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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
_X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from ______ to ______.
Commission File Number: 0-28100
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AXENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 87-0393420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 Research Boulevard
Suite 200
Rockville, Maryland 20850
(Address of principal executive offices)
(301) 258-5043
(Registrant's telephone number including area code)
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Indicate by check mark whether 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______
As of April 30, 1997, there were 10,232,814 shares outstanding of the
Registrant's Common Stock, par value $.02 per share, excluding 1,550,000 shares
reserved for issuance related to the acquisition of AssureNet Pathways, Inc.
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AXENT TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of 4
March 31, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations 5
for the three months ended March 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the 6
three months ended March 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 17
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PART I. FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
The financial statements set forth below for the three month periods ended March
31, 1997 and 1996 are unaudited, and have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations.
These financial statements should be read in conjunction with the latest audited
consolidated financial statements and the notes thereto for the fiscal year
ended December 31, 1996, which are included in the Company's Form 10-K as filed
with the SEC on March 28, 1997.
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AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
March 31,
December 31, 1997
1996 (unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 17,261 $ 16,086
Short-term investments 18,629 18,343
Accounts receivable, net 4,826 5,060
Prepaid expenses and other current assets 568 807
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Total current assets 41,284 40,296
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Purchased software 500 1,736
Property and equipment, net 1,417 2,314
Other assets 800 844
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Total assets $ 44,001 $ 45,190
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 6,361 $ 8,681
Deferred revenue 3,029 4,286
Net identifiable (assets) liabilities
from discontinued operations 163 (45)
---------------- -----------------
Total liabilities 9,553 12,922
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Stockholders' equity:
Common stock, par value $0.02: 10,130,064 and
11,707,214 shares issued, respectively 203 235
Additional paid-in capital 47,909 72,416
Accumulated deficit (13,597) (40,282)
Cumulative currency translation adjustments (67) (101)
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Total stockholders' equity 34,448 32,268
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Total liabilities and stockholders'
equity $ 44,001 $ 45,190
================ =================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
For the Three Months Ended
March 31,
-----------------------------------
1996 1997
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Net revenues:
Product licenses $ 2,674 $ 5,915
Maintenance and support services 1,015 1,816
Consulting services 393 424
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Total net revenues 4,082 8,155
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Cost of net revenues:
Product licenses 111 509
Maintenance and support services 195 365
Consulting services 76 60
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Total cost of net revenues 382 934
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Gross profit 3,700 7,221
Operating expenses:
Sales and marketing 2,813 4,292
Research and development 1,084 1,897
General and administrative 557 784
Write-off of purchased in-process
research and development --- 27,632
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Total operating expenses 4,454 34,605
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Loss from continuing operations before
royalties, interest, and taxes (754) (27,384)
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Royalty income 800 658
Interest income 72 369
Income tax provision (35) (501)
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Income (loss) from continuing operations 83 (26,858)
Income from discontinued operations 1,027 173
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Net income $ 1,110 $ (26,685)
================ =================
Net income (loss) per common share:
Continuing operations $ 0.01 $ (2.12)
Discontinued operations $ 0.11 $ 0.01
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Net income per common share $ 0.12 $ (2.11)
================ =================
Weighted average number of common shares
used in computing net income per common
share in (000's) 9,101 12,646
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
For the Three Months Ended
March 31,
-----------------------------------
1996 1997
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CASH INFLOWS (OUTFLOWS)
Operating activities:
Net income (loss) from continuing
operations $ 83 $ (26,858)
Non-cash items:
Depreciation and amortization 143 335
Write-off of purchased in-process
research and development --- 27,632
Change in assets and liabilities (1,708) (1,596)
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Net cash provided/(used) by continuing
operations (1,482) (487)
Net cash provided/(used) by discontinued
operations 2,036 (250)
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Net cash provided/(used) by operating
activities 554 (737)
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Investing activities:
Capital expenditures (259) (266)
Payments for corporate acquisition (100) ---
Advances on line of credit to Raxco
Software, Inc. (73) ---
Proceeds from sale of Helpdesk business 150 ---
Maturity of short-term investments --- 286
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Net cash provided/(used) by continuing
operations (282) 20
Net cash provided/(used) by discontinued
operations 248 215
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Net cash provided/(used) by investing
activities (34) 235
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Financing activities:
Proceeds from issuance of common stock 8 96
Proceeds from line of credit draw --- 490
Principal payments on line of credit --- (1,225)
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Net cash provided/(used) by continuing
operations financing activities 8 (639)
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Effect of exchange rate changes on cash (39) (34)
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Net increase (decrease) in cash and
cash equivalents 489 (1,175)
Cash and cash equivalents, beginning of period 6,083 17,261
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Cash and cash equivalents, end of period $ 6,572 $ 16,086
================ =================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AXENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of AXENT Technologies, Inc. and its wholly owned subsidiaries
(collectively, the "Company" or "AXENT"). The Company's condensed consolidated
financial statements reflect the operations of AssureNet Pathways, Inc.
