 55,000
Sales taxes payable 118,464
Other accrued expenses 25,000
--------- ----------
$ 227,545 $1,311,044
========= ==========
56
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. 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,
1995 1996
---- ----
Deferred tax assets (liabilities):
Deferred income $ 4,828 $ 37,750
Inventory allowance 19,310 19,310
Allowance for bad debts 9,122 97,475
Deferred rent 20,453 30,230
Non-deductible accruals - 93,993
Stock-based employee
compensation - 188,388
Licensing fee - (300,622)
Net operating loss carryforward 635,215 2,894,848
--------- -----------
Total gross deferred tax asset 688,928 3,061,372
Less valuation allowance (688,928) (3,061,372)
--------- -----------
Net deferred tax asset $ - $ -
========== =============
The net change in the valuation allowance from 1995 to
1996 is due principally to increases in net operating losses and the
difference in the tax treatment for the acquisition of certain
licensing rights. Valuation allowances have been recognized due to the
uncertainty of realizing the benefit of net operating loss
carryforwards. As of December 31, 1996, the Company had net operating
loss carryforwards of approximately $7,496,000 for Federal and state
income tax purposes available to offset future taxable income. The net
operating loss carryforwards begin expiring from 2008 to 2011.
57
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. SHAREHOLDERS' EQUITY
COMMON STOCK
On February 16, 1993, the Company was authorized to issue
5,666,666 shares of Common Stock, all one class, with no par
value. On January 1, 1994, the Company amended the Articles of
Incorporation to increase the authorized shares of Common Stock
from 5,666,666 to 13,333,333 and establish a par value of $0.001
per share. Each holder of Common Stock has one vote for each share
of Common Stock held and shall participate proportionately in the
assets upon dissolution in accordance with their respective
ownership.
During February 1994, the Company's founder, President and Chief
Executive Officer agreed to contribute 333,333 shares of the
Company's Common Stock to the Company and the Company agreed to
issue those shares of Common Stock to an employee at the then
current fair market value of the shares, which equaled par value
at that time, in consideration for services rendered to the
Company by the employee. In connection with the Company's
commitment to issue the 333,333 shares of Common Stock, the
Company recorded compensation expense of $500 for the year ended
December 31, 1994. The Company's founder, President and Chief
Executive Officer contributed these shares to the Company in May
1995 and the Company issued such shares to the employee at that
time.
In October 1996, the Company completed an underwritten initial
public offering of 3,000,000 shares of its common stock, at a
public offering price of $5.00 per share (the "Offering"). The net
proceeds from the Offering of approximately $12,645,000 were used
to repay indebtedness outstanding under the Company's senior
subordinated note and promissory notes due to the Company's
President and Chief Executive Officer (See Note 5).
In November 1996, the Company's underwriters exercised their
option to purchase an additional 200,000 shares of Common Stock of
which 117,791 shares were issued by the Company and 82,209 shares
58
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
were sold by certain shareholders, for $5.00 per share. The
Company did not receive any of the proceeds from the sale of
shares by the selling shareholders.
STOCK SPLITS
On November 11, 1995, the Board of Directors authorized and the
shareholders approved a ten-for-one stock split of the outstanding
shares of the Company's Common Stock. On June 12 and June 28,
1996, respectively, the Board of Directors authorized and the
shareholders approved a two-for-three reverse stock split of the
outstanding shares of the Company's Preferred and Common Stock,
which was effective July 2, 1996. All references to Common Stock,
Preferred Stock, options and per share data have been restated to
give effect to both stock splits.
STOCK OPTIONS PLANS
The Company has the following three stock option plans: 1995
Non-Statutory Stock Option Plan, the 1996 Non-Statutory Stock
Option Plan and the 1996 Incentive Stock Plan ("Plans"). The Plans
were adopted to attract and retain key employees, directors,
officers and consultants. The Plans are administered by a
committee appointed by the Board of Directors ("Compensation
Committee").
1995 NON-STATUTORY STOCK OPTION PLAN
The Compensation Committee determines the number of options
granted to a key employee, the vesting period and the exercise
price provided it is not below market value on the date of the
grant for the 1995 Non-Statutory Stock Option Plan ("1995 Plan").
In most cases, the options 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 with 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.
59
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Option activity for the period from the 1995 Plan's
inception to December 31, 1996 was as follows:
Shares Price
------ -----
Balance as of December 31, 1994 - -
Granted 350,293 $0.4245-$2.505
Exercised - -
Canceled - -
-------
Balance as of December 31, 1995 350,293 $0.4245-$2.505
Granted 2,000 $4.50
Exercised - -
Canceled (2,000) $4.50
-------
Balance as of December 31, 1996 350,293 $0.4245-$2.505
=======
The Compensation Committee, which administers the 1995 Plan, was
authorized by the Board of Directors to grant options for a total
of 352,293 shares of Common Stock under the 1995 Plan. As of
December 31, 1996, the Compensation Committee had granted a total
of 352,293 options, of which 213,331 were issued at $0.4245 per
share, 136,962 were issued at $2.505 per share and 2,000 were
issued at $4.50 per share. As of December 31, 1995 and 1996,
44,445 and 229,087, respectively, of the options were vested and
exercisable. As of December 31, 1996, the Company had no shares of
Common Stock available for grant under the 1995 Plan.
1996 NON-STATUTORY STOCK OPTION PLAN
The Compensation Committee, which administers the 1996
Non-Statutory Stock Option Plan ("Non-Statutory Plan"),
established the options price to be the fair market value of the
stock on the date of grant. The options are not transferable, are
subject to various restrictions outlined in the Non-Statutory Plan
and must be exercised by December 31, 1996. During April 1996, the
Company's founder, President and Chief Executive Officer
60
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
contributed 383,965 shares of Common Stock to the Company and the
Company issued those shares to employees in connection with the
exercise of stock options granted under the Non-Statutory Plan.
The Company recognized compensation expense of $287,976 with a
corresponding increase to additional paid-in capital to record
this transaction.
