<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 22, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
AXENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
2400 RESEARCH BOULEVARD
SUITE 200
ROCKVILLE, MARYLAND 20850
(301) 258-5043
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DELAWARE 7372 87-0393420
(PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
(STATE OR OTHER CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
JOHN C. BECKER
AXENT TECHNOLOGIES, INC.
2400 RESEARCH BOULEVARD, SUITE 200
ROCKVILLE, MD 20850
(301) 258-5043
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF AGENT FOR SERVICE)
----------------
COPIES TO:
EDWIN M. MARTIN, JR., ESQ. WARREN T. LAZAROW, ESQ.
PIPER & MARBURY L.L.P. BROBECK, PHLEGER & HARRISON LLP
SUITE 800 TWO EMBARCADERO PLACE
1200 NINETEENTH STREET, N.W. 2200 GENG ROAD
WASHINGTON, D.C. 20036 PALO ALTO, CA 94303
(202) 861-3900 (415) 424-0160
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement and the satisfaction or waiver of certain other conditions under the
Agreement and Plan of Merger described herein.
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock........... 1,589,754 $2.20 $3,500,974 $1,061
- ---------------------------------------------------------------------------------------------
</TABLE>
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(1) Reflects (i) the maximum number of shares of Common Stock of AXENT
Technologies, Inc. ("AXENT") that may be issued in connection with the
merger of AssureNet Pathways, Inc. ("AssureNet") with a wholly-owned
subsidiary of AXENT, as described herein, and (ii) 39,754 shares of AXENT
Common Stock underlying certain AssureNet warrants.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended
(the "Securities Act").
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
AXENT TECHNOLOGIES, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY
ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-
4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
----------------------------------------- ----------------------
<S> <C>
(INFORMATION ABOUT THE TRANSACTION)
1.Forepart of the Registration Statement
and Outside Front Cover Page of Facing Page; Outside Front Cover
Prospectus........................... Page
2.Inside Front and Outside Back Cover
Pages of Prospectus.................. Inside Front and Outside Back Cover
Page; Additional Information
3.Risk Factors, Ratio of Earnings to
Fixed Charges and Other Information.. Summary; Risk Factors; Selected
Historical Consolidated Financial
Data and Unaudited Pro Forma
Condensed Combined Financial Data;
Comparative Per Share Data; The
Merger; AXENT Business; AssureNet
Business; Financial Statements of
AXENT and AssureNet
4.Terms of the Transaction............... Summary; The Merger; The Merger
Agreement; Description of AXENT
Capital Stock; Comparison of Rights
of Holders of AXENT Common Stock and
Holders of AssureNet Capital Stock
5.Pro Forma Financial Information........ Selected Historical Consolidated
Financial Data and Unaudited
Condensed Combined Pro Forma
Financial Data
6.Material Contacts with the Company
Being Acquired....................... The Merger; The Merger Agreement
7.Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters............ *
8.Interests of Named Experts and
Counsel.............................. Legal Matters; Experts
9.Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... *
(INFORMATION ABOUT THE REGISTRANT)
10.Information with Respect to S-3
Registrants.......................... *
11.Incorporation of Certain Information by
Reference............................ *
12.Information with Respect to S-2 or S-3
Registrants.......................... *
13.Incorporation of Certain Information by
Reference............................ *
14.Information with Respect to Registrants
Other Than S-2 or S-3 Registrants.... Summary; Risk Factors; Market Price
Information and Dividend Policies;
The Merger; AXENT Business; Selected
Historical Consolidated Financial
Data and Unaudited Condensed
Combined Pro Forma Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results
of Operations--AXENT; Management--
AXENT; Principal Stockholders--
AXENT; Financial Statements of AXENT
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-
4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
----------------------------------------- ----------------------
<S> <C>
(INFORMATION ABOUT THE COMPANY BEING ACQUIRED)
15.Information with Respect to S-3
Companies............................ *
16.Information with Respect to S-2 or S-3
Companies............................ *
17.Information with Respect to Companies
other than S-2 or S-3 Companies...... Summary; Risk Factors; The Merger;
AssureNet Business; Selected
Historical Consolidated Financial
Data and Unaudited Condensed
Combined Pro Forma Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results
of Operations--AssureNet; Principal
Shareholders--AssureNet; Financial
Statements of AssureNet
(VOTING AND MANAGEMENT INFORMATION)
18.Information if Proxies, Consents or
Authorization Are to be Solicited.... Summary; The AssureNet Special
Meeting; The Merger; AXENT Business;
AssureNet Business
19.Information if Proxies, Consents or
Authorizations Are Not to be
Solicited or in an Exchange Offer.... *
</TABLE>
- --------
* Not Applicable.
<PAGE>
ASSURENET PATHWAYS, INC.
201 RAVENDALE DRIVE
MOUNTAIN VIEW, CALIFORNIA 94030
February , 1997
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders (the
"AssureNet Special Meeting") of AssureNet Pathways, Inc., a California
corporation ("AssureNet"), to be held on March , 1997 at 8:00 a.m., local
time, at the offices of Brobeck, Phleger & Harrison LLP, Two Embarcadero
Place, 2200 Geng Road, Palo Alto, California 94303.
At the AssureNet Special Meeting, you will be asked to consider and vote
upon the approval and adoption of (i) the Agreement and Plan of Merger, dated
as of January 6, 1997 (the "Merger Agreement"), among AssureNet, AXENT
Technologies, Inc., a Delaware corporation ("AXENT"), and Axquisition, Inc., a
wholly-owned subsidiary of AXENT (the "Merger Subsidiary"), and (ii) the
Merger (as defined below), as described in the accompanying Notice of Special
Meeting of Shareholders and Prospectus/Proxy Statement. A copy of the Merger
Agreement appears as Annex A to the accompanying Prospectus/Proxy Statement.
Pursuant to the Merger Agreement, AssureNet will be merged with and into the
Merger Subsidiary (the "Merger"), and the Merger Subsidiary will remain as the
surviving wholly-owned subsidiary of AXENT. The Merger will become effective
upon the filing by the Surviving Corporation of a duly executed Certificate of
Merger with the State of Delaware (the "Effective Time") and will be deemed
effective in California once filed in Delaware. At that time, outstanding
shares of capital stock (the "AssureNet Stock") will be converted into shares
of AXENT Common Stock. Outstanding options and warrants to purchase AssureNet
Stock will be assumed by AXENT.
Each share of Series A and B Preferred Stock will be converted into a
fraction of a share of AXENT Common Stock determined by (a) dividing the
liquidation preference for such share ($.90 for the Series A and $1.00 for the
Series B) by the average closing price of a share of AXENT Common Stock for
the ten (10) trading days ending the third day preceding the Closing Date (the
"AXENT Share Value") and (b) adding the Common Stock Conversion Ratio
determined as set forth below (the "Series A Conversion Ratio" and the "Series
B Conversion Ratio," respectively).
Each share of Series C Preferred Stock will be converted into a fraction of
a share of AXENT Common Stock determined by (a) dividing the liquidation
preference for such share ($4.10) by the AXENT Share Value and (b) adding the
Common Stock Conversion Ratio (determined as set forth below) multiplied by
1.85 (the "Series C Conversion Ratio").
Each share of Common Stock will be converted into a fraction of a share of
AXENT Common Stock equal to a fraction (the "Common Stock Conversion Ratio")
the numerator of which is the result of subtracting the Liquidation Preference
Shares (determined as set forth below) from the lesser of (a) 1,550,000 or (b)
$29,450,000 divided by the AXENT Share Value and the denominator of which is
the sum of (i) the number of shares of AssureNet Common Stock outstanding
immediately prior to the Effective Time, (ii) the number of shares of
AssureNet Common Stock into which the AssureNet Preferred Stock outstanding
immediately prior to the Effective Time is convertible and (iii) the number of
shares of AssureNet Common Stock issuable upon exercise of all options and
warrants to purchase AssureNet Common Stock outstanding immediately prior to
the Effective Time (A) with exercise prices less than the result of
multiplying the Common Stock Conversion Ratio by the AXENT Share Value or (B)
granted or issued on or after January 6, 1997 (the "Counted Assumed Option
Shares" and "Counted Assumed Warrant Shares," respectively). The Liquidation
Preference Shares will be determined by dividing $10,498,420.90 by the AXENT
Share Value.
1
<PAGE>
On February 1997, the last reported sale price per share of the AXENT
Common Stock on The Nasdaq National Market was $ . If the Effective Time had
been February , 1997, the AXENT Share Value would have been $ and the
Series A Conversion Ratio would have been , the Series B Conversion Ratio
would have been , the Series C Conversion Ratio would have been and the
Common Stock Conversion Ratio would have been . Holders of AssureNet Stock
will receive cash in lieu of any fractional shares of AXENT Common Stock to
which such AssureNet shareholders would have been entitled. Each outstanding
option or warrant to purchase AssureNet Common Stock will be assumed by AXENT
and become an option or warrant, as applicable, to purchase a number of shares
of AXENT Common Stock determined by multiplying the number of shares subject
to the option or warrant, as applicable, by the Common Stock Conversion Ratio,
rounded down to the next lowest whole number of shares, at an exercise price
equal to the exercise price of such option or warrant, as applicable, at the
time of the Merger divided by the Common Stock Conversion Ratio, rounded up to
the next highest cent. If the requisite approval of the shareholders of
AssureNet is received, the Merger is expected to be consummated on or about
, 1997.
We urge you to read the enclosed Prospectus/Proxy Statement for a
description of the federal income tax consequences of the exchange and
assumption of securities pursuant to the Merger.
THE ASSURENET BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER
IS IN THE BEST INTERESTS OF ASSURENET AND ITS SHAREHOLDERS AND HAS APPROVED
AND ADOPTED THE MERGER AGREEMENT AND THE MERGER. THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF ASSURENET VOTE FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
The affirmative vote of (a) the holders of a majority of the outstanding
shares of AssureNet Common Stock, voting together as a single class, (b) the
holders of a majority of the outstanding shares of AssureNet Preferred Stock,
voting together as a single class on an "as converted" basis, and (c) the
holders of a majority of the outstanding shares of AssureNet Series C
Preferred Stock, voting separately as a class, is necessary to approve and
adopt the Merger Agreement and the Merger. The Merger will require the
satisfaction or waiver of other conditions as described in the attached
Prospectus/Proxy Statement. Shareholders who do not vote in favor of the
Merger and who comply with other requirements of the California General
Corporation Law ("CGCL") will have a right to demand payment for, and
appraisal of, the "fair market value" of their shares. See "The Merger --
Dissenters' Rights" in the accompanying Prospectus/Proxy Statement.
We urge you to read the enclosed materials carefully and to complete, sign
and date the enclosed proxy and return it promptly in the enclosed prepaid
envelope, whether or not you plan to attend the AssureNet Special Meeting. You
may revoke your proxy at any time before it has been voted, and if you attend
the AssureNet Special Meeting in person, you may, if you wish, vote your
shares personally on all matters whether or not you have previously returned
your proxy. Your prompt cooperation will be greatly appreciated.
Please do not send your share certificates with your proxy. If the Merger
Agreement is approved and adopted by the AssureNet shareholders and all other
conditions to the Merger are satisfied, you will receive a transmittal form
and instructions for the surrender and exchange of your shares.
Sincerely yours,
Ainslie J. Mayberry
Acting President and Chief Executive
Officer
2
<PAGE>
ASSURENET PATHWAYS, INC.
201 RAVENDALE DRIVE
MOUNTAIN VIEW, CALIFORNIA 94030
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1997
TO THE SHAREHOLDERS OF ASSURENET PATHWAYS, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"AssureNet Special Meeting") of AssureNet Pathways, Inc., a California
corporation ("AssureNet"), will be held on , 1997 at 8:00 a.m., local time,
at the offices of Brobeck, Phleger & Harrison, LLP, Two Embarcadero Place,
2200 Geng Road, Palo Alto, California 94303, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt (i) the
Agreement and Plan of Merger, dated as of January 6, 1997 (the "Merger
Agreement"), among AssureNet, AXENT Technologies, Inc., a Delaware
corporation ("AXENT"), and Axquisition, Inc., a wholly-owned subsidiary
of AXENT (the "Merger Subsidiary"), and (ii) the merger of AssureNet
with and into the Merger Subsidiary (the "Merger"), whereupon the Merger
Subsidiary will remain as a surviving wholly-owned subsidiary of AXENT,
as described in the accompanying Prospectus/Proxy Statement and;
2. To transact such other business as may properly come before the
AssureNet Special Meeting or any adjournments or postponements thereof.
Pursuant to the Merger Agreement, AssureNet will be merged with and into the
Merger Subsidiary (the "Merger"), and the Merger Subsidiary will remain as a
surviving wholly-owned subsidiary of AXENT. The Merger will become effective
upon the filing by the Surviving Corporation of a duly executed Certificate of
Merger with the State of Delaware (the "Effective Time") and will be deemed
effective in California once filed in Delaware. At that time, outstanding
shares of capital stock (the "AssureNet Stock") will be converted into shares
of AXENT Common Stock. Outstanding options and warrants to purchase AssureNet
capital stock will be assumed by AXENT. Each share of Series A and B Preferred
Stock will be converted into a fraction of a share of AXENT Common Stock
determined by (a) dividing the liquidation preference for such share ($.90 for
the Series A and $1.00 for the Series B) by the average closing price of a
share of AXENT Common Stock for the ten (10) trading days ending the third day
preceding the Closing Date (the "AXENT Share Value") and (b) adding the Common
Stock Conversion Ratio determined as set forth below (the "Series A Conversion
Ratio" and the "Series B Conversion Ratio," respectively).
Each share of Series C Preferred Stock will be converted into a fraction of
a share of AXENT Common Stock determined by (a) dividing the liquidation
preference for such share ($4.10) by the AXENT Share Value and (b) adding the
Common Stock Conversion Ratio (determined as set forth below) multiplied by
1.85 (the "Series C Conversion Ratio").
Each share of Common Stock will be converted into a fraction of a share of
AXENT Common Stock equal to a fraction (the "Common Stock Conversion Ratio")
the numerator of which is the result of subtracting the Liquidation Preference
Shares (determined as set forth below) from the lesser of (a) 1,550,000 or (b)
$29,450,000 divided by the AXENT Share Value and the denominator of which is
the sum of (i) the number of shares of AssureNet Common Stock outstanding
immediately prior to the Effective Time, (ii) the number of shares of
AssureNet Common Stock into which the AssureNet Preferred Stock outstanding
immediately prior to the Effective Time is convertible and (iii) the number of
shares of AssureNet Common Stock issuable upon exercise of all options and
warrants to purchase AssureNet Common Stock outstanding immediately prior to
the Effective Time (A) with exercise prices less than the result of
multiplying the Common Stock Conversion Ratio by the AXENT Share Value or (B)
granted or issued on or after January 6, 1997 (the "Counted Assumed Option
Shares" and "Counted Assumed Warrant Shares," respectively). The Liquidation
Preference Shares shall be determined by dividing $10,498,420.90 by the AXENT
Share Value. If the Effective Time had been February , 1997 the AXENT Share
Value would have been $ and the Series A Conversion Ratio would have been
<PAGE>
, the Series B Conversion Ratio would have been , the Series C
Conversion Ratio would have been and the Common Stock Conversion Ratio
would have been . Holders of AssureNet Stock will receive cash in lieu of
any fractional shares of AXENT Common Stock to which such AssureNet
shareholders would have been entitled. Each outstanding option or warrant to
purchase AssureNet Common Stock will be assumed by AXENT so as to represent an
option or warrant, as applicable, to purchase a number of shares of AXENT
Common Stock determined by multiplying the number of shares subject to the
option or warrant, as applicable, by the Common Stock Conversion Ratio,
rounded down to the next lowest whole number of shares, at an exercise price
equal to the exercise price of such option or warrant, as applicable, at the
time of the Merger divided by the Conversion Ratio, rounded up to the next
highest cent.
Shareholders who do not vote in favor of the Merger and who comply with
other requirements of the California General Corporation Law ("CGCL") will
have a right to demand payment for, and appraisal of, the "fair market value"
of their shares. See "The Merger--Dissenters' Rights" in the accompanying
Prospectus/Proxy Statement.
The holders of record of AssureNet Common Stock, AssureNet Series A
Preferred Stock, AssureNet Series B Preferred Stock and AssureNet Series C
Preferred Stock at the close of business on February , 1997 are entitled to
notice of and to vote at the AssureNet Special Meeting and any adjournments or
postponements thereof and are cordially invited to attend the AssureNet
Special Meeting.
To ensure your representation at the AssureNet Special Meeting, you are
urged to mark, sign and return the enclosed proxy in the accompanying
envelope, whether or not you expect to attend the AssureNet Special Meeting.
No postage is required if mailed in the United States. Any AssureNet
shareholder attending the AssureNet Special Meeting may vote in person even if
that shareholder has returned a proxy.
By order of the Board of Directors
Warren T. Lazarow
Assistant Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THE ASSURENET SPECIAL MEETING, PLEASE
PROMPTLY COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE
ACCOMPANYING ENVELOPE. NO POSTAGE NEED BE AFFIXED IF THE PROXY IS MAILED IN
THE UNITED STATES. DO NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1997
AXENT TECHNOLOGIES, INC. ASSURENET PATHWAYS, INC.
2400 RESEARCH BOULEVARD, 201 RAVENDALE DRIVE
SUITE 200 MOUNTAIN VIEW, CALIFORNIA 94030
ROCKVILLE, MARYLAND 20850
PROSPECTUS/PROXY STATEMENT
This Prospectus/Proxy Statement is being furnished to holders of Common Stock
("AssureNet Common Stock") and Preferred Stock ("AssureNet Preferred Stock"
and, together with the AssureNet Common Stock, the "AssureNet Stock"), of
AssureNet Pathways, Inc., a California corporation ("AssureNet"), in connection
with the solicitation of proxies by the AssureNet Board of Directors (the
"AssureNet Board") for use at the Special Meeting of AssureNet Shareholders
(the "AssureNet Special Meeting") to be held on March , 1997 at the offices
of Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo
Alto, California 94303, commencing at 8:00 a.m., local time, and at any
adjournments or postponements thereof.
This Prospectus/Proxy Statement also constitutes a prospectus of AXENT
Technologies, Inc., a Delaware corporation ("AXENT"), with respect to the
issuance of up to an aggregate of 1,550,000 shares of AXENT Common Stock in
addition to the assumption of AssureNet's outstanding options and warrants in
order to effect the proposed acquisition of AssureNet by AXENT (the "Merger")
pursuant to an Agreement and Plan of Merger, dated as of January 6, 1997 (the
"Merger Agreement"), among AXENT, Axquisition, Inc., a wholly-owned subsidiary
of AXENT (the "Merger Subsidiary"), and AssureNet. All information contained in
this Prospectus/Proxy Statement relating to AXENT has been supplied by AXENT,
and all information relating to AssureNet has been supplied by AssureNet. On
February , 1997, the last reported sale price per share of the AXENT Common
Stock on The Nasdaq National Market was $ .
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY ASSURENET SHAREHOLDERS IN CONNECTION WITH THE
MERGER AND THE ACQUISITION OF SECURITIES OFFERED HEREBY.
In accordance with the California General Corporation Law, holders of
AssureNet Stock are entitled to dissenters' rights in connection with the
Merger. See "The Merger--Dissenters' Rights."
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROSPECTUS/PROXY STATEMENT HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
This Prospectus/Proxy Statement and the accompanying form of proxies are
first being mailed to shareholders of AssureNet on or about March , 1997.
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS MARCH , 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION...................................................... 1
SUMMARY.................................................................... 3
The Companies............................................................ 3
Date, Place and Purpose of the AssureNet Special Meeting................. 4
Shareholders Entitled to Vote............................................ 4
Votes Required........................................................... 4
The Merger............................................................... 4
Recommendation........................................................... 5
Voting Agreements........................................................ 6
Effective Time of the Merger............................................. 6
Management of AssureNet after the Merger................................. 6
Conditions to the Merger................................................. 6
Termination; Amendment and Waiver........................................ 6
Management Agreement..................................................... 7
Surrender of Certificates................................................ 7
Dissenters' Rights....................................................... 7
Certain Federal Income Tax Consequences of the Merger.................... 8
Accounting Treatment..................................................... 8
Restrictions on Resale of Securities Issued in the Merger................ 8
Comparison of Stockholder Rights......................................... 8
Risk Factors............................................................. 8
Summary Consolidated Financial Data--AXENT............................... 9
Summary Consolidated Financial Data--AssureNet........................... 10
RISK FACTORS............................................................... 11
Risks Relating to the Merger............................................. 11
Risks Relating to AXENT and AssureNet.................................... 13
Risks Relating to AXENT.................................................. 13
Risks Relating to AssureNet.............................................. 21
MARKET PRICE INFORMATION AND DIVIDEND POLICIES............................. 30
THE ASSURENET SPECIAL MEETING.............................................. 31
General.................................................................. 31
Purpose of the AssureNet Special Meeting................................. 31
Board of Directors Recommendation........................................ 31
Date, Time and Place..................................................... 31
Record Date; Shares Outstanding.......................................... 31
Voting at the AssureNet Special Meeting.................................. 31
Solicitation of Proxies.................................................. 32
Dissenters' Rights....................................................... 32
THE MERGER................................................................. 32
Background of the Merger................................................. 32
Reasons for the Merger................................................... 32
Voting Agreements........................................................ 34
Ownership of AssureNet Stock by Directors and Officers of AssureNet...... 34
Accounting Treatment..................................................... 34
Certain Federal Income Tax Consequences.................................. 34
Federal Securities Law Consequences...................................... 36
Nasdaq National Market Listing........................................... 36
Dissenters' Rights....................................................... 36
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
THE MERGER AGREEMENT..................................................... 37
The Merger............................................................. 38
Conversion of Securities............................................... 38
Stock Option Plans..................................................... 38
Assumption of Warrants................................................. 39
Representations and Warranties......................................... 39
Certain Covenants and Agreements....................................... 39
No Solicitation........................................................ 40
Related Matters after the Merger....................................... 41
Conditions............................................................. 41
Termination............................................................ 42
Amendment and Waiver................................................... 42
Related Agreements..................................................... 42
AXENT BUSINESS........................................................... 44
Industry Background.................................................... 44
The AXENT Technologies Solution........................................ 45
Strategy............................................................... 46
Technology............................................................. 47
Products and Services.................................................. 48
Sales and Marketing.................................................... 50
Customers.............................................................. 51
Product Development.................................................... 52
Competition............................................................ 52
Intellectual Property Rights........................................... 53
Facilities............................................................. 54
Employees.............................................................. 55
Litigation............................................................. 55
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA AND UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL DATA....................................... 56
COMPARATIVE PER SHARE DATA............................................... 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--AXENT.................................................... 62
Overview............................................................... 62
Results of Operations.................................................. 63
Quarterly Results of Operations........................................ 68
Liquidity and Capital Resources........................................ 70
Certain Factors Affecting Future Performance........................... 71
AXENT MANAGEMENT......................................................... 72
Officers and Directors................................................. 72
Directors' Compensation and Other Arrangements......................... 73
Executive Compensation................................................. 75
Severance Arrangements................................................. 77
Executive Bonus Plan................................................... 77
Stock Option Plans..................................................... 77
Compensation Committee Interlocks and Insider Participation............ 78
Limitation on Liability and Indemnification Matters.................... 78
CERTAIN TRANSACTIONS--AXENT.............................................. 79
PRINCIPAL STOCKHOLDERS--AXENT............................................ 80
</TABLE>
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ASSURENET BUSINESS....................................................... 82
Industry Background.................................................... 82
AssureNet Products..................................................... 85
Product Development.................................................... 87
Sales and Marketing.................................................... 87
Customers.............................................................. 89
Customer Service and Support........................................... 89
Manufacturing and Suppliers............................................ 90
Competition............................................................ 91
Proprietary Rights..................................................... 91
Employees.............................................................. 92
Facilities............................................................. 92
Legal Proceedings...................................................... 92
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--ASSURENET................................................ 93
Overview............................................................... 93
Results of Operations.................................................. 95
Liquidity and Capital Resources........................................ 97
PRINCIPAL SHAREHOLDERS--ASSURENET........................................ 99
DESCRIPTION OF AXENT CAPITAL STOCK....................................... 101
Common Stock........................................................... 101
Preferred Stock........................................................ 101
Transfer Agent and Registrar........................................... 101
Listing................................................................ 101
DESCRIPTION OF ASSURENET CAPITAL STOCK................................... 102
Common Stock........................................................... 102
Preferred Stock........................................................ 102
Voting Rights.......................................................... 104
COMPARISON OF RIGHTS OF HOLDERS OF AXENT COMMON STOCK
AND HOLDERS OF ASSURENET CAPITAL STOCK.................................. 105
Capitalization......................................................... 105
Conversion of AssureNet Stock.......................................... 105
Limitation on Directors' Liability; Indemnification of Officers,
Directors,
Employees or other Agents............................................. 105
Amended Bylaws......................................................... 106
Size of the Board of Directors......................................... 106
Classified Board of Directors.......................................... 106
Removal of Directors................................................... 106
Cumulative Voting for Directors........................................ 107
Loans to Officers and Employees........................................ 107
Power to Call Special Meeting of Stockholders.......................... 107
Inspection of Stockholder List......................................... 107
Dividend and Repurchase Shares......................................... 107
Approval of Certain Corporate Transactions............................. 108
Class Voting in Certain Corporate Transactions......................... 108
Appraisal Rights....................................................... 108
Dissolution............................................................ 109
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LEGAL MATTERS............................................................ 109
EXPERTS.................................................................. 109
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS................................. 110
OTHER MATTERS............................................................ 110
INDEX TO FINANCIAL STATEMENTS............................................ F-1
ANNEX A -- AGREEMENT AND PLAN OF MERGER.................................. A-1
ANNEX B -- SHAREHOLDER AGREEMENT......................................... B-1
ANNEX C -- CHAPTER 13 OF THE GENERAL CORPORATION LAW OF CALIFORNIA
DISSENTERS RIGHTS............................................ C-1
</TABLE>
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AVAILABLE INFORMATION
AXENT is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by AXENT with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the following Regional Offices of the Commission: Seven World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material also can
be obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, AXENT
is required to file electronic versions of these documents with the Commission
through the Commission's Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. AXENT Common Stock is traded on The Nasdaq National Market.
Reports and other information filed by AXENT can also be inspected at the
offices of the National Association of Securities Dealers, Inc. (the "NASD"),
Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
AXENT has filed with the Commission a Registration Statement on Form S-4
(together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the shares of AXENT Common Stock to be issued pursuant
to this Prospectus/Proxy Statement. This Prospectus/Proxy Statement does not
contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. Such additional information may be obtained
from the Commission's principal office in Washington, D.C. or from the offices
of the NASD in Washington, D.C. Although statements contained in this
Prospectus/Proxy Statement as to the contents of any contract or other
document referred to herein set forth all material elements of such documents,
such statements are not necessarily complete. With respect to each such
contract or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the
matters involved, and each such statement, although setting forth all material
elements of such document, shall be deemed qualified in all respects by such
reference.
COPIES OF AXENT'S FILINGS WITH THE COMMISSION MAY BE OBTAINED UPON WRITTEN
OR ORAL REQUEST WITHOUT CHARGE FROM AXENT, 2400 RESEARCH BOULEVARD, SUITE 200,
ROCKVILLE, MARYLAND 20850, ATTENTION: INVESTOR RELATIONS, TELEPHONE (301) 258-
5043. IN ORDER TO ASSURE TIMELY DELIVERY OF THE REQUESTED MATERIAL BEFORE THE
ASSURENET SPECIAL MEETING, ANY REQUEST SHOULD BE MADE PRIOR TO MARCH ,
1997.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY AXENT, ASSURENET OR ANY OTHER PERSON. THIS
PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE ANY SUCH OFFER OR SOLICITATION OF AN OFFER IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS/PROXY STATEMENT NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF AXENT OR ASSURENET SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
AXENT Technologies, OmniGuard/Enterprise Security Manager,
OmniGuard/Enterprise Access Control and OmniGuard/Intruder Alert are
registered trademarks of AXENT. OmniGuard, OmniGuard/Enterprise
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Resource Manager and OmniGuard/UNIX Privilege Manager are trademarks of AXENT.
ICAN, PATHMASTER, WinDMS and SECURELINK are registered trademarks of
AssureNet. Practical Secure Access Solutions is a service mark of AssureNet.
AssureNet Pathways, Defender, Web Defender, All-Star Partners, SecureNet Key,
SNK, SSNK, Defender Security Server, DIG PATH, DMS, and DSS are trademarks of
AssureNet, and AssureNet has applied for federal or state registration with
respect to certain of these marks. All other trademarks or tradenames referred
to in this Prospectus/Proxy Statement are the property of their respective
owners.
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus/Proxy Statement. Reference is made to, and this Summary is qualified
in its entirety by, the more detailed information contained in this
Prospectus/Proxy Statement and the Annexes hereto. Unless otherwise defined
herein, capitalized terms used in this Summary have the respective meanings
ascribed to them elsewhere in this Prospectus/Proxy Statement. Shareholders are
urged to read this Prospectus/Proxy Statement and the Annexes hereto in their
entirety.
THE COMPANIES
AXENT. AXENT develops, markets, licenses and supports computer security
solutions for enterprise computing environments. AXENT's OmniGuard family is a
suite of software products which provides a comprehensive solution to a wide
range of computer security requirements across multiple computing platforms.
OmniGuard products enable organizations to centrally manage computer security
functions. In addition, OmniGuard products provide data confidentiality, access
control, user administration, monitoring, and intrusion detection across local
area networks ("LANs"), the Internet and intranets and on personal computers,
computers running NT, UNIX, NetWare and other midrange and mainframe operating
systems. AXENT addresses the growing requirement for comprehensive security
solutions as organizations migrate from centralized, proprietary computing
platforms to distributed, heterogeneous client/server environments accessible
from both internal networks and external networks, such as the Internet. AXENT
believes that enterprise security is best addressed primarily as a business
problem rather than a technological one and that its OmniGuard family of
software products and related consulting services enable organizations to
select, install, manage and maintain robust yet cost-effective security
solutions appropriate for their businesses.
AXENT's OmniGuard family of software products consists of Enterprise Security
Manager ("ESM"), Intruder Alert ("ITA") and Enterprise Access Control ("EAC"),
UNIX Privilege Manager ("UPM") and Enterprise Resource Manager ("ERM"), each of
which is available across a variety of common computing platforms. These
products may be used in combination to provide a comprehensive information
security solution for the enterprise or individually to fulfill a specific
need.
As of December 31, 1996, more than 300 customers in a broad range of
industries had deployed one or more of the OmniGuard software products and more
than 450 customers had deployed one or more of the Company's other security
products.
AXENT evolved from two separate entities that were merged in 1991. The result
of the merger was a new entity, Raxco, Inc. the direct predecessor of AXENT. On
December 19, 1995, Raxco, Inc.'s name was changed to AXENT Technologies, Inc.
AXENT's principal executive offices are located at 2400 Research Boulevard,
Suite 200, Rockville, Maryland 20850. Its telephone number is (301) 258-5043.
As used in this Prospectus/Proxy Statement, the term "AXENT" refers to AXENT
Technologies, Inc. and its subsidiaries.
AssureNet. AssureNet is a leading provider of network security products and
services that protect enterprise networks, including private LANs, wide area
networks ("WANs") and internal networks based on non-proprietary communications
protocols ("Intranets"). AssureNet's products, which run on a variety of open
computing platforms and support networking and security standards, prevent
unauthorized network access which could result in the theft and manipulation of
mission critical information. AssureNet's network security solution is based on
one-time password challenge/response authentication and identification
technology and includes Defender Security Server ("DSS") software, Defender
hardware products, software and hardware SecureNet Keys, the Defender
Management System ("DMS") software and technical support and services. In
addition, AssureNet's hardware-based network security products also protect
access to legacy host systems, upon which many companies are still dependent.
AssureNet was incorporated in March 1970 in California under the name Digital
Pathways, Inc. and changed to its current name in 1996. AssureNet's principal
executive offices are located at 201 Ravendale Drive, Mountain View, California
94030. Its telephone number is (415) 964-0707. As used in this Prospectus/Proxy
Statement, the term "AssureNet" refers to AssureNet Pathways, Inc. and its
subsidiaries, unless the context otherwise requires.
3
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DATE, PLACE AND PURPOSE OF THE ASSURENET SPECIAL MEETING
The AssureNet Special Meeting will be held on March , 1997 at 8:00 a.m.,
local time, at Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200
Geng Road, Palo Alto, California 94303.
The purpose of the AssureNet Special Meeting is to consider and vote upon:
(i) a proposal to approve and adopt the Merger Agreement and the Merger (each
as defined herein) and (ii) such other matters as may properly be brought
before the Special Meeting or any postponements or adjournments thereof. See
"The AssureNet Special Meeting."
SHAREHOLDERS ENTITLED TO VOTE
Holders of record of AssureNet Stock at the close of business on February ,
1997 (the "Record Date") are entitled to notice of and to vote at the AssureNet
Special Meeting and any adjournments or postponements thereof. On the Record
Date, there were outstanding shares of AssureNet Common Stock,
shares of AssureNet Series A Preferred Stock, shares of AssureNet Series
B Preferred Stock and shares of AssureNet Series C Preferred Stock
(collectively, the "AssureNet Stock").
VOTES REQUIRED
The approval and adoption of the Merger Agreement and the Merger will require
the affirmative vote of (a) the holders of a majority of the outstanding shares
of AssureNet Common Stock, voting together as a single class, (b) the holders
of a majority of the outstanding shares AssureNet Preferred Stock, voting
together as a single class on an "as converted" basis, and (c) the holders of a
majority of the outstanding shares of AssureNet Series C Preferred Stock,
voting separately as a class. Each share of AssureNet Common Stock, Series A
Preferred Stock and Series B Preferred Stock is entitled to one vote on all
matters presented at the AssureNet Special Meeting. Each share of Series C
Preferred Stock is entitled to 1.85 votes on all matters presented at the
AssureNet Special Meeting. Certain shareholders who as of January 6, 1997 held
in the aggregate approximately 100% of the Series C Preferred Stock, 67% of the
Total Preferred Stock (on an as converted basis) and 65% of the AssureNet
Common Stock have entered into Shareholder Agreements (the "Shareholder
Agreements") with AXENT and AssureNet providing, among other things, for the
appointment of nominees of AXENT as proxies to vote all shares of AssureNet
Stock owned by such shareholders in favor of approval of the Merger Agreement
and the Merger. As of February , 1997, such shares represented approximately
% of the shares of AssureNet Stock entitled to vote at the AssureNet Special
Meeting. Accordingly, approval of the Merger Agreement and the Merger by the
shareholders of AssureNet is assured. See "The AssureNet Special Meeting--
Voting at the AssureNet Special Meeting" and "The Merger Agreement--Related
Agreements--Shareholder Agreements."
Votes may be cast in person at the AssureNet Special Meeting or by proxy. Any
AssureNet shareholder who executes and returns a proxy may revoke such proxy at
any time before it is voted by (i) notifying in writing the Secretary of
AssureNet at 201 Ravendale Drive, Mountain View, California 94030, (ii)
granting a subsequent proxy, or (iii) appearing in person and voting at the
AssureNet Special Meeting. Attendance at the AssureNet Special Meeting will not
in and of itself constitute revocation of a proxy.
THE MERGER
Effects of the Merger. Upon consummation of the Merger, pursuant to the
Merger Agreement, (i) AssureNet will be merged with and into the Merger
Subsidiary, which will remain the surviving wholly-owned subsidiary of AXENT
(the "Surviving Corporation"), and (ii) each issued and outstanding share of
AssureNet Stock (other than shares of AssureNet Stock owned beneficially by
AXENT or the Merger Subsidiary and shares of AssureNet Stock for which demands
for dissenters' rights under the CGCL have been duly and timely delivered) will
be converted into the right to receive such number of shares of AXENT Common
Stock as is equal to the Conversion Ratio (as defined below) for such class.
AssureNet shareholders will receive cash in lieu of any fractional shares of
AXENT Common Stock to which such AssureNet shareholders would otherwise have
been entitled. See "The Merger Agreement--The Merger."
Conversion Ratio. Each share of AssureNet Series A and B Preferred Stock will
be converted into a fraction of a share of AXENT Common Stock determined by (a)
dividing the liquidation preference for such
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share ($.90 for the Series A and $1.00 for the Series B) by the average closing
price of a share of AXENT Common Stock for the ten (10) trading days ending the
third day preceding the Closing Date (the "AXENT Share Value") and (b) adding
the Common Stock Conversion Ratio determined as set forth below (the "Series A
Conversion Ratio" and the "Series B Conversion Ratio," respectively).
Each share of AssureNet Series C Preferred Stock will be converted into a
fraction of a share of AXENT Common Stock determined by (a) dividing the
liquidation preference for such share ($4.10) by the AXENT Share Value and (b)
adding the Common Stock Conversion Ratio (determined as set forth below)
multiplied by 1.85 (the "Series C Conversion Ratio").
Each share of AssureNet Common Stock will be converted into a fraction of a
share of AXENT Common Stock equal to a fraction (the "Common Stock Conversion
Ratio") the numerator of which is the result of subtracting the Liquidation
Preference Shares from the lesser of (a) 1,550,000 or (b) $29,450,000 divided
by the AXENT Share Value and the denominator of which is the sum of (i) the
number of shares of AssureNet Common Stock outstanding immediately prior to the
Effective Time (as defined below); (ii) the number of shares of AssureNet
Common Stock into which the AssureNet Preferred Stock outstanding immediately
prior to the Effective Time is convertible and (iii) the number of shares of
AssureNet Common Stock issuable upon exercise of all options and warrants to
purchase AssureNet Common Stock outstanding immediately prior to the Effective
Time (A) with exercise prices less than the result of multiplying the Common
Stock Conversion Ratio by the AXENT Share Value or (B) granted or issued on or
after January 6, 1997 (the "Counted Assumed Option Shares" and "Counted Assumed
Warrant Shares," respectively). If the Effective Time had been February , 1997
the AXENT Share Value would have been $ and the Series A Conversion Ratio
would have been , the Series B Conversion Ratio would have been , the Series
C Conversion Ratio would have been and the Common Stock Conversion Ratio
would have been . The Series A Conversion Ratio, Series B Conversion Ratio,
Series C Conversion Ratio and Common Stock Conversion Ratio are collectively
referred to herein as the "Conversion Ratios."
Assumption of Options and Warrants. Upon consummation of the Merger, each
then outstanding option to purchase AssureNet Common Stock (an "AssureNet
Option") will be assumed by AXENT and automatically become an option (an "AXENT
Option") to purchase the number of shares of AXENT Common Stock (rounded down
to the next lowest whole number) equal to the number of shares of AssureNet
Common Stock issuable upon exercise of such AssureNet Option multiplied by the
Common Stock Conversion Ratio. The exercise price per share (rounded up to the
next highest whole cent) under the AXENT Option will be equal to the exercise
price of such AssureNet Option divided by the Common Stock Conversion Ratio.
See "The Merger Agreement--Stock Option Plans."
At the Effective Time, AXENT will agree to assume AssureNet's obligations
under outstanding warrants to purchase AssureNet Stock. Accordingly, AXENT will
agree to issue upon exercise the number of shares of AXENT Common Stock
(rounded down to the next lower whole number ) equal to the number of shares of
AssureNet Stock issuable upon exercise of such warrants multiplied by the
Common Stock Conversion Ratio, at a price per share (rounded up to the next
higher whole cent) equal to the exercise price per share of such warrant
divided by the Common Stock Conversion Ratio. AXENT has agreed to provide
certain holders of warrants to purchase AssureNet Stock certain registration
rights with respect to the shares of AXENT Common Stock issuable to them upon
exercise of such warrants assumed by AXENT as described in the Merger
Agreement.
RECOMMENDATION
The AssureNet Board has unanimously approved the Merger Agreement and the
Merger and recommends that all holders of AssureNet Stock approve and adopt the
Merger Agreement and the Merger.
The AssureNet Board considered many factors in reaching its conclusion to
approve the Merger Agreement and to recommend that shareholders vote for
approval of the Merger Agreement and the Merger. See "The Merger--Reasons for
the Merger."
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VOTING AGREEMENTS
Certain shareholders who as of January 6, 1997 held in the aggregate
approximately 100% of the Series C Preferred Stock, 67% of the AssureNet
Preferred Stock (on an as converted basis) and 65% of the AssureNet Common
Stock have entered into Shareholder Agreements with AXENT and AssureNet
providing, among other things, for the appointment of nominees of AXENT as
proxies to vote all shares of AssureNet Stock owned by such shareholders in
favor of approval of the Merger and the Merger Agreement. See "The Merger
Agreement--Related Agreements."
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing by the Surviving Corporation
of a duly executed Certificate of Merger with the Secretary of State of the
State of Delaware (the "Effective Time") and will be deemed effective in
California once filed in Delaware. It is anticipated that the Merger will
become effective as promptly as practicable after the requisite shareholder
approval has been obtained and all regulatory approvals and other conditions to
the Merger set forth in the Merger Agreement have been satisfied or waived. It
is anticipated that, assuming all conditions are met, the Merger will occur on
or about March , 1997. See "The Merger Agreement--Conditions."
MANAGEMENT OF ASSURENET AFTER THE MERGER
After the Effective Time, it is expected that the current directors and
officers of the Merger Subsidiary will continue as members of management of the
Surviving Corporation, which will operate as a wholly-owned subsidiary of
AXENT. As a result, none of the AssureNet's present directors or officers will
become a director or officer of the Surviving Corporation.
CONDITIONS TO THE MERGER
The respective obligations of AXENT and AssureNet to consummate the Merger
are subject to the satisfaction of a number of conditions, including, among
others, (i) approval by the shareholders of AssureNet; (ii) approval for
listing on The Nasdaq National Market of the AXENT Common Stock to be issued in
the Merger; (iii) effectiveness of the Registration Statement of which this
Prospectus/Proxy Statement is a part; (iv) filing, occurrence or acquisition of
all authorizations, consents, orders or approvals of, or declarations or
filings with, or expirations of waiting periods imposed by, any governmental
entity; (v) receipt by each party of various legal opinions, accountants'
comfort letters and other certificates, consents and approvals from the other
parties to the Merger and from third parties; (vi) accuracy in all material
respects of the representations and warranties of each party and compliance in
all material respects with all covenants and conditions by each party. See "The
Merger--Accounting Treatment," "The Merger--Certain Federal Income Tax
Consequences" and "The Merger Agreement--Conditions."
TERMINATION; AMENDMENT AND WAIVER
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, in certain circumstances, including (i) by mutual
consent of AXENT and AssureNet, (ii) by either party, if the Merger shall not
have been consummated on or before April 11, 1997, (iii) by AssureNet if the
AXENT Share Value is less than $14.00 per share, (iv) by AssureNet if
AssureNet's Board of Directors makes a "Fiduciary Determination" (as defined in
the Merger Agreement) or (v) by either party if the shareholders of AssureNet
fail to approve and adopt the Merger Agreement and the Merger. See "The Merger
Agreement--Termination."
If either party terminates the Merger Agreement for reasons described in
clauses (i) through (iii) or clause (v), that party has no liability to the
other except for liability for any breaches of covenants (but not warranties
and representations) in the Merger Agreement, which liability will not exceed a
total of $1,000,000. If AssureNet terminates the Merger Agreement as a result
of a "Fiduciary Determination," AssureNet is required to pay a fee to AXENT
equal to five percent of the value of the aggregate consideration provided for
in the Merger Agreement (based on the value of AXENT Common Stock on the date
AXENT receives notice of termination) plus reasonable transaction costs.
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The Merger Agreement may be amended by the written agreement of AXENT and
AssureNet at any time before or after the approval of AssureNet's shareholders.
See "The Merger Agreement--Amendment and Waiver."
MANAGEMENT AGREEMENT
Concurrent with the execution of the Merger Agreement, AssureNet and AXENT
entered into a Management Agreement pursuant to which AXENT has full power and
authority to manage the business and operations of AssureNet from January 6,
1997 to the Effective Time of the Merger, unless the Management Agreement is
otherwise terminated, provided, however, that AXENT will use its best efforts
to consult with and inform appropriate officers of AssureNet regarding actions
proposed to be taken under the Management Agreement and will obtain the
approval of AssureNet's Board if required under AssureNet's charter documents
or California law. See "The Merger Agreement--Related Agreements."
SURRENDER OF CERTIFICATES
If the Merger becomes effective, AXENT will mail a letter of transmittal with
instructions to all holders of record of AssureNet Stock at the Effective Time
for use in surrendering their stock certificates in exchange for certificates
representing shares of AXENT Common Stock and a cash payment in lieu of
fractional shares, if any. CERTIFICATES SHOULD NOT BE SURRENDERED UNTIL THE
LETTER OF TRANSMITTAL IS RECEIVED. See "The Merger Agreement--Conversion of
Securities."
DISSENTERS' RIGHTS
If the Merger is approved by the required vote of AssureNet's shareholders,
each holder of shares of AssureNet Stock who does not vote in favor of the
Merger and who follows the procedures set forth in Chapter 13 of the CGCL will
be entitled to have shares of AssureNet Stock purchased by AssureNet for cash
at their fair market value. The fair market value of the shares of AssureNet
Stock will be determined as of the day before the first announcement of the
terms of the proposed Merger, excluding any appreciation or depreciation in
consequence of the proposed Merger and therefore valuing the shares of
AssureNet Stock as if the Merger had not occurred. On December 26, 1996, the
AssureNet Board of Directors determined that the fair market value of shares of
its capital stock equaled $.75 for Common Stock, $1.36 for Series A Preferred
Stock, $1.43 for Series B Preferred Stock and $4.17 for Series C Preferred
Stock.
Within ten (10) days after approval of the Merger by AssureNet's
shareholders, AssureNet must mail a notice of such approval (the "Approval
Notice") to all shareholders who have not voted in favor of the Merger,
together with a statement of the price determined by AssureNet to represent the
fair market value of the applicable dissenting shares, a brief description of
the procedures to be followed in order for the shareholder to pursue
dissenter's rights, and a copy of Sections 1300-1304 of the CGCL. The statement
of price by AssureNet constitutes an offer by AssureNet to purchase all
dissenting shares at the stated amount.
A shareholder of AssureNet electing to exercise dissenters' rights must,
within thirty (30) days after the date on which the Approval Notice is mailed
to such shareholder, mail or deliver the written demand to AssureNet stating
that such holder is demanding purchase of his or her shares of AssureNet Stock,
stating the number of shares which AssureNet must purchase, what the
shareholder claims is to be the fair market value of such shares and enclosing
the share certificates for endorsement by AssureNet.
If AssureNet and the shareholder agree that the shares are dissenting shares
and agree upon the price of the shares, AssureNet must pay the shareholder the
agreed upon price plus interest thereon at the legal rate from the date of the
agreement within thirty (30) days from the later of (i) the date of the
agreement on dissenting shares, or (ii) the date all contractual conditions to
the Merger are satisfied.
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If AssureNet denies that the shares are dissenting shares, or if AssureNet
and the shareholder fail to agree upon the fair market value of the shares,
then within six (6) months after the date the Approval Notice was mailed to
shareholder, any shareholder who has made a valid written purchase demand and
who has not voted in favor of approval and adoption of the Merger may file a
complaint in California superior court requesting a determination as to whether
the shares are dissenting shares or as to the fair market value of such
holder's shares of AssureNet Stock, or both. See "The Merger--Dissenters'
Rights."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
If the Merger so qualifies, no gain or loss would be recognized by AXENT,
AssureNet or the Merger Subsidiary, and no gain or loss would be recognized by
any shareholders of AssureNet, except in respect of cash received for
fractional shares or shares of AssureNet Stock for which demands for
dissenters' rights under the CGCL have been duly and timely delivered.
Consummation of the Merger is conditioned upon there being delivered prior to
the closing to each of AXENT and AssureNet an opinion of their respective
counsel to the effect that the Merger will constitute a reorganization under
Section 368(a) of the Code. See "The Merger--Certain Federal Income Tax
Consequences."
ACCOUNTING TREATMENT
The Merger is being accounted for as a purchase for accounting and financial
reporting purposes. See "The Merger--Accounting Treatment" and "The Merger
Agreement--Conditions."
RESTRICTIONS ON RESALE OF SECURITIES ISSUED IN THE MERGER
Shares of AXENT Common Stock issued in the Merger will be freely
transferable, except for shares issued to persons who may be deemed
"affiliates" of AssureNet, which will be subject to certain restrictions on
resale under Rule 145 promulgated under the Securities Act. AXENT has agreed to
provide certain holders of warrants to purchase AssureNet Common Stock certain
registration rights with respect to the shares of AXENT Common Stock issuable
to them upon exercise of such warrants after conversion into warrants to
purchase AXENT Common Stock as described in the Merger Agreement. Pursuant to
Continuity of Interest and Lock Up Agreements, certain shareholders of
AssureNet have agreed that from the Effective Time through December 31, 1997,
each such shareholder will not sell or otherwise transfer more than 50,000
shares of AXENT Common Stock to be received in the Merger in any consecutive
ninety (90) day period. See "The Merger Agreement--Related Agreements--
Continuity of Interest and Lock Up Agreements."
COMPARISON OF STOCKHOLDER RIGHTS
See "Comparison of Rights of Holders of Axent Common Stock and Holders of
AssureNet Capital Stock" for a summary of the material differences between the
rights of holders of AXENT Common Stock and AssureNet Stock.
RISK FACTORS
In considering the proposed Merger, shareholders should consider, among other
risks, the risks set forth under the caption "Risk Factors."
8
<PAGE>
AXENT
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues........... $ 2,558 $4,158 $6,075 $8,594 $14,728 $9,030 $14,359
Gross profit........... 2,254 3,456 5,136 7,356 12,981 7,732 13,040
Income (loss) from
continuing operations
before royalty,
interest, and taxes... (462) (359) (337) (5,313) (4,712) (5,363) (914)
Income (loss) from
discontinued
operations, net of
tax(1)................ (2,816) (1,685) 1,663 3,782 5,050 3,970 2,144
Net income (loss)...... (3,278) (2,044) 2,232 509 2,355 926 3,871
Net income (loss) per
common share(2)....... $(0.55) $(0.25) $ 0.25 $ 0.06 $ 0.26 $ 0.10 $ 0.38
Weighted average number
of common shares
outstanding........... 5,936 8,332 9,021 9,065 9,118 9,126 10,302
<CAPTION>
QUARTER ENDED
(UNAUDITED)
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues........... $ 2,739 $3,504 $2,787 $5,698 $ 4,082 $5,325 $ 4,952
Income (loss) from
continuing operations
before royalty,
interest and taxes.... (2,128) (1,395) (1,840) 651 (754) 108 (268)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
1995 (UNAUDITED)
------------ ------------------
ACTUAL ACTUAL
------------ ------------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $6,083 $15,660
Short-term investments........................ -- 17,316
Net identifiable (assets) liabilities from
discontinued operations(1)................... 1,319 458
Working capital............................... 1,948 30,648
Total assets.................................. 12,646 39,639
Stockholders' equity.......................... 2,976 32,023
</TABLE>
- --------
(1) See Note 2 of Notes to AXENT Consolidated Financial Statements.
(2) For a description of the computation of net income (loss) per share and
shares used in computing net income (loss) per share, see Note 1 of Notes
to AXENT Consolidated Financial Statements.
9
<PAGE>
ASSURENET
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues........... $ 8,060 $9,271 $8,558 $11,987 $11,478 $8,198 $11,716
Gross profit........... 4,250 5,049 5,193 7,499 6,766 5,097 7,463
Income (loss) from
continuing operations
before interest and
taxes extraordinary
item and cummulative
effect of change in
accounting policy..... 341 494 94 1,795 (2,346) (1,170) (2,544)
Cummulative effect of
change in accounting
policy................ -- -- 900 -- -- -- --
Net income (loss)...... 770 464 947 1,112 (2,625) (1,117) (3,260)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
(UNAUDITED)
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues.................... $ 2,471 $2,328 $3,399 $3,280
Income (loss) from continuing
operations before interest and
taxes.......................... (385) (623) (163) (1,175)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
1995 (UNAUDITED)
------------ ------------------
ACTUAL ACTUAL
------------ ------------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................. $ (201) $ 578
Total assets.................................... 4,993 6,776
Long-term obligations........................... 93 59
Redeemable Convertible Preferred Stock.......... 0 4,846
Accumulated deficit............................. (3,377) (6,697)
Total shareholders' equity (deficit)............ 905 (2,210)
</TABLE>
10
<PAGE>
RISK FACTORS
This Prospectus/Proxy Statement contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects" and similar expressions are intended to identify forward-looking
statements. Actual results could differ materially from those indicated by
such forward-looking statements as a result of certain risk factors set forth
below and elsewhere in this Prospectus/Proxy Statement.
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY
STATEMENT, ASSURENET SHAREHOLDERS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISKS RELATING TO THE MERGER IN EVALUATING THE PROPOSALS TO BE VOTED ON AT THE
ASSURENET SPECIAL MEETING AND IN EVALUATING AN INVESTMENT IN AXENT COMMON
STOCK.
RISKS RELATING TO THE MERGER
CHALLENGES OF INTEGRATION. The managements of AXENT and AssureNet have
entered into the Merger Agreement with the expectation that the Merger will
result in beneficial synergies. See "The Merger--Reasons for the Merger."
Achieving the anticipated benefits of the Merger will depend in part upon
whether the integration of the two companies' businesses is accomplished in an
efficient and effective manner, and there can be no assurance that this will
occur. The successful combination of companies in a rapidly changing high
technology industry may be more difficult to accomplish than in other
industries. The combination of the two companies will require, among other
things, integration of the companies' respective product offerings and
coordination of their sales and marketing and research and development
efforts. There can be no assurance that such integration will be accomplished
smoothly or successfully. The difficulties of such integration may be
increased by the necessity of coordinating geographically separated
organizations and addressing possible differences in corporate cultures and
management philosophies. The integration of certain operations following the
Merger will require the dedication of management resources which may
temporarily distract attention from the day-to-day business of the combined
company. The business of the combined companies may also be disrupted by
employee uncertainty and lack of focus during such integration. The inability
of management to successfully integrate the operations of the two companies
could have a material adverse effect on the business, results of operations
and financial condition of AXENT.
POSSIBLE ADVERSE EFFECT ON CUSTOMER PURCHASING DECISIONS. There can be no
assurance that present and potential customers of AXENT and AssureNet will
continue their current buying patterns without regard to the announced Merger.
In particular, AXENT and AssureNet believe that certain customers' purchasing
decisions may be affected as they evaluate the future product strategy and
competitive positioning of AXENT and the combined company. Any adverse
decisions made as a result of such evaluations could have a material adverse
effect upon the results of operations of AXENT and/or AssureNet and/or the
combined company both in the near and the long term.
INCURRENCE OF SIGNIFICANT CHARGES. AXENT expects to incur a one-time charge
currently estimated to be $24 million to $32 million in the first quarter of
1997, the quarter in which the Merger is expected to be consummated, to
reflect in-process research and development costs. This amount is a
preliminary estimate and is therefore subject to change if, for example, there
is a change in the AXENT Share Value, there are continuing losses incurred or
unexpected debt incurred by AssureNet or there are changes in estimates of
transaction-related costs. Additional unanticipated expenses may be incurred
relating to the integration of the businesses of AssureNet and AXENT,
including the integration of certain product lines and distribution and
administrative functions. Although AXENT expects that the elimination of
duplicative expenses as well as other efficiencies related to the integration
of the business of AssureNet may offset additional expenses over time, there
can be no assurance that such net benefit will be achieved in the near term,
or at all. See "Selected Historical Consolidated Financial Data and Unaudited
Pro Forma Combined Financial Data."
POSSIBLE DILUTION. Although the companies believe that beneficial synergies
will result from the Merger, there can be no assurance that the combining of
the two companies' businesses, even if achieved in an efficient and effective
manner, will result in increased earnings per AXENT share (taking into
consideration the greater number of AXENT shares outstanding as a result of
the Merger) or a financial condition superior to that which would have been
achieved by AXENT. As discussed above, AXENT anticipates that the results of
operations for the combined
11
<PAGE>
company in the quarter in which the Merger occurs will be materially adversely
affected. Additionally, AssureNet has incurred and expects to continue to
incur significant losses which will affect the combined company. Further,
AXENT expects that risks inherent in anticipated changes in AssureNet's
business (such as shifting focus and emphasis from indirect channels to direct
sales and from hardware-related business to predominantly software-related
business) may also affect the combined company. While neither AXENT nor
AssureNet anticipates that the Merger will be dilutive for the shareholders of
the respective companies over the long term, there can be no assurance that,
if the Merger fails to produce the anticipated benefits, it will not have the
dilutive effect of causing the per share earnings of the combined company to
be lower than they would have been for either company if operated
independently. Furthermore, if the anticipated benefits are not achieved, or
if the Merger has other adverse effects that are not currently anticipated,
the Merger could result in a reduction in per share earnings of the combined
company (as compared to the per share earnings that either or both of the
companies would have achieved if the Merger had not occurred). Even if the
effects of the Merger prove to be as anticipated, there can be no assurance
that future earnings will not be adversely affected by any number of economic,
market or other factors that are not related to the Merger.
LOSS OF KEY EMPLOYEES, CONSULTANTS, DISTRIBUTORS OR RESELLERS OF
ASSURENET. As part of its strategy to increase awareness of AssureNet's
network security products and to broaden the market for such products,
AssureNet has established a number of strategic relationships with
consultants, systems integrators, resellers and distributors. These companies
provide software development, reselling and training services that are
important to existing and future business. Some of the relationships are only
recently established and they are typically nonexclusive and may be
discontinued at any time. The successful continuation of AssureNet's business
by AXENT and the successful integration of the companies' operations depends
upon the continued contribution of key employees and consultants of AssureNet
and the continued loyalty of key distributors and resellers of AssureNet's
products. The loss of key personnel, consultants, distributors or resellers of
AssureNet could adversely affect the financial condition and results of
operation of AssureNet before completion of the Merger and of the combined
companies after completion of the Merger. AssureNet's ability to retain key
employees may be affected by layoffs of employees in early 1997 in connection
with the Merger. Competition for qualified personnel, distributors and
resellers is intense, and there can be no assurance that AXENT will be
successful in retaining AssureNet's key employees, consultants, distributors
and resellers. In addition, during the pre-merger and integration phases,
aggressive competitors may undertake initiatives to attract customers and to
recruit key employees, consultants, distributors and resellers.
LOSS DUE TO DELAYS IN COMPLETION OF MERGER. As AssureNet has incurred
significant operating losses in 1996 and is expected to incur additional
operating losses prior to completion of the Merger, delays in completion of
the Merger may adversely impact the financial condition and results of
operations of AssureNet before completion of the Merger, may affect the charge
anticipated to be incurred by AXENT in connection with the Merger and may
adversely affect the combined companies after completion of the Merger. In
addition, possible delays in completion of the Merger may increase the risk of
loss of key personnel, consultants, distributors and resellers of AssureNet
and will require the continued operation of duplicative functions and staffs
of the companies, which will adversely impact the financial condition and
results of operations of the combined companies.
CONVERSION RATIOS DO NOT REFLECT CHANGES IN STOCK PRICES. The price of AXENT
Common Stock at the Effective Time of the Merger may vary significantly from
the price at the date of execution of the Merger Agreement, the date hereof or
the date on which shareholders vote on the Merger Agreement and the Merger due
to, among other factors, market perception of the synergies expected to be
achieved by the Merger, changes in the business, operations or prospects of
AXENT or AssureNet, market assessments of the likelihood that the Merger will
be consummated and the timing thereof, and general market and economic
conditions. Accordingly, AssureNet shareholders may receive shares of AXENT
Common Stock with a market value different from the value of such shares at
the time the Merger was negotiated. Although the number of shares to be
delivered will decline if the AXENT Share Value is greater than $19.00 and
AssureNet is permitted to terminate the Merger if the AXENT Share Value falls
below $14.00, within such range, if AXENT's Share Value increases from the
time the Merger Agreement was negotiated, AXENT will effectively be required
to pay more per share of AssureNet Stock than assumed at the time the Merger
was negotiated. See "The Merger Agreement--Conversion of Securities."
FEDERAL INCOME TAX CONSEQUENCES AND CONTINUITY OF INTEREST. One of the
requirements for the Merger being treated as a "reorganization" that is
generally tax free under the Code is that the "continuity of interest"
requirement be met. Under this requirement, holders of AssureNet Stock must
intend, at the time of the Merger, to retain a portion of their AXENT Common
Stock, such that AssureNet shareholders, as a group, have a
12
<PAGE>
significant equity interest in AXENT after the Merger. If former AssureNet
shareholders should collectively sell in excess of 50% of the AXENT Common
Stock to be delivered at the Effective Time within a relatively short period
after the Effective Time, for example one to two years, the Internal Revenue
Service (the "IRS") may contend that this requirement is not met. In such
event, the Merger would be a taxable transaction and former AssureNet
shareholders would recognize taxable income as of the date of the Merger based
on the difference between the tax basis in their shares of AssureNet Stock and
the fair market value of AXENT Common Stock received by them on that date (even
if such fair market value declines after the Merger). See "The Merger--Certain
Federal Income Tax Consequences."
CHANGE IN NATURE OF INVESTMENT. Shareholders of AssureNet currently hold an
equity interest in AssureNet, a privately-held company substantially focused on
a single business. The value of an equity interest in AssureNet is primarily
related to the success or decline of that single business. If the Merger is
completed, at the Effective Time the shareholders of AssureNet will have their
shares of AssureNet Stock automatically converted into shares of AXENT Common
Stock. Following the Merger, AXENT will be engaged in a different aspect of
business and the relative success or decline of its business could impact the
operating results of AXENT and the value of the AXENT Common Stock received in
the Merger. In addition, holders of AssureNet Preferred Stock currently have
liquidation and other preferences over AssureNet Common Stock. Such preferences
will terminate as a result of the conversion of shares of AssureNet Preferred
Stock into shares of AXENT Common Stock.
RISKS RELATING TO AXENT AND ASSURENET
In addition to the foregoing risks, the risks set forth below relating to
AXENT and to AssureNet will be applicable to the merged company.
RISKS RELATING TO AXENT
HISTORICAL LOSSES FROM CONTINUING OPERATIONS. AXENT incurred losses from
continuing operations before interest and taxes for the years 1991 to 1995 of
$462,000, $359,000, $337,000, $5,313,000 and $4,712,000, respectively. For the
first nine months of 1996, AXENT had income from continuing operations before
interest and taxes of $1,484,000. As of September 30, 1996, AXENT had an
accumulated deficit of $15,406,000. A substantial portion of AXENT's funding in
1991 through 1995 was derived from its discontinued operations, which
contributed income in the years 1993 to 1995 and in the nine months ended
September 30, 1996, of $1,663,000, $3,782,000, $5,050,000 and $2,144,000,
respectively. While developing and enhancing the OmniGuard family of software
products, AXENT pursued a divestment strategy with regard to its utility,
storage and Helpdesk software products, which constitute the discontinued
operations. AXENT began marketing the first of its OmniGuard products in
November 1994, and, as a result, has limited experience in marketing such
products. Due to AXENT's limited operating history with respect to the
OmniGuard products, no assurance can be given regarding its future performance.
In particular, no assurance can be given that AXENT's information security
business will be capable of sustaining profitability on a quarterly or annual
basis. See "AXENT Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--AXENT."
DEPENDENCE ON OMNIGUARD FAMILY OF PRODUCTS; NEW PRODUCT INTRODUCTIONS. The
first OmniGuard product, Enterprise Security Manager, was released commercially
in November 1994; Intruder Alert was released commercially in April 1995;
Enterprise Access Control for UNIX was released commercially in April 1995;
Enterprise Access Control for PCs was released commercially in May 1995;
Enterprise Access Control for Windows 95 and UNIX Privilege Manager were
released commercially in October 1996. Accordingly, AXENT has a relatively
short operating history with these products. AXENT's future success will in
large part depend on revenues from these products. AXENT is currently devoting
significant resources to the development of versions of its products that
operate on other hardware platforms and operating systems, the development of
enhancements to its products and the development of additional products that
will be offered as part of the OmniGuard family of software products, including
Enterprise Resource Manager, which will provide central user administration,
enhanced network security and one-time sign-on to the network. There can be no
assurance that AXENT will successfully complete the development of these
products in a timely fashion, that AXENT will be able to develop
13
<PAGE>
versions of its OmniGuard products that operate on the range of hardware
platforms and operating systems currently anticipated or that AXENT's current
or future products will satisfy the needs of the computer information security
market or achieve market acceptance or, if market acceptance is achieved, that
AXENT will be able to maintain such acceptance for a significant period of
time and maintain continued compatibility with new releases of operating
systems and with new operating systems that may be developed. Any inability of
AXENT to develop on a timely basis products that address changing customer
requirements may require AXENT to substantially increase development
expenditures or may result in a loss of market share to a competitor. There
can also be no assurance that security-related products or technologies
developed by others will not adversely affect AXENT's competitive position or
render its products or technologies noncompetitive or obsolete. See "AXENT
Business--Products and Services," "--Product Development" and "--Competition."
POTENTIAL SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND
LENGTHY SALES CYCLE. AXENT has experienced significant quarterly fluctuations
in its operating results and anticipates such fluctuations in the future.
Typically, revenues, operating income and net income for AXENT's fourth
quarter are higher than those for the first quarter of the following year. In
addition, revenues tend to be lower in the summer months, particularly in
Europe, when businesses often defer purchase decisions. AXENT has historically
recognized a substantial portion of its license revenues in the last month of
each quarter. AXENT generally ships its software products on a trial basis and
recognizes revenue upon receipt of a binding obligation by the customer and,
as a result, has little or no backlog. Quarterly revenues and operating
results therefore depend on the volume and timing of orders received during
the quarter, which are difficult to forecast. In addition, consulting service
revenues tend to fluctuate as projects, which may continue over several
quarters, are undertaken or completed. Operating results may also fluctuate on
a quarterly basis due to factors such as the demand for AXENT's products, the
introduction of new products and product enhancements by AXENT or its
competitors, market acceptance of new products introduced by AXENT or its
competitors and the size, timing, cancellation or delay of customer orders,
including cancellation or delay of such orders in anticipation of new product
introduction or enhancement. AXENT's quarterly operating results are also
affected by the budgeting cycles of customers, changes in the proportion of
revenues attributable to licenses and service fees, changes in the mix of
products sold, changes in the percentage of products sold through AXENT's
direct sales force, changes in product pricing, changes in the development of
AXENT's direct and indirect distribution channels, competitive conditions in
the industry and changes in general economic conditions.
The value of individual transactions as a percentage of quarterly revenues
can be substantial, and particular transactions may generate a substantial
portion of the operating profits for the quarter in which they are signed. The
sales of AXENT'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 AXENT's security products is typically between nine and 12 months and
subject to a number of significant risks over which AXENT has little or no
control. Because AXENT's staffing and other operating expenses are based on
anticipated revenue levels, a substantial portion of which is not typically
generated until the end of each quarter, and a high percentage of AXENT's
expenses are fixed, delays in the receipt of orders can cause significant
variations in operating results from quarter to quarter. In addition, AXENT
may expend significant resources pursuing potential sales that will not be
consummated. See "AXENT Business--Sales and Marketing." AXENT also may choose
to reduce prices or to increase spending in response to competition or to
pursue new market opportunities, which may adversely affect AXENT's operating
results. Accordingly, AXENT believes that period-to-period comparisons of its
results of operations may not be meaningful and should not be relied upon as
an indication of future performance. Furthermore, there can be no assurance
that AXENT will be able to grow and sustain profitability on a quarterly
basis. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--AXENT."
Due to all the foregoing factors, it is likely that in some future quarters
AXENT's operating results will be below the expectations of public market
analysts and investors. Regardless of the general outlook for AXENT's
business, the announcement of quarterly operating results below analyst and
investor expectations could have a material adverse effect on the price of
AXENT's Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--AXENT."
14
<PAGE>
POSSIBLE ADVERSE EFFECTS OF SPIN-OFF; DEPENDENCE ON ROYALTIES. Effective
December 31, 1995, AXENT transferred certain operations, assets, liabilities
and foreign subsidiaries related to AXENT's OpenVMS utility software business
to Raxco Software, Inc. ("Raxco") and distributed shares of Raxco's
convertible preferred stock to AXENT's stockholders (the "Spin-Off"). See
"AXENT Business" and "Certain Transactions--AXENT." In connection with the
Spin-Off, AXENT granted Raxco exclusive distribution rights to its OpenVMS
utility software products in exchange for the payment of royalties, pursuant
to an exclusive distributor license agreement (the "Exclusive Distributor
License Agreement"). AXENT's operating results for the foreseeable future are
expected to depend, to a significant degree, on these royalties. The market
for OpenVMS utility software products is likely to continue to decline over
the next several years due in part to customers migrating from the OpenVMS
operating system to other operating systems including UNIX and Windows NT. See
"AXENT Business" and Note 2 of Notes to Consolidated Financial Statements.