("AssureNet") since January 7, 1997 and include a write-off of purchased
in-process research and development (see "Business Combinations"). The Company
develops, markets, licenses and supports enterprise-wide information security
solutions for client/server computing environments and provides related
services.
The accompanying unaudited condensed consolidated financial statements reflect
all the adjustments that, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. The results for
the three month period ended March 31, 1997 may not necessarily be indicative of
the results for the entire year. The December 31, 1996 condensed consolidated
balance sheet was derived from audited financial statements as of the same date
but does not include all disclosures required by generally accepted accounting
principles.
These financial statements should be read in conjunction with the Company's
annual audited financial statements for the year ended December 31, 1996, which
are included in the Company's Form 10-K as filed with the SEC on March 28, 1997.
Business Combinations
On March 25, 1997, AXENT completed the acquisition of AssureNet. In connection
with the acquisition, AXENT agreed to issue 1,550,000 shares of common stock in
exchange for all of the outstanding shares of AssureNet preferred and common
stock and certain outstanding AssureNet stock options and warrants, when
exercised. In addition, AXENT assumed all other AssureNet stock options and
warrants outstanding at the time of the merger.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, a portion of the total purchase price, which was approximately $32
million, was allocated to the net assets acquired, based on their estimated fair
market value. The fair market value of the tangible assets acquired was
approximately $2.9 million. The Company also acquired approximately $1.5 million
in purchased software which is being amortized over three years on a
straight-line basis. In addition, approximately $27.6 million of the purchase
price was allocated to in-process research and development based on the
determination of the products' net present value using a discounted cash flow
model. These products had not reached technological feasibility and had no
probable future uses, and therefore were expensed at the date of the
acquisition. As a result of the signing of a definitive agreement between AXENT
and AssureNet, the transfer of control of AssureNet's operations to AXENT and
the quantification of consideration, AssureNet's operations have been included
in the Company's condensed consolidated financial statements since January 7,
1997.
Before the acquisition, AssureNet developed and marketed certain hardware and
software remote access authentication products (Defender(TM) products) and had
certain other software products under development. AXENT intends to integrate
the existing Defender software technology with the Omniguard(R) family of
products where appropriate. With the exception of hardware tokens, AXENT intends
to cease actively marketing the majority of AssureNet hardware products and
focus its efforts on marketing the Defender software products. The acquisition
is also expected to permit AXENT to expand its indirect distribution
capabilities by adding AssureNet's distributors.
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Short-Term Investments
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Pursuant to SFAS No. 115,
the Company has classified its short-term securities investments as
"available-for-sale" and accordingly carries such securities at aggregate fair
value with unrealized gains and losses included as a component of stockholders'
equity, net of tax. The Company's available-for-sale short-term investments
consist primarily of certificates of deposit and government securities, all with
maturities less than one year. The Company determines the fair value of equity
securities based on the market value provided by brokers/dealers, and determines
the cost based on specific identification. The estimated fair value of each
investment approximates cost. Therefore, there were no unrealized gains or
losses as of March 31, 1997.