Option activity for the period from the Non-Statutory Plan's
inception to December 31, 1996 was as follows:
Shares Price
------ -----
Balance as of December 31, 1995 - -
Granted 383,965 $0.75
Exercised (383,965) $0.75
Canceled - -
--------
Balance as of December 31, 1996 - -
========
As of December 31, 1996, 383,965 options were granted under the
Non-Statutory Plan. No additional options are available for grant
under the plan. The options were exercised on April 22, 1996 at
$0.75 a share in exchange for notes and par value in cash. The
Company recognized $1,439,867 in compensation expense based upon
the difference between the fair market value of $4.50 at the date
of issuance and the exercise price of $0.75 per share. The notes
are full recourse promissory notes bearing interest at 6% per
annum and are collateralized by the stock issued upon exercise of
the stock options. Principal and interest is payable in
installments. Maturities range from April 1997 to April 2006. The
Company has accounted for these notes as a reduction to
shareholders' equity as of December 31, 1996.
1996 INCENTIVE STOCK PLAN
During June 1996, the Company adopted the 1996 Incentive Stock
Plan ("1996 Plan"), under which incentive stock options,
non-qualified stock options and restricted share awards may be
made to the Company's key employees, directors, officers and
61
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
consultants. Both incentive stock options and options that are not
qualified under Section 422 of the Internal Revenue Code of 1986,
as amended, ("Non-Qualified Options") are available under the 1996
Plan. The options are not transferable and are subject to various
restrictions outlined in the 1996 Plan. The Compensation
Committee, which administers the 1996 Plan, determines the number
of options granted to a key employee, officer or consultant, the
vesting period and the exercise price provided that it is not
below market value. The 1996 Plan will terminate during June 2006
unless terminated earlier by the Board of Directors.
The 1996 Plan also provides for the automatic grant of a
Non-Qualified Option to purchase 6,666 shares of Common Stock to
each new non-employee director. All options have a five year term
and are exercisable on the date of grant. As of December 31, 1996,
two of the Company's directors were eligible to participate in the
1996 Plan and each director was granted a Non-Qualified Option to
purchase 6,666 shares of Common Stock.
Option activity for the period from the 1996 Plan's inception to
December 31, 1996 was as follows:
<TABLE>
<CAPTION>
Incentive Non-Qualified
Stock Options Stock Options
Shares Price Share Price
------ ----- ----- -----
<S> <C> <C> <C> <C>
Balance as of December 31, 1995
Granted 386,310 $4.50-$9.00 837,903 $3.75-$9.00
Exercised - - - -
Canceled (41,476) $4.50-$9.00 (29,066) $3.75
-------- --------
Balance as of December 31, 1996 344,834 $4.50-$9.00 808,837 $3.75-$9.00
======= =======
</TABLE>
The Compensation Committee authorized the Board of Directors to
grant options for a total of 2,333,333 shares of Common Stock
under the 1996 Plan. As of December 31, 1996, the Compensation
Committee had granted a total of 837,903 Non-Qualified Options, of
62
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
which 590,394 were issued at $3.75 per share, 155,509 were issued
at $4.50 per share, 78,668 were issued at $5.00 per share and
13,332 were issued at $9.00 per share. Of the total 837,903
Non-Qualified Options, 486,447 are vested and exercisable as of
December 31, 1996. The Compensation Committee had also granted
386,310 incentive stock options, of which 190,642 were issued at
$4.50 per share, 175,000 were issued at $5.00, and 20,668 were
issued at $9.00. Of the total 386,310 incentive stock options,
71,312 were vested and exercisable as of December 31, 1996. As of
December 31, 1996, the Company had 1,179,662 shares of Common
Stock available for grant under the 1996 Plan.
The Company accounts for the fair value of its grants under the
Plans in accordance with APB 25. Accordingly, no compensation
expense has been recognized for the Plans. Had compensation
expense been determined based on the fair value at the grant dates
for awards under the Plans consistent with the method of SFAS 123,
the Company's net loss and loss per common share would have been
increased to the pro forma amounts indicated below:
1995 1996
---- ----
Net loss
As reported $1,122,011 $6,695,556
Pro forma $1,154,939 $9,509,366
Loss per common share
As reported $0.12 $0.66
Pro forma $0.12 $0.93
63
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
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, 1995 and 1996, respectively: dividend
yield of 0%, expected volatility of 43%, risk-free interest rate
of 6.2% and 6.5% and expected terms of 3.0 and 3.4 years,
respectively.
A summary of the status of the Plans is presented below:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996
----------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Options outstanding beginning
of period - - 350,293 $1.238
Options exercised - - (383,965) $0.75
Options canceled - - (72,542) $5.480
Options granted 350,293 $1.238 1,610,178 $2.438
Options outstanding end
of period 350,293 $1.239 1,503,964 $2.433
Options exercisable at end
of period 44,445 $0.425 786,846 $3.118
Weighted-average fair value
of options granted
during the period - $0.094 - $1.758
</TABLE>
As of December 31, 1996, the weighted average remaining
contractual life of the options that range from $3.75 to $9.00 is
7.1 years.
As of December 31, 1995 and 1996, the pro forma tax effects under
SFAS 109 would include an increase to both the deferred tax asset
and the valuation allowance of $12,700 and $1,086,700,
respectively, and no impact to the statement of operations.
64
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SERIES A CONVERTIBLE PREFERRED STOCK
During April and May, 1996, the Board of Directors authorized the
issuance of 791,011 shares of Series A Stock with a par value of
$0.001. On April 15, 1996, the Company repaid the full amount of
the 7% uncollateralized promissory notes outstanding, including
accrued interest, to seven of the investors who participated in
the December 1995 and January 1996 note offering, by issuing
shares of the Company's Series A Stock, at a price of $4.50 per
share. The Company paid cash to each of these investors in an
amount equal to the value of any fractional shares of Series A
Stock that would otherwise have been transferred to such
investors. In addition, the Company permitted the seven investors
to purchase an additional 222,222 shares of Series A Stock at a
price of $4.50 per share. Of the remaining seven investors, two
transferred their notes to one of the other remaining investors.
The remaining five investors exchanged their notes, including the
transferred notes, for shares of the Company's Series A Stock on
May 24, 1996, also at a price of $4.50 per share. A total of
791,011 shares of Series A Stock were issued on May 24, 1996.