The Exclusive Distributor License Agreement provides for the payment of
royalties equal to the greater of 30% of the gross revenues from the OpenVMS
utility software products or $2.0 million in 1996, $1.5 million in 1997 and
$1.0 million in 1998. If the Spin-Off had occurred as of January 1, 1993, the
royalty that AXENT would have received from Raxco for the last three years
would have been $5,465,000, $5,217,000, $4,294,000, respectively. However,
such historical royalties are not indicative of future results, and there can
be no assurance that AXENT will receive even the minimum royalty. For the nine
months ended September 30, 1996, AXENT had received royalties of $2,398,000
from Raxco under the Exclusive Distributor License Agreement, which AXENT
accounted for as non-operating income from continuing operations. The failure
of Raxco to effectively market such software products or its inability to pay
such royalties could have a material adverse effect on AXENT's financial
condition and results of operations.
Although the Exclusive Distributor License Agreement provides AXENT with
remedies for Raxco's failure to perform its obligations under the agreement or
to pay the required royalties, there can be no assurance that Raxco will
perform its obligations or pay the required royalties on a timely basis, if at
all. Such remedies include AXENT's right to terminate the agreement upon a
breach by Raxco and upon such termination of the agreement, unless otherwise
agreed by the parties, Raxco will assign any agreements related to the utility
software products to AXENT, and AXENT would have the opportunity to hire Raxco
employees who are considered key to the marketing and technical support of
such products. In the event that the agreement expires by its terms, Raxco
will assign any agreements related to the utility software products to AXENT.
In either event, no assets or liabilities of Raxco will be transferred back to
AXENT when the Exclusive Distributor License Agreement terminates. In
addition, Raxco is subject to a non-competition agreement with AXENT for a
period ending on the earlier to occur of (i) December 31, 2001, or (ii) the
date one year following the termination of the Exclusive Distributor License
Agreement, after which time there can be no assurance that Raxco or its
successor will not become a competitor of AXENT.
Although the results of the business transferred to Raxco have historically
been profitable, there can be no assurance that such results will continue or
that Raxco will be able to continue operating as a stand-alone business.
Failure of Raxco to remain viable or to satisfy its obligations could have a
material adverse effect on AXENT's financial condition and results of
operations.
RISKS ASSOCIATED WITH INFORMATION SECURITY MARKET. The market for AXENT's
OmniGuard software products is in an early stage of development. Declines in
demand for AXENT'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, could have a material
adverse effect on AXENT's financial condition or results of operations. In
addition, an actual or perceived breach of network or computer security at one
of AXENT's customers, regardless of whether such breach is attributable to
AXENT's products, could adversely affect the market's perception of AXENT and
AXENT's financial condition or results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
AXENT."
15
<PAGE>
PRODUCT DEVELOPMENT RISKS IN A RAPIDLY CHANGING INDUSTRY. The information
security industry is characterized by rapid changes, including frequent new
product introductions, continuing advances in technology and changes in
customer requirements and preferences. The introduction of new technologies
could render AXENT's existing products obsolete or unmarketable or require
AXENT to invest resources in products that may not become profitable. The
development cycle for AXENT's new products may be significantly longer than
AXENT's historical product development cycle, resulting in higher development
costs or a loss in market share. There can be no assurance that (i) AXENT will
be able to counter challenges to its current products; (ii) AXENT's future
product offerings will keep pace with the technological changes implemented by
competitors or persons seeking to breach information security; (iii) AXENT's
products will satisfy evolving preferences of customers and prospects; or (iv)
AXENT 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
AXENT's financial condition and results of operations. Because of the
complexity of AXENT's software products which operate on or utilize multiple
platforms and communications protocols, AXENT has from time to time
experienced delays in introducing new products and product enhancements
primarily due to development difficulties or shortages of development
personnel. There can be no assurance that AXENT will not experience longer
delays or other difficulties that could delay or prevent the successful
development, introduction or marketing of new products or product
enhancements. See "AXENT Business--Product Development."
INTENSE AND CONSTANTLY EVOLVING COMPETITION. Competition in the information
security market is intense and constantly evolving, and AXENT expects such
competition to increase in the future. AXENT believes that significant
competitive factors affecting this market are depth of product functionality,
breadth of platform support, product quality and performance, conformance to
industry standards, product price and customer support. In addition, the
ability to rapidly develop and implement new products and features for the
market is critical. There can be no assurance that AXENT can maintain or
enhance its competitive position against current and future competitors.
Significant factors such as the emergence of new products, fundamental changes
in computing technology and aggressive pricing and marketing strategies may
also affect AXENT's competitive position. Many of these factors are out of
AXENT's control. See "AXENT Business--Industry Background."
AXENT's competitors fall into four main categories: large, multi-product
vendors, single purpose product providers, platform vendors and publicly
available software.
Large, multi-product vendors. AXENT's principal competitors include IBM,
Computer Associates International, Inc. ("Computer Associates"), ICL
Enterprises Ltd. ("ICL"), Digital Equipment Corporation ("Digital") and
Compagnie des Machines Bull SA ("Groupe Bull"). Each of these organizations
has strategic software products that cover various aspects of information
security and compete directly with one or more components of AXENT's product
line.
Single purpose product providers. AXENT's principal single purpose product
competitors include Mergent International, Inc., Memco Software Ltd, (Memco's
products are also marketed by Platinum Technology, Inc.), Dynasoft Software
A.B. (marketed by its distributor, Securix, in the U.S.), Fischer
International Systems, Inc., Intrusion Detection, Inc. and the LAN Support
Group. These vendors each sell products that offer particular information
security functions for specific computing platforms. These products compete
with one or more of AXENT's products in specific functional areas or on
specific platforms. There can be no assurance that these competitors will not
expand their product offerings to other functional areas or platforms and
compete with more of AXENT's products.
Platform vendors. AXENT competes with platform vendors such as Digital,
Hewlett-Packard, IBM, Sun Microsystems, Inc. ("Sun") and Microsoft Corp.
("Microsoft"). Each of these vendors offers operating system software that
often includes native security functionality. To the extent that the security
features which become incorporated in operating systems overlap all or a
portion of the functionality offered by AXENT's products, AXENT's products may
no longer be required by customers to meet their information security
requirements. All of these vendors have indicated plans to expand the
information security within their operating systems.
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Publicly available software. A substantial portion of AXENT's current
business comes from customers buying UNIX versions of its products. Certain
UNIX products that compete with one or more aspects of AXENT's products are
available in the public domain for little or no cost or from open systems
standards organizations such as the Open Software Foundation's ("OSF")
Distributed Computing Environment ("DCE"). OSF DCE technologies can be
licensed for a fee and have been incorporated into operating systems and into
third party security products.
Many of AXENT's current and potential competitors have longer operating
histories, significantly greater financial, technical and marketing resources,
greater name recognition and a larger installed customer base than AXENT. In
addition, one or more of these competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements, and to
devote greater resources to the development, promotion and sale of their
products than AXENT. There can be no assurance that AXENT's current or
potential competitors will not develop products comparable or superior to
those developed by AXENT or adapt more quickly than AXENT to new technologies,
evolving industry trends or changing customer requirements. Increased
competition could result in price reductions, reduced margins or loss of
market share, any of which could materially adversely affect AXENT's financial
condition or results of operations. There can be no assurance that AXENT will
be able to compete successfully against current and future competitors, or
that competitive pressures faced by AXENT will not have a material adverse
effect on its financial condition and results of operations. If AXENT is
unable to compete successfully against current and future competitors, AXENT's
financial condition and results of operations will be materially adversely
affected. See "AXENT Business--Competition."
MANAGEMENT OF CHANGES. AXENT has experienced changes in its operations that
have placed significant demands on AXENT's administrative, operational,
technical and financial resources. To compete effectively, both in its
domestic and international operations, and to manage future growth, if any,
AXENT must continue to strengthen its operational, financial and management
information reporting systems, controls and procedures on a timely basis and
expand, train and manage its work force. There can be no assurance that AXENT
will be able to take such actions successfully. The failure of AXENT's
management team to effectively manage change could have a material adverse
impact on AXENT's financial condition and results of operations.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS. In the normal course of its
business, AXENT evaluates potential acquisitions of businesses, products and
technologies, such as AssureNet, that could complement or expand AXENT's
business. In the event AXENT identifies an appropriate acquisition candidate,
there is no assurance that AXENT would be able to successfully negotiate the
terms of any such acquisition, finance such acquisition and integrate such
acquired business, products or technologies into AXENT's existing business and
operations. Furthermore, the negotiation of potential acquisitions as well as
the integration of an acquired business could cause diversions of management
time and resources. There can be no assurance that a given acquisition,
whether or not consummated, would not materially adversely affect AXENT's
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--AXENT." If
AXENT proceeds with one or more additional significant acquisitions in which
the consideration consists of cash, a substantial portion of AXENT's available
cash could be used to consummate the acquisitions. If AXENT consummates one or
more additional significant acquisitions in which the consideration consists
of stock, stockholders of AXENT, including the former AssureNet shareholders,
could suffer a significant dilution of their interests in AXENT. If AXENT
consummates one or more significant acquisitions accounted for as a purchase,
substantial one-time charges for write-offs associated with the acquisition
may be incurred, which could impair AXENT's financial position.
RISK OF LIABILITY DUE TO ERRORS OR FAILURES OF PRODUCT SECURITY
FEATURES. Products as complex as those offered by AXENT may contain undetected
errors, failures or bugs when first introduced or when new versions are
released. AXENT has in the past discovered software errors, failures and bugs
in certain of its product offerings after their introduction and has
experienced delays or lost revenues during the period required to correct
these errors. In particular, the computer environment is characterized by a
wide variety of standard and non-standard configurations that make pre-release
testing for programming or compatibility errors very
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difficult and time-consuming. Furthermore, there can be no assurance that,
despite testing by AXENT and by others, errors, failures or bugs will not be
found in new products or releases after commencement of commercial shipments
by AXENT. Errors, failures or bugs in AXENT's products could result in adverse
publicity, in product returns, in loss of or delay in market acceptance of
AXENT's products or in claims by the customer or others against AXENT.
Alleviating such problems could require significant expenditures of capital
and resources by AXENT and could cause interruptions, delays or cessation of
service to AXENT's customers. AXENT attempts to limit its liability to
customers, including liability arising from a failure of the security features
contained in AXENT's products, through contractual limitations of warranties
and remedies. AXENT's consulting agreements with its customers generally
contain provisions designed to limit AXENT's exposure to claims related to
negligence or errors or omissions by AXENT's employees and agents. However,
some courts have held similar contractual limitations of liability, or the
"shrinkwrap licenses" in which they sometimes are embodied, to be
unenforceable. Accordingly, there can be no assurance that such limitations
will be enforced. The consequences of errors, failures or bugs in AXENT's
products could have a material adverse effect on AXENT's financial condition
and results of operations. See "AXENT Business--Products and Services" and "--
Sales and Marketing."
SALES AND DISTRIBUTION RISKS. As of December 31, 1996, AXENT had 38
employees in its direct sales organization and 10 employees in its marketing
organization, many of whom have been employed by AXENT for less than two
years. In order to support sales growth, if any, AXENT will need to maintain
the size of its sales and marketing staff, increase the staff's productivity
and expand its indirect distribution channels. There can be no assurance that
AXENT will be able to leverage successfully its sales force or that AXENT's
sales and marketing organization will successfully compete against the more
extensive and well funded sales and marketing organizations of many of AXENT's
current and future competitors. AXENT is in the early stages of developing its
indirect distribution channels in North America and Europe. There can be no
assurance that AXENT will be able to attract and retain third parties that
will be able to market AXENT's products effectively and will be qualified to
provide timely and cost-effective customer support and service. AXENT's
arrangements with its distributors and resellers generally do not contain
minimum purchase requirements, and such distributors and resellers may carry
competing product offerings. There can be no assurance that any distributor or
reseller will continue to represent AXENT's products. The inability to
recruit, or the loss of, important sales personnel, distributors or resellers
could materially adversely affect AXENT's financial condition and results of
operations. See "AXENT Business--Competition" and "--Sales and Marketing."
DEPENDENCE ON KEY PERSONNEL. AXENT's success depends to a significant degree
upon the continuing contributions of its key management, sales, marketing,
professional services, customer support and product development personnel. The
loss of the services of any key employee could adversely affect AXENT's
financial condition and results of operations. AXENT believes that its future
success will depend in large part upon its ability to attract and retain
highly-skilled managerial, sales, marketing, professional services, customer
support and product development personnel. AXENT requires consulting services
personnel and sales consultants who are highly technically trained in the
field of information security, and the competition for such individuals is
intense. AXENT has at times experienced, and continues to experience,
difficulty in recruiting qualified personnel. Competition for qualified
personnel in the software industry is intense, and there can be no assurance
that AXENT will be successful in retaining its key employees or that it can
attract or retain additional skilled personnel as required. See "AXENT
Management."
RISKS ASSOCIATED WITH INTERNATIONAL SALES. Sales outside the United States
accounted for approximately 34%, 27% and 26% of AXENT's net revenues from its
information security products in the years ended December 31, 1994 and 1995,
and the nine months ended September 30, 1996, respectively. Management expects
that international sales will continue to generate a significant portion of
AXENT's total revenue. AXENT's international business may be subject to a
variety of risks, including costs and risks relating to the establishment and
expansion of indirect distribution channels in certain countries or regions,
delays in expanding its international distribution channels, difficulties in
collecting international accounts receivable from distributors or resellers,
and increased costs associated with maintaining international marketing
efforts. AXENT's
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international sales are denominated in the local currency of the country in
which the sale was made, and AXENT is subject to the risks associated with
fluctuations in currency exchange rates. As AXENT does not currently hedge
foreign currency risk, a decrease in the value of any of these foreign
currencies relative to the U.S. dollar will affect the profitability in U.S.
dollars of AXENT's products sold in these markets. In addition, AXENT is
subject to the usual risks of doing business abroad, including increases in
duty rates, the introduction of non-tariff barriers and difficulties in
enforcement of intellectual property rights. There can be no assurance that
these factors will not have a material adverse effect on AXENT's financial
condition or results of operations. See "AXENT Business--Sales and Marketing."
EFFECT OF GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS. AXENT's international
sales and operations may be subject to risks such as the imposition of
governmental controls, new or changed export license requirements,
restrictions on the export of critical technology, trade restrictions and
changes in tariffs. While AXENT believes its products are designed to meet the
regulatory standards of foreign markets, any inability to obtain foreign
regulatory approvals on a timely basis could have a material adverse effect on
AXENT's financial condition or results of operations. Certain of AXENT's
products are subject to export controls under U.S. law, and AXENT believes it
has obtained all necessary export approvals when required. There can be no
assurance, however, that the list of products and countries for which export
approval is required, and the regulatory policies with respect thereto, will
not be revised from time to time. The inability of AXENT to obtain required
approvals under these regulations could materially adversely affect the
ability of AXENT to make international sales. For example, because of U.S.
governmental controls on the exportation of encryption technology, AXENT is
unable to export some of its products with the most robust information
security encryption technology. As a result, foreign competitors facing less
stringent controls on their products may be able to compete more effectively
than AXENT in the global information security market. There can be no
assurance that these factors will not have a material adverse effect on
AXENT's financial condition or results of operations. See "AXENT Business--
Industry Background" and "--Products and Services."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. AXENT
regards its software as proprietary, and its success and ability to compete is
dependent in part upon its proprietary technology and rights. AXENT relies on
copyright and trade secret laws, trademarks, confidentiality procedures and
contractual provisions to protect its proprietary software, documentation and
other proprietary information. Although AXENT holds two patents and has two
pending patent applications which cover certain aspects of its technology,
such patents and patent applications are unrelated to its information security
products. AXENT does not rely upon patent protection and there can be no
assurance that AXENT will seek patents on aspects of its technology relating
to its information security products, that any such patents will issue or that
any such patents will be sufficiently broad to protect AXENT's technology
relating to its information security products. Although the effectiveness of
AXENT's products is not dependent upon the secrecy of its proprietary
technology or licensed technology, the public disclosure of its technology
could result in a perception of breached security and reduced effectiveness of
AXENT's products, which could have an adverse effect on AXENT's financial
condition or results of operations. There also can be no assurance that the
confidentiality agreements and other methods on which AXENT relies to protect
its trade secrets and proprietary information and rights will be adequate.
Litigation to defend and enforce AXENT's intellectual property rights could
result in substantial costs and diversion of resources and could have a
material adverse effect on AXENT's financial condition and results of
operations regardless of the final outcome of such litigation. Despite AXENT's
efforts to safeguard and maintain its proprietary rights, there can be no
assurance that AXENT will be successful in doing so or that the steps taken by
AXENT in this regard will be adequate to deter misappropriation or independent
third-party development of its technology or to prevent an unauthorized third
party from copying or otherwise obtaining and using AXENT's products,
technology or other information that AXENT regards as proprietary. There can
also be no assurance that AXENT's trade secrets or non-disclosure agreements
will provide meaningful protection of AXENT's proprietary information.
Furthermore, there can be no assurance that others will not independently
develop similar technologies or duplicate any technology developed by AXENT or
that AXENT's technology will not infringe upon patents or other rights owned
by others. AXENT's inability to protect its proprietary rights would have a
material adverse effect on AXENT's financial condition and results of
operations.
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As the number of information security products in the industry increases and
the functionality of these products further overlaps, software developers and
publishers may increasingly become subject to claims of infringement or
misappropriation of the intellectual property or proprietary rights of others.
There can be no assurance that third parties will not assert infringement or
misappropriation claims against AXENT in the future with respect to current or
future products. Further, AXENT 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 AXENT's rights may be
ineffective in such countries, and technology developed in such countries may
not be protectable in jurisdictions where protection is ordinarily available.
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 AXENT's financial condition and results of operations.
Adverse determinations in such claims or litigation could also have a material
adverse effect on AXENT's financial condition and results of operations. See
"AXENT Business--Intellectual Property Rights."
LITIGATION. AXENT is currently involved in a lawsuit brought by Advanced
Systems Concepts, Inc. ("ASCI"). ASCI has alleged that AXENT conspired with
others to steal ASCI's proprietary information and to violate ASCI's licensing
agreement with Digital Equipment Corporation. ASCI has asserted that it is
entitled to unspecified compensatory damages and punitive damages. This case
involves a number of complex issues, and no assurance can be given as to its
likely outcome. If ASCI's claims against AXENT are not dismissed, the ASCI
litigation could result in substantial expense to AXENT and diversion of
effort by certain of AXENT's management. If AXENT is found to have conspired
to misappropriate proprietary rights of ASCI, AXENT could be liable for
damages and an injunction could be issued regarding three of AXENT's OpenVMS
utility software products, which could have a material adverse effect on
AXENT's financial condition and results of operations. During 1993, 1994, 1995
and the nine months ended September 30, 1996, AXENT's net revenues from the
specific OpenVMS utility software products that are the subject of the
litigation were $4.8 million, $4.5 million, $3.7 million and $1.8 million,
respectively. Had the Spin-Off occurred as of January 1, 1993, AXENT would
have received royalty revenues from such products during 1993, 1994, 1995 and
the nine months ended September 30, 1996 of $1.4 million, $1.4 million, $1.1
million and $540,000, respectively. See "AXENT Business--Litigation."
POSSIBLE VOLATILITY OF SHARE PRICE. The market price of AXENT Common Stock,
which is traded on The Nasdaq National Market, may be subject to significant
fluctuations in response to operating results, announcements of technological
innovations or new products by AXENT or its competitors, patent or proprietary
rights developments and market conditions for computer industry stocks in
general. In addition, the stock market in recent years has experienced extreme
price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of individual companies. These
market fluctuations, as well as general economic conditions, may adversely
affect the market price of AXENT Common Stock. The trading prices of many high
technology companies' stocks are at or near their historical highs and reflect
price/earnings ratios substantially above historical norms. There can be no
assurance that the trading price of AXENT Common Stock will remain at or near
its current level. Additionally, it is likely that in some future quarters
AXENT's operating results will be below the expectations of public market
analysts and investors. Regardless of the general outlook for AXENT's
business, the announcement of quarterly operating results below analyst and
investor expectations could have a material and adverse effect on the price of
AXENT's Common Stock. See "Market Price Information and Dividend Policies."
DIVIDENDS. No dividends have been paid on AXENT Common Stock to date and
AXENT does not anticipate paying dividends in the foreseeable future. See
"Market Price Information and Dividend Policies."
ANTITAKEOVER PROVISIONS. AXENT's Certificate of Incorporation (the "AXENT
Certificate") requires that any action required or permitted to be taken by
stockholders of AXENT must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in writing, and
requires reasonable advance notice by a stockholder of a proposal or director
nomination which such stockholder desires to present at any annual or special
meeting of stockholders. Special meetings of stockholders may be called only
by the Chairman of the Board, the Chief Executive Officer or, if none, the
President of AXENT or by the Board
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of Directors. The AXENT Certificate provides for a classified Board of
Directors, and members of the Board of Directors may be removed only for cause
upon the affirmative vote of holders of at least two-thirds of the shares of
capital stock of AXENT entitled to vote. These provisions, and other
provisions of the AXENT Certificate, may have the effect of deterring hostile
takeovers or delaying or preventing changes in control or management of AXENT,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. In addition, these
provisions may limit the ability of stockholders to approve transactions that
they may deem to be in their best interests. See "Description of AXENT Capital
Stock."
RISKS RELATING TO ASSURENET
RECENT DECLINE IN PERFORMANCE; RECENT LOSSES; UNCERTAINTY OF FUTURE RESULTS
OF OPERATIONS. For the nine months ended September 30, 1996, AssureNet had a
net loss of $3.3 million compared to a loss of $1.1 million for the
corresponding period in 1995. AssureNet had net losses of $76,700, $1.9
million and $1.3 million for the quarters ended March 31, 1996, June 30, 1996
and September 30, 1996, respectively. AssureNet expects such losses to
increase for the period ended December 31, 1996 and to continue for the
foreseeable future. Such losses have been a result of, among other things,
AssureNet's investment in an indirect distribution sales channel, declining
revenues from the sale of hardware products and increased research,
development, sales, marketing and administrative expenses incurred in the
expectation of substantial growth, which has not, to date, occurred. AssureNet
has been attempting to implement a change in its product and distribution
strategy whereby it has sought to become principally a provider of software-
based network security products through indirect sales channels. AssureNet has
only a limited operating history as a software provider, and several of
AssureNet's significant software products were introduced in 1996 and early
1997. Despite AssureNet's shift in strategy, software revenues constituted
only approximately 11% and 28% of total net revenues, respectively, for the
year ended December 31, 1995 and the nine months ended September 30, 1996.
Based on recent losses suffered since it has begun using an indirect
distribution strategy, AssureNet is presently re-evaluating its distribution
strategy. AssureNet expects that there will be a mix of direct and indirect
sales in 1997. AssureNet has also replaced substantially all of its management
team. In particular, AssureNet's recently-hired President and Chief Executive
Officer left AssureNet in July 1996 and AssureNet's recently-hired Senior
Vice-President of Sales and Marketing left AssureNet in January 1997. As a
result, most of AssureNet's existing senior management team is relatively new
to AssureNet or to the senior management positions held by them. There can be
no assurance that these individuals will be able to manage AssureNet
successfully. In view of its recent financial results, management changes, the
significant risks associated with the introduction of its relatively new
software products and significant and ongoing changes in its distribution
strategy, the rapidly changing nature of the network security market and the
uncertainties associated with the development of additional software products,
there can be no assurance that AssureNet's strategy will be successful or that
AssureNet will not continue to incur substantial losses in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--AssureNet," "AssureNet Business--AssureNet Products" and
"AssureNet Business--Sales and Marketing." See "--Management Changes;
Dependence Upon Key Personnel; Management of Business."
RISKS ASSOCIATED WITH NEW PRODUCT AND DISTRIBUTION STRATEGY. AssureNet was
founded in 1970 and historically derived most of its net revenue from the sale
of hardware-based network security products through a direct sales force to
large companies. In late 1995, AssureNet began to shift its strategy to focus
increasingly on providing primarily software-based network security products
through indirect sales channels. In late 1996, AssureNet re-assessed its sales
strategy and in 1997 AssureNet expects to utilize a mix of indirect and direct
sales channels. AssureNet has also substantially re-structured its management
team and, in connection with the Merger, is in the process of substantially
reorganizing many of the departments within AssureNet. In order to execute its
turnaround strategy, AssureNet must, among other things, complete the
development of new software products, increase market acceptance of its
software products, achieve significantly increased sales levels through both
direct and indirect distribution channels, respond effectively to competitive
developments including the introduction of new products by its competitors,
attract, retain and motivate qualified employees, and continue to develop and
market new products, while controlling costs. Over the next several quarters,
AssureNet's results of operations may fluctuate significantly as AssureNet
attempts to further refine its distribution strategy. If the relationship of
revenues to expenses does not improve significantly, AssureNet's business,
financial condition
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and results of operations would be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--AssureNet," "AssureNet Business--Sales and Marketing," "--
AssureNet Products."
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS; LIMITED BACKLOG; LENGTHY
SALES CYCLE. The Company has experienced, and will in the future experience,
significant fluctuations in annual and quarterly revenues and operating
results. AssureNet suffered net losses of $2.6 million, $76,700, $1.9 million
and $1.3 million on net revenues of $11.5 million, $5.3 million, $3.6 million
and $2.8 million for the year ended December 31, 1995 and the quarters ended
March 31, 1996, June 30, 1996 and September 30, 1996, respectively.
AssureNet's revenues and operating results in general are relatively difficult
to forecast for a number of reasons, including (i) timing and level of market
acceptance for AssureNet's products, (ii) competitive conditions in the
industry, (iii) fluctuations in the development and growth of the computer and
network security industries in general, (iv) the timing of the introduction of
new products or product enhancements by AssureNet or its competitors, (v) the
percentage of AssureNet's net revenue derived from indirect sales channels,
(vi) the Company's ability to expand its marketing and sales force and
distribution channels, (vii) delay or deferral of customer implementations of
AssureNet's products, (viii) the timing of orders and shipments of products,
(ix) changes in the level of operating expenses and (x) the mix between
hardware and software products.
The sales of AssureNet's security products have historically involved
significant education of and commitment of capital by prospective customers
and significant time, effort and expense by AssureNet. For these and other
reasons, the sales cycle associated with the sales of AssureNet's security
products has historically been long and subject to a number of significant
risks, including customers' budget constraints and internal authorization
review, over which AssureNet has little or no control. The failure to close an
anticipated sale in any particular quarter could have a material adverse
effect on AssureNet's business, financial condition and results of operations.
In addition, AssureNet often has recognized a substantial portion of its net
revenue in the final weeks of a quarter. Accordingly, a delay in shipment near
the end of a particular quarter may cause sales in a particular quarter to
fall significantly below AssureNet's expectations and may adversely affect
AssureNet's business or results of operations for such quarter, as has
recently been the case. Due to AssureNet's size, AssureNet is particularly
susceptible to fluctuations in net revenue due to receipt of a limited number
of large orders or the loss of one or more major customers or a decrease in
orders by such customers. Because AssureNet's expenses are relatively fixed, a
small variation in the timing of recognition of specific revenues can cause,
and has in the past caused, significant variations in operating results from
quarter to quarter and has in the past resulted in, and may in the future
result in, losses in a given quarter or quarters and may have a material
adverse affect on AssureNet's business or results of operations. AssureNet may
also experience seasonality due to customer buying patterns in Europe, where
businesses tend to defer purchase decisions during the summer months. As a
result of the foregoing factors, AssureNet believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.
MANAGEMENT CHANGES; DEPENDENCE UPON KEY PERSONNEL; MANAGEMENT OF
BUSINESS. In December 1995, January 1996 and April 1996, AssureNet hired a new
President and Chief Executive Officer, Senior Vice President of Marketing and
Sales, and Senior Vice President of Product Development, respectively. In July
1996, the President and Chief Executive Officer resigned, whereupon a group of
executive officers assumed his prior duties. In December 1996, AssureNet's
Chief Financial Officer was named Acting President and Chief Executive
Officer, in addition to her other duties. In connection with the Merger, the
Senior Vice President of Marketing and Sales left AssureNet in January 1997.
Accordingly, most of AssureNet's existing senior management team is relatively
new to AssureNet or to the senior management positions presently held by them.
The loss of the services of one or more of AssureNet's executive officers
could have a material adverse effect on AssureNet's business, results of
operations and financial condition. In addition, in connection with
AssureNet's transition in product line and sales strategy and in anticipation
of the Merger, AssureNet has recently experienced a significant reduction in
its number of employees, particularly those employees in administrative,
production and other overhead areas. AssureNet expects that it may be required
to further reduce its workforce in connection with the Merger, particularly as
to those positions which are duplicated at AXENT. AssureNet's future
performance
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depends significantly upon the continued service and performance of those
officers and key employees remaining.
AssureNet's ability to compete effectively will require AssureNet to
implement and improve its financial and management controls, reporting systems
and procedures on a timely basis and expand, train and manage its employee
work force. There can be no assurance that AssureNet will be able to do so
successfully. AssureNet's failure to do so could have a material adverse
effect upon AssureNet's business, results of operations and financial
condition. In order to grow, AssureNet may be required to hire a number of
engineering, sales and marketing personnel. Competition for such personnel is
intense, and there can be no assurance that AssureNet will be able to attract,
assimilate or retain highly qualified employees in the future. If AssureNet is
unable to hire and retain such personnel, particularly in key positions,
AssureNet's business, results of operations and financial condition could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--AssureNet" and "AssureNet
Business--Employees".
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT DEVELOPMENT. The
markets for AssureNet's security products are characterized by rapidly
changing technology, evolving industry standards and new product
introductions. AssureNet's future results of operations will depend in
significant part upon its ability to enhance its existing products and develop
and introduce new products and technologies on a timely basis to meet changing
customer requirements, and keep pace with emerging industry standards and the
increasingly sophisticated needs of its customers. AssureNet is currently
devoting significant resources toward the development of enhancements to its
existing products and the development of new products. The introduction of
products embodying new technologies and the emergence of new industry
standards may render AssureNet's existing products obsolete and unmarketable.
The life cycles of AssureNet's products are difficult to estimate. In
addition, the development cycle for AssureNet's new products may be
significantly longer than AssureNet's historical product development cycle,
resulting in higher development costs or a loss in market share. Advances in
techniques by individuals and entities seeking to gain unauthorized access to
networks could expose AssureNet's existing products to new and unexpected
attacks and require accelerated development of new products. There can be no
assurance that AssureNet will be successful in developing and marketing
product enhancements or new products that respond to technological change
implemented by competitors or persons seeking to breach network security or
evolving industry standards, that AssureNet will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products, or that its new products and product enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. If AssureNet is unable, for technological or other reasons, to
develop and introduce new products or enhancements of existing products in a
timely manner in response to changing market conditions or customer
requirements, AssureNet's business, results of operations and financial
condition will be materially adversely affected.
AssureNet's future results of operations are highly dependent upon its
ability to introduce and market new products. In particular, AssureNet has
only recently introduced its 32-bit Software Key for Windows NT environments
and its DSS for Sun Solaris (UNIX). AssureNet believes that these products
will be an important component of its software solution. AssureNet is also
currently working on other software security products. These new products and
products under development are subject to significant technical and marketing
risks. AssureNet has historically relied on the assistance of third-party
consultants to complete certain aspects of its product development, in part
due to the size of and resource constraints imposed on its internal
engineering staff. In the past, AssureNet has experienced delays in the
commencement of commercial shipments of new products and enhancements,
resulting in customer frustrations and delay or loss of net revenue. If the
development of AssureNet's new software products falls behind schedule, as has
occurred in the past, or if such products do not achieve market acceptance,
AssureNet's business, results of operations and financial condition could be
materially adversely affected. See "AssureNet Business--Product Development"
and "--Competition."
MODIFICATION OF DISTRIBUTION STRATEGY. Historically, most of AssureNet's net
revenue has been generated through sales of hardware-based network security
products by AssureNet's direct sales force to large corporations. In mid-1995,
AssureNet began establishment of a new distribution strategy pursuant to which
23
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AssureNet's products were sold by VARs, systems integrators, distributors and
original equipment manufacturers ("OEMs"). Such indirect sales accounted for
approximately 17% and 29%, respectively, of AssureNet's net revenue for 1995
and for the nine months ended September 30, 1996. AssureNet has invested
significant resources to develop this channel, and this has significantly
reduced margins and increased sales and marketing expenses. Consequently,
despite a significant increase in unit sales volume, net revenues have not
increased proportionately during the nine month period ended September 30,
1996. Accordingly, AssureNet is currently reevaluating its sales distribution
strategy for 1997 and intends to utilize a mixed distribution strategy on a
going-forward basis. There can be no assurance that AssureNet will be able to
continue to attract VARs, systems integrators and OEMs that will market
AssureNet's products effectively or provide timely and cost-effective customer
support and service. In addition, AssureNet's agreements with VARs, systems
integrators and OEMs are not and will not be exclusive and in many cases may
be terminated by either party without cause, and most of AssureNet's VARs,
systems integrators and OEMs carry competing product lines. Therefore, there
can be no assurance that any VAR, systems integrator or OEM will represent or
continue to represent AssureNet's products, and the inability to recruit, or
the loss of, VARs, systems integrators or OEMs could materially adversely
affect AssureNet's business, financial condition and results of operations.
Selling through indirect channels also may hinder and has in the past
engendered difficulties with respect to AssureNet's ability to accurately
forecast sales, evaluate customer satisfaction, provide quality service and
support or recognize emerging customer requirements. The use of a mixed
distribution strategy could also create the risk of distribution channel
conflict, as indirect distributors and resellers may perceive AssureNet's
direct sales force as competition, thereby reducing such distributors' and
resellers' incentive to carry or promote AssureNet's products. Any of the
foregoing may materially adversely affect AssureNet's business, financial
condition and results of operations. See "Potential Adverse Impact of Product
Returns and Price Reductions," "AssureNet Business--Sales and Marketing."
RISKS ASSOCIATED WITH COMPUTER AND NETWORK SECURITY MARKETS; PRODUCT
ACCEPTANCE. AssureNet currently devotes a majority of its research and
development, manufacturing, marketing and sales resources to service the
emerging remote access computing market. Declines in demand for AssureNet's
products, whether as a result of competition, technological change, the
public's awareness of the need for network security products, developments in
the hardware and software environments in which these products operate,
general economic conditions or other factors, could have a material adverse
effect on AssureNet's business, financial condition and results of operations.
AssureNet's focus on the remote access market may make it more vulnerable to a
decline in that market than companies with more diverse product offerings.
Moreover, AssureNet's future financial performance will depend in large part
on continued growth in the remote access computing market, which in turn will
depend in part on the growth in the number of organizations utilizing remote
access computing products and the number of applications developed for use
with those products. There can be no assurance that these markets will
continue to grow or that AssureNet will be able to respond effectively to the
evolving requirements of these markets. Many of AssureNet's customers have not
yet adopted a single integrated remote access solution, and there can be no
assurance that AssureNet's products will be the standard adopted by its
customers. An actual or perceived breach of network or computer security at
one of AssureNet's customers, regardless of whether such breach is
attributable to AssureNet's products, could adversely affect the market's
perception of AssureNet and AssureNet's business, financial condition and
results of operations.
AssureNet is focusing its resources on developing and marketing software-
only network security solutions for open distributed computing environments.
These products are currently expected to account for an increasing percentage
of AssureNet's future net revenue growth, if any. While the adoption of open
distributed systems architectures in general and the acceptance of open
distributed computing for business critical applications in particular have
increased in recent years, there can be no assurance that this trend will
continue. Moreover, there can be no assurance that the network security market
will accept a software-only solution or, even if AssureNet's software-based
network security products gain widespread acceptance, that such products will
be preferred over competing software products. If software-based network
security systems do not gain widespread market acceptance or AssureNet's
products are not viewed as preferable or superior to competing software
products, AssureNet's business, financial condition and results of operations
will be materially adversely affected.
24
<PAGE>
AssureNet also intends to expand its products to operate across more diverse
open networks, which may encompass an increasing variety of hardware and
software operating environments. Such efforts will also require significant
commitments of financial and product development resources, and there can be
no assurance that such efforts will be successful, especially given that
AssureNet has had limited experience with some of the components of these more
diverse environments. The failure of such efforts could have a material
adverse effect on AssureNet's business, financial condition and results of
operations. See "AssureNet Business--Industry Background."
INTENSE COMPETITION. The market for computer and network security products
is intensely competitive, and AssureNet believes that competition in this
market is likely to intensify. AssureNet currently experiences competition
from a number of companies, including (i) software operating systems suppliers
and application software vendors that incorporate a single-factor static
password security system into their products, (ii) vendors of hardware tokens
and software keys such as Security Dynamics Technologies, Inc. ("Security
Dynamics"), Secure Computing Corporation ("SCC"), Leemah DataCom Security
Corporation ("Leemah"), Racal-Guardata, Inc., and Cylink Corporation
("Cylink"), (iii) smart card security device vendors, such as AT&T
Technologies, Inc., Bull HN Information Systems, Inc. and Schlumberger,
Limited, (iv) biometric security device vendors, such as Eye Dentify Systems,
Fingermatrix (U.K.) Limited and Identix, Inc., and (v) dialback security
system manufacturers, such as Leemah. AssureNet may in the future also face
competition from these and other parties that develop computer and network
security products based upon approaches similar to or different from those
employed by AssureNet. In particular, AssureNet could face competition from
large operating system software companies and network equipment companies.
Such companies may include, by way of example, but not by way of limitation,
software providers such as Microsoft, IBM, Novell, Hewlett Packard and
Netscape, and network equipment providers such as Cisco, Bay Networks and
3Com. There can be no assurance that the market for computer and network
security products will not ultimately be dominated by approaches other than
the approach marketed by AssureNet. While AssureNet believes that it does not
currently compete against manufacturers of other classes of security products
(such as encryption), there can be no assurance that such companies will not
compete with AssureNet in the future or that its existing competitors will not
acquire such companies (e.g., Security Dynamics' acquisition of RSA, Inc., a
leading encryption company).
AssureNet believes that the principal competitive factors affecting the
market for computer and network security products include ease of use, ease of
administration, quality and reliability, level of security, compatibility with
heterogeneous computing environments, scalability, ability to be implemented
and managed by the user, distribution channels, customer service and support
and price. Many of AssureNet's current and potential competitors are
substantially larger than AssureNet and have significantly greater financial,
technical and marketing resources, have well-established and maintained
channels of distribution and have generated better market awareness as a
result of public company status, substantial advertising or larger sales and
marketing groups. Using such greater resources, such competitors have been
able to attract and retain key technical and market personnel, attract
customers and expand their operations. Such competitors may also be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than AssureNet. Due to the non-proprietary nature of
its products and low barriers to entry in the network security market,
AssureNet expects additional competition from established and emerging
companies as the market for computer and network security products continues
to evolve. AssureNet expects its competitors to continue to improve the
performance of their current products and to introduce new products or new
technologies that provide added functionality and other features. Successful
new product introductions or enhancements by AssureNet's competitors could
cause a significant decline in sales or loss of market acceptance of
AssureNet's products and services, result in intense price competition or make
AssureNet's products and services or technologies obsolete or noncompetitive.
AssureNet is aware that some of its competitors, including Security Dynamics,
are also in the process of developing software-based network security
solutions. Any reduction in gross margins resulting from competitive factors
such as price competition could have a material adverse effect on AssureNet's
business, financial condition or results of operations. There can be no
assurance that AssureNet will have sufficient resources to make investments in
research and development or sales and marketing or that AssureNet will be able
to make the
25
<PAGE>
technological advances necessary to maintain competitiveness. In addition,
current and potential competitors have established and may in the future
establish collaborative relationships among themselves or with third parties,
including third parties with whom AssureNet has strategic relationships, to
increase the ability of their products to address the security needs of
AssureNet's prospective customers. AssureNet also expects that new competitors
will enter into AssureNet's markets through a combination of internal
development and acquisitions (e.g., Hewlett Packard's recent acquisition of
SecureWare, Inc., a development stage Internet security firm). Accordingly, it
is possible that new competitors or alliances may emerge and rapidly acquire
significant market share. If this were to occur, the business, financial
condition and results of operations of AssureNet would be materially adversely
affected. See "AssureNet Business--Competition."
RISKS ASSOCIATED WITH CUSTOMER CONCENTRATION. During the last quarter of
1995 and the first quarter of 1996, one customer, British Gas, accounted for
approximately 20% and 48% of AssureNet's net revenue, respectively. No
customer accounted for more than 10% of net revenue in the second quarter of
1996. However, in the third quarter of 1996, Ingram Micro Inc., AssureNet's
North American distributor, and Anixter Inc., a large systems integrator,
accounted for 16% and 11% of net revenue, respectively. AssureNet expects that
a small number of customers could account for a significant portion of its net
revenue in future quarters until AssureNet's new software products achieve
broad market acceptance, particularly if such customers place
disproportionately large orders with AssureNet. As a result of this customer
concentration, AssureNet's business, results of operations and financial
condition could be materially adversely affected by the failure of one or more
anticipated order or orders to materialize and by a deferral or cancellation
of an order or orders. In addition, there can be no assurance that net revenue
from customers that have accounted for significant net revenue in past
periods, individually or in the aggregate, will continue, or if continued will
reach or exceed historical levels in any future period. AssureNet's results of
operations may in the future be subject to substantial period-to-period
fluctuations as a consequence of such customer concentration. See "AssureNet
Business--Customers."
NEED TO ESTABLISH AND MAINTAIN COLLABORATIVE RELATIONSHIPS. A significant
business strategy of AssureNet is to develop collaborative agreements with
remote access providers and firewall product vendors to, among other things,
bundle AssureNet's products with other products sold by these providers.
Certain of these providers and vendors integrate AssureNet's software
technology into their products to provide compatibility between their product
offerings and certain of AssureNet's software products. AssureNet believes
that some of its direct competitors have and other present or potential
competitors may also establish numerous significant strategic alliances and
collaborative relationships. There can be no assurance that AssureNet's
existing collaborative relationships will be commercially successful, that
AssureNet will be able to negotiate additional collaborative relationships,
that such additional collaborations will be available to AssureNet on
acceptable terms or that any such relationships, if established, will be
commercially successful. In addition, there can be no assurance that parties
with which AssureNet has established collaborative relationships will not
pursue alternative technologies or develop alternative products in addition to
or in lieu of AssureNet's products either on their own or in collaboration
with others, including AssureNet's competitors. AssureNet's business,
financial condition or results of operations may be adversely affected by the
lack of success of its collaborators in marketing such collaborative products.
See "AssureNet Business--Strategy," "--AssureNet Products," "--Sales and
Marketing."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. AssureNet
relies on trade secret laws, employee and third-party non-disclosure agreements
and other methods to protect its proprietary rights. AssureNet also enters into
confidentiality and/or license agreements with its employees, consultants and
distributors, as well as with its customers and potential customers seeking
proprietary information, and attempts to limit access to and distribution of its
software, documentation and other proprietary information. Due to the reliance
on non-proprietary technology and standard operating platforms, unlike certain
of its competitors, AssureNet has not patented any of its technology. There can
also be no assurance that AssureNet's trade secrets or non-disclosure agreements
will provide meaningful protection of AssureNet's proprietary information.
Furthermore, there can be no assurance that others will not independently
develop similar technologies or duplicate any technology developed by AssureNet.
AssureNet's inability to protect its proprietary rights could have a material
adverse effect on AssureNet's business, financial condition and results of
operations. Further,
26
<PAGE>
AssureNet 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 protection of AssureNet's rights may be ineffective in
such countries.
As the number of network security products in the industry increases and the
functionality of these products further overlaps, AssureNet believes that
software developers and publishers may increasingly become subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against AssureNet in the future with respect to
current or future products. Although AssureNet is not currently the subject of
any intellectual property litigation, there has been substantial litigation
regarding patent, copyright, trademark and other intellectual property rights
involving computer software companies. Any claims or litigation, with or
without merit, could be costly and time consuming and could result in a
diversion of management's attention, which could have a material adverse
effect on AssureNet's business, financial condition and results of operations,
regardless of the outcome of the litigation. Adverse determinations in such
claims or litigation could result in the loss of AssureNet's proprietary
rights, subject AssureNet to significant liabilities, require AssureNet to
seek licenses from third parties, or prevent AssureNet from licensing its
technologies, any of which could also have a material adverse effect on
AssureNet's business, financial condition and results of operations. See
"AssureNet Business--Proprietary Rights."
AssureNet also licenses software from third parties which is incorporated
into its products. These licenses expire from time to time. There can be no
assurance that these third party technology licenses will continue to be
available to AssureNet in commercially reasonable terms. In particular,
AssureNet currently licenses the copy protection used in the Software
SecureNet Key from BBI Computer Systems, Inc. ("BBI") pursuant to a "shrink-
wrap" perpetual nonexclusive license. AssureNet is presently negotiating an
individualized perpetual license with BBI. The loss of a relationship with BBI
or the inability to maintain any similar technology license could result in
delays or reductions in product shipments until equivalent technology could be
identified, licensed and integrated. Any such delays or reductions in product
shipments would materially adversely affect AssureNet's business, results of
operations and financial condition. In addition, AssureNet generally does not
have access to source code for the software supplied by these third parties.
Certain of these third parties, including BBI, are small companies that do not
have extensive financial and technical resources. If any of these
relationships were terminated or if any of these third parties were to cease
doing business, AssureNet may be forced to expend significant time and
development resources to replace the licensed software. Such an event would
have a material adverse effect upon AssureNet's business, results of
operations and financial condition. See "AssureNet Business--Sales and
Marketing" and "--Proprietary Rights."
INTERNATIONAL SALES AND SUPPORT. Sales outside North America accounted for
approximately 14%, 27%, 30% and 48% of AssureNet's revenue in 1993, 1994, 1995
and for the nine months ended September 30, 1996, respectively. To date,
AssureNet has generated only limited international net revenue from sales
outside of Europe. An important element of AssureNet's strategy is to expand
its international operations. In this regard, although AssureNet has
established a subsidiary in the United Kingdom and is currently investing
resources in its international operations, there can be no assurance that
AssureNet will be successful in expanding its international operations. In
addition, AssureNet has only limited experience in developing localized
versions of its products and marketing and distributing its products
internationally. There can be no assurance that AssureNet will be able to
successfully localize, market, sell and deliver its products internationally.
The inability of AssureNet to successfully expand its international operations
in a timely manner could materially adversely affect AssureNet's business,
results of operations or financial condition. In addition, AssureNet's
international business is and may continue to be subject to a variety of
risks, including delays in establishing international distribution channels,
difficulties in collecting international accounts receivable, and increased
costs associated with maintaining international marketing efforts. Although
AssureNet's sales in continental Europe are typically denominated in U.S.
dollars, AssureNet's sales in the United Kingdom are denominated in the local
currency, and AssureNet is subject to the risks associated with fluctuations
in currency exchange rates. A decrease in the value of British currency
relative to the U.S. dollar could affect the profitability in U.S. dollars of
AssureNet's products sold in the United Kingdom. Additional risks inherent in
AssureNet's international business activities
27
<PAGE>
generally include unexpected changes in regulatory requirements, tariffs and
other trade barriers, political and economic instability, reduced protection
for intellectual property rights in certain countries, costs of localizing
products for foreign countries, lack of acceptance of localized products in
foreign countries, difficulties in managing international operations,
difficulty in accounts receivable collection, differences in accounting
practices, potentially adverse tax consequences, restrictions on the
repatriation of earnings, and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will not have a
material adverse effect on AssureNet's future international sales and,
consequently, AssureNet's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--AssureNet," "AssureNet Business--Sales and
Marketing."
Although AssureNet's products are subject to export controls under United
States laws, AssureNet believes it has obtained all material export approvals.
There can be no assurance, however, that the list of products and countries
for which export approval is required, and the regulatory policies with
respect thereto, will not be revised from time to time. The inability of
AssureNet to obtain required approvals under these regulations could adversely
affect the ability of AssureNet to make international sales.
DEPENDENCE ON SUPPLIERS AND CONTRACT MANUFACTURERS; RISKS ASSOCIATED WITH
DOING BUSINESS IN CHINA. AssureNet relies on outside vendors to manufacture
certain components used in the production of AssureNet's products. Certain
components and services necessary for the manufacture of AssureNet's products
are obtained from a sole supplier or a limited group of suppliers. AssureNet
contracts for the manufacture of its Defender Series hardware products with
one assembly operation located in San Jose, California and for the manufacture
of all of its SecureNet Key hardware tokens with a sub-assembly subcontractor
located in China. The integrated circuits contained in AssureNet's SecureNet
Key hardware tokens are currently purchased from NEC, Ltd. ("NEC"), a Japanese
computer chip manufacturer. NEC has verbally assured AssureNet that NEC will
give AssureNet at least twelve months' notice prior to any cessation of
production. There can be no assurance that NEC will be able to furnish
AssureNet with a sufficient number of integrated circuits to meet customer
demand, that AssureNet will be able to purchase integrated circuits from NEC
at commercially acceptable prices or that, if NEC discontinues the manufacture
of certain integrated circuits, AssureNet will be able to procure integrated
circuits from another supplier on a timely basis and at commercially
acceptable prices. AssureNet believes that it would take approximately twelve
months to identify and commence production of a suitable replacement chip from
a new supplier, and attempts to maintain a two month supply of SecureNet Key
hardware tokens in inventory and four month supply of integrated circuits.
AssureNet purchases all of these sole or limited source components pursuant to
purchase orders placed from time to time, and except as described above, has
no guaranteed supply arrangements. The inability to obtain sufficient
manufactured goods or sole or limited source components as required, or to
obtain or develop alternative sources at competitive prices or quality if and
as required in the future, could result in delays in product shipments or
increase AssureNet's material costs, either of which would materially
adversely affect AssureNet's business, financial condition or results of
operations. See "AssureNet Business--Manufacturing and Suppliers."
AssureNet imports all of its SecureNet Key hardware tokens from a
subassembly subcontractor located in Shenzhen Province, China, which exposes
AssureNet to the possibility of product supply disruption and increased costs
in the event of changes in the policies or actions of the Chinese government,
political unrest or unstable economic conditions in China or developments in
the United States that are adverse to trade, including enactment of
protectionist legislation. In addition, the preferential tax treatment granted
to enterprises located in "special economic zones" could also be withdrawn,
adversely affecting the costs of manufacturing in China. In the United States,
the so-called "Special 301" law (19 U.S.C. (S)2242) provides that the United
States Trade Representative ("USTR") is to designate certain priority foreign
countries for special scrutiny or investigation in connection with the failure
to adequately protect intellectual property rights. On different occasions,
China has been designated under Special 301 provisions. To date, this
designation has not had an adverse impact on products imported by AssureNet.
However, AssureNet is unable to predict whether current actions being taken by
the USTR with regard to China or any future actions taken under Special 301
provisions will result in the imposition of sanctions by the United States
against China, or whether any such sanctions will result in increases
28
<PAGE>
in cost or reductions in the supply of SecureNet Key hardware tokens. The
United States also provides China with most-favored-nation ("MFN") status,
allowing China to receive the same tariff treatment that the United States
extends to its "most favored" trading partners. Notwithstanding this current
policy, the U.S. government could seek to revoke MFN status for China, or
condition its renewal on factors such as China's human rights record. Any
revocation of China's MFN status could result in higher tariffs on AssureNet's
SecureNet Key hardware tokens manufactured in China, which higher tariffs
could have a material adverse effect on AssureNet's business, financial
condition and results of operations.
POTENTIAL ADVERSE IMPACT OF PRODUCT RETURNS AND PRICE REDUCTIONS. AssureNet
generally recognizes revenue upon shipment to its customers, including
distributors and VARs. AssureNet provides certain of its customers with
product return rights for stock balancing or product evaluation. AssureNet
also provides some of its customers with price protection rights. As AssureNet
increases its sales efforts through indirect channels, a significantly greater
percentage of its total sales each quarter have become, and will likely
continue to become, subject to product return rights and price protection
rights. Further, it is AssureNet's policy to allow returns for up to 30 days
(and sometimes longer periods based on contract) and AssureNet generally
warrants its software products for 90 days and its hardware products for one
year. Stock balancing rights permit customers to return products to AssureNet
for credit, within specified limits and subject to purchasing an equal amount
of other AssureNet products. Product evaluation rights permit customers to
evaluate products for 30 to 90 days after receipt of goods, without obligation
to purchase. Price protection rights require that AssureNet grant retroactive
price adjustments for inventories of AssureNet's products held by VARs if
AssureNet lowers its prices for such products. Additionally, AssureNet grants,
via contract, most-favored customer status to certain of its customers.
Although AssureNet believes that it currently has adequate reserves to cover
product returns and price reductions, there can be no assurance that AssureNet
will not experience significant returns or price protection adjustments in the
future or that such reserves will be adequate to cover such returns and price
reductions. Any returns or adjustments in excess of the adjustments could have
a material adverse effect on AssureNet's business, financial condition and
results of operations. See "AssureNet Business--Sales and Marketing."
PRODUCT LIABILITY; RISK OF PRODUCT DEFECT. Customers rely on AssureNet's
network security products to prevent unauthorized access to their networks and
data transmissions. A malfunction or the inadequate design of AssureNet's
products could result in tort or warranty claims. Although AssureNet attempts
to reduce the risk of such losses through warranty disclaimers and liability
limitation clauses in its sales orders and by maintaining product liability
insurance, there can be no assurance that such measures will be effective in
limiting AssureNet's liability for any such damages. Any liability for damages
resulting from security breaches could be substantial and could have a
material adverse effect on AssureNet's business, financial condition and
results of operations. Complex software products such as those offered by
AssureNet may contain undetected errors or failures when first introduced or
when new versions are released, and software products or media may contain
undetected viruses. In particular, the personal computer hardware environment
is characterized by a wide variety of non-standard configurations that makes
pre-release testing for programming or compatibility errors very difficult and
time consuming. Although AssureNet has not experienced material adverse
effects resulting from any errors in its products or product enhancements to
date, there can be no assurance that, despite testing by AssureNet and by
current and potential customers, errors will not be found in new products or
releases after commencement of commercial shipments, resulting in loss of or
delay in market acceptance, which could have a material adverse effect upon
AssureNet's business, results of operations and financial condition. See
"AssureNet Business--Product Development."
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<PAGE>
MARKET PRICE INFORMATION AND DIVIDEND POLICIES
AXENT Common Stock is traded on The Nasdaq National Market under the symbol
"AXNT." There is no established public trading market for AssureNet Stock.
AXENT Common Stock began trading on The Nasdaq National Market on April 24,
1996. The following table sets forth for the periods indicated the high and
low sale prices per share of AXENT Common Stock on The Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
Second Quarter (from April 24, 1996)......... 24 13 1/2
Third Quarter................................ 23 1/2 9 3/8
Fourth Quarter............................... 23 3/4 12 5/8
1997
First Quarter (through February , 1997).....
</TABLE>
The last reported sale price per share of the AXENT Common Stock on The
Nasdaq National Market on January 6, 1997, the last full trading day prior to
the public announcement of the proposed Merger, was $16.00. Based upon the
last reported sale price of AXENT Common Stock on February , 1997, the
conversion in the Merger would result in the following per AssureNet share
results.
<TABLE>
<CAPTION>
MARKET VALUE OF
CLASS AXENT STOCK RECEIVED
----- --------------------
<S> <C>
Series A Preferred....................................
Series B Preferred....................................
Series C Preferred....................................
Common................................................
</TABLE>
Because the market price of AXENT Common Stock is subject to fluctuation,
the market value of the shares of AXENT Common Stock that holders of AssureNet
Stock will receive in the Merger may increase or decrease prior to the Merger.
AssureNet shareholders are urged to obtain a current market quotation for
AXENT Common Stock.
At February , 1997, there were holders of record of AssureNet Common
Stock, holders of record of AssureNet Series A Preferred Stock, holders
of record of AssureNet Series B Preferred Stock and holders of record of
AssureNet Series C Preferred Stock.
Neither AXENT nor AssureNet has ever declared or paid cash dividends. AXENT
does not intend to declare or pay any cash dividends in the foreseeable
future. Future cash dividends, if any, will be determined by the AXENT Board
and will be based upon AXENT's earnings, capital requirements, financial
condition and other factors deemed relevant by the AXENT Board.
AssureNet has agreed in the Merger Agreement not to declare, set aside or
pay any dividends on its capital stock prior to the Effective Time. See "The
Merger Agreement--Certain Covenants and Agreements."
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<PAGE>
THE ASSURENET SPECIAL MEETING
GENERAL
This Prospectus/Proxy Statement is being furnished to holders of AssureNet
Stock in connection with the solicitation of proxies under the CGCL by the
AssureNet Board for use at the AssureNet Special Meeting and any adjournments
or postponements thereof. Each copy of this Prospectus/Proxy Statement mailed
to holders of AssureNet Stock is accompanied by a form of proxy for use at the
AssureNet Special Meeting.
This Prospectus/Proxy Statement and the accompanying forms of proxies are
first being mailed to shareholders of AssureNet on or about March , 1997.
ASSURENET SHAREHOLDERS ARE REQUESTED TO COMPLETE, SIGN AND DATE THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO ASSURENET IN THE ENCLOSED,
POSTAGE-PAID ENVELOPE.
ASSURENET SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXIES.
PURPOSE OF THE ASSURENET SPECIAL MEETING
At the AssureNet Special Meeting, the holders of AssureNet Stock eligible to
vote will consider and vote upon: (i) the approval and adoption of the Merger
Agreement and the Merger and (ii) such other matters as may properly come
before the AssureNet Special Meeting or any adjournments or postponements
thereof.
BOARD OF DIRECTORS RECOMMENDATION
The AssureNet Board has unanimously approved the Merger Agreement and the
Merger and recommends a vote FOR approval and adoption of the Merger Agreement
and the Merger.
DATE, TIME AND PLACE
The AssureNet Special Meeting is scheduled to be held on March , 1997 at
8:00 a.m., local time, at the offices of Brobeck, Phleger & Harrison LLP, Two
Embarcadero Place, 2200 Geng Road, Palo Alto, California 94303.
RECORD DATE; SHARES OUTSTANDING
The AssureNet Board has fixed the close of business on February , 1997 as
the AssureNet Record Date for the determination of AssureNet shareholders
entitled to notice of and to vote at the AssureNet Special Meeting and at any
adjournments or postponements thereof.
On the AssureNet Record Date, there were outstanding shares of AssureNet
Common Stock held by shareholders of record, shares of AssureNet Series
A Preferred Stock held by shareholders of record, shares of AssureNet
Series B Preferred Stock held by shareholders of record, and shares of
AssureNet Series C Preferred Stock held by shareholders of record.
VOTING AT THE ASSURENET SPECIAL MEETING
The presence, either in person or by proxy under the CGCL, of the holders of
a majority of the outstanding shares of the AssureNet Stock issued and
outstanding and entitled to vote at the AssureNet Special Meeting is necessary
to constitute a quorum at the AssureNet Special Meeting.
The affirmative vote of (a) the holders of a majority of the outstanding
shares of AssureNet Common Stock, voting together as a single class, (b) the
holders of a majority of the outstanding shares of AssureNet Preferred Stock,
voting together as a single class on an "as converted" basis and (c) the
holders of a majority of the outstanding shares of AssureNet Series C
Preferred Stock, voting separately as a class, is required to approve and
adopt the Merger Agreement and the Merger. Each share of AssureNet Stock is
entitled to one vote (other than shares of Series C Preferred Stock, each of
which is entitled to 1.85 votes) on the approval and adoption of the Merger
Agreement and the Merger. Under applicable California law, in tabulating the
vote on each such matter, abstentions will have the same effect as a vote
against the proposal to approve and adopt the Merger Agreement and the Merger.
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Pursuant to the Shareholder Agreements, certain shareholders have agreed to
vote all shares of AssureNet Stock then owned by such shareholder in favor of
the Merger Agreement and the Merger. As of January 6, 1997, such shareholders
owned an aggregate of 7,560,173 shares of AssureNet Stock, representing
approximately 65% of the outstanding shares of AssureNet Common Stock, 67% of
the AssureNet Preferred Stock (on an as converted basis) and 100% of the
Series C Preferred Stock. Accordingly, approval of the Merger Agreement and
the Merger by the shareholders of AssureNet is assured. See "The Merger
Agreement--Related Agreements--Shareholder Agreements."
When a proxy is returned properly signed and dated, the shares represented
thereby will be voted in accordance with the instructions on the proxy. If a
shareholder does not return a signed proxy, the shares will not be voted.
Shareholders are urged to mark the boxes on the proxy to indicate how their
shares are to be voted. If a shareholder returns a signed proxy, but does not
indicate how such holder's shares are to be voted, the shares represented by
the proxy will be voted for the approval and adoption of the Merger Agreement
and the Merger.
Any AssureNet shareholder that executes and returns a proxy may revoke such
proxy at any time before it is voted by (i) notifying in writing the Secretary
of AssureNet at 201 Ravendale Drive, Mountain View, California 94030, (ii)
granting a subsequent proxy, or (iii) appearing in person and voting at the
AssureNet Special Meeting. Attendance at the AssureNet Special Meeting will
not in and of itself constitute revocation of a proxy under the CGCL.
The AssureNet Board is not currently aware of any matters to come before the
AssureNet Special Meeting other than as described herein. If, however, other
matters are properly brought before the AssureNet Special Meeting, including
among other things consideration of a motion to adjourn the AssureNet Special
Meeting to another time and/or place (including without limitation for the
purpose of soliciting additional proxies), the persons appointed as the named
proxies will have discretion to vote or act thereon according to their best
judgment.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
AssureNet, who will not be compensated for such services, may solicit proxies
from AssureNet shareholders personally or by telephone, telecopy or telegram
or other forms of communication.
DISSENTERS' RIGHTS
Holders of the AssureNet Stock will be entitled to dissenters' rights in
connection with the approval and adoption of the Merger Agreement and the
Merger. See "The Merger--Dissenters' Rights."
THE MERGER
BACKGROUND OF THE MERGER
The AssureNet Board unanimously recommends that the shareholders of
AssureNet vote FOR approval and adoption of the Merger and Merger Agreement
for the reasons set forth below.
REASONS FOR THE MERGER
AssureNet
In reaching its decision to approve the terms of the Merger Agreement and
the Merger, the AssureNet Board consulted with its legal advisors regarding
the legal terms of the transaction and the AssureNet Board's obligation in its
consideration of the proposed transaction and consulted with AssureNet's
management.
In the course of its deliberations, the AssureNet Board reviewed and
considered the following additional factors: (i) the terms and conditions of
the Merger Agreement, including the amount and form of the consideration; (ii)
information regarding AXENT's and AssureNet's respective businesses,
prospects, financial
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performance, financial condition, operations and technology; (iii) the
compatibility of the respective managements and corporate cultures of AXENT
and AssureNet; (iv) reports from AssureNet's management and its legal advisors
on the results of their due diligence investigations of AXENT; (v) other prior
offers for acquisitions and (vi) the belief that the Merger represents the
most favorable economic alternative currently available to the shareholders of
AssureNet. While the AssureNet Board evaluated both companies' prospects in
terms of the future potential of their industries, businesses, products and
employees, the Board did not rely on the achievability of financial forecasts
due to inherent uncertainties in the industry, the rapid changes that take
place in the marketplace and in the technology, and the difficulty in
predicting future revenue streams.
The AssureNet Board also considered the following potentially negative
factors: (i) the potential disruption of AssureNet's business that might
result from employee uncertainty and lack of focus following announcement of
the Merger and during the integration of the operations of AXENT and
AssureNet; (ii) the possibility that the Merger might not be consummated, and
the effects of the public announcement of the Merger on (A) AssureNet's sales
and operating results, (B) AssureNet's ability to attract and retain key
management, marketing and technical personnel and (C) progress of certain
development projects; (iii) the risk that the market price of AXENT Common
Stock might be adversely affected by the public announcement of the Merger,
(iv) the risk that, despite the intentions and the efforts of the parties to
support their respective products, the announcement of the Merger could result
in decisions by customers to defer purchases of products of AXENT or
AssureNet; (v) the risk that the other benefits sought to be achieved in the
Merger will not be achieved; and (vi) the other risks described under "Risk
Factors."
AXENT
AXENT is pursuing the acquisition of AssureNet because of (i) AXENT's belief
in the complementary nature of AssureNet's authentication products and
technology with AXENT's current and future security management products and
technology and (ii) AXENT's belief that it can leverage and expand upon the
indirect distribution channels of AssureNet which are complementary to AXENT's
direct selling model and will provide the combined company a larger, more
effective and more diversified global distribution capacity. In reaching its
decision to approve the Merger Agreement, the AXENT Board of Directors
consulted with management of AXENT, legal counsel regarding the legal terms of
the proposed merger and the obligations of AXENT's Board in its consideration
of the proposed transaction and with AXENT's financial advisers regarding the
financial aspects of the proposed Merger. The AXENT Board considered the
following information and factors: (a) AXENT's belief that authentication
technology will be a key technology for implementing computer security
solutions for enterprise computing environments involving remote access
(whether from home users, mobile users or from the Internet or intranets) and
that AssureNet's challenge/response authentication technology is recognized
for its ease of use, security, scalability, flexibility and low cost of
implementation; (b) AXENT's belief that implementation of its strategy of
expanding its product offerings for the enterprise security market will
require authentication technology to meet customer demands for enhanced
security, flexibility and ease of use, and that the acquisition of such
technology and existing customer base through the proposed Merger was more
advantageous than attempting to develop such technology internally; (c) the
complementary nature of AXENT's and AssureNet's existing and future products,
their product development and direct and indirect sales staffs; (d) AXENT's
corporate strategy and knowledge of the information security industry; (e) the
ability of AXENT's management personnel to assume the additional
responsibilities resulting from the proposed Merger; (f) the financial and
other significant terms of the proposed Merger, including the terms and
conditions of the Merger Agreement and the related agreements, including the
Management Agreement; (g) the presentation of AXENT's financial adviser
regarding the consideration to be paid by AXENT in the Merger; (h) risks
associated with AssureNet's business and financial condition, including recent
changes in its marketing strategy, its migration from hardware products to
software products and its recent operating losses; (i) risks associated with
the Merger, including risk that issuance of AXENT Common Stock in the Merger
might be dilutive to AXENT stockholders, risk that the trading price of AXENT
Common Stock might be adversely affected by the announcement of the Merger,
risk that the anticipated benefits from the Merger might not be fully achieved
or might not be achieved on the timetable anticipated, risk relating to
charges expected to be incurred in connection with the Merger, risk that the
Merger might not be consummated following the public announcement thereof and
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the difficulty of managing two separate operations in distant geographic
locations; and (j) current industry, economic and market conditions and
anticipated changes therein. In view of the variety of factors considered in
connection with its evaluation of the AssureNet acquisition, the AXENT Board
did not find it practicable to, and did not, quantify or otherwise assign
relative weights to the specific factors considered in its determination to
approve the AssureNet acquisition. After taking into consideration all factors
and considerations, including the factors discussed above, the AXENT Board
concluded that the Merger was in the best interests of AXENT and its
stockholders.
VOTING AGREEMENTS
Certain shareholders who as of January 6, 1997 held in the aggregate
approximately 100% of the Series C Preferred Stock, 67% of the AssureNet
Preferred Stock (on an as converted basis) and 65% of the AssureNet Common
Stock have entered into Shareholder Agreements with AXENT and AssureNet
providing, among other things, for the appointment of nominees of AXENT as
proxies to vote all shares of AssureNet Stock owned by such shareholders in
favor of approval of the Merger and the Merger Agreement. See "The Merger
Agreement--Related Agreements."
OWNERSHIP OF ASSURENET STOCK BY DIRECTORS AND OFFICERS OF ASSURENET
As of January 6, 1997, directors and officers of AssureNet and their
affiliates may be deemed to be beneficial owners of approximately 32% of the
outstanding shares of AssureNet Stock (on an as converted basis). See
"Principal Shareholders--AssureNet" for additional information concerning such
ownership. As discussed below under "The Merger Agreement--Related
Agreements--Shareholders Agreements," each of the directors of AssureNet has
agreed to vote or direct the vote of all of the outstanding shares of
AssureNet Stock over which he has voting control in favor of the approval of
the Merger Agreement and the Merger.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses the material federal income tax
considerations of the Merger that are generally applicable to holders of
AssureNet Stock. This discussion reflects the opinions of counsel attached as
Exhibit 8.1 to the Registration Statement of which this Prospectus/Proxy
Statement is a part (the "Exhibit Opinion"). The Exhibit Opinion includes an
opinion to the effect that the Merger will constitute a "reorganization" (a
"Reorganization") within the meaning of Section 368(a) of the Code. The
Exhibit Opinion, which is based on certain assumptions and subject to certain
limitations and qualifications as noted in the opinion, was prepared by Piper
& Marbury L.L.P., counsel to AXENT .
AssureNet shareholders should be aware that the following discussion does
not deal with all federal income tax considerations that may be relevant to
particular AssureNet shareholders in light of their particular circumstances,
such as shareholders who are dealers in securities, tax-exempt entities,
corporations that treat the Merger as producing gain for financial statement
purposes or persons who are foreign persons or who acquired their AssureNet
Stock through stock option or stock purchase programs or in other compensatory
transactions. In addition, the following discussion does not address the tax
consequences of transactions effectuated prior to or after the Merger (whether
or not such transactions are in connection with the Merger), including without
limitation the exercise of options or rights to purchase AssureNet Stock in
anticipation of the Merger or the assumption by AXENT of options or rights to
acquire AssureNet Stock. Finally, no foreign, state or local tax
considerations are addressed herein. ACCORDINGLY, ASSURENET SHAREHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO
THEM OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES TO THEM OF THE MERGER.