Short-term investments as of March 31, 1997, consisted of the following:
Certificates of deposit $ 1,787,000
Government securities 16,556,000
==============
$18,343,000
==============
Purchased Software
In 1996, the Company entered into an agreement with an unrelated third party to
pay up to $1,500,000 for a nonexclusive license to the source code of certain
security technology. Pursuant to this agreement, the Company paid the third
party $900,000 of which $500,000 was an acquisition fee upon acceptance of the
source code and $400,000 was a non-refundable prepayment against future
royalties. The Company may be required to pay up to an additional $600,000 in
royalties based on a percentage of the net revenues derived from the source code
license over a three year period. The acquisition fee is included in purchased
software.
Initial Public Offering
In February 1996, the Company filed a registration statement with the Securities
and Exchange Commission permitting the Company to sell 2,000,000 shares of its
common stock to the public. The registration statement also permitted certain
non-officer stockholders of the Company to sell up to 990,000 shares to the
public, including up to 390,000 shares to cover over-allotments. The
registration statement became effective on April 23, 1996. The initial public
offering resulted in proceeds to the Company of approximately $25.3 million, net
of approximately $2.7 million in underwriting fees and offering expenses, which
are not reflected in the condensed consolidated financial statements for the
period ended March 31, 1996. The Company received no proceeds from the sale of
shares by selling stockholders in the initial public offering.
Discontinued Operations
In mid-1994 the Company made a strategic decision to focus its business on the
information security market and to divest itself of products and services
unrelated to such business. The following businesses have been divested by the
Company: (i) the storage management products business, which was sold in 1994
for cash, notes and the assumption of certain liabilities, (ii) the OpenVMS
utility software distribution business, which was conveyed to Raxco Software,
Inc. ("Raxco") in a spin-off effective December 31, 1995 and (iii) the Helpdesk
products business, which was sold in February 1996, for cash, a note, royalties
and the assumption of certain liabilities. The results of operations for these
divested businesses have been accounted for as discontinued operations in
accordance with Accounting Principles Bulletin No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30").
Prior to the divestment of those businesses, the Company utilized centralized
systems for cash management, payroll, purchasing, distribution, employee benefit
plans, insurance and administrative services. As a result, substantially all of
the cash receipts of the Company and the discontinued operations were
commingled. Similarly, operating expenses, capital expenditures and other cash
outlays were
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centrally disbursed and charged directly or allocated to the discontinued
operations. In the opinion of management, the Company's methods for allocating
costs among the continued and discontinued operations are reasonable. However,
the historical results are not necessarily indicative of the costs that would
have been incurred by the Company had the divestments occurred prior to the
beginning of those periods.
In February 1996, the Company disposed of its Helpdesk operations for
approximately $2.0 million, consisting of an initial cash payment of $150,000, a
non-interest bearing note of $150,000, assumption of approximately $400,000 in
obligations and liabilities, and the payment of a royalty up to a maximum of
$1.3 million on future gross revenues from all Helpdesk product license and
maintenance fees. The Company transferred to the buyer the Helpdesk products and
the related fixed assets and customer base. The buyer assumed all of the
Company's obligations related to the Helpdesk products including obligations
related to sales, marketing, support, and development employees, telephone
support obligations for the existing customers and the facility lease
obligations. Through March 31, 1997 the Company has recorded royalties of
approximately $48,000.
Income Tax
The Company files a consolidated federal income tax return in the U.S. with its
U.S. subsidiaries. Deferred income taxes have been established by each entity
based upon its temporary differences, the reversal of which will result in
taxable or deductible amounts in future years when the related asset or
liability is recovered or settled.
For the three months ended March 31, 1997, the Company recorded a tax provision
on the income from continuing and discontinued operations. The effective tax
rate for the three months ended March 31, 1997 approximates the statutory tax
rate. As of March 31, 1997, the Company has general business credits of
approximately $190,000, expiring between 1997 and 2006. The Company also has
alternative minimum tax credits of approximately $200,000, which do not expire.
In addition, the Company's newly acquired subsidiary, AssureNet, has net
operating losses and credits that expire at various dates through 2011. As of
March 31, 1997, the net operating losses were approximately $5.2 million and
research and development credit carryforwards were approximately $365,000. The
losses and credits of AssureNet are limited based on the future taxable income
of the subsidiary and by the more than 50% change of ownership.