In connection with the IPO, each share of Series A Stock
automatically converted into 1.20 shares of Common Stock. The
791,011 shares of Series A Stock were converted into 949,209
shares of Common Stock. James F. Chen, the Company's founder,
President and Chief Executive Officer, contributed 39,552 shares
of Common Stock, to the Company due to the increase in the Series
A Stock's conversion ratio, because the initial offering price per
share of Common Stock in the IPO was less that $7.00.
65
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. COMMITMENTS
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, 1996 are as follows:
Operating Capital
--------- -------
1997 $371,317 $ 82,388
1998 714,684 49,682
1999 734,457 40,038
2000 747,870 36,357
2001 621,417 36,357
thereafter 870,235 7,364
--------- --------
Total minimum payments $4,059,980 215,829
==========
Interest (38,115)
--------
Present value of capital lease
obligations 177,714
Less: current portion (65,232)
--------
Capital lease obligations non-current $112,482
========
Rent expense was $12,366, $92,785 and $258,607, for the
years ended December 31, 1994, 1995 and 1996, respectively.
In March 1997, the Company entered into an operating lease
agreement for new office space. Payments under the lease will commence
on or about July 1, 1997 and will continue through the initial lease
term of six years. The Company was required to pay a security deposit
of $370,000, a portion of which will be returned to the Company at the
end of each lease year.
66
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The cost and accumulated depreciation of assets under
capital leases were as follows as of December 31:
1995 1996
---- ----
Furniture $ 8,752 $ 8,752
Computers and equipment 114,640 209,725
---------- --------
123,392 218,477
Accumulated depreciation (3,192) (34,221)
----------- ---------
$ 120,200 $184,256
=========== ========
LICENSE AGREEMENTS
In 1994, the Company entered into two licensing agreements whereby
the Company obtained the right to modify and sell certain
technology used in its product line. One of the agreements
requires the Company to pay fees based on product and subscription
sales for any product using the licensed technology. The other
agreement provides for payment of fees based upon gross revenues
of the Company. This latter agreement also gives the other party
("Licensor") the right to forfeit future licensing fees in
exchange for 2% of the Company's outstanding voting stock, after
giving effect to the issuance. The Licensor elected to receive
voting stock in May 1996. In October 1996, the Company issued
188,705 shares of Common Stock to the Licensor. The fair market
value of the stock issued is recorded as an asset by the Company
and is being amortized over the period of its estimated useful
life, 3 years. The Company incurred expenses totaling $0, $110,860
and $135,779 relating to these agreements in 1994, 1995 and 1996,
respectively.
67
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
10. FINANCING
The Company has incurred net losses of $457,088,
$1,122,011 and $6,695,556, for the years ended December 31, 1994, 1995
and 1996. Management considers the Company's current working capital
position sufficient to cover operating losses over their next operating
cycle. Management has historically been successful in obtaining outside
financing to meet obligations and funding working capital requirements
as they come due. Most recently, the Company closed on several
transactions that provided additional cash flow. These are summarized
below.
During June 1996, the Company borrowed $1,500,000 and
issued an 8% uncollateralized senior subordinated note due June 18,
2000, with 333,332 detachable warrants to purchase Common Stock. (See
Notes 4 and 5.)
The Company also raised an additional $999,999 by issuing
222,222 shares of Series A Stock at $4.50 per share. During June 1996,
the Company signed a software license contract with a customer for
$2,000,000, with payment terms of $750,000 to be received during 1996
and the remaining $1,250,000 to be paid over the remaining contract
period.
During October 1996, the Company successfully consummated
an IPO. Net proceeds to the Company were approximately $12,645,000, a
portion of which was used to repay the senior subordinated note and
promissory notes to the President and Chief Executive Officer.
In November 1996, the Company's underwriters exercised
their option to purchase an additional 200,000 shares of Common Stock
of which 117,791 shares were issued by the Company and 82,209 shares
were purchased from selling shareholders, for $5.00 per share. The
Company did not receive any of the proceeds from the sale of shares by
the selling shareholders.
68
<PAGE>
V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
11. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
First Seconded Third Fourth
Quarter Quarter Quarter Quarter
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
1995
Net revenues $ 150,257 $ 218,961 $ 356,021 $ 378,262
Gross profit 97,667 140,401 230,539 257,735
Net loss (154,791) (245,136) (60,536) (661,548)
Net loss per share (0.02) (0.03) (0.01) (0.07)
1996
Net revenues $ 1,021,811 $ 1,354,576 $ 1,720,543 $ 2,169,219
Gross profit 699,813 876,023 1,205,105 1,459,589
Net loss (994,660) (3,393,401) (977,514) (1,329,978)
Net loss per share (0.10) (0.34) (0.11) (0.11)
</TABLE>
69
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning directors and executive
officers is incorporated herein by reference to the Company's definitive proxy
statement for its annual stockholders' meeting to be held on May 15, 1997.
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 15, 1997.
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 15, 1997.
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 15, 1997.
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The financial statement schedules filed as part of this report are listed in the
Index to Financial Statements and Schedules on page F-1 immediately following
the signatures to this report.