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The following discussion is based on the interpretation of the Code,
applicable Treasury Regulations, judicial authority and administrative rulings
and practice, all as of the date hereof of Piper & Marbury L.L.P. The IRS is
not precluded from adopting a contrary position. In addition, there can be no
assurance that future legislative, judicial or administrative changes or
interpretations will not adversely affect the accuracy of the statements and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the Merger to
AXENT, AssureNet and/or their respective stockholders and shareholders.
Subject to the limitations and qualifications referred to herein, and as a
result of the Merger qualifying as a Reorganization, Piper & Marbury L.L.P. is
of the following opinion (subject to the qualifications set forth immediately
following the numbered paragraphs):
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code;
(ii) No material gain or loss will be recognized by AXENT, the Merger
Subsidiary or AssureNet solely as a result of the Merger;
(iii) No gain or loss will be recognized by the holders of AssureNet
Stock upon the exchange of AssureNet Stock solely for shares of AXENT
Common Stock as a result of the Merger (except to the extent of cash
received in lieu of a fractional share thereof);
(iv) Cash received by the holders of AssureNet Stock in lieu of
fractional shares of AXENT Common Stock will be treated as received as a
distribution in redemption of such fractional shares, subject to the
provisions of Section 302 of the Code, as if such fractional shares had
been issued in the Merger and then redeemed by AXENT;
(v) The tax basis of the shares of AXENT Common Stock received by the
holders of AssureNet Stock in the Merger will be equal to the tax basis of
the shares of AssureNet Stock exchanged therefor in the Merger, reduced by
any basis allocable to a fractional share of AXENT Common Stock treated as
sold or exchanged under Section 302 of the Code; and
(vi) The holding period for the shares of AXENT Common Stock received by
the holders of AssureNet Stock will include the holding period for the
shares of AssureNet Stock exchanged therefor in the Merger, provided that
the shares of AssureNet Stock are held as capital assets at the Effective
Time.
An AssureNet shareholder who exercises dissenters' rights with respect to
all of such holder's shares of AssureNet Stock will generally recognize
gain or loss for federal income tax purposes, measured by the difference
between the holder's basis in such shares and the amount of cash received,
provided that the payment is neither essentially equivalent to a dividend
within the meaning of Section 302 of the Code nor has the effect of a
distribution of a dividend within the meaning of Section 356(a)(2) of the
Code (collectively, a "Dividend Equivalent Transaction"). Such gain or loss
will be capital gain or loss, provided that the AssureNet Stock is held as
a capital asset at the time of the Merger. A sale of AssureNet Stock
pursuant to an exercise of dissenters' rights will generally not be a
Dividend Equivalent Transaction if, as a result of such exercise, the
shareholder exercising dissenters' rights owns no shares of AXENT Common
Stock or AssureNet Stock (either actually or constructively within the
meaning of Section 318 of the Code). If, however, a shareholder's sale for
cash of AssureNet Stock pursuant to an exercise of dissenters' rights is a
Dividend Equivalent Transaction, then such shareholder will generally
recognize ordinary income for federal income tax purposes in an amount up
to the entire amount of cash so received.
Neither AXENT nor AssureNet has requested a ruling from the IRS in connection
with the Merger. However, it is a condition of the respective obligations of
AXENT and AssureNet to consummate the Merger that such parties receive
confirming tax opinions from their respective legal counsel to the effect that
for federal income tax purposes, the Merger will constitute a Reorganization.
The Exhibit Opinion is not intended to satisfy this closing condition. These
closing opinions, which are collectively referred to herein as the "Tax
Opinions," neither bind the IRS nor preclude the IRS from adopting a contrary
position. As with the Exhibit Opinion, the Tax Opinions will be subject to
certain assumptions and qualifications and will be based on the truth and
accuracy of certain representations of AXENT, AssureNet and the Merger
Subsidiary, including representations
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in certain certificates of the respective managements of AXENT, AssureNet and
the Merger Subsidiary dated on or prior to the Closing Date. Of particular
importance will be an assumption that the "continuity of interest" requirement
for treatment of the Merger as a "reorganization" will be satisfied and the
representations (described below) relating to that requirement. To satisfy the
continuity of interest requirement, AssureNet shareholders must not, pursuant
to a plan or intent existing at or prior to the Merger, dispose of or transfer
so much of either (i) their AssureNet Stock in anticipation of the Merger or
(ii) the AXENT Common Stock to be received in the Merger (collectively, "Plan
Dispositions"), that the AssureNet shareholders, as a group, would no longer
have a significant equity interest in the AssureNet business conducted by AXENT
after the Merger. Each counsel rendering a Tax Opinion will receive, as a
condition of issuing such Tax Opinion, representations from AXENT and AssureNet
that neither has knowledge of any such plan or intent and representations from
AssureNet affiliates that they are not participating in and are not aware of
any such plan or intent.
A successful IRS challenge to the Reorganization status of the Merger would
result in an AssureNet shareholder recognizing gain or loss with respect to
each share of AssureNet Stock surrendered equal to the difference between the
shareholder's basis in such share and the fair market value, as of the
Effective Time, of the AXENT Common Stock received in exchange therefor. In
such event, an AssureNet shareholder's aggregate basis in the AXENT Common
Stock so received would equal its fair market value, and the shareholder's
holding period for such stock would begin the day after the Merger.
Even if the Merger qualifies as a Reorganization, a recipient of shares of
AXENT Common Stock would recognize gain to the extent that such shares were
considered to be received in exchange for services or property (other than
solely AssureNet Stock). All or a portion of such gain may be taxable as
ordinary income. Gain would also have to be recognized to the extent that an
AssureNet shareholder was treated as receiving (directly or indirectly)
consideration other than AXENT Common Stock in exchange for the AssureNet
Stock.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of AXENT Common Stock received by AssureNet shareholders in the
Merger will be freely transferable, except that shares of AXENT Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of AssureNet prior to the date of the AssureNet
Special Meeting may be resold by them only in transactions permitted by the
resale provisions of Rule 145 promulgated under the Securities Act or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of AssureNet generally include individuals or entities that control,
are controlled by, or are under common control with, such party and may include
certain officers and directors of AssureNet as well as principal shareholders
of AssureNet. The Merger Agreement requires AssureNet to cause each of its
affiliates to execute a written agreement to the effect that such person will
not offer or sell or otherwise dispose of any of the shares of AXENT Common
Stock issued to such person in or pursuant to the Merger in violation of the
Securities Act or the rules and regulations promulgated by the Commission
thereunder.
Pursuant to Continuity of Interest and Lock-Up Agreements, certain
shareholders of AssureNet have agreed that from the Effective Time through
December 31, 1997, each such shareholder will not sell or otherwise transfer
more than 50,000 shares of AXENT Common Stock to be received in the Merger in
any consecutive ninety (90) day period.
NASDAQ NATIONAL MARKET LISTING
It is a condition to the Merger that the shares of AXENT Common Stock to be
issued pursuant to the Merger Agreement and required to be reserved for
issuance in connection with the Merger be authorized for listing on The Nasdaq
National Market. An application has been filed for listing the shares of AXENT
Common Stock on The Nasdaq National Market.
DISSENTERS' RIGHTS
Pursuant to the terms of the Merger Agreement, if holders of AssureNet Stock
exercise dissenters' rights in connection with the Merger under Section 1300-
1312 of the CGCL ("Section 1300"), any Dissenting Shares
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will not be converted into the right to receive shares of AXENT Common Stock by
virtue of the Merger, but instead will be converted into the right to receive
such consideration as may be determined to be due with respect to such
Dissenting Shares pursuant to the laws of the State of California. The
following summary of the provisions of Section 1300 is not intended to be a
complete statement of such provisions and is qualified in its entirety by
reference to the full text of Section 1300, a copy of which is attached hereto
as Annex C and is incorporated herein by reference.
If the Merger is approved by the required vote of AssureNet shareholders,
each holder of shares of AssureNet Stock who does not vote in favor of the
Merger and who follows the procedures set forth in Section 1300 will be
entitled to have shares of AssureNet Stock purchased by AssureNet for cash at
their fair market value. The fair market value of the shares of AssureNet Stock
will be determined as of the day before the first announcement of the terms of
the proposed Merger, excluding any appreciation or depreciation in consequence
of the proposed Merger and therefore valuing the shares of AssureNet Stock as
if the Merger had not occurred. On December 26, 1996, the AssureNet Board of
Directors determined that the fair market value of shares of its capital stock
equaled $.75 for Common Stock, $1.36 for Series A Preferred Stock, $1.43 for
Series B Preferred Stock and $4.17 for Series C Preferred Stock.
Within ten (10) days after approval of the Merger by AssureNet shareholders,
AssureNet must mail a notice of such approval (the "Approval Notice") to all
shareholders who have not voted in favor of the Merger, together with a
statement of the price determined by AssureNet to represent the fair market
value of the applicable Dissenting Shares, a brief description of the
procedures to be followed in order for the shareholder to pursue dissenters'
rights and a copy of Sections 1300-1304 of the CGCL. The statement of price by
AssureNet constitutes an offer by AssureNet to purchase all Dissenting Shares
at the stated amount.
A shareholder of AssureNet electing to exercise dissenters' rights must,
within thirty (30) days after the date in which the Approval Notice is mailed
to such shareholder, mail or deliver the written demand to AssureNet stating
that such holder is demanding purchase of his or her shares of AssureNet Stock,
stating the number of shares which AssureNet must purchase, what the
shareholder claims to be the fair market value of such shares and enclosing the
share certificates for endorsement by AssureNet.
If AssureNet and the shareholder agree that the shares are Dissenting Shares
and agree upon the price of the shares, AssureNet must pay the shareholder the
agreed upon price plus interest thereon at the legal rate from the date of the
agreement on Dissenting Shares within thirty (30) days from the later of (i)
the date of the agreement on Dissenting Shares, or (ii) the date all
contractual conditions to the Merger are satisfied.
If AssureNet denies that the shares are Dissenting Shares, or if AssureNet
and the shareholder fail to agree upon the fair market value of the shares of
capital stock, then within six (6) months after the date the Approval Notice
was mailed to shareholders, any shareholder who has made a valid written
purchase demand and who has not voted in favor of approval and adoption of the
Merger may file a complaint in California superior court requesting a
determination as to whether the shares are Dissenting Shares or as to the fair
market value of such holder's shares of AssureNet Stock, or both.
Shareholders who receive cash for their shares of AssureNet Stock upon
exercise of dissenters' rights will realize taxable gain or loss. See "--
Certain Federal Income Tax Consequences."
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Annex A to this Prospectus/Proxy
Statement and incorporated herein by reference. Although this section
summarizes the material terms of the Merger Agreement, such summary is
qualified in its entirety by reference to the Merger Agreement. Shareholders of
AssureNet are urged to read the Merger Agreement in its entirety for a more
complete description of the Merger.
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THE MERGER
The Merger Agreement provides that, following the approval and adoption of
the Merger and the Merger Agreement by the shareholders of AssureNet and the
satisfaction or waiver of the other conditions to the Merger, AssureNet will be
merged with and into the Merger Subsidiary, with the Merger Subsidiary
continuing as the Surviving Corporation, which will remain a wholly-owned
subsidiary of AXENT.
If all such conditions to the Merger are satisfied or waived, the Merger will
become effective upon the filing by the Surviving Corporation of a duly
executed Certificate of Merger with the Secretary of State of the State of
Delaware, which is deemed effective in California once filed in Delaware.
CONVERSION OF SECURITIES
Upon consummation of the Merger and without any action on the part of AXENT,
AssureNet or any of AssureNet's shareholders, pursuant to the Merger Agreement,
each issued and outstanding share of AssureNet Stock (other than shares of
AssureNet Stock owned beneficially by AXENT or the Merger Subsidiary, shares of
AssureNet Stock for which demands for dissenters' rights under the CGCL have
been duly and timely delivered) will be converted into the right to receive a
number of shares of AXENT Common Stock determined in accordance with the Merger
Agreement. Assuming, for illustration, that if the Effective Time had been
February , 1997 the AXENT Share Value would have been $ and the Series A
Conversion Ratio would be , the Series B Conversion Ratio would be , the
Series C Conversion Ratio would be , and the Common Stock Conversion Ratio
would be . If any holder of shares of AssureNet Stock would be entitled to
receive a number of shares of AXENT Common Stock that includes a fraction,
then, in lieu of a fractional share, such holder will be entitled to receive
cash in an amount equal to such fractional part of a share of AXENT Common
Stock multiplied by the average of the closing price of AXENT Common Stock, as
reported on The Nasdaq National Market, for the ten (10) trading days ending
three (3) days prior to the Closing Date. Each share of Common Stock of the
Merger Subsidiary issued and outstanding immediately prior to the Effective
Time shall remain outstanding.
Within thirty (30) days after the Effective Time, Boston EquiServ LP (the
"Exchange Agent") will mail transmittal forms and exchange instructions to each
holder of record of AssureNet Stock to be used to surrender and exchange
certificates evidencing shares of AssureNet Stock for certificates evidencing
the shares of AXENT Common Stock to which such holder has become entitled.
After receipt of such transmittal forms, each holder of certificates formerly
representing AssureNet Stock will be able to surrender such certificates to the
Exchange Agent, and each such holder will receive in exchange therefor (subject
to any taxes required to be withheld) certificates evidencing the number of
whole shares of AXENT Common Stock to which such holder is entitled and any
cash which may be payable in lieu of a fractional share of AXENT Common Stock.
Such transmittal forms will be accompanied by instructions specifying other
details of the exchange. ASSURENET SHAREHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM.
After the Effective Time, each certificate evidencing AssureNet Stock, until
so surrendered and exchanged, will be deemed, for all purposes, to evidence
only the right to receive the number of whole shares of AXENT Common Stock
which the holder of such certificate is entitled to receive and the right to
receive any cash payment in lieu of a fractional share of AXENT Common Stock.
The holder of such unexchanged certificate will not be entitled to receive any
dividends or other distributions payable by AXENT until the certificate has
been exchanged. Subject to applicable laws, such dividends and distributions,
together with any cash payment in lieu of a fractional share of AXENT Common
Stock, will be paid without interest.
STOCK OPTION PLANS
At the Effective Time, each outstanding AssureNet Option under AssureNet's
Restated 1982 Stock Option Plan (the "AssureNet Option Plan"), whether vested
or unvested or subject to repurchase by AssureNet following such exercise,
shall be deemed to constitute an option to acquire, on the same terms and
conditions as were applicable under such AssureNet Option, the number of shares
of AXENT Common Stock (rounded down
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to the next lower whole number) equal to the number of shares of AssureNet
Common Stock issuable upon exercise of such AssureNet Option multiplied by the
Common Stock Conversion Ratio, at a price per share (rounded up to the next
higher whole cent) equal to the exercise price per share of such AssureNet
Option divided by the Conversion Ratio. As of February , 1997, options to
acquire shares of AssureNet Common Stock were outstanding under the
AssureNet Option Plan.
AXENT has agreed to reserve for issuance a sufficient number of shares of
AXENT Common Stock for delivery under the AssureNet Option Plan assumed as
described above. As soon as practicable after the Effective Time, and in any
event no later than 45 days after the Closing, AXENT will file a registration
statement on Form S-8 (or any successor form) with respect to the shares of
AXENT Common Stock subject to such options and shall maintain the effectiveness
of such registration statement for so long as such options remain outstanding.
ASSUMPTION OF WARRANTS
At the Effective Time, AXENT agrees to assume AssureNet's obligations under
outstanding warrants to purchase AssureNet Stock. Accordingly, AXENT will agree
to issue upon exercise the number of shares of AXENT Common Stock (rounded down
to the next lower whole number) equal to the number of shares of AssureNet
Stock issuable upon exercise of such warrants multiplied by the Common Stock
Conversion Ratio, at a price per share (rounded up to the next higher whole
cent) equal to the exercise price per share of each such warrant immediately
prior to the Effective Time divided by the Common Stock Conversion Ratio.
AXENT has agreed to provide certain holders of such warrants certain
registration rights with respect to the shares of AXENT Common Stock issuable
to them upon exercise of such warrants.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement includes various customary representations and
warranties of the parties. The Merger Agreement includes representations and
warranties by AssureNet as to, among other things: (i) organization, good
standing and corporate power of AssureNet and its subsidiaries; (ii) ownership
of subsidiaries; (iii) authorization, execution, delivery and enforceability of
the Merger Agreement and related agreements, (iv) the Merger Agreement's
noncontravention of charter documents, mortgages, credit agreements, leases and
other agreements and the need to obtain governmental or third-party consents or
approvals (except for certain approvals or filings specified in the Merger
Agreement); (v) capitalization; (vi) delivery, accuracy and compliance as to
generally accepted accounting principles of AssureNet's financial statements;
(vii) the absence of certain material adverse changes or events; (viii)
undisclosed liabilities; (ix) taxes, tax returns and audits; (x) ownership and
condition of assets; (xi) intellectual property; (xii) real property leases;
(xiii) written arrangements; (iv) insurance; (xv) litigation; (xvi) employees;
(xvii) employee benefit plans; (xviii) environmental matters; (xix) compliance
with laws; (xx) permits; (xxi) interested party transactions; and (xxii)
broker's and finder's fees.
The Merger Agreement also includes representations and warranties by AXENT
and the Merger Subsidiary as to, among other things: (i) organization, good
standing and corporate power of AXENT and the Merger Subsidiary; (ii)
authorization, execution, delivery and enforceability of the Merger Agreement
and related agreements; (iii) the Merger Agreement's noncontravention of
charter documents, mortgages, credit agreements, leases and other agreements,
and absence of any need to obtain governmental or third-party consents or
approvals (except for certain approvals or filings specified in the Merger
Agreement); (iv) capitalization; (v) issuance of AXENT Common Stock in the
Merger; (vi) documents and financial statements filed by AXENT with the
Commission and the accuracy of information contained therein; (vii) the absence
of certain material adverse changes or events; (viii) broker's and finder's
fees; (ix) undisclosed liabilities; (x) taxes, tax returns and audits; (xi)
litigation; (xii) compliance with laws; (xiii) intellectual property; (xiv)
employee benefit plans; and (xv) the lack of requirement for an AXENT
stockholder vote.
CERTAIN COVENANTS AND AGREEMENTS
Each of the parties to the Merger Agreement has agreed to: (i) use its best
efforts to consummate the transactions contemplated by the Merger Agreement;
(ii) use its best efforts to obtain all waivers, permits,
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consents, approvals or other authorizations from third parties and governmental
entities necessary for the consummation of the transactions contemplated by the
Merger Agreement; (iii) jointly prepare and file with the Commission the
Registration Statement and this Prospectus/Proxy Statement; and (iv) promptly
notify the other party in writing of the occurrence of any event or development
that would (a) render any statement, representation or warranty of any other
party in the Merger Agreement inaccurate or incomplete in any material respect
or (b) constitute or result in a breach by any other party or failure by any
other party to comply with any agreement or covenant in the Merger Agreement
applicable to such party.
AssureNet has also agreed that, during the period from the date of the Merger
Agreement until the Effective Time, except as contemplated by the Merger
Agreement, AssureNet and its subsidiaries: (i) will carry on its business in
the ordinary course in substantially the same manner as previously conducted
and in compliance with applicable laws and regulations, including the use of
reasonable efforts to (a) preserve intact its current business organization,
(b) keep its physical assets in good working condition, (c) keep available the
services of its current officers and employees and (d) preserve its
relationships with customers, suppliers and others having business dealings
with it; (ii) will not, without the written consent of AXENT: (a) issue,
authorize the issuance of, redeem or repurchase any shares of its capital stock
or securities convertible into shares of its capital stock, or any rights,
warrants or options to acquire, or other agreements obligating it to issue any
such shares or other convertible securities, subject to certain exceptions; (b)
split, combine or reclassify any shares of its capital stock or declare or pay
any dividends on or make other distributions in respect of any of its capital
stock; (c) create, incur or assume indebtedness (or guarantees thereof), assume
or guarantee the obligations of any other person or entity, or make any loans
or advances to or investments in any other person or entity other than in the
ordinary course of business consistent with past practice; (d) increase the
compensation payable to its officers or employees (except for increases in the
ordinary course of business consistent with past practice) or establish, adopt,
enter into or amend any plan for the benefit of its directors, officers or
employees, subject to certain exceptions; (e) acquire, sell, lease, encumber or
dispose of any assets or property, other than in the ordinary course of
business consistent with past practice; (f) amend its charter or by-laws; (g)
change in any material respect its accounting methods, principles or practices,
subject to certain exceptions; (h) pay any obligation or liability other than
in the ordinary course of business consistent with past practice; (i) mortgage
or pledge any of its properties or assets or subject any such assets to any
Security Interest (as defined in the Merger Agreement); (j) sell, assign,
transfer or license any Intellectual Property (as defined in the Merger
Agreement) other than in the ordinary course of business consistent with past
practice; (k) enter into, amend, terminate, take or omit to take any action
that would constitute a violation of or default under any material contract or
agreement; (l) make or commit to make any capital expenditure in excess of
$50,000 per item; (m) take any action or fail to take any action with the
knowledge that such action or failure to take action would result in any of its
representations and warranties in the Merger Agreement becoming untrue or any
of the conditions of closing not being satisfied; (n) hire, terminate or
discharge any employee or engage or terminate any consultant; and (o) agree in
writing or otherwise to take any of the above actions.
Concurrent with the execution of the Merger Agreement, AssureNet and AXENT
entered into a Management Agreement pursuant to which AXENT has full power and
authority to manage the business and operations of AssureNet from January 6,
1997 to the Effective Time, unless the Management Agreement is otherwise
terminated, provided, however, that AXENT will use its best efforts to consult
with and inform appropriate officers of AssureNet regarding actions proposed to
be taken under the Management Agreement and will obtain the approval of
AssureNet's Board if required under AssureNet's charter documents or California
law. See "--Related Agreements."
NO SOLICITATION
The Merger Agreement provides that AssureNet will not, directly or
indirectly, and will use its best efforts to cause its officers, directors,
employees, representatives and agents not to solicit, initiate, engage or
participate in or knowingly encourage discussions or negotiations with any
person or entity concerning any merger, consolidation, business combination,
sale of material assets, sale of shares of capital stock or similar
transactions involving AssureNet or any of its subsidiaries, other than the
transactions contemplated by the Merger
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Agreement (any of the foregoing being referred to as an "Acquisition
Proposal"), provided, however, that pursuant to the Merger Agreement, the
AssureNet Board of Directors may accept an unsolicited Acquisition Proposal if
the Board makes a "Fiduciary Determination" (as defined in the Merger
Agreement) with respect thereto. See "--Termination." AssureNet is required to
immediately notify AXENT of, and to disclose to AXENT all details of, any
inquiries, discussions or negotiations relating to an Acquisition Proposal
after receipt of any Acquisition Proposal.
RELATED MATTERS AFTER THE MERGER
At the Effective Time, AssureNet will be merged with and into the Merger
Subsidiary, and the Merger Subsidiary will be the Surviving Corporation and
remain a wholly-owned subsidiary of AXENT. Each share of AssureNet Stock issued
and outstanding immediately prior to the Effective Time will be converted into
and exchanged for validly issued, fully paid and nonassessable shares of AXENT
Common Stock, determined according to the appropriate Conversion Ratios. Each
stock certificate of the Merger Subsidiary evidencing ownership of any such
shares shall remain outstanding.
Except for the corporate name change, at the Effective Time the Certificate
of Incorporation and By-Laws of the Merger Subsidiary as in effect immediately
prior to the Effective Time will be the Certificate of Incorporation and By-
Laws of the Surviving Corporation.
The directors and others of the Merger Subsidiary shall remain as directors
and officers of the Surviving Corporation after the Effective Time. As a
result, none of AssureNet's present directors or officers will become a
director or officer of the Surviving Corporation.
CONDITIONS
The respective obligations of AXENT and AssureNet to effect the Merger are
subject to the following conditions, among others that: (i) the Merger and the
Merger Agreement shall have been approved and adopted by the shareholders of
AssureNet; (ii) the Registration Statement shall have become effective and
shall not be the subject of a stop order or proceedings seeking a stop order;
(iii) no temporary restraining order, preliminary or permanent injunction or
other order shall be in effect nor shall there be any proceeding seeking any of
the foregoing that prevents, or seeks to prevent, the consummation of the
Merger; (iv) no action shall be taken, nor any statute, rule, regulation, or
order enacted, entered, enforced or deemed applicable to the Merger which makes
the consummation of the Merger illegal; (v) receipt by AXENT of all state
securities or "Blue Sky" permits and other authorizations necessary to issue
shares of AXENT Common Stock pursuant to the Merger; (vi) receipt by AXENT of a
written opinion from Piper & Marbury L.L.P, counsel to AXENT, and receipt by
AssureNet of an opinion of Brobeck, Phleger & Harrison LLP, counsel to
AssureNet, both to the effect that the Merger will be treated for Federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code (see "The Merger--Certain Federal Income Tax Consequences"); (vii) the
authorization of the shares of AXENT Common Stock to be issued in the Merger
for listing on The Nasdaq National Market; and (viii) certain shareholders and
affiliates of AssureNet shall have executed and delivered continuity of
interest agreements relating to the tax-free treatment of the business
combination to be effected by the Merger.
The obligation of AXENT to consummate the Merger also is subject to certain
additional conditions, including, among others that: (i) AssureNet shall have
received all material waivers, permits, consents, approvals or other
authorizations; (ii) as of the Closing Date, AssureNet's representations and
warranties contained in the Merger Agreement shall be true and correct in all
material respects as of the date of the Merger Agreement; (iii)
AXENT shall have received from Brobeck, Phleger & Harrison LLP, counsel to
AssureNet, an opinion in the form set forth as Exhibit C to the Merger
Agreement; (iv) AXENT shall have received a "comfort letter" dated as of a date
not more than two days prior to the date that the Registration Statement is
declared effective and shall have received a subsequent similar letter dated as
of a date not more than two days prior to the Effective Time from Arthur
Andersen LLP, auditors for AssureNet, in a customary form reasonably
satisfactory to AXENT; and (v) AXENT shall have received the resignations,
effective as of the Effective Time, of each director of AssureNet and its
subsidiaries.
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The obligation of AssureNet to consummate the Merger is subject to certain
additional conditions, including among others that: (i) as of the Closing Date,
the representations and warranties of AXENT and the Merger Subsidiary contained
in the Merger Agreement shall be true and correct in all material respects as
of the date of the Merger Agreement; (ii) AssureNet shall have received from
Piper & Marbury L.L.P., counsel to AXENT and the Merger Subsidiary, an opinion
in the form set forth as Exhibit D to the Merger Agreement; and (iii) the
holders of certain of AssureNet's warrants shall have been granted all forms of
registration rights pursuant to an amendment to AXENT's Registration Rights
Agreement dated December 10, 1992.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the shareholders of AssureNet:
(i) by mutual written consent of AXENT and AssureNet;
(ii) by AXENT or AssureNet, if, at the AssureNet Special Meeting
(including any adjournment or postponement thereof), the requisite vote of
the shareholders of AssureNet in favor of the Merger Agreement and the
Merger shall not have been obtained;
(iii) by either AXENT or AssureNet if the Merger shall not have been
consummated by April 11, 1997;
(iv) by AssureNet if the AXENT Share Value is less than $14.00; or
(v) by AssureNet if AssureNet's Board of Directors makes a "Fiduciary
Determination" (as defined in the Merger Agreement).
In the event of any termination of the Merger Agreement by either AXENT or
AssureNet as provided above, the Merger Agreement will become void and there
will be no liability or obligation on the part of AXENT, AssureNet or the
Merger Subsidiary, except to the extent that such termination results from the
breach of the Merger Agreement. If either party terminates the Merger Agreement
for reasons described in clauses (i) through (iv), that party has no liability
to the other except for liability for any breaches of covenants (but not
warranties and representations) in the Merger Agreement, which liability will
not exceed a total of $1,000,000. If AssureNet terminates the Merger Agreement
as a result of a "Fiduciary Determination," AssureNet is required to pay a fee
to AXENT equal to five percent of the value of the aggregate consideration
provided for in the Merger Agreement (calculated based on the value of AXENT
Common Stock on the date AXENT receives notice of termination) plus reasonable
transaction costs.
Whether or not the Merger is consummated, all fees, costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby shall be paid by the party incurring such expenses.
AMENDMENT AND WAIVER
The Merger Agreement may be amended at any time by written authorization of
the Boards of Directors of both AXENT and AssureNet, but after approval by the
shareholders of AssureNet of the matters presented in connection with the
Merger to them, no amendment shall be made which by law requires further
approval by such shareholders, without such further approval. AXENT and
AssureNet, by action taken or authorized by their respective Boards of
Directors, may extend the time for performance of the obligations or other acts
of the other parties to the Merger Agreement, may waive inaccuracies in the
representations or warranties contained in the Merger Agreement and may waive
compliance with any agreements or conditions contained in the Merger Agreement.
RELATED AGREEMENTS
The agreements summarized below are related to the Merger Agreement and the
transactions contemplated thereby.
SHAREHOLDER AGREEMENTS. Concurrent with the execution of the Merger
Agreement, certain shareholders (the "Principal Shareholders"), who, as of
January 6, 1997, held in the aggregate approximately 65% of the
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outstanding AssureNet Common Stock, 67% of the AssureNet Preferred Stock (on an
as converted basis) and 100% of the Series C Preferred Stock of AssureNet, each
entered into a Shareholder Agreement with AssureNet and AXENT, the form of
which is attached hereto as Annex C.
Pursuant to the terms of the Shareholder Agreements, the Principal
Shareholders have agreed that until the Merger shall have occurred, or such
earlier date on which the Merger Agreement is terminated in accordance with its
terms, such Principal Shareholders will not transfer, sell, exchange, pledge or
otherwise encumber any shares of AssureNet Stock owned or acquired prior to or
during such period.
The Principal Shareholders have also agreed pursuant to the Shareholder
Agreements to vote their shares of capital stock of AssureNet in favor of
approval and adoption of the Merger and the Merger Agreement and against
approval of any proposal made in opposition to or in competition with the
consummation of the Merger, including any other merger, consolidation, sale of
assets, reorganization, recapitalization or the dissolution of AssureNet (each,
an "Opposing Proposal"). In connection with such obligations, each Principal
Shareholder has granted AXENT an irrevocable proxy authorizing AXENT nominees,
at any time prior to the Effective Time or the termination of the Merger
Agreement, to vote all shares of capital stock of AssureNet owned by such
Principal Shareholder in favor of approval of the Merger Agreement and the
Merger and against approval of any Opposing Proposal.
MANAGEMENT AGREEMENT. Concurrent with the execution of the Merger Agreement,
AssureNet and AXENT entered into a Management Agreement, the form of which is
Exhibit G to the Merger Agreement. The parties entered into the Management
Agreement with the expectation that the Merger would be consummated and that,
in the interim, the parties would benefit if AXENT could make and implement
good faith decisions to integrate the operations and products of AssureNet with
those of AXENT. AXENT has full power and authority under the Management
Agreement to manage the operations of AssureNet from January 6, 1997 to the
Effective Time of the Merger, unless the Management Agreement is otherwise
terminated. AXENT's powers on behalf of AssureNet include, but are not limited
to, borrowing and repaying funds, paying creditors and otherwise disbursing
funds, managing and directing the production, enhancement, licensing,
distribution and marketing of AssureNet's hardware and software products,
developing new products, hiring and terminating employees of AssureNet,
directing the performance of AssureNet's existing contractual obligations and
negotiating and entering into contracts (so long as no individual contract
requires the expenditure of more than $300,000) on behalf of AssureNet. AXENT
will use its best efforts to consult with and inform the Chief Financial
Officer (or other appropriate officer) of AssureNet of actions proposed to be
taken under the Management Agreement, and will obtain the approval of
AssureNet's directors if required under AssureNet's charter documents or
California law. AXENT will use its reasonable business judgment and will treat
AssureNet's assets as it treats its own assets in the course of operating
AXENT's own business. AXENT will receive no fees for its services under the
Management Agreement, but will be reimbursed by AssureNet for equipment,
reasonable travel costs and related expenses incurred under the Management
Agreement. The parties have agreed to indemnify each other for breaches or
violations of the terms of the Management Agreement. AXENT has additionally
agreed to indemnify AssureNet and its officers, directors, employees and
shareholders against losses arising from AXENT's willful misfeasance, gross
negligence or reckless disregard of its duties. Prior to the Effective Time,
the Management Agreement terminates automatically if the Merger Agreement
terminates and may be terminated by AXENT at any time.
CONTINUITY OF INTEREST AND LOCK UP AGREEMENTS. Certain shareholders of
AssureNet have agreed that from the Effective Time through December 31, 1997,
each such shareholder will not sell or otherwise transfer more than 50,000
shares of AXENT Common Stock to be received in the Merger in any consecutive
ninety (90) day period.
REGISTRATION RIGHTS. AXENT has agreed to provide certain holders of warrants
to purchase AssureNet Common Stock certain registration rights with respect to
the shares of AXENT Common Stock issuable to them upon exercise of such
warrants after conversion into warrants to purchase AXENT Common Stock as
described in the Merger Agreement.
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AXENT BUSINESS
In addition to the historical information contained herein, this
Prospectus/Proxy Statement contains forward-looking statements which involve
risks and uncertainties. AXENT's and AssureNet's actual results may differ
significantly from those discussed herein. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--AXENT" as well as those discussed elsewhere in this
Prospectus/Proxy Statement.
AXENT develops, markets, licenses and supports computer security solutions
for enterprise computing environments. AXENT's OmniGuard family is a suite of
software products which provides a comprehensive solution to a wide range of
computer security requirements across multiple computing platforms. OmniGuard
products enable organizations to centrally manage computer security functions.
In addition, OmniGuard products provide data confidentiality, access control,
user administration, monitoring, and intrusion detection across local area
networks ("LANs"), the Internet and intranets and on personal computers,
computers running NT, UNIX, NetWare, and other midrange and mainframe
operating systems. AXENT addresses the growing requirement for comprehensive
security solutions as organizations migrate from centralized, proprietary
computing platforms to distributed, heterogeneous client/server environments
accessible from both internal networks and external networks, such as the
Internet. AXENT believes that enterprise security is best addressed primarily
as a business problem rather than a technological one and that its OmniGuard
family of software products and related consulting services enable
organizations to select, install, manage and maintain robust yet cost-
effective security solutions appropriate for their businesses.
The increasing capabilities and declining cost of desktop computers and
workstations, coupled with improvements in network communications technology,
have motivated many organizations to transition from host-centric systems
dominated by mainframes or minicomputers to distributed, client/server
environments. As these environments become widespread, they have been
increasingly used for mission-critical applications. As a result, sensitive
corporate information has become distributed across client/server networks,
where the level of security readily attainable on host-centric systems is much
more difficult to achieve. Organizations have therefore developed a growing
need for comprehensive client/server oriented information security solutions.
AXENT's OmniGuard family of software products consists of Enterprise
Security Manager (ESM), Intruder Alert (ITA), Enterprise Access Control (EAC),
UNIX Privilege Manager (UPM), and Enterprise Resource Manager (ERM--formerly
referred to as Enterprise SignOn or ESO), each of which is available across a
variety of common computing platforms. These products may be used in
combination to provide a comprehensive information security solution for the
enterprise or individually to fulfill a specific need. ESM, AXENT's flagship
product, provides a framework that enables business managers to centrally
define, manage and enforce security policies across a distributed,
heterogeneous computing environment and works with other OmniGuard and third-
party security products. OmniGuard can also be part of a broader systems
management strategy and can be used in conjunction with client/server
administration platforms such as AT&T's OneVision, MC/EMpower of MainControl,
Inc., Hewlett-Packard's OpenView and Tivoli's Tivoli Management Environment.
AXENT owns a line of utility software products for the OpenVMS platform that
is now marketed by Raxco, pursuant to an Exclusive Distributor License
Agreement. Raxco was spun-off by AXENT as of December 31, 1995. AXENT also
owns and markets several security products developed for OpenVMS systems that
are predecessors of the OmniGuard family of software products.
INDUSTRY BACKGROUND
As organizations migrate from centralized, proprietary computing toward
distributed client/server environments, mission-critical applications for
payroll, financial reporting, order processing, billing, manufacturing design,
funds transfer and medical records are increasingly being deployed on networks
of personal computers, workstations and servers. Client/server environments,
however, present significant challenges in designing and implementing
information security functions which were not as difficult in the traditional
centralized environment. These challenges include the following:
. Physically dispersed storage of sensitive corporate information. In the
centralized computing environment, sensitive corporate data was
physically stored in one or a few controlled sites, allowing for
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strict access control. In a client/server environment, information may be
scattered across thousands of file servers, desktop computers and laptops,
providing multiple points of access. Thus, information can be easily
removed on a floppy disk or portable hard drive or sent out of the
protected environment over external networks.
. Wide access to information. In contrast to the centralized computing
environment where access to data was restricted to one or a few consoles
or a number of dumb terminals linked through a controlled, proprietary
internal network, the client/server environment frequently allows access
to information from a number of locations either within the internal
network or on external networks, such as the Internet. In addition, in
the less secure client/server environment, the network traffic itself can
be monitored by unauthorized parties.
. Multiple platform computing environment. While the centralized computing
environment can utilize a single technical architecture for security
functions, the client/server environment forces organizations to
implement security measures across a broad range of disparate computing
hardware, operating systems and communications protocols. Different
platforms included in a network are likely to provide inconsistent levels
of security.
The conflict between the benefit of easy access to information inherent in
the client/server computing environment and the need to protect and secure
corporate information requires a new generation of security software
solutions. These solutions must be specifically designed to function in large-
scale, multi-platform computing environments while providing the same level of
protection and security functionality expected of a centralized computing
environment. Security solutions must:
. Manage security. Enable management to centrally define, manage, implement
and enforce corporate security policies which are tailored to the
specific needs of their business;
. Control access. Control access to computing resources such as clients,
servers or the network;
. Identify and authenticate. Ensure the identity of users attempting to
access computing resources;
. Protect information. Preserve the confidentiality and integrity of
information by ensuring that only those with proper authority may view,
monitor, modify or delete information;
. Administer users. Centrally administer the user's credentials and
privileges; and
. Audit. Monitor all systems to detect and prevent intrusions or
unauthorized actions.
The operating systems of most distributed computing platforms and most
third-party products generally address only some of these needs. In addition,
few vendors provide centralized security management for heterogeneous
environments. In an enterprise computing environment, all of these functions
must be available on all parts of a client/server network--client, internal
network, server and connections to external networks such as the Internet--to
provide robust security. Therefore, any comprehensive enterprise solution
needs to address these key functions across multiple client/server platforms
and communication protocols and be tied together by an enterprise security
framework.
THE AXENT TECHNOLOGIES SOLUTION
AXENT's OmniGuard family of software products, together with its related
consulting services, provides a comprehensive security solution based on
AXENT's belief that corporate security policy, determined by the specific
needs of the business, must be the foundation for the development and
implementation of information security. ESM provides an enterprise security
framework that ties together security functions--whether such functions are
provided by AXENT's products, the operating system, the network or other
vendors' products--and enables the organization's management to relate those
functions to business goals and objectives. AXENT's products provide a
comprehensive security solution that can manage and enhance the security
capabilities already resident in a wide range of distributed computing
platforms.
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OmniGuard's features enable organizations to establish appropriate security
policies based on business needs and risk analysis, including the need for
central control of the level of security on all platforms, status reporting
and enforcing corporate security policy. OmniGuard ensures that only
authorized users have access to computing resources such as clients and
servers or the network itself, and monitors all systems in order to detect and
prevent intrusions or unauthorized actions. OmniGuard authenticates users
logging into the network and preserves the confidentiality and integrity of
information by allowing only those who have proper authority to view, monitor,
modify or delete information. OmniGuard also enables the security
administrator to establish authorized users, create, modify and delete user
privileges, and manage the credentials of users.
The OmniGuard solution incorporates the following key elements:
Enables organizations to establish security policy to match business
needs. As part of its security solution, AXENT provides services that
enable an organization to determine an appropriate security policy to match
its business requirements, to adopt a solution to fit those requirements
and to incorporate those policies into the OmniGuard framework.
Provides open security framework that manages AXENT or third-party
security solutions. ESM enables business managers to centrally manage
security across a distributed multi-platform client/server computing
environment and works with other OmniGuard and third-party products. The
OmniGuard family of software products can also be integrated into a broader
systems management environment and can be used in conjunction with widely
deployed client/server administration platforms. An important benefit of
OmniGuard's framework-based, open-component approach is that an
organization can use the most appropriate security technology to manage a
particular security issue. OmniGuard is designed with an open architecture.
It uses a published application program interface ("API") and has an
optionally available software development kit which enables customer-
developed applications or other third party products to be integrated into
the OmniGuard security management framework.
Provides security component solutions that can be used stand-alone or as
part of AXENT's framework. AXENT currently offers Intruder Alert and
Enterprise Access Control, individually or as part of its OmniGuard family
of software products. AXENT is also developing OmniGuard/Enterprise
Resource Manager (ERM), which is a family of products to administer users
and other computing resources as well as provide one-time identification
and authentication of network users. ERM is currently in beta testing with
commercial availability planned for March 1997. See "--Product
Development." Customers can use existing and planned individual OmniGuard
products to satisfy a specific security need or to address security issues
on a specific platform. While each product can function independently of
other OmniGuard components, OmniGuard products can also be combined to
provide a more comprehensive security solution that supports environments
ranging in size from a single desktop up to and including global,
enterprise-wide environments.
Enables easy management of security across heterogeneous computing
environments. OmniGuard enables security administrators to manage security
across multiple heterogeneous platforms from a central workstation. Each of
OmniGuard's Windows- and UNIX Motif-based graphical user interfaces enables
an administrator to centrally establish security policies, evaluate
security status, monitor and prevent unauthorized actions, detect and
prevent Internet intrusions administer users, and make changes to security
settings for the systems being managed. Because OmniGuard displays security
information in an easy to understand graphical format, security
administrators can manage multiple types of systems without the necessity
of knowing the specific capabilities or user interfaces of each of the
operating systems in the administered environment.
Leverages security capabilities of existing systems and provides
mainframe-level security and functionality across various operating
systems. Most client/server operating systems provide limited security
functionality while some, such as common personal computer operating
systems, provide none. AXENT's solution enhances the information security
capabilities of host operating systems and network operating systems to
provide mainframe-level security functionality on a wide variety of
client/server computing platforms.
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Supports multiple operating systems, network operating systems and
network protocols. OmniGuard supports a range of popular operating systems
including MS/DOS, Windows 3.x, Windows 95, Windows NT, UNIX, NetWare and
OpenVMS, and interfaces with mainframe security products, such as
IBM's RACF and Computer Associates' ACF 2. OmniGuard also works with most
popular network protocols, including TCP/IP, NetWare IPX and DECNet. See
"--Product Development."
STRATEGY
AXENT's objective is to be the leading provider of information security
solutions for enterprise computing environments. Key elements of AXENT's
strategy to attain this objective are:
Provide comprehensive business security solutions. AXENT seeks to provide
a comprehensive family of products that addresses most, if not all, of an
organization's enterprise security requirements. AXENT intends to add new
products, enhance existing functions and increase the number of platforms
supported by the OmniGuard family of products. AXENT believes that adding
new products and functions to the OmniGuard family will allow AXENT to
market new technology to current customers while it expands its customer
base.
AXENT is currently developing OmniGuard/Enterprise Resource Manager
(ERM), a product designed to provide central user administration, network-
wide identification and authorization, and secure, one-time sign-on to an
organization's network. Using ERM, administrators will be able to centrally
create, modify and delete users and their security profiles across
disparate platforms. ERM is also designed to provide network-wide
identification and authentication to enable users to sign-on to the network
once and gain secure access to heterogeneous application servers. AXENT
intends to design future releases of ERM to support multiple authentication
methods, including smart cards, tokens, DCE authentication services and
Kerberos.
Support multiple platforms. AXENT believes that OmniGuard's depth of
product functionality and breadth of platform support give it an advantage
over its competitors. Because of the difficulty in developing software
products that function across multiple, disparate platforms, AXENT believes
that its technology leadership creates a significant barrier to entry for
single platform vendors that attempt to support multiple platforms. AXENT
has invested heavily in developing several cross-platform technologies
which serve as the core of OmniGuard and provide hard-to-duplicate product
features. See "--Product Development."
Provide consulting services to enhance product offerings. AXENT believes
that there is a significant need for technical expertise in deploying
client/server security solutions. AXENT has an experienced consulting
services group that supplies services before, during and after an OmniGuard
sale, in order to configure a security solution appropriate to an
enterprise's needs. AXENT intends to expand its consulting services
business to enable faster implementation and roll-out of AXENT's products.
Increase market penetration with multiple channels. AXENT currently has a
targeted distribution strategy aimed at large corporate customers using a
mix of direct sales, original equipment manufacturers ("OEMs"), system
integrators and distributors, both domestically and abroad. AXENT plans to
increase market penetration by increasing the productivity of its direct
sales channel and expanding its indirect distribution channels. AXENT has
marketing relationships with several large computer and professional
services companies. AXENT intends to solidify and expand the existing
relationships and develop strategic partnerships in order to become the
security standard for client/server computing environments inside major
systems management frameworks.
TECHNOLOGY
AXENT's OmniGuard family of software products is designed to allow
organizations to centrally manage information security in client/server
computing environments. OmniGuard products can be deployed on a stand-alone
basis as well as in client/server environments with thousands of machines. A
typical OmniGuard product deployment contains three main components: graphical
user interface, managers and agents. The graphical user interface can reside
on either a UNIX workstation running Motif or on a personal computer running
Microsoft Windows. The manager/agent architecture enables OmniGuard to scale
up to large client/server computing environments.
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A manager typically resides on a server and connects to the graphical user
interface over the network. Functions common to all managed platforms are
implemented in the manager. Functions specific to a particular platform are
implemented in the agents. Agents contain most of the processor-intensive code
and report only summary information or alarms to a manager. A manager
aggregates information from the agents and presents it to the administrator
through the graphical user interface. Conversely, instructions given through
the graphical user interface to the manager can be implemented on multiple
agents. AXENT has designed trusted communications paths intended to prevent
the interception or unauthorized manipulation of the data traffic among the
managers, agents and graphical user interface.
With the OmniGuard software products, the graphical user interface, manager
and agent software can all reside on different platforms. For example, the
graphical user interface can reside on a PC using Microsoft Windows, while the
manager runs on a Novell, Inc. ("Novell") NetWare server and the agents run on
a mix of PCs, UNIX servers, Novell servers and OpenVMS platforms. OmniGuard
managers communicate with agents over the native communications protocol for
each respective platform. In other words, NetWare managers communicate with
NetWare agents using IPX and with UNIX agents using TCP/IP.
PRODUCTS AND SERVICES
OmniGuard Products
AXENT's OmniGuard family of software products provides business managers
with a framework and the capability to centrally manage corporate information
security across client/server environments.
OMNIGUARD PRODUCTS
<TABLE>
<CAPTION>
SINGLE COPY PLATFORMS DATE OF COMMERCIAL
PRODUCT NAME LIST PRICE SUPPORTED INTRODUCTION DESCRIPTION
------------ ----------- -------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Enterprise Security
Manager................ $ 395-3,995 NetWare 3.x + 4.x, 11/94 Centralized
Windows NT, security management
UNIX, OpenVMS across distributed
Windows multi-platform
client/server
computing
environments
Intruder Alert.......... $ 395-3,995 NetWare 3.x + 4.x, 4/95 Detection of and
UNIX, OpenVMS, automated response
Windows NT to unauthorized
Windows activity across
multi-platform
client/server
computing
environments
Enterprise Access
Control for UNIX....... $ 393-3,995 UNIX 4/95 Central
administration of
users and secure
authentication
across
heterogeneous UNIX
environments
Enterprise Access
Control for PCs........ $139 MS/DOS + Windows 3.x 5/95 Central definition
and control of user
access to computing
resources and
automatic file
encryption for
MS/DOS and Windows
3.x PCs
Enterprise Access
Control for Windows
95..................... $139 Windows 95 10/96 Central definition
and control of user
access to computing
resources and
automatic file
encryption for
Windows 95 PCs
UNIX Privilege Manager.. $99-$1,995 UNIX 10/96 Centralized control
of UNIX root
privilege
Enterprise Resource
Manager................ $95-$19,950 Netware 3.x + 4.x, Planned Centralized
Banyan, UNIX, for the administration of
Windows, Netscape first quarter users and other
of 1997 computing resources
as well as one-time
identification and
authentication of
network users
</TABLE>
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. OmniGuard/Enterprise Security Manager. ESM, AXENT's flagship product,
enables a security manager to centrally define, manage and enforce
information security policies in enterprise computing environments and
works with other OmniGuard and third-party security products. ESM is a
security management framework that enables the establishment of security
policies based on business risk analysis, central control of the level of
security on all platforms, determination of the status of information
security in the enterprise and enforcement of corporate security policy.
ESM security policies can be applied to a single user or machine, a group
of users or machines, or to an entire organization. ESM integrates
security functionality from the operating system with the functionality
provided by it and other OmniGuard products as well as third-party
security products. With an easy-to-use graphical user interface, ESM
permits information security administrators to quickly assess the overall
status of corporate information security and analyze weak areas. ESM
periodically monitors the entire network for viruses, worms, weak
passwords, trap doors, modifications to key programs or files, users with
unauthorized privileges, Internet vulnerabilities and other security
threats.
. OmniGuard/Intruder Alert. ITA permits information security administrators
to monitor an organization's network for suspicious events in real time.
Using a graphical user interface, a security manager can define rules and
desired reactions to unauthorized events across heterogeneous UNIX,
NetWare, Windows NT, and personal computer platforms on the
organization's network. ITA uses knowledge-based technology to correlate
multiple events across multiple machines to determine if a security
violation has occurred. In addition to logging an event, ITA can alert
the security administrator of significant security threats in real time
via a message to the administrator's workstation, E-mail or pager. ITA
can also take active measures to control security such as disconnecting a
session, shutting down an application, blocking an external Internet
address or alerting an Internet firewall to block a particular type of
access.
. OmniGuard/Enterprise Access Control for UNIX. EAC/UNIX allows managers to
centrally define and control access to information across a range of
different UNIX platforms and supplements built-in native UNIX security
features. Security administrators may assign users to groups and define
password control features such as length, time-of-day access restrictions
and requirements to periodically change passwords. Unattended
workstations can also be locked based on selected criteria. In addition,
EAC/UNIX provides an intuitive graphical user interface for adding,
modifying and deleting users across heterogeneous UNIX platforms.
. OmniGuard/Enterprise Access Control for PC's and Windows 95s. EAC allows
managers to centrally control access to information stored on MS-DOS,
Windows 3.x or Windows 95-based desktop computers through user
identification and authentication functions, providing these systems with
security functionality meeting U.S. Government "C2" functionality
guidelines. EAC allows system administrators to define file-level
discretionary access controls and automatically encrypts protected files.
EAC transparently enforces those controls no matter where such files
reside. If a file is protected by EAC, only authorized users can access
that file on the local hard drive, on a network server or as it is
transferred over either internal or external networks. EAC also offers
features such as single sign-on to network servers and secure deletion of
protected files.
. OmniGuard/UNIX Privilege Manager. UPM enables users to execute programs
or commands that ordinarily require UNIX root privileges without having
to give the user access to the root account. In addition, UPM provides a
full and indelible audit trail of all actions occurring in important
accounts such as root.
. OmniGuard/Enterprise Resource Manager (formerly called Enterprise
SignOn). ERM is a family of products designed to administer users and
other computing resources as well as identify and authenticate network
users. ERM provides a single point of user administration and resource
management for PCs, NT, UNIX, NetWare, Banyan, Internet, mainframes and
other applications. In addition, ERM enables users to log-on once to an
enterprise security server and gain secure access to all network
resources they are authorized to run. ERM is currently in beta testing
with commercial availability planned for the first quarter of 1997.
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OpenVMS Security Products
AXENT markets several security products which are predecessors to the
OmniGuard family of software products. AXENT developed these products for
OpenVMS systems. These products provide improved access control, full system
monitoring, automated reporting and analysis, and security auditing and
assessment.
OpenVMS Utility Products
As of December 31, 1995, AXENT transferred to Raxco the marketing,
distribution and maintenance rights to AXENT's OpenVMS utility software
products. The products marketed and distributed by Raxco include nine products
that provide system management and performance enhancement functions for the
OpenVMS system. All of these products run on Digital's VAX and Alpha
platforms. The products automate time and labor intensive tasks, such as
defragmentation and optimization of disk files, memory tuning, input and
output caching and user support functions. The benefits of the products
include simplified system management, faster response times, higher system
throughput and improved end-user productivity. The products are sold
separately and in technology-integrated packages that provide single-source
solutions to the OpenVMS customer base.
Services
In addition to its software products, AXENT provides fee-based, on-site
consulting and training services through a group of 27 information security
analysts. AXENT's information security analysts deliver standardized fixed-
price consulting packages that can provide customers with an objective
assessment of their existing security systems, identify shortcomings in their
computers or networks and suggest corrective actions. The analysts, on a fee
basis, assist with information risk analysis, develop security policy,
implement AXENT's products and help organizations securely connect to the
Internet. The analysts also design customized consulting packages to help
customers analyze their information security requirements, integrate in-house
security products into the OmniGuard framework or develop customized
information security solutions. In addition, the analysts provide pre-sales
assistance for customers evaluating AXENT's software products.
AXENT believes that a high level of continuing customer service and support
is required in order to be successful in the enterprise information security
market. All customers who enter into maintenance agreements with AXENT are
provided normal business hours telephone support, staffed by experienced
information security professionals. For an additional charge, customers can
receive telephone support twenty-four hours a day, seven days a week. All
customers who enter into maintenance agreements with AXENT receive free
upgrades and enhancements to the current products that are made generally
available and access to technical support personnel for answers to product
related questions.
AXENT offers a comprehensive, standardized education and training program to
end-users of its products. Training classes are offered through in-house
facilities at AXENT's offices in Provo, Utah, as well as at customer
locations. AXENT also provides on-site training services upon request by
customers. Fees for educational and training services are charged separately
from AXENT's software products.
SALES AND MARKETING
AXENT markets its products and services through a 38 person direct sales
organization and through a mix of indirect channels including OEMs, systems
integrators and distributors, both domestically and abroad.
Direct Sales. The direct sales organization is divided into four districts
in North America and one district in the United Kingdom. AXENT's sales
strategy emphasizes activity based selling using telemarketing to qualify
prospects and determine their information security requirements and strategic
solution selling once potential customers are identified. On-site meetings,
often conducted with one of AXENT's consultants, are used to demonstrate
information security solutions to finalize product and service transactions.
AXENT's products are primarily sold to large, corporate customers that have
deployed or are beginning to deploy mission-critical applications into
client/server computing environments. A customer's decision to use AXENT's
products may involve a substantial financial commitment, including the license
costs, consulting fees, maintenance fees, education and deployment costs, as
well as substantial involvement of the customer's
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personnel resources. Accordingly, a decision to purchase AXENT's products
often involves the customer's senior management. As a result, the sales cycle
for AXENT's products historically has been relatively long, averaging nine to
twelve months.
AXENT has designed a pilot program to assist customers in decision-making.
The pilot program, which is a coordinated effort between sales and marketing
and consulting services, involves a small-scale installation which requires a
financial and personnel commitment by the customer and which allows the
customer to fully understand OmniGuard's features and capabilities. The pilot
program is becoming more frequently deployed as customers consider large-scale
installations of OmniGuard products.
Indirect Distribution Channels. An important facet of AXENT's sales strategy
is the development of indirect distribution channels, such as OEMs, systems
integrators for particular vertical markets and other software vendors whose
products fit well with those of AXENT. AXENT currently has several indirect
distribution relationships, including an OEM relationship with AT&T whereby
OmniGuard is bundled with NCR's OneVision systems management framework. AXENT
also receives referral business as part of Hewlett-Packard OpenView Solution
Partners program, Sun's Solstice program and Tivoli's Tivoli Plus program.
International Distribution Channels. AXENT sells its products
internationally through a combination of direct sales and distributors. AXENT
maintains a direct presence in the United Kingdom, Belgium and the Netherlands
and has entered into non-exclusive marketing relationships with several
independent distributors in order to serve additional international markets in
which AXENT does not have a direct presence. These distributors are located in
France, Germany, Italy, Norway, Sweden, Finland, Australia, Asia and South
America. These distributors license AXENT's products at a discount for
relicensing to end user customers, and may provide training, support and
consulting services to such customers. For the fiscal year ended December 31,
1995 and the nine-months ended September 30, 1996, international revenues
accounted for approximately 27% and 26% of AXENT's revenues, respectively. See
Note 14 of Notes to AXENT Consolidated Financial Statements for financial
information regarding AXENT's foreign operations.
Marketing. In support of direct and indirect operations, AXENT conducts
marketing programs intended to position and promote its products and services.
Marketing personnel engage in a wide variety of activities in support of all
distribution channels, including direct mail, Internet marketing, advertising,
seminars, public relations and trade shows as well as overseeing AXENT's
participation in industry programs and forums. Strategic marketing is
conducted through market analysis and interpretation by a customer advisory
council which meets for the purpose of validating AXENT product development
direction. AXENT's internal product steering committee establishes long- and
short-term strategic product goals. In addition, AXENT's marketing department
participates and assists in preparing and giving sales and product training
seminars for both AXENT's internal sales force and the sales forces of its
channel partners. The marketing department also has a leading role in product
marketing activities, including product management, cooperative positioning
and long-term product direction.
CUSTOMERS
Through September 30, 1996, AXENT had licensed various OmniGuard products to
more than 300 customers world-wide. These customers, which include British
Telecom plc, Johnson & Johnson, LSI Logic and Wells Fargo Bank, are public and
private sector entities utilizing client/server computing environments with
numerous users and diverse operating system platforms. Wells Fargo Bank
accounted for more than ten percent of AXENT's total revenues for the nine
months ended September 30, 1996.
AXENT's customers represent enterprises across a broad range of industries,
including financial services, technology, professional services, government,
consumer products and energy and utilities. These customers include ten of the
Business Week's 30 largest U.S. public companies and nine of Forbes' 30
largest U.S. private companies and five of the six largest public accounting
firms.
In order to protect its intellectual property, AXENT does not sell or
transfer title to its products to customers. Instead, AXENT provides software
products to customers under non-exclusive, non-transferable perpetual license
agreements.
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PRODUCT DEVELOPMENT
AXENT believes that a technically competent, quality oriented and highly
productive software development organization is the key to AXENT's continued
successful product introduction. The software development staff is also
responsible for enhancing AXENT's existing products and expanding its product
line. AXENT's products have been developed primarily by its internal
development staff, in some instances with the assistance of external
consultants. Through the acquisition of Datamedia in December 1994, AXENT
added to its product line a personal computer access control software product
and acquired certain in-process research and development projects related to
Enterprise Resource Manager. Certain other technologies have been acquired
through licensing arrangements and earlier acquisitions.
AXENT has its principal software development centers in Nashua, New
Hampshire, and Provo, Utah. The software development efforts in Nashua are
focused on access control, user administration and resource management
products. The Provo center focuses on security management and intrusion
detection. The development centers operate with small project teams, state-of-
the-art software development tools, and industry standard languages and
compilers. AXENT employs a separate development team to port its products to
new operating systems or new releases of supported operating systems. AXENT
uses object-oriented development techniques to minimize the amount of code
changes required to support new platforms and enhancements to its family of
products. AXENT has a rigorous quality control process and source code is
tightly managed, backed-up regularly and escrowed in a secure, off-site
location.
AXENT is currently developing OmniGuard/Enterprise Resource Manager (ERM)
which was formerly known as Enterprise SignOn. ERM is a family of products,
designed to administer users and other computing resources as well as identify
and authenticate network users. Collectively, the ERM components provide a
single point of user administration and resource management for PCs, NT, UNIX,
NetWare, Banyan, Internet, and mainframes. When used for network
identification and authentication, ERM enables users to log-on once to an
enterprise security server and gain secure access to all network resources
they are authorized to run. ERM is currently in beta testing with commercial
availability planned for March 1997.
AXENT is also developing versions of its OmniGuard family of software
products to work with applications such as Internet firewalls, Lotus Notes,
SAP/R3 and PeopleSoft, and relational databases such as Oracle, Informix, and
Sybase.
AXENT has from time to time experienced delays in introducing new products
and product enhancements and there can be no assurance that AXENT will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products or product
enhancements. In addition, there can be no assurance that such new products or
product enhancements will meet the requirements of the marketplace and achieve
market acceptance. Any such failure could have a material adverse effect on
AXENT's financial condition and results of operations. See "Risk Factors--Risk
Factors Relating to AXENT--Product Development Risks in a Rapidly Changing
Industry."
COMPETITION
Competition in the information security market is intense and constantly
evolving, and AXENT expects such competition to increase in the future. AXENT
believes that significant competitive factors affecting this market are depth
of product functionality, breadth of platform support, product quality and
performance, conformance to industry standards, product price and customer
support. In addition, AXENT believes that the ability to rapidly develop and
implement new products and features for the market is critical. There can be
no assurance that AXENT can maintain or enhance its competitive position
against current and future competitors. Significant factors such as the
emergence of new products, fundamental changes in computing technology and
aggressive pricing and marketing strategies may also affect AXENT's
competitive position. Many of these factors are out of AXENT's control.
AXENT's competitors fall into four main categories: large, multi-product
vendors, single purpose product providers, platform vendors and publicly
available software.
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Large, multi-product vendors. AXENT's principal competitors include IBM,
Computer Associates, ICL, Digital and Groupe Bull. Each of these organizations
has strategic software products that cover various aspects of information
security and compete directly with one or more components of AXENT's product
line.
Single purpose product providers. AXENT's principal single purpose product
competitors include Mergent International, Inc., Memco Software Ltd. (Memco's
products are also marketed by Platinum Technology, Inc. and the Tivoli
division of IBM), Dynasoft Software A.B. (marketed by its distributor,
Securix, in the U.S.), Fischer International Systems, Intrusion Detection,
Inc. and the LAN Support Group. These vendors each sell products that offer
particular information security functions, for specific computing platforms.
These products compete with one or more of AXENT's products in specific
functional areas or on specific platforms. While AXENT believes that these
competitors do not provide the depth of function and breadth of platform
support provided by AXENT's products, there can be no assurance that these
competitors will not expand their product offerings to other functional areas
or platforms and compete with more of AXENT's products.
Platform vendors. AXENT competes with platform vendors such as Digital,
Hewlett Packard, IBM, Sun, and Microsoft. Each of these vendors offers
operating system software that often includes native security functionality.
To the extent that the security features which become incorporated in
operating systems overlap all or a portion of the functionality offered by
AXENT's products, AXENT's products may no longer be required by customers to
meet their information security requirements. All of these vendors have
indicated plans to expand the information security within their operating
systems.
Publicly available software. A substantial portion of AXENT's current
business comes from customers licensing UNIX versions of its products. Certain
UNIX security products that compete with one or more aspects of AXENT's
products are available in the public domain for little or no cost or from open
systems standards such as the Open Group's Distributed Computing Environment
("DCE"). DCE can be licensed for a fee and have been incorporated into
operating systems and into third party security products. AXENT intends to
work with and support DCE as well as other standards that become widely
adopted by AXENT's customers.
Many of AXENT's current and potential competitors have longer operating
histories, significantly greater financial, technical and marketing resources,
greater name recognition and a larger installed customer base than AXENT. In
addition, one or more of these competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements, and to
devote greater resources to the development, promotion and sale of their
products than AXENT. There can be no assurance that AXENT's current or
potential competitors will not develop products comparable or superior to
those developed by AXENT or adapt more quickly than AXENT to new technologies,
evolving industry trends or changing customer requirements. Increased
competition could result in price reductions, reduced margins or loss of
market share, any of which could materially adversely affect AXENT's financial
condition or results of operations. There can be no assurance that AXENT will
be able to compete successfully against current and future competitors or that
competitive pressures faced by AXENT will not have a material adverse effect
on its financial condition and results of operations. If AXENT is unable to
compete successfully against current and future competitors, AXENT's financial
condition and results of operations will be materially adversely affected.
INTELLECTUAL PROPERTY RIGHTS
AXENT's success is heavily dependent on its proprietary technology. AXENT
views its software as proprietary and relies on a combination of trade secret,
copyright and trademark laws, non-disclosure agreements and contractual
provisions to establish and protect its proprietary rights. AXENT has no
patents or patents pending with respect to its security information products
and has not to date registered any of its copyrights. In addition, AXENT is
currently seeking to register certain of its trademarks in principal foreign
jurisdictions. AXENT uses a signed license agreement with many customers and a
printed "shrink-wrap" license for all other users of its products in order to
protect its copyrights and trade secrets. Since shrink-wrap licenses are not
signed by the licensee, many authorities believe that they may not be
enforceable under many state's laws and the laws of many foreign
jurisdictions. The laws of Maryland, which the printed shrink-wrap licenses
purport to make the governing law, are unclear on this subject.
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AXENT also relies on trade secrets to protect its proprietary rights in its
software. AXENT attempts to protect its trade secrets and other proprietary
information through agreements with customers and suppliers, non-disclosure
and non-competition agreements with employees and consultants and other
security measures. Although AXENT intends to protect its rights vigorously,
there can be no assurance that these measures will be successful.
Despite AXENT's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of AXENT's products or to obtain and use
information that AXENT regards as proprietary. Policing unauthorized use of
AXENT's products is difficult, and, while AXENT is unable to determine the
extent to which piracy of its software products exists, such piracy can be
expected to be a persistent problem, particularly in international markets and
as a result of the growing use of the Internet. In addition, the laws of some
foreign countries either do not protect AXENT's proprietary rights or offer
only limited protection for those rights. There can be no assurance that the
steps taken by AXENT to protect its proprietary rights will be adequate or
that AXENT's competitors will not independently develop technologies that are
substantially equivalent or superior to AXENT's technologies or products.
There has been substantial litigation in the software industry involving
intellectual property rights. Although AXENT does not believe that it is
infringing the intellectual property rights of others, there can be no
assurance that such claims, if asserted, would not have a material adverse
effect on AXENT's financial condition and results of operations. In addition,
as AXENT may acquire or license a portion of the software included in its
products from third parties, its exposure to infringement actions may increase
because AXENT must rely upon such third parties for information as to the
origin and ownership of such acquired or licensed software. Although AXENT
would intend to obtain representations as to the origins and ownership of such
acquired or licensed software and obtain indemnification to cover any breach
of any such representations, there can be no assurance that such
representations will be accurate or that such indemnification will provide
adequate compensation for any breach of such representations. In the future,
litigation may be necessary to enforce and protect trade secrets, copyrights
and other intellectual property rights of AXENT. AXENT may also be subject to
litigation to defend against claimed infringement of the rights of others or
to determine the scope and validity of the intellectual property rights of
others. Any such litigation could be costly and divert management's attention,
either of which could have a material adverse effect on AXENT's financial
condition and results of operations. Adverse determinations in such litigation
could result in the loss of AXENT's proprietary rights, subject AXENT to
significant liabilities, require AXENT to seek licenses from third parties and
prevent AXENT from selling its products, any one of which could have a
material adverse effect on AXENT's financial condition and results of
operations.
As of December 31, 1996, AXENT has received two patents and has filed two
patent applications on the products being marketed by Raxco. The status of
patents involves complex legal and factual questions and the breadth of claims
allowed is uncertain. Accordingly, there can be no assurance that patent
applications filed by AXENT will result in patents being issued or that its
patents, and any patents that may be issued to it in the future, will afford
protection against competitors with similar technology; nor can there be any
assurance that patents issued to AXENT will not be infringed upon or designed
around by others or that others will not obtain patents that AXENT would need
to license or design around. If existing or future patents containing broad
claims are upheld by the courts, the holders of such patents might be in a
position to require companies to obtain licenses. There can be no assurances
that licenses that might be required for AXENT's products would be available
on reasonable terms, if at all.
FACILITIES
AXENT's principal administrative, sales and marketing facility is located in
approximately 17,000 square feet of office space in Rockville, Maryland which
it has leased through February 1999. AXENT's development laboratories are
located in Provo, Utah and Nashua, New Hampshire, where it has leased
approximately 20,000 and 10,000 square feet, respectively. AXENT's customer
service department is resident in the Provo facility. AXENT also leases
domestic sales offices in Lexington, Massachusetts, Kirkland, Washington, Los
Angeles,
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California, and Bridgewater, New Jersey, approximately 9,000 square feet of
office space in the United Kingdom and a small office in the Netherlands.
AXENT believes that its existing facilities are adequate for its needs and
that additional space will be available as needed.
EMPLOYEES
As of January 2, 1997, AXENT had 157 full-time employees at its offices in
the U.S., including 56 in product development, 20 in customer support, 24 in
sales, seven in marketing, 22 in customer service and consulting, and 28 in
finance, executive, centralized services and administration. As of January 2,
1997, AXENT had 39 full-time employees located predominantly in the office of
its United Kingdom subsidiary, of which 14 were engaged in sales, eight in
support, three in marketing, five in customer service and consulting and nine
in finance and administration.
AXENT's future success will depend in significant part on the continued
service of its key technical, sales and senior management personnel.