Stock Option Plan
In January 1996, the Company adopted the 1996 Stock Option Plan and the 1996
Directors' Stock Option Plan, providing for the issuance of up to 1,000,000 and
200,000 shares, respectively. Of the 1,000,000 shares provided in the 1996 Stock
Option Plan, options covering an aggregate of 461,500 and 425,500 shares were
issued during 1996 and the first three months of 1997, respectively. In April
1997, the Company issued options covering 189,492 shares in accordance with the
1996 Stock Option Plan, in addition to repricing options covering 561,000
shares. Of the 200,000 shares provided in the 1996 Directors' Stock Option Plan,
options covering 19,000 shares were issued in January 1997.
On January 28, 1997, the Company's Board of Directors adopted, subject to
stockholder approval, amendments to the 1996 Stock Option Plan increasing the
number of shares of Common Stock reserved for issuance thereunder to 1,975,000
and limiting the total number of options that may be granted during any fiscal
year of the Company, to any one individual, to 500,000.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which is
required to be adopted for financial statements issued after December 15, 1997.
At that time, the Company will change the method currently used to compute
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earnings per share and restate all prior periods presented. The Company does not
expect the adoption of SFAS No. 128 to have a material impact on the Company's
financial condition or results of operations.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risk and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those identified in "Certain
Factors Affecting Future Performance" and those discussed in the "Risk Factors"
set forth in Amendment No. 2 to the Company's Registration Statement on Form S-4
(File No. 333-20207), as filed with the SEC on March 6, 1997.
Three Months Ended March 31, 1997 Compared to
Three Months Ended March 31, 1996
Net Revenues
The Company's net revenues from product licenses increased approximately 122%,
or $3.25 million, from $2.67 million for the three months ended March 31, 1996
to $5.92 million for the three months ended March 31, 1997. For those periods in
1996 and 1997, net revenues from product licenses represented 65.6% and 72.5% of
total net revenues, respectively. The increase in product license revenue is
primarily attributable to broader acceptance of the Company's products, the
introduction and general release of new products and the expansion of available
products running on new or additional platforms. The Company has also benefitted
since January 7, 1997 from the licensing of the Defender products acquired
through the AssureNet transaction.
The Company's net revenues from maintenance and support services increased
approximately 78%, or $800,000, from $1.02 million for the three months ended
March 31, 1996 to $1.82 million for the three months ended March 31, 1997. The
increase in maintenance and support service revenues is primarily attributable
to growth in the customer base purchasing maintenance, either through their new
license purchase or by renewing maintenance on a previously purchased license,
as well as the addition of the Defender customers on maintenance acquired
through the AssureNet transaction. For those periods in 1996 and 1997, net
revenues from maintenance and support services represented 24.9% and 22.3% of
total net revenues, respectively.
The Company's net revenues from consulting services increased approximately 8%,
or $31,000, from $393,000 for the three months ended March 31, 1996 to $424,000
for the three months ended March 31, 1997. The increase in consulting service
revenues is primarily attributable to an increase in consulting services
associated with increased licenses of the Company's products. For those periods
in 1996 and 1997, net revenues from services represented 9.5% and 5.2% of total
net revenues, respectively.
Revenues from North American and International operations were 74% and 26% of
total revenues, respectively, for the three months ended March 31, 1997 as
compared to 78% and 22%, respectively for the same period in 1996.
Cost of Net Revenues
The Company's cost of net revenues for product licenses includes cost of media,
product packaging, documentation and other production costs, amortization of
purchased software costs, and product royalties. Cost of net revenues associated
with product licenses increased approximately 359%, or $398,000, from $111,000
for the three months ended March 31, 1996 to $509,000 for the three months ended
March 31,
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1997. For those periods in 1996 and 1997, cost of net revenues for product
licenses represented 4.2% and 8.6% of net revenues from product licenses,
respectively. The increase in the cost of net revenues for product licenses is
primarily attributable to the commencement of amortization on the purchased
software acquired through the AssureNet transaction, plus the increased cost of
producing the hardware products associated with the Defender product line. Cost
of net revenues for product licenses, as a percentage of revenues from product
licenses, may fluctuate from period to period due to a change in product mix, a
change in the number or size of transactions recorded in a quarter, or an
increase or decrease in licenses of royalty bearing products.