(b) Exhibits
70
<PAGE>
The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Number Description
<S> <C>
3.1 Amended and Restated Certificate of Incorporation as of July 2, 1996*
3.2 Amended and Restated Bylaws dated as of February 6, 1997
3.3 Certificate of Amendment to Certificate of Designation, Preferences, and Rights of Series A
Convertible Preferred Stock dated September 9, 1996*
9.1 Voting Trust Agreement between Hai Hua Cheng and James F. Chen, Trustee*
9.2 Voting Trust Agreement between Robert Zupnik and James F. Chen, Trustee*
9.3 Voting Trust Agreement between Dennis Winson and James F. Chen, Trustee*
10.1 Employment Agreement between V-ONE and James F. Chen dated as of June 12, 1996*
10.2 V-ONE 1995 Non-Statutory Stock Option Plan*
10.3 V-ONE 1996 Non-Statutory Stock Option Plan*
10.4 V-ONE 1996 Incentive Stock Plan*
10.5 Software License Agreement between Trusted Information Systems, Inc. ("TIS") and V-ONE executed
October 6, 1994*
10.6 First Amendment to the Software License Agreement between TIS and V-ONE*
10.7 Second Amendment to the Software License Agreement between TIS and V-ONE*
10.8 Third Amendment to the Software License Agreement between TIS and V-ONE*
10.9 Fourth Amendment to the Software License Agreement between TIS and V-ONE*
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*
10.11 Amendment Number Two to the OEM Master License Agreement between RSA and V-ONE and Conversion
Agreement dated May 23, 1996*
10.12 Promissory Note for Hai Hua Cheng with Allonge and Amendment dated June 12, 1996*
10.13 Form of Exchange and Purchase Agreement dated April 1996*
10.14 Registration Rights Agreement between V-ONE and JMI Equity Fund II, L.P. ("JMI")*
10.15 8% Senior Subordinated Note due June 18, 2000 issued by V-ONE to JMI*
10.16 Warrant to Purchase 100,000 shares of Common Stock (now 66,666 shares of Common Stock) Issued by
V-ONE to JMI*
10.17 Warrant to Purchase 400,000 shares of Common Stock (now 319,999 shares of Common Stock) Issued
by V-One to JMI*
10.18 Employment Agreement between V-ONE and Jieh-Shan Wang dated as of July 8, 1996*
11 Computation of Primary and Fully Diluted Loss Per Share
23.1 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule for the year ended December 31, 1996
- - -------------------------------------------------------------------------------------------------------------------
* The information required by this exhibit is incorporated herein by reference to the
Company's Registration Statement and Form S-1 (No. 333-06535).
</TABLE>
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
71
<PAGE>
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 28, 1997 By: /S/ James F. Chen
--------------------
James F. Chen
President and Chief
Executive Officer
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below as of March 28, 1997 by the following persons on behalf of the
registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ James F. Chen President, Chief Executive
- - ------------------------- Officer and Director March 28, 1997
/s/ Charles B. Griffis Senior Vice President, Chief
- - ------------------------ Financial Officer and Treasurer March 28, 1997
/S/ Charles C. Chen Director* March 28, 1997
- - ------------------------
/S/ Hai Hua Cheng Director* March 28, 1997
- - -------------------------
/S/ Harry S. Gruner Director* March 28, 1997
- - -------------------------
/S/ William E. Odom Director* March 28, 1997
- - -------------------------
*By: James F. Chen
-----------------
Attorney-in-fact
</TABLE>
72
<PAGE>
V-ONE CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts and Reserves F-2
F-1
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
V-ONE CORPORATION
(For the years ended December 31, 1994, 1994 and 1996)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning of Costs and End of Period
Description Period Expenses Deductions
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
December 31, 1994 $ --- $ --- $ --- $ ---
December 31, 1995 --- 23,620 --- 23,620
December 31, 1996 23,620 228,775 --- 252,395
DEFERRED TAX ASSET VALUATION ALLOWANCE
December 31, 1994 --- 165,804 --- 165,804
December 31, 1995 165,804 340,489 --- 506,293
December 31, 1996 506,293 2,555,079 --- 3,061,372
ALLOWANCE FOR NON-SALABLE INVENTORY
December 31, 1994 --- --- --- ---
December 31, 1995 --- 50,000 --- 50,000
December 31, 1996 50,000 --- --- 50,000
</TABLE>
F-2
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
V-ONE CORPORATION
AS OF FEBRUARY 6, 1997
ARTICLE I.
MEETINGS OF SHAREHOLDERS
Section 1.1 PLACES OF MEETINGS. All meetings of the shareholders shall
be held at such place, either within or without the State of Delaware, as from
time to time may be fixed by the Board of Directors.
Section 1.2 ANNUAL MEETING. The annual meeting of the shareholders for
the election of Directors and transaction of such other business as may come
before the meeting shall be held at such date and time as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting. Unless otherwise designated by the Board of Directors, the annual
meeting shall be held on the first Friday of the month of June.
Section 1.3 SPECIAL MEETINGS. A special meeting of the shareholders for
any purpose or purposes may be called at any time by the President or the
Chairman of the Board or a majority of the Board of Directors as prescribed by
statute.
Section 1.4 NOTICE OF MEETINGS. Written notice of all meetings shall be
given, stating the place, date, and hour of the meeting and stating the place
within the city or other municipality or community at which the list of
stockholders of the Corporation may be examined. The notice of a meeting shall
in all instances state the purpose or purposes for which the meeting is called.
If any action is proposed to be taken which would, if taken, entitle
stockholders to receive payment for their shares of stock, the notice shall
include a statement of that purpose and to that effect. Except as otherwise
provided by the General Corporation Law of the State of Delaware, a copy of the
notice of any meeting shall be given, personally or by telex, telefax,
telephone, telegraph or postal mail, not less than ten days nor more than sixty
<PAGE>
days before the date of the meeting, unless the lapse of the prescribed period
of time shall have been waived, and directed to each stockholder at his record
address or at such other address which he/she may have furnished by request in
writing to the Secretary of the Corporation. Notice by mail shall be deemed to
be given when deposited, with postage thereon prepaid, in the U.S. mail. If a
meeting is adjourned to another time, not more than thirty days hence, and/or to
another place, and if an announcement of the adjourned time and/or place is made
at the meeting, it shall not be necessary to give notice of the adjourned
meeting. Notice need not be given to any stockholder who submits a written
waiver of notice by him/her before or after the time stated therein. Attendance
of a person at a meeting of stockholders shall constitute a waiver of notice of
such meeting, except when the stockholder attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any meeting of the
stockholders need be specified in any written waiver of notice.
Section 1.5 QUORUM. Any number of shareholders together holding at
least a majority of the outstanding shares of stock entitled to vote with
respect to the business to be transacted, who shall be present in person or
represented by proxy at any meeting duly called, shall constitute a quorum for
the transaction of business. If less than quorum shall be in attendance at the
time for which a meeting shall have been called, the meeting may be adjourned
from time to time by a majority of the shareholders present or represented by
proxy without notice other than by announcement at the meeting.