Competition for such personnel is intense and there can be no assurance that
AXENT can retain its key managerial, sales and technical employees, or that it
can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future. None of AXENT's employees is represented
by a labor union. AXENT has not experienced any work stoppages and considers
its relations with its employees to be good.
LITIGATION
In November 1995, Advanced Systems Concepts Inc. ("ASCI") filed a lawsuit in
the U.S. District Court for the District of New Jersey naming as defendants
AXENT, the manager of technical support for Raxco, an independent contractor
of Raxco, several of such contractor's officers and employees, a company
regarded by ASCI as a competitor, several of such company's officers and
employees and a former employee of ASCI. ASCI alleged that the defendants
participated in a conspiracy to misappropriate various proprietary rights of
ASCI and that the defendants engaged in racketeering, mail fraud, wire fraud,
unfair competition, breach of employment agreement, conversion, embezzlement
and tortious interference with contractual relationships. The allegations
against the defendants stem from communication among the various defendants,
including one communication by the Raxco employee to the former ASCI employee
at the request of the independent contractor. ASCI is seeking treble damages
under the federal racketeering laws, attorneys' fees and other damages and an
injunction against continuing use of technology that allegedly was acquired
unlawfully. AXENT has denied ASCI's substantive claims and intends to seek
dismissal of the claims against it and vigorously defend the litigation. If
ASCI's claims against AXENT are not dismissed, the ASCI litigation could
result in substantial expense to AXENT and diversion of effort by certain of
AXENT's management. If AXENT is found to have conspired to misappropriate
proprietary rights of ASCI, AXENT could be liable for damages and an
injunction could issue regarding certain of AXENT's OpenVMS utility software
products. None of ASCI's claims relate to any of the OmniGuard products. AXENT
believes the possibility of an unfavorable outcome related to this litigation
is remote.
AXENT is not currently aware of any other pending or threatened litigation
that could have a material adverse effect on AXENT's financial condition or
results of operations.
55
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA AND UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL DATA
The following Selected Historical Consolidated Financial Data of AXENT and
AssureNet should be read in conjunction with their respective consolidated
financial statements and the notes thereto included herein. The consolidated
statement of operations data for each of the three years in the period ended
December 31, 1995 and the consolidated balance sheet data at December 31, 1994
and 1995 are derived from, and are qualified by reference to, the respective
audited consolidated financial statements and the notes thereto included
elsewhere herein. The consolidated statement of operations data for the nine
months ended September 30, 1995 and 1996 and the consolidated balance sheet
data at September 30, 1996 are derived from unaudited consolidated financial
statements of AXENT and AssureNet. The management of each of AXENT (with
respect to the unaudited financial statements of AXENT) and AssureNet (with
respect to the unaudited financial statements of AssureNet) believes that all
adjustments necessary for a fair presentation thereof have been made to the
unaudited consolidated financial data for AXENT and AssureNet, as applicable,
and that such data have been prepared on the same basis as their respective
audited consolidated financial statements included elsewhere herein.
The Unaudited Pro Forma Condensed Combined Balance Sheet Data as of
September 30, 1996 gives effect to the Merger as if it had occurred on
September 30, 1996, and is derived from the unaudited consolidated balance
sheets of AXENT and AssureNet as of September 30, 1996 appearing elsewhere
herein.
The Unaudited Pro Forma Condensed Combined Statement of Operations Data for
the nine months ended September 30, 1996 gives effect to the Merger as if it
had occurred at the beginning of the period, and is derived from the unaudited
consolidated statements of operations of AXENT and AssureNet for the nine
months ended September 30, 1996 appearing elsewhere herein.
The unaudited pro forma Condensed Combined Financial Data is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the Merger had been
consummated as of the beginning of the period or of the future operating
results or financial position of the combined companies.
56
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF AXENT
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------ ------ ------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues:
Product licenses....... $ 1,886 $ 3,045 $4,316 $5,832 $10,117 $ 5,785 $ 9,727
Maintenance & support
services.............. 672 1,113 1,759 2,242 3,281 2,486 2,673
Consulting services.... -- -- -- 520 1,330 759 1,959
------- ------- ------ ------ ------- -------- ---------
Total net revenues... 2,558 4,158 6,075 8,594 14,728 9,030 14,359
------- ------- ------ ------ ------- -------- ---------
Cost of net revenues.... 304 702 939 1,238 1,747 1,298 1,319
------- ------- ------ ------ ------- -------- ---------
Gross profit........... 2,254 3,456 5,136 7,356 12,981 7,732 13,040
------- ------- ------ ------ ------- -------- ---------
Operating expenses:
Sales and marketing.... 1,107 2,272 3,751 5,697 11,324 8,491 8,672
Research and
development........... 892 690 860 1,644 3,976 2,928 3,510
General and
administrative........ 717 853 862 1,048 2,393 1,676 1,772
Write-off of purchased
in-process research
and development....... -- -- -- 4,280 -- -- --
------- ------- ------ ------ ------- -------- ---------
Total operating
expenses............ 2,716 3,815 5,473 12,669 17,693 13,095 13,954
------- ------- ------ ------ ------- -------- ---------
Income (loss) from
continuing operations
before royalty,
interest and taxes..... (462) (359) (337) (5,313) (4,712) (5,363) (914)
Royalty income.......... -- -- -- -- -- -- 2,398
Interest income
(expense).............. -- -- -- -- (129) (103) 668
Income tax benefit
(provision)............ -- -- 906 2,040 2,146 2,422 (425)
------- ------- ------ ------ ------- -------- ---------
Income (loss) from
continuing operations.. (462) (359) 569 (3,273) (2,695) (3,044) 1,727
Income (loss) from
discontinued
operations, net of
tax.................... (2,816) (1,685) 1,663 3,782 5,050 3,970 2,144
------- ------- ------ ------ ------- -------- ---------
Net income (loss)....... $(3,278) $(2,044) $2,232 $ 509 $ 2,355 $ 926 $ 3,871
======= ======= ====== ====== ======= ======== =========
Net income (loss) per
common share:
Continuing operations.. $ (0.08) $ (0.04) $ 0.06 $(0.36) $ (0.30) $ (0.33) $ 0.17
Discontinued
operations............ (0.47) (0.21) 0.19 0.42 0.56 0.43 0.21
------- ------- ------ ------ ------- -------- ---------
Net income (loss) per
common share........... $ (0.55) $ (0.25) $ 0.25 $ 0.06 $ 0.26 $ 0.10 $ 0.38
======= ======= ====== ====== ======= ======== =========
Weighted average number
of common shares
outstanding............ 5,936 8,332 9,021 9,065 9,118 9,126 10,302
======= ======= ====== ====== ======= ======== =========
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents........... $ 2,897 $ 3,198 $4,577 $6,612 $ 6,083 $ 15,660
Short-term
investments........... -- -- -- -- -- 17,316
Net identifiable
(assets) liabilities
from discontinued
operations............ 4,886 4,739 3,685 (1,221) 1,319 458
Working capital........ (2,105) (1,925) 691 2,366 1,948 30,648
Total assets........... 5,000 5,534 7,141 10,009 12,646 39,639
Total debt............. -- -- -- 2,817 900 826
Stockholders' equity... (969) (1,065) 1,358 1,944 2,976 32,023
</TABLE>
57
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ASSURENET
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues............ $ 8,060 $ 9,271 $ 8,558 $11,987 $11,478 $ 8,198 $ 11,716
Cost of revenues........ 3,810 4,222 3,365 4,488 4,712 3,101 4,253
------- ------- ------- ------- ------- -------- --------
Gross profit............ 4,250 5,049 5,193 7,499 6,766 5,097 7,463
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Sales and marketing.... 2,325 2,763 3,168 3,615 5,866 4,116 6,318
Research and
development........... 704 685 681 758 1,431 1,005 1,854
General and
administrative........ 880 1,107 1,250 1,331 1,815 1,146 1,835
------- ------- ------- ------- ------- -------- --------
Total operating
expenses............ 3,909 4,555 5,099 5,704 9,112 6,267 10,007
------- ------- ------- ------- ------- -------- --------
Income (loss) from
operations............. 341 494 94 1,795 (2,346) (1,170) (2,544)
Total other income
(expense), net......... (42) (30) 21 13 24 37 (704)
------- ------- ------- ------- ------- -------- --------
Income (loss) before
provision (benefit) for
income taxes,
extraordinary item and
cumulative effect of
change in accounting
policy................. 299 464 115 1,808 (2,322) (1,133) (3,248)
(Provision) benefit for
income taxes........... (149) (192) (68) (696) (303) 16 (12)
------- ------- ------- ------- ------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
policy................. 150 272 47 1,112 (2,625) (1,117) (3,260)
Extraordinary item...... 620 192 -- -- -- -- --
Cumulative effect of
change in accounting
policy................. -- -- 900 -- -- -- --
------- ------- ------- ------- ------- -------- --------
Net income (loss)....... $ 770 $ 464 $ 947 $ 1,112 $(2,625) $ (1,117) $ (3,260)
======= ======= ======= ======= ======= ======== ========
CONSOLIDATED BALANCE
SHEET DATA:
Working capital......... $ 1,302 $ 991 $ 1,137 $ 2,589 $ (201) $ 1,326 $ 578
Total assets............ 2,895 3,319 3,914 5,591 4,993 5,196 6,776
Long-term obligations... 28 10 -- 42 93 84 59
Redeemable Convertible
Preferred Stock -- -- -- -- -- -- 4,846
Accumulated deficit..... (3,275) (2,811) (1,864) (752) (3,377) (1,911) (6,697)
Total shareholders'
equity (deficit)....... 974 1,395 2,331 3,504 905 2,460 (2,210)
</TABLE>
58
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 PRO FORMA
---------------------- ----------------------- PRO FORMA
AXENT ASSURENET ADJUSTMENTS ADJUSTMENTS COMBINED
--------- ----------- ----------- ----------- ---------
DEBIT CREDIT
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues:
Product licenses and
software............. $ 9,727 $ 3,319 $13,046
Hardware.............. -- 8,397 8,397
Services.............. 4,632 -- 4,632
--------- --------- -------
Total net revenues.. 14,359 11,716 26,075
--------- --------- -------
Cost of net revenues.... 1,319 4,253 342(1) 5,914
--------- --------- -------
Gross profit............ 13,040 7,463 20,161
Operating expenses:
Sales and marketing... 8,672 6,318 14,990
Research and develop-
ment................. 3,510 1,854 5,364
General and adminis-
trative.............. 1,772 1,835 3,607
--------- --------- -------
Total operating ex-
penses............. 13,954 10,007 23,961
--------- --------- -------
Income (loss) from
continuing operations
before royalty,
interest and taxes..... (914) (2,544) (3,800)
--------- --------- -------
Royalty income.......... 2,398 -- 2,398
Interest and other
income (expense)....... 668 (704) (36)
Income tax benefit
(provision)............ (425) (12) (437)
--------- --------- -------
Income (loss) from
continuing operations.. $ 1,727 $ (3,260) $(1,875)
========= ========= =======
Net income (loss) per
common share:
Continuing opera-
tions................ $ 0.17 $ (0.16)
Weighted average number
of common shares
outstanding(2)......... 10,302 11,852
========= =======
</TABLE>
- --------
(1) To record additional amortization expense on the purchased technology as
if the acquisition had occurred at the beginning of the period presented.
Purchased technology is amortized on a straight line basis over three
years.
(2) To record 1,550,000 additional shares of AXENT's Common Stock to be issued
in connection with the AssureNet pending acquisition. The closing market
price on January 6, 1997, $16.00 per share, was assumed for purposes of
the purchase price calculation.
59
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 PRO FORMA
--------------------------------------------- PRO FORMA
AXENT ASSURENET ADJUSTMENTS ADJUSTMENTS COMBINED
--------- ---------------------- ----------- ---------
DEBIT CREDIT
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET:
ASSETS:
Current assets:
Cash and cash
equivalents.......... $ 15,660 $ 977 $16,637
Short-term
investments.......... 17,316 300 17,616
Accounts receivable,
net of allowance for
doubtful accounts of
$286 and $111,
respectively......... 4,337 2,617 6,954
Inventories (net of
reserves of $109).... -- 641 641
Prepaid expenses and
other current
assets............... 882 124 1,006
--------- -------- -------
Total current
assets............. 38,195 4,659 42,854
Property and equipment,
net.................... 1,430 1,695 3,125
Other assets............ 14 422 436
Purchased Software...... -- -- $ 1,369(1) 1,369
--------- -------- ------- ------- -------
Total assets........ $ 39,639 $ 6,776 $ 1,369 $47,784
========= ======== ======= ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities.. $ 3,906 $ 2,630 $ 3,173(4) $ 9,709
Note payable.......... 826 400 1,226
Deferred revenue...... 2,357 998 3,355
Current maturities of
capital lease
obligations.......... -- 53 53
Net identifiable
(assets) liabilities
from discontinued
operations........... 458 -- 458
--------- -------- -------
Total current
liabilities........ 7,547 4,081 14,801
Long-term capital lease
obligation............. -- 59 59
Long-term deferred
revenue, net of current
portion................ 69 -- 69
--------- -------- -------
Total liabilities... 7,616 4,140 14,929
Stockholders' equity.... 32,023 2,636 26,018(2) 32,855
6,776(3)
-- 4,140(3)
2,050(6)
24,800(5)
--------- -------- ------- ------- -------
Total liabilities and
stockholders' equity... $ 39,639 $ 6,776 $32,794 $34,163 $47,784
========= ======== ======= ======= =======
</TABLE>
- --------
(1) To record the estimated purchased technology relating to the pending
acquisition of AssureNet. The purchase price allocation may change upon
final determination of the purchase price.
(2) To record the estimated write-off of in-process research and development
related to the pending acquisition of AssureNet. The Write-off of in-
process research and development may change upon final determination of
the purchase price.
(3) To adjust stockholders' equity for the assets purchased and liabilities
assumed as part of the pending acquisition of AssureNet.
(4) To accrue for the direct costs associated with combining and integrating
the operations of AXENT and AssureNet.
(5) To record the issuance of 1,550,000 shares of AXENT's Common Stock related
to the pending acquisition of AssureNet. The closing market price on
January 6, 1997, $16.00 per share, was assumed for purposes of the
purchase price calculation.
(6) To record the estimated transaction costs and registration and issue costs
related to the acquisition of AssureNet.
60
<PAGE>
COMPARATIVE PER SHARE DATA (UNAUDITED)
The following table sets forth as of the dates and for the periods indicated
selected historical per share data of AXENT and AssureNet and the
corresponding pro forma and pro forma equivalent per share amounts after
giving effect to the Merger. The data presented are based upon the unaudited
historical financial statements and related notes of AXENT and of AssureNet
which are included elsewhere herein, and the Unaudited Pro Forma Condensed
Combined Financial Statements appearing elsewhere herein. This information
should be read in conjunction with such historical and unaudited pro forma
financial statements and related notes thereto. The assumptions used in the
preparation of this table appear elsewhere herein. See "Pro Forma Condensed
Combined Financial Statements" and the "Consolidated Financial Statements of
AXENT and AssureNet" included elsewhere herein. The unaudited pro forma
combined financial data are not necessarily indicative of the results of
operations or the future operations of the combined organization or the actual
results that would have occurred if the Merger had been consummated as of the
beginning of the earliest period presented.
<TABLE>
<CAPTION>
ASSURENET
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
AXENT COMBINED ASSURENET EQUIVALENT (1)
---------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Book value per common
share(2):
September 30, 1996........ $ 3.20 $ 2.84 $ 0.24 $ 0.20
Income (loss) per common
share from continuing
operations:
Nine months ended
September 30, 1996(2).... $ 0.17 $(0.16) $(0.30) $(0.01)
</TABLE>
NOTES TO COMPARATIVE PER SHARE DATA
(1) AssureNet's pro forma equivalent represents the pro forma combined book
value per common share and loss per common share from continuing
operations multiplied by .06955, the Exchange Ratio.
(2) Historical book value per share is computed by dividing total
stockholders' equity by the number of shares of common stock outstanding
at the end of the period. Pro forma book value per share is computed by
dividing pro forma stockholders' equity by the pro forma number of shares
of common stock outstanding at the end of the period. Historical and pro
forma book value per share do not reflect the exercise of outstanding
options or warrants. AssureNet's historical book value per share and net
loss per common share gives effect to the assumed conversion of
AssureNet's preferred stock into AssureNet Common Stock. (Series C
Preferred Stock is converted on a one-for-one basis. As of December 31,
1996, the conversion ratio was increased to 1.85 shares of Common Stock
for each share of Series C Preferred Stock.) If AssureNet's preferred
stock is not converted into AssureNet Common Stock, the AssureNet
historical book value per common share, and loss per common share as of
September 30, 1996 would be $0.61 and $(0.76), respectively.
61
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--AXENT
Management's Discussion and Analysis of Financial Condition and Results of
Operations--AXENT and other parts of this Prospectus/Proxy Statement contain
forward-looking statements which involve risks and uncertainties. AXENT's and
AssureNet's actual results may differ significantly from the results discussed
in forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors."
OVERVIEW
AXENT develops, markets, licenses and supports computer security solutions
for enterprise computing environments. Historically, AXENT offered an array of
system management software products and certain security products. In 1994,
AXENT made a strategic decision to focus its business on the information
security market and to divest itself of products and services unrelated to
such core business. AXENT made the first sale of its OmniGuard/Enterprise
Security Manager product in November 1994.
The businesses divested by AXENT were (i) the storage management products
business, which was sold in 1994 for cash, notes and the assumption of certain
liabilities, (ii) the Helpdesk products business, which was sold in February
1996, for cash, a note, royalties and the assumption of certain liabilities,
and (iii) the OpenVMS utility software products business, which was conveyed
to Raxco, effective as of December 31, 1995. AXENT has retained ownership of
the OpenVMS utility software products which will be distributed by Raxco
pursuant to an Exclusive Distributor License Agreement. The historical results
of operations for these divested operations have been accounted for as
discontinued operations in accordance with APB No. 30. See "Risk Factors--
Risks Relating to AXENT--Possible Adverse Effects of Spin-Off; Dependence on
Royalties," "AXENT Business," "Certain Transactions--AXENT" and AXENT's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus/Proxy Statement.
Prior to the divestment of these businesses, AXENT 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 AXENT, Raxco and the other
discontinued operations were commingled. Similarly, operating expenses,
capital expenditures and other cash outlays were centrally disbursed and
charged directly or allocated to Raxco and the other discontinued operations.
In the opinion of management, AXENT'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 AXENT or its discontinued operations had the divestments occurred
at the beginning of 1993. AXENT believes that it is not practicable to
determine what those costs would have been on a stand-alone basis.
AXENT's results of operations for 1994 reflect AXENT's acquisition of
Datamedia in December 1994 for up to $5.0 million in a transaction accounted
for using the purchase method. AXENT incurred a one-time charge of $4.3
million to write-off purchased in-process research and development costs
related to Datamedia products under development. See "AXENT Business--Product
Development." The remaining purchase price was allocated to existing net
assets and purchased software costs of $548,000 and $102,000, respectively.
Existing net assets included $639,000 of cash and cash equivalents. The
operating results of Datamedia have been included in AXENT's Consolidated
Statement of Operations since the date of acquisition.
AXENT's revenues are derived principally from two sources: (i) product
license fees for the use of AXENT's software products and (ii) service fees
for maintenance, consulting services and training related to AXENT's software
products. AXENT generally ships its software on a trial basis and recognizes
revenue upon acceptance of the software by the customer, unless AXENT has
significant future obligations to the customer, in which case revenue is
recognized when such obligations are satisfied. Service revenues from
consulting and training are recognized as services are performed, and
maintenance revenues are deferred and recognized ratably over the maintenance
period, typically one year.
AXENT markets its products primarily through a direct sales organization,
distributors and other marketing relationships. Sales made through
distributors typically have a lower gross margin than direct sales. Revenues
62
<PAGE>
from independent distributors accounted for approximately 8% of AXENT's net
revenues from its information security products for each of the years ended
December 31, 1994 and 1995, respectively, and 10% for the nine months ended
September 30, 1996. AXENT generally records revenue from distributors at the
net license or service fee, after deducting the distributors' commissions,
which range from 50% to 75%.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of net revenues for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------- --------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues:
Product licenses.............. 71.0% 67.9% 68.7% 64.1% 67.7%
Maintenance & support
services..................... 29.0 26.1 22.3 27.5 18.6
Consulting services........... 0 6.0 9.0 8.4 13.7
------- ------- ------- ------ ------
Total net revenues.............. 100.0 100.0 100.0 100.0 100.0
======= ======= ======= ====== ======
Total cost of net revenues...... 15.5 14.4 11.9 14.4 9.2
------- ------- ------- ------ ------
Gross profit.................... 84.5 85.6 88.1 85.6 90.8
------- ------- ------- ------ ------
Operating expenses:
Sales and marketing........... 61.7 66.3 76.9 94.0 60.4
Research and development...... 14.2 19.1 27.0 32.4 24.4
General and administrative.... 14.2 12.2 16.2 18.6 12.3
Write-off of purchased in-
process research and
development.................. -- 49.8 -- -- --
------- ------- ------- ------ ------
Total operating expenses.... 90.1 147.4 120.1 145.0 97.1
------- ------- ------- ------ ------
Income (loss) from continuing
operations before royalty,
interest and taxes............. (5.6) (61.8) (32.0) (59.4) (6.3)
Royalty income.................. -- -- -- -- 16.7
Interest (expense) income....... -- -- (0.9) (1.1) 4.7
Income tax benefit (provision).. 14.9 23.7 14.6 26.8 (3.0)
------- ------- ------- ------ ------
Income (loss) from continuing
operations..................... 9.3 (38.1) (18.3) (33.7) 12.1
Income from discontinued
operations, net of tax......... 27.4 44.0 34.3 44.0 14.9
------- ------- ------- ------ ------
Net income...................... 36.7% 5.9% 16.0% 10.3% 27.0%
======= ======= ======= ====== ======
The following table sets forth the cost of net revenues as a
percentage of the related net revenues for the periods indicated.
Cost of product licenses........ 16.1% 17.0% 8.8% 11.6% 3.5%
Cost of maintenance, support and
consulting services............ 13.9% 9.0% 18.7% 19.4% 21.0%
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenues. AXENT's net revenues from product licenses increased
approximately 68%, or $3.94 million, from $5.79 million for the nine months
ended September 30, 1995, to $9.73 million for the nine months ended September
30, 1996. For those periods in 1995 and 1996, net revenues from product
licenses represented 64% and 68% of total net revenues, respectively. The
increase in product license revenue is primarily attributable to the expansion
of AXENT's product offerings, with the introduction, general release and
increased market acceptance of additional products comprising the OmniGuard
family of software products throughout 1995, offset in part by a decrease in
license revenues derived from AXENT's other (primarily OpenVMS) computer
security software products. OmniGuard/Intruder Alert and OmniGuard/Enterprise
Access Control for both UNIX and PCs were released commercially during the
second quarter of 1995.
63
<PAGE>
AXENT's net revenues from maintenance and support services increased
approximately 7%, or $180,000, from $2.49 million for the nine months ended
September 30, 1995, to $2.67 million for the nine months ended September 30,
1996. The increase in net revenues from maintenance and support services is
attributable to a larger base of customers on maintenance agreements resulting
from the increased licensing of AXENT's OmniGuard products, offset in part by
a decrease in maintenance revenues derived from AXENT's other (primarily
OpenVMS) computer security software products. For those periods in 1995 and
1996, net revenues from maintenance fees and other services represented 28%
and 19% of total net revenues, respectively. The decrease of net revenues from
maintenance and support services as a percentage of total net revenues is
attributable to the increase in total revenues, particularly net revenues from
product licenses.
AXENT's net revenues from consulting services increased approximately 158%,
or $1.20 million, from $759,000 for the nine months ended September 30, 1995
to $1.96 million for the nine months ended September 30, 1996. The increase in
consulting services revenues is attributable to an increase in the size and
number of engagements associated with licensing of AXENT's OmniGuard products.
For those periods in 1995 and 1996, net revenues from consulting services
represented 8% and 13% of total net revenues, respectively.
AXENT currently believes that period-to-period comparisons of net revenues
from the licensing of different software products and the provision of related
services are not necessarily meaningful as an indication of future
performance.
Revenues derived from North American and from international operations as a
percent of total net revenues were 74% and 26%, respectively, for the nine
months ended September 30, 1996 as compared to 77% and 23%, respectively, for
the same period of 1995.
Cost of net revenues. AXENT's cost of net revenues includes cost of media,
product packaging, documentation and other production costs, amortization of
purchased software costs, product royalties, and direct and indirect costs of
providing training, technical support and consulting services to AXENT's
customers. Cost of net revenues increased approximately 2%, or $20,000 from
$1.30 million for the nine months ended September 30, 1995, to $1.32 million
for the nine months ended September 30, 1996. For those periods in 1995 and
1996, cost of net revenues represented 14% and 9% of net revenues,
respectively. The increase in cost of net revenues is directly related to the
increased number of consulting services engagements and an increase in staff
of AXENT's customer support and services operations necessary to support a
larger customer base and the additional products offered by AXENT. The
increase in the cost of net revenues is offset in part by the following: 1) an
increase in production efficiency due to the consolidation of worldwide
production in 1996; 2) a change in product media to CD-ROM resulting in a
decrease in production and shipping expenses; and 3) an increase in the
average size of the transactions recorded in the nine months ended September
30, 1996 compared to the same nine month period of 1995. Cost of net revenues
as a percentage of net revenues may fluctuate from period to period due to a
change in product mix, a change in the number or size of transactions recorded
year over year or an increase or decrease in licenses of royalty bearing
products.
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 2%, or $180,000, from $8.49
million for the nine months ended September 30, 1995 to $8.67 million for the
nine months ended September 30, 1996. The increase in dollar amount was due
primarily to additional investment in AXENT's U.S. and UK operations,
increased commissions associated with the additional revenues and increased
investment in indirect distribution, offset in part by the closing of AXENT's
German and Swiss direct offices during the fourth quarter of 1995. For those
periods in 1995 and 1996, sales and marketing expenses represented 94% and 60%
of total net revenues, respectively. The decrease in sales and marketing
expenses as a percent of total net revenue is attributable to the increase in
total net revenues for the nine months ended September 30, 1996.
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 generally are expensed as
incurred. Research and development expenses increased
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20%, or $580,000, from $2.93 million for the nine months ended September 30,
1995 to $3.51 million for the nine months ended September 30, 1996. For those
periods in 1995 and 1996, research and development expenses represented 32%
and 24% of total net revenues, respectively. The increase in dollar amount
resulted primarily from the addition of internal and third-party contract
developers needed to develop, maintain and enhance the OmniGuard family of
software products including AXENT's Enterprise Resource Manager product
currently under development. The decrease in research and development expenses
as a percentage of total net revenues was due primarily to the increase in
total net revenues. AXENT currently anticipates that research and development
expenses may increase in absolute dollars as AXENT continues to commit
substantial resources to research and development in future periods.
AXENT believes that a significant level of investment for product research
and development is essential for it to achieve and maintain market leadership.
Accordingly, AXENT anticipates that it will continue to devote substantial
resources to product research and development for the foreseeable future. To
date, substantially all research and development costs have been expensed as
incurred.
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 5%, or
$90,000 from $1.68 million for the nine months ended September 30, 1995 to
$1.77 million for the nine months ended September 30, 1996. For those periods
in 1995 and 1996, general and administrative expenses represented 19% and 12%
of total net revenues, respectively. The decrease in general and
administrative expenses as a percentage of total net revenues was due
primarily to the increase in total net revenues.
In 1996, certain general and administrative expenses are offset in part by
the Administrative Services Agreement between AXENT and Raxco. That agreement
provides for Raxco to pay AXENT on an annual basis, the greater of $750,000 or
the actual cost of providing certain operational and system support services
including bookkeeping, personnel processing, administrative support,
facilities management and product packaging and mailing. For the nine months
ended September 30, 1996, AXENT received $562,500 from Raxco under the
Administrative Services Agreement.
Royalty income. For the nine months ended September 30, 1996, AXENT recorded
royalty income of $2.40 million pursuant to the Exclusive Distributor License
Agreement with Raxco. The Agreement provides for payment by Raxco to AXENT the
greater of (i) a 30% royalty on license and services fees related to the
OpenVMS utility software products owned by AXENT and marketed exclusively 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.
During the nine months ended September 30, 1996, Raxco reported to AXENT
gross revenues of approximately $8.70 million, which included approximately
$8.0 million of revenues from licensing of AXENT's OpenVMS utility products.
As of September 30, 1996, Raxco has fully paid the royalty income due to
AXENT. Raxco reported to AXENT, a net loss of $735,000 for the nine months
ended September 30, 1996.
Interest income (expense). Interest income increased 749%, or $771,000,
from an expense of $103,000 for the nine months ended September 30, 1995, to
income of $668,000 for the nine months ended September 30, 1996. The increase
is primarily attributable to interest on the proceeds from AXENT's initial
public offering, as well as a decrease in the amortization of discount on the
note payable.
Income taxes. AXENT accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires AXENT to record an asset with respect to the expected future
value of its net operating loss carryforwards. AXENT's history of operating
losses makes the realization of its net operating loss carryforwards
uncertain. Accordingly, AXENT has placed a valuation allowance against its
deferred tax asset. AXENT has recorded a provision for federal and state
income taxes associated with the discontinued operations which is
substantially offset by an accrued tax benefit related to the loss from
continuing operations. Under the Tax Reform Act of 1986, the amounts of and
benefit from net operating losses that can be carried forward may be impaired
or limited in certain circumstances.
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AXENT recorded a tax benefit for the nine months ended September 30, 1995
related to a loss from continuing operations. AXENT recorded a provision for
the nine months ended September 30, 1996 related to the income from continuing
operations. The effective rate for the nine months ended September 30, 1996
differs from the federal statutory rate due to the carryforward benefit of net
operating losses and the change in the for deferred tax assets.
Income (loss) from continuing operations. As a result of the above, AXENT
recorded income from continuing operations of $1.73 million for the nine
months ended September 30, 1996, an increase of $4.77 million, from the loss
of $3.04 million for the nine months ended September 30, 1995.
Income from discontinued operations. Income from discontinued operations
consists of the net results of operations from the divested businesses of
AXENT, which for financial statement purposes have been accounted for in
accordance with APB 30 and classified as discontinued operations. AXENT's
income from discontinued operations decreased 46%, or $1.83 million, from
$3.97 million for the nine months ended September 30, 1995 to $2.14 million
for the nine months ended September 30, 1996. For those periods in 1995 and
1996 income from discontinued operations represented 44% and 15% of total net
revenues, respectively. AXENT anticipates a continued decline in income from
discontinued operations over the next several quarters.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net revenues. AXENT's net revenues from product licenses increased
approximately 74%, or $4.3 million, from $5.8 million in 1994 to $10.1 million
in 1995, representing 68% and 69% of total net revenues in 1994 and 1995,
respectively. The increase in product license revenues is primarily
attributable to the expansion of AXENT's product offerings, with the
introduction and general release of the OmniGuard family of software products,
offset in part by a decrease in AXENT's other computer security products. One
OmniGuard product was available for sale by the end of 1994, and three
OmniGuard products were available for sale by the end of 1995. Product license
revenues relating to the OmniGuard family of software products accounted for
approximately 85% of AXENT's net product license revenues in 1995 compared
with only 12% in 1994.
AXENT's net revenues from maintenance and support services increased
approximately 46.3%, or $1.1 million, from $2.2 million in 1994 to $3.3
million in 1995, representing 26% and 22% of total net revenue in 1994 and
1995, respectively. The increase in net revenues from maintenance and support
services is attributable to a larger base of customers on maintenance
agreements as a result of increased product licenses. The decrease in net
revenues from maintenance and support services as a percentage of total net
revenues is attributable to the increase in total net revenues, particularly
net revenues from product licenses.
AXENT's net revenues from consulting services increased approximately 150%,
or $780,000, from $520,000 in 1994 to $1.3 million in 1995, representing 6%
and 9% of total net revenues in 1994 and 1995, respectively. The increase in
net revenues from consulting services is primarily attributable to the
introduction of consulting services related to net revenues from the Company's
OmniGuard family of products.
Cost of net revenues. AXENT's cost of net revenues for product licenses
includes the cost of media, product packaging, documentation and other
production costs and amortization of purchased software costs. AXENT's cost of
net revenues for services includes the direct and indirect costs of providing
training, technical support and consulting services to AXENT's customers. Cost
of net revenues increased approximately 31%, or $400,000 from $1.3 million in
1994 to $1.7 million in 1995, representing 14% and 12% of total net revenues
in 1994 and 1995, respectively. The increase in cost of net revenues is
primarily attributable to increased unit sales of the OmniGuard family of
products and increased consulting engagements, which resulted in increased
staffing of AXENT's customer support and services operations, offset by final
amortization in 1994 of approximately $565,000 associated with previously
purchased software.
Sales and marketing. Sales and marketing expenses consist primarily of
personnel costs, including commissions, salaries, benefits and bonuses,
travel, telephone and costs of advertising, public relations seminars and
trade shows. Sales and marketing expenses increased 99%, or $5.6 million, from
$5.7 million in 1994 to $11.3 million in 1995, representing 66% and 77% of net
revenues in 1994 and 1995, respectively. The increase as a percentage of net
revenues was principally due to costs associated with the transition from
primarily a telemarketing model to a more direct selling model including the
expansion of AXENT's direct sales organization, increased technical pre-sales
personnel, personnel increases in the marketing group and increased
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<PAGE>
costs associated with advertising and public relations. The dollar increase
was primarily due to the same factors, as well as higher sales commissions
associated with increased net revenues. Sales and marketing expenses for 1995
included approximately $957,000 of costs relating to AXENT's former German and
Swiss operations which were discontinued during 1995. Effective November 1995,
AXENT began marketing its products through independent distributors in Germany
and Switzerland.
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.
Research and development expenses increased approximately 142%, or $2.3
million, from $1.6 million in 1994 to $4.0 million in 1995, representing 19%
and 27% of net revenues in 1994 and 1995, respectively. Such increase resulted
primarily from the addition of developers needed to develop, maintain and
enhance the OmniGuard family of software products, including AXENT's
Enterprise Resource Manager product currently under development. See "AXENT
Business--Product Development."
AXENT believes that a significant level of investment for product research
and development is essential for it to achieve and maintain market leadership.
Accordingly, AXENT anticipates that it will continue to devote substantial
resources to product research and development for the foreseeable future. To
date, substantially all research and development costs have been expensed as
incurred.
General and administrative. General and administrative expenses consist
primarily of personnel costs, including salaries, benefits and bonuses,
related costs for management, finance and accounting, legal and other
professional services, and depreciation of equipment and facilities. While
AXENT discontinued certain operations during 1995, the general and
administrative expenses related to AXENT's infrastructure did not change
materially, causing a greater proportion of total expenses to be borne by to
AXENT's continuing operations. General and administrative expenses increased
by approximately 128%, or $1.3 million, from $1.0 million in 1994 to $2.4
million in 1995, representing 12% and 16% of net revenues in 1994 and 1995,
respectively. The increase in 1995 is principally due to a decrease in the
amount of general and administrative expenses borne by AXENT's discontinued
operations.
Income (loss) from continuing operations before interest and taxes. As a
result of the above, the loss from continuing operations before interest and
taxes decreased approximately 11%, or $600,000, from $5.3 million in 1994 to
$4.7 million in 1995.
Income tax provision. AXENT accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires AXENT to record an asset with respect to the expected
future value of its net operating loss carryforwards. AXENT's history of
operating losses makes the realization of its net operating loss carryforwards
uncertain. Accordingly, AXENT has placed a valuation allowance against its
deferred tax asset. AXENT has recorded a provision for federal and state
income taxes associated with the discontinued operations which is
substantially offset by an accrued tax benefit related to the loss from
continuing operations. Under the Tax Reform Act of 1986, the amounts of and
benefit from net operating losses that can be carried forward may be impaired
or limited in certain circumstances. At December 31, 1995, AXENT had federal
net operating loss carryforwards of approximately $1.8 million, which may be
utilized to reduce future taxable income through the year 2007.
Income from discontinued operations. Income from discontinued operations
consists of the net results of operations from the divested businesses of
AXENT, which for financial statement purposes have been accounted for in
accordance with APB No. 30 and classified as discontinued operations. See
"AXENT Business," "Certain Transactions--AXENT" and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus/Proxy
Statement. AXENT's income from discontinued operations increased approximately
33%, or $1.3 million, from $3.8 million in 1994 to $5.0 million in 1995,
representing 44% and 34% of net revenues in 1994 and 1995, respectively.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Net revenues. AXENT's net revenues from product licenses increased
approximately 35%, or $1.5 million, from $4.3 million in 1993 to $5.8 million
in 1994, representing 71% and 68% of total net revenues in
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1993 and 1994, respectively. The increase in product license revenues is
primarily attributable to the expansion of AXENT's OpenVMS security product
offerings and the first full year of general availability of AXENT's Security
Toolkit/UNIX product.
AXENT's net revenues from maintenance and support services increased
approximately 27%, or $500,000, from $1.7 million in 1993 to $2.2 million in
1994, representing 29% and 26.1% of total net revenue in 1993 and 1994,
respectively. The increase in net revenues from maintenance and support
services is attributable to a larger base of customers on maintenance
agreements as a result of increased product licenses. The decrease in net
revenues from maintenance and support services as a percentage of total net
revenues is attributable to the increase in total net revenues, particularly
net revenues from product licenses.
In 1994, net revenues from consulting services accounted for approximately
6%, or $520,000 of total net revenues. AXENT introduced consulting services in
order to meet customers implementation and training requests for AXENT's
Security Toolkit/UNIX product.
Cost of net revenues. Cost of net revenues increased approximately 38%, or
$361,000 from $939,000 in 1993 to $1.3 million in 1994, representing 15% and
14% of total net revenues in 1993 and 1994, respectively. The increase in cost
of net revenues is primarily attributable to increased unit sales and
increased staffing of AXENT's customer support operations. Cost of net
revenues for 1994 included final amortization of approximately $565,000
associated with previously purchased software.
Sales and marketing. Sales and marketing expenses increased approximately
52%, or $1.9 million, from $3.8 million in 1993 to $5.7 million in 1994,
representing 62% and 66% of net revenues in 1993 and 1994, respectively. The
percentage increase was primarily due to expansion of AXENT's direct sales
organization, increased technical pre-sales personnel, personnel increases in
the marketing group and increased costs associated with advertising and public
relations. Additionally, AXENT began to move towards a direct marketing model.
The dollar increase was primarily due to the same factors, as well as higher
sales commissions associated with increased revenue.
Research and development. Research and development expenses increased
approximately 91%, or $784,000, from $860,000 in 1993 to $1.6 million in 1994,
representing 14% and 19% of net revenues in 1993 and 1994, respectively. The
increase in research and development expenses results from the addition of
developers needed to develop, maintain and enhance the OpenVMS and UNIX
security products and to develop the OmniGuard products, the first of which
was released in November 1994.
General and administrative. General and administrative expenses increased
approximately 22%, or $186,000, from $862,000 in 1993 to $1.0 million in 1994,
representing 14% and 12% of net revenues in 1993 and 1994, respectively.
Income (loss) from continuing operations before interest and taxes. AXENT's
loss from continuing operations before interest and taxes increased
approximately 1,477%, or $5.0 million, from ($337,000) in 1993 to ($5.3)
million in 1994. The increase in loss from continuing operations before
interest and taxes is primarily related to the write-off of purchased in-
process research and development.
Income tax provision. At December 31, 1994, AXENT had federal net operating
loss carryforwards of approximately $2.7 million which may be utilized to
reduce future taxable income through the year 2007, subject to certain
limitations.
Income from discontinued operations. AXENT's income from discontinued
operations increased approximately 127%, or $2.1 million, from $1.7 million in
1993 to $3.8 million in 1994. Approximately $2.3 million of the increase was
attributable to the gain on the sale of the storage management products.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly consolidated financial
data for 1994 and 1995 and the nine months ended September 30, 1996. AXENT
believes that all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the selected quarterly information when read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere herein.
The results of operations for any quarter are not necessarily indicative of
results that may be expected for any subsequent periods.
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<PAGE>
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS OF AXENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
---------------------------------- ----------------------------------- --------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
------- ------- -------- ------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues:
Product licenses...... $ 852 $ 906 $1,978 $ 2,096 $ 1,680 $ 2,558 $ 1,547 $4,332 $2,674 $3,929 $3,124
Maintenance & support
services............. 503 520 390 829 926 733 827 795 860 856 957
Consulting services... 40 40 240 200 133 213 413 571 548 540 871
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Total net revenues... 1,395 1,466 2,608 3,125 2,739 3,504 2,787 5,698 4,082 5,325 4,952
Cost of net revenues... 241 266 343 388 435 442 421 449 382 481 456
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Gross profit........... 1,154 1,200 2,265 2,737 2,304 3,062 2,366 5,249 3,700 4,844 4,496
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Operating expenses:
Sales and marketing... 952 1,021 1,931 1,793 2,918 2,884 2,689 2,833 2,813 2,968 2,891
Research and
development.......... 386 320 427 511 981 996 951 1,048 1,084 1,173 1,253
General and
administrative....... 164 155 431 298 533 577 566 717 557 595 620
Write off of purchased
in-process research
and development...... -- -- -- 4,280 -- -- -- -- -- -- --
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Total operating
expenses............ 1,502 1,496 2,789 6,882 4,432 4,457 4,206 4,598 4,454 4,736 4,764
Income (loss) from
continuing operations
before royalty,
interest and taxes.... (348) (296) (524) (4,145) (2,128) (1,395) (1,840) 651 (754) 108 (268)
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Royalty income......... -- -- -- -- -- -- -- -- 800 804 794
Interest expense
(income).............. -- -- -- -- (34) (35) (34) (26) 72 257 339
Income tax (provision)
benefit............... 134 114 200 1,592 958 634 830 (276) (35) (25) (365)
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Income (loss) from
continuing
operations............ (214) (182) (324) (2,553) (1,204) (796) (1,044) 349 83 1,144 500
Income from
discontinued
operations, net of
tax................... 296 277 351 2,858 1,238 1,394 1,338 1,080 1,027 526 591
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Net income............. $ 82 $ 95 $ 27 $ 305 $ 34 $ 598 $ 294 $1,429 $1,110 $1,670 $1,091
====== ====== ====== ======= ======= ======= ======= ====== ====== ====== ======
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS OF AXENT
(AS A PERCENTAGE OF TOTAL NET REVENUES)
<CAPTION>
1994 1995 1996
---------------------------------- ----------------------------------- --------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
------- ------- -------- ------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues:
Product licenses...... 61.1% 61.8% 75.8% 67.1% 61.3% 73.0% 55.5% 76.0% 65.6% 73.8% 63.1%
Maintenance & support
services............. 36.0 35.5 15.0 26.5 33.8 20.9 29.7 14.0 21.0 16.1 19.3
Consulting services... 2.9 2.7 9.2 6.4 4.9 6.1 14.8 10.0 13.4 10.1 17.6
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Total net revenues... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of net revenues... 17.3 18.1 13.2 12.4 15.9 12.6 15.1 7.9 9.3 9.0 9.2
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Gross profit........... 82.7 81.9 86.8 87.6 84.1 87.4 84.9 92.1 90.7 91.0 90.8
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Operating expenses:
Sales and marketing... 68.2 69.7 74.0 57.3 106.5 82.3 96.5 49.7 69.0 55.7 58.4
Research and
development.......... 27.6 21.8 16.4 16.4 35.8 28.4 34.1 18.4 26.6 22.0 25.3
General and
administrative....... 11.9 10.6 16.5 9.5 19.5 16.5 20.3 12.6 13.7 11.2 12.5
Write off of purchased
in-process research
and development...... -- -- -- 137.0 -- -- -- -- -- -- --
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Total operating
expenses............ 107.7 102.1 106.9 220.2 161.8 127.2 150.9 80.7 109.3 88.9 96.2
Income (loss) from
continuing operations
before royalty,
interest and taxes.... (25.0) (20.2) (20.1) (132.6) (77.7) (39.8) (66.0) 11.4 (18.6) 2.1 (5.4)
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Royalty income......... -- -- -- -- -- -- -- -- 19.6 15.1 16.0
Interest (expense)
income................ -- -- -- -- (1.3) (1.0) (1.2) (0.5) 1.8 4.8 6.8
Income tax (provision)
benefit............... 9.6 7.8 7.7 50.9 34.9 18.1 29.8 (4.8) (0.9) (0.5) (7.4)
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Income (loss) from
continuing
operations............ (15.4) (12.4) (12.4) (81.7) (44.1) (22.7) (37.4) 6.1 1.9 21.5 10.1
Income from
discontinued
operations, net of
tax................... 21.2 18.9 13.5 91.5 45.2 39.8 48.0 19.0 25.2 9.9 11.9
------ ------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Net income............. 5.8% 6.5% 1.1% 9.8% 1.1% 17.1% 10.6% 25.1% 27.1% 31.4% 22.0%
====== ====== ====== ======= ======= ======= ======= ====== ====== ====== ======
</TABLE>
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The following table sets forth the cost of net revenues as a percentage of
the related net revenues for the periods indicated.
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------------- -------------------------------- ------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
------- ------- -------- ------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of product
licenses............... 20.3% 22.8% 14.3% 15.5% 14.7% 9.2% 12.1% 5.0% 4.2% 3.0% 3.7%
Cost of maintenance,
support and consulting
services............... 12.5% 10.5% 9.5% 6.0% 17.7% 21.9% 18.9% 16.9% 19.2% 26.1% 18.5%
</TABLE>
AXENT has experienced quarterly fluctuations in operating results and
anticipates that such fluctuations will continue. Quarterly revenues and
operating results depend on the volume and timing of orders received during
the quarter, which are sometimes difficult to forecast. Historically, AXENT
has often recognized a substantial portion of its product license revenues in
the last month of the quarter. Operating results may fluctuate due to a
variety of reasons, including the impact of a large order. For example, an
individual transaction accounted for 16% of the total net revenues in the
quarter ended September 30, 1994. In addition, revenues tend to be lower in
the summer months, particularly in Europe, where businesses often defer
purchase decisions. Because AXENT's staffing and other operating expenses are
based on anticipated revenue, a substantial portion of which is not typically
generated until the end of each quarter, delays in the receipt of orders can
cause significant variations in operating results from quarter to quarter.
AXENT's revenues historically have been higher in the fourth quarter of each
fiscal year than in the first quarter of the following fiscal year. AXENT
believes that fourth calendar quarter revenues are positively impacted by the
end of year budgeting cycles of some large corporate customers, as well as the
annual nature of AXENT's sales compensation plans. AXENT expects that this
will continue for the foreseeable future and may intensify depending upon the
timing of new product introductions by AXENT. See "Risk Factors--Risks
Relating to AXENT--Potential Significant Fluctuations in Quarterly Operating
Results and Lengthy Sales Cycle."
LIQUIDITY AND CAPITAL RESOURCES
AXENT's overall cash and cash equivalents were $15.66 million at September
30, 1996, an increase of approximately $9.58 million from $6.08 million at the
beginning of the year. During the nine months ended September 30, 1995, AXENT
financed its operations primarily through cash flows generated from
discontinued operations and available working capital. AXENT's continuing
operating activities used cash of $6.65 million for the nine months ended
September 30, 1995 and provided $799,000 for the nine months ended September
30, 1996 resulting from increased licensing of AXENT's OmniGuard products in
the nine months ended September 30, 1996. Total cash provided by operating
activities of AXENT's discontinued operations was $6.98 million and $750,000
for the nine months ended September 30, 1995 and 1996, respectively.
AXENT made capital expenditures of approximately $767,000 and $733,000 for
the nine months ended September 30, 1995 and 1996, respectively. These
purchases have generally consisted of computer workstations, networking
equipment, office furniture and equipment. AXENT had no firm commitments for
capital expenditures as of September 30, 1996.
During the nine months ended September 30, 1996, AXENT's cash position was
also affected by the following: 1) AXENT received proceeds from its initial
public offering of approximately $25.13 million, net of approximately $3.46
million in underwriting fees and offering expenses; 2) AXENT invested
approximately $17.32 million in certificates of deposit and government
securities; 3) AXENT received $300,000 as a result of the disposal of the
Helpdesk products in February 1996; 4) AXENT paid $100,000 to former Datamedia
stockholders as part of the December 1994 Datamedia acquisition; and 5) AXENT
received $748,000 as payment on the note receivable related to the sale of
AXENT's storage management products in 1994.
AXENT had a revolving credit facility commitment with a bank for up to $2.50
million which expired in May 1996. There were no amounts outstanding under
this revolving credit facility commitment at the time of expiration.
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As of September 30, 1996, Raxco fully paid all amounts due to AXENT under
the Exclusive Distributor License Agreement, the Administrative Services
Agreement and the Line of Credit Loan Agreement.
AXENT believes that 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.
Depending on AXENT's future growth and acquisitions, AXENT will consider from
time to time various financing alternatives and may seek to raise additional
capital through equity or debt financing or to enter into strategic
arrangements. There can be no assurance, however, that this funding will be
available on terms acceptable to AXENT, if at all.
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
Although AXENT has experienced significant growth in revenues from the
OmniGuard family of software products, AXENT does not believe prior growth
rates are indicative of future operating results. In addition, AXENT expects
increased competition and intends to invest significantly in its product
development. As a result, there can be no assurance that AXENT will remain
profitable on a quarterly or annual basis. Due to AXENT'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 AXENT's products; the size and
timing of customer orders; the number of competitors and the breadth and
functionality of their product offerings; the introduction of new products and
product enhancements by AXENT or its competitors; the budgeting cycle of
customers; changes in the proportion of revenues attributable to license fees
and consulting services; the availability of services personnel to
demonstrate, install, configure and implement products; changes in the level
of operating expenses; and competitive conditions in the industry; and changes
in technologies affecting computing, networking, communications, systems and
applications management and data security.
The market for AXENT's software products is highly competitive, and AXENT
expects that it will face increasing price pressures from its current
competitors and new market entrants. Any material reduction in the price of
AXENT's software products would negatively affect gross margins and could
materially adversely affect AXENT's financial condition and results of
operations. See "Risk Factors--Risks Relating to AXENT--Recent Losses From
Continuing Operations," "--Potential Significant Fluctuations in Quarterly
Operating Results and Lengthy Sales Cycle" and "--Intense and Constantly
Evolving Competition."
The sales of AXENT'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 AXENT's security products is typically long and subject to a
number of significant risks over which AXENT has little or no control and, as
a result, AXENT may expend significant resources pursuing potential sales that
will not be consummated.
AXENT 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, export limitations on encryption technologies,
tariffs and other trade barriers, political and economic instability in
foreign markets, 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 cause, some foreign customers to delay new orders or delay
payment for existing orders. These factors may, in the future, contribute to
fluctuations in AXENT's financial condition and results of operations.
Although AXENT'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. See "Risk Factors--Risks
Relating to AXENT--Risks Associated with International Sales."
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AXENT MANAGEMENT
OFFICERS AND DIRECTORS
The officers and directors of AXENT are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard A. Lefebvre....................... 50 Chief Executive Officer, Chairman
of the Board and Director
John C. Becker............................ 39 President, Chief Operating
Officer and Director
Brett M. Jackson.......................... 38 Senior Vice President
Peter B. Privateer........................ 42 Senior Vice President
James R. Bowerman......................... 41 Vice President
Robert A. Clyde........................... 37 Vice President
Robert B. Edwards, Jr..................... 40 Vice President, Chief Financial
Officer and Treasurer
Gary M. Ford.............................. 42 Vice President, General Counsel
and Secretary
Thomas M. McDonough....................... 42 Vice President
Gabriel A. Battista(2).................... 52 Director
Richard A. Hosley II(1)................... 52 Director
Jacqueline C. Morby(1).................... 59 Director
Arthur C. Patterson....................... 53 Director
Richard W. Smith(2)....................... 44 Director
</TABLE>
- --------
(1) Member, Compensation Committee
(2) Member, Audit Committee
RICHARD A. LEFEBVRE has served as Chief Executive Officer, Chairman of the
Board and a Director of AXENT since March 1991 and as President of AXENT from
March 1991 to October 1996. He also served as President, Chief Executive
Officer and a director of a predecessor of AXENT from January 1989 until March
1991. From April 1987 to January 1989, Mr. Lefebvre was the Executive Vice
President and Chief Operating Officer of Sage Software, Inc., now Intersolv,
Inc.
JOHN C. BECKER has served as President, Chief Operating Officer and Director
of AXENT since October 1996. From October 1992 to October 1996 he served as
Executive Vice President, Chief Financial Officer and Treasurer and from March
1991 to October 1992, he served as Senior Vice President and Chief Financial
Officer of AXENT. From November 1989 to March 1991, Mr. Becker served as Vice
President of a predecessor of AXENT and was responsible for finance and
administration. From 1979 to November 1989, Mr. Becker held various positions
involving financial matters at Marriott Corporation and MCI Communications
Inc.
BRETT M. JACKSON has served as a Senior Vice President of AXENT responsible
for world-wide sales and consulting services since August 1993. From October
1992 through July 1993, he served as a Vice President, and was responsible for
product operations. From April 1991 through September 1992, Mr. Jackson served
as a Vice President of AXENT, and was responsible for sales and marketing
matters. Prior to such time from July 1989, he served as Director of Marketing
of a predecessor of AXENT.
PETER B. PRIVATEER has served as a Senior Vice President of AXENT
responsible for product operations and marketing matters since August 1993.
From July 1992 to July 1993, he was a Vice President of Marketing, of
Intersolv, Inc. From 1991 to July 1992, he was Vice President, Strategic
Marketing of KnowledgeWare, Inc., and was Vice President, Product Marketing
there from 1990 to 1991 and Director, Product Programs from 1988 to 1990.
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<PAGE>
JAMES R. BOWERMAN has been a Vice President of AXENT and General Manager of
AXENT's Resource Management business unit since August 1996. From July 1994 to
August 1996, he served as a Vice President responsible for product engineering
and from July 1993 to June 1994, he served as a Vice President and General
Manager of AXENT's Storage Division. From October 1992 until July 1993, he
served as Director and General Manager of AXENT's Unitech Products Group, and
from September 1989 to September 1992 he served as Director, Software Products
at Systems Center, Inc.
ROBERT A. CLYDE has been a Vice President of AXENT and General Manager of
AXENT's Security Management business unit since August 1996. From June 1995 to
August 1996, he served as a Vice President responsible for client services and
sales support, and from May 1994 to June 1995, he served as a Vice President
of AXENT responsible for product management. From 1991 to April 1994, Mr.
Clyde served as a Vice President and General Manager of AXENT responsible for
the security products group. Prior to such time, Mr. Clyde served as Vice
President and Director of the Clyde product group.
ROBERT B. EDWARDS, JR. has served as Chief Financial Officer of AXENT since
October 1996 and as a Vice President of AXENT responsible for finance matters
and internal operations since June 1994. From March 1992 to May 1994 he served
as the Director of Finance of AXENT. From 1989 to March 1992, he was an Audit
Manager with Arthur Andersen & Co.
GARY M. FORD has served as a Vice President, General Counsel and Secretary
of AXENT since August 1995. From 1984 through July 1995, Mr. Ford was a member
of the law firm of Tucker, Flyer & Lewis, a professional corporation.
THOMAS M. MCDONOUGH has served as a Vice President of AXENT responsible for
North American sales since March 1994. From September 1993 to February 1994,
he served as a Vice President of AXENT responsible for business development
and corporate marketing. From October 1990 to August 1993, Mr. McDonough
served as Branch Manager, Telecommunications Accounts (Washington, D.C.) of
Digital Equipment Corporation.
GABRIEL A. BATTISTA has been a Director of AXENT since September 1995. In
1995, he became the Chief Executive Officer and President of Cable and
Wireless, Inc. ("Cable"). From 1991 to 1995, Mr. Battista served as President
and Chief Operating Officer of Cable.
RICHARD A. HOSLEY II has been a Director of AXENT since July 1991. Mr.
Hosley has been a private investor since October 1990. Prior to such time, he
was the Chief Executive Officer, President and Vice Chairman of BMC Software,
Inc. Mr. Hosley serves as a director of Logic Works, Inc.
JACQUELINE C. MORBY has been a Director of AXENT since March 1991 and was a
director of a predecessor of AXENT from 1988 to March 1991. She has been a
Managing Director at TA Associates, Inc., since 1982. Ms. Morby serves as a
director of Pacific Mutual Life Insurance Company.
ARTHUR C. PATTERSON has been a Director of AXENT since March 1991 and was a
director of a predecessor of AXENT from 1990 to March 1991. Since 1983, he has
been the Managing Partner of Accel Partners, a venture capital firm. Mr.
Patterson also serves as a director of PageMart Wireless, Inc., VIASOFT, Inc.,
UUNET Technologies, Inc. and GT Global Group of Investment Companies.
RICHARD W. SMITH has been a Director of AXENT since April 1991. He is an
individual general partner of the general partners of Lawrence, Smith & Horey
III, Lawrence, Tyrrell, Ortale & Smith and Lawrence, Tyrrell, Ortale & Smith
II, L.P. Mr. Smith has been involved in the venture capital industry since
1979.
Officers of AXENT are elected by the Board of Directors on an annual basis
and serve until their successors have been duly elected and qualified. AXENT's
Certificate of Incorporation provides for a classified Board of Directors
consisting of three classes of directors with each class required to be as
nearly equal in number as possible. The number of directors is determined from
time to time by the Board of Directors and is currently fixed at seven
members. A single class of directors is elected each year at AXENT's annual
meeting of
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stockholders. Subject to transition provisions, each director elected at each
such meeting will serve for a term ending on the date of the third annual
meeting of stockholders after his election and until his successor has been
elected and duly qualified. Messrs. Becker and Patterson are serving for terms
expiring on the date of AXENT's 1997 Annual Meeting of Stockholders, Mr. Smith
and Ms. Morby are serving for terms expiring on the date of AXENT's 1998
Annual Meeting of Stockholders and Messrs. Hosley, Battista and Lefebvre are
serving for terms expiring on the date of AXENT's 1999 Annual Meeting of
Stockholders.
AXENT's Board of Directors currently has two committees, the Audit Committee
and the Compensation Committee. The Audit Committee, among other things,
recommends the firm to be appointed as independent accountants to audit
AXENT's financial statements, discusses the scope and results of the audit
with the independent accountants, reviews with management and the independent
accountants AXENT's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of AXENT and
reviews the non-audit services to be performed by the independent accountants.
The current members of the Audit Committee are Messrs. Battista and Smith. The
Compensation Committee reviews and recommends the compensation arrangements
for management of AXENT and administers AXENT's Stock Option Plans. The
members of the Compensation Committee are Ms. Morby and Mr. Hosley.
DIRECTORS' COMPENSATION AND OTHER ARRANGEMENTS
During 1996, AXENT paid to or to the order of directors, other than those
who are also employees of AXENT, a fee of $1,000 per meeting attended in
person. Prior to AXENT's initial public offering, those fees were paid only to
eligible directors who were not serving on AXENT's Board as representatives of
a stockholder. Commencing in 1997, directors, other than those who are also
employees of AXENT, will receive awards of stock options under the 1996
Directors' Stock Option Plan in lieu of any fees for serving as a director of
AXENT. During 1996, AXENT paid to or to the order of Ms. Morby and Messrs.
Hosley, Smith, Battista and Patterson aggregate meeting fees of $2,000,
$3,000, $2,000, $2,000 and $1,000, respectively. Other than these fees, no
director received any fees or other compensation for serving in such capacity
during 1996. Directors other than those who are employees of AXENT are
reimbursed for certain reasonable expenses incurred in attending Board
meetings.
1996 Directors' Stock Option Plan. The 1996 Directors' Stock Option Plan
(the "Director Plan") was adopted by the Board of Directors in January 1996.
Under the terms of the Director Plan, directors of AXENT who are not employees
of AXENT are eligible to receive non-statutory options to purchase shares of
Common Stock. A total of 200,000 shares of Common Stock may be issued upon
exercise of options granted under the Director Plan. Unless terminated sooner
by the Board of Directors, the Director Plan will terminate in 2006, or the
date on which all shares available for issuance under the Director Plan shall
have been issued pursuant to the exercise of options granted under the
Director Plan.
Options to purchase 9,000 shares of Common Stock will be granted to each
eligible director upon his or her initial election or appointment to the Board
of Directors and will vest in three equal annual installments on the
anniversaries of the date of grant (or the date of the annual meeting of
stockholders in such year, if earlier). Annual options to purchase 2,000
shares of Common Stock will be granted to each eligible director, including
those eligible directors currently on the Board, at the first meeting of the
Board in 1997 and on the date of each annual meeting of stockholders
commencing in 1997. Such annual options will vest in full at the earlier of
(i) the first anniversary of the date of the grant or (ii) the date of the
next annual meeting of stockholders. The exercise price of options granted
under the Director Plan will equal the closing price per share of the Common
Stock on the date of grant.
Options granted under the Director Plan are not transferable by the optionee
except by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order. In the event an optionee ceases to serve
as a director, each option may be exercised by the optionee for the portion
then exercisable at any time within 60 days after the optionee ceases to serve
as a director; provided, however, that in the event that the optionee ceases
to serve as a director due to his death or disability, then the optionee, or
his or her administrator, executor or heirs, may exercise the exercisable
portion of the option for up to 180 days following the date the optionee
ceases to serve as a director. No option is exercisable after the expiration
of nine years from the date of grant.
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<PAGE>
Upon a "Change in Control of AXENT" as defined in the Director Plan, any
outstanding options issued pursuant to the Director Plan prior to the date of
such Change in Control of AXENT shall vest and be exercisable as to 50% of the
number of shares of Common Stock that remain unvested on the date of such
Change in Control.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information for the year
ended December 31, 1996, concerning compensation paid or accrued by AXENT to
or on behalf of AXENT's Chief Executive Officer and each of the four other
most highly compensated officers of AXENT as of December 31, 1996, each of
whose compensation exceeded $100,000 (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
------------------- ------
SECURITIES
NAME AND FISCAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS(#) COMPENSATION(2)
------------------ ------ --------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Richard A. Lefebvre..... 1996 $271,992 $131,000 12,000 $1,347
Chief Executive Officer 1995 $271,992 $ 81,772 -- $ 807
John C. Becker.......... 1996 $143,750 $ 80,000 60,000 $ 698
President and Chief 1995 $138,000 $ 52,281 10,000 $ 622
Operating Officer
Brett M. Jackson........ 1996 $129,125 $ 85,000 32,000 $ 678
Senior Vice President 1995 $120,000 $ 35,146 10,000 $ 597
Peter B. Privateer...... 1996 $131,000 $ 70,000 24,000 $ 739
Senior Vice President 1995 $130,000 $ 28,331 20,000 $ 611
Thomas M. McDonough..... 1996 $ 90,000 $ 94,897 20,000 $ 571
Vice President 1995 $ 90,000 $ 38,525 -- $ 485
</TABLE>
- --------
(1) AXENT's officers are eligible for annual cash bonuses. Such bonuses are
generally based upon achievement of corporate performance objectives
determined by the Compensation Committee. Amounts shown include maximum
bonus potential for 1996 and actual bonus earned and paid for 1995. See
"--Executive Bonus Plan."
(2) "All Other Compensation" includes the payment by AXENT of the annual
premium for certain term life insurance and long-term disability premiums
pursuant to a benefit program.
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<PAGE>
The following table sets forth certain information regarding options to
purchase AXENT Common Stock which were granted in the fiscal year ended
December 31, 1996, to each of the Named Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (4)
------------------------------------------------------ --------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR(2) ($/SH)(3) DATE 5%($) 10%($)
---- ---------- -------------- ----------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Lefebvre..... 12,000 2.59% $10-$15 3/22/06-10/21/06 $ 75,467 $ 191,249
John C. Becker.......... 60,000 12.94% $10-$15 3/22/06-10/21/06 503,116 1,274,994
Brett M. Jackson........ 32,000 6.90% $10-$15 3/22/06-10/21/06 251,558 637,497
Peter B. Privateer...... 24,000 5.18% $10-$15 3/22/06-10/21/06 188,668 478,123
Thomas M. McDonough..... 20,000 4.31% $10-$15 3/22/06-10/21/06 144,646 366,561
</TABLE>
- --------
(1) The stock options vest over four years in sixteen equal quarterly
installments provided that such officer remains continuously employed by
AXENT.
(2) Based on options to purchase 463,500 shares of AXENT Common Stock granted
during the year ended December 31, 1996.
(3) All stock options were granted with an exercise price equal to the fair
market value of the AXENT Common Stock, as determined by the Board of
Directors, on the grant date. After AXENT's initial public offering, the
fair market value was based on the market price of AXENT Common Stock on
the date of grant.
(4) These amounts are based on compounded annual rates of stock price
appreciation of five and ten percent over the ten-year term of the options
and are mandated by rules of the Commission. Actual gains, if any, on
stock option exercises are dependent on future performance of the AXENT
Common Stock, overall market conditions, as well as the option holder's
continued employment throughout the vesting period. The amounts reflected
in this table may not necessarily be achieved or may be exceeded. The
indicated amounts are net of the option exercise price but before taxes
that may be payable upon exercise.
The following table sets forth certain information regarding options to
purchase AXENT Common Stock held as of December 31, 1996, by each of the Named
Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE- MONEY OPTIONS AT
SHARES YEAR-END (#) FISCAL YEAR-END ($)(2)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Lefebvre.... 65,000 $970,313 560,250 9,750 7,306,250 48,750
John C. Becker......... 1,000 15,300 145,563 73,437 1,872,175 282,025
Brett M. Jackson....... 12,000 190,950 96,313 53,687 1,199,525 355,775
Peter B. Privateer..... 20,000 293,750 38,500 65,500 440,000 560,000
Thomas M. McDonough.... 7,500 109,688 7,875 22,625 76,125 119,875
</TABLE>
- --------
(1) Calculated based on the market price of AXENT Common Stock at the time of
exercise, less the exercise price payable for such shares multiplied by
the number of shares underlying the option.
(2) Calculated on the basis of the closing market price of the Common Stock at
December 31, 1996, $15.00 per share, less the exercise price payable for
such shares multiplied by the number of shares underlying the option.
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<PAGE>
SEVERANCE ARRANGEMENTS
In the event AXENT terminates the employment of an officer without cause,
the officer is entitled to receive certain severance benefits in accordance
with AXENT's severance policy, as follows: (1) President and Chief Executive
Officer--as determined by contract; (2) Senior Vice Presidents and Executive
Vice Presidents employed for three years or more--one year; (3) Senior Vice
Presidents and Executive Vice Presidents employed for one year or more, but
less than three years--six months; and (4) Vice Presidents and Senior Vice
Presidents employed for less than one year--three months. Accordingly, Mr.
Lefebvre would be entitled to receive the compensation and benefits otherwise
payable to him for a period of two years following termination without cause,
the sale of AXENT or a decrease in his duties, as stated in a letter agreement
between AXENT and Mr. Lefebvre, effective November 1, 1992. Messrs. Becker,
Jackson and Privateer each would be entitled to receive the compensation and
benefits otherwise payable to him for a period of one year following
termination without cause, the sale of AXENT or a decrease in his duties.
Certain stock options of Messrs. Lefebvre, Becker, Jackson, Privateer and
McDonough vest in full upon an acquisition of AXENT.
EXECUTIVE BONUS PLAN
AXENT has an executive bonus plan designed to attract, retain and provide
performance incentives for key management personnel. The plan provides for a
cash bonus to be paid to the key management personnel upon attainment of
individualized predetermined performance objectives. Awards made to management
under the plan are determined by the Compensation Committee. For the year
ending December 31, 1997, Mr. Lefebvre, Mr. Becker, Mr. Jackson, Mr. Privateer
and Mr. McDonough will be eligible for annual bonus payments in amounts up to
$160,000, $145,000, $120,000, $90,000 and $85,000, respectively.
STOCK OPTION PLANS
AXENT's Amended and Restated 1991 Stock Option Plan (the "1991 Option Plan")
authorizes the issuance of 1,501,714 shares of Common Stock pursuant to the
exercise of stock option grants less (i) any shares of Common Stock issued
upon the exercise of all or any part of certain options and warrants issued by
Clyde, Inc., a predecessor to AXENT, and assumed by AXENT, and (ii) any shares
of Common Stock issued upon the exercise of a certain option granted to an
individual in April 1992. At December 31, 1996, 287,017 shares had been issued
pursuant to exercises of stock options granted under the 1991 Option Plan and
warrants issued by Clyde, Inc., options for 1,115,000 shares were outstanding
and 99,697 shares remained available for future grant under the 1991 Option
Plan. AXENT's 1996 Stock Option Plan (the "1996 Option Plan") authorizes the
issuance of 1,000,000 shares of Common Stock pursuant to the exercise of stock
option grants. At December 31, 1996, no shares had been issued under the 1996
Option Plan, options for 441,700 shares were outstanding and 558,300 shares
remained available for future grant under the 1996 Option Plan. The 1991
Option Plan and the 1996 Option Plan are collectively referred to as the
"Option Plans."