The Company's cost of net revenues from maintenance and support services
includes the direct and indirect costs of providing technical support to the
Company's customers. Cost of net revenues from maintenance and support services
increased 87%, or $170,000 from $195,000 for the three months ended March 31,
1996 to $365,000 for the three months ended March 31, 1997. For those periods in
1996 and 1997, cost of net revenues from maintenance and support services
represented 19.2% and 20.1% of net revenues for maintenance and support
services, respectively. The increase in cost of net revenues from maintenance
and support services is directly related to the increase in staff of the
Company's customer support operations necessary to support a larger installed
customer base as well as additional products offered by the Company, including
the Defender product line acquired from AssureNet.
The Company's cost of net revenues from consulting services includes the direct
and indirect costs of providing training and consulting services to the
Company's customers. Cost of net revenues from consulting services decreased
21%, or $16,000 from $76,000 for the three months ended March 31, 1996 to
$60,000 for the three months ended March 31, 1997. For those periods in 1996 and
1997, cost of net revenues from consulting services represented 19.3% and 14.2%
of net revenues for consulting services, respectively.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel costs, including
commissions, salaries, benefits and bonuses, travel, telephone, costs of
advertising, public relations seminars and trade shows. Sales and marketing
expenses increased 53%, or $1.48 million, from $2.81 million for the three
months ended March 31, 1996 to $4.29 million for the three months ended March
31, 1997. For those periods in 1996 and 1997, sales and marketing expenses
represented 69.0% and 52.6% of total net revenues, respectively. The increase in
dollar amount was due to investment in additional staffing for the Company's US
and UK operations as well as the addition of costs associated with the Defender
product line. The decrease in sales and marketing expenses as a percentage of
total net revenues was due primarily to the increase in total net revenues and
the maturation of the Company's indirect channel of distribution through
resellers and distributors.
Research and Development
Research and development expenses consist primarily of personnel costs,
including salaries, benefits and bonuses, travel and other personnel-related
expenses of the employees engaged in ongoing research and development projects
and third party development contracts. Costs related to research and development
of products are expensed as incurred. Research and development expenses
increased 76%, or $820,000, from $1.08 million for the three months ended March
31, 1996 to $1.90 million for the three months ended March 31, 1997. For those
periods in 1996 and 1997, research and development expenses represented 26.6%
and 23.3% of total net revenues, respectively. The increase in dollar amount
resulted from the addition of staff needed to develop, maintain and enhance the
OmniGuard family of software products including OmniGuard Enterprise Resource
Manager, in addition to the costs associated with the Defender product line
acquired from AssureNet. The decrease in research and development expenses as a
percentage of total net revenues was due primarily to the increase in total net
revenues. The Company currently anticipates that research and development
expenses may increase in absolute dollars as the Company continues to commit
substantial resources to research and development in future periods.
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General and Administrative
General and administrative expenses consist primarily of personnel costs,
including salaries, benefits and bonuses and related costs for management,
finance and accounting, legal and other professional services. General and
administrative expenses increased 41%, or $227,000, from $557,000 for the three
months ended March 31, 1996 to $784,000 for the three months ended March 31,
1997. For those periods in 1996 and 1997 general and administrative expenses
represented 13.7% and 9.6% of total net revenues, respectively. The increase in
dollar amount is primarily a result of increased staffing required to meet the
administrative needs of a growing organization. The decrease in general and
administrative expenses as a percentage of total net revenues was due primarily
to the increase in total net revenues.
Write-off of purchased in-process research and development
The Company incurred a one-time charge associated with the acquisition of
AssureNet of approximately $27.6 million for the write-off of purchased
in-process research and development that had not reached technological
feasibility and had no probable future uses.
Royalty Income
The Company recorded royalty income of $658,000 for the three months ended March
31, 1997, a decline of $142,000 or 18%, from $800,000 for the same period during
1996. This royalty is pursuant to the Exclusive Distributor License Agreement
with Raxco that provides for payment by Raxco to the Company of the greater of
(i) a 30% royalty on license and services fees related to the OpenVMS utility
software products owned by the Company and marketed by Raxco or (ii) $2.0
million for 1996, $1.5 million for 1997 and $1.0 million for 1998, and a 30%
royalty thereafter for two additional years.