Section 1.6 PROXIES AND VOTING. Each shareholder shall, at every
meeting of the shareholders, be entitled to one vote in person or by proxy for
each share of capital stock having voting power held by such shareholder as of
the record date set for the meeting. All action requiring the approval of the
shareholders shall be authorized by a majority of the votes cast except where
the General Corporation Laws of the State of Delaware prescribes a different
percentage of votes and/or a different exercise of voting power; provided,
however, that directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. A proxy shall be authorized by an instrument
in writing, dated and signed by the shareholder entitled to vote or his duly
authorized attorney-in-fact. The original or a facsimile of the proxy shall be
filed with the Secretary. All voting may be taken either by voice vote or by
written ballots, except where otherwise required by law. No proxy shall be voted
after three years from its date, unless the proxy provides for a longer period.
Section 1.7 INSPECTORS AND JUDGES. The person presiding at any meeting
of shareholders may, but need not, appoint one or more inspectors or judges.
Each inspector or judge, if any, before entering upon the discharge of his/her
duties, shall take and sign an oath faithfully to execute the duties of
inspector or judge at such meeting with strict impartiality and according to the
best of his/her ability. The inspectors or judges, if any, shall determine the
2
<PAGE>
number of shares of stock outstanding and the voting power of each, the shares
of stock represented at the meeting, the existence of a quorum, the validity and
effect of proxies, and shall receive votes, ballots or consents, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes, ballots or consents, determine the result,
and do such acts as are proper to conduct the election or vote with fairness to
all shareholders. On request of the person presiding at the meeting, the
inspector or inspectors or judge or judges, if any, shall make a report in
writing of any challenge, question or matter determined by him/her or them and
execute a certificate of any fact found by him/her or them.
Section 1.8 WRITTEN CONSENT. Any action required or permitted by law to
be taken at a shareholders' meeting may be taken without a meeting, without
action by the Board of Directors, without prior notice, and without a vote, if
consents in writing setting forth the action are signed by all shareholders
entitled to vote upon the action. Written consents, in order to be valid, must
be delivered by postal mail or telefax to the Secretary of the Corporation for
inclusion in the minutes or filing in the corporate minutes. Every written
consent shall bear the signature of each shareholder who makes the consent and
the date upon which the consent was signed.
ARTICLE II.
DIRECTORS
Section 2.1 POWERS OF DIRECTORS. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors, which shall exercise all powers of the Corporation, except as
otherwise expressly provided by law, the Certificate of Incorporation, or these
Bylaws.
Section 2.2 NUMBER OF DIRECTORS. The number of Directors which shall
constitute the Board of Directors shall be not more than seven. The first Board
of Directors shall consist of the following three Directors: James F. Chen,
Charles Chen, and H.H. Cheng. Thereafter, within the limits specified above, the
number of Directors shall be determined by resolution of the Board of Directors
at the annual meeting.
Section 2.3 ELECTION OF DIRECTORS. Directors shall be elected at each
annual meeting of shareholders to succeed those Directors whose terms have
expired and to fill any vacancies then existing. Directors shall hold their
offices for terms of one year and until their successors are elected on a
staggered basis as provided for in the Amended and Restated Certificate of
Incorporation.
Section 2.4 ADVANCE NOTICE OF NOMINATION OF DIRECTORS. Unless a
Director is nominated by a member of the Board of Directors, no person shall be
nominated or elected as a Director unless the Board receives written notice of
his nomination not less than 120 calendar days in advance of the anniversary
date of the Corporation's previous year's annual meeting of stockholders.
3
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Section 2.5 NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Newly created
directorships resulting from an increase in the authorized number of Directors
shall be filled by vote of a majority of the Directors then in office and shall
be distributed among the three classes of Directors so that, as nearly as
possible, each class will consist of an equal number of Directors. Vacancies in
the Board of Directors however occurring shall be filled by a majority of the
Directors then in office, although less than a quorum, or by a sole remaining
Director. A Director chosen to fill a vacancy shall have the same term as that
Director's predecessor.
Section 2.6 REMOVAL AND RESIGNATION OF DIRECTORS. Directors may be
removed from office only for cause at a meeting called expressly for that
purpose by the vote of shareholders holding not less than 67% of the shares
entitled to vote at an election of Directors or by a vote of a majority of the
Directors. Directors may resign at any time upon written notice to the
Corporation. Such resignation shall become effective upon receipt and need not
be accepted by the Board to become effective.
ARTICLE III.
BOARD OF DIRECTORS' MEETINGS
Section 3.1 REGULAR MEETINGS. The first meeting of the Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the shareholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected Directors in order legally to constitute the
meeting, provided a quorum shall be present, or it may convene at such place and
time as shall be fixed by the consent in writing of all the Directors.
Thereafter regular meetings of the Board of Directors shall be held at such time
and place as the Board of Directors shall from time to time determine. No notice
shall be required for any such regular meetings.
Section 3.2 SPECIAL MEETINGS. Special meetings of the Board of
Directors, or the reconvening of any regular meeting, may be called by one-third
of the Directors then in office, or by the President or Chairman of the Board,
by giving: (1) no less than one day's actual notice to each Director by oral
communication, computer e-mail, telegram, telefax or telex; or (2) no less than
10 days' notice to each Director by registered letter.
Section 3.3 PARTICIPATION IN MEETINGS BY TELEPHONE. Members of the
Board of Directors, or any Committee thereof, may participate in meetings by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other and be heard.
Section 3.4 UNANIMOUS WRITTEN CONSENT. Any action required or permitted
to be taken at any meeting of the Board of Directors, or of any Committee
thereof, may be taken without a meeting if all the members of the Board of
Directors or Committee consent thereto in writing and the writing is filed in
the minute book of the Corporation.
4
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Section 3.5 QUORUM. Except as otherwise provided in these Bylaws, a
majority of the Directors in office shall constitute a quorum for the
transaction of business, and the vote of a majority of the Directors present at
any meeting at which a quorum is present shall be the act of the Board of
Directors. If a quorum shall fail to attend any meeting, a majority of those
Directors present may adjourn and reconvene the meeting at another place, date,
or time, without further notice other than an announcement at the originally
scheduled meeting.