The 1991 Option Plan provides for grants of options to employees,
consultants, directors and advisers of AXENT, and the 1996 Option Plan
provides for grants to employees and consultants. Each stock option granted
under the Option Plans is evidenced by a written stock option agreement
between AXENT and the optionee. The Option Plans provide for the granting of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and non-statutory stock options. The Option
Plans are administered by the Compensation Committee which has sole discretion
and authority, consistent with the provisions of the Option Plans, and has the
right, among other things, to determine which eligible participants will
receive options, the time when options will be granted, the terms of options
granted and the number of shares that will be subject to options granted under
the Option Plans.
For any option intended to qualify as an incentive stock option, the
exercise price must not be less than 100% of the fair market value of the
Common Stock on the date the option is granted (110% of the fair market value
of such Common Stock with respect to any optionee who immediately before any
option is granted,
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<PAGE>
directly or indirectly, possesses more than 10% of the total combined voting
power of all classes of stock of AXENT ("10% Owners")). The Compensation
Committee has the authority to determine the time or times at which options
granted under the Option Plans become exercisable; provided that, for any
option intended to qualify as an incentive stock option, such option must
expire no later than ten years from the date of grant (five years with respect
to options granted to 10% Owners). Options are non-assignable and non-
transferable, unless a stock option agreement provides that such option may be
transferred by the optionee upon death, by will or the laws of descent and
distribution. Options generally may be exercised only while the optionee is
either employed by, or rendering service to, AXENT or within a specified
period of time thereafter. The Compensation Committee may accelerate the date
of exercise of any option or waive any condition or restriction pertaining to
such option at any time. Unless terminated sooner by the Board of Directors,
the 1991 Option Plan will terminate in 2001, or the date on which all shares
available for issuance shall have been issued pursuant to the exercise of
options granted under the 1991 Option Plan. Unless terminated sooner by the
Board of Directors of AXENT, the 1996 Option Plan will terminate in 2006, or
the date on which all shares available for issuance shall have been issued
pursuant to the exercise of options granted under the 1996 Option Plan.
The 1996 Option Plan provides that in the event of a Change in Control of
AXENT, as defined therein, any restrictions on options granted pursuant to the
1996 Option Plan prior to the date of such Change in Control shall terminate
with respect to the number of whole shares constituting fifty percent (50%) of
the shares subject to any such restriction.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of December 31, 1996, the members of the Compensation Committee are Ms.
Morby and Mr. Hosley. Neither Ms. Morby nor Mr. Hosley was at any time during
the fiscal year ended December 31, 1995, or at any other time, an officer or
employee of AXENT. No member of the Compensation Committee serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of AXENT's Board of Directors
or Compensation Committee. Mr. Lefebvre was a member of the Compensation
Committee through December 1995; Mr. Lefebvre is also the Chairman and Chief
Executive Officer of AXENT.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The AXENT's Certificate of Incorporation provides that to the fullest extent
permitted by Delaware law a director of AXENT shall not be personally liable
to AXENT or its stockholders for monetary damages for breach of fiduciary duty
as a director. Under current Delaware law, liability of a director may not be
limited (i) for any breach of the director's duty of loyalty to AXENT or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or purchases and (iv)
for any transaction from which the director derives an improper personal
benefit. The effect of this provision of AXENT's Certificate of Incorporation
is to limit or eliminate the rights of AXENT and its stockholders (through
stockholders' derivative suits on behalf of AXENT) to recover monetary damages
against a director for breach of such director's fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in those circumstances described in clauses (i) through (iv)
above. This provision does not limit or eliminate the rights of AXENT or any
stockholder to seek nonmonetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. AXENT's Certificate of
Incorporation and Amended and Restated Bylaws (the "Bylaws") provide that
AXENT shall indemnify its directors, officers, employees and agents to the
fullest extent permitted by Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law, and AXENT has
entered into indemnification agreements with its directors and executive
officers to that effect. AXENT maintains officer and director liability
insurance providing coverage of up to $7.0 million with respect to liabilities
arising out of certain matters, including matters arising under the Securities
Act.
At present, there is no pending litigation or proceeding involving any
officer or director, employee or agent of AXENT where indemnification will be
required or permitted. AXENT is not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification, except as
disclosed under "AXENT Business--Litigation."
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CERTAIN TRANSACTIONS--AXENT
Effective as of December 31, 1995, AXENT transferred certain operations,
assets and liabilities to Raxco and approved the distribution of the
convertible preferred stock of Raxco to AXENT's stockholders. The distributed
operations included the sales, marketing and support operations related to the
OpenVMS utility software products business, leaving AXENT with the sales,
marketing, development and support operations associated with the information
security business and ownership of the OpenVMS utility software products. As
part of the Spin-Off, AXENT and Raxco entered into four agreements, an
Agreement and Plan of Separation, an Exclusive Distributor License Agreement
(the "Distributor Agreement"), an Administrative Services Agreement and a Line
of Credit Loan Agreement. Pursuant to the Distributor Agreement, Raxco will
distribute AXENT's OpenVMS utility software products and pay AXENT for a five
year period a royalty on the licensed products. The minimum annual royalty
payable under the Distributor Agreement is $2.0 million, $1.5 million and $1.0
million for 1996, 1997 and 1998, respectively. AXENT will account for
royalties in future periods as non-operating income from continuing
operations. Raxco will pay directly certain obligations under existing
development and support contracts. Pursuant to the Administrative Services
Agreement, Raxco will pay AXENT the greater of $750,000 per year or the actual
cost of providing certain operational and system support services including
bookkeeping, personnel processing, administrative support, facilities
management, and product packaging and mailing. Under the Line of Credit Loan
Agreement, through December 31, 1996, AXENT provided a line of credit to Raxco
of up to $750,000 for general working capital needs. Advances under the Line
of Credit Loan Agreement bore interest at prime plus 1% and were secured by
all of Raxco's assets.
AXENT transferred to Raxco approximately $1,387,000 of assets including,
among other things, fixed assets, customer base, employees and facilities and
the future obligations related thereto. Also included in this transfer were
the fixed assets, customer base, employees and facilities and the future
obligations related thereto of certain foreign subsidiaries of AXENT located
in the United Kingdom. The Board of Directors of Raxco is comprised of five
members, two of whom are officers of AXENT who are serving in such capacity
for the purpose of facilitating a smooth transition to Raxco's management
team.
In February 1996, AXENT disposed of its Helpdesk operations for a purchase
price of approximately $2.0 million. The purchase price consisted of an
initial payment of $150,000 in cash, a note in the principal amount of
$150,000, the assumption of approximately $400,000 of deferred maintenance
obligations and liabilities, and the payment of a royalty of 6% of the future
gross revenues from all Helpdesk product license and maintenance fees, up to a
maximum aggregate amount of $1.3 million. The proceeds from the disposal of
the Helpdesk operations will be added to AXENT's working capital. Messrs.
Hosley, Lefebvre and Smith are directors of the purchaser of the Helpdesk
operations. However, none of these directors participated in the vote
approving the transaction for either party and such relationships were
disclosed to the Board of Directors prior to their vote on such transaction.
AXENT believes that all transactions set forth above were made on terms no
less favorable to AXENT than would have been obtained from unaffiliated third
parties. AXENT has adopted a policy whereby all future transactions between
AXENT and its officers, directors and affiliates will be on terms no less
favorable to AXENT than could be obtained from unaffiliated third parties and
will be approved by a majority of the disinterested members of the Board of
Directors.
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PRINCIPAL STOCKHOLDERS--AXENT
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of December 31, 1996: (i) by each
person who is known by AXENT to own beneficially more than 5% of the Common
Stock; (ii) by each director of AXENT; (iii) by each of the Named Officers;
and (iv) by all directors and executive officers of AXENT as a group. Except
as otherwise noted, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1)
---------------- ---------------------------
NUMBER PERCENT
-------------- ------------
<S> <C> <C>
TA Associates, Inc.(2).......................... 1,232,142 12.2%
125 High Street
High Street Tower
Boston, MA 02110
General Atlantic Partners II L.P................ 944,991 9.3
125 East 56th Street
New York, NY 10022
Edison Venture Fund(3).......................... 566,667 5.6
997 Lenox Drive, #3
Lawrenceville, NJ 08648
Hancock Venture Partners, Inc.(4)............... 532,323 5.3
One Financial Center, 44th Floor
Boston, MA 02111
Richard A. Lefebvre(5).......................... 580,250 5.4
2400 Research Boulevard, Suite 200
Rockville, MD 20850
John C. Becker(6)............................... 148,063 1.4
Brett M. Jackson(7)............................. 97,814 *
Peter B. Privateer(8)........................... 39,250 *
Thomas M. McDonough(9).......................... 8,250 *
Gabriel A. Battista(10)......................... 3,000 *
Richard A. Hosley II(11)........................ 20,000 *
Jacqueline C. Morby(12)......................... 1,232,142 12.2
Arthur C. Patterson(13)......................... 449,492 4.4
Richard W. Smith(14)............................ 459,007 4.5
Executive officers and directors as a group (10
persons)(15)................................... 3,037,268 27.6
</TABLE>
- --------
*Less than 1% of the outstanding Common Stock.
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(1) Applicable percentage of ownership is based upon 10,130,314 shares of
AXENT Common Stock outstanding. Beneficial ownership is determined in
accordance with the rules of the Commission, and includes voting and
investment power with respect to shares. Shares of AXENT Common Stock
subject to options currently exercisable or exercisable within 60 days
after January 1, 1997, are deemed outstanding for computing the
percentage ownership of the person holding such options, but are not
deemed outstanding for computing the percentage ownership of any other
person.
(2) Includes 958,049 shares beneficially owned by Advent VI L.P., 48,383
shares beneficially owned by Advent Industrial L.P., 198,072 shares
beneficially owned by Advent Atlantic and Pacific L.P., 15,445 shares
beneficially owned by TA Venture Investors, L.P., 11,642 shares
beneficially owned by TA Associates V L.P. and 551 shares beneficially
owned by TA Associates Management Profit Sharing Trust F/B/O Henry
Koerner. TA Associates, Inc. acts as the indirect general partner of
Advent VI L.P. and Advent Atlantic and Pacific L.P. and exercises sole
investment and voting power with respect to such shares. Principals and
employees of TA Associates, Inc. comprise the general partners of TA
Venture Investors, L.P., the indirect general partners of Advent
Industrial L.P., and act as Trustees of the TA Associates Management
Profit Sharing Trust. Jacqueline C. Morby, a Director of AXENT, is a
managing director of TA Associates, Inc., a general partner of TA Venture
Investors, L.P., and TA Associates V L.P., an indirect general partner of
Advent Industrial L.P. and a Trustee of the TA Associates Management
Profit Sharing Trust.
(3) Includes 475,269 shares beneficially owned by Edison Venture Fund II,
L.P. and 91,398 shares beneficially owned by Edison Venture Fund II-PA,
L.P.
(4) Includes 242,207 shares beneficially owned by Mayflower Fund Limited
Partnership, 47,909 shares beneficially owned by Falcon Ventures L.P. and
242,207 shares beneficially owned by Hancock Venture Partners III L.P.
Hancock Venture Partners, Inc. disclaims beneficial ownership of the
securities owned by such limited partnerships.
(5) Includes 560,250 shares issuable upon exercise of outstanding options.
(6) Includes 148,063 shares issuable upon exercise of outstanding options.
(7) Includes 97,314 shares issuable upon exercise of outstanding options and
500 shares owned by his spouse.
(8) Includes 39,250 shares issuable upon exercise of outstanding options.
(9) Includes 8,250 shares issuable upon exercise of outstanding options.
(10) Includes 3,000 shares issuable upon exercise of outstanding options.
(11) Includes 20,000 shares issuable upon exercise of outstanding options.
(12) Includes shares beneficially owned by Advent VI L.P., Advent Industrial
L.P., Advent Atlantic and Pacific L.P., and TA Associates Management
Profit Sharing Trust and the remainder of the shares described in
footnote (2) as being owned by TA Venture Investors L.P. or TA Associates
V L.P. as to which Ms. Morby disclaims beneficial ownership other than
with respect to 2,774 shares of Common Stock beneficially owned by Ms.
Morby through TA Venture Investors L.P., which are included in the 15,445
shares, and 1,369 shares of common stock beneficially owned by TA
Associates V L.P., which are included in the 11,642 shares described in
footnote (2) above.
(13) Includes 436,008 shares beneficially owned by Accel III L.P. and 13,484
shares beneficially owned by Accel Investors '89 L.P. Mr. Patterson is a
general partner of Accel Investors '89 L.P. and an individual general
partner of the general partner of Accel III L.P. Mr. Patterson disclaims
beneficial ownership of the securities owned by such limited
partnerships.
(14) Includes 271,403 shares beneficially owned by Lawrence, Tyrrell, Ortale &
Smith, and 180,856 shares beneficially owned by Lawrence, Tyrrell, Ortale
& Smith II, L.P. Mr. Smith is an individual general partner of the
general partners of Lawrence, Tyrrell, Ortale & Smith and Lawrence,
Tyrrell, Ortale & Smith II, L.P. Mr. Smith disclaims beneficial ownership
of the securities owned by such limited partnerships.
(15) See footnotes (5) through (14) above. Includes 876,127 shares issuable
upon the exercise of vested options.
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ASSURENET BUSINESS
This Prospectus/Proxy Statement contains forward looking statements about
future results which are subject to risks and uncertainties. AXENT's and
AssureNet'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 in "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--AssureNet" as well as those discussed elsewhere in this
Prospectus/Proxy Statement.
AssureNet is a leading provider of network security products and services
that protect enterprise networks, including LANs, WANs and Intranets.
AssureNet's products, which run on a variety of open computing platforms and
support networking and security standards, prevent unauthorized network access
which could result in the theft and manipulation of mission critical
information. AssureNet's network security solution is based on one-time
password challenge/response authentication and identification technology and
includes Defender Security Server ("DSS") software, Defender hardware
products, software and hardware SecureNet Keys, the Defender Management System
("DMS") software, technical support and services. The DSS software provides
network resident identification and authentication and manages external access
to workstations, personal computers and third-party communications gateways
and other network hardware and software. DSS software is currently offered on
Microsoft NT, Novell Netware and Sun Solaris (UNIX) platforms. The hardware
and software SecureNet Key tokens utilize the Data Encryption Standard ("DES")
to authenticate a user's identity. The Software SecureNet Key, also called a
"Software Token" or "Software Key," provides integration of challenge/response
with communications protocols and currently supports DOS, Windows and
Macintosh operating environments. DMS is award winning audit, report and
management software utilizing a Windows-based graphical user interface ("GUI")
which manages the client and server. In addition, AssureNet's hardware-based
network security products also protect access to legacy host systems, upon
which many companies are still dependent. AssureNet believes that its security
solutions can be deployed across large, geographically dispersed enterprise
networks due to its client/server architecture and the ability of its
management software to control security from a central location.
INDUSTRY BACKGROUND
Enterprise Computing. Developments in communications and microprocessor
technologies have advanced the evolution of computing environments from
standalone host systems to distributed, multi-vendor enterprise networks,
consisting of LANs, WANs and Intranets. These client/server networks
distribute mission-critical applications and information across the
enterprise, enhancing productivity by enabling users to communicate with each
other and share data and resources throughout the entire organization.
As organizations continue to deploy client/server technology across the
enterprise, employees are becoming increasingly dependent on networks to
access mission-critical information such as customer databases, order entry
systems, inventory control systems, E-mail and groupware applications.
Furthermore, customers are also becoming increasingly dependent on access to
networks to complete transactions, such as submitting purchase orders for
inventory. The need for daily access to such mission-critical information in
conjunction with the increasing number of mobile professionals and
telecommuters has made real-time remote access to enterprise networks a
business requirement in today's global economy.
Enterprise Network Security. Data security has always been a concern of
large organizations, but until the advent of distributed computing, it was
relatively easy to protect data against unauthorized access and theft by
locating large, host systems in secure areas and restricting access to a few
individuals. With the evolution of computing to distributed, multi-vendor
networks, data security became a more significant issue for large
organizations as legacy host systems running mission-critical applications
were integrated into corporate networks and the number of network users within
such organizations increased significantly.
The advent of remote-access networking and communications technology and the
escalating popularity of mobile, home and remote site computing as well as on-
line services have significantly impaired an organization's
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ability to monitor and control data security risk. By providing employees and
customers with the ability to access corporate information from outside the
organization, organizations have created gateways into their enterprise
networks that can be exploited by unauthorized users. Furthermore, today's
distributed computing environments create significant intra-organizational
security management issues as enterprises seek to create accessible shared
LANs and Intranets, while at the same time protecting the integrity and
confidentiality of the information accessible via such network. Thus, a
significant new challenge in network security is to protect the enterprise
from unauthorized access from both within and outside the organization.
Enterprise Security Requirements. As large organizations continue to move
toward distributed, multi-vendor computing environments where increasing
numbers of employees and customers depend on remote connectivity to enterprise
networks, AssureNet believes that there will be an increasing need for
complete enterprise security solutions. Large-scale deployments of remote
access solutions across the enterprise will necessitate network security
solutions that are easy to administer from a central location. The
heterogeneous computing environments that exist in most large organizations
today will demand security solutions that support networking and security
standards, and run on a variety of open computing platforms. Large-scale
deployments of remote access capability across the enterprise will require
security solutions that can accommodate an increasing number of users and that
are easy to use. The continued migration of sensitive, mission-critical
information into the distributed computing environment will require network
security solutions that are commercially proven, provide the highest level of
network security, and can be implemented and managed by the customer rather
than the vendor. Finally, as network security is increasingly provided as part
of a complete remote network solution by VARs and system integrators, network
security solutions should be capable of being implemented and supported by
such third parties.
Network Security Technology
Access control, authentication and security management are three of the
necessary components of an enterprise network security solution. Access
control products include dedicated hardware systems as well as client/server
software systems which are located on networks. Authentication products
include static password systems, hardware tokens and software tokens based on
one-time password technology. Management software tools are designed to
administer the systems controlling access and providing authentication.
Access Control. Access control systems generally work in conjunction with an
authentication system to control who has access to what computer resources.
The access control is the gating function, either allowing or disallowing use
of specific resources. There are two alternatives in the implementation of any
access control system for remote access to a computer or computer network: (i)
place a discrete control system between the user and the protected resource
such as a LAN or host computer ("off-network") or (ii) logically embed the
access control functionality into an underlying access server ("on-network").
AssureNet's access control products include both on-network client/server
software and off-network proprietary hardware solutions.
Off-network access control systems generally employ dedicated hardware which
supports a standard physical layer interface within the remote access system.
An example of this is the RS-232 interface between a modem and a port on a
communications server. The off-network access control system interrupts this
interface until a user is authenticated, and once authenticated, establishes
the connection between the modem and the communication server.
As opposed to the off-network system which provides its own switching
hardware, however, the on-network system employs the switching capability of
the existing communications server software. The access control function is
provided by modifying the applications software resident in the communication
server or other gateway system, and thereby making the communications server
act as the client in a client/server access control system. The essential
requirements of on-network client/server access control systems include: (i) a
secure database to contain user records; (ii) easily implemented software
interfaces for providing authentication and access control services to third
party client applications; and (iii) a user interface for supervision of the
server
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system which allows user accounts to be added/modified and deleted without
affecting the operation of the server software. The security server software
is usually installed on a high-performance application server platform such as
Windows NT Advanced Server, Novell Netware or UNIX.
Authentication Technologies. Current generally accepted methods of user
authentication include: (i) something secret the user knows, such as a
password, phrase, personal identification number ("PIN"), code or fact, (ii)
something physical the user possesses, such as a smart card, badge or other
form of discrete "token," which is resistant to counterfeiting, and (iii)
software "tokens" which are embedded in the user's workstation. A fourth
method of user identification involves something unique to the user, such as a
fingerprint, signature, retinal pattern, voice print or other measurable
personal characteristic or "biometric;" however, AssureNet believes such
methods are not commercially practicable today. AssureNet believes that token-
based security systems using a "two factor authentication" methodology, i.e.,
the system checks for something the user knows, such as a PIN, and then
something the user has, such as a token, are today's preferred authentication
solution for remote access to networks.
Passwords. Until fairly recently, the most common method of user
identification and authentication were static (non-changing) password
systems. These systems require only something a user knows, such as a
secret word, phrase or PIN selected by the user or chosen for the user by
the system or application. Static passwords are often shared between users
and can be guessed, stolen or observed, often without user awareness.
Static passwords are also vulnerable to "sniffing" programs and to attacks
using software designed to randomly generate and attempt thousands of short
passwords. As a result, while relied upon by many organizations for
authentication, static passwords are easily compromised.
Hardware Tokens/Smart Cards. Hardware tokens and smart cards are forms of
authentication based on something physical possessed by the user.
. Hardware tokens are electronic devices which are used to generate one-
time passwords. One-time passwords eliminate many of the risks
inherent in the use of static passwords for authentication. The token
is generally a small hand-held device which implements a cryptographic
process to generate information which uniquely identifies the user who
possesses the token, and changes the information each time the user
authenticates to a protected system (so that the process cannot be
circumvented by monitoring a valid user authentication and
subsequently reusing the captured information). Time synchronous
tokens are based on the accurate synchronization of separate clocks in
each of two systems, the token and the server. The clock in the token
is programmed with a unique "seed" value for each user by the token
vendor and hermetically sealed. Because the time-synchronous tokens
are sealed, when the battery is expended the card must be replaced
with a new card. Event-driven synchronous tokens are based on a one-
to-one relationship between the number of times the token is used and
the number of times the user attempts to log onto the protected
system. Consequently, if the "event button" is accidentally pushed,
the token and the server become unsynchronized, and the system
administrator must manually intervene in order to resynchronize them.
Challenge/response asynchronous tokens are approximately the same size
as synchronous tokens but also include a keypad. Challenge/response
tokens are initially programmed by the customer with a unique "seed"
value used as one input to the token's cryptographic algorithm. To
access a system using this kind of token, a user activates the token
using a PIN and then enters into the token a series of numbers (a
"challenge") that has been sent to the user's personal computer from
the network security server. The token, using the cryptographic
algorithm, then produces another series of numbers (a "response") to
the challenge. This response is then entered into the user's personal
computer and the security server then authenticates the user. Since the
functionality of the challenge/response token is asynchronous and
programmed by the customer, there is no need to permanently seal the
token, enabling the user to replace the battery and reuse the token
indefinitely. Additionally, since no synchronization is required, this
process is very reliable, and reduces the administrative burden of
keeping the system operating correctly. Once the secret seed values are
created and distributed to the token or software client and server, the
only possible corrective actions
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required of the system administrator would occur if an end user lost
his token or his account was locked due to an intrusion attempt.
. Smart cards typically consist of a solid state data storage device
mounted on a plastic card which contains some information unique to
the individual user. Possession of this card may be used as one factor
in a two-factor authentication process. Smart cards are inexpensive
(the card itself may be produced in large quantities for less than a
dollar each); however, a special card reader must be installed on
every workstation of a network with smart card authentication
services. The cost of retrofitting even a significant fraction of the
existing networked computers in most large organizations is
prohibitive. Thus, smart cards are not widely implemented today.
Challenge/response software keys. Challenge/response software keys
perform the same challenge/response authentication as challenge/response-
based hardware tokens; however, they come in a floppy diskette format. Some
software keys are copy-protected and can be installed on a hard disk while
still retaining their copy protection. Software keys that are copy
protected provide two factor authentication when combined with something
secret the user knows such as a PIN. To authenticate with a software key,
the user simply enters his/her PIN. The software key then automatically
executes the challenge/response process without further user interaction.
AssureNet believes that authentication using software keys is a secure and
easy-to-use authentication method and provides flexibility, scalability and
low cost of implementation.
Security Management. There is no widely adopted standard for the management
of security systems, therefore most security vendors have implemented
proprietary solutions. These management systems range from character-based,
command line interfaces to modern graphical user interface systems. At one end
of the available product spectrum are systems which can only be used to manage
a single security sub-system, requiring the administrator to visit the sites
where multiple sub-systems are located. At the other end of the spectrum are
security management systems, such as those offered by AssureNet's DMS and DMS
Reports software, which allow centralized and/or distributed management of
enterprise-wide security systems, supporting multiple access control systems
and authentication servers.
ASSURENET PRODUCTS
AssureNet's network security products, which provide access control,
authentication and security management primarily for the remote access market,
are based on the one-time password challenge/response identification and
authentication methodology and include Defender Security Server ("DSS")
software, Defender hardware products, software and hardware SecureNet Key
tokens, the Defender Management System ("DMS") software, technical support and
services. In addition, AssureNet's hardware-based network security products
also protect access to legacy host systems, upon which many companies are
still dependent. AssureNet's software and hardware security products run on a
variety of open computing platforms and support networking and security
standards wherever possible to insure compatibility with heterogeneous
computing environments. AssureNet's products are designed to facilitate the
management of global network security systems on an enterprise-wide basis and
address the growing security requirements associated with the increased use of
public networks by remote access users. See "Risk Factors--Risks Relating to
AssureNet--Rapid Technological Change; Dependence on New Product Development."
Defender Software Products
Software SecureNet Keys. The Software Key, also called a Software Token, was
initially introduced in 1989. In 1994, AssureNet introduced the Software
SecureNet Key for Windows. Each Software Key contains the DES
challenge/response algorithm for generating one-time passwords and is
programmed by the customer with a secret seed value (typically under the
control of a network security administrator) which is unique to the Software
Key. The data file containing the authentication information used in the
challenge/response algorithm is encrypted, and cannot be decrypted without use
of a PIN. The Software Key automatically authenticates the
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user by performing a challenge/response authentication after the user enters
his or her PIN. Therefore, only a person who has the PIN and the software-
token-enabled machine can use the software. The PIN is only known by the local
user; it is never transmitted. It can be changed at any time by the local user
without the intervention or knowledge of anyone else, including the system
administrator, thereby making it more secure. Additionally, the systems
administrator can securely un-install the Software Key, change the seed value,
and subsequently re-deploy the Software Key to a new user. In AssureNet's
standard product, copy protection prevents an attacker from getting a working
copy of the software and prevents an authorized user from making multiple
copies of the software. Copy protection provides the second factor of the two-
factor authentication process, the first being the possession of the PIN. Both
the Software Keys and Hardware Tokens and the authentication server have
security measures designed to detect a suspected attack and deactivate an
individual user's access. Pursuant to special contract, AssureNet will provide
un-copy-protected Software Tokens to a company for its internal use only. The
Software Key supports DOS, Windows, Windows for Workgroups, Windows 95,
Windows NT and Apple ARA operating environments. Software Keys currently are
list priced between $25 and $30.
Defender Security Server Software. The DSS software, an integrated security
server, delivers network security protection for LANs, WANs and Intranets.
AssureNet released a Novell version of the DSS software in August 1995, a
Windows NT Advanced Server version in December 1995, and a Sun Solaris version
in January 1997. The DSS software provides the centralized authentication and
security administration mechanism for devices protected by the agent
associated with the DSS, such as communications servers and firewalls. The
server software provides administrative and reporting functions through the
DMS and DMS Reports software. The DSS and DMS software combination is
currently available at a list price of $1,995 plus a user-license fee of $40
to $105 list price per user, depending on the total number of users per
server. AssureNet's agent has also been integrated into a variety of leading
communication servers, RADIUS and TACACS+ servers and firewalls to provide
interoperability with DSS.
DMS Software. DMS management software is a GUI-based management system that
provides an easy-to-use interface for managing, from a single workstation,
security related information for thousands of users in an enterprise network.
Currently, DMS is able to manage all AssureNet products. Such Management
includes configuring access rules for classes of users and services, defining
individual users and assigning privileges to those users, creating new user
accounts--including programming SecureNet Key tokens, auditing access and
attempted accesses, performing diagnostics and generating reports from the
collected audit data. Whether the user is authenticated or not a record is
logged and an audit trail is maintained by the system. AssureNet's software is
designed to intercept attempted system abuse and automatically take
preventative action if the system suspects that a Software Key or Hardware
Token is lost or stolen or a PIN is compromised. In December 1995, a new
graphical reports module was added, DMS Reports, which is able to analyze and
report on the large volume of raw audit data captured by distributed Defender
systems. In November 1996, DMS and DMS Reports were updated to add features
and support a hierarchy of security supervisors that can manage large
worldwide networks. The DMS management software runs in the Windows 3.x,
Windows 95 and Windows for Workgroups environments.
Defender Hardware Products
SecureNet Key Tokens. The Hardware Token, a hardware version of the Software
Token which implements the same challenge/response algorithm, was first
introduced in 1986. Hardware Tokens are shipped from the factory unprogrammed,
allowing the customers to control the secret seed value of their own tokens,
thereby eliminating the risk of disclosure of the individual seed values by
the vendor or any intermediary such as a VAR or distributor. The seed value is
created and loaded into the Hardware Tokens by the network security
administrator, using the DMS software. Like the Software Key, the Hardware
Token is PIN protected. In cases of loss or theft, the Hardware Token cannot
be used without the PIN. After a series of invalid PINs are entered, the
secret seed value is erased, disabling the token until reprogrammed by the
network security administrator. Hardware Tokens can be used for an indefinite
length of time with periodic replacement of batteries. Even though the
Hardware Token requires more user interaction than a Software Key, there are
three primary reasons why this product is still being used: (i) supporting
users whose computer interface does not support one of the
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operating systems for which the Software Key is available, such as UNIX
workstations or older "dumb" terminals; (ii) supporting users who frequently
log on from a variety of different computers, such as technical support
specialists who are logging on from multiple sites/workstations during the day
and (iii) customers whose users or management believe that Hardware Tokens are
more secure than Software Tokens. Each Hardware Token currently has a list
price of between $40 and $50.
Defender Hardware. The Defender hardware is needed primarily to support
dial-up access to host systems such as mainframes and mini-computers. The
original Defender II was introduced in 1983, the Defender 1000, now called the
Defender S/P, was introduced in 1989 and the Defender 5000, now called the
Defender M/P, was introduced in 1991, in order to provide enhanced
functionality over the Defender II products. Even though these legacy systems
are frequently connected to the enterprise LAN/WAN backbone network, a large
number of AssureNet's customers continue to provide direct dial access to the
host, rather than routing dial access through a LAN communications server and
subsequent gateway. By implementing direct host access, the customer reduces
traffic on the LAN, and eliminates the need for the end user to load complex
LAN protocol software including drivers, when the end user frequently only
requires a simple terminal emulation interface. The Defender hardware systems
provide authentication, access control and accounting for remote access
networks via serial, asynchronous communications, and have proven to be
effective at protecting dial-up access to legacy host computers, remote
control or remote node LAN access, and for diagnostic or maintenance port
access to mission-critical systems such as PBX, voice mail, routers and
environmental control systems. The Defender M/P has a list price starting at
$9,995 and the Defender S/P has a list price of $495.
PRODUCT DEVELOPMENT
AssureNet has a dedicated product development and engineering organization
and periodically releases new products and enhancements to existing products.
Product development efforts are directed at increasing product functionality,
improving product performance and expanding the capabilities of the products
to interoperate with third party software and hardware. AssureNet has devoted
substantial development resources to develop additional functionality for its
products and the capability to support additional platforms, third-party
communication servers, firewalls and emerging technologies. AssureNet has
developed tools to assist customers, strategic marketing partners and other
third-party integrators in integrating AssureNet's products with custom and
other third-party network or system applications. In addition to enhancing its
existing products, one of AssureNet's goals is to offer products in other
categories of network security, such as the World Wide Web. AssureNet
continues to identify and prioritize various technologies for potential future
product offerings. AssureNet may develop these products internally or enter
into arrangements to license or acquire products or technologies from third
parties. See "Risk Factors--Risks Relating to AssureNet--Rapid Technological
Change; Dependence on New Product Development."
As of December 31, 1996, AssureNet's product development staff consisted of
11 full-time employees engaged in engineering and development, including
software and hardware engineering, testing and quality assurance. AssureNet
also engages outside contractors where appropriate to supplement AssureNet's
in-house expertise or expedite projects based on customer or market demand.
AssureNet's total research and development expenses for the years ended
December 31, 1993, 1994, 1995 and for the nine months ended September 30,
1996, were approximately $681,000, $758,000, $1.4 million and $1.9 million,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--AssureNet--Results of Operations."
SALES AND MARKETING
Sales. AssureNet has historically employed a direct sales force to market,
sell and support its network security products to large corporations in North
America and the United Kingdom. AssureNet's customers have generally been in
the financial services, electronics, communications, healthcare and
manufacturing industries.
In late 1995, AssureNet began a transition from relying primarily on direct
sales to customers to utilizing indirect sales channels for the sale of its
network security products. AssureNet intends to utilize a mixed
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distribution strategy to market its network security products. AssureNet has
adopted this strategy because it believes that large organizations are
increasingly relying upon VARs and system integrators to supply complete
remote access and security solutions. AssureNet sells and licenses its
products through written sales and license agreements under terms and
conditions that AssureNet believes are consistent with industry practice.
AssureNet will seek to further penetrate its direct and indirect customer base
with new products and services as well as leverage its successful customer
relationships to obtain new customers in AssureNet's targeted markets.
AssureNet's products are designed to allow both its client and server
products to be sold and installed by VARs and system integrators as part of a
complete remote access solution. AssureNet experienced a rapid transition from
direct-sales-generated revenue to indirect-sales-generated revenue in the
first nine months of 1996. AssureNet's net revenue from direct sales efforts
for the years ended December 31, 1993, 1994, 1995 and for the nine months
ended September 30, 1996, was approximately 100%, 95%, 83% and 71% of net
revenue, respectively. Indirect sales channels accounted for approximately 0%,
5%, 17% and 29%, respectively, of net revenue for 1993, 1994, 1995 and for the
nine months ended September 30, 1996. AssureNet's net revenue from direct
sales efforts for the periods ended March 31, 1996, June 30, 1996 and
September 30, 1996 were approximately 83%, 66% and 54% of net revenue,
respectively, while AssureNet's net revenue from indirect sales channels
accounted for 17%, 34% and 46% of net revenue, respectively, for the same time
periods. Unit volumes of product shipments increased substantially during the
nine months ended September 30, 1996; however, revenues declined due to per
unit price decreases and reduced margins from sales through the indirect
channel. AssureNet anticipates that its indirect sales as a percentage of
total sales will grow in 1997 and that unit volumes will continue to grow
substantially.
As of December 31, 1996, AssureNet's field sales organization consisted of
20 sales, technical and customer support personnel operating out of
AssureNet's Mountain View headquarters and 6 field locations in North America
and 14 sales and technical support personnel operating out of one location in
the United Kingdom. Select national and regional VARs and system integrators
who are capable of representing AssureNet's network security products are
being employed to deliver complete, secure remote access and other network
solutions to their customers. These VARs and system integrators are being
selected for their capability to offer AssureNet's products in combination
with related products and services, as well as for their capability to serve
particular vertical markets. Included in this group are national VARs such as
Anixter, Entex and National Business Group, as well as regional VARs such as
Data Transit, Computer Networks and Integrated Digital Networks. AssureNet
also markets, sells and licenses its software products indirectly through one
major North American distributor, Ingram, that delivers product to a multitude
of smaller VARs where a direct purchasing relationship with AssureNet is not
commercially desirable. As of December 31, 1996, AssureNet had relationships
with 62 distributors and resellers in North America, 7 distributors and
resellers in the Pacific Rim and 19 distributors and resellers throughout the
United Kingdom and European continent.
Additionally, AssureNet broadly expanded its line of software products and
increased software revenues in the first three quarters of 1996. AssureNet
earned 87%, 71% and 44% of its revenue from hardware for the periods ended
March 31, 1996, June 30, 1996 and September 30, 1996, while it earned 13%, 29%
and 56% of its revenue from software for the same time periods. The Company
expects that its percentage of software sales will continue to grow. See "Risk
Factors--Risks Relating to AssureNet--Modification of Distribution Channel."
International Sales. AssureNet derived approximately $1.2 million, $3.2
million, $3.4 million, and $5.7 million, or approximately 14%, 27%, 30% and
48%, of its total net revenue, from international customers in 1993, 1994,
1995 and the nine months ended September 30, 1996, respectively. A majority of
such international net revenue was derived from sales in the United Kingdom
with smaller international sales totals in continental Europe, Asia and the
Pacific Rim. Sales outside of the United States and the United Kingdom
represented approximately 6% and 7%, respectively, of AssureNet's total net
revenue for 1995 and for the nine months ended September 30, 1996. Because
AssureNet has only recently begun to penetrate international markets outside
of the United Kingdom, AssureNet believes that international sales present a
significant market
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opportunity and will continue to increase as a percentage of total net
revenue. Channel sales, principally through distributors, comprise the
majority of international sales and in Japan represent all sales of
AssureNet's products. AssureNet's international distributors provide initial
sales support, installation, technical support and follow-on service to local
customers. AssureNet hopes to expand its business outside North America and
the United Kingdom through the establishment of additional third-party
distribution arrangements, primarily on the European continent and the Far
East, the use of Axent's foreign sales network and the hiring of sales
personnel. AssureNet generally grants its distributors non-exclusive
distribution rights. See "Risk Factors--Risks Relating to AssureNet--
International Sales & Support."
Marketing. In support of its sales efforts, AssureNet conducts targeted
marketing programs, including direct mail, channel marketing, promotions,
seminars, trade shows and telemarketing and ongoing customer and third-party
communication programs. AssureNet also seeks to stimulate interest in
enterprise network security through its public relations program, speaking
engagements, white papers, technical notes and programs targeted at educating
consultants on AssureNet's capabilities. With competing vendors offering
different solutions, customers in the market for computer and network security
solutions tend to thoroughly evaluate new products and vendors. AssureNet
offers evaluation installations for prospective customers desiring first-hand
experience in using its software products prior to making a purchase decision.
Under this program, prospective customers install a demonstration version of
one of AssureNet's access control products on their own system and generally
run pilot programs with up to 10 Software Tokens and/or Hardware Tokens.
Collaborative Relationships. AssureNet has developed collaborative marketing
and other third-party relationships with most of the leading remote access
communication server and firewall vendors and hopes to develop such
relationships with the leading database software, operating systems, hardware
networking products, Internet-related products and application software
vendors. Such vendors integrate AssureNet's agent software into their products
to provide compatibility with AssureNet's DSS software systems. AssureNet is
in the process of expanding these relationships to include joint marketing
initiatives. It is anticipated that these relationships will also assist
AssureNet in increasing its base of new customers. For a discussion of certain
risks associated with its collaborative strategic relationships, see "Risk
Factors--Risks Relating to AssureNet--Need to Establish and Maintain
Collaborative Relationships."
CUSTOMERS
Historically, AssureNet's customers have been principally in the financial
services, electronics, communications, health care and manufacturing
industries. These customers are generally sophisticated and knowledgeable
purchasers of security systems and they provide AssureNet with critical
technical feedback that assists AssureNet in meeting the future security needs
of these customers. AssureNet believes that as networks proliferate and become
more complex and as more users require remote access to corporate resources,
the number of industries concerned with enterprise network security and access
to information will grow. During the year ended December 31, 1995, no customer
accounted for more than 10% of AssureNet's net revenue; however, during the
quarter ended December 31, 1995 and the nine months ended September 30, 1996,
British Gas accounted for greater than ten percent of AssureNet's net revenue.
Similarly, during the quarter ended September 30, 1996, each of Ingram,
AssureNet's North American distributor, and Anixter, a large systems
integrator, accounted for greater than 10% of AssureNet's net revenue. See
"Risk Factors--Risks Relating to AssureNet--Risks Associated with Customer
Concentration."
CUSTOMER SERVICE AND SUPPORT
AssureNet believes that a high level of customer service and support is
critical to AssureNet's success. The services provided by AssureNet include
technical support, maintenance, training and consulting. These services are
designed to increase customer satisfaction, provide feedback to AssureNet as
to customers' demands and requirements, and generate recurring revenue.
AssureNet plans to continue to expand its services and support programs as the
complexity of the products offered by AssureNet increases and believes there
is a significant opportunity to sell additional services to its customers in
the future.
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Customer Support. AssureNet maintains a customer support help desk and
technical support organization at its headquarters in Mountain View,
California and in Bramley, Basingstoke, Hants in the United Kingdom. A
significant portion of AssureNet's service and support activities are provided
remotely from AssureNet's headquarters in Mountain View, California. AssureNet
also has field technical support personnel that work directly with AssureNet's
sales force, distributors and customers.
AssureNet offers customer support through telephone, electronic mail, World
Wide Web and facsimile and provides new software releases, maintenance
releases and enhancements under annual maintenance and support agreements with
customers. Additional customer support is provided by AssureNet's VARs,
systems integrators and distributors. Maintenance and customer support are not
included in software license fees but are purchased separately for an annual
fee generally equivalent to between 10% and 16% of the then-current list
prices of the licensed products.
AssureNet offers education and training programs, as well as customized
consulting services, to its users. Fees for education, training and consulting
services are generally charged on a per diem basis, separately from
AssureNet's products. AssureNet also provides product information bulletins on
an ongoing basis, including bulletins posted through its Internet web site,
and periodic informational updates about the products installed. These
bulletins generally answer commonly asked questions and provide information
about new product features.
Warranty. AssureNet generally sells each of its products to customers with a
one-year hardware warranty and a 90-day software warranty. After the
expiration of the warranty period, customers may elect to purchase a
maintenance contract for renewable periods. Under these contracts, AssureNet
agrees to provide (i) corrections for documented program errors, (ii) version
upgrades for both software and firmware, (iii) repair or replacement of
Defender hardware and software products that do not perform in accordance with
its functional specifications and (iv) telephone consultation.
MANUFACTURING AND SUPPLIERS
Hardware Manufacturing. AssureNet contracts for the manufacture of its
Hardware Tokens with a subcontractor located in China. This subcontractor is
currently producing approximately 5,000 Hardware Tokens per month and has
indicated that it is capable of producing in excess of 100,000 Hardware Tokens
per month. AssureNet contracts for the manufacture of its Defender hardware
products with one assembly operation located in San Jose, California. This
subcontractor manufactures products in accordance with AssureNet's
specifications. AssureNet purchases all components from independent vendors
and sends them to the subcontractor. AssureNet has generally been able to
obtain adequate supplies of these products in a timely manner from these
vendors and believes that alternate vendors can be identified if current
vendors are unable to fulfill its needs. However, delays or failure to
identify alternate vendors, if required, or a reduction or interruption in
supply or a significant increase in the manufacturing costs could adversely
affect AssureNet's financial condition or results of operations and could
impact customer relations. See "Risk Factors--Risks Relating to AssureNet--
Dependence on Suppliers and Contract Manufacturers; Risks Associated With
Doing Business in China."
Software Manufacturing. AssureNet purchases duplicating services for its
software products from an outside vendor, which utilizes a duplication method
designed to enhance the quality of the software code reproduced on standard
diskettes. The outside vendor also applies the copy protection mechanism to
AssureNet's Software Token. AssureNet's Software Token and DSS, DMS and DMS
Reports software are distributed as object code on standard magnetic
diskettes, together with printed documentation.
Suppliers. Although AssureNet generally uses standard parts and components
for its products, certain components are currently available only from a
single source or from limited sources. With respect to Hardware Tokens,
AssureNet purchases the microprocessors for its tokens from NEC, a Japanese
computer chip manufacturer. There can be no certainty that NEC will be able to
furnish AssureNet a sufficient number of microprocessors to meet customer
demand, that AssureNet will be able to purchase microprocessors from NEC
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at commercially acceptable prices or, if NEC discontinues the manufacture of
microprocessors, that AssureNet will be able to procure microprocessors from
another supplier on a timely basis and at commercially acceptable prices.
AssureNet believes that it would take approximately twelve months to identify
and commence production of suitable replacements for the Hardware Token.
AssureNet attempts to maintain a two-month supply of Hardware Tokens in
inventory. In dealing with manufacturers and suppliers, AssureNet generally
purchases components and products subject to the terms and conditions of
standard purchase orders. See "Risk Factors--Risks Relating to AssureNet--
Dependence on Suppliers and Contract Manufacturers; Risks Associated With
Doing Business in China."
COMPETITION
The market for computer and network security products is intensely
competitive, and AssureNet believes that competition in this market is likely
to intensify. AssureNet currently experiences competition from a number of
companies, including (i) software operating systems suppliers and application
software vendors that incorporate a single-factor static password security
system into their products, (ii) vendors of hardware tokens and software keys
such as Security Dynamics, SCC, CryptoCard, Cylink, Leemah and Racal-Guardata,
Inc., (iii) smart card security device vendors, such as AT&T Technologies,
Inc., Bull HN Information Systems, Inc. and Schlumberger, Limited, (iv)
biometric security device vendors, such as Eye Dentify Systems, Fingermatrix
(U.K.) Limited and Identix, Inc., and (v) dialback security system
manufacturers, such as Leemah. AssureNet may in the future also face
competition from these and other parties that develop computer and network
security products based upon approaches similar to or different from those
employed by AssureNet. In particular, AssureNet could face competition from
large operating system software companies and network equipment companies.
Such companies may include, by way of example, but not by way of limitation,
software providers such as Microsoft, IBM, Novell, Hewlett Packard and
Netscape, and network equipment providers such as Cisco, Bay Networks and
3Com. There can be no assurance that the market for computer and network
security products will not ultimately be dominated by approaches other than
the approach marketed by AssureNet. While AssureNet believes that it does not
currently compete against manufacturers of other classes of security products
(such as encryption), there can be no assurance that such companies will not
compete with AssureNet in the future or that its existing competitors will not
acquire such companies (e.g., Security Dynamics' acquisition of RSA, Inc., a
leading encryption company).
AssureNet believes that the principal competitive factors affecting the
market for computer and network security products include ease of use, ease of
administration, quality and reliability, level of security, compatibility with
heterogeneous computing environments, scalability, ability to be implemented
and managed by the user, distribution channels, customer service and support
and price. Although AssureNet believes that its products currently compete
favorably with respect to such factors, there can be no assurance that
AssureNet can maintain its competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other competitive resources. See "Risk
Factors--Risks Relating to AssureNet--Intense Competition."
PROPRIETARY RIGHTS
AssureNet relies on a combination of trade secret, copyright and trademark
law, software licenses and nondisclosure agreements to establish and protect
its proprietary rights in its products. AssureNet enters into confidentiality
and/or license agreements with substantially all of its employees and
distributors, as well as with those customers and potential customers seeking
proprietary information, and limits access to and distribution of its
software, documentation and other proprietary information. Despite these
precautions, it may be possible for unauthorized third parties to copy aspects
of AssureNet's products or to obtain and use information that AssureNet
regards as proprietary. AssureNet has certain registered and other trademarks.
AssureNet believes that its products, trademarks and other proprietary rights
do not infringe the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims in
the future. See "Risk Factors--Risks Relating to AssureNet--Limited Protection
of Intellectual Property and Proprietary Rights."
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EMPLOYEES
At December 31, 1996, AssureNet and its United Kingdom subsidiary employed
75 full-time and 3 contract employees. Of these employees, 11 full-time
employees were involved in research and development, 46 full-time employees
and 1 contract employee in sales, marketing and customer support, 6 full-time
employees in production and 12 full-time and 2 contract employees in
administration and finance. No employees are covered by any collective
bargaining agreements. Over the past year AssureNet has experienced increased
turn-over in employees due to changes in direction and other factors. Although
AssureNet believes that its relationships with its employees are good, recent
events may cause some concern among employees.
FACILITIES
AssureNet's principal administrative, sales and marketing, research and
development and support facilities consist of approximately 27,000 square feet
of office space in Mountain View, California. AssureNet occupies these
premises under a lease expiring in January 31, 1999. As of December 31, 1996,
the annual base rent for this facility was approximately $223,500, with such
annualized rent increasing to $240,000 in February 1997 and to $256,000 in
February 1998. In support of its field sales and support organization,
AssureNet also leases facilities and offices in 6 other locations in the
United States, and one location in the United Kingdom. AssureNet believes its
current headquarters will provide sufficient space for growth for the
foreseeable future.
LEGAL PROCEEDINGS
AssureNet is not a party to any litigation, other than claims incurred in
the ordinary course of business, none of which it believes could have a
material adverse effect on AssureNet or its business.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--ASSURENET
Management's Discussion and Analysis of Financial Condition and Results of
Operations--AssureNet and other parts of this Prospectus/Proxy Statement
contain forward-looking statements which involve risks and uncertainties.
AssureNet's and AXENT's actual results may differ significantly from the
results discussed in forward-looking statements. Factors that might cause such
a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
AssureNet is a leading provider of network security products and services
that protect access to enterprise networks, including LANs, WANs and
Intranets. AssureNet was co-founded in 1970 as an information-technology
consulting firm. In 1983, AssureNet introduced the Defender hardware access
control products to address user environments that included centralized and
distributed legacy mainframes. Between 1983 and 1989, AssureNet developed and
began to market its SecureNet Key hardware tokens and Software SecureNet Key
tokens as remote access authentication issues became of increasing concern to
large enterprises. Between 1990 and 1994, AssureNet introduced new Defender
hardware products to provide network security for legacy host computers and
LANs. During this period, a majority of AssureNet's net revenue was derived
from the sale of SecureNet Key hardware tokens and the Defender hardware
products.
In late 1995, AssureNet initiated a period of transition with respect to its
sales model, management personnel and product mix. AssureNet shifted its
historical direct sales model toward a channel sales strategy, resulting in a
reorganization of the sales force during the first quarter of 1996. During the
period December 1994 to December 1995, AssureNet also increased its full-time
work force from 61 to 85 employees in anticipation of significant growth. To
manage this transition, AssureNet replaced most of its management team and
substantially reorganized all of the departments within AssureNet. In December
1995, January 1996 and April 1996, AssureNet hired a new President and Chief
Executive Officer, Senior Vice President of Marketing and Sales, and Senior
Vice President of Product Development, respectively. In July 1996, the
President and Chief Executive Officer resigned, whereupon a group of executive
officers, including the Chief Financial Officer, the Senior Vice President of
Marketing and Sales and the Senior Vice President of Product Development,
assumed his duties. In December 1996, AssureNet's Chief Financial Officer was
named Acting President and Chief Executive Officer, in addition to her other
offices. AssureNet reduced its workforce to a total of 75 employees as of
December 31, 1996. The Senior Vice President of Marketing and Sales left
AssureNet in January 1997. See "Risk Factors--Risks Relating to AssureNet--
Recent Decline in Performance; Recent Losses; Uncertainty of Future Results of
Operations," "--Modification of Distribution Strategy," "--Fluctuations in
Quarterly Results of Operations; Limited Backlog; Lengthy Sales Cycle" and "--
Management Changes; Dependence Upon Key Personnel; Management of Business."
AssureNet suffered a net loss of $3.3 million for the nine months ended
September 30, 1996 compared to a net loss of $1.1 million in the corresponding
prior period, and AssureNet had net losses of $76,700, $1.9 million and $1.3
million for the quarters ended March 31, 1996, June 30, 1996 and September 30,
1996, respectively. Such losses were a result of, among other things,
AssureNet's investment in an indirect distribution sales channel, declining
revenues from the sale of hardware products and increased research,
development, sales, marketing and administrative expenses incurred in the
expectation of substantial revenue growth which has not, to date, occurred.
During the first quarter of 1996, AssureNet experienced substantially
increased revenues, primarily due to a large sale of hardware-based network
security products to a foreign customer. In the second quarter of 1996,
AssureNet accelerated its transition to the use of indirect sales channels,
and as a result of such transition incurred a significant reduction in the
productivity of its direct sales force which was not offset by a corresponding
increase in indirect sales. In July, 1996, the Chief Executive Officer
resigned, resulting in significant management distraction. During the third
quarter of 1996, the transition to the indirect channel was further
accelerated and
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software per unit prices were decreased, resulting in a significant reduction
in net revenues and gross margin. Additional investment in marketing
communication/awareness programs failed to create the increased market demand
needed for a successful transition to the indirect channel. Lack of channel-
ready product slowed channel acceptance and increased the cost of supporting
product distribution through the indirect channel.
Sales during the nine months ended September 30, 1996 principally consisted
of Defender hardware, DSS and DMS software and both Hardware Tokens and
Software Keys. Included in these amounts is a significant first quarter sale
of primarily third-party goods executed by AssureNet's United Kingdom
subsidiary acting as a systems integrator. During the second and third
quarters of 1996, the United Kingdom subsidiary transitioned away from such
systems integration service. AssureNet expects to generate a majority of its
future revenues from sales of DSS software user-licenses and Software Keys.
AssureNet substantially increased its investment in research and product
development from $1 million for the nine month period ended September 30, 1995
to $1.9 million for the nine month period ended September 30, 1996, an
increase of 85%. In August 1995, AssureNet introduced the NetWare version of
the DSS software, designed to provide network security protection for LANs,
WANs and Intranets. AssureNet released a Windows NT Advanced Server version of
the DSS software in December 1995. In January of 1997, AssureNet introduced a
UNIX version of the DSS software for the Sun Solaris (UNIX) platform. In mid
1995, AssureNet accelerated its development of its Software Tokens,
culminating in the delivery of both Windows 95 and Windows NT tokens in June
1996 and December 1996, respectively. See "Risk Factors--Risks Relating to
AssureNet--Recent Decline in Performance; Recent Losses; Uncertainty of Future
Results of Operations."
To improve future operating results, AssureNet must, among other things,
increase market awareness and acceptance of its software products, achieve
significantly higher sales levels through a mixed distribution strategy,
complete the development of certain software products, respond effectively to
competitive developments including introduction of new products by AssureNet's
competitors, continue to attract, retain and motivate qualified individuals,
and continue to develop and market new products and control costs. There can
be no assurance that AssureNet's strategy will be successful or that AssureNet
will experience increased net revenue or become profitable at any time in the
future. See "Risk Factors--Risks Relating to AssureNet--Recent Decline in
Performance; Recent Losses; Uncertainty of Future Results of Operations," "--
Fluctuations in Quarterly Results of Operations; Limited Backlog; Lengthy
Sales Cycle," "--Risks Associated with New Product and Distribution Strategy,"
"--Management Changes; Dependence Upon Key Personnel; Management of Business,"
"--Risks Associated with Computer and Network Security Markets; Product
Acceptance" and "--Modification of Distribution Strategy."
AssureNet generates revenues from sales of its hardware products and fees
received under software license agreements. Sales are made indirectly through
resellers and systems integrators and, in some cases, directly to end users.
Revenue on hardware products is recognized upon shipment to the customer.
License fees are generally recognized when a customer purchase order has been
received, the software has been shipped, AssureNet has a right to invoice the
customer, collection of the receivable is probable and there are no
significant obligations remaining. Software licenses exclude new versions of
the licensed software but include a 90-day technical support period. After the
90-day period, AssureNet's customers often enter into maintenance agreements
for ongoing technical support and new versions of the software. Revenues from
any post-contract support services are recorded as deferred revenue and are
recognized ratably over the term of the support period or when the services
are performed, as applicable. AssureNet provides for estimated future returns,
stock rotation, and the estimated cost of warranty at the time of sale based
on historical experience. During the first nine months of 1996, such returns
have been 10% of AssureNet's indirect channel revenues.
In March 1996, AssureNet completed the sale of 1,280,488 shares of
Redeemable convertible preferred stock at $4.10 per share and warrants to
purchase 512,195 shares of Common Stock to venture capital investors which
provided net proceeds to AssureNet of approximately $4.8 million. A portion of
the net proceeds from the sale of the Redeemable convertible preferred stock
was used to retire certain indebtedness and the remainder was used for working
capital purposes. AssureNet is currently evaluating its available credit
facility in regard to its cash flow requirements.
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RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data of
AssureNet expressed as a percentage of net revenue for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
Hardware................. 98.4% 94.5% 88.5% 89.0% 71.7%
Software................. 1.6 5.5 11.5 11.0 28.3
------- ------- -------- -------- --------
Total net revenue...... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Hardware................. 38.9 35.5 39.3 36.3 35.0
Software................. 0.4 1.9 1.8 1.5 1.3
------- ------- -------- -------- --------
Total cost of revenue.. 39.3 37.4 41.1 37.8 36.3
Gross profit............... 60.7 62.6 58.9 62.2 63.7
------- ------- -------- -------- --------
Operating expenses:
Research and
development............. 8.0 6.3 12.5 12.3 15.8
Sales and marketing...... 37.0 30.2 51.1 50.2 53.9
General and
administrative.......... 14.6 11.1 15.8 14.0 15.7
------- ------- -------- -------- --------
Total operating
expenses.............. 59.6 47.6 79.4 76.5 85.4
------- ------- -------- -------- --------
Income (loss) from
operations................ 1.1 15.0 (20.5) (14.3) (21.7)
Total other income
(expense), net............ 0.2 0.1 0.2 0.4 (6.0)
Income (loss) before
provision (benefit) for
income taxes,
extraordinary item and
cumulative effect of
change in accounting
policy.................... 1.3 15.1 (20.3) (13.9) (27.7)
(Provision) benefit for
income taxes.............. (0.8) (5.8) (2.6) 0.2 (0.1)
------- ------- -------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
policy.................... 0.5 9.3 (22.9) (13.7) (27.8)
Cumulative effect of change
in accounting principle... 10.5 -- -- -- --
------- ------- -------- -------- --------
Net income (loss).......... 11.0% 9.3% (22.9)% (13.7)% (27.8)%
======= ======= ======== ======== ========
</TABLE>
Comparison of Nine Months Ended September 30, 1996 and 1995
Net Revenue. Net revenue is comprised of sales of software and hardware
network security products and service fees for maintenance contracts and
training services. Net revenue increased 43% from $8.2 million for the nine
months ended September 30, 1995 to $11.7 million for the nine months ended
September 30, 1996. The increase was primarily due to $2.4 million of revenue
from a large sale of hardware-based network security products to a foreign
customer and an increase in software sales of 270% from $898,000 for the nine
months ended September 30, 1995 to $3.3 million for the nine months ended
September 30, 1996. The increase in software sales is primarily attributable
to the expansion and market acceptance of AssureNet's DSS and Software
SecureNet Key token product lines during the last quarter of 1995 and the nine
months ended September 30, 1996. From September 30, 1995 to September 30,
1996, hardware revenues increased from $6.2 million to $7.5 million,
respectively. However, a substantial portion of the revenue was attributable
to a one-time sale of $2.4 million to a foreign customer including a
substantial amount of third-party hardware products. Excluding revenue from
the foreign customer, hardware revenues decreased from approximately 76% of
net revenue for the nine months ended September 30, 1995 to approximately 55%
of net revenue for the nine months ended September 30, 1996. The decrease of
hardware sales was primarily due to increased acceptance of software security
products and the focus on selling software through the indirect channel. In
addition, maintenance revenues decreased from
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14% of revenue for the nine months ended September 30, 1995 to 8% of revenue
for the nine months ended September 30, 1996. The majority of maintenance
revenue is derived from hardware products, and the decline in hardware revenue
for the same period resulted in lower maintenance revenue.
Gross Margin. Cost of revenue consists primarily of production,
installation, warranty and customer service costs. Gross margin increased from
62% of net revenue for the nine months ended September 30, 1995 to 64% of net
revenue for the nine months ended September 30, 1996. The higher gross margin
was attributable to the increase in software revenue as a percentage of net
revenue, and was offset by the reduced margins from the increase in indirect
sales. Such indirect sales accounted for 16% of net revenue for the nine
months ended September 30, 1995 and 29% of net revenue for the nine months
ended September 30, 1996. Additionally, a large sale of hardware-based network
security products to a foreign customer contributed to the reduction in gross
margin, as it included a large amount of third-party equipment. AssureNet
offers its distribution channel discounts ranging from 25% to 36%. Excluding
the gross margin attributable to the large sale to the foreign customer, gross
margin would have been $6.4 million or 68.8% of net revenue, primarily due to
enhanced software and international sales which have higher gross margins than
hardware and North American sales.
Research and Development. Research and development expenses consist
primarily of engineering personnel, amortization of capitalized engineering,
third-party developers and related overhead costs. At September 30, 1996 the
amount of unamortized capitalized engineering costs was $422,000 and this is
being amortized over periods ranging from twelve to eighteen months. Research
and development expenses increased 85% from $1 million for the nine months
ended September 30, 1995 to $1.9 million for the nine months ended September
30, 1996. For these periods research and development represented 12% and 16%
of net revenue respectively. The significant increase in research and
development expenses resulted from employing additional engineering staff to
design new software products and enhancements to the existing products,
increased amortization of capitalized engineering and expensed third-party
development costs. AssureNet anticipates that research and development costs
will continue to increase in future periods.
Sales and Marketing. Sales and marketing expenses include salaries,
commissions, advertising, travel and other selling related expenses. Sales and
marketing expenses increased 54% from $4.1 million for the nine months ended
September 30, 1995 to $6.3 million for the nine months ended September 30,
1996, representing 50% and 54% of net revenue, respectively. The increase in
dollar amount was due primarily to the hiring of additional sales and
marketing employees to support the transition to the indirect channel,
additional investment in international operations, increased commissions and
the development of a marketing communications/ awareness program offset
partially by a decrease in sales expenses related to the direct sales effort.
Particularly as AssureNet reevaluates its sales and marketing strategies with
respect to direct and indirect distribution channels, AssureNet anticipates
that sales and marketing expenses will continue to increase.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for administration, finance, human resources,
information systems and general management including salaries, benefits, and
related costs, legal, auditing and other expenses. General and administration
expenses increased 60% from $1.1 million for the nine months ended September
30, 1995 to $1.8 million for the nine months ended September 30, 1996 due to
additional personnel and increases in salaries, benefits, depreciation, and
audit and legal fees, particularly associated with AssureNet's prior attempt
at a business combination with another company.
Other Expenses. In the first two quarters of 1996 AssureNet incurred
substantial expenses relating to an attempted initial public offering ("IPO").
The expenses consisted primarily of legal and accounting fees. AssureNet also
incurred expenses related to the resignation of an executive officer.
Provisions for Income Taxes. AssureNet accounts for income taxes under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." SFAS 109 requires AssureNet to record an
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asset with respect to the future value of its net operating loss
carryforwards. AssureNet's history of losses makes the realization of its net
operating loss carryforwards uncertain, therefore AssureNet has offset a
valuation allowance against its deferred tax asset. Income taxes increased
from a credit of $16,000 for the nine months ended September 30, 1995 (based
on a tax loss carryforward) to a $12,000 expense for the nine months ended
September 30, 1996. The increase in taxes is related to franchise tax expense
in the states in which AssureNet is authorized to do business and taxes
associated with AssureNet's United Kingdom subsidiary. AssureNet has adjusted
its transfer pricing to its United Kingdom subsidiary to reflect the results
of a transfer pricing study conducted by AssureNet's previous accountants.
Comparison of Years Ended December 31, 1995, 1994 and 1993
Net Revenue. AssureNet's net revenue increased 40% from $8.6 million in 1993
to $12.0 million in 1994. The increase was primarily due to a large contract
in the United Kingdom, increased market acceptance of AssureNet's products and
an increase in maintenance and training revenue. Net revenue decreased 4% from
$12.0 million in 1994 to $11.5 million in 1995. The decrease was due to a
transition from a hardware-based product line to a software-based product
line, partially offset by United Kingdom net revenue increases. Hardware
revenue decreased from approximately 94% of net revenue in 1994 to
approximately 90% of net revenue in 1995 while software revenue grew from
approximately 6% of net revenue in 1994 to approximately 10% of net revenue in
1995.
Gross Margin. Gross profit as a percentage of net revenue was 61%, 63% and
59% in 1993, 1994 and 1995, respectively. The improvement in gross margin
during 1994 was attributable to the growth of software revenue, which has a
higher gross margin than hardware revenue, and an increase in international
sales, which typically has a higher gross margin than domestic sales. The
decrease in gross profit during 1995 resulted from increased sales of hardware
and software products through indirect sales channels. Indirect sales
channels, which have higher distribution costs, accounted for 5% of net
revenue in 1994 compared to 17% of net revenue in 1995.
Research and Development. Research and development expenses increased from
$681,000 in 1993 to $758,000 in 1994 to $1.4 million in 1995, representing 8%,
6% and 12% of net revenue, respectively. The significant increase in research
and development expenses resulted from employing additional engineering staff
to develop new software products.
Sales and Marketing. Sales and marketing expenses increased from $3.2
million in 1993 to $3.6 million in 1994 to $5.9 million in 1995, representing
37%, 30% and 51% of net revenue, respectively. The substantial increase in
1995 was caused by the addition of 17 new sales personnel and the development
of a marketing communications program and a partnering program.
General and Administrative. General and administrative expenses increased
from $1.2 million in 1993 to $1.3 million in 1994 to $1.8 million in 1995,
representing 15%, 11% and 16% of net revenue, respectively. The increase in
1995 was primarily attributable to recruitment fees for key executives and
certain financial advisory fees.
Provision for Income Taxes. AssureNet's provision for income tax was $68,000
in 1993, $696,000 in 1994 and $303,000 in 1995. The provision for income taxes
as a percentage of pre-tax income was 59% and 38% in 1993 and 1994,
respectively. See Note 9 of Notes to Consolidated Financial Statements. The
provision for income taxes takes into account the effects of foreign income
taxes and federal and state income taxes affected by the utilization of
various carryforwards and credits. As of December 31, 1995, AssureNet had
$1.56 million of deferred tax assets for application against future taxable
income. Due to the uncertainties of achieving future taxable income, AssureNet
has provided a valuation allowance for the deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, AssureNet has financed its operations primarily through the
sale of preferred stock totalling approximately $8.7 million, bank debt and
cash generated from operations. In 1993 and 1994, $455,000 and
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$1.3 million, respectively, of cash was provided by operations while in 1995,
$1.3 million was used in operations. For the nine months ended september 30,
1996, $1.9 million of cash was used in operations. Cash was provided for
operations in 1996 from the sale of Redeemable convertible preferred stock for
net proceeds of $4.8 million, and the cash used during 1995 was provided by
cash reserves, bank debt and increases in accounts payable and accrued
liabilities. In 1993 and 1994, the cash provided was used to support
AssureNet's working capital requirements. In 1994 and 1995, AssureNet
experienced significant growth in receivables, accompanying AssureNet's
increased sales volume in the final quarter of each such year, which was
partially offset by increases in accounts payable and other current
liabilities.
In 1993, 1994, 1995 and for the nine months ended September 30, 1996,
AssureNet's investing activities have consisted entirely of purchases of
property and equipment. In those periods, AssureNet used $181,000, $220,000,
$600,000 and $1.2 million, respectively, of cash to purchase property and
equipment, primarily for personal computers, office furniture, leasehold
improvements and for expanding network capabilities for AssureNet's growing
employee base. In addition, in 1993, 1994, 1995 and for the nine months ended
September 30, 1996, AssureNet incurred $191,000, $210,000, $256,000 and
$381,000, respectively, for capitalized contract engineering costs. AssureNet
expects that the rate of purchases of property and equipment will increase as
AssureNet's employee base grows. AssureNet's principal commitments consist
primarily of leases on its headquarters and United Kingdom facilities, its
internal management information systems and its telephone system. See Note 5
of Notes to Consolidated Financial Statements.
To date, AssureNet has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
At September 30, 1996, AssureNet had $1.3 million in cash and cash
equivalents and short-term investments and $578,000 of working capital. As of
September 30, 1996, AssureNet was operating under a $4 million bank line of
credit agreement, secured by the assets of AssureNet, that permits borrowing
of 80% of eligible domestic accounts receivable. Eligible domestic accounts
receivable are defined as those outstanding less than 90 days. Certain
accounts receivable are also specifically excluded from the definition of both
domestic and foreign accounts receivable. Borrowings bear interest at the
bank's prime rate plus 0.5% (8.75% in total at September 30, 1996). There were
$400,000 in borrowings outstanding under the line of credit as of September
30, 1996. AssureNet is currently evaluating its credit facility to ensure
availability of working capital for at least the next twelve month period. In
this regard, AssureNet is currently negotiating with a new bank for a new
credit facility and has signed a letter of intent for such facility. As a
result of AssureNet's recent losses, there can be no assurance that AssureNet
will be able to raise additional capital or obtain such additional working
capital on terms acceptable to AssureNet or at all.
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PRINCIPAL SHAREHOLDERS--ASSURENET
The following table sets forth certain information regarding the beneficial
ownership of AssureNet's Common Stock as of January 3, 1997, by (i) each
person who is known by AssureNet to beneficially own more than 5% of
AssureNet's Common Stock, (ii) each of AssureNet's directors, (iii) each of
the Chief Executive Officer and the four other most highly compensated
executive officers and (iv) all current executive officers and directors as a
group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1)
-------------------------------------
NUMBER OF NUMBER OF SHARES OF
SHARES OF PREFERRED STOCK APPROXIMATE
COMMON --------------------------- PERCENT
BENEFICIAL OWNER STOCK(1) SERIES A SERIES B SERIES C OWNED(2)
- ---------------- --------- -------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Weiss, Peck & Greer Venture 341,464 -- -- 1,579,269 16.4%
Capital Funds(3)............
c/o Weiss, Peck & Greer
Venture Partners
555 California Street, Suite
3130
San Francisco, CA 94104
Melvin Schwartz(4).......... 546,582 707,582 -- -- 11.0%
Leonard & Ilene 521,844 521,844 10,305 -- 9.3%
Birkwood(5).................
24 Taupo Bay Road
RD 1, Mangonni
Northland, New Zealand
Menlo Ventures Capital 170,731 -- -- 789,634 8.3%
Funds(6)....................
c/o Menlo Ventures
Building 4, Suite 100
Menlo Park, CA 94025
Unco Ventures, Ltd.(7)...... -- -- 839,695 -- 7.4%
Genesis Fund, Ltd.
c/o Acorn Ventures, Inc.