For the three month period ended March 31, 1997, Raxco reported to the Company
gross revenues of $2.7 million, which included approximately $2.2 million of
OpenVMS utility revenues, as well as net income of $120,000. As of March 31,
1997, Raxco had fully paid the royalty income then due to the Company.
Interest Income
Interest income increased 413%, or $297,000, from $72,000 for the three month
period ended March 31, 1996 to $369,000 for the three month period ended March
31, 1997. The increase is attributable primarily to interest on the proceeds
from the Company's initial public offering.
Income Taxes
The Company accounts for income taxes under Statements of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
the Company to record an asset with respect to the expected future temporary
differences. The Company's history of net operating losses has made the
realization of its credit carryforwards uncertain. Accordingly, the Company
placed a partial valuation allowance against its deferred tax assets.
The Company recorded a tax provision related to its income from continuing and
discontinued operations for the three months ended March 31, 1996 and March 31,
1997, respectively.
Income (Loss) from Continuing Operations
As a result of the approximately $27.6 million write-off of purchased in-process
research and development, the Company recorded a loss from continuing operations
of $26.9 million for the three months ended
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March 31, 1997, a decrease of $27.0 million, from income of $83,000 for the
three months ended March 31, 1996.
Income from Discontinued Operations
Income from discontinued operations consists of the net results of operations
from the divested businesses of the Company, which for financial statement
purposes have been accounted for in accordance with APB No. 30 and classified as
discontinued operations. The Company's income from discontinued operations
decreased 83% , or $857,000, from $1.03 million for the three month period ended
March 31, 1996 to $173,000 for the three months ended March 31, 1997. For those
periods in 1996 and 1997 income from discontinued operations represented 25.2%
and 2.1% of total net revenues, respectively. The Company anticipates a
continued decline in income from discontinued operations over the next several
quarters.
Financial Condition-Liquidity and Capital Resources
The Company's overall cash and cash equivalents were $16.1 million at March 31,
1997, which is an decrease of approximately $1.2 million from $17.3 million at
December 31, 1996. During the three month period ended March 31, 1997, the
Company financed its operations primarily through cash reserves and available
working capital. For the three month period ended March 31, 1996, the Company
financed its operations primarily through cash flows generated from discontinued
operations and available working capital. The Company's continuing operating
activities used cash of $1.5 million and $487,000 for the three month period
ended March 31,1996 and 1997, respectively. During the three months ended March
31, 1997, the Company's use of cash from continuing operating activities was
primarily a result of the payment of accrued bonuses, value-added tax (VAT),
commissions and other accrued expenses associated with the Company's performance
in the previous calendar quarter as well as the payment of accrued expenses
assumed through the AssureNet acquisition. Total cash provided by discontinued
operations operating activities was $2.0 million for the three months ended
March 31, 1996 and total cash used by discontinued operations operating
activities was $250,000 for the three months ended March 31, 1997.
The Company made capital expenditures of approximately $259,000 and $266,000 for
the three month periods ended March 31, 1996 and 1997, respectively. These
purchases have generally consisted of computer workstations, networking
equipment, office furniture and equipment. The Company had no firm commitments
for capital expenditures as of March 31, 1997.
During the three month period ended March 31, 1997, the Company's cash position
was also affected by the following: 1) the Company paid-off the line of credit
carried by AssureNet of $1.2 million; 2) the Company received proceeds of
$96,000 from the issuance of common stock; 3) the Company received a payment of
$215,000 on the note receivable related to the sale of the Company's storage
management products in 1994.
The Company expects to have cash outlays in future periods of approximately $2.3
million for transaction fees and expenses, including investment bankers, legal
counsel, accountants and document printing, associated with the acquisition of
AssureNet. The Company believes that the net proceeds from the initial public
offering, cash generated from operations, cash generated under the
Administrative Services Agreement and the Exclusive Distributor License
Agreement with Raxco, together with existing sources of liquidity will be
sufficient to meet its capital expenditures, working capital and other cash
requirements both for the next twelve months and for the foreseeable future.