Section 3.6 CONDUCT OF BUSINESS. The Board of Directors shall have the
authority to make, and from time to time to alter, amend and supplement, rules
of conduct for its own meetings. Any Director shall have the right to put any
item on the agenda of any meeting of the Board of Directors.
ARTICLE IV.
COMMITTEES
Section 4.1 ESTABLISHMENT. The Board of Directors, by resolution
adopted by a majority of the number of Directors fixed by these Bylaws, may
establish such Committees of the Board as it may deem advisable, consisting of
not less than two Directors; and the members, terms and authority of such
Committees shall be as set forth in the resolutions establishing the same;
provided, however, no Committee of the Board of Directors shall have the power
to (1) amend the Certificate of Incorporation; (2) adopt an agreement of merger
or consolidation; (3) recommend to the shareholders the sale, lease or exchange
of all or substantially all of the Corporation's assets; (4) recommend to the
shareholders a dissolution of the Corporation or a revocation of a dissolution;
(5) amend the Bylaws of the Corporation; (6) declare a dividend; (7) authorize
the issuance of stock; (8) change the number of Directors or fill a vacancy in
the Board of Directors or in any Committee; or (9) perform any other function
prohibited by law. Persons who are not directors may attend and participate in
Committee meetings in an advisory capacity at the invitation of the Committee,
but they may not vote.
The Board of Directors may establish rules and regulations for the
conduct of the proceedings of any Committee and may appoint the chairman of the
Committee and a secretary of the Committee. To the extent that the Board of
Directors does not exercise these powers of appointment, they may be exercised
by the Committee, subject to the power of the Board of Directors to change the
Committee's action. Each Committee may be terminated at the will of the Board of
Directors.
Section 4.2 MEETINGS. Regular and special meetings of any Committee
established pursuant to this Article may be called and held subject to the same
requirements with respect to time, place and notice as are specified in these
Bylaws for regular and special meetings of the Board of Directors.
Section 4.3 QUORUM AND MANNER OF ACTING. A majority of the members of
any Committee serving at the time of any meeting thereof shall constitute a
quorum for the transaction of business at such meeting. The action of a majority
of those members present at a Committee meeting at which a quorum is present
shall constitute the act of the Committee.
5
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Section 4.4 TERM OF OFFICE. Members of any Committee shall be elected
as above provided and shall hold office so long as they serve as Directors or
until their successors are elected by the Board of Directors or until such
Committee is dissolved by the Board of Directors.
Section 4.5 RESIGNATION AND REMOVAL. Any member of a Committee may
resign at any time by giving written notice of the member's intention to do so
to the President, the Chairman of the Board or the Secretary of the Corporation,
or may be removed, with or without cause, at any time by such vote of the Board
of Directors as would suffice for the member's election.
Section 4.6 VACANCIES. Any vacancy occurring in a Committee resulting
from any cause whatever may be filled by a majority of the number of Directors
fixed by these Bylaws or by a majority of the remaining Committee members.
ARTICLE V.
OFFICERS
Section 5.1 GENERAL. The executive officers of the Corporation shall be
chosen by the Board of Directors and shall be a Chairman of the Board and Chief
Executive Officer, a President, a Treasurer, a Secretary, and such
Vice-Presidents as the Board of Directors may from time to time determine. Other
offices may be established by the Board of Directors from time to time. Any
number of offices may be held by the same person. Any number of offices may be
left temporarily vacant at the option of the Board of Directors. The officers of
the Corporation shall be reaffirmed or replaced at the first meeting of the
Board of Directors subsequent to each annual meeting of shareholders, unless the
Board of Directors determines, upon appointing an officer, that he/she shall
serve for a different term. All executive officers have a right to act as a
second signatory on contracts when such a second signature is required by law.
Section 5.2 CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. The
Chairman of the Board and Chief Executive Officer shall preside at all meetings
of the shareholders and the Board of Directors, shall see that all orders and
resolutions of the Board of Directors are carried into effect, and shall have
general active management of the business of the Corporation. Except where, by
law, the signature of the President is required, the Chairman of the Board and
Chief Executive Officer shall possess the same power as the President to sign
all certificates, contracts, and other instruments of the Corporation which may
be authorized by the Board of Directors.
Section 5.3 PRESIDENT. The President, in the absence of the Chairman of
the Board and Chief Executive Officer, shall preside at all meetings of the
shareholders and of the Board of Directors, shall have general and active
management of the business of the Corporation, and shall see that all orders and
resolutions of the Board of Directors are carried into effect. The President
shall have authority to sign all stock certificates, contracts and other
instruments of the Corporation, and to affix the seal of the Corporation to such
documents. The President has the authority to delegate portions of his power to
one or more Vice Presidents. The President shall perform such other functions as
the Board of Directors may from time to time require.
6
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Section 5.4 CHIEF OPERATING OFFICER. The Chief Operating Officer shall
perform such functions as the Board of Directors may from time to time require.
Section 5.5 EXECUTIVE VICE PRESIDENT AND VICE PRESIDENT. In the absence
of the President, an Executive Vice President or a Vice President (as one or
more may be appointed by the Board of Directors; or in the absence of such
delegation appointed by the President) shall perform the duties of the
President. The Vice Presidents shall not have the power to sign stock
certificates, contracts or other instruments of the Corporation, nor to affix
the seal of the Corporation to such documents, unless authorized to do so by the
President. The Vice Presidents shall perform such other functions as the Board
of Directors may from time to time require.
Section 5.6 TREASURER. The Treasurer shall have responsibility for the
Corporation's funds and for keeping full and accurate accounts of receipts and
disbursements in books belonging to the Corporation. The Treasurer shall
deposit, or authorize deposit of, all moneys and other valuable effects in the
name and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors.
The Treasurer shall disburse, or authorize disbursements of, the funds
of the Corporation as necessary and proper for the operation of the Corporation,
taking proper receipts for such disbursements; provided, however, that the Board
of Directors shall, from time to time, set a maximum expenditure amount, and
disbursement of sums over and above such amount shall require a resolution of
the Board of Directors. The Treasurer may authorize another officer of the
Corporation or an accountant retained by the Corporation to disburse sums of the
Corporation necessary and proper for the daily operating expenses of the
Corporation, up to a maximum amount which the Treasurer shall set from time to
time, which will not exceed any maximum expenditure amount set by the Board of
Directors. The Treasurer shall not be required to be bonded.