520 Post Oak Boulevard,
Suite 130
Houston, TX 77027
Charles E. Erickson(8)...... 750,000 -- -- -- 6.2%
Oak Investment Partners -- -- 675,000 -- 5.9%
III,........................
a Limited Partnership
One Gorham Island
Westport, CT 06880
Mohr, Davidow Ventures I.... -- -- 575,000 -- 5.1%
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Philip D. Black(3).......... 341,464 -- -- 1,579,269 16.4%
Ainslie J. Mayberry(9)...... 496,138 27,054 -- -- 4.6%
Wesley Raffel(10)........... 270,150 -- -- -- 2.3%
Harry J. Saal(11)........... 185,000 -- -- -- 1.6%
Edward Birss(12)............ 150,000 -- -- -- 1.3%
Douglas M. Stone(13)........ 65,000 -- -- -- *
All Directors and executive
officers as a group
(9 persons)(14)............. 3,049,389 734,636 -- 1,579,269 41.0%
</TABLE>
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- --------
* Less than 1%.
(1) Not including AssureNet Preferred Stock.
(2) Percent of outstanding shares of Common Stock, assuming conversion of
AssureNet Series A, Series B and Series C Preferred Stock into Common
Stock as set forth in "Description of Assure Net Capital Stock" herein.
(3) Includes 862,281 shares of Series C Preferred (as converted) owned by WPG
Enterprise Fund II, L.P. ("WPGEFII") along with 186,439 shares of Common
Stock subject to a warrant exercisable within sixty (60) days of January
3, 1997, and 716,988 shares of Series C Preferred (as converted) owned by
Weiss, Peck & Greer Venture Associates III, L.P. ("WPGVAIII"), along with
155,025 shares of Common Stock subject to a warrant exercisable within
sixty (60) days of January 3, 1997. Mr. Philip Black, a Director of the
Company, is a general partner of WPG Venture Partners III, L.P., the
general partner of WPGEFII and WPGVAIII. As such, Mr. Black may be deemed
to share voting and investment power with respect to such shares. Mr.
Black disclaims beneficial ownership of such shares except to the extent
of his interest in such shares arising from his interests in the entities
referred to herein. Because the Company did not meet certain financial
goals set forth in the Company's Articles of Incorporation, as of
December 31, 1996, each share of Series C Preferred will, upon
conversion, convert into 1.85 shares of Common Stock. Thus the share and
percentage numbers in the Principal Shareholders Table have been adjusted
to reflect such conversion.
(4) Includes 500,582 shares of Common Stock and 601,582 shares of Series A
Preferred held in trust for the benefit of Mr. Schwartz and his wife.
Also includes 46,000 shares of Common Stock and 106,000 shares of Series
A Preferred held in the name of Columbia University over which Mr.
Schwartz has indirect voting control.
(5) Includes 1,300 shares of Common Stock, 1,300 shares of Series A Preferred
and 10,305 shares of Series B Preferred owned by Leonard Birkwood.
(6) Includes 777,964 shares of Series of C Preferred (as converted) owned by
Menlo Ventures VI, L.P. along with 168,170 shares of Common Stock subject
to a warrant exercisable within sixty (60) days of January 3, 1997 and
11,670 shares of Series C Preferred (as converted) owned by Menlo
Entrepreneurs Fund VI, L.P. along with 2,561 shares of Common Stock
subject to a warrant exercisable within sixty (60) days of January 3,
1997.
(7) Comprises 540,000 shares owned by Unco Ventures, Ltd. and 299,695 shares
owned by Genesis Fund, Ltd.
(8) Includes 750,000 shares subject to stock options within sixty (60) days
of January 3, 1997.
(9) Includes 3,334 shares subject to stock options exercisable within sixty
(60) days of January 3, 1997 and 6,500 shares of Common Stock held by
Ryan Mayberry, 6,500 shares of Common stock held by Nicholas Mayberry,
6,500 shares of Common Stock held by John Nagel and 1,000 shares of
Common Stock held by Monica Nagel, all of whom reside with Ms. Mayberry.
Also includes 472,304 shares of Common Stock and 27,054 shares of Series
A Preferred held by the Ainslie Jill Mayberry Trust of which Ms. Mayberry
is the sole trustee.
(10) Includes 220,150 shares subject to stock options exercisable within sixty
(60) days of January 3, 1997. Mr. Raffel left AssureNet in January 1996,
but will continue to provide consulting services and vest in his stock
options for a period of six (6) months.
(11) Includes 60,000 shares subject to stock options exercisable within sixty
(60) days of January 3, 1997. Mr. Saal disclaims beneficial ownership of
32,500 shares of Common Stock held by the Jessica Lynn Saal 1990 Trust
and 32,500 shares of Common Stock held by the Nathaniel Mark Saal 1990
Trust.
(12) Includes 150,000 shares of subject to stock options exercisable within
sixty (60) days of January 3, 1997.
(13) Mr. Stone resigned as President, Chief Executive Officer and director as
of July 29, 1996.
(14) See Notes 3, 4, 9, 10, 11, and 12 above.
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DESCRIPTION OF AXENT CAPITAL STOCK
AXENT's authorized capital stock consists of 50,000,000 shares of Common
Stock, $.02 par value per share, and 5,000,000 shares of Preferred Stock, $.02
par value per share. There are no shares of Preferred Stock outstanding.
COMMON STOCK
At December 31, 1996, there were 10,130,314 shares of Common Stock
outstanding and held of record by approximately 150 stockholders. Each holder
of Common Stock is entitled to one vote for each share held on all matters
submitted to a vote of stockholders. The holders of Common Stock, voting as a
single class, are entitled to elect all of the directors of AXENT. Matters
submitted to stockholder approval generally require a majority vote.
Holders of Common Stock are entitled to receive, subject to the preferential
rights of holders of outstanding stock having preferential rights as to
dividends, such dividends as may be declared by the Board of Directors out of
funds legally available therefor. "In the event of a liquidation, dissolution
or winding up of AXENT, holders of Common Stock would be entitled to share in
AXENT's assets remaining after the payment of liabilities and the satisfaction
of any liquidation preference granted the holders of any outstanding shares of
preferred stock, if any. Holders of Common Stock have no preemptive or other
subscription rights. The shares of Common Stock are not convertible into any
other security and have no redemption rights. The outstanding shares of Common
Stock are, and the shares being offered hereby will be, upon issuance and
sale, fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of holders of shares of any series of Preferred Stock which AXENT may
designate and issue in the future.
PREFERRED STOCK
AXENT has the authority to issue up to 5,000,000 shares of Preferred Stock.
The Board of Directors has the authority to issue, without any further action
by the stockholders (except as may be required by applicable law or stock
exchange regulations), the Preferred Stock in one or more series, to establish
from time to time the number of shares to be included in each series, and to
fix the designations, powers, preferences and rights of the shares of each
series and the qualifications, limitations or restrictions thereof. Although
the ability of the Board of Directors to designate and issue Preferred Stock
provides desirable flexibility, issuance of Preferred Stock may have adverse
effects on the holders of Common Stock including restrictions on dividends on
the Common Stock if dividends on the Preferred Stock have not been paid;
dilution of voting power of the Common Stock to the extent the Preferred Stock
has voting rights; or deferral of participation in AXENT's assets upon
liquidation until the satisfaction of any liquidation preference granted to
holders of the Preferred Stock. In addition, issuance of Preferred Stock could
make it more difficult for a third party to acquire a majority of the voting
power of the outstanding capital stock and accordingly may be used as an
"anti-takeover" device. The Board of Directors, however, currently does not
contemplate the issuance of any Preferred Stock and is not aware of any
pending transactions that would be affected by such issuance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for AXENT's Common Stock is Boston
EquiServe LP.
LISTING
Shares of AXENT Common Stock currently trade on The Nasdaq National Market
under the symbol "AXNT." The shares offered hereby have been submitted for
approval.
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DESCRIPTION OF ASSURENET CAPITAL STOCK
The authorized capital stock of AssureNet consists 33,276,321 of shares of
Common Stock and 6,723,679 shares of Preferred Stock, 1,947,689 shares of
which are designated as Series A Preferred, 3,495,500 shares of which are
designated as Series B Preferred and 1,280,490 shares of which are designated
Series C Preferred.
COMMON STOCK
As of January 3, 1997, there were 3,543,770 shares of AssureNet Common Stock
outstanding and held of record by approximately 175 shareholders. Certain
holders of AssureNet Stock have preemptive rights pursuant to a right of first
offer but have no right to convert AssureNet Common Stock into any other
securities. Such right of first offer shall be terminated prior to
consummation of the Merger. All outstanding shares of AssureNet Common Stock
are validly issued, fully paid and nonassessable.
PREFERRED STOCK
As of January 3, 1997, there were 1,947,689 shares of Series A Preferred
issued and outstanding, 3,495,500 shares of Series B Preferred issued and
outstanding and 1,280,488 shares of Series C Preferred issued and outstanding.
The principal rights, privileges and preferences of the issued and outstanding
shares of AssureNet Preferred Stock are set forth below.
Dividends
Dividends accrue annually on each share of AssureNet Preferred Stock
commencing with the date such share is issued, when, as and if declared by the
AssureNet Board paid out of any assets legally available therefor, (i) at an
annual rate of $.09 per share with respect to shares of Series A Preferred,
(ii) at an annual rate of $.10 per share with respect to shares of Series B
Preferred and (iii) at an annual rate of $.41 per share with respect to shares
of Series C Preferred. All dividends are non-cumulative. If any such dividends
are declared, AssureNet must satisfy a dividend preference, with dividends to
be paid first to holders of Series C Preferred, then to holders of Series B
Preferred, then to holders of Series A Preferred and subsequently holders of
Common Stock may be paid dividends when, as and if declared by the AssureNet
Board, such dividends also being non-cumulative. Such dividend amounts to be
paid may be greater than that specified if so declared by the Board.
Liquidation
(a) Liquidation Preference. In the event of any liquidation, dissolution or
winding up of AssureNet (which, as defined in AssureNet's Articles of
Incorporation, would include the Merger) holders of the Series C Preferred,
then Series B Preferred and then Series A Preferred are entitled to receive,
prior and in preference to any distribution of any assets of AssureNet to the
holders of AssureNet Common Stock, $4.10 and $1.00 and $.90 per share,
respectively, plus all declared and unpaid dividends. After the holders of
AssureNet Preferred Stock have received the full amount of their liquidation
preference, the holders of AssureNet Common Stock and the holders of AssureNet
Preferred Stock shall be entitled to receive all remaining assets of AssureNet
available for distribution, pro rata based on the number of shares of
AssureNet Common Stock held by each (assuming conversion of all shares of
Series A, Series B and Series C Preferred into AssureNet Common Stock).
(b) Determination of value. The value of the assets to be distributed in the
event of a liquidation, dissolution or winding up of AssureNet shall be
determined by the AssureNet Board, provided that any securities to be
delivered shall be valued as follows:
(1) Securities not subject to investment letter or other similar
restrictions on free marketability:
(i) If traded on a securities exchange or through The Nasdaq National
Market, the value shall be deemed to be the value determined according
to a formula decided upon by the Assure Net Board;
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(iii) If traded over-the-counter, the value shall be deemed to be the
value determined according to a formula decided upon the AssureNet
Board;
(iii) If there is no public market, the value shall be the fair
market value thereof, as mutually determined by AssureNet and the
holders of at least a majority of the voting power of all the then
outstanding shares of Preferred Stock, including a majority of the
voting power of the Series C Preferred Stock, voting separately as a
class, which voting power shall be determined in accordance with
AssureNet's Articles of Incorporation.
(2) The method of valuation of securities subject to investment letter or
other restrictions on free marketability (other than restrictions arising
solely by virtue of a shareholder's status as an affiliate or former
affiliate) shall be to make an appropriate discount from the market value
determined as above in (1)(i), (ii) or (iii) to reflect the approximate
fair market value thereof, as mutually determined by AssureNet and the
holders at least a majority of the voting power of all then outstanding
shares of Preferred Stock, including a majority of the voting power of the
Series C Preferred Stock, voting separately as a class, which voting power
shall be determined in accordance with AssureNet's Articles of
Incorporation.
Redemption
On each of March 1, 2000, March 1, 2001, March 1, 2002 and March 1, 2003,
each individual holder of the outstanding shares of AssureNet Series C
Preferred Stock may request the redemption of such holder's outstanding Series
C Preferred Stock in amounts equal to twenty-five percent (25%) on the first
Redemption Date, thirty-three and one-third percent (33 1/3%) on the second
Redemption Date and fifty percent (50%) on the third Redemption Date. Upon
receipt of such request, AssureNet is obligated to redeem such shares to the
extent funds are available therefor. The redemption price for the Series C
Preferred is $4.10 per share, plus all declared but unpaid dividends on the
shares being redeemed.
Conversion
Each share of the Series A Preferred and Series B Preferred is presently
convertible into one share of AssureNet Common Stock, and each share of Series
C Preferred is presently convertible into 1.85 shares of AssureNet Common
Stock, with the Series B and Series C Preferred being subject to anti-dilution
adjustment provisions.
Certain Protective Provisions
In addition to any other rights provided by law or agreement, so long as
twenty-five percent (25%) or more of the shares of Series A Preferred, Series
B Preferred and Series C Preferred originally issued are outstanding,
AssureNet may not, without first obtaining the affirmative vote or written
consent of the holders of at least a majority of the then outstanding shares
of Series A Preferred, Series B Preferred and Series C Preferred, voting
together as a single class and on an as-converted basis, and, with respect to
the Series C Preferred, voting together as a separate class on an as-converted
basis:
(a) sell or convey all or substantially all of its property or business
or merge into or consolidate with any other corporation (other than a
wholly-owned subsidiary corporation) or effect any other transaction or
series of related transactions in which more than fifty percent (50%) of
the voting power of AssureNet is disposed of;
(b) alter or change the rights, preferences or privileges of the shares
of Series A, Series B or Series C Preferred Stock;
(c) increase or decrease (other than by redemption or conversion) the
total number of authorized shares of Series A, Series B or Series C
Preferred Stock;
(d) authorize or issue, or obligate itself to issue, any other equity
security (including any other security convertible into or exercisable for
any equity security) having a preference over the Series A, Series B or
Series C Preferred Stock with respect to voting, dividends or upon
liquidation;
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(e) declare or pay a dividend on, or otherwise make a distribution with
respect to any shares, other than the Series A, Series B or Series C
Preferred Stock, except for employee repurchases of capital stock on
termination; or
(f) voluntarily elect to liquidate, dissolve or wind-up.
VOTING RIGHTS
Subject to the protective provisions described above and except as otherwise
required by law, the holders of the Series A Preferred, Series B Preferred,
Series C Preferred and AssureNet Common Stock are entitled to notice of any
shareholders' meeting and to vote together as one class upon any matter
submitted to the shareholders for a vote on the following basis:
(a) Common Vote. Each shareholder of AssureNet Common Stock issued and
outstanding shall have one vote.
(b) Preferred Vote. .Each holder of Preferred Stock shall have a number
of votes equal to the number of shares of AssureNet Common Stock into which
such AssureNet Preferred Stock is convertible.
So long as twenty-five percent (25%) or more, respectively, of each of the
shares of Series B Preferred and Series C Preferred originally issued are
outstanding, such shares shall be entitled to certain rights with respect to
election of directors.
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COMPARISON OF RIGHTS OF HOLDERS OF AXENT
COMMON STOCK AND HOLDERS OF ASSURENET CAPITAL STOCK
Upon consummation of the Merger, the holders of AssureNet Stock will become
holders of AXENT Common Stock. AXENT is a Delaware Corporation and is bound by
the DGCL and AssureNet is a California corporation and is bound by the CGCL.
In addition, the charter and bylaws of AXENT differ from those of AssureNet in
several significant respects. The differences between the charters and bylaws
of AXENT and AssureNet and the DGCL and the CGCL will ultimately result in
changes in the rights of holders of AssureNet Stock. The following is a
summary of some of the important distinctions between the charter documents of
AXENT and AssureNet and between DGCL and CGCL. It is not practical to
summarize all such differences in the Prospectus/Proxy Statement, but some of
the principal differences which could materially affect the rights of holders
of AXENT Common Stock and holders of AssureNet Common Stock include the
following:
CAPITALIZATION
The Articles of Incorporation of AssureNet currently provide that AssureNet
is authorized to issue up to 33,276,321 shares of AssureNet Common Stock, and
6,723,679 shares of AssureNet Preferred Stock, of which AssureNet is
authorized to issue 1,947,689 shares of Series A Preferred, 3,495,500 shares
of Series B Preferred and 1,280,490 shares of Series C Preferred. The
Certificate of Incorporation of AXENT currently provides that AXENT is
authorized to issue up to 30,000,000 shares of AXENT Common Stock, and
3,000,000 shares of Preferred Stock (the "AXENT Preferred"). The AXENT Board
is authorized to determine or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of AXENT
Preferred, and to fix the number of shares of any series of AXENT Preferred
and the designation of any such series of AXENT Preferred. Further, the AXENT
Preferred may be issued from time to time in one or more series. At present,
AXENT has no plans to issue any such shares of AXENT Preferred.
CONVERSION OF ASSURENET STOCK
As of the Effective Time, holders of AssureNet Preferred Stock shall no
longer be entitled to certain rights previously provided for in AssureNet's
Articles of Incorporation. Such rights include, among other matters,
(i) accruing dividends, when and as declared, on a non-cumulative basis, at
(a) an annual rate of $.09 per share with respect to Series A Preferred, (b)
an annual rate of $.10 per share with respect to Series B Preferred and (c) an
annual rate of $.41 per share with respect to Series C Preferred; (ii) a
liquidation preference (a) equal to $.90 for each share of Series A Preferred,
plus an amount equal to the total of all declared but unpaid dividends on the
Series A Preferred, (b) equal to $1.00 for each share of Series B Preferred,
plus an amount equal to the total of all declared but unpaid dividends on the
Series B Preferred and (c) equal to $4.10 for each share of Series C
Preferred, plus an amount equal to the total of all declared but unpaid
dividends on the Series C Preferred; (iii) the right to vote separately on
certain corporate actions; (iv) certain anti-dilution adjustment upon dilutive
issuances of AssureNet Stock; and (v) the right to cause the redemption of
shares of AssureNet Preferred Stock.
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION OF OFFICERS, DIRECTORS,
EMPLOYEES OR OTHER AGENTS
Under the DGCL, Delaware corporations are permitted to adopt a provision in
their certificate of incorporation reducing or eliminating the liability of a
director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that such liability does not
arise from certain proscribed conduct (including intentional misconduct and
breach of the duty of loyalty). California corporations are permitted under
CGCL to adopt a similar provision. The Certificate of Incorporation of AXENT
provides for limitations on directors' liability to the fullest extent
permissible under the DGCL. AssureNet has adopted a similar provision in its
Articles of Incorporation eliminating the personal liability of AssureNet's
directors for monetary damages to the fullest extent under the CGCL.
Under the DGCL, Delaware corporations are permitted to adopt a provision in
their certificates of incorporation indemnifying any of their officers,
directors, employees or other agents, who are parties to any
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action, suit or proceeding by reason of the fact that he or she is or was a
director, officer, employee or other agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
other agent of another organization provided that such officer, director,
employee or other agent acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation. California corporations are permitted under CGCL to adopt a
similar provision and AssureNet has adopted such a provision providing for
such protections. The Bylaws of AXENT provide for indemnification of officers,
directors, employees or other agents to the maximum extent and in the manner
permitted by the DGCL. AssureNet has adopted a similar provision in its
Bylaws, providing for indemnification of any officer, director, employee or
other agent as to those liabilities and on those terms and conditions as are
specified in the CGCL.
AMENDED BYLAWS
The Certificate of Incorporation of AXENT provides that the AXENT Board is
expressly authorized to adopt, amend or repeal the Bylaws of AXENT. The
Articles of Incorporation of AssureNet contain no similar provision although
the Bylaws of AssureNet and the CGCL permits such actions by the AssureNet
Board, except for certain limitations provided in the Bylaws of AssureNet and
CGCL.
SIZE OF THE BOARD OF DIRECTORS
The DGCL permits the board of directors to change the authorized number of
directors by amendment to the bylaws or in the manner provided in the bylaws,
unless the number of directors is fixed in the certificate of incorporation,
in which case a change in the number of directors can be made only by
amendment to the certificate of incorporation. The number of directors of
AXENT is currently fixed at six. Under the CGCL, although changes in the
number of directors must in general be approved by the shareholders, the board
of directors may fix the exact number of directors within a stated range set
forth in the articles of incorporation or bylaws, if the stated range has been
approved by the shareholders. The Bylaws of AssureNet currently provide for a
range of three to five directors, with the number currently fixed at three.
The number of directors may be changed by an amendment to the AssureNet Bylaws
adopted by the shareholders entitled to exercise a majority of the voting
power provided that any amendment reducing the number of directors to fewer
than five cannot be adopted if the votes cast against its adoption are equal
to or greater than sixteen and two-thirds percent of the outstanding shares.
CLASSIFIED BOARD OF DIRECTORS
A classified board is one on which a certain number, but not all, of the
directors are elected on a rotating basis each year. The DGCL permits, but
does not require, a classified board of directors, pursuant to which the
directors can be divided into as many as three classes with staggered terms of
office, with only one class of directors standing for election each year. The
Certificate of Incorporation of AXENT provides for a classified board of
directors. Under the CGCL, directors generally must be elected annually;
however, a "listed" corporation with (1) outstanding securities listed on the
New York or American Stock Exchange or (2) a class of securities designated as
a national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. if the corporation has at
least eight hundred holders of its equity securities is permitted to adopt a
classified board. AssureNet's Articles of Incorporation do not provide for a
classified board of directors.
REMOVAL OF DIRECTORS
Under the DGCL, a director of a corporation that does not have a classified
board of directors or cumulative voting may be removed without cause by a
majority stockholder vote. In contrast, under the CGCL, any director or the
entire board of directors may be removed, with or without cause, with the
approval of a majority of the outstanding shares entitled to vote; however, no
directors may be removed (unless the entire board is removed) if the number of
votes cast against the removal would be sufficient to elect the directors
under cumulative voting.
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CUMULATIVE VOTING FOR DIRECTORS
Under the DGCL, cumulative voting in the election of directors is not
available unless specifically provided in the certificate of incorporation. In
an election of directors under cumulative voting, each share of stock normally
having one vote is entitled to a number of votes equal to the number of
directors to be elected. A stockholder may then cast all such votes for a
single candidate or may allocate them among as many candidates as the
stockholder may choose. AXENT has not provided for cumulative voting in its
Certificate of Incorporation. In contrast, the CGCL provides that any
shareholder is entitled to cumulate his or her vote in the election of
directors upon proper notice of his or her intention to do so. However, a
"listed" corporation (as defined above in section entitled "Classified Board
of Directors") may eliminate shareholders' cumulative voting rights. AssureNet
has not eliminated the right of cumulative voting.
LOANS TO OFFICERS AND EMPLOYEES
Under the DGCL, a corporation may make loans to, guarantee the obligations
of, or otherwise assist its officers or other employees and those of its
subsidiaries when such action, in the judgment of the directors, may
reasonably be expected to benefit the corporation. Under the CGCL, any such
loan or guaranty to or for the benefit of the director or officer of the
corporation or any of its subsidiaries requires approval of the shareholders
unless such loan or guaranty is provided under a plan approved by shareholders
owning a majority of the outstanding shares of the corporation. In addition,
under the CGCL, shareholders of any corporation with one hundred or more
shareholders of record may approve a bylaw authorizing the board of directors
alone to approve a loan or guaranty to or on behalf of an officer (whether or
not a director) if the board determines that such a loan or guaranty may
reasonably be expected to benefit the corporation.
POWER TO CALL SPECIAL MEETING OF STOCKHOLDERS
Under the DGCL, a special meeting of stockholders may be called by the board
of directors or by any other person authorized to do so in the certificate of
incorporation or the bylaws. AXENT's Bylaws provide that special meetings of
the stockholders may be called at any time by the Board of Directors, the
Chairman of the Board, the President or the Chief Executive Officer. In
contrast, under the CGCL, a special meeting of the shareholders may be called
by the Board of Directors, the Chairman of the Board, the President, the
holders of shares entitled to cast not less than ten percent of the votes at
such meeting or such additional persons as may be provided in the articles or
bylaws. According to the AssureNet Bylaws, a special meeting of the
shareholders may be called by the Board of Directors, the Chairman of the
Board, the President, by any officer instructed by the Board of Directors to
call a meeting or by the holders of shares entitled to cast not less than ten
percent of the votes at the meeting being called.
INSPECTION OF STOCKHOLDER LIST
Both the DGCL and the CGCL allow any holder to inspect the stockholder list
for a purpose reasonably related to such person's interest as a stockholder.
The CGCL provides, in addition, an absolute right to inspect and copy the
corporation's shareholder list by a person or persons holding five percent or
more of a corporation's voting shares, or any shareholder or shareholders
holding one percent or more of such shares who has filed certain documents
with the SEC relating to the election of directors. The DGCL does not provide
for any such absolute right of inspection.
DIVIDEND AND REPURCHASE SHARES
The DGCL permits a corporation, unless otherwise restricted by its
certificate of incorporation, to declare and pay dividends out of its surplus
or, if there is no surplus, out of net profits for the fiscal year in which
the dividend is declared and/or for the preceding fiscal years as long as the
amount of capital of the corporation is not less than the aggregate amount of
the capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets. In addition, the DGCL
generally provides that a corporation may redeem or repurchase its shares only
if such redemption or repurchase would not impair the capital of the
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corporation. The ability of a Delaware corporation to pay dividends on, or to
make repurchases or redemptions of, its shares is dependent on the financial
status of the corporation standing alone and not on a consolidated basis. In
determining the amount of surplus of a Delaware corporation, the assets of the
corporation, including stock of subsidiaries owned by the corporation, must be
valued at their fair market value as determined by the board of directors,
regardless of their historical book value.
Under the CGCL, a corporation may not make any distribution (including
dividends, whether in cash or in other property, and repurchase of its shares)
unless either the corporation's retained earnings immediately prior to the
proposed distribution equal or exceed the amount of the proposed distribution
or, immediately after giving effect to such distribution, the corporation's
assets (exclusive of good will, capitalized research and development expenses
and deferred charges) would be at least equal to one and one quarter times it
liabilities (not including deferred taxes, deferred income and other deferred
credits), and the corporation's current assets, as defined, would be at least
equal to its current liabilities (or one and one quarter times its current
liabilities if the average pre-tax and pre-interest earnings for the preceding
two fiscal years were less than the average interest expense for such years).
Such tests are applied to California corporations on a consolidated basis.
Under the CGCL, there are certain exceptions to the foregoing rule for
repurchases of shares in connection with certain recission actions or pursuant
to certain employee stock plans.
APPROVAL OF CERTAIN CORPORATE TRANSACTIONS
Under both the DGCL and CGCL, with certain exceptions, any merger,
consolidation or sale of all or substantially all the assets of a corporation
must be approved by the corporation's board of directors and a majority of the
outstanding shares entitled to vote. Under the CGCL, similar board and
shareholder approval is required in connection with certain additional
acquisition transactions.
CLASS VOTING IN CERTAIN CORPORATE TRANSACTIONS
The DGCL does not generally require separate class votes of all voting
classes in order to approve charter amendments, mergers and sales of
substantially all assets. The DGCL, however, provides that all classes of
stock, even nonvoting classes of stock, vote on charter amendments that
adversely affect the rights of holders of such class. Under the CGCL, with
certain exceptions, any merger, certain sales of all or substantially all the
assets of a corporation and certain transactions must be approved by a
majority of the outstanding shares of each class of stock (without regard to
limitations on voting rights). In addition, holders of AssureNet Series C
Preferred Stock are entitled to a separate class vote on these and certain
other matters.
APPRAISAL RIGHTS
Under the DGCL and the CGCL, a stockholder of a corporation participating in
certain major corporate transactions may, under varying circumstances, be
entitled to dissenters' or to appraisal rights pursuant to which such
stockholder may receive cash in the amount of the fair market value of the
shares held by such stockholder (as determined by a court or by agreement of
the corporation and the stockholder) in lieu of the consideration such
stockholder would otherwise receive in the transaction. The limitations on the
availability of appraisal rights under the DGCL are different from those under
CGCL. Under the DGCL, appraisal rights are generally not available to (i)
stockholders with respect to the sale, lease or other exchange of all or
substantially all of the assets of a corporation; (ii) stockholders with
respect to a merger or consolidation by a corporation the shares of which are
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or are held of record by more than two
thousand holders if such stockholders receive only shares of the surviving
corporation or shares of any other corporation which are either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or are held of record by more than two thousand
holders; or (iii) stockholders of a corporation surviving a merger if no vote
of the stockholders of the surviving corporation is required to approve the
merger because, among other
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things, the number of shares to be issued in the merger does not exceed twenty
percent of the shares of the surviving corporation outstanding immediately
prior to the merger, and if certain other conditions are met.
The limitations on the availability of dissenters' rights under the CGCL are
different from the availability of appraisal rights under the DGCL.
Shareholders of a California corporation whose shares are listed on a national
securities exchange or on a list of over-the-counter margin stocks issued by
the Board of Governor of the Federal Reserve System generally do not have such
dissenters' rights unless the holders of at least five percent of the class of
outstanding shares claim the right. Appraisal rights are unavailable, however,
if the shareholders of a corporation or the corporation itself, or both,
immediately prior to a reorganization shall own (immediately after the
reorganization) more than five-sixths of the voting power of the surviving or
acquiring corporation or its parent.
Dissenters' rights are available to shareholders of AssureNet with respect
to the Merger. See "The Merger--Dissenters' Rights."
DISSOLUTION
Under the DGCL, a dissolution must be approved by stockholders holding one
hundred percent of the total voting power or the dissolution must be initiated
by the board of directors and approved by a simple majority of stockholders of
the corporation. Under the CGCL, shareholders holding fifty percent or more of
the voting power may authorize a corporation's dissolution, with or without
the approval of the corporation's board of directors and this right may not be
modified by the articles of incorporation.
LEGAL MATTERS
The validity of the shares of AXENT Common Stock to be issued in connection
with the Merger and certain tax consequences associated with the Merger will
be passed upon for AXENT by Piper & Marbury L.L.P., Washington. D.C.
Certain tax consequences of the Merger will be passed upon for AssureNet by
Brobeck, Phleger and Harrison LLP, Palo Alto, California.
EXPERTS
The consolidated balance sheets of AXENT as of December 31, 1993, 1994 and
1995 and the related statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995
included in this Prospectus/Proxy Statement have been audited by Coopers &
Lybrand L.L.P., independent certified public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said report.
The audited consolidated financial statements of AssureNet as of December
31, 1995, and for the year then ended, included in this Prospectus/Proxy
Statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said report.
The consolidated financial statements of AssureNet as of December 31, 1994
and for the years ended December 31, 1993 and 1994, included in this
Prospectus/Proxy Statement have been audited by Frank, Rimerman & Co. LLP
independent public accountants, as indicated in their report with respect
thereto, and are included herein by reliance upon the authority of said firm
as experts in giving said report.
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CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
In November 1995, AssureNet's Board of Directors retained Arthur Andersen
LLP as its independent public accountants and replaced AssureNet's former
auditors, Frank, Rimerman & Co. LLP. The financial statements for the years
ended December 31, 1993 and December 31, 1994 were audited by Frank, Rimerman
& Co. LLP and their reports thereon contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope
or application of accounting principles. The decision to change independent
accountants was approved by resolution of the Board of Directors and there
were no disagreements with the former auditors on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure with respect to AssureNet's consolidated financial statements for
the fiscal years ended December 31, 1993 and 1994 or up through the time of
dismissal which, if not resolved to the former auditors' satisfaction, would
have caused them to make reference to the subject matter of the disagreement
in connection with their report. Prior to retaining Arthur Andersen LLP,
AssureNet had not consulted with Arthur Andersen LLP regarding accounting
principles.
OTHER MATTERS
As of the date of this Prospectus/Proxy Statement, the AssureNet Board does
not know of any other matters to be presented for action by the shareholders
at the AssureNet Special Meeting. If, however, any other matters not now known
are properly brought before the AssureNet Special Meeting, the AssureNet proxy
holders will vote upon the sale according to their discretion and best
judgment.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of AXENT
AXENT TECHNOLOGIES, INC.
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September
30, 1996 (unaudited)..................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995 and the nine months ended September 30, 1995
(unaudited) and 1996 (unaudited)......................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1993, 1994 and 1995 and the nine months ended
September 30, 1996 (unaudited)........................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and the nine months ended September 30, 1995
(unaudited) and 1996 (unaudited)......................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Financial Statements of Business Acquired
ASSURENET PATHWAYS, INC. AND SUBSIDIARIES
Reports of Independent Public Accountants
Report of Arthur Andersen LLP........................................... F-23
Report of Frank, Rimerman LLP........................................... F-24
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September
30, 1996 (unaudited)..................................................... F-25
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995 and the nine months ended September 30, 1995
(unaudited) and 1996 (unaudited)......................................... F-26
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1993, 1994 and 1995 and the nine months ended
September 30, 1996 (unaudited)........................................... F-27
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and the nine months ended September 30, 1995
(unaudited) and 1996 (unaudited)......................................... F-28
Notes to Consolidated Financial Statements................................ F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of AXENT Technologies, Inc.:
We have audited the consolidated balance sheets of AXENT Technologies, Inc.
and subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AXENT
Technologies, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Washington, D.C.
February 13, 1996
F-2
<PAGE>
AXENT TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
ASSETS 1994 1995 1996
------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ 6,612,000 $ 6,083,000 $ 15,660,000
Short-term investments............. -- -- 17,316,000
Accounts receivable, net of
allowance for doubtful accounts of
$220,000, $297,000 and $456,000,
respectively...................... 2,488,000 5,071,000 4,337,000
Prepaid expenses and other current
assets............................ 217,000 338,000 882,000
------------ ------------ ------------
Total current assets............. 9,317,000 11,492,000 38,195,000
------------ ------------ ------------
Property and equipment, net (note
4).................................. 590,000 1,097,000 1,430,000
Other assets......................... 102,000 57,000 14,000
------------ ------------ ------------
Total assets....................... $ 10,009,000 $ 12,646,000 $ 39,639,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued
liabilities (note 7).............. $ 3,437,000 $ 5,035,000 $ 3,906,000
Current portion of long-term debt
(note 3 and 5).................... 1,952,000 900,000 826,000
Deferred revenue................... 2,783,000 2,290,000 2,357,000
Net identifiable (assets)
liabilities from discontinued
operations (note 2)............... (1,221,000) 1,319,000 458,000
------------ ------------ ------------
Total current liabilities........ 6,951,000 9,544,000 7,547,000
Long-term liabilities:
Long-term debt, net of current
portion (note 5).................. 865,000 -- --
Long-term deferred revenue, net of
current portion................... 249,000 126,000 69,000
------------ ------------ ------------
Total liabilities................ 8,065,000 9,670,000 7,616,000
------------ ------------ ------------
Commitments and contingencies (note
8)
Stockholders' equity:
Common stock, par value $0.02:
7,944,389, 7,953,464 and
10,007,489 shares issued,
respectively...................... 159,000 159,000 200,000
Additional paid-in capital......... 28,438,000 22,133,000 47,324,000
Accumulated deficit................ (26,176,000) (19,277,000) (15,406,000)
Currency translation adjustments... (477,000) (39,000) (95,000)
------------ ------------ ------------
Total stockholders' equity....... 1,944,000 2,976,000 32,023,000
------------ ------------ ------------
Total liabilities and stockholders'
equity............................ $ 10,009,000 $ 12,646,000 $ 39,639,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE>
AXENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Product licenses...... $4,316,000 $ 5,832,000 $10,117,000 $ 5,785,000 $ 9,727,000
Maintenance & support
services............. 1,759,000 2,242,000 3,281,000 2,486,000 2,673,000
Consulting services... -- 520,000 1,330,000 759,000 1,959,000
---------- ----------- ----------- ----------- -----------
Total net revenues.. 6,075,000 8,594,000 14,728,000 9,030,000 14,359,000
---------- ----------- ----------- ----------- -----------
Cost of net revenues.... 939,000 1,238,000 1,747,000 1,298,000 1,319,000
---------- ----------- ----------- ----------- -----------
Gross profit............ 5,136,000 7,356,000 12,981,000 7,732,000 13,040,000
---------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing... 3,751,000 5,697,000 11,324,000 8,491,000 8,672,000
Research and
development.......... 860,000 1,644,000 3,976,000 2,928,000 3,510,000
General and
administrative....... 862,000 1,048,000 2,393,000 1,676,000 1,772,000
Write-off of purchased
in-process research
and development...... -- 4,280,000 -- -- --
---------- ----------- ----------- ----------- -----------
Total operating
expenses........... 5,473,000 12,669,000 17,693,000 13,095,000 13,954,000
---------- ----------- ----------- ----------- -----------
Income (loss) from
continuing operations
before royalty interest
and taxes.............. (337,000) (5,313,000) (4,712,000) (5,363,000) (914,000)
Royalty income.......... -- -- -- -- 2,398,000
Interest (expense)
income................. -- -- (129,000) (103,000) 668,000
Income tax (provision)
benefit................ 906,000 2,040,000 2,146,000 2,422,000 (425,000)
---------- ----------- ----------- ----------- -----------
Income (loss) from
continuing operations.. 569,000 (3,273,000) (2,695,000) (3,044,000) 1,727,000
Income from discontinued
operations, net of
tax.................... 1,663,000 3,782,000 5,050,000 3,970,000 2,144,000
---------- ----------- ----------- ----------- -----------
Net income.............. $2,232,000 $ 509,000 $ 2,355,000 $ 926,000 $ 3,871,000
========== =========== =========== =========== ===========
Net income (loss) per
common share:
Continuing
operations........... $ 0.06 $ (0.36) $ (0.30) $ (0.33) $ 0.17
Discontinued
operations........... 0.19 0.42 0.56 0.43 0.21
---------- ----------- ----------- ----------- -----------
Net income (loss) per
common share........... $ 0.25 $ 0.06 $ 0.26 $ 0.10 $ 0.38
========== =========== =========== =========== ===========
Weighted average number
of common shares used
in computing net income
(loss) per common share
outstanding............ 9,020,942 9,065,485 9,118,439 9,125,864 10,301,807
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE>
AXENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, 1995 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
ADDITIONAL CURRENCY
PAID-IN TRANSLATION ACCUMULATED
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT TOTAL
---------- --------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1992................... 7,849,540 $ 157,000 $ 28,331,000 $ (636,000) $ (28,917,000) $ (1,065,000)
Net income.............. -- -- -- -- 2,232,000 2,232,000
Stock options exer-
cised.................. 93,899 2,000 105,000 -- -- 107,000
Foreign currency trans-
lation gain............ -- -- -- 84,000 -- 84,000
---------- --------- ------------ ---------- ------------- ------------
BALANCE, DECEMBER 31,
1993................... 7,943,439 $ 159,000 $ 28,436,000 $ (552,000) $ (26,685,000) $ 1,358,000
Net income.............. -- -- -- -- 509,000 509,000
Stock options exer-
cised.................. 950 -- 2,000 -- -- 2,000
Foreign currency trans-
lation gain............ -- -- -- 75,000 -- 75,000
---------- --------- ------------ ---------- ------------- ------------
BALANCE, DECEMBER 31,
1994................... 7,944,389 $ 159,000 $ 28,438,000 $ (477,000) $ (26,176,000) $ 1,944,000
Net income.............. -- -- -- -- 2,355,000 2,355,000
Stock options exer-
cised.................. 9,075 -- 18,000 -- -- 18,000
Foreign currency trans-
lation gain............ -- -- -- 46,000 -- 46,000
Spin-off of discontinued
operations............. -- -- (6,323,000) 392,000 4,544,000 (1,387,000)
---------- --------- ------------ ---------- ------------- ------------
BALANCE, DECEMBER 31,
1995................... 7,953,464 $ 159,000 $ 22,133,000 $ (39,000) $ (19,277,000) $ 2,976,000
Net income.............. -- -- -- -- 3,871,000 3,871,000
Issuance of common stock
(net of costs of
$910,000).............. 2,000,000 40,000 25,092,000 -- -- 25,132,000
Stock options exer-
cised.................. 54,025 1,000 99,000 -- -- 100,000
Foreign currency trans-
lation loss............ -- -- -- (56,000) -- (56,000)
---------- --------- ------------ ---------- ------------- ------------
BALANCE, SEPTEMBER 30,
1996 (UNAUDITED)....... 10,007,489 $ 200,000 $ 47,324,000 $ (95,000) $ (15,406,000) $ 32,023,000
========== ========= ============ ========== ============= ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE>
AXENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Income (loss) from
continuing operations.. $ 569,000 $(3,273,000) $(2,695,000) $(3,044,000) $ 1,727,000
Adjustments to reconcile
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization........... 535,000 697,000 263,000 200,000 443,000
Write-off of purchased
in-process research and
development............ -- 4,280,000 -- -- --
Provision for losses on
accounts receivable.... 117,000 296,000 (18,000) -- 28,000
Provision (benefit) for
income taxes........... (906,000) (2,040,000) (2,146,000) (2,422,000) 425,000
Amortization of discount
on long-term debt...... -- -- 129,000 102,000 39,000
(Increase) decrease in
accounts receivable.... (527,000) (1,003,000) (2,565,000) (268,000) 778,000
(Increase) decrease in
other assets........... (11,000) (101,000) (121,000) (182,000) (543,000)
Increase (decrease) in
accrued liabilities and
accounts payable....... (35,000) 2,215,000 885,000 (87,000) (2,042,000)
Increase (decrease) in
deferred revenue....... 252,000 2,156,000 (616,000) (953,000) (56,000)
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) operating
activities............. (6,000) 3,227,000 (6,884,000) (6,654,000) 799,000
Net cash provided by
discontinued operating
activities (note 2).... 2,861,000 3,386,000 7,707,000 6,978,000 750,000
----------- ----------- ----------- ----------- ------------
Net cash provided by
operating activities.... 2,855,000 6,613,000 823,000 324,000 1,549,000
----------- ----------- ----------- ----------- ------------
Cash flow from investing
activities:
Capital expenditures.... (362,000) (361,000) (867,000) (767,000) (733,000)
Proceeds from sale of
Helpdesk business...... -- -- -- -- 300,000
Purchase of short-term
investments............ -- -- -- -- (17,316,000)
Purchase of software.... -- (865,000) -- -- --
Payments for corporate
acquisition (note 3)... -- (964,000) (1,833,000) (895,000) (100,000)
----------- ----------- ----------- ----------- ------------
Net cash used in
investing activities.... (362,000) (2,190,000) (2,700,000) (1,662,000) (17,849,000)
Net cash provided by
(used in) discontinued
investing activities
(note 2)................ (711,000) (780,000) 1,284,000 1,354,000 701,000
----------- ----------- ----------- ----------- ------------
Net cash used in
investing activities.... (1,073,000) (2,970,000) (1,416,000) (308,000) (17,148,000)
----------- ----------- ----------- ----------- ------------
Cash flows from financing
activities:
Proceeds from initial
public offering of
common stock (net of
costs of $910,000)..... -- -- -- -- 25,132,000
Proceeds from issuance
of capital stock....... 107,000 2,000 18,000 -- 100,000
Net cash used in
discontinued financing
activities (note 2).... (469,000) (1,685,000) -- -- --
Net cash provided by
(used in) continuing
financing activities... (362,000) (1,683,000) 18,000 -- 25,232,000
----------- ----------- ----------- ----------- ------------
Effect of exchange rate
on cash................. (41,000) 75,000 46,000 (494,000) (56,000)
----------- ----------- ----------- ----------- ------------
Net increase (decrease)
in cash and cash
equivalents............. 1,379,000 2,035,000 (529,000) (478,000) 9,577,000
Cash and cash
equivalents, beginning
of period............... 3,198,000 4,577,000 6,612,000 6,612,000 6,083,000
----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents, end of
period.................. $ 4,577,000 $ 6,612,000 $ 6,083,000 $ 6,134,000 $ 15,660,000
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
AXENT Technologies, Inc. and its subsidiaries (the "Company" or "AXENT")
develop, market, license and support enterprise-wide information security
solutions for client/server computing environments and provide related
services. Effective December 31, 1995, the structure of AXENT was
substantially altered when AXENT authorized the distribution of the preferred
stock of a wholly-owned subsidiary, Raxco Software, Inc. ("Raxco") resulting
in the division of the Company's operations into two separate companies. See
note 2 for a discussion of the spin-off and future relationship and other
divestments.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, which could differ from actual results. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses for these financial statements.
Unaudited Interim Financial Data
The unaudited interim financial statements for the nine months ended
September 30, 1995 and 1996 have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial information set forth therein, in accordance with
generally accepted accounting principles. The Company believes the results of
operations for the interim periods are not necessarily indicative of the
results to be expected for any future period.
Consolidation
The accompanying consolidated financial statements include the accounts of
AXENT Technologies, Inc. and its wholly-owned subsidiaries, including AXENT
Technologies Limited, AXENT BV and Datamedia Corporation and its subsidiaries.
These entities are collectively referred to as the "Company." All significant
intercompany transactions have been eliminated.
Revenue Recognition
The Company develops, markets, licenses and supports computer software
products and provides related services. The Company conveys the rights to use
the software products to customers under perpetual license agreements, and
conveys the rights to product support and enhancements in annual maintenance
agreements or understandings. The Company generally ships its software on a
trial basis and recognizes revenue upon acceptance of the software by the
customer unless the Company has significant future obligations to the
customer, in which case revenue is recognized when such obligations are
satisfied. Insignificant vendor obligations are accrued upon acceptance of the
product by the customer. Service revenue includes product support and
maintenance, training, and consulting revenue. The Company defers and
recognizes product support and maintenance revenue over the term of the
contract period, which is generally one year. The Company recognizes training
and consulting revenue as the services are provided. The Company generally
expenses sales commissions as the related revenue is recognized and pays sales
commissions upon receipt of payment from the customer.
Fees for software porting agreements are generally recognized as revenue
upon the completion of milestones specified in the agreements. Porting fees
are generally included in license fee revenue.
In addition to the direct sales effort, the Company licenses its products
and provides support services to customers through a network of independent
distributors, primarily in foreign countries where it has no direct presence.
The Company generally records revenue from independent distributors at the net
license or service
F-7
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
fee, after deducting the corresponding independent distributor's commissions
which range from 50%-75%. Product support and enhancement fees from
independent distributors, net of independent distributor commissions, are
recorded as deferred revenue when received and recognized ratably over the
applicable contract period. Included in the financial statements are net
revenues from independent distributors of $321,000, $651,000 and $1,211,000 in
1993, 1994 and 1995, respectively and $1,487,000 for the nine months ended
September 30, 1996.
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 with respect to its continuing
operations.
Net income per common share
Net income per common share is computed on a primary and fully diluted
basis, using the weighted average number of shares of common stock, assuming
conversion of dilutive common stock equivalent shares from common stock
options and warrants. Pursuant to the Securities and Exchange Commission's
Staff Accounting Bulletin No. 83, common stock and common stock equivalent
shares issued by the Company at prices below the public offering price during
the twelve month period prior to the offering date (using the treasury stock
method and the public offering price of $14.00 per share) have been included
in the calculation of common and common equivalent shares as if they were
outstanding for all periods presented.
Net income per common share subsequent to the Company's initial public
offering is calculated in accordance with APB No. 15 "Earnings per Share."
Purchased Software
Purchased software is recorded at the lower of cost or net realizable value.
Amortization is calculated on a straight-line basis over the estimated lives
of the software products, generally three years. Amortization expense for the
nine months ended September 30, 1996 was approximately $43,000 (see note 3).
Income Taxes
Under SFAS No. 109, "Accounting for Income Taxes," deferred tax assets or
liabilities are recorded to reflect the tax consequences on future years of
the differences between the financial statement and income tax bases of assets
and liabilities, using presently enacted tax rates. Deferred income tax
expenses or credits are based on the changes in the asset or liability from
period to period.
Foreign Currency Translation
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of December 31 and September 30.
Revenue and expense accounts of these operations are translated at average
exchange rates prevailing during the month the transactions occur. Translation
gains and losses are included as an adjustment to stockholders' equity. Net
transaction gains (losses) for the years ended December 31, 1993, 1994 and
1995 were ($58,000), ($4,000) and $3,000, respectively, and ($12,000) for the
nine months ended September 30, 1996, and are included in the income (loss)
from continuing operations.
F-8
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents consist of time and demand deposits and short-term
repurchase agreements, which have original maturity dates of three months or
less. As of December 31, 1994 and 1995, and the nine months ended September
30, 1996, the Company had experienced no losses on these investments.
Short-Term Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities." Pursuant to SFAS 115, the Company has
classified its short-term securities investments as "available-for-sale" and
accordingly carries such securities at aggregate fair value. Management
determines the appropriate classification of short-term securities investments
at the time of purchase and reevaluates such designation as of each balance
sheet date. Available-for-sale securities are held with the intention to sell
as deemed appropriate by the Company. Unrealized gains and losses on
available-for-sale securities are deferred and included as a component of
stockholders' equity, net of tax effect. The Company's available-for-sale
short-term investments consist primarily of certificates of deposit and
government securities. The Company held no short-term investments at
December 31, 1995. The estimated fair value of each investment approximates
cost, and therefore there are no unrealized gains and losses as of September
30, 1996.
Short-term investments as of September 30, 1996, consisted of the following:
<TABLE>
<S> <C>
Certificates of deposit........................................... $ 1,505
Government securities............................................. 15,811
-------
$17,316
=======
</TABLE>
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and cash equivalents,
accounts receivable, and to a lesser extent, currencies denominated in other
than U.S. dollars. The Company limits the amount of investment exposure to any
one financial instrument. The Company performs on-going credit evaluations and
maintains reserves for potential credit losses; historically such losses have
been immaterial. The Company minimizes the amount of cash it maintains in
local currencies by maintaining excess cash in U.S. dollars.
One customer accounted for 13% or more of revenue in the nine months ended
September 30, 1996. Two customers accounted for 33% and 31% of total accounts
receivable at December 31, 1994 and 1995, respectively.
Product Acquisition
In August 1996, the Company entered into an agreement with a third party to
purchase a nonexclusive source code license for approximately $1,500,000.
Pursuant to this agreement, the Company will pay the third party (i) an
acquisition fee of $500,000, $300,000 due upon closing of the agreement and
$200,000 due upon acceptance of the source code and (ii) a royalty up to
$1,000,000 over a three year period based on the net revenues from the source
code license. The Company is obligated to make a $400,000 non-refundable
prepayment associated with the royalty upon acceptance of the source code.
During the third quarter ended September 1996, the Company paid $300,000 in
accordance with the agreement.
F-9
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. RESTRUCTURING, DISPOSITIONS AND LIQUIDATIONS
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 core business.
Effective December 31, 1995, in a transaction intended to qualify as a tax-
free reorganization, the Company transferred certain operations, assets,
liabilities and foreign subsidiaries to Raxco and approved the distribution of
the preferred stock of such subsidiary to the Company's stockholders resulting
in the division of the Company's operations into two separate companies (the
"Spin-off"). The distributed operations included the sales, marketing and
support operations related to the OpenVMS utility software business, leaving
the Company with the sales, marketing, development and support operations
associated with the information security business and ownership of the OpenVMS
utility software products. The Company elected to spin-off the distributed
operations because of (i) the Company's strategic focus on information
security, (ii) the fundamental differences between the information security
business and the OpenVMS utility software business and (iii) the capital
requirements of multiple lines of businesses.
In connection with the Spin-off, the Company and Raxco entered into an
Exclusive Distributor License Agreement, an Administrative Services Agreement
and a Line of Credit Loan Agreement. Pursuant to the Exclusive Distributor
License Agreement, Raxco will distribute the Company's OpenVMS utility
software products and pay the Company the greater of (i) a 30% royalty on the
gross license and services fees related to the licensed products 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. The Company will account for
royalties in future periods as non-operating income from continuing
operations. Pursuant to the Administrative Services Agreement, Raxco will pay
the Company the greater of $750,000 or the actual cost of providing certain
operational and system support services including bookkeeping, personnel
processing, administrative support, facilities management and product
packaging and mailing. Pursuant to the Line of Credit Agreement, the Company
will provide a line of credit to Raxco of up to $750,000 for general working
capital needs for a period of 12 months. Advances under the Line of Credit
Loan Agreement will bear interest at prime plus 1% and be collateralized by
all of Raxco's assets.
During the nine months ended September 30, 1996, Raxco reported to the
Company gross revenues of approximately $8.70 million, which included
approximately $8.00 million of revenues from licensing of the Company's
OpenVMS utility products. As of September 30, 1996, Raxco has fully paid the
royalty income due to the Company. Raxco reported to the Company, a net loss
of $735,000 for the nine months ended September 30, 1996.
On December 31, 1994, the Company sold its storage management products for
approximately $1.0 million in cash, $2.5 million in notes receivable and the
assumption of $1.5 million in certain liabilities, primarily related to
customer support obligations for the storage management products. In addition,
the purchaser assumed ongoing facility lease obligations of approximately
$887,000, and personnel obligations associated with approximately 28
employees. The notes receivable have a stated interest rate of 8.5% and are
due quarterly over a two and one-half year period. Of the notes receivable,
$350,000 is contingent on the purchasers' successful completion of future
software deliverables to a specific customer. This transaction resulted in a
pre-tax gain of approximately $4.8 million ($4.3 million after tax), net of
costs incurred in connection with the sale. The Company recognized $2.3
million of the gain in 1994 and deferred $2.5 million.
The deferred gain will be recognized as the payments on the notes are
received which approximates the potential exposure and time frame of certain
contractual indemnification provisions provided by the Company to the buyer
for third party claims related to product ownership and performance prior to
the sale or other related
F-10
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
liabilities incurred by the Company prior to the sale. The Company recognized
$860,000 of the gain in 1995 and $615,000 during the nine months ended
September 30, 1996.
During 1994 and 1995, the Company restructured, sold or put into liquidation
several wholly-owned subsidiaries and ceased direct operations in France,
Germany, Switzerland, Sweden and Norway. The Company subsequently entered into
distribution agreements with independent distributors to market the Company's
information security products in these countries.
For financial statement purposes, the foregoing discontinued operations as
well as the Helpdesk operations (the "Discontinued Operations") have been
accounted for in accordance with APB 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,"
and classified as discontinued operations in the Consolidated Statement of
Operations. Prior to the Spin-off, the Company and Raxco shared certain
administrative functions including 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 Raxco
were co-mingled. Similarly, operating expenses, capital expenditures and other
cash outlays were centrally disbursed and charged directly or allocated, based
on relative revenue or headcount percentages, to Raxco. In the opinion of
management, the Company's methods for allocating costs are reasonable.
However, such allocated costs are not necessarily indicative of the costs that
would have been incurred by the Company or Raxco if the Discontinued
Operations had been discontinued as of the beginning of 1993. It is not
practicable to determine what those costs would have been on a stand-alone
basis.
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. The Company did not recognize a material gain associated with the
transaction. In June 1996, the Company received $150,000 in full payment of
the non-interest bearing note associated with the sale of the Helpdesk
operations.
F-11
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the results of Discontinued Operations for the
divested operations for the years ended December 31, 1993, 1994 and 1995 and
the nine months ended September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ----------------------
1993 1994 1995 1995 1996
------------------------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues:
Open VMS utility....... $ 18,215,000 $17,391,000 $14,313,000 $10,731,000 $ --
Storage management..... 4,914,000 5,116,000 91,000 91,000 --
Helpdesk............... 1,509,000 1,723,000 2,359,000 1,635,000 --
------------ ----------- ----------- ----------- ----------
Total net revenues... 24,638,000 24,230,000 16,763,000 12,457,000 --
------------ ----------- ----------- ----------- ----------
Cost of net revenues..... 2,304,000 3,171,000 1,537,000 1,050,000 --
------------ ----------- ----------- ----------- ----------
Gross profit............. 22,334,000 21,059,000 15,226,000 11,407,000 --
------------ ----------- ----------- ----------- ----------
Operating expenses:
Sales and marketing.... 12,173,000 11,694,000 5,420,000 4,190,000 --
Research and
development........... 4,218,000 3,308,000 1,970,000 1,430,000 --
General and
administrative........ 3,171,000 2,514,000 1,850,000 1,050,000 --
------------ ----------- ----------- ----------- ----------
Total operating
expenses............ 19,562,000 17,516,000 9,240,000 6,670,000 --
------------ ----------- ----------- ----------- ----------
Income from operations... 2,772,000 3,543,000 5,986,000 4,737,000 --
Non-operating income..... -- -- -- -- 2,203,000
Gain on sale of storage
management products..... -- 2,295,000 860,000 645,000 645,000
Interest income
(expense), net.......... (93,000) 50,000 421,000 312,000
------------ ----------- ----------- ----------- ----------
Income before income
taxes................... 2,679,000 5,888,000 7,267,000 5,694,000 2,848,000
Provision for income
taxes................... 1,016,000 2,106,000 2,217,000 1,724,000 704,000
------------ ----------- ----------- ----------- ----------
Income from discontinued
operations, net of tax.. $ 1,663,000 $ 3,782,000 $ 5,050,000 $ 3,970,000 $2,144,000
============ =========== =========== =========== ==========
</TABLE>
F-12
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the identifiable net assets and liabilities
related to the Discontinued Operations included in the accompanying
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30,
1996. Pursuant to the terms of the Spin-off, the Company will retain the
identifiable assets and liabilities of Raxco at December 31, 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1994 1995 1996
------------ ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable.................. $ 6,096,000 $ 3,058,000 $ 176,000
Notes receivable..................... 1,785,000 1,108,000 1,229,000
Other current assets................. 519,000 181,000 7,000
Property and equipment............... 788,000 -- --
Long-term notes receivable........... 1,640,000 780,000 --
Other assets......................... 571,000 -- --
------------ ----------- -----------
Total assets....................... $ 11,399,000 $ 5,127,000 $ 1,412,000
------------ ----------- -----------
Accrued liabilities and accounts
payable............................. $ (3,153,000) $(1,062,000) $ (404,000)
Deferred gain........................ (860,000) (860,000) (995,000)
Deferred revenue..................... (4,525,000) (3,744,000) (471,000)
Long-term deferred gain.............. (1,640,000) (780,000) --
------------ ----------- -----------
Total liabilities.................. $(10,178,000) $(6,446,000) $(1,870,000)
------------ ----------- -----------
Net identifiable assets
(liabilities)....................... $ 1,221,000 $(1,319,000) $ (458,000)
============ =========== ===========
</TABLE>
In connection with the Spin-off, the Company transferred to Raxco certain
identifiable assets and foreign operations and made certain accruals for
anticipated costs associated with the Spin-off. These transfers resulted in
contributions to Raxco of additional paid in capital, currency translation
adjustments and accumulated deficit of approximately $6.3 million, $392,000
and $4.5 million, respectively.
F-13
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the Statement of Cash Flows related to the
Discontinued Operations included in the accompanying Consolidated Statement of
Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the nine
months ended September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER, 31 SEPTEMBER 30,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
discontinued operating
activities:
Income from
discontinued
operations........... $1,663,000 $ 3,782,000 $5,050,000 $3,970,000 $2,144,000
Adjustments to reconcile
income (loss) to net
cash provided by
operating activities:
Depreciation and
amortization......... 1,061,000 1,017,000 900,000 673,000 --
Gain on sale of
storage management
products............. -- (2,295,000) (860,000) (645,000) (645,000)
Provision for losses
on accounts
receivable........... 390,000 573,000 -- -- --
Provision for income
taxes................ 906,000 2,040,000 2,146,000 1,191,000 201,000
(Increase) decrease in
accounts receivable.. (1,316,000) (649,000) 3,038,000 3,307,000 2,882,000
(Increase) decrease in
other assets......... 48,000 (122,000) 338,000 253,000 174,000
Decrease in accrued
liabilities and
accounts payable..... (577,000) (1,715,000) (2,091,000) (1,106,000) (872,000)
Increase (decrease) in
deferred revenue..... 569,000 755,000 (781,000) (640,000) (3,105,000)
Interest accrued on
note receivable...... 117,000 -- (33,000) (25,000) (29,000)
---------- ----------- ---------- ---------- ----------
Net cash provided by
operating activities... $2,861,000 $ 3,386,000 $7,707,000 $6,978,000 $ 750,000
========== =========== ========== ========== ==========
Cash flow from
discontinued operations
investing activities:
Capitalization of
computer software
development costs.... (250,000) (400,000) -- -- --
Proceeds from sale of
assets............... 125,000 136,000 -- -- --
Proceeds from sale of
storage management
products............. -- 75,000 1,570,000 1,570,000 701,000
Capital expenditures.. (586,000) (591,000) (286,000) (216,000) --
---------- ----------- ---------- ---------- ----------
Net cash (used in)
provided by investing
activities............. $ (711,000) $ (780,000) $1,284,000 $1,354,000 $ 701,000
========== =========== ========== ========== ==========
Cash flow from
discontinued operations
financing activities:
Principal payments
under capital lease
obligations.......... (31,000) -- -- -- --
Principal payments on
notes payable........ (438,000) (1,685,000) -- -- --
---------- ----------- ---------- ---------- ----------
Net cash used in
financing activities... $ (469,000) $(1,685,000) $ -- $ -- $ --
========== =========== ========== ========== ==========
</TABLE>
F-14
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. ACQUISITION OF DATAMEDIA CORPORATION
On December 9, 1994, the Company acquired all of the outstanding shares of
Datamedia Corporation ("Datamedia") for up to $5.0 million in a transaction
accounted for using the purchase method. The acquisition provided for an
initial payment of $2.5 million less certain deductible costs, with two
additional $1.0 million payments due December 9, 1995 and December 9, 1996,
respectively (see note 5). The agreement also provided for up to $500,000 in
royalty payments at 10% of product license revenues through December 31, 1995,
payable on or before March 31, 1996. The Company evaluated the assets of
Datamedia and allocated and expensed as a one-time charge $4.3 million to
write-off purchased in-process research and development costs of a future
product based on the determination of the future product's net present value.
The Company used a discounted cash flow model to determine the valuation of
the product. At the time of the purchase, management determined that the
purchased in-process research and development had not reached technological
feasibility and there was no alternative future use for this technology.
Accordingly, this purchased in-process research and development was written
off as of December 31, 1994. The remaining purchase price was allocated to
existing net assets and purchased software costs of $548,000 and $102,000,
respectively. Existing net assets included $639,000 of cash and cash
equivalents. The operating results of Datamedia have been included in the
Consolidated Statement of Operations since the date of acquisition.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements.................. $ 178,000 $ 144,000 $ 155,526
Computer equipment...................... 1,850,000 2,379,000 3,070,933
Furniture and fixtures.................. 831,000 1,055,000 1,083,434
---------- ---------- ----------
2,859,000 3,578,000 4,309,893
Less accumulated depreciation and amor-
tization............................... (2,269,000) (2,481,000) (2,880,171)
---------- ---------- ----------
Property and equipment, net............. $ 590,000 $1,097,000 $1,429,722
========== ========== ==========
</TABLE>
Property and equipment are stated at cost. Depreciation and amortization are
calculated using either straight-line or accelerated methods over the
estimated useful lives of the assets. Depreciation expense amounted to
approximately $202,000, $132,000, $212,000 and $400,000 for 1993, 1994, 1995
and the nine months ended September 30, 1996, respectively. The principal
estimated useful lives range from three to five years for computer equipment
and seven years for furniture and fixtures. Leasehold improvements are
amortized over the shorter of their economic useful life or the terms of the
respective lease.
NOTE 5. LONG-TERM DEBT
Long-term debt as of December 31, 1994, 1995 and September 30, 1996 consists
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
----------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to former Datamedia stock-
holders................................ $ 2,817,000 $ 900,000 $ 826,000
Less current portion.................... (1,952,000) (900,000) (826,000)
----------- --------- ---------
Long-term portion....................... $ 865,000 $ 0 $ 0
=========== ========= =========
</TABLE>
F-15
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Datamedia acquisition in 1994 (see note 3), the
Company recorded the two additional non-interest bearing $1.0 million payments
due to the former Datamedia stockholders, on December 9, 1995 and December 9,
1996 at a discounted value of $930,000 and $865,000, respectively. The
discounted value reflects a 7.5% imputed interest rate. As of December 31,
1994, the current portion of notes payable to Datamedia also included $350,000
recorded for the royalty related liability and $672,000 related to the initial
payment of $2.5 million. The Datamedia notes are collateralized by
substantially all of the assets of the Company, subordinated to the interest
of the Bank of Boston (the "Bank").
During 1995, the Company paid former Datamedia stockholders $1,833,000,
consisting of $672,000 relating to the initial payment of $2.5 million,
$932,000 relating to the $1.0 million installment due December 9, 1995,
accrued interest of $64,000 and $165,000 relating to the rights of certain
former Datamedia stockholders to receive their portion of the December 1996
$1.0 million payment and the March 1996 royalty-related payment. The
negotiated, discounted prepayment of 1996 amounts due resulted in a savings of
$52,000 to the Company. Included in the notes payable balance as of December
31, 1995 is $65,000 related to accrued interest. Based on actual Datamedia
product license revenue through December 31, 1995, the royalty-related
liability due March 31, 1996, was reduced to $137,000. As of September 30,
1996 the Company paid former Datamedia shareholders $137,000 related to the
royalty-related liability due March 31, 1996. Included in the note payable
balance as of September 30, 1996 is $104,000 of accrued interest.
The Company has a revolving credit facility commitment with the Bank for up
to $2.5 million, of which approximately $2.4 million was available as of
December 31, 1995. Any outstanding balance of the revolving credit facility
bears interest at the Bank's base rate plus 0.25%.
In 1996 the revolving credit facility commitment with the Bank expired.
There were no amounts outstanding under the revolving credit facility at the
time of expiration.
In 1995, the Company issued a letter of credit for 100,000 Deutschemarks,
approximately $70,000, related to undelivered service obligations for a
customer. Due to the liquidation of the Company's German subsidiary, such
letter of credit was redeemed by the customer in January 1996 and the Company
was relieved of its service obligation.
Total interest expense was $39,000 for the nine months ended September 30,
1996, $129,000 in 1995 and zero in 1993 and 1994. Interest expense in 1995 and
1996 relates solely to the imputed interest on the note payable to former
Datamedia stockholders.
NOTE 6. DEVELOPER ROYALTIES
The Company has royalty agreements with William R. Davy, the developer for
six products associated with the Discontinued Operations, the first of which
commenced in December 1987. The revenues derived from such products accounted
for approximately 55% of revenues from Discontinued Operations in 1995. These
agreements provide for royalty payments to the developer of a percentage of
the net product license fees (gross revenues excluding product support and
enhancement fees less appropriate deductions such as independent distributor
commissions) upon receipt of payment by the Company (see note 2). Following
the Spin-Off, Raxco is responsible for the payment of royalties to the
developer. The Company incurred royalties for the last three fiscal years of
$570,000, $642,000 and $488,000, respectively.
F-16
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. ACCRUED LIABILITIES AND ACCOUNTS PAYABLE
Accrued liabilities and accounts payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable........................... $1,042,000 $1,794,000 $1,866,000
Accrued royalties and commissions.......... 261,000 617,000 449,000
Accrued payroll, bonus and vacation........ 888,000 1,022,000 1,384,000
Deferred rent.............................. 152,000 -- --
Spin-off, merger and other................. 960,000 977,000 68,000
Subsidiary liquidation and restructuring... 134,000 625,000 139,000
---------- ---------- ----------
$3,437,000 $5,035,000 $3,906,000
========== ========== ==========
</TABLE>
Spin-off, merger, liquidation and restructuring costs are management's best
estimate of the accounting, legal, personnel and transaction costs to be
incurred by the Company related to these activities. The amounts the Company
will ultimately incur could differ from the amounts accrued in arriving at net
income.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under operating leases expiring through
2015. A majority of the leases contain escalation clauses tied to Consumer
Price Index changes, which provide for increases in base rental to recover
increases in future operating costs. The future minimum rental payments shown
below include base rentals exclusive of any future escalation. Rent expense is
recognized ratably over the period of occupancy for these leases. Rent expense
amounted to approximately $722,000, $722,000, $779,000 and $673,000 for 1993,
1994, 1995 and the nine months ended September 30, 1996, respectively.
The future minimum payments under non-cancelable lease agreements as of
September 30, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997............................................................... $1,028,477
1998............................................................... 879,563
1999............................................................... 642,820
2000............................................................... 443,692
2001............................................................... 320,592
Thereafter......................................................... 902,481
----------
$4,217,625
==========
</TABLE>
Legal Proceedings
The Company is subject to legal proceedings and claims which are in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially effect
the financial position or results of operations of the Company.
F-17
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. COMMON STOCK
At December 31, 1995, the Company was authorized to issue 10,000,000 shares
of common stock, with a par value of $0.02 per share. At December 31, 1994 and
1995 the Company had 7,944,389 and 7,953,464 common shares issued and
outstanding, respectively. The Company has outstanding warrants to purchase
30,000 common shares with an exercise price of $1.40 per share. In January
1996, the Board of Directors adopted an amended and restated Certificate of
Incorporation which increased the authorized capitalization of the Company
from 10,000,000 shares of common stock to 50,000,000 shares of common stock
and 5,000,000 shares of preferred stock.