Certain Factors Affecting Future Performance
Although the Company has experienced significant growth in revenues from the
OmniGuard family of software products, the Company does not believe prior growth
rates are indicative of future operating results. In addition, the Company
expects increased competition and intends to invest significantly in its product
development. As a result, there can be no assurance that the Company will remain
profitable on a
13
<PAGE>
quarterly or annual basis. Due to the Company's limited operating history with
respect to the OmniGuard family of software products, predictions as to future
operating results are difficult. Future operating results may fluctuate due to
factors such as: demand for the Company's products; the size and timing of
customer orders; the integration of AssureNet operations and products into the
Company's operations and product offerings; the introduction of new products and
product enhancements by the Company or its competitors; the budgeting cycle of
customers; changes in the proportion of revenues attributable to license fees
and consulting services; changes in the level of operating expenses; and
competitive conditions in the industry.
The market for the Company's software products is highly competitive, and the
Company expects that it will face increasing price pressures from its current
competitors and new market entrants. Any material reduction in the price of the
Company's software products would negatively affect gross margins and could
materially adversely affect the Company's financial condition and results of
operations.
The sales of the Company's security products generally involve significant
testing by and education of prospective customers as well as a commitment of
resources by both parties. For these and other reasons, the sales cycle
associated with the sales of the Company's security products is typically long
and subject to a number of significant risks over which the Company has little
or no control and, as a result, the Company may expend significant resources
pursuing potential sales that will not be consummated.
The Company anticipates that international sales will continue to represent a
significant percentage of revenue in the foreseeable future. International sales
are subject to a number of risks, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, political and economic
instability in foreign markets, restrictions on exporting or importing certain
technologies, difficulty in the staffing, management and integration of foreign
operations, longer payment cycles, greater difficulty in accounts receivable
collection, currency fluctuations and potentially adverse tax consequences. The
uncertainty of the monetary exchange values has caused, and may in the future,
contribute to fluctuations in the Company's financial condition and results of
operations. Although the Company's results of operations have not been
materially adversely affected to date as a result of currency fluctuations, the
long-term impact of currency fluctuations, including any possible effect on the
business outlook in other developing countries, cannot be predicted.
The foregoing Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risk and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed above and in
the "Risk Factors" set forth in Amendment No. 2 to the Company's Registration
Statement on Form S-4 (File No. 333-20207), filed with the SEC on March 6, 1997.
14
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number Exhibit Description
3.1* Amended and Restated Certificate of Incorporation of the Company.
3.2+ Amended and Restated Bylaws of the Company.
4.1* Specimen stock certificate for shares of Common Stock of the Company.
10.1* The Company's 1991 Amended and Restated Stock Option Plan.
10.2** The Company's 1996 Amended and Restated Stock Option Plan.
10.3** The Company's 1996 Amended and Restated Directors' Stock Option Plan.
10.7* Registration Rights Agreement dated as of December 10, 1992, by and
among the Company and the parties thereto.
10.7.1** Amendment No. 1 to Registration Rights Agreement dated as of February
26, 1997, by and among the Company and the parties thereto.
10.8* Settlement Agreement effective as of September 13, 1991, by and among
the Company and the parties thereto.
10.9* Form of Indemnification Agreement between the Company and its directors
and executive officers.
10.10* Agreement of Merger dated as of November 17, 1994, among the Company,
Datamedia Corporation and Raxco Acquisition Corporation.
10.11* Lease Agreement dated as of September 6, 1995, by and between Research
Grove Associates and the Company.
10.12* Lease of Real Property dated as of March 7, 1995, by and between TNK
Associates and the Company.
10.13* Deed of Lease dated as of March 14, 1995 by and between Bill Harris
Music, Inc. and the Company.
10.14* Agreement dated as of December 30, 1987, by and between the Company and
William R. Davy.
10.15* Agreement dated as of September 20, 1990, by and between the Company
and William R. Davy.
10.16* Agreement dated as of November 7, 1991, by and between the Company and
William R. Davy.
10.17* Severance Arrangement for Richard A. Lefebvre, dated October 16, 1992.
10.18* Severance Arrangement for John C. Becker, dated October 16, 1992.
10.19* Severance Arrangement for Brett Jackson, dated October 16, 1992.