The Treasurer shall, when required, render to the President or the
Board of Directors an account of the transactions and of the financial condition
of the Corporation. The accounting of the Corporation shall be maintained
according to generally accepted accounting principles. The Treasurer shall have
the authority to retain, from time to time, an attorney or accountant to review
the accounts, prepare the tax returns of the Corporation, and perform such other
services as may be necessary and proper to maintain the financial records of the
Corporation.
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The Treasurer shall perform such other functions as the Board of
Directors may from time to time require.
Section 5.6 SECRETARY. The Secretary shall issue all authorized notices
for, and shall prepare and maintain custody of the minutes of, all meetings of
the shareholders and the Board of Directors. The Secretary shall have charge of
the corporate books. The Secretary shall have custody of the seal of the
Corporation and shall have authority to affix the seal to any instrument
requiring it and to attest to the authenticity of that seal by the Secretary's
signature. The Secretary shall authenticate records of the Corporation. The
Secretary shall sign all stock certificates. The Secretary shall perform such
other functions as the Board of Directors may from time to time require.
Section 5.7 DELEGATION OF AUTHORITY. The Board of Directors may, from
time to time, delegate the powers and duties of any executive officer to any
other executive officer, and may designate the powers of non-executive officers
to any other officers or agents, notwithstanding the provisions hereof.
Section 5.8 COMPENSATION. The salaries of all officers and agents of
the Corporation shall be fixed by the Board of Directors or set forth in
employment agreements or other compensation arrangements approved by the Board.
Section 5.9 REMOVAL. Any officer may be removed at any time, with or
without cause, by the Board of Directors.
ARTICLE VI.
INDEMNIFICATION OF DIRECTORS, OFFICERS, AGENTS, AND EMPLOYEES
Section 6.1 RIGHT TO INDEMNIFICATION. Each person who was or is made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he/she is or was a Director, officer, agent, or
employee of the Corporation shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the General Corporation Law of
the State of Delaware, as the same exists or may hereafter be amended, against
any expenses, (including attorneys fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred by such person in connection
therewith. Notwithstanding the above, no Director shall be indemnified nor held
harmless in violation of the provisions set forth in the Certificate of
Incorporation; and no Director, officer, agent, or employee shall be indemnified
nor held harmless by the Corporation unless:
(1) In the case of conduct in his/her official capacity with
the Corporation, he/she acted in good faith and in a manner he/she
reasonably believed to be in the best interests of the Corporation;
(2) In all other cases, his/her conduct was at least not
opposed to the best interests of the Corporation nor in violation of
the Certificate, Bylaws or any agreement entered into by the
Corporation; and
(3) In the case of any criminal proceeding, he/she had no
reasonable cause to believe that his/her conduct was unlawful.
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Section 6.2 RIGHT TO ADVANCEMENT OF EXPENSES. The right to
indemnification conferred in Section 6.1 of this Article shall include the right
to be paid by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that such an
advancement of expenses shall be made only upon delivery to the Corporation of
(1) a statement of his/her good faith belief that he/she has met the standard of
conduct described in Section 6.1; and (2) an undertaking by or on behalf of the
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision that he/she is not entitled to be
indemnified for such expenses.
Section 6.3 DETERMINATION AND AUTHORIZATION TO INDEMNIFY. The
Corporation may not indemnify a Director under Section 6.1 unless authorized
after a determination has been made that indemnification of the Director is
permissible in the circumstances because he/she has met the standard of conduct
in Section 6.1. This determination shall be made by the Board of Directors by a
majority vote of a quorum consisting of Directors not at the time parties to the
proceeding.
Section 6.4 NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification
and to the advancement of expenses conferred in this Article shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, the Corporation's Certificate of Incorporation, agreement,
vote of shareholders or disinterested Directors, or otherwise.
Section 6.5 INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any Director, officer, employee or agent of the
Corporation against any expense, liability or loss.
ARTICLE VII.
STOCK
Section 7.1 ISSUANCE. The Corporation may issue shares of capital stock
of any class or series now or hereafter authorized in the Certificate of
Incorporation, in accordance with the authority granted by a Board of Directors
resolution.
Section 7.2. STOCK CERTIFICATES. Each shareholder shall be entitled to
a certificate signed in the name of the Corporation by the President and by the
Secretary, and affixed with the seal of the Corporation. The Treasurer may sign
in lieu of the Secretary. Signatures on the certificate may be facsimiles. In
case any officer who has signed or whose facsimile signature has been placed
upon such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he/she were such officer at the date of its issue.
Section 7.3 TRANSFER OF STOCK. Transfer of stock may be made only on
the transfer ledger of the Corporation kept at an office of the Corporation or
in the possession of the Secretary or the corporate transfer agent. Upon
surrender to the Corporation or the transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
9
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Section 7.4 RECORD DATE. In order that the Corporation may determine
the shareholders entitled to notice of or to vote at any meeting of
shareholders, or to receive payment of any dividend or other distribution or
allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock, the Board of Directors may fix a record date.
Such record date shall not precede the date on which the Board of Directors'
resolution fixing the record date is adopted, and shall not be more than 70 days
prior to the meeting or such other action as above described.
If no record date is fixed by the Board of Directors for determination
of who is entitled to vote or receive notice of a shareholders' meeting, the
record date shall be at the close of business on the day preceding the day on
which notice is given; or if notice is waived, at the close of business on the
day preceding the day on which the meeting is held. If no record date is set for
determining shareholders entitled to receive a dividend or other distribution or
allotment of rights or to exercise any rights in respect to any change,
conversion or exchange of stock, the record date shall be at the close of
business on the day on which the Board of Directors adopts a resolution relating
thereto.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section, such determination shall
apply to any adjournment thereof unless the Board of Directors fixes a new
record date, which it shall do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting.