In February 1996, the Company filed a registration statement with the
Securities and Exchange Commission and sold 2,000,000 shares of its common
stock to the public. Under that registration statement, certain non-officer
stockholders of the Company sold 990,000 shares to the public, which included
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 $25.13 million, net of approximately $3.46
million in underwriting fees and offering expenses. The Company received no
proceeds from the sale of shares by selling stockholders in the initial public
offering.
At September 30, 1996, the Company had 10,007,489 common shares issued and
outstanding.
NOTE 10. STOCK OPTION PLAN
The Company adopted the 1991 Stock Option Plan (the "1991 Plan") which
provided for 1,501,714 reserved shares of common stock to be issued under the
plan or pursuant to other options and warrants. Of the reserved shares,
options for 1,283,700 shares and warrants for 30,000 shares are outstanding;
110,417 shares have been issued; and 77,597 shares are available for future
grants. In January 1996, the Board of Directors adopted the 1996 Stock Option
Plan and the 1996 Directors' Stock Option Plan providing for reserved shares
of 1,000,000 and 200,000, respectively. The 1991 and 1996 Plans provide for
incentive stock options in accordance with Internal Revenue Code Section
422(b) and nonqualified stock options. All full-time employees and officers of
the Company, subject to provisions of the Internal Revenue Code, are eligible
to receive incentive stock options. Nonqualified options may be granted to
officers, full-time employees, directors and consultants. Options vest over a
period of three and one half to five years.
F-18
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Option activity for 1993, 1994, 1995 and September 30, 1996 is summarized as
follows:
<TABLE>
<CAPTION>
NUMBER
RANGE OF OPTIONS PRICE
----- ---------- -----------
<S> <C> <C>
Outstanding, January 1, 1993...................... 753,863 $1.40-$1.70
Granted......................................... 597,200 2.50- 3.00
Exercised....................................... (75,700) 1.40- 1.70
Canceled........................................ (92,100) 1.40- 2.50
--------- -----------
Outstanding, December 31, 1993.................... 1,183,263 1.40- 3.00
Granted......................................... 195,800 3.00- 3.00
Exercised....................................... (950) 1.70- 2.50
Canceled........................................ (104,080) 1.40- 3.00
--------- -----------
Outstanding, December 31, 1994.................... 1,274,033 1.40- 3.00
Granted......................................... 161,100 3.00- 4.00
Exercised....................................... (9,075) 1.40- 3.00
Canceled........................................ (142,358) 1.40- 4.00
--------- -----------
Outstanding, December 31, 1995.................... 1,283,700 1.40- 4.00
--------- -----------
Granted (unaudited)............................. 302,900 10.00-12.00
Exercised (unaudited)........................... (53,775) 1.40- 3.00
Canceled (unaudited)............................ (44,700) 1.70-12.00
--------- -----------
Outstanding, September 30, 1996 (unaudited)....... 1,488,125 $1.40-12.00
========= ===========
</TABLE>
Stock options for 569,888, 760,776 and 909,713 and 1,055,689 shares were
vested and exercisable as of December 31, 1993, 1994, 1995 and September 30,
1996, respectively.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") was issued and will
require the Company to elect either expense recognition under FAS 123 or its
disclosure-only alternative for stock-based employee compensation. The expense
recognition provision encouraged by SFAS 123 would require fair-value based
financial accounting to recognize compensation expense for employee stock
compensation plans. SFAS 123 must be adopted in the Company's fiscal 1996
financial statements. The Company has determined that it will elect the
disclosure-only alternative. The Company will be required to disclose the pro
forma net income or loss and per share amounts in the notes to the financial
statements using the fair-value based method beginning in fiscal 1996 with
comparable disclosures for fiscal 1995. The Company has not determined the
impact of these pro forma adjustments.
NOTE 11. INCOME TAXES
During 1993, the Company adopted the asset and liability method of
accounting for income taxes as required by SFAS No. 109. The Company was in a
net deferred asset position and established a reserve for the full amount of
the asset as of January 1, 1993. As a result, the cumulative effect of
adopting this change in method of accounting for income taxes was zero.
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.
F-19
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the provision (benefit) for income taxes included in the
Consolidated Statement of Operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
--------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Continuing Operations
Federal.................. $(844,000) $(1,900,000) $(1,999,000) $ 659,000
State.................... (62,000) (140,000) (147,000) 116,000
Foreign.................. -- -- -- (350,000)
--------- ----------- ----------- ---------
Total provision (benefit)
from continuing
operations................ $(906,000) $(2,040,000) $(2,146,000) $ 425,000
========= =========== =========== =========
</TABLE>
The Company's effective tax rate on pre-tax income from continuing
operations differs from the U.S. federal statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------- SEPTEMBER 30,
1993 1994 1995 1996
-------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
U.S. federal statutory rate.......... (34.0%) (34.0%) (34.0%) 34.0%
Increase (decrease) in rates result-
ing from
State taxes........................ (2.5) (2.5) (2.5) 5.5
Permanent differences.............. 0.4 0.1 1.0 0.5
Write-off of purchased in process
R&D............................... -- 22.9 -- --
Foreign losses not benefited....... 1.8 -- -- 7.4
Foreign income not subject to tax.. -- (0.3) (5.0) --
Carryforward (benefit) of net oper-
ating loss........................ (429.0) (18.8) (5.8) (23.0)
Change in reserve for deferred tax
asset............................. 194.4 (5.8) 2.0 (4.7)
-------- ------- ------- -----
Effective tax rate................... (268.9%) (38.4%) (44.3%) 19.7%
======== ======= ======= =====
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
SEPTEMBER 30, 1996
1994 1995 (UNAUDITED)
---------------------- ---------------------- ---------------------------------
FEDERAL STATE FEDERAL STATE FEDERAL STATE FOREIGN
----------- --------- ----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Current deferred asset
Accrued expenses...... $ 414,000 $ 43,000 $ 269,000 $ 32,000 $ 296,000 $ 37,000 $ --
Deferred rent......... 93,000 9,000 27,000 3,000 -- -- --
Deferred revenue...... 189,000 20,000 471,000 54,000 157,000 20,000 --
Reserves.............. 243,000 26,000 364,000 46,000 340,000 42,000 --
----------- --------- ----------- --------- ----------- --------- ---------
Total current deferred.. 939,000 98,000 1,131,000 135,000 793,000 99,000 --
----------- --------- ----------- --------- ----------- --------- ---------
Non-current deferred
asset
Depreciation and
amortization......... 245,000 26,000 207,000 32,000 148,000 18,000 --
Net operating loss.... 932,000 29,000 596,000 -- -- -- 159,000
State tax effect...... (52,000) -- (57,000) -- (40,000) -- --
Credits............... 309,000 -- 569,000 -- 400,000 -- --
----------- --------- ----------- --------- ----------- --------- ---------
Total non-current
deferred............... 1,434,000 55,000 1,315,000 32,000 508,000 18,000 159,000
----------- --------- ----------- --------- ----------- --------- ---------
Gross deferred tax
assets................. 2,373,000 153,000 2,446,000 167,000 1,301,000 117,000 159,000
Valuation allowance..... (2,373,000) (153,000) (2,446,000) (167,000) (1,301,000) (117,000) (159,000)
----------- --------- ----------- --------- ----------- --------- ---------
Net deferred tax
assets................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
=========== ========= =========== ========= =========== ========= =========
</TABLE>
F-20
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In adopting SFAS No. 109, the Company determined that previously
unrecognized tax benefits did not satisfy the recognition criteria set forth
in the standard. Accordingly, a valuation allowance was recorded against the
applicable deferred tax assets. Recognition of these benefits requires future
taxable income.
As of September 30, 1996, the Company has an alternative minimum tax credit
in the amount of $200,000 and general business credits of approximately
$200,000, which expire between 1997 and 2006. The company also has foreign
loss carryover in the amount of $469,000 which does not expire.
The Company has general business credits of approximately $409,000 which
expire between 1997 and 2006.
NOTE 12. 401(K) RETIREMENT PLANS
The Company sponsors a 401(k) Retirement Plan (the "401(k) Plan"). The plan
is a qualified plan under section 401(k) of the Internal Revenue Code.
Pursuant to the 401(k) Plan, eligible participants, which includes all full-
time U.S. employees, may elect to contribute a percentage of their annual
gross compensation to the 401(k) Plan. Contributions to the 401(k) Plan by the
Company are discretionary. For the years ended December 31, 1993, 1994 and
1995 and the nine months ended September 30, 1996, the Company did not
contribute to the 401(k) Plan.
The Company also sponsors a voluntary defined contribution retirement plan
(the "UK Plan") for certain employees in the United Kingdom. Employees may
elect to contribute a percentage of their annual gross compensation to the UK
Plan. Employer contributions to the UK Plan are required for all participating
employees at 3% of their base salary. Contributions to the plan were $30,000,
$25,000 and $4,500 for the years ended December 31, 1993, 1994 and 1995,
respectively,
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of non-cash investing and financing activities
include the following:
1993
The Company increased the total borrowings under its line of credit by
$117,000, representing the roll-up of all accrued interest and fees.
1994
The Company received $2.5 million in notes receivable as part of the sale of
its storage management products. In connection with the Datamedia acquisition,
the Company issued notes payable for $2,817,000 (see note 5).
1995
In connection with the Spin-off of the OpenVMS utility software business,
the Company made certain accruals and transferred certain identifiable assets
and foreign operations to Raxco in the amount of $1,387,000 (see note 2).
Cash paid for interest associated with discontinued operations was $72,000
and $100,000 for 1993 and 1994, respectively. Cash paid for income taxes
associated with discontinued operations was $110,000, $66,000, and $71,000 for
1993, 1994 and 1995, respectively.
F-21
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14. FOREIGN OPERATIONS
The Company operates primarily in the United States and Europe. Summary
information related to these operations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- SEPTEMBER 30,
1996 1996 1996 1996
---------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Revenues
United States................ $3,952,000 $ 5,701,000 $10,687,000 $10,583,000
International................ 2,123,000 2893,000 4,041,000 3,776,000
---------- ----------- ----------- -----------
$6,075,000 $ 8,594,000 $14,728,000 $14,359,000
========== =========== =========== ===========
Total Assets
United States................ $5,784,000 $ 8,408,000 $10,257,000 $37,858,000
International................ 1,357,000 1,601,000 2,389,000 1,781,000
---------- ----------- ----------- -----------
$7,141,000 $10,009,000 $12,646,000 $39,639,000
========== =========== =========== ===========
</TABLE>
NOTE 15. SUBSEQUENT EVENT (UNAUDITED)
On January 6, 1997, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with AssureNet Pathways, Inc. ("AssureNet").
Pursuant to the Merger Agreement, outstanding shares of preferred and common
stock of AssureNet will be converted into shares of AXENT common stock, and
options and warrants issued by AssureNet and outstanding at the consummation
of the Merger will be assumed by the Company so that they will be exercisable
to purchase the Company's common stock. Each share of AssureNet Series A and B
Preferred Stock will be converted into a fraction of a share of AXENT common
stock determined by (a) dividing the liquidation preference for such share
($.90 for the Series A and $1.00 for the Series B) by the average closing
price of a share of AXENT common stock for the ten trading days ending on the
third day preceding the Closing Date (the "AXENT Share Value") and (b) adding
the Common Stock Conversion Ratio determined as set forth below (the "Series A
Conversion Ratio" and the "Series B Conversion Ratio," respectively).
Each share of AssureNet Series C Preferred Stock will be converted into a
fraction of a share of AXENT common stock determined by (a) dividing the
liquidation preference for such share ($4.10) by the AXENT Share Value and (b)
adding the Common Stock Conversion Ratio multiplied by 1.85 (the "Series C
Conversion Ratio").
Each share of AssureNet's common stock will be converted into a fraction of
a share of AXENT common stock equal to a fraction (the "Common Stock
Conversion Ratio") the numerator of which is the result of subtracting the
Liquidation Preference Shares (determined as set forth below) from the lesser
of (a) 1,550,000 or (b) $29,450,000 divided by the AXENT Share Value and the
denominator of which is the sum of (i) the number of shares of AssureNet's
common stock outstanding immediately prior to the effective time of the
merger; (ii) the number of shares of AssureNet's common stock into which
AssureNet's Preferred Stock outstanding immediately prior to the effective
time of the merger is convertible and (iii) the number of shares of
AssureNet's common stock issuable upon exercise of all options to purchase
AssureNet's common stock outstanding immediately prior to the effective time
of the merger (A) with exercise prices less than the result of multiplying the
Common Stock Conversion Ratio by the AXENT Share Value or (B) options and
warrants granted or issued on or after January 6, 1997. The Merger Agreement
is subject to certain conditions including approval by AssureNet's
shareholders. The Liquidation Preference Shares shall be determined by
dividing $10,498,420.90 by the AXENT Share Value.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AssureNet Pathways, Inc.:
We have audited the accompanying consolidated balance sheet of AssureNet
Pathways, Inc. (formerly Digital Pathways, Inc.) and subsidiaries as of
December 31, 1995, and the related consolidated statements of income,
shareholders' equity (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AssureNet Pathways, Inc.
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
San Jose, California
March 15, 1996
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AssureNet Pathways, Inc.:
We have audited the accompanying consolidated balance sheet of AssureNet
Pathways, Inc. and subsidiaries as of December 31, 1994, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the years ended December 31, 1993 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated 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 AssureNet Pathways, Inc.
and subsidiaries as of December 31, 1994, and the results of their operations
and their cash flows for the years ended December 31, 1993 and 1994 in
conformity with generally accepted accounting principles.
Frank, Rimerman & Co. LLP
San Jose, California
March 15, 1996
F-24
<PAGE>
ASSURENET PATHWAYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996
------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $1,486 $ 279 $ 977
Short-term investments........................ -- -- 300
Accounts receivable, net of allowance for
doubtful accounts of $46, $46 and $111,
respectively................................. 2,290 2,848 2,617
Inventories................................... 598 564 641
Deferred income taxes, net.................... 170 -- --
Prepaid expenses and other.................... 90 103 124
------ ------- -------
Total current assets...................... 4,634 3,794 4,659
PROPERTY AND EQUIPMENT, net..................... 428 770 1,695
DEFERRED INCOME TAXES, net...................... 155 -- --
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net..... 331 384 422
OTHER........................................... 43 45 --
------ ------- -------
$5,591 $ 4,993 $ 6,776
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Line of credit................................ $ -- $ 925 $ 400
Accounts payable.............................. 728 1,557 1,459
Accrued compensation and commissions.......... 242 314 369
Accrued liabilities........................... 346 617 802
Deferred revenue.............................. 716 535 998
Current portion of capital lease obligations.. 13 47 53
------ ------- -------
Total current liabilities................. 2,045 3,995 4,081
LONG-TERM LIABILITIES:
Capital lease obligations, net of current
portion...................................... 42 93 59
------ ------- -------
2,087 4,088 4,140
------ ------- -------
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK.......................................... -- -- 4,846
SHAREHOLDERS' EQUITY:
Preferred stock
Authorized--6,723,679 shares
Outstanding--5,443,189 shares; aggregate
liquidation preference of $5,248 at
December 31, 1995 and September 30, 1996... 3,834 3,834 3,834
Common stock
Authorized--33,276,321 shares
Outstanding--2,862,437, 2,737,770 and
4,269,448 shares, respectively............. 506 522 733
Shareholder note receivable................... (17) -- --
Cumulative translation adjustment............. (67) (74) (80)
Accumulated deficit........................... (752) (3,377) (6,697)
------ ------- -------
Total shareholders' equity (deficit)...... 3,504 905 (2,210)
------ ------- -------
$5,591 $ 4,993 $ 6,776
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
ASSURENET PATHWAYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
------------------------ ----------------
1993 1994 1995 1995 1996
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUE:
Hardware........................ $8,424 $11,331 $10,163 $ 7,300 $ 8,397
Software........................ 134 656 1,315 898 3,319
------ ------- ------- ------- -------
Total net revenue............. 8,558 11,987 11,478 8,198 11,716
------ ------- ------- ------- -------
COST OF REVENUE:
Hardware........................ 3,332 4,359 4,523 2,977 4,095
Software........................ 33 129 189 124 158
------ ------- ------- ------- -------
Total cost of revenue......... 3,365 4,488 4,712 3,101 4,253
------ ------- ------- ------- -------
GROSS PROFIT...................... 5,193 7,499 6,766 5,097 7,463
------ ------- ------- ------- -------
OPERATING EXPENSES:
Sales and marketing............. 3,168 3,615 5,866 4,116 6,318
Research and development........ 681 758 1,431 1,005 1,854
General and administrative...... 1,250 1,331 1,815 1,146 1,835
------ ------- ------- ------- -------
Total operating expenses...... 5,099 5,704 9,112 6,267 10,007
------ ------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS..... 94 1,795 (2,346) (1,170) (2,544)
OTHER INCOME (EXPENSE):
Interest expense................ (29) (8) (32) (14) (42)
Interest income................. 50 21 56 51 62
Expensed offering costs......... -- -- -- -- (724)
------ ------- ------- ------- -------
Total Other income, (expense)
net.......................... 21 13 24 37 (704)
------ ------- ------- ------- -------
Income (loss) before provision
for income taxes and
cumulative effect of change
in accounting principle...... 115 1,808 (2,322) (1,133) (3,248)
PROVISION (BENEFIT) FOR INCOME
TAXES............................ 68 696 303 (16) 12
------ ------- ------- ------- -------
NET INCOME (LOSS) BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING....................... 47 1,112 (2,625) (1,117) (3,260)
Cumulative effect of change in
accounting principle........... 900 -- -- -- --
------ ------- ------- ------- -------
NET INCOME (LOSS)................. $ 947 $ 1,112 $(2,625) $(1,117) $(3,260)
====== ======= ======= ======= =======
Net income per share for
cumulative effect of change in
accounting principle............. 0.11 -- -- -- --
====== ======= ======= ======= =======
Net income (loss) per share....... $ 0.12 $ 0.14 $ (0.95) $ (0.41) $ (0.77)
====== ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding.... 8,094 8,139 2,777 2,757 4,255
====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
ASSURENET PATHWAYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK SHAREHOLDER CUMULATIVE SHAREHOLDERS'
---------------- ---------------- NOTE TRANSLATION ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT RECEIVABLE ADJUSTMENT DEFICIT (DEFICIT)
--------- ------ --------- ------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1992................... 5,443,189 $3,834 2,646,706 $497 $(18) $(108) $(2,811) $ 1,394
Issuance of common
stock................. -- -- 1,000 -- -- -- -- --
Issuance of common
stock pursuant to
exercise of stock
options............... -- -- 6,813 1 -- -- -- 1
Collection of note
receivable............ -- -- -- -- 1 -- -- 1
Translation adjustment -- -- -- -- -- (12) -- (12)
Net income............. -- -- -- -- -- -- 947 947
--------- ------ --------- ---- ---- ----- ------- -------
BALANCE, December 31,
1993................... 5,443,189 3,834 2,654,519 498 (17) (120) (1,864) 2,331
Issuance of common
stock................. -- -- 3,250 -- -- -- -- --
Issuance of common
stock pursuant to
exercise of stock
options............... -- -- 80,001 8 -- -- -- 8
Translation
adjustment............ -- -- -- -- -- 53 -- 53
Net income............. -- -- -- -- -- -- 1,112 1,112
--------- ------ --------- ---- ---- ----- ------- -------
BALANCE, December 31,
1994................... 5,443,189 3,834 2,737,770 506 (17) (67) (752) 3,504
Issuance of common
stock................. -- -- 1,500 4 -- -- -- 4
Issuance of common
stock pursuant to
exercise of stock
options............... -- -- 123,167 12 -- -- -- 12
Collection of note
receivable............ -- -- -- -- 17 -- -- 17
Translation
adjustment............ -- -- -- -- -- (7) -- (7)
Net loss............... -- -- -- -- -- -- (2,625) (2,625)
--------- ------ --------- ---- ---- ----- ------- -------
BALANCE, December 31,
1995................... 5,443,189 3,834 2,862,437 522 -- (74) (3,377) 905
Issuance of common
stock pursuant to
exercise of stock
options (unaudited)... -- -- 1,407,011 211 -- -- -- 211
Translation adjustment
(unaudited)........... -- -- -- -- -- (6) -- (6)
Accretion of
mandatorily redeemable
convertible preferred
stock to redemption
value (unaudited)..... -- -- -- -- -- -- (60) (60)
Net loss (unaudited)... -- -- -- -- -- -- (3,260) (3,260)
--------- ------ --------- ---- ---- ----- ------- -------
BALANCE, September 30,
1996 (unaudited)....... 5,443,189 $3,834 4,269,448 $733 $ -- $ (80) $(6,697) $(2,210)
========= ====== ========= ==== ==== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
ASSURENET PATHWAYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------
1993 1994 1995 1995 1996
----- ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................. $ 947 $1,112 $(2,625) $(1,117) $(3,260)
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities-
Depreciation and amortization.... 186 276 505 324 661
Loss on disposal of equipment.... 6 68 82 61 21
Cumulative effect of change in
accounting principle............ (900) -- -- -- --
Change in assets and liabilities-
Decrease (increase) in accounts
receivable.................... 434 (1,087) (561) 66 231
Decrease (increase) in
inventories................... (59) (58) 34 (44) (77)
Decrease (increase) in deferred
income taxes, net............. 58 517 325 -- --
Decrease (increase) in prepaid
expenses and other............ (29) (21) (13) (238) (21)
Decrease (increase) in other
assets........................ 17 (15) (1) 9 --
Increase (decrease) in accounts
payable....................... (134) 210 826 284 (98)
Increase (decrease) in accrued
liabilities................... (90) 235 343 (27) 204
Increase (decrease) in deferred
revenue....................... 19 90 (183) (51) 463
----- ------ ------- ------- -------
Net cash (used in) provided
by operating activities..... 455 1,327 (1,268) 384 (1,876)
----- ------ ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment......................... (181) (220) (600) (373) (1,224)
Payments for software development
costs............................. (191) (210) (256) (210) (381)
Purchase of short-term
investments....................... -- -- -- -- (2,159)
Proceeds from sale of short-term
investments....................... -- -- -- -- 1,859
----- ------ ------- ------- -------
Net cash used in investing
activities.................. (372) (430) (856) (583) (1,905)
----- ------ ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit....... -- -- 925 360 --
Payments on line of credit......... -- -- -- -- (525)
Payments of capital lease
obligations....................... (20) (20) (42) (31) (30)
Payments on notes payable.......... (120) (60) -- -- --
Proceeds from sale of common
stock............................. 1 8 16 10 211
Proceeds from shareholder note
receivable........................ 1 -- 17 17 --
Proceeds from sale of mandatorily
redeemable convertible preferred
stock............................. -- -- -- -- 5,250
Issuance costs of mandatorily
redeemable convertible preferred
stock............................. -- -- -- -- (464)
----- ------ ------- ------- -------
Net cash provided by (used
in) financing activities.... (138) (72) 916 356 4,442
----- ------ ------- ------- -------
EFFECT OF FOREIGN CURRENCY EXCHANGE
RATE CHANGES........................ (3) 17 1 88 37
----- ------ ------- ------- -------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS.................... (58) 842 (1,207) (872) 698
CASH AND CASH EQUIVALENTS, beginning
of period........................... 702 644 1,486 1,486 279
----- ------ ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period.............................. $ 644 $1,486 $ 279 $ 614 $ 977
===== ====== ======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes......... $ 21 $ 5 $ 40 $ 30 $ 2
Cash paid for interest............. $ 29 $ 8 $ 32 $ 34 $ 42
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Property and equipment acquired
under capital leases.............. $ -- $ 66 $ 127 $ 114 $ 4
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
ASSURENET PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
AssureNet Pathways, Inc. (the "Company") is a provider of network security
products and services that protect enterprise networks, including private
local area networks, wide area networks and internal networks based on non-
proprietary communications protocols. The Company's products, which are based
on a variety of open computing platforms and support networking and security
standards, prevent unauthorized network access and the theft and manipulation
of mission critical information. The Company is incorporated in California and
has three wholly-owned subsidiaries located in the United Kingdom, Delaware
and the U.S. Virgin Islands. The Company changed its name to AssureNet
Pathways, Inc., from Digital Pathways, Inc. in June 1996.
The Company is subject to a number of business risks, including competition
from other companies, dependence on the success of new product introductions,
the growth of the remote access market, dependence on key employees and the
ability to attract and retain additional qualified personnel to manage the
anticipated growth of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all intercompany accounts and
transactions.
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
disclosure 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.
Unaudited Interim Financial Data
The unaudited interim financial statements as of September 30, 1996 and for
the nine months ended September 30, 1995 and 1996 have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles. The
Company believes the results of operations for the interim periods are not
necessarily indicative of the results to be expected for any future period.
Effect of Recent Pronouncements
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The disclosure requirements of
SFAS No. 123 are effective as of the beginning of the Company's 1996 fiscal
year. The Company does not expect the new pronouncement to have an impact on
its results of operations since the intrinsic value-based method prescribed by
APB Opinion No. 25 and also allowed by SFAS No. 123 will continue to be used
for the valuation of stock-based compensation plans.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with an original maturity of three
months or less to be cash and cash equivalents. The majority of the Company's
investments have consisted of money market accounts and are classified as cash
and cash equivalents in the accompanying consolidated balance sheets.
F-29
<PAGE>
ASSURENET PATHWAYS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
Short-term Investments
The Company has adopted the provisions of SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". Under SFAS No. 115, the
Company classifies its short term investments as "available for sale".
Accordingly, the investments are stated at fair value in the accompanying
balance sheet. Unrealized gains and losses to date have not been material.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives (three to ten years)
of the assets. Leasehold improvements and assets acquired under capital leases
recorded at the present value of the related lease obligations are depreciated
on a straight-line basis over the shorter of the lease term or the estimated
useful lives (three to ten years). Betterments, renewals and extraordinary
repairs that extend the life of an asset are capitalized; other repairs and
maintenance are expensed. The cost and accumulated depreciation applicable to
assets retired are removed from the accounts and the gain or loss on
disposition recognized in income. Property and equipment consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
----- ------
<S> <C> <C>
Computer equipment............................................ $ 575 $ 938
Production machinery and equipment............................ 73 83
Leasehold improvements........................................ 109 125
Furniture and fixtures........................................ 83 134
----- ------
Total property and equipment.............................. 840 1,280
Less--Accumulated depreciation and amortization............... (412) (510)
----- ------
Property and equipment, net............................... $ 428 $ 770
===== ======
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $66,000 and $193,000 as of
December 31, 1994 and 1995, respectively. Accumulated amortization on the
leased assets was approximately $5,000 and $37,000 as of December 31, 1994 and
1995, respectively.
Software Development Costs
The Company capitalizes software development costs in compliance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Capitalization of software development costs begins upon the establishment of
technological feasibility for the product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenue, estimated economic life and changes in software and hardware
technology.
Amortization of capitalized software development costs begins when the
products are available for general release to customers and is generally
computed on a straight-line basis over the remaining estimated economic life
of the product (18 months to three years). It is reasonably possible that the
estimates of the remaining estimated economic life of the products will be
significantly reduced in the near term due to competitive pressures and other
factors. As a result, the carrying amount of the capitalized software costs
may be reduced
F-30
<PAGE>
ASSURENET PATHWAYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 AND 1996 IS UNAUDITED)
materially in the near term. Amortization, which is included in cost of
revenue amounted to approximately $40,000, $89,000 and $203,000 for the years
ended December 31, 1993, 1994 and 1995, respectively. As of December 31, 1994
and 1995 there was approximately $161,000 and $185,000, respectively, included
in capitalized software development costs that was not being amortized as the
related products had achieved technical feasibility but were not yet in
general release.
Foreign Currency Translation
The functional currency of the Company's subsidiaries is the local currency.
Accordingly, the Company applies the current rate method to translate the
subsidiaries' financial statements into U.S. dollars. Translation adjustments
are included as a separate component of shareholders' equity in the
accompanying consolidated financial statements.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock (using the "if
converted" method) and stock options and warrants (using the treasury stock
method). Common equivalent shares are not included in the computation if the
effect is antidilutive.
Revenue Recognition
The Company generates revenue from sales of its hardware products and fees
received under software license agreements. Sales are made directly to end
users and indirectly through resellers. Revenue on hardware products is
recognized upon shipment to the customer. License fees are generally
recognized when a customer purchase order has been received, the software has
been shipped, the Company has a right to invoice the customer, collection of
the receivable is probable and there are no significant obligations remaining.
Software licenses exclude new versions of the licensed software but include a
90-day technical support period. Revenues for this 90-day support period are
unbundled from the software license fees and recognized ratably over 90 days.
After the 90-day period, the Company's customers generally enter into
maintenance agreements for ongoing technical support.
Maintenance revenue is recognized ratably over the term of the support
period. Deferred revenue primarily relates to maintenance services which have
been paid by customers prior to the performance of those services.
The Company grants certain rights of return to its customers and provides
for estimated future returns, stock rotation, price protection and the
estimated cost of warranty at the time of sale based on historical experience.
To date, such returns have not been significant.
Concentration of Credit Risk
Financial instruments which may potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. As of
December 31, 1995, approximately 22% of accounts receivable was concentrated
with one customer. As of September 30, 1996, approximately 17% and 14% of
accounts receivable were concentrated with two different customers,
respectively. The Company generally does not require collateral on accounts
receivable as the majority of the Company's customers are large, well
established companies.
F-31
<PAGE>
ASSURENET PATHWAYS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 AND 1996 IS UNAUDITED)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and include material, labor and manufacturing costs. Inventories consist of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
--------- SEPTEMBER 30,
1994 1995 1996
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials........................................ $342 $136 $229
Work-in-process...................................... 155 167 13
Finished goods....................................... 101 261 399
---- ---- ----
Total.............................................. $598 $564 $641
==== ==== ====
</TABLE>
The Company is dependent on certain national and international suppliers,
including limited and sole-source suppliers, to provide key components and
assembly services for the Company's products. If these suppliers were unable
to provide these key components or services in a timely manner, or production
of key components was ceased by these suppliers, the Company's business,
operating results and financial condition could be adversely affected.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
--------- SEPTEMBER 30,
1994 1995 1996
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
Warranty reserve..................................... $ 97 $121 $119
Other................................................ 249 496 683
---- ---- ----
$346 $617 $802
==== ==== ====
</TABLE>
3. LINE OF CREDIT:
During October 1994, the Company entered into a Loan and Security Agreement
(the "Agreement") with a bank. Borrowings under the Agreement bear interest at
0.5% above the Bank's prime rate (9.0% at December 31, 1995) and were limited
to $1,500,000. As of December 31, 1995, the outstanding balance was
approximately $925,000. As of September 30, 1996, the outstanding balance was
approximately $400,000. The line of credit is secured by substantially all of
the Company's assets. The Agreement requires the Company to maintain specified
levels of net tangible worth and to comply with certain other covenants. At
December 31, 1995, the Company was not in compliance with all of the financial
covenants under the Agreement. As of December 31, 1995, a waiver for this non-
compliance has been received from the Bank. On April 5, 1996 the borrowing
limit under the Agreement was increased to $4,000,000 and the terms of certain
financial covenants were amended. At September 30, 1996, the Company was not
in compliance with all of the financial covenants under the Agreement. No
waiver has been received from the bank for this non-compliance and the amount
outstanding under the Agreement is due on-call. This Agreement expired on
October 21, 1996 and has been verbally extended by the bank.
F-32
<PAGE>
ASSURENET PATHWAYS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 AND 1996 IS UNAUDITED)
4. CAPITAL LEASE OBLIGATIONS:
Minimum future lease payments under capital leases as of December 31, 1995
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996............................................................... $ 63
1997............................................................... 63
1998............................................................... 39
1999............................................................... 3
----
Total minimum lease payments.................................... 168
Less--Amount representing interest (12.0% to 16.6%)................. (28)
----
Present value of lease payments..................................... 140
Less--Current portion............................................... (47)
----
Long-term portion................................................... $ 93
====
</TABLE>
5. COMMITMENTS:
The Company leases its current facilities and certain equipment under
noncancelable operating leases that expire at various dates through 2014.
Under the terms of the facilities' leases, the Company is responsible for
utilities, maintenance, insurance and property taxes. As of December 31, 1995,
the future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996.............................................................. $ 387
1997.............................................................. 302
1998.............................................................. 316
1999.............................................................. 53
2000.............................................................. 32
Thereafter........................................................ 427
------
$1,517
======
</TABLE>
Rental expense was approximately $552,000, $579,000 and $595,000 for the
years ended December 31, 1993, 1994 and 1995, respectively.
In January 1996, the Company entered into a guarantee with a vendor of the
Company's UK subsidiary. The Company guarantees that all obligations of the UK
subsidiary, arising from the provision of certain equipment by the vendor,
will be met. This guarantee remains in force until all obligations to the
vendor have been satisfied. The Company does not expect to incur any losses as
a result of this guarantee.
6. SAVINGS AND RETIREMENT PLAN:
Effective April 1, 1988, the Company established a Savings and Retirement
Plan ("the Plan"), which generally covers all employees of the Company who are
over 21 years of age and have worked for the Company for at least six months.
Annual contributions to the Plan may take two forms: Annual Profit Sharing
contributions and Employer Matching contributions.
F-33
<PAGE>
ASSURENET PATHWAYS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 AND 1996 IS UNAUDITED)
Annual Profit Sharing contributions to the Plan are discretionary, as
determined by the Board of Directors. Contributions vest at a rate of 50% per
year beginning with an individual's second year with the Company. As of
December 31, 1995, the Company has made no Annual Profit Sharing contributions
to the Plan.
Employer Matching contributions are discretionary, as determined by the
Board of Directors. Employer Matching contributions are equal to 25% of the
employee's salary reduction contributions to the Plan. For the years ended
December 31, 1993, 1994 and 1995, Employer Matching contributions amounted to
$31,000, $30,000 and $44,000, respectively.
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In March 1996, the Company completed the sale of 1,280,488 newly issued
Series C Redeemable Convertible Preferred Stock ("Series C") at a price of
$4.10 per share, net of issuance costs of approximately $341,000, and issued
warrants to purchase 512,195 shares of Common Stock at a price equal to the
Series C conversion price. The warrants expire on the earlier of the closing
of an initial public offering or March 5, 1998. The Series C is senior to the
Series A and B. The rights and preferences of the Series C are as follows:
Dividends
The holders of the Series C shall be entitled, when and as declared by the
Board of Directors, to dividends at a rate of $0.41 per share, per annum,
payable in preference and priority to payment of any dividend on any other
series of stock, preferred or common.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company,
each holder of a share of Series C will have a right to receive an amount
equal to $4.10, plus any accrued and unpaid dividends, prior and in preference
to any liquidation payment to the holders of Common Stock.
Redemption
Holders of Series C may, at their option, require the Company to redeem
shares on each of March 1, 2000, March 1, 2001, March 1, 2002 and March 1,
2003. The shares that can be redeemed on each of March 1, 2000, March 1, 2001
and March 1, 2002, are subject to certain restrictions included in the
Company's Articles of Incorporation. The redemption price is the original
issue price of Series C plus all declared but unpaid dividends.
Conversion Rights
Each share of Series C can be converted into one share of Common Stock at
any time at the option of the holder.
If the Company completes an underwritten public offering for at least $20
million in gross proceeds with a price per share of Common Stock of not less
than $10.25 ("qualified public offering"), each share of Series C will
automatically convert into one share of Common Stock.
If the Company completes an underwritten public offering for at least $20
million in gross proceeds at a price per share of common stock of less than
$10.25, the conversion of each share of Series C into Common Stock is subject
to adjustment as detailed in the Company's Articles of Incorporation.
F-34
<PAGE>
ASSURENET PATHWAYS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 AND 1996 IS UNAUDITED)
If the Company does not effect a qualified public offering by December 31,
1996 and the Company does not achieve audited results for the 1996 calendar
year of $20 million in revenue and $1 million in pretax income, the conversion
of each share of Series C into Common Stock is subject to adjustment as
detailed in the Company's Articles of Incorporation.
8. SHAREHOLDERS' EQUITY:
Series A and Series B Convertible Preferred Stock
The Convertible Preferred Stock outstanding consists of 1,947,689 and
3,495,500 shares of Series A Convertible Preferred Stock ("Series A") and
Series B Convertible Preferred Stock ("Series B"), respectively.
The rights and preferences of the Series A and B Convertible Preferred Stock
are as follows:
Dividends
The holders of Series B shall be entitled when and if declared by the Board
of Directors, to dividends at a rate of $0.10 per share, per annum, payable in
preference and priority to payment of any dividend on Series A or Common
Stock. The holders of Series A shall be entitled, when, as, and if declared by
the Board of Directors, to dividends at a rate of $0.09 per share, per annum,
payable in preference and priority to any payment of any dividend on the
Common Stock. Dividends are not cumulative.
Liquidation Preference
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary, the assets and funds of the Company available
for distribution will be distributed.
The holders of the Series B are entitled to receive, prior and in preference
to any distribution of any assets and property to the holders of Series A or
Common Stock, an amount equal to $1.00 per share plus any declared but unpaid
dividends. If the assets and property are insufficient to permit the payment
of the entire preferential amount for the holders of the Series B, then the
entire assets and property will be distributed ratably among the holders of
the Series B.
The holders of the Series A are entitled to receive, prior and in preference
to any distribution of any assets and property to the holders of Common Stock,
an amount equal to $0.90 per share plus any declared but unpaid dividends. If
the remaining assets and property are insufficient to permit the payment of
the entire preferential amount, then the entire remaining assets and property
will be distributed ratably among the holders of the Series A.
After the distribution of the preferential amounts to the preferred
shareholders, the holders of Series A and Series B and Common Stock shall be
entitled to receive all remaining assets distributed ratably, based on the
number of shares of Common, Series A and B (on an as converted basis) then
issued and outstanding.
Conversion
Each share of Series A and B can be converted into one share of Common Stock
at any time at the option of the holder. The conversion rate is subject to
adjustment for anti-dilution as defined in the Articles of Incorporation.
F-35
<PAGE>
ASSURENET PATHWAYS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 AND 1996 IS UNAUDITED)
Each share of Series A and B shall automatically be converted into shares of
Common Stock immediately prior to the closing of the issuance of shares
following the effectiveness of a registration statement under the Securities
Act of 1933 when the net proceeds equal or exceed $5,000,000 and the price per
share of Common Stock is not less than $3.00.
Common Stock
As of December 31, 1995, the Company has reserved the following shares of
authorized but unissued Common Stock:
<TABLE>
<S> <C>
Conversion of outstanding convertible preferred stock--
Series A......................................................... 1,947,689
Series B......................................................... 3,495,500
Stock Option Plan.............................................. 3,317,777
---------
8,760,966
=========
</TABLE>
Stock Plans
Stock Option Plan and Stock Purchase Plan
As of December 31, 1995, the Company's Board of Directors and shareholders
have authorized a maximum of 3,950,000 shares of Common Stock to be issued
under either the Company's Stock Option Plan (the "Option Plan") or the Stock
Purchase Plan (the "Purchase Plan").
Under the Company's Option Plan, the Board of Directors may grant incentive
stock options to employees and nonstatutory stock options to employees,
directors and consultants. The exercise price for an incentive stock option
cannot be less than the fair market value of one share of Common Stock, as
determined by the Board of Directors on the date of grant. The exercise price
per share of nonstatutory stock options granted under the Option Plan cannot
be less than 85% of the fair market value of one share of Common Stock on the
date of grant.
Under the Option Plan, in the event of the termination of a purchaser's
continuous status as an employee or consultant, the Company has the right to
repurchase, at the original exercise price, any unvested stock purchased under
a stock option.
The Option Plan grants the Board of Directors the discretion to determine
when the options granted thereunder shall become exercisable. The majority of
the options do not vest for the first seven months, vest in 7/48ths at the end
of the seventh month and, thereafter, vest at the rate of 1/48th per month
until fully vested in four (4) years.
Under the Company's Purchase Plan, the Board of Directors may grant stock
purchase rights to employees, directors and consultants. The purchase price
per share for a stock purchase right cannot be less than 100% of the fair
market value of one share of Common Stock, as determined by the Board of
Directors on the date of grant.
The Purchase Plan grants the Board of Directors the discretion to determine
when the stock purchase rights granted shall become exercisable. The majority
of purchase rights are immediately exercisable.
The Company granted stock purchase rights to acquire 0, 4,250 and 1,500
shares of common stock in the years ended December 31, 1993, 1994 and 1995,
respectively.
F-36
<PAGE>
ASSURENET PATHWAYS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 AND 1996 IS UNAUDITED)
In addition, the Company's Board of Directors may grant stock options
outside of the Option Plan. The exercise price of stock options granted
outside of the Option Plan is determined by the Board of Directors based on
the fair market value of one share of common stock on the date of grant.
Executive Performance Incentive Plan
The Company's Executive Performance Incentive Plan (the "Executive Plan")
was adopted by the Board of Directors on March 5, 1996 and bases a portion of
the compensation for a select group of senior executive employees on the
attainment of certain performance goals for the Company and for each
individual.
The Executive Plan is administered by the Compensation Committee of the
Board of Directors. Employees who are selected for participation will have a
base bonus established by the Compensation Committee at the beginning of each
fiscal year. The base bonus may then be increased or decreased in accordance
with a formula which is based on a comparison of achieved net revenue and pre-
tax profits. The bonus is paid quarterly over the fiscal year. For the first
two quarters of 1996, the base bonus will be paid with options granted under
the Company's Stock Plan. The number of shares for which the options will be
granted is equal to the base bonus for each of the first two quarters divided
by the fair market value of the Company's common stock on the date of grant.
Stock option activity is as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
OUTSTANDING
-------------------------
NUMBER PRICE
OF SHARES PER SHARE
---------- -------------
<S> <C> <C>
BALANCE, December 31, 1993........................ 1,918,277 $0.10
Granted......................................... 557,000 $0.10
Exercised....................................... (80,001) $0.10
Canceled........................................ (107,824) $0.10
---------- -------------
BALANCE, December 31, 1994........................ 2,287,452 $0.10
Granted......................................... 905,500 $0.10 - $3.15
Exercised....................................... (123,167) $0.10
Canceled........................................ (124,452) $0.10
---------- -------------
BALANCE, December 31, 1995........................ 2,945,333 $0.10 - $3.15
Granted (unaudited)............................. 746,176 $3.35 - $3.75
Exercised (unaudited)........................... (1,394,111) $0.10 - $1.50
Canceled (unaudited)............................ (798,393) $0.10 - $3.75
---------- -------------
BALANCE, September 30, 1996 (unaudited)........... 1,499,005 $0.10 - $3.75
========== =============
</TABLE>
As of September 30, 1996, there were 781,374 (unaudited) shares available
for grant under the option plan. As of September 30, 1996, 737,882 (unaudited)
of the outstanding options and purchase rights had vested.
9. INCOME TAXES:
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
109 "Accounting for Income Taxes." SFAS No. 109 provides for an asset and
liability approach to accounting for income taxes under which deferred income
taxes are provided based upon enacted tax laws and rates applicable to the
periods in which taxes become payable. The cumulative effect of adopting SFAS
No. 109 resulted in an increase in net income of
F-37
<PAGE>
ASSURENET PATHWAYS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 AND 1996 IS UNAUDITED)
approximately $900,000 which is shown separately in the consolidated statement
of operations for the year ended December 31, 1993.
The provision (benefit) for income taxes consisted of the following
components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current--
Federal................................................... $-- $-- $ 6
State..................................................... 10 48 1
Foreign................................................... -- 131 (29)
---- ---- ----
Total current........................................... 10 179 (22)
---- ---- ----
Deferred--
Federal................................................... 105 430 325
State..................................................... 10 30 --
Foreign................................................... (57) 57 --
---- ---- ----
Total deferred.......................................... 58 517 325
---- ---- ----
Total provision for income taxes........................ $ 68 $696 $303
==== ==== ====
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rates as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Provision (benefit) computed at federal statutory rate... 35% 35% (35)%
State income taxes, net of federal tax benefit........... 6 6 (6)
Foreign tax differential................................. 10 -- --
Net operating losses not utilized........................ -- 41
Change in valuation allowance............................ -- 14
Other.................................................... 8 (3) (1)
--- --- ---
Total provision for income taxes..................... 59% 38% 13%
=== === ===
</TABLE>
The major components of the deferred tax asset are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
----- -------
<S> <C> <C>
Reserves and allowances...................................... $ 174 $ 185
Net operating loss carryforwards............................. 248 1,025
Research and development credit carryforwards................ 300 300
Other........................................................ 30 45
----- -------
Sub-total................................................ 752 1,555
Valuation allowance.......................................... (300) (1,370)
----- -------
Deferred tax asset....................................... 452 185
Deferred tax liabilities--capitalized software............... (127) (185)
----- -------
Deferred tax asset, net.................................. $ 325 $ --
===== =======
</TABLE>
F-38
<PAGE>
ASSURENET PATHWAYS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 AND 1996 IS UNAUDITED)
Net operating loss and tax credit carryforwards expire at various dates
through 2006. The Company believes sufficient uncertainty exists regarding the
realizability of the operating loss and credit carryforwards and, accordingly,
has provided a valuation allowance for them. Net operating loss carryforwards
for federal and state income tax purposes at December 31, 1995 were
approximately $3,000,000 and $850,000, respectively. Research and development
tax credit carryforwards at December 31, 1995 were approximately $300,000. The
Internal Revenue Service Code contains provisions which may limit the net
operating loss and tax loss carry forwards to be used in any given year upon
the occurrence of certain events, including a significant change in ownership
interests.
10. GEOGRAPHIC AREA AND SEGMENT DATA
The Company operates in a single industry segment. The Company markets its
products in the United States and in foreign countries through its sales
personnel, independent sales representatives and distributors.
The Company's operations by geographical area for each of the years ended
December 31, 1993, 1994 and 1995, respectively, were as follows (in
thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS
UNITED UNITED AND
STATES KINGDOM ELIMINATIONS CONSOLIDATED
------ ------- ------------ ------------
<S> <C> <C> <C> <C>
1993
Revenues:
Customers....................... $7,350 $1,208 $ -- $ 8,558
Intercompany.................... 424 -- (424) --
------ ------ ----- -------
$7,774 $1,208 $(424) $ 8,558
====== ====== ===== =======
Income (loss) from operations..... $ 297 $ (162) $ (41) $ 94
Interest income (expense), net.... $ 29 $ (8) $ -- $ 21
-------
Income before taxes............... $ 115
=======
Identifiable assets............... $4,184 $ 569 $(839) $ 3,914
====== ====== ===== =======
<CAPTION>
ADJUSTMENTS
UNITED UNITED AND
STATES KINGDOM ELIMINATIONS CONSOLIDATED
------ ------- ------------ ------------
<S> <C> <C> <C> <C>
1994
Revenues:
Customers....................... $8,763 $3,224 $ -- $11,987
Intercompany.................... 848 -- (848) --
------ ------ ----- -------
$9,611 $3,224 $(848) $11,987
====== ====== ===== =======
Income from operations............ $1,208 $ 642 $ (55) $ 1,795
Interest income (expense), net.... $ 21 $ (8) $ -- $ 13
-------
Income before taxes............... $ 1,808
=======
Identifiable assets............... $5,099 $1,382 $(890) $ 5,591
====== ====== ===== =======
</TABLE>
F-39
<PAGE>
ASSURENET PATHWAYS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 AND 1996 IS UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENTS
UNITED UNITED AND
STATES KINGDOM ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------
<S> <C> <C> <C> <C>
1995
Revenues:
Customers...................... $ 8,056 $3,422 $ -- $11,478
Intercompany................... 986 -- (986) --
------- ------ ----- -------
$ 9,042 $3,422 $(986) $11,478
======= ====== ===== =======
(Loss) income from operations.... $(2,385) $ 55 $ (16) $(2,346)
Interest income, net............. $ 17 $ 7 $ -- $ 24
-------
(Loss) before taxes.............. $(2,322)
=======
Identifiable assets.............. $ 4,082 $1,910 $(999) $ 4,993
======= ====== ===== =======
</TABLE>
Intercompany sales and transfers are accounted for based on established
intercompany sales prices.
For each of the years ended December 31, 1993, 1994 and 1995, no one
customer accounted for more than 10% of net revenue.
11. EVENTS SUBSEQUENT TO THE DATE OF AUDITORS' REPORT (UNAUDITED)
Conversion rights of Series C
As of December 31, 1996, the conversion ratio of Series C has increased from
one share of the Company's Common Stock to 1.85 shares of the Company's Common
Stock.
Agreement and Plan of Merger
On January 6, 1997, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with AXENT Technologies, Inc. ("AXENT").
Pursuant to the Merger Agreement, outstanding shares of preferred and common
stock and outstanding options and warrants of the Company will be converted
into shares of AXENT common stock or options or warrants to purchase AXENT
common stock, as applicable. Each share of Series A and B will be converted
into a fraction of a share of AXENT common stock determined by (a) dividing
the liquidation preference for such share ($.90 for the Series A and $1.00 for
the Series B) by the average closing price of a share of AXENT common stock
for the ten trading days ending the third day preceding the Closing Date (the
"AXENT Share Value") and (b) adding the Common Stock Conversion Ratio
determined as set forth below (the "Series A Conversion Ratio" and the "Series
B Conversion Ratio," respectively).
Each share of Series C will be converted into a fraction of a share of AXENT
common stock determined by (a) dividing the liquidation preference for such
share ($4.10) by the AXENT Share Value and (b) adding the Common Stock
Conversion Ratio multiplied by 1.85 (the "Series C Conversion Ratio").
Each share of the Company's common stock will be converted into a fraction
of a share of AXENT common stock equal to a fraction (the "Common Stock
Conversion Ratio") the numerator of which is the result of subtracting the
Liquidation Preference Shares (determined as set forth below) from the lesser
of (a) 1,550,000 or
F-40
<PAGE>
ASSURENET PATHWAYS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1995 AND 1996 IS UNAUDITED)
(b) $29,450,000 divided by the AXENT Share Value and the denominator of which
is the sum of (i) the number of shares of the Company's common stock
outstanding immediately prior to the effective time of the merger agreement;
(ii) the number of shares of the Company's common stock into which the
Company's Preferred Stock outstanding immediately prior to the effective time
of the merger agreement is convertible and (iii) the number of shares of the
Company's common stock issuable upon exercise of all options and warrants to
purchase the Company's common stock outstanding immediately prior to the
effective time of the merger agreement (A) with exercise prices less than the
result of multiplying the Common Stock Conversion Ratio by the AXENT Share
Value or (B) granted or issued on or after January 6, 1997. The Liquidation
Preference Shares shall be determined by dividing $10,498,420.90 by the AXENT
Share Value. The Merger Agreement is subject to certain conditions including
approval by the Company's shareholders.
F-41
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") entered into as of
January 6, 1997 by and among Axent Technologies, Inc., a Delaware corporation
(the "Buyer"), Axquisition, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Buyer (the "Transitory Subsidiary"), and Assurenet Pathways,
Inc., a California corporation (the "Company"). The Buyer, the Transitory
Subsidiary and the Company are referred to collectively herein as the
"Parties."
This Agreement contemplates a merger of the Company into the Transitory
Subsidiary in a transaction that will qualify under Section 368 of the Code
(as defined below). In such merger, the shareholders of the Company will
receive capital stock of the Buyer in exchange for their capital stock of the
Company.
Now, Therefore, in consideration of the representations, warranties,
agreements and covenants herein contained, the Parties agree as follows.
ARTICLE I
THE MERGER
1.1 The Merger. Upon and subject to the terms and conditions of this
Agreement, the Company shall merge with and into the Transitory Subsidiary
(with such merger referred to herein as the "Merger") at the Effective Time
(as defined below). From and after the Effective Time, the separate corporate
existence of the Company shall cease and the Transitory Subsidiary shall
continue as the surviving corporation in the Merger (the "Surviving
Corporation"). The "Effective Time" shall be the time at which the Company and
the Transitory Subsidiary file the agreement of merger and certificates of
merger prepared and executed in accordance with the relevant provisions of the
California General Corporation Law and the Delaware General Corporation Law
(together, the "Certificates of Merger") with the Secretaries of State of the
State of Delaware and the State of California. The Merger shall have the
effects specified in this Agreement and in Section 259 of the Delaware General
Corporation Law.
1.2 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Piper & Marbury,
L.L.P., 1200 Nineteenth Street, N.W., Washington, D.C., commencing at 10:00
a.m. local time on March 14, 1997, or, if all of the conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
have not been satisfied or waived by such date, on such mutually agreeable
later date as soon as practicable after the satisfaction or waiver of all
conditions to the obligations of the Parties to consummate the transactions
contemplated hereby (the "Closing Date").
1.3 Actions at the Closing. At the Closing, (a) the Company shall deliver to
the Buyer and the Transitory Subsidiary the various certificates, instruments
and documents referred to in Section 5.2, (b) the Buyer and the Transitory
Subsidiary shall deliver to the Company the various certificates, instruments
and documents referred to in Section 5.3, (c) the Company and the Transitory
Subsidiary shall file with the Secretaries of State of the State of Delaware
and the State of California the Certificates of Merger and (d) the Buyer shall
deliver certificates for the Merger Shares (as defined below) to Boston
EquiServ LP as exchange agent (the "Exchange Agent") in accordance with
Section 1.7.
1.4 Additional Action. The Surviving Corporation may, at any time after the
Effective Time, take any action, including executing and delivering any
document, in the name and on behalf of either the Company or the Transitory
Subsidiary, in order to consummate the transactions contemplated by this
Agreement.
<PAGE>
1.5 Conversion of Shares.
(a) "Buyer Share Market Value" shall be the average closing price on the
Nasdaq National Market System for the Buyer's shares of Common Stock for the
ten (10) trading days ending three (3) days prior to the Closing Date.
"Merger Shares" shall be that number of shares of Common Stock of the Buyer
("Buyer Common Stock") equal to the lesser of (a) 1,550,000 shares or (b) the
result of dividing $29,450,000 by the Buyer Share Market Value.
"Common Stock Conversion Ratio" shall be a fraction of a share determined by
(a) subtracting from the Merger Shares a number of shares equal to
$10,498,420.90 divided by the Buyer Share Market Value, and (b) dividing that
result by the sum of (i) Common Stock Equivalents and (ii) Counted Assumed
Option Shares.
"Common Stock Equivalents" shall mean the total number of shares of Common
Stock outstanding plus the total number of shares to which holders of
outstanding shares of Preferred Stock would be entitled upon conversion.
"Counted Assumed Option Shares" shall mean the shares of Company Common
Stock issuable upon exercise of options outstanding at the Closing (whether
vested or unvested) with exercise prices per share less than the Common Stock
Conversion Ratio multiplied by the Buyer Share Market Value. In addition, any
option granted by the Company from the date of this Agreement until the
Closing shall only be exercisable for shares of Company Common Stock that are
Counted Assumed Option Shares. In addition, any warrant granted by the Company
from the date of this Agreement until the Closing shall only be exercisable
for shares of Company Common Stock that are Counted Assumed Option Shares.
"Series C Conversion Rate" shall mean the total number of shares to which
holders of Series C Convertible Preferred Stock would be entitled upon
conversion divided by the total number of shares of Series C Convertible
Preferred Stock outstanding immediately prior to the Merger.
"Company Shareholders" shall mean the holders of the Company's Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock and Common Stock.
"Company Shares" shall mean shares of the Company's equity securities
actually held by each Company Shareholder.
(b) At the Effective Time, by virtue of the Merger and without any action on
the part of any Party or the holder of any of the following securities:
Each share of Series A Convertible Preferred Stock, no par value per share,
issued and outstanding immediately prior to the Effective Time shall be
converted into a fraction of a share of Buyer Common Stock determined by (i)
dividing $.90 by the Buyer Share Market Value and (ii) adding the Common Stock
Conversion Ratio.
Each share of Series B Convertible Preferred Stock, no par value per share,
issued and outstanding immediately prior to the Effective Time shall be
converted into a fraction of a share of Buyer Common Stock determined by (i)
dividing $1.00 by the Buyer Share Market Value and (ii) adding the Common
Stock Conversion Ratio.
Each share of Series C Convertible Preferred Stock, no par value per share,
issued and outstanding immediately prior to the Effective Time shall be
converted into a fraction of a share of Buyer Common Stock determined by (i)
dividing $4.10 by the Buyer Share Market Value and (ii) adding the Common
Stock Conversion Ratio multiplied by the Series C Conversion Rate.
2
<PAGE>
Each share of Company Common Stock issued and outstanding immediately prior
to the Effective Time shall be converted into such fraction of a share of
Buyer Common Stock as is equal to the Common Stock Conversion Ratio.
The Merger Shares shall be subject to equitable adjustment in the event of
any stock split, stock dividend, reverse stock split or similar event
affecting the Buyer Common Stock between the date of this Agreement and the
Effective Time.
(c) Each Company Share held in the Company's treasury immediately prior to
the Effective Time and each Company Share owned beneficially by the Buyer or
the Transitory Subsidiary shall be cancelled and retired without payment of
any consideration therefor.
(d) Each share of common stock, $.01 par value per share, of the Transitory
Subsidiary issued and outstanding immediately prior to the Effective Time
shall remain outstanding.
(e) Notwithstanding the foregoing, no fractional shares of Buyer Common
Stock shall be issued; but instead such fractional shares shall be converted
into cash as provided in Section 1.9.
1.6 Dissenting Shares.
(a) For purposes of this Agreement, "Dissenting Shares" means Company Shares
held as of the Effective Time by a Company Shareholder who has not voted such
Company Shares in favor of the adoption of this Agreement and the Merger and
with respect to which appraisal shall have been duly demanded and perfected in
accordance with Chapter 13 of the California General Corporation Law and not
effectively withdrawn or forfeited prior to the Effective Time.
Notwithstanding Section 1.5(a) above, Dissenting Shares shall not be converted
into or represent the right to receive Merger Shares, unless such Company
Shareholder shall have forfeited his right to appraisal under the California
General Corporation Law or withdrawn, with the consent of the Company, his
demand for appraisal. If such Company Shareholder has so forfeited or
withdrawn his right to appraisal of Dissenting Shares, then as of the
occurrence of such event, such holder's Dissenting Shares shall cease to be
Dissenting Shares and shall be converted into and represent the right to
receive the Merger Shares issuable in respect of such Company Shares pursuant
to Section 1.5(a).
(b) The Company shall give the Buyer (i) prompt notice of any written
demands for appraisal of any Company Shares, withdrawals of such demands, and
any other instruments that relate to such demands received by the Company and
(ii) the opportunity to direct all negotiations and proceedings with respect
to demands for appraisal under the California General Corporation Law. The
Company shall not, except with the prior written consent of the Buyer, make
any payment with respect to any demands for appraisal of Company Shares or
offer to settle or settle any such demands.
1.7 Exchange of Shares.
(a) Prior to the Effective Time, the Buyer shall appoint the Exchange Agent
to effect the exchange for the Merger Shares of certificates that, immediately
prior to the Effective Time, represented Company Shares converted into Merger
Shares pursuant to Section 1.5 ("Certificates"). On the Closing Date, the
Buyer shall deliver to the Exchange Agent, in trust for the benefit of holders
of Certificates, a stock certificate (issued in the name of the Exchange Agent
or its nominee) representing the Merger Shares, as described in Section
1.5(a). Within thirty (30) days after the Effective Time, the Buyer shall
cause the Exchange Agent to send a notice and a transmittal form to each
holder of a Certificate advising such holder of the effectiveness of the
Merger and the procedure for surrendering to the Exchange Agent such
Certificate in exchange for the Merger Shares issuable pursuant to Section
1.5(a). Each holder of a Certificate, upon proper surrender thereof to the
Exchange Agent in accordance with the instructions in such notice, shall be
entitled to receive in exchange therefor (subject to any taxes required to be
withheld) the Merger Shares issuable pursuant to Section 1.5(a). Until
properly surrendered, each such Certificate shall be deemed for all purposes
to evidence only the right to receive the Merger Shares issuable pursuant to
Section 1.5(a). Holders of Certificates shall not be entitled to receive
certificates for the Merger Shares to which they would otherwise be entitled
until such Certificates are properly surrendered.
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(b) If any Merger Shares are to be issued in the name of a person other than
the person in whose name the Certificate surrendered in exchange therefor is
registered, it shall be a condition to the issuance of such Merger Shares that
(i) the Certificate so surrendered shall be transferable, and shall be
properly assigned, endorsed or accompanied by appropriate stock powers, (ii)
such transfer shall otherwise be proper and (iii) the person requesting such
transfer shall pay to the Exchange Agent any transfer or other taxes payable
by reason of the foregoing or establish to the satisfaction of the Exchange
Agent that such taxes have been paid or are not required to be paid.
Notwithstanding the foregoing, neither the Exchange Agent nor any Party shall
be liable to a holder of Company Shares for any Merger Shares issuable to such
holder pursuant to Section 1.5(a) that are delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(c) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed, the Buyer shall issue in exchange
for such lost, stolen or destroyed Certificate the Merger Shares issuable in
exchange therefor pursuant to Section 1.5(a). The Board of Directors of the
Buyer may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificate to
submit to the Buyer an affidavit and to give to the Buyer an indemnity against
any claim that may be made against the Buyer with respect to the Certificate
alleged to have been lost, stolen or destroyed.
(d) Promptly following the date which is six months after the Closing Date,
the Exchange Agent shall return to the Buyer all Merger Shares in its
possession, and the Exchange Agent's duties shall terminate. Thereafter, each
holder of a Certificate may surrender such Certificate to the Buyer and,
subject to applicable abandoned property, escheat and similar laws, receive in
exchange therefor the Merger Shares issuable with respect thereto pursuant to
Section 1.5(a).
1.8 Dividends. No dividends or other distributions that are payable to the
holders of record of Buyer Common Stock as of a date on or after the Closing
Date shall be paid to former Company Shareholders entitled by reason of the
Merger to receive Merger Shares until such holders surrender their
Certificates in accordance with Section 1.7. Upon such surrender, the Buyer
shall pay or deliver to the persons in whose name the certificates
representing such Merger Shares are issued any dividends or other
distributions that are payable to the holders of record of Buyer Common Stock
as of a date on or after the Closing Date and which were paid or delivered
between the Effective Time and the time of such surrender; provided that no
such person shall be entitled to receive any interest on such dividends or
other distributions.
1.9 Fractional Shares. No certificates or scrip representing fractional
Merger Shares shall be issued to former Company Shareholders upon the
surrender for exchange of Certificates, and such former Company Shareholders
shall not be entitled to any voting rights, rights to receive any dividends or
distributions or other rights as a stockholder of the Buyer with respect to
any fractional Merger Shares that would otherwise be issued to such former
Company Shareholders. In lieu of any fractional Merger Shares that would
otherwise be issued, each former Company Shareholder that would have been
entitled to receive a fractional Merger Share shall, upon proper surrender of
such person's Certificates, receive a cash payment equal to the Buyer Share
Market Value, multiplied by the fraction of a share that such Company
Shareholder would otherwise be entitled to receive.
1.10 Options and Warrants.
(a) As of the Effective Time, all options to purchase Company Shares issued
by the Company pursuant to its Restated 1982 Stock Option Plan, as amended, or
pursuant to the resolution of the Company's Board of Directors or the
Compensation Committee thereof ("Options"), whether vested, unvested or
subject to repurchase by the Company following such exercise, shall be assumed
by the Buyer. The Buyer and the Company shall enter into the Stock Option
Assumption Agreement in the form attached hereto as Exhibit E. Immediately
after the Effective Time, each Option outstanding immediately prior to the
Effective Time shall be deemed to constitute an option to acquire, on the same
terms and conditions as were applicable under such Option at the Effective
Time, such number of shares of Buyer Common Stock as is equal to the number of
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Company Shares subject to the unexercised portion of such Option multiplied by
the Common Stock Conversion Ratio (with any fraction resulting from such
multiplication to be rounded down to the next lower whole number). The
exercise price per share of each such assumed Option shall be equal to the
exercise price of such Option immediately prior to the Effective Time, divided
by the Common Stock Conversion Ratio (with any fraction of a cent resulting
from such division to be rounded up to the next higher whole cent). The term,
exercisability, vesting schedule, repurchase provisions, status as an
"incentive stock option" under Section 422 of the Internal Revenue Code of
1986 (as amended, the "Code"), if applicable, and all of the other terms of
the Options shall otherwise remain unchanged.
(b) As soon as practicable after the Effective Time, the Buyer or the
Surviving Corporation shall deliver to the holders of Options appropriate
notices setting forth such holders' rights pursuant to such Options, as
amended by this Section 1.10, and the agreements evidencing such Options shall
continue in effect on the same terms and conditions (subject to the amendments
provided for in this Section 1.10 and such notice).
(c) The Buyer shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Buyer Common Stock for delivery upon
exercise of the Options assumed in accordance with this Section 1.10. As soon
as practicable after the Effective Time, and in any event no later than 45
days after the Closing, the Buyer shall file a Registration Statement on Form
S-8 (or any successor form) under the Securities Act of 1933 (as amended, the
"Securities Act") with respect to all shares of Buyer Common Stock subject to
such Options, and shall maintain the effectiveness of such Registration
Statement for so long as such Options remain outstanding.
(d) As of the Effective Time, the warrants to purchase Company Common Stock
listed in Section 1.10(d) of the Disclosure Schedule (the "Warrants"), shall
be assumed by the Buyer. The Buyer and the Company shall enter into the
Warrant Assumption Agreement in the form attached hereto as Exhibit F.
Immediately after the Effective Time, each Warrant outstanding immediately
prior to the Effective Time shall be deemed to constitute a warrant to
acquire, on the same terms and conditions as were applicable under such
Warrant at the Effective Time, such number of shares of Buyer Common Stock as
is equal to the number of Company Common Stock subject to the unexercised
portion of such Warrant multiplied by the Common Stock Conversion Ratio (with
any fraction resulting from such multiplication to be rounded down to the next
lower whole number). The exercise price per share of each such assumed Warrant
shall be equal to the exercise price of such Warrant immediately prior to the
Effective Time, divided by the Common Stock Conversion Ratio (with any
fraction of a cent resulting from such division to be rounded up to the next
higher whole cent). The Buyer shall use its best efforts to obtain the
necessary approvals in connection with granting the holders of the Warrants
all forms of registration rights pursuant to an amendment to the Buyer's
Registration Rights Agreement dated December 10, 1992.
(e) The Company shall use its best efforts to obtain, prior to the Closing,
the consent from each holder of an Option or a Warrant to the amendment of
such Option or Warrant pursuant to this Section 1.10.
1.11 Certificate of Incorporation. The Certificate of Incorporation of the
Surviving Corporation shall be the same as the Certificate of Incorporation of
the Transitory Subsidiary immediately prior to the Effective Date and attached
hereto as Exhibit A, except that the name of the corporation shall be changed
to the name of the Company.
1.12 By-laws. The By-laws of the Surviving Corporation shall be the same as
the By-laws of the Transitory Subsidiary immediately prior to the Effective
Time, except that the name of the corporation set forth therein shall be
changed to the name of the Company.
1.13 Directors and Officers. The directors of the Transitory Subsidiary
shall remain the directors of the Surviving Corporation after the Effective
Time. The officers of the Transitory Subsidiary shall remain as officers of
the Surviving Corporation after the Effective Time, retaining their respective
positions.
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1.14 No Further Rights. From and after the Effective Time, no Company Shares
shall be deemed to be outstanding, and holders of Certificates shall cease to
have any rights with respect thereto, except as provided herein or by law.
1.15 Closing of Transfer Books. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of Company Shares shall
thereafter be made. If, after the Effective Time, Certificates are presented
to the Surviving Corporation or the Exchange Agent, they shall be cancelled
and exchanged for Merger Shares in accordance with Section 1.5(a), subject to
applicable law in the case of Dissenting Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer and the Transitory
Subsidiary that the statements contained in this Article II are true and
correct in all material respects, except as set forth in the disclosure
schedule attached hereto (the "Disclosure Schedule") or except where the
failure to comply or fulfill, accurately state or accurately represent or
accurately warrant would not have a material adverse effect on the business or
results of operations of the Company and its Subsidiaries on a consolidated
basis. The Disclosure Schedule shall be initialed by the Parties and shall be
updated as of the Closing Date.
2.1 Organization, Qualification and Corporate Power. The Company is a
corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the State of California. The Company is duly
qualified to conduct business and is in corporate and tax good standing under
the laws of each jurisdiction in which the nature of its businesses or the
ownership or leasing of its properties requires such qualification. The
Company has the corporate power and authority to carry on the businesses in
which it is engaged and to own and use the properties owned and used by it.
The Company has furnished or made available to the Buyer true and complete
copies of its Articles of Incorporation and By-laws, each as amended and as in
effect on the date hereof (hereinafter "Articles of Incorporation and "By-
laws," respectively). The Company is not in default under or in violation of
any provision of its Articles of Incorporation or By-laws, each as amended to
date. Other than the wholly-owned subsidiaries listed in Section 2.5 of the
Disclosure Schedule, the Company does not have any direct or indirect
subsidiaries or any other equity interest in any other firm, corporation,
partnership, joint venture, association or other business organization.