10.20* The Company's Officer/Vice President Severance Policy.
10.21* Exclusive Distributor License Agreement, effective as of December 31,
1995, between the Company and Raxco Software, Inc.
10.22* Administrative Services Agreement, effective as of December 31, 1995,
between the Company and Raxco Software, Inc.
10.23* Line of Credit Loan Agreement, effective as of December 31, 1995,
between the Company and Raxco Software, Inc.
10.24* Agreement and Plan of Separation, effective as of December 31, 1995,
between the Company and Raxco Software, Inc.
10.28* Purchase Agreement, date as of February 29, 1996, by and between the
Company and Silvon Software, Inc.
10.29** Amended Agreement and Plan of Merger among the Company, Axquisition,
Inc., and AssureNet Pathways, Inc., dated as of January 6, 1997 and
amended February 26, 1997.
15
<PAGE>
11.1++ Computation of Net Income Per Share for the three months ended March
31, 1996 and 1995.
21.1* Subsidiaries of the Registrant.
27++ Financial Data Schedule.
- --------------------------------------------------------------------------------
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 333-01368) and incorporated herein by reference.
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (File No. 333-20207) and incorporated herein by reference.
+ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the Quarter Ended September 30, 1996.
++ Filed herewith.
Reports on Form 8-K
A report on Form 8-K dated January 6, 1997 was filed with the SEC on January 22,
1997 reporting, under Item 5, the execution of the Agreement and Plan of Merger
by the Company, AssureNet and the Company's acquisition subsidiary. No financial
statements were included in that report.
A report on Form 8-K dated March 25, 1997 was filed with the SEC on April 9,
1997 announcing, under Item 2, the completion of the acquisition of AssureNet;
financial information required by Item 7 was incorporated by reference to
Amendment No. 2 to the Company's registration statement on Form S-4 (File No.
333-20207).
16
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
AXENT TECHNOLOGIES, INC.
Date: May 14, 1997 By: /s/ Robert B. Edwards, Jr.
-----------------------------------
Robert B. Edwards, Jr.
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
EXHIBIT 11.1
AXENT TECHNOLOGIES, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
Period Ended March 31,
-----------------------------------
1996 1997
---------------- -----------------
Income (loss) from continuing operations $ 83,000 $ (26,858,000)
Income from discontinued operations $ 1,027,000 $ 173,000
---------------- -----------------
Net income $ 1, 110,000 $ (26,685,000)
================ =================
Weighted average common shares outstanding 8,982,599 12,646,000
Common shares issued within one year of
initial filing 9,075 ---
Stock options issued within one year of
initial filing (using the treasury stock
method and public offering price of
$14.00 per share) 108,958 ---
---------------- -----------------
Weighted average number of common shares
outstanding 9,100,632 12,646,000
Net income (loss) per common share and
common share and common share equivalents:
Continuing operations $ 0.01 $ (2.12)
Discontinued operations $ 0.11 $ 0.01
---------------- -----------------
$ 0.12 $ (2.11)
================ =================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the condensed
consolidated balance sheet and statement of operations of AXENT Technologies,
Inc. as of and for the three months ended March 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 16,086,000
<SECURITIES> 18,343,000
<RECEIVABLES> 6,055,000
<ALLOWANCES> 995,000
<INVENTORY> 0
<CURRENT-ASSETS> 40,296,000
<PP&E> 5,093,000
<DEPRECIATION> 2,779,000
<TOTAL-ASSETS> 45,190,000
<CURRENT-LIABILITIES> 12,922,000
<BONDS> 0
0
0
<COMMON> 235,000
<OTHER-SE> 32,033,000
<TOTAL-LIABILITY-AND-EQUITY> 45,190,000
<SALES> 0
<TOTAL-REVENUES> 8,155,000
<CGS> 0
<TOTAL-COSTS> 934,000
<OTHER-EXPENSES> 34,605,000
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (27,384,000)
<INCOME-TAX> 501,000
<INCOME-CONTINUING> (26,858,000)
<DISCONTINUED> 173,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,685,000)
<EPS-PRIMARY> (2.11)
<EPS-DILUTED> (2.11)
</TABLE>