In order that the Corporation may determine the shareholders entitled
to consent in writing to corporate action taken without a meeting, the Board of
Directors may fix a record date, which shall not precede and shall not be more
than ten days after the date on which the resolution fixing the record date is
adopted. If no record date has been fixed by the Board of Directors, and the
Board of Directors is not required by law to take some action prior to the
action for which written consent is sought, the record date shall be the first
date on which a signed written consent is properly delivered to the Corporation.
If no record date had been fixed by the Board of Directors and the Board of
Directors is required by law to take some action prior to the action for which
written consent is sought, the record date shall be the close of business on the
day on which the Board of Directors adopts a resolution taking such prior
action.
Section 7.5 REPLACEMENT CERTIFICATES. New stock certificates may be
issued to replace certificates lost, stolen, destroyed, or mutilated, upon such
terms and conditions, including proof of loss or destruction and the giving of a
satisfactory bond of indemnity, as the Board of Directors may from time to time
determine.
10
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Section 7.6 HOLDERS OF RECORD. The Corporation shall be entitled to
treat the holder of record of any share or shares of capital stock as the holder
and owner in fact thereof for all purposes and shall not be bound to recognize
any equitable or other claim of right, title, or interest in such share or
shares on the part of any other person, whether or not the Corporation shall
have express or other notice thereof, except as otherwise provided by law.
Section 7.7 REGULATIONS. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VIII.
LIST OF SHAREHOLDERS
The officer or agent having charge of the transfer books for shares
shall make, at least ten days before each meeting of shareholders, a complete
list of the shareholders entitled to vote at such meeting, arranged by voting
group and within each voting group by class or series of shares, with the
address of each and the number of shares held by each, which list, for a period
of ten days prior to such meeting, shall be kept on file at the principal
business office of the Corporation and shall be subject to inspection by any
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any shareholder during the whole time of the meeting. The
original share transfer book, or a duplicate thereof, shall be prima facie
evidence as to who are the shareholders entitled to examine such list or share
transfer book or to vote at any meeting of the shareholders.
ARTICLE IX.
MISCELLANEOUS
Section 9.1 DIVIDENDS. Dividends upon the capital stock of the
Corporation may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of capital stock. Before payment of any dividend, there may be set aside
out of any funds of the Corporation available for dividends such sum or sums as
the Board of Directors in its absolute discretion, from time to time, believes
is proper as a reserve fund to meet contingencies, or equalize dividends, or for
such other purposes as the Board of Directors determines is conducive to the
interests of the Corporation. The Board of Directors may at any time modify or
abolish any such reserve fund.
Section 9.2 ANNUAL STATEMENT. The Board of Directors shall present at
each annual meeting, and at any special meeting of the shareholders when called
for by vote of the shareholders, a full and clear statement of the business and
condition of the Corporation.
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Section 9.3 FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors from time to time.
Section 9.4 CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 9.5 SEAL. The Corporate seal shall have inscribed thereon the
name of the Corporation, the year of its organization and the words "Corporate
Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any manner reproduced.
Section 9.6 AMENDMENTS. These Bylaws may be altered, amended, repealed,
or replaced by new Bylaws by the affirmative vote of a majority of the Board of
Directors at any regular or special meeting of the Board of Directors unless the
Certificate of Incorporation or law reserve this power to the shareholders.
I HEREBY CERTIFY that the foregoing is a full, true and correct copy of
the Bylaws of V-ONE Corporation, a Delaware corporation, as in effect on the
date hereof.
WITNESS my hand and the seal of the Corporation.
Dated: February 6, 1997 By: /s/ Charles Chen
----------------
Charles Chen, Secretary
(SEAL)
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EXHIBIT 11
V-ONE CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
For the Period Ended December 31,
1995 1996
<S> <C> <C>
Net Income (Loss) $ (1,122,011) $ (6,695,556)
Weighted average common shares outstanding 8,378,210 10,089,294
Series A Convertible Preferred Stock 949,209 ---
Stock options issued within one year of initial filing
(using the treasury stock method and the initial
public offering price of $5.00 per share) 240,091 120,046
Weighted average number of common shares outstanding
9,567,509 10,209,340
Net income (loss) per common share and common share (0.12) (0.66)
equivalent
</TABLE>
1. All common share amounts have been restated to reflect a 2 for 3 reverse
stock split effected on July 3, 1996.
2. In accordance with the Securities and Exchange Commission Staff Accounting
Bulletin No. 83 ("SAB No. 83"), all common and common equivalent shares and
other potentially dilutive instruments (including stock options and the
redeemable convertible preferred stock) issued during the twelve month
period prior to the initial filing date in June 1996 of the Registration
Statement have been included in the calculation as if they were outstanding
for all periods presented prior to the IPO, even if the common equivalent
shares were anti-dilutive. The common equivalent shares for stock options
were determined using the treasury stock method at the offering price of
$5.00 per share. The redeemable convertible preferred stock was included on
an as-if converted basis in accordance with SAB No. 83.
3. Fully diluted net income (loss) per share is the same as primary net income
(loss) per share. Common stock equivalents have only been included when the
effect of their inclusion would be dilutive.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
V-ONE Corporation on Form S-8 (File No. 333-17749) of our report dated March 24,
1997 on our audits of the financial statements and financial statement schedules
of V-ONE Corporation as of December 31, 1995 and 1996 and for the three years in
the period ended December 31, 1996, which report is included on page F-2 in the
Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
McLean, Virginia
March 27, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE ACCOMPANYING REGISTRATION
STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,894
<SECURITIES> 0
<RECEIVABLES> 2,647
<ALLOWANCES> (252)
<INVENTORY> 419
<CURRENT-ASSETS> 14,134
<PP&E> 889
<DEPRECIATION> (132)
<TOTAL-ASSETS> 15,697
<CURRENT-LIABILITIES> 1,491
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 13,981
<TOTAL-LIABILITY-AND-EQUITY> 15,697
<SALES> 6,266
<TOTAL-REVENUES> 6,266
<CGS> 2,026
<TOTAL-COSTS> 10,585
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (519)
<INCOME-PRETAX> (6,696)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,696)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,696)
<EPS-PRIMARY> (.66)
<EPS-DILUTED> (.66)
</TABLE>