2.2 Capitalization. The authorized capital stock of the Company consists of
(i) 40,000,000 shares of Company Common Stock, of which 4,293,020 shares are
issued and outstanding and no shares are held in the treasury of the Company,
(ii) preferred stock, of which (A) 1,947,689 shares have been designated as
Series A Preferred, of which 1,947,689 shares are issued and outstanding, (B)
3,495,500 have been designated as Series B Preferred, of which 3,495,500
shares are issued and outstanding, and (C) 1,280,490 shares have been
designated as Series C Preferred, of which 1,280,488 shares are issued and
outstanding. Section 2.2 of the Disclosure Schedule sets forth a complete and
accurate list of (i) all shareholders of the Company, indicating the type and
number of Company Shares held by each shareholder, and (ii) all holders of
Options and Warrants, indicating the type and number of Company Shares subject
to each Option and Warrant and the exercise price thereof. Copies of all
Options and Warrants have previously been provided or made available to the
Buyer. All of the Options have been granted pursuant to a form of agreement or
other instrument previously provided to the Buyer. All of the issued and
outstanding Company Shares are, and all Company Shares that may be issued upon
exercise of Options and Warrants will be, duly authorized, validly issued,
fully paid, nonassessable and free of all preemptive rights. There are no
declared or accrued but unpaid dividends with regard to any issued and
outstanding Company Shares. Holders of issued and outstanding Company Shares
have no basis for asserting rights to rescind the purchase of any such Company
Shares. There are no outstanding or authorized options, warrants, rights,
calls, convertible instruments, agreements or commitments to which the Company
is a party or which are binding upon the Company providing for the issuance,
disposition or acquisition of any of its capital stock. There are no
outstanding securities of the Company of any type or nature. There are no
outstanding or
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authorized stock appreciation, phantom stock or similar rights with respect to
the Company. There are no agreements, voting trusts, proxies, or
understandings with respect to the voting, or registration under the
Securities Act, of any Company Shares (i) between or among the Company and any
of its shareholders and (ii) to the best of the Company's knowledge, between
or among any of the Company's shareholders. All of the issued and outstanding
Company Shares were issued in compliance with applicable federal and state
securities laws.
2.3 Authorization of Transaction. The Company has the corporate power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution and delivery of this Agreement and, subject to the
adoption of this Agreement and the approval of the Merger by a majority of the
votes represented by the outstanding Company Shares entitled to vote on this
Agreement and the Merger voting in accordance with the California General
Corporation Law and the Articles of Incorporation of the Company (the
"Requisite Shareholder Approval"), the performance by the Company of this
Agreement and the consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by the necessary corporate action
on the part of the Company. This Agreement has been duly and validly executed
and delivered by the Company and, assuming the due authorization, execution
and delivery by the Buyer and the Transitory Subsidiary, constitutes a valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors'
rights and remedies generally, and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding therefor may be brought.
2.4 Noncontravention. Subject to compliance by the Company with (i) the
applicable requirements of the Securities Act, (ii) any applicable state or
foreign securities laws, (iii) the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "Hart-Scott-Rodino Act"), (iv) the filing of the
Certificates of Merger as required by the Delaware General Corporation Law and
the California General Corporation Law, and (v) the filing with the Securities
and Exchange Commission (the "SEC"), the National Market System (the "NMS")
and the National Association of Securities Dealers (the "NASD") of any
registration statement and the declaration by the SEC of the effectiveness of
such registration statement, neither the execution and delivery of this
Agreement by the Company, nor the consummation by the Company of the
transactions contemplated hereby, will (a) conflict with or violate any
provision of the Articles of Incorporation or By-laws of the Company, (b)
require on the part of the Company or any corporation with respect to which
the Company, directly or indirectly, has the power to vote or direct the
voting of sufficient securities to elect a majority of the directors (a
"Subsidiary") any filing with, or any permit, authorization, consent or
approval of, any United States federal or state court, arbitrational tribunal,
administrative agency or commission or other United States federal or state
governmental or regulatory authority or agency (a "Governmental Entity"), (c)
conflict with, result in a breach of, constitute (with or without due notice
or lapse of time or both) a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify or cancel, or
require notice, consent or waiver under, any contract, lease, sublease,
license, sublicense, franchise, permit, indenture, agreement or mortgage for
borrowed money, instrument of indebtedness, Security Interest (as defined
below) or other arrangement to which the Company or any Subsidiary is a party
or by which the Company or any Subsidiary is bound or to which any of their
assets is subject, (d) result in the imposition of a Security Interest upon
any assets of the Company or any Subsidiary or (e) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Company, any
Subsidiary or any of their properties or assets. For purposes of this
Agreement, "Security Interest" means any mortgage, pledge, security interest,
encumbrance, charge, or other lien (whether arising by contract or by
operation of law), other than (i) mechanic's, materialmen's, and similar
liens, (ii) liens arising under worker's compensation, unemployment insurance,
social security, retirement, and similar legislation, and (iii) liens on goods
in transit incurred pursuant to documentary letters of credit, in each case
arising in the ordinary course of business consistent with past custom and
practice (including with respect to frequency and amount) ("Ordinary Course of
Business") of the Company and not material to the Company.
2.5 Subsidiaries. Section 2.5 of the Disclosure Schedule sets forth for each
Subsidiary (a) its name and jurisdiction of incorporation, (b) the number of
shares of authorized capital stock of each class of its capital stock,
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(c) the number of issued and outstanding shares of each class of its capital
stock, the names of the holders thereof and the number of shares held by each
such holder, (d) the number of shares of its capital stock held in treasury,
and (e) its directors and officers. Each Subsidiary is a corporation duly
organized, validly existing and in corporate and tax good standing (to the
extent such good standing is recognized in the jurisdiction of incorporation)
under the laws of the jurisdiction of its incorporation. Each Subsidiary is
duly qualified to conduct business and is in corporate and tax good standing
under the laws of each jurisdiction in which the nature of its businesses or
the ownership or leasing of its properties requires such qualification. Each
Subsidiary has the requisite corporate power and authority to carry on the
businesses in which it is engaged and to own and use the properties owned and
used by it. The Company has delivered or made available to the Buyer correct
and complete copies of the charter and By-laws of each Subsidiary, as amended
to date. No Subsidiary is in default under or in violation of any provision of
its charter or By-laws. All of the issued and outstanding shares of capital
stock of each Subsidiary are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights. All shares of each Subsidiary
that are held of record or owned beneficially by either the Company or any
Subsidiary or any nominee are held or owned free and clear of any restrictions
on transfer (other than restrictions under the Securities Act, state
securities laws or foreign securities laws), written claims, Security
Interests, options, warrants, rights, contracts and calls. There are no
outstanding or authorized options, warrants, rights, agreements or commitments
to which the Company or any Subsidiary is a party or which are binding on any
of them providing for the issuance, disposition or acquisition of any capital
stock of any Subsidiary. There are no outstanding stock appreciation, phantom
stock or similar rights with respect to any Subsidiary. There are no voting
trusts, proxies, or other agreements or understandings with respect to the
voting of any capital stock of any Subsidiary. The Company does not control
directly or indirectly or have any direct or indirect equity participation, or
any commitment to acquire any such direct or indirect equity participation, in
any corporation, partnership, trust, or other business association which is
not a Subsidiary.
2.6 Financial Statements. The Company has provided or made available to the
Buyer (i) the audited consolidated balance sheets and statements of
operations, changes in shareholders' equity and cash flows for each of the
1993, 1994 and 1995 fiscal years for the Company and the Subsidiaries (or such
shorter periods as such Subsidiaries have been in existence); and (ii) the
unaudited consolidated balance sheet, statement of operations and statement of
cash flows as of and for the quarter and nine month period ended as of
September 30, 1996 (the "Most Recent Fiscal Quarter End"). Such financial
statements (collectively, the "Financial Statements") have been prepared in
accordance with United States generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods covered thereby,
fairly present the financial condition, results of operations and cash flows
of the Company and the Subsidiaries as of the respective dates thereof and for
the periods referred to therein and are consistent with the books and records
of the Company and the Subsidiaries, provided, however, that the Financial
Statements referred to in clause (ii) above are subject to normal recurring
year-end adjustments (which will not in the aggregate be material) and do not
include footnotes.
2.7 Absence of Certain Changes. Since September 30, 1996, (a) there has not
been any material adverse change in the assets, business, financial condition
or results of operations of the Company and its Subsidiaries (taken as a
whole), nor has there occurred any event or development which could reasonably
be foreseen to result in such a material adverse change in the future, and (b)
neither the Company nor any Subsidiary has taken any unapproved actions set
forth in paragraphs (a) through (o) of Section 4.5.
2.8 Undisclosed Liabilities. None of the Company and its Subsidiaries has
any liability (whether known or unknown, whether absolute or contingent,
whether liquidated or unliquidated and whether due or to become due), except
for (a) liabilities accrued or reserved against the September 30, 1996
unaudited consolidated balance sheet of the Company and its Subsidiaries
("Most Recent Balance Sheet"), (b) liabilities which have arisen since
September 30, 1996 in the Ordinary Course of Business, (c) contractual or
statutory liabilities incurred in the Ordinary Course of Business which are
not required by GAAP to be reflected on a balance sheet, (d) liabilities
disclosed in Section 2.8 of the Disclosure Schedule, and (e) liabilities
adequately reserved against or disclosed in writing.
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2.9 Tax Matters.
(a) Each of the Company and the Subsidiaries has filed all Tax Returns (as
defined below) that it was required to file and all such Tax Returns were
correct and complete in all material respects. Each of the Company and the
Subsidiaries has paid or will pay all Taxes (as defined below) that are due on
or before the Closing Date, whether or not shown on any such Tax Returns,
except such as are being contested in good faith by appropriate proceedings
(to the extent any such proceedings are required) and with respect to which
the Company is maintaining reserves adequate for their payment. The accrued
but unpaid Taxes of the Company and the Subsidiaries for Tax Periods through
the date of the Most Recent Balance Sheet do not exceed the accruals and
reserves for Taxes (other than deferred Taxes) set forth on the Most Recent
Balance Sheet. All Taxes attributable to the period January 1, 1996 through
the Closing Date are attributable to the conduct by the Company and the
Subsidiaries of their respective operations in the Ordinary Course of
Business. Neither the Company nor any Subsidiary has any actual or potential
liability for any Tax obligation of any taxpayer (including without limitation
any affiliated group of corporations or other entities that included the
Company or any Subsidiary during a prior period) other than the Company and
the Subsidiaries. All Taxes that the Company or any Subsidiary is or was
required by law to withhold or collect have been duly withheld or collected
and, to the extent required, have been paid to the proper Governmental Entity.
(i) For purposes of this Agreement, "Taxes" means all taxes, charges,
fees, levies or other similar assessments or liabilities, including without
limitation income, gross receipts, ad valorem, premium, value-added,
excise, real property, personal property, sales, use, transfer,
withholding, employment, payroll and franchise taxes imposed by the United
States of America or any state, local or foreign government, or any agency
thereof, or other political subdivision of the United States or any such
government, and any interest, fines, penalties, assessments or additions to
tax resulting from, attributable to or incurred in connection with any tax
or any contest or dispute thereof and any amounts of Taxes of another
person that the Company or any Subsidiary is liable to pay by law.
(ii) For purposes of this Agreement, "Tax Returns" means all reports,
returns, declarations, statements or other information required to be
supplied to a taxing authority in connection with Taxes.
(iii) For purposes of determining the amount of Taxes attributable to a
specified period (e.g., the period from the date of the Most Recent Balance
Sheet through the Closing Date) other than a Tax Period, each Tax shall be
computed as if the specified period were a Tax Period. For purposes of this
paragraph (iii), a Tax Period means a period for which a Tax is required to
be computed under applicable statues and regulations.
(b) The Company has delivered or made available to the Buyer correct and
complete copies of all federal income Tax Returns, examination reports and
statements of deficiencies assessed against or agreed to by any of the Company
or any Subsidiary since December 31, 1992. The federal income Tax Returns of
the Company have been audited by the Internal Revenue Service or are closed by
the applicable statute of limitations for the taxable years prior to fiscal
1993. No examination or audit or any Tax Returns of the Company or any
Subsidiary by any Governmental Entity is currently in progress or, to the
actual knowledge of the Company and the Subsidiaries, threatened or
contemplated. Neither the Company nor any Subsidiary has waived any statute of
limitations with respect to taxes or agreed to an extension of time with
respect to a tax assessment or deficiency.
(c) Neither the Company nor any Subsidiary is a "consenting corporation"
within the meaning of Section 341(f) of the Code and none of the assets of the
Company or the Subsidiaries are subject to an election under Section 341(f) of
the Code. Neither the Company nor any Subsidiary has been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the
Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code. Neither the Company nor any Subsidiary is a party to any Tax allocation
or sharing agreement other than an agreement to which only the Company and the
Subsidiaries are parties.
(d) Neither the Company nor any Subsidiary is or has ever been a member of
an "affiliated group" of corporations (within the meaning of Section 1504 of
the Code), other than a group of which only the Company and the Subsidiaries
are members.
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2.10 Assets. Each of the Company and the Subsidiaries has good and
marketable title to all tangible assets necessary for the conduct of its
businesses as presently conducted. Each such tangible asset is free from
material defects, has been maintained in accordance with normal industry
practice, is in good operating condition and repair (subject to normal wear
and tear) and is suitable for the purposes for which it presently is used. No
asset of the Company (tangible or intangible) is subject to any Security
Interest, except the following: (a) liens shown on the Most Recent Balance
Sheet securing specified liabilities or obligations with respect to which no
material default exists (or event that, whether with or without notice, lapse
of time, or the happening or occurrence of any other event would constitute a
default); (b) exceptions disclosed in Section 2.10 of the Disclosure Schedule;
and (c) liens for current taxes not yet due and payable for which adequate
reserves have been provided.
2.11 Owned Real Property. None of the Company or any Subsidiary owns any
real property.
2.12 Intellectual Property.
(a) Each of the Company and the Subsidiaries owns, or is licensed or
otherwise possesses legally enforceable rights to use, all patents,
trademarks, trade names, service marks, copyrights, and any applications for
such patents, trademarks, trade names, service marks and copyrights, and all
patent rights, trade secrets, schematics, technology, know-how, computer
software programs or applications and tangible or intangible proprietary
information or material (collectively, "Intellectual Property") that are used
to conduct its business as currently conducted or planned by the Company to be
conducted. The Company has taken reasonable measures to protect the
proprietary nature of each item of Intellectual Property that it considers
confidential, and to maintain in confidence all trade secrets and confidential
information that it presently owns or uses.
(i) Section 2.12 of the Disclosure Schedule lists all patents and patent
applications and all trademarks, registered copyrights, trade names and
service marks owned by the Company and which are used in the business of
the Company or the Subsidiaries, including the jurisdictions in which each
such Intellectual Property right has been issued or registered or in which
any such application for such issuance or registration has been filed.
(ii) Section 2.12 of the Disclosure Schedule lists all written licenses,
sublicenses and other agreements to which the Company or a Subsidiary is a
party and pursuant to which any person is authorized to use any
Intellectual Property rights, except such licenses, sublicenses or other
agreements with end-users that grant non-exclusive rights to use a Company
product in accordance with the Company's standard form of end-user license
agreement.
(iii) Section 2.12 of the Disclosure Schedule lists all written licenses,
sublicenses and other agreements as to which the Company or a Subsidiary is
a party and pursuant to which the Company or a Subsidiary is authorized to
use any third party patents, patent rights, trademarks, service marks,
trade secrets or copyrights, including software ("Third Party Intellectual
Property Rights") which are used in the business of the Company or any
Subsidiary or which are incorporated in any existing product or service of
the Company or any Subsidiary, including, without limitation, the Defender
series, Defender Security Server software, Software SecureNet Keys, Windows
Defender Management System and SecureNet Key tokens.
(iv) Section 2.12 of the Disclosure Schedule lists all written agreements
or other arrangements under which the Company or any Subsidiary has
provided or agreed to provide source code of any Company product to any
third party, except for software development kits provided to agent
integration providers.
The Company has made available to the Buyer correct and complete copies of
all such patents, registrations, applications (owned by the Company), and all
licenses, sublicenses and agreements as amended to date. Except for retail
purchases of software, neither the Company nor any Subsidiary is a party to
any oral license, sublicense or agreement which, if reduced to written form,
would be required to be listed in Section 2.12 of the Disclosure Schedule
under the terms of this Section 2.12(a).
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(b) With respect to each item of Intellectual Property that the Company or
any Subsidiary owns: (i) subject to such rights as have been granted by the
Company or any Subsidiary under license agreements entered into by the Company
(copies of which have previously been made available or disclosed in writing
to the Buyer), the Company or a Subsidiary possesses all right, title and
interest in and to such item; and (ii) such item is not subject to any
outstanding judgment, order, decree, stipulation or injunction. With respect
to each item of Third Party Intellectual Property Rights: (i) the license,
sublicense or other agreement covering such item is legal, valid, binding,
enforceable and in full force and effect with respect to the Company or any
Subsidiary party thereto, and to the Company's knowledge is legal, valid,
binding, enforceable and in full force and effect with respect to each other
party thereto; (ii) such license, sublicense or other agreement will continue
to be legal, valid, binding, enforceable and in full force and effect
immediately following the Closing in accordance with the terms thereof as in
effect prior to the Closing; (iii) neither the Company nor any Subsidiary
party to such license, sublicense or other agreement is in breach or default
thereunder, and to the Company's knowledge no other party to such license,
sublicense or other agreement is in breach or default thereunder, and no event
has occurred which with notice or lapse of time would constitute a breach or
default or permit termination, modification or acceleration thereunder; (iv)
the underlying item of Third Party Intellectual Property is not subject to any
outstanding judgment, order, decree, stipulation or injunction to which the
Company or any Subsidiary is a party or has been specifically named, nor to
the Company's knowledge subject to any other outstanding judgment, order,
decree, stipulation, or injunction; and (v) no license or other fee is payable
upon any transfer or assignment of such license, sublicense or other
agreement.
(c) Except as set forth in Section 2.12 of the Disclosure Schedule, neither
the Company nor any of the Subsidiaries (i) has been named in any suit, action
or proceeding which involves a claim of infringement or misappropriation of
any Intellectual Property right of any third party or (ii) has received any
written notice alleging any such claim of infringement or misappropriation.
The Company has made available to the Buyer correct and complete copies of all
such suits, actions or proceedings or written notices to the extent the
Company is not prohibited from disclosing the same under applicable court
orders. The manufacturing, marketing, licensing or sale of the products or
performance of the service offerings of the Company and the Subsidiaries do
not currently infringe, and have not within the six years prior to the date of
this Agreement infringed, any Intellectual Property right of any third party;
and to the knowledge of the Company and the Subsidiaries, the Intellectual
Property rights of the Company and the Subsidiaries are not being infringed by
activities, products or services of any third party.
2.13 Real Property Leases. Section 2.13 of the Disclosure Schedule lists all
real property leased or subleased to the Company or any Subsidiary. The
Company has delivered or made available to the Buyer correct and complete
copies of the leases and subleases (as amended to date) listed in Section 2.13
of the Disclosure Schedule. With respect to each lease and sublease listed in
Section 2.13 of the Disclosure Schedule:
(a) the lease or sublease is legal, valid, binding, enforceable and in
full force and effect with respect to the Company or any Subsidiary party
thereto, to the Company's best knowledge is legal, valid, binding,
enforceable and in full force and effect with respect to each other party
thereto, and will continue to be so following the Closing in accordance
with the terms thereof as in effect prior to the Closing;
(b) neither the Company nor any other Subsidiary party to the lease or
sublease is in breach or default thereunder, to the Company's best
knowledge no other party to the lease or sublease is in breach or default,
and no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration thereunder;
(c) there are no disputes, oral agreements or forbearance programs in
effect as to the lease or sublease; and
(d) neither the Company nor any Subsidiary has assigned, transferred,
conveyed, mortgaged, deeded in trust or encumbered any interest in the
leasehold or subleasehold.
2.14 Contracts. Section 2.14 of the Disclosure Schedule lists the following
written arrangements (including without limitation written agreements) to
which the Company or any Subsidiary is currently a party and which has not
been terminated in accordance with its terms:
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(a) any written arrangement (or group of related written arrangements)
for the lease of personal property from or to third parties providing for
lease payments in excess of $50,000 per annum;
(b) any written arrangement (or group of related written arrangements)
for the licensing or distribution of software, products or other personal
property or for the furnishing or receipt of services (i) which calls for
performance over a period of more than one year, (ii) which involves more
than the sum of $50,000, or (iii) in which the Company or any Subsidiary
has granted rights to license, sublicense or copy, "most favored nation"
pricing provisions or exclusive marketing or distribution rights relating
to any products or territory or has agreed to purchase a minimum quantity
of goods or services or has agreed to purchase goods or services
exclusively from a certain party;
(c) any written arrangement establishing a partnership or joint venture;
(d) any written arrangement (or group of related written arrangements)
under which it has created, incurred, assumed, or guaranteed (or may
create, incur, assume, or guarantee) indebtedness (including capitalized
lease obligations) involving more than $50,000 or under which it has
imposed (or may impose) a Security Interest on any of its assets, tangible
or intangible;
(e) any written arrangement concerning confidentiality or noncompetition;
(f) any written arrangement involving any of the Company Shareholders or
their affiliates, as defined in Rule 12b-2 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") ("Affiliates");
(g) any written arrangement under which the consequences of a default or
termination could have a material adverse effect on the assets, business,
financial condition or results of operations of the Company and its
consolidated Subsidiaries;
(h) any other written arrangement (or group of related written
arrangements) either involving more than $50,000 or not entered into in the
Ordinary Course of Business;
(i) any written arrangement under which the Company or any Subsidiary
provides maintenance or support services to any third party with regard to
the Company's Defender series hardware products and any written arrangement
containing a commitment by the Company to provide support for any such
products for more than one year from the date of this Agreement; and
(j) any written arrangement by which the Company agrees to make available
any Defender series hardware product or other hardware product.
The Company has delivered or made available to the Buyer a correct and
complete copy of each written arrangement (as amended to date) listed in
Section 2.14 of the Disclosure Schedule. Except as set forth in the Disclosure
Schedule, with respect to each written arrangement so listed: (i) the written
arrangement is legal, valid, binding and enforceable and in full force and
effect with respect to the Company or any Subsidiary party thereto and, to the
Company's knowledge the written arrangement is legal, valid, binding and is
enforceable and in full force and effect with respect to each other party
thereto, except as enforcement may be limited by bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights generally,
and except that the availability of equitable remedies, including specific
performance, is subject to the discretion of the Court before which any
proceedings therefor may be brought; (ii) the written arrangement will
continue to be legal, valid, binding and enforceable and in full force and
effect immediately following the Closing in accordance with the terms thereof
as in effect prior to the Closing and does not require the consent of any
party to the transactions contemplated hereby; and (iii) neither the Company
nor any Subsidiary party thereto is in breach or default, to the Company's
knowledge no other party thereto is in breach or default, and no event has
occurred which with notice or lapse of time would constitute a breach or
default or permit termination, modification, or acceleration, under the
written arrangement. Neither the Company nor any Subsidiary is a party to any
oral contract, agreement or other arrangement which, if reduced to written
form, would be required to be listed in Section 2.14 of the Disclosure
Schedule under the terms of this Section 2.14.
2.15 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Company or any Subsidiary.
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2.16 Insurance. Section 2.16 of the Disclosure Schedule lists each current
insurance policy (including fire, theft, casualty, general liability, workers
compensation, business interruption, environmental, product liability and
automobile insurance policies and bond and surety arrangements) to which the
Company or any Subsidiary is a party, a named insured, or otherwise the
beneficiary of coverage at any time within the past year. Each such policy is
in full force and effect and will continue to be in full force and effect
following the Closing.
Neither the Company nor any Subsidiary is in breach or default (including
with respect to the payment of premiums or the giving of notices) under such
policy, and no event has occurred which, with notice or the lapse of time,
would constitute such a breach or default or permit termination, modification
or acceleration, under such policy; and neither the Company nor any Subsidiary
has received any notice from the insurer disclaiming coverage or reserving
rights with respect to a particular claim or such policy in general. Within
the last year, neither the Company nor any Subsidiary has incurred any loss,
damage, expense or liability covered by any such insurance policy for which it
has not properly asserted a claim under such policy. Each of the Company and
the Subsidiaries is covered by insurance in scope and amount customary and
reasonable for the businesses in which it is engaged.
2.17 Litigation.
(a) Section 2.17 of the Disclosure Schedule identifies, and contains a brief
description of, (i) any unsatisfied judgment, order, decree, stipulation or
injunction and (ii) any claim, complaint, action, suit, proceeding, hearing or
investigation of or in any Governmental Entity or before any arbitrator
affecting the Company to which the Company, any Subsidiary, officer, director,
employee or agent of the Company is or was (for the five years prior to and
including the date hereof) a party or, to the knowledge of the Company and the
Subsidiaries, is threatened to be made a party. Other than as set forth in
Section 2.17 of the Disclosure Schedule, none of the complaints, actions,
suits, proceedings, hearings, and investigations set forth in Section 2.17 of
the Disclosure Schedule, if determined adversely to the Company or any
Subsidiary, could have a material adverse effect on the assets, business,
financial condition or results of the operations of the Company and its
Subsidiaries taken as a whole.
(b) The Company has provided or has made available any agreement or other
document or instrument settling any claim, complaint, action, suit or other
proceeding, or a threat of any such claim, complaint, action, suit or other
proceedings, against the Company.
2.18 Employees. Section 2.18 of the Disclosure Schedule contains a list of
all employees of the Company and each Subsidiary, along with the position of
each such person. Section 2.18 of the Disclosure Schedule lists the annual
rate of compensation for each such person who is paid more than $125,000
annually in salary plus bonus. The Company has provided Buyer with a written
list of the annual rate of compensation for all other employees of the Company
and each Subsidiary. Each such employee has entered into a
confidentiality/assignment of inventions agreement with the Company or a
Subsidiary, a copy of which has previously been delivered or made available to
the Buyer. To the knowledge of the Company and its Subsidiaries, no key
employee or group of employees has any current plans to terminate employment
with the Company or any Subsidiary. Neither the Company nor any Subsidiary is
a party to or bound by any collective bargaining agreement, nor has any of
them experienced any strikes, formal grievances, claims of unfair labor
practices or other collective bargaining disputes. The Company and the
Subsidiaries have no knowledge of any organizational effort made or
threatened, either currently or within the past two years, by or on behalf of
any labor union with respect to employees of the Company or any Subsidiary.
2.19 Employee Benefits.
(a) Section 2.19 of the Disclosure Schedule contains a complete and accurate
list of all Employee Benefit Plans (as defined below) maintained, or
contributed to, by the Company, any Subsidiary, or any ERISA Affiliate (as
defined below). For purposes of this Agreement, "Employee Benefit Plan" means
any "employee pension benefit plan" (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")), any
"employee welfare benefit plan" (as defined in Section 3(1) of ERISA), and any
other written
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or oral plan, agreement or arrangement involving direct or indirect
compensation, including without limitation insurance coverage, severance
benefits, disability benefits, deferred compensation, bonuses, stock options,
stock purchase, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement compensation. For purposes of this Agreement,
"ERISA Affiliate" means any entity which is a member of (i) a controlled group
of corporations (as defined in Section 414(b) of the Code), (ii) a group of
trades or businesses under common control (as defined in Section 414(c) of the
Code), or (iii) an affiliated service group (as defined under Section 414(m)
of the Code or the regulations under Section 414(o) of the Code), any of which
includes the Company or a Subsidiary. Complete and accurate copies of (i) all
Employee Benefit Plans which have been reduced to writing, (ii) written
summaries of all unwritten Employee Benefit Plans, if any, (iii) all related
trust agreements, insurance contracts and summary plan descriptions, and (iv)
all annual reports filed on IRS Form 5500, 5500C or 5500R for the last five
plan years for each Employee Benefit Plan, have been delivered or made
available to the Buyer. Each Employee Benefit Plan has been administered in
accordance with its terms and each of the Company, the Subsidiaries and the
ERISA Affiliates has met its obligations with respect to such Employee Benefit
Plan and has made all required contributions thereto. The Company and all
Employee Benefit Plans are in compliance with the currently applicable
provisions of ERISA and the Code and the regulations thereunder.
(b) There are no investigations by any Governmental Entity, termination
proceedings or other claims (except claims for benefits payable in the normal
operation of the Employee Benefit Plans and proceedings with respect to
qualified domestic relations orders), suits or proceedings against or
involving any Employee Benefit Plan or asserting any rights or claims to
benefits under any Employee Benefit Plan that could give rise to any
liability.
(c) All the Employee Benefit Plans that are intended to be qualified under
Section 401(a) of the Code have received determination, opinion or
notification letters from the Internal Revenue Service to the effect that such
Employee Benefit Plans are qualified and the plans and the trusts related
thereto are exempt from federal income taxes under Sections 401(a) and 501(a),
respectively, of the Code, no such determination, opinion or notification
letter has been revoked and revocation has not been threatened, and no such
Employee Benefit Plan has been amended since the date of its most recent
determination, opinion or notification letter or application therefor in any
respect, and no act or omission has occurred, that would adversely affect its
qualification or increase its cost.
(d) Neither the Company, any Subsidiary, nor any ERISA Affiliate has ever
maintained an Employee Benefit Plan subject to Section 412 of the Code or
Title IV of ERISA.
(e) At no time has the Company, any Subsidiary or any ERISA Affiliate been
obligated to contribute to any "multi-employer plan" (as defined in Section
4001(a)(3) of ERISA).
(f) There are no unfunded obligations under any Employee Benefit Plan
providing benefits after termination of employment to any employee of the
Company or any Subsidiary (or to any beneficiary of any such employee),
including but not limited to retiree health coverage and deferred
compensation, but excluding continuation of health coverage required to be
continued under Section 4980B of the Code and insurance conversion privileges
under state law.
(g) No act or omission has occurred and no condition exists with respect to
any Employee Benefit Plan maintained by the Company, any Subsidiary or any
ERISA Affiliate that would subject the Company, any Subsidiary or any ERISA
Affiliate to any fine, penalty, tax or liability of any kind imposed under
ERISA or the Code.
(h) No Employee Benefit Plan is funded by, associated with, or related to a
"voluntary employee's beneficiary association" within the meaning of Section
501(c)(9) of the Code.
(i) No Employee Benefit Plan, plan documentation or agreement, summary plan
description or other written communication distributed generally to employees
by its terms prohibits the Company from amending or terminating any such
Employee Benefit Plan.
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(j) Section 2.19 of the Disclosure Schedule discloses each: (i) written
agreement with any director, executive officer or other key employee of the
Company or any Subsidiary which has not been terminated in accordance with its
terms (A) the benefits of which are contingent, or the terms of which are
altered, upon the occurrence of a transaction involving the Company or any
Subsidiary of the nature of any of the transactions contemplated by this
Agreement, (B) providing any term of employment or compensation guarantee or
(C) providing severance benefits or other benefits after the termination of
employment of such director, executive officer or key employee; (ii)
agreement, plan or arrangement under which any person may receive payments
from the Company or any Subsidiary that may be subject to the tax imposed by
Section 4999 of the Code or included in the determination of such person's
"parachute payment" under Section 280G of the Code; and (iii) agreement or
plan binding the Company or any Subsidiary, including without limitation any
stock option plan, stock appreciation right plan, restricted stock plan, stock
purchase plan, severance benefit plan, or any Employee Benefit Plan, any of
the benefits of which will be increased, or the vesting of the benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement.
2.20 Environmental Matters.
(a) Each of the Company and the Subsidiaries has complied with all
applicable Environmental Laws (as defined below). There is no pending or, to
the knowledge of the Company and the Subsidiaries, threatened civil or
criminal litigation, written notice of violation, formal administrative
proceeding, or investigation, inquiry or information request by any
Governmental Entity, relating to any Environmental Law involving the Company
or any Subsidiary. For purposes of this Agreement, "Environmental Law" means
any federal, state or local law, statute, rule or regulation or the common law
relating to the environment or occupational health and safety, including
without limitation any statute, regulation or order pertaining to (i)
treatment, storage, disposal, generation and transportation of toxic or
hazardous substances or solid or hazardous waste; (ii) air, water and noise
pollution; (iii) groundwater and soil contamination; (iv) the release or
threatened release into the environment of toxic or hazardous substances, or
solid or hazardous waste, including without limitation emissions, discharges,
injections, spills, escapes or dumping of pollutants, contaminants or
chemicals; (v) the protection of wild life, marine sanctuaries and wetlands,
including without limitation all endangered and threatened species; (vi)
storage tanks, vessels and containers; (vii) underground and other storage
tanks or vessels, abandoned, disposed or discarded barrels, containers and
other closed receptacles; (viii) health and safety of employees and other
persons; and (ix) manufacture, processing, use, distribution, treatment,
storage, disposal, transportation or handling of pollutants, contaminants,
chemicals or industrial, toxic or hazardous substances or oil or petroleum
products or solid or hazardous waste. As used above, the terms "release" and
"environment" shall have the meaning set forth in the federal Comprehensive
Environmental Compensation, Liability and Response Act of 1980 ("CERCLA").
(b) There have been no releases of any Materials of Environmental Concern
(as defined below) into the environment at any parcel of real property or any
facility when owned, operated or controlled by the Company or a Subsidiary.
Neither the Company nor any Subsidiary is aware of any other releases of
Materials of Environmental Concern that could reasonably be expected to have
an impact on the real property or facilities owned, operated or controlled by
the Company or a Subsidiary. For purposes of this Agreement, "Materials of
Environmental Concern" means any chemicals, pollutants or contaminants,
hazardous substances (as such term is defined under CERCLA), solid wastes and
hazardous wastes (as such terms are defined under the federal Resources
Conservation and Recovery Act), toxic materials, oil or petroleum and
petroleum products, or any other material subject to regulation under any
Environmental Law.
(c) Set forth in Section 2.20(c) of the Disclosure Schedule is a list of all
environmental reports, investigations and audits relating to premises
currently or previously owned or operated by the Company or a Subsidiary
(whether conducted by or on behalf of the Company or a Subsidiary or a third
party, and whether done at the initiative of the Company or a Subsidiary or
directed by a Governmental Entity or other third party) which to the knowledge
of the Company were issued or conducted during the past five years and which
the
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Company has possession of or access to. Complete and accurate copies of each
such report, or the results of each such investigation or audit, have been
provided to the Buyer.
2.21 Legal Compliance. Each of the Company and the Subsidiaries, and the
conduct and operations of their respective businesses, are in compliance with
each law (including rules and regulations thereunder) of any federal, state,
local or foreign government, or any Governmental Entity, which (a) affects or
relates to this Agreement or the transactions contemplated hereby or (b) is
applicable to the Company or such Subsidiary or business.
2.22 Permits. Section 2.22 of the Disclosure Schedule sets forth a list of
all permits, licenses, registrations, certificates, orders or approvals from
any Governmental Entity required for the Company or a Subsidiary to conduct
its business as currently conducted (including without limitation those issued
or required under applicable export laws or regulations) ("Permits") issued to
or held by the Company or any Subsidiary. Such listed Permits are the only
Permits that are required for the Company and the Subsidiaries to conduct
their respective businesses as presently conducted. Each such Permit is in
full force and effect and, to the knowledge of the Company or any Subsidiary,
no suspension or cancellation of such Permit is threatened and to the
Company's knowledge there is no basis for believing that such Permit will not
be renewable upon expiration.
2.23 Certain Business Relationships With Affiliates. No Affiliate of the
Company or of any Subsidiary (a) owns any property or right, tangible or
intangible, which is used in the business of the Company or any Subsidiary,
(b) has any claim or cause of action against the Company or any Subsidiary, or
(c) owes any money to the Company or any Subsidiary. Section 2.23 of the
Disclosure Schedule describes any transactions or relationships between the
Company and any Affiliate thereof which are reflected in the statements of
operations of the Company included in the Financial Statements.
2.24 Fees. Except as disclosed in Section 2.24 of the Disclosure Schedule or
otherwise in this Agreement, neither the Company nor any Subsidiary has any
liability or obligation to pay any fees or commissions to any broker,
investment banking firm, finder or agent with respect to the transactions
contemplated by this Agreement.
2.25 Books and Records. The minute books and other similar records of the
Company and each Subsidiary contain true and complete records of all actions
taken at any meetings of the Company's or such Subsidiary's shareholders,
Board of Directors or any committee thereof and of all written consents
executed in lieu of the holding of any such meeting. The books and records of
the Company and each Subsidiary accurately reflect in all material respects
the assets, liabilities, business, financial condition and results of
operations of the Company or such Subsidiary and have been maintained in
accordance with good business and bookkeeping practices.
2.26 Company Action. The Board of Directors of the Company, at a meeting
duly called and held, has by the unanimous vote of all directors (i)
determined that the Merger is fair and in the best interests of the Company
and its shareholders, (ii) adopted this Agreement in accordance with the
provisions of the California General Corporation Law, and (iii) directed that
this Agreement and the Merger be submitted to the Company Shareholders for
their adoption and approval and resolved to recommend that Company
Shareholders vote in favor of the adoption of this Agreement and the approval
of the Merger.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSITORY SUBSIDIARY
Each of the Buyer and the Transitory Subsidiary represents and warrants to
the Company that the following statements contained in this Article III are
true and correct in all material respects:
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3.1 Organization. Each of the Buyer and the Transitory Subsidiary is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation. Each of the Buyer and the Transitory
Subsidiary is duly qualified to conduct business and is in corporate good
standing under the laws of its jurisdiction in which the nature of its
businesses or the ownership or leasing of its properties requires such
qualification, except in those jurisdictions where the failure to be so
qualified will not have a material adverse effect on the business of the Buyer
or the Transitory Subsidiary or result in a material delay of the transactions
contemplated by this Agreement. The Buyer and the Transitory Subsidiary have
the corporate power and authority to carry on the businesses in which each is
engaged and to own and use the properties owned and used by it, except to the
extent a failure will not have a material adverse effect on the business of
the Buyer or the Transitory Subsidiary or result in a material delay of the
transactions contemplated by this Agreement. Neither the Buyer nor the
Transitory Subsidiary is in material default under or in violation of any
material provision of its Certificate of Incorporation or By-laws.
3.2 Capitalization. The authorized capital stock of the Buyer consists of
50,000,000 shares of Buyer Common Stock, of which 10,096,874 shares were
issued and outstanding and no shares were held in the treasury of the Buyer as
of October 31, 1996, and 5,000,000 shares of Preferred Stock, of which no
shares are outstanding. All of the issued and outstanding shares of Buyer
Common Stock are duly authorized, validly issued, fully paid, nonassessable
and free of all preemptive rights. All of the Merger Shares will be, when
issued in accordance with this Agreement, duly authorized, validly issued,
fully paid, nonassessable and free of all liens and encumbrances and subject
to no preemptive rights.
3.3 Authorization of Transaction. Each of the Buyer and the Transitory
Subsidiary has the corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. Subject to approval by the
stockholders of the Buyer, the execution and delivery of this Agreement and
the performance of this Agreement and the consummation of the transactions
contemplated hereby by the Buyer and the Transitory Subsidiary have been duly
and validly authorized by the necessary corporate action on the part of the
Buyer and Transitory Subsidiary. This Agreement has been duly and validly
executed and delivered by the Buyer and the Transitory Subsidiary and,
assuming the due authorization, execution and delivery by the Company,
constitutes a valid and binding obligation of the Buyer and the Transitory
Subsidiary, enforceable against them in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights and remedies generally, and
except that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought.
3.4 Noncontravention. Subject to compliance with (i) the applicable
requirements of the Securities Act, (ii) any applicable state or foreign
securities laws, (iii) the Exchange Act, (iv) the Hart-Scott-Rodino Act and
the filing of the Certificates of Merger as required by the Delaware General
Corporation Law and the California General Corporation Law, and (v) the filing
with the SEC, the NMS and the NASD of any registration statement and the
declaration by the SEC of the effectiveness of such registration statement,
neither the execution and delivery of this Agreement, nor the consummation by
the Buyer or the Transitory Subsidiary of the transactions contemplated hereby
will (a) conflict or violate any provision of the charter or By-laws of the
Buyer or the Transitory Subsidiary, (b) require on the part of the Buyer or
the Transitory Subsidiary any filing with, or permit, authorization, consent
or approval of, any Governmental Entity, (c) conflict with, result in breach
of, constitute (with or without due notice or lapse of time or both) a default
under, result in the acceleration of, create in any party any right to
accelerate, terminate, modify or cancel, or require notice, consent or waiver
under, any contract, lease, sublease, license, sublicense, franchise, permit,
indenture, agreement or mortgage for borrowed money, instrument of
indebtedness, Security Interest or other arrangement to which the Buyer or
Transitory Subsidiary is a party or by which either is bound or to which any
of their assets are subject, or (d) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Buyer or the Transitory
Subsidiary or any of their properties or assets.
3.5 Reports and Financial Statements. The Buyer has previously furnished or
made available to the Company complete and accurate copies, as amended or
supplemented, of its (a) Registration Statement on
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Form S-1 which was declared effective by the Securities and Exchange
Commission ("SEC") on April 23, 1996, and (b) all other reports filed by the
Buyer under Sections 13, 14 or 15(d) of the Exchange Act with the SEC since
April 23, 1996 (such reports are collectively referred to herein as the "Buyer
Reports"). The Buyer Reports constitute all of the documents required to be
filed by the Buyer under Sections 13, 14 or 15(d) of the Exchange Act with the
SEC since December 31, 1995. As of their respective dates, the Buyer Reports
complied in all material respects with applicable SEC and NASDAQ requirements
and did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited financial statements and unaudited interim
financial statements of the Buyer included in the Buyer Reports (i) comply as
to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto, (ii) have
been prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby (except as may be indicated therein or in the
notes thereto, and in the case of quarterly financial statements, as permitted
by Form 10-Q under the Exchange Act), (iii) fairly present the consolidated
financial condition, results of operations and cash flows of the Buyer as of
the respective dates thereof and for the periods referred to therein, and (iv)
are consistent with the books and records of the Buyer.
3.6 Absence of Material Adverse Changes. Since December 31, 1995, there has
not been any material adverse change in the assets, business, financial
condition or results of operations of the Buyer, nor has there occurred any
event or development which could reasonably be foreseen to result in such a
material adverse change in the future.
3.7 Brokers' Fees. Neither the Buyer nor the Transitory Subsidiary has any
liability or obligation to pay any fees or commissions to any broker, finder
or agent with respect to the transactions contemplated by this Agreement
except to Montgomery Securities.
3.8 Disclosure. No representation or warranty by the Buyer contained in this
Agreement, and no statement contained in any document, certificate or other
instrument delivered to or to be delivered by or on behalf of the Buyer
pursuant to this Agreement, contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact necessary, in
light of the circumstances under which it was or will be made, in order to
make the statements herein or therein not misleading.
3.9 Undisclosed Liabilities. Neither the Buyer nor the Transitory Subsidiary
has any liability (whether known or unknown, whether absolute or contingent,
whether liquidated or unliquidated and whether due or to become due), except
for (a) liabilities accrued or reserved against the September 30, 1996
unaudited consolidated balance sheet of the Company and its Subsidiaries
("Buyer Balance Sheet"), (b) liabilities which have arisen since September 30,
1996 in the Ordinary Course of Business, (c) contractual or statutory
liabilities incurred in the Ordinary Course of Business which are not required
by GAAP to be reflected on a balance sheet, and (d) liabilities disclosed in
Section 3.9 of the Disclosure Schedule.
3.10 Tax Matters.
(a) The Buyer has filed all Tax Returns (as defined below) that it was
required to file and all such Tax Returns were correct and complete in all
material respects. The Buyer has paid or will pay all Buyer Taxes (as defined
below) that are due on or before the Closing Date, whether or not shown on any
such Tax Returns, except such as are being contested in good faith by
appropriate proceedings (to the extent any such proceedings are required) and
with respect to which the Buyer is maintaining reserves adequate for their
payment. The accrued but unpaid Buyer Taxes of the Buyer for Tax Periods
through the date of the Buyer Balance Sheet do not exceed the accruals and
reserves for Buyer Taxes (other than deferred Taxes) set forth on the Buyer
Balance Sheet. All Buyer Taxes attributable to the period January 1, 1996
through the Closing Date are attributable to the conduct by the Buyer of its
operations in the Ordinary Course of Business. The Buyer does not have any
actual or potential liability for any Tax obligation of any taxpayer
(including without limitation any affiliated group of corporations or other
entities that included the Buyer during a prior period) other than the Buyer.
All Taxes that
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the Buyer is or was required by law to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the
proper Governmental Entity.
(i) For purposes of this Agreement, "Buyer Taxes" means all taxes,
charges, fees, levies or other similar assessments or liabilities,
including without limitation income, gross receipts, ad valorem, premium,
value-added, excise, real property, personal property, sales, use,
transfer, withholding, employment, payroll and franchise taxes imposed by
the United States of America or any state, local or foreign government, or
any agency thereof, or other political subdivision of the United States or
any such government, and any interest, fines, penalties, assessments or
additions to tax resulting from, attributable to or incurred in connection
with any tax or any contest or dispute thereof and any amounts of Taxes of
another person that the Buyer is liable to pay by law.
(ii) For purposes of determining the amount of Taxes attributable to a
specified period (e.g., the period from the date of the Buyer Balance Sheet
through the Closing Date) other than a Tax Period, each Tax shall be
computed as if the specified period were a Tax Period. For purposes of this
paragraph (ii), a Tax Period means a period for which a Tax is required to
be computed under applicable statutes and regulations.
(b) No examination or audit of any Tax Returns of the Buyer by any
Governmental Entity is currently in progress or, to the actual knowledge of
the Buyer threatened or contemplated. The Buyer has not waived any statute of
limitations with respect to taxes or agreed to an extension of time with
respect to a tax assessment or deficiency.
(c) The Buyer is not a "consenting corporation" within the meaning of
Section 341(f) of the Code and none of the assets of the Buyer is subject to
an election under Section 341(f) of the Code. The Buyer has not been a United
States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(l)(A)(ii) of the Code. The Buyer is not a party to any Tax allocation
or sharing agreement other than an agreement to which only the Buyer and the
Transitory Subsidiary are parties.
(d) The Buyer has never been a member of an "affiliated group" of
corporations (within the meaning of Section 1504 of the Code), other than a
group of which only the Buyer and the Transitory Subsidiary are members.
3.11 Litigation.
(a) Section 3.11 of the Disclosure Schedule identifies, and contains a brief
description of, (i) any unsatisfied judgment, order, decree, stipulation or
injunction and (ii) any claim, complaint, action, suit, proceeding, hearing or
investigation of or in any Governmental Entity or before any arbitrator to
which the Buyer, officer, director, employee or agent of the Buyer is or was
(for the one year prior to and including the date hereof) a party or, to the
knowledge of the Buyer is threatened to be made a party. Other than as set
forth in Section 3.11 of the Disclosure Schedule, none of the complaints,
actions, suits, proceedings, hearings, and investigations set forth in Section
3.11 of the Disclosure Schedule, if determined adversely to the Buyer, could
have a material adverse effect on the assets, business, financial condition,
results of operations or future prospects of the Buyer.
3.12 Legal Compliance. Each of the Buyer and the Transitory Subsidiary, and
the conduct and operations of their respective businesses, are in compliance
with each law (including rules and regulations thereunder) of any federal,
state, local or foreign government, or any Governmental Entity, which (a)
affects or relates to this Agreement or the transactions contemplated hereby
or (b) is applicable to the Buyer or such Transitory Subsidiary or business,
except for any violation of or default which will not have a material adverse
effect on the assets, business, financial condition, results of operations or
future prospects of the Buyer or such Transitory Subsidiary.
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3.13 Buyer Stockholder Vote. The Buyer's stockholders are not required to
vote on the Merger under the Delaware General Corporation Law or the rules of
Nasdaq/NMS.
3.14 Intellectual Property. The description of the intellectual property of
the Buyer in the "Intellectual Property Rights" section contained in the
Prospectus of the Buyer dated April 23, 1996 is true and complete in all
material respects as of the date of this Agreement.
3.15 Employee Benefits. All material employee benefit plans covering
employees of the Buyer are listed in Section 3.15 of the Buyer Disclosure
Schedule (the "Benefit Plans"). To the extent applicable, the Benefit Plans
comply, in all material respects, with the requirements of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") and the Code, and
any Benefit Plan intended to be qualified under Section 401(a) of the Code has
been determined by the Internal Revenue Service to be so qualified or a
determination letter has been sought. No Benefit Plan is covered by Title IV
of ERISA or Section 412 of the Code. To the knowledge of the executive
officers of the Buyer, neither a Benefit Plan nor the Buyer has incurred any
liability or penalty under Section 4975 of the Code or Section 502(i) of
ERISA. Each Benefit Plan has been maintained and administered in all material
respects in compliance with its terms and with ERISA and the Code to the
extent applicable thereto. To the knowledge of the executive officers of the
Buyer, there are no pending or anticipated material claims against or
otherwise involving any of the Benefit Plans and no suit, action or other
litigation (excluding claims for benefits incurred in the ordinary course of
Benefit Plan activities) has been brought against or with respect to any such
Benefit Plan. All material contributions required to be made as of the date
hereof to the Benefit Plans have been made or provided for.
ARTICLE IV
COVENANTS
4.1 Best Efforts. Each of the Parties shall use its best efforts, to the
extent commercially reasonable, to take all actions and to do all things
necessary, proper or advisable to consummate the transactions contemplated by
this Agreement; provided, however, that notwithstanding anything in this
Agreement to the contrary, the Buyer shall not be required to sell or dispose
of or hold separately (through a trust or otherwise) any assets or businesses
of the Buyer or its Affiliates.
4.2 Notices and Consents. Each of the Buyer, the Transitory Subsidiary and
the Company shall use its respective best efforts to obtain, at its expense,
all such waivers, permits, consents, approvals or other authorizations from
third parties and Governmental Entities, and to effect all such registrations,
filings and notices with or to third parties and Governmental Entities, as may
be required by or with respect to the Buyer, the Transitory Subsidiary or the
Company, respectively, in connection with the transactions contemplated by
this Agreement (including without limitation, with respect to the Company,
those listed in Section 2.4 or Section 2.22 of the Disclosure Schedule).
4.3 Special Meeting, Prospectus/Proxy Statement and Registration Statement.
(a) The Buyer and the Company shall jointly prepare, and the Buyer shall
file with the SEC under the Exchange Act, preliminary proxy materials for the
purpose of soliciting proxies from Company Shareholders to vote in favor of
the adoption of this Agreement and the approval of the Merger at a special
meeting of Company Shareholders to be called and held for such purpose (the
"Company Special Meeting"). Such proxy materials shall be in the form of a
proxy statement/prospectus to be used for the purpose of offering the Merger
Shares to Company Shareholders and soliciting such proxies or votes from
Company Shareholders (such proxy statement/prospectus, together with any
accompanying letters to shareholders, notices of meeting and forms of proxy,
shall be referred to herein as the "Prospectus/Proxy Statement"). The
Prospectus/Proxy Statement shall be included as a part of the Registration
Statement on Form S-4 (the "Registration Statement"), which the Buyer shall
file with the SEC under the Securities Act. The Buyer, with the assistance of
the Company, shall promptly respond to any SEC comments on the Registration
Statement and shall otherwise use its best efforts to resolve as
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promptly as practicable all SEC comments to the satisfaction of the SEC and to
cause the Registration Statement to be declared effective as promptly as
practicable. The Buyer shall also take any and all such actions as may be
necessary or as it may deem advisable for the purpose of complying with all
applicable state securities laws in connection with the offering and issuance
of the Merger Shares.
(b) Promptly following the resolution to the satisfaction of the SEC of all
SEC comments on the Prospectus/Proxy Statement (or the expiration of the ten-
day period under Rule 14a-6(a) under the Exchange Act, if no SEC comments are
received by such date), the Company shall distribute the Prospectus/Proxy
Statement to its shareholders and, pursuant thereto, shall respectively call
the Company Special Meeting in accordance with the California General
Corporation Law and shall solicit proxies from its shareholders to vote in
favor of the adoption of this Agreement and the approval of the Merger at the
Company Special Meeting.
(c) The Company shall comply with all applicable provisions of the
California General Corporation Law in the preparation, filing and distribution
of the Prospectus/Proxy Statement, the solicitation of proxies thereunder, and
the calling and holding of the Company Special Meeting. Without limiting the
foregoing, the Company shall ensure that the Prospectus/Proxy Statement does
not, as of the date on which it is distributed to Company Shareholders, and as
of the date of the Company Special Meeting, contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading (provided that the Company shall only be responsible for the
accuracy and completeness of information relating to the Company or furnished
by the Company in writing for inclusion in the Prospectus/Proxy Statement).
(d) The Buyer shall comply with all applicable provisions of and rules under
the Securities Act and the Exchange Act and state securities laws in the
preparation and filing of the Registration Statement and the offering and
issuance of the Merger Shares. Without limiting the foregoing, the Buyer shall
ensure that the Registration Statement does not, as of its effective date,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading (provided that the Buyer shall not be responsible for the
accuracy and completeness of information relating to the Company or any other
information furnished by the Company in writing for inclusion in the
Registration Statement).
(e) The Company, acting through its Board of Directors, shall include in the
Prospectus/Proxy Statement the unanimous recommendation of its Board of
Directors that the Company Shareholders vote in favor of the adoption of this
Agreement and the approval of the Merger, and shall otherwise use its best
efforts to obtain the Requisite Shareholder Approval.
4.4 Operation of Business. Except as contemplated by this Agreement (or
otherwise consented to by Buyer in writing), during the period from the date
of this Agreement to the Effective Time, the Company shall (and shall cause
each Subsidiary to) conduct its operations in the Ordinary Course of Business
and in compliance with all applicable laws and regulations and, to the extent
consistent therewith, use all reasonable efforts to preserve intact its
current business organization, keep its physical assets in good working
condition, keep available the services of its current officers and employees
and preserve its relationships with customers, suppliers and others having
business dealings with it to the end that its goodwill and ongoing business
shall not be impaired in any material respect. Without limiting the generality
of the foregoing, after the date of this Agreement but prior to the Effective
Time, neither the Company nor any Subsidiary shall, without the written
consent of the Buyer:
(a) issue, sell, deliver or agree or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) or authorize
the issuance, sale or delivery of, or redeem or repurchase, any stock of
any class or any other securities or any rights, warrants or options to
acquire any such stock or other securities (except pursuant to the
conversion or exercise of convertible securities, Options or Warrants
outstanding on the date hereof), or amend any of the terms of any such
convertible securities, Options or Warrants;
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(b) split, combine or reclassify any shares of its capital stock;
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock;
(c) create, incur or assume any debt not currently outstanding (including
obligations in respect of capital leases); assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person or entity; or make any
loans, advances or capital contributions to, or investments in, any other
person or entity, except in the Ordinary Course of Business;
(d) enter into, adopt or amend any Employee Benefit Plan or any
employment or severance agreement or arrangement of the type described in
Section 2.19(j) or increase in any manner the compensation or fringe
benefits of, or modify the employment terms of, its directors, officers or
employees, generally or individually, or pay any benefit not required by
the terms in effect on the date hereof of any existing Employee Benefit
Plan;
(e) acquire, sell, lease, encumber or dispose of any assets or property
(including without limitation any shares or other equity interests in or
securities of any Subsidiary or any corporation, partnership, association
or other business organization or division thereof), other than purchases
and sales of assets in the Ordinary Course of Business;
(f) amend its charter or By-laws, except required by this Agreement;
(g) change in any material respect its accounting methods, principles or
practices, except insofar as may be required by a generally applicable
change in GAAP;
(h) discharge or satisfy any Security Interest or pay any obligation or
liability other than in the Ordinary Course of Business;
(i) mortgage or pledge any of its property or assets or subject any such
assets to any Security Interest;
(j) sell, assign, transfer or license any Intellectual Property, other
than in the Ordinary Course of Business;
(k) enter into, amend, terminate, take or omit to take any action that
would constitute a violation of or default under, or waive, release or
assign any rights under, any material contract or agreement;
(l) make or commit to make any capital expenditure in excess of $50,000
per item;
(m) take any action or fail to take any action permitted by this
Agreement with the knowledge that such action or failure to take action
would result in (i) any of the representations and warranties of the
Company set forth in this Agreement becoming untrue or (ii) any of the
conditions to the Merger set forth in Article V not being satisfied;
(n) hire, terminate or discharge any employee or engage or terminate any
consultant, provided however that any employee or consultant may himself or
herself terminate his or her relationship with the Company in accordance
with the terms of any applicable employment, consulting or similar
agreement; or
(o) agree in writing or otherwise to take any of the foregoing actions.
Without limiting the generality of the foregoing, prior to the Effective
Time, neither the Company nor any Subsidiary shall be deemed in breach of any
representation, warranty, covenant or disclosure of this Section 4.4 where the
Buyer has participated in such act or failure to act pursuant to the
Management Agreement in the form attached hereto as Exhibit G.
4.5 Full Access. The Company shall (and shall cause each Subsidiary to)
permit representatives of the Buyer to have full access (at all reasonable
times, and in a manner so as not to interfere with the normal business
operations of the Company and the Subsidiaries) to all premises, properties,
financial and accounting records, contracts, other records and documents, and
personnel, of or pertaining to the Company and each Subsidiary, subject to
compliance with applicable confidentiality obligations of the Company.
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4.6 Notice of Breaches. The Company shall promptly deliver to the Buyer
written notice of any event or development of which the Company is aware that
would (a) render any representation or warranty of the Company in this
Agreement (including the Disclosure Schedule) inaccurate or incomplete in any
material respect, or (b) constitute or result in a breach by the Company or
any of its Affiliates of, or a failure by the Company or any of its Affiliates
to comply with, any agreement or covenant in this Agreement applicable to such
party. The Buyer or the Transitory Subsidiary shall promptly deliver to the
Company written notice of any event or development that would (i) render any
statement, representation or warranty of the Buyer or the Transitory
Subsidiary in this Agreement inaccurate or incomplete in any material respect,
or (ii) constitute or result in a breach by the Buyer or the Transitory
Subsidiary of, or a failure by the Buyer or the Transitory Subsidiary to
comply with, any agreement or covenant in this Agreement applicable to such
party. No such disclosure shall be deemed to avoid or cure any such
misrepresentation or breach.
4.7 Exclusivity. The Company shall not, and the Company shall use its best
efforts to cause its Affiliates and each of its officers, directors,
employees, representatives and agents not to, directly or indirectly, except
to the extent required by fiduciary obligations under applicable law as
advised by legal counsel, solicit, initiate, engage or participate in or
knowingly encourage discussions or negotiations with any person or entity
(other than the Buyer) concerning any merger, consolidation, sale of material
assets, tender offer, recapitalization, accumulation of Company Shares, proxy
solicitation or other business combination involving the Company, any
Subsidiary or any division of the Company or any Subsidiary. The Company shall
immediately notify the Buyer of, and shall disclose to the Buyer all details
of, any inquiries, discussions or negotiations of the nature described in the
first sentence of this Section 4.7.
4.8 Agreements From Affiliates of the Company. Concurrently with the
execution of this Agreement, the Company shall deliver to the Buyer a list of
all persons or entities who are at such time Affiliates of the Company (the
"Company Affiliates"). In order to help ensure that the issuance of Merger
Shares will comply with the Securities Act and that the Merger will be treated
as a tax-free reorganization, the Company shall cause each Company Affiliate
and such other Shareholders as are listed in Section 4.8 of the Disclosure
Schedule to execute and deliver to the Buyer on or before the date of this
Agreement, a written agreement substantially in the form attached hereto as
Exhibit B (the "Continuity of Interest and Lock up Agreement").
4.9 Merger Shares; Stock Options. The Buyer shall list the Merger Shares on
the Nasdaq NMS and shall cause such listing to be approved prior to the
Effective Time. The Merger Shares shall be issued pursuant to the Registration
Statement. As soon as practicable following the Closing, and in any event no
later than 45 days after the Closing, the Buyer shall file a registration
statement on Form S-8 (or any successor form) to cover the stock options to be
assumed by the Buyer which such options are listed in the Disclosure Schedule.
4.10 Confidentiality. Except as otherwise expressly contemplated herein,
each of the parties hereto agrees that it shall, and shall cause its
subsidiaries and the officers, employees and authorized representatives of
each of them to, hold in strict confidence all data and information obtained
by them from the other parties hereto (unless such information is or becomes
readily ascertainable from public or published information) and shall not, and
shall use its best efforts to ensure that such subsidiaries, directors,
officers, employees and authorized representatives do not, disclose such
information to others without the prior written consent of the party from
which such data or information was obtained, except as required by law after
consultation with counsel (provided that any such party shall consult with the
other party prior to making such disclosure). In the event of the termination
of this Agreement, each of the parties will return or destroy all documents,
work papers and other materials (including all copies made thereof) obtained
pursuant hereto.
4.11 Audited Financial Statements. The Company shall use its best efforts to
cause Arthur Andersen LLP, auditors for the Company, to complete the
preparation of audited financial statements of the Company for the year ended
December 31, 1996, on or before February 15, 1997 or such later date as may be
agreed to by the Buyer in writing.
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ARTICLE V
CONDITIONS TO CONSUMMATION OF MERGER
5.1 Conditions to Each Party's Obligations. The respective obligations of
each Party to consummate the Merger are subject to the satisfaction of the
following conditions:
(a) this Agreement and the Merger shall have received the Requisite
Shareholder Approval by the Company Shareholders;
(b) the Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
SEC and remain in effect;
(c) no temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other legal
or regulatory restraint or prohibition preventing the consummation of the
Merger or limiting or restricting the Buyer's conduct or operation of the
business of the Buyer or the Surviving Corporation after the Merger shall
have been issued, nor shall any proceeding brought by any Governmental
Entity, seeking any of the foregoing be pending; nor shall there be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Merger which makes the consummation of
the Merger illegal;
(d) the Buyer shall have received all permits and other authorizations
required under applicable state securities laws for the issuance of the
Merger Shares;
(e) the Buyer shall have received the written opinion of its counsel and
the Company shall each have received the written opinion of counsel to the
Company in form reasonably satisfactory to each of the opposing counsel to
the effect that the Merger will be treated for federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code (in
rendering such opinions counsel may rely upon representations and
certificates of the Buyer, the Transitory Subsidiary and the Company and
their shareholders);
(f) the Merger Shares shall have been authorized for listing on the
Nasdaq National Market upon official notice of issuance; and
(g) Each of the shareholders of the Company listed in Section 4.8 of the
Disclosure Schedule and the Company Affiliates shall have executed and
delivered Continuity of Interest Agreements, in each case relating to the
tax-free treatment of the business combination to be effected by the
Merger, the form of which is attached hereto as Exhibit B.
5.2 Conditions to Obligations of the Buyer and the Transitory
Subsidiary. The obligation of each of the Buyer and the Transitory Subsidiary
to consummate the Merger is subject to the satisfaction of the following
additional conditions:
(a) the Company and the Subsidiaries shall have obtained all of the
waivers, permits, consents, approvals or other authorizations, and effected
all of the registrations, filings and notices, referred to in Section 4.2,
except for any which if not obtained or effected would not have a material
adverse effect on the assets, business, financial condition, results of
operations or future prospects of the Company or any Subsidiary or on the
ability of the Parties to consummate the transactions contemplated by this
Agreement;
(b) At the Closing Date, the representations and warranties of the
Company set forth in Article II shall have been true and correct in all
material respects.
(c) the Buyer and the Transitory Subsidiary shall have received from
Brobeck, Phleger & Harrison, LLP, counsel to the Company, an opinion in the
customary form reasonably satisfactory to Buyer and as set forth as Exhibit
C attached hereto, addressed to the Buyer and the Transitory Subsidiary and
dated as of the Closing Date;
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(d) the Buyer shall have received a "comfort letter" dated as of a date
not more than two days prior to the date that the Registration Statement is
declared effective and shall have received a subsequent similar letter
dated as of a date not more than two days prior to the Effective Time, from
Arthur Anderson LLP, auditors for the Company, addressed to the Buyer in a
customary form reasonably satisfactory to the Buyer; and
(e) the Buyer and the Transitory Subsidiary shall have received the
resignations, effective as of the Effective Time, of each director of the
Company and the Subsidiaries.
5.3 Conditions to Obligations of the Company. The obligation of the Company
to consummate the Merger is subject to the satisfaction of the following
additional conditions:
(a) At the Closing Date, the representations and warranties of the Buyer
and the Transitory Subsidiary set forth in Article III shall have been true
and correct in all material respects;
(b) the Company Shareholders shall have received from Piper & Marbury
L.L.P., counsel to the Buyer and the Transitory Subsidiary, an opinion in
the form set forth as Exhibit D attached hereto, addressed to the Company
Shareholders and dated as of the Closing Date; and
(c) the holders of the Warrants shall have been granted all forms of
registration rights pursuant to an amendment to the Buyer's Registration
Rights Agreement dated December 10, 1992.
ARTICLE VI
TERMINATION
6.1 Termination of Agreement. The Parties may terminate this Agreement prior
to the Effective Time (whether before or after Requisite Shareholder Approval)
as provided below:
(a) the Parties may terminate this Agreement by mutual written consent;
(b) any Party may terminate this Agreement by giving written notice to
the other Parties at any time after the Company Shareholders have voted on
whether to approve this Agreement and the Merger in the event this
Agreement and the Merger failed to receive the Requisite Shareholder
Approval;
(c) any party may terminate this Agreement by giving written notice to
the other party if the Closing shall not have occurred on or before April
11, 1997;
(d) the Company may terminate this Agreement by giving written notice to
the Buyer and the Transitory Subsidiary if the Buyer Share Market Value is
less than $14.00 per share; or
(e) the Company may terminate this Agreement if upon receipt of a bona
fide offer or proposal unrelated to any solicitation by the Company, its
Directors, Officers or Agents made in whole or in part after the date of
this Agreement ("Unsolicited") relating to, or any indication of interest
in, a merger, consolidation, share exchange or other business combination
involving the Company, or the acquisition of all or a substantial equity
interest in, or all or a substantial portion of the assets of, the Company,
other than the transactions contemplated by this Agreement (an "Acquisition
Proposal"), the Board of Directors makes a good faith determination, after
considering the written advice of outside counsel regarding the fiduciary
duties of directors under law, that the acceptance of such Unsolicited,
bona fide Acquisition Proposal is in the best interests of the Company's
shareholders (a "Fiduciary Determination").
6.2 Effect of Termination. If any Party terminates this Agreement pursuant
to Section 6.1, all obligations of the Parties hereunder shall terminate
without any liability of any Party to any other Party (except for any
liability of any Party for breaches of the covenants (but not for breaches of
any representation or warranty) contained in this Agreement, which such
liability shall not exceed $1,000,000 in the aggregate). Notwithstanding the
foregoing, if the Company terminates this Agreement pursuant to subsection
6.1(e) of this Agreement, the Company shall promptly thereafter, and in no
event later than 45 days after such termination, pay to the Buyer a
25
<PAGE>
fee, as liquidated damages, equal to 5% of the value of the aggregate
consideration provided for in this Agreement (calculated based on the value of
Buyer's shares on the date Buyer receives notice of termination) plus
reasonable transaction costs. Buyer's receipt of notification of any
Acquisition Proposal or any other event or condition that results in
termination of this Agreement as a result of the Company's Board of Directors
making a Fiduciary Determination shall not affect the Buyer's rights to
receive this termination fee.
ARTICLE VII
DEFINITIONS
For purposes of this Agreement, each of the following defined terms is
defined in the Section of this Agreement indicated below.
<TABLE>
<CAPTION>
DEFINED TERM SECTION
- ------------ -------
<S> <C>
Affiliate......................................................... 2.14(f)
Affiliate Agreement............................................... 4.9
Buyer............................................................. Introduction
Buyer Common Stock................................................ 1.5(a)
Buyer Share Market Value.......................................... 1.5(a)
Buyer Reports..................................................... 3.5
CERCLA............................................................ 2.20(a)
Certificates of Merger............................................ 1.1
Certificates...................................................... 1.7(a)
Closing........................................................... 1.2
Closing Date...................................................... 1.2
Code.............................................................. 1.10(a)
Company........................................................... Introduction
Company Affiliate................................................. 4.9
Company Common Stock.............................................. 1.5(a)
Company Preferred Shares.......................................... 1.5(a)
Company Shares.................................................... 1.5(a)
Company Special Meeting........................................... 4.3(a)
Company Shareholder............................................... 1.5(a)
Common Stock Conversion Ratio..................................... 1.5(a)
Common Stock Equivalents.......................................... 1.5(a)
Counted Assumed Option Shares..................................... 1.5(a)
Disclosure Schedule............................................... Article II
Dissenting Shares................................................. 1.6(a)
Effective Time.................................................... 1.1
Employee Benefit Plan............................................. 2.19(a)
Environmental Law................................................. 2.20(a)
ERISA............................................................. 2.19(a)
ERISA Affiliate................................................... 2.19(a)
Exchange Act...................................................... 2.14(f)
Exchange Agent.................................................... 1.3
Financial Statements.............................................. 2.6
GAAP.............................................................. 2.6
Governmental Entity............................................... 2.4
Hart-Scott-Rodino Act............................................. 2.4
Intellectual Property............................................. 2.12(a)
Materials of Environmental Concern................................ 2.20(b)
Merger............................................................ 1.1
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM SECTION
- ------------ ------------
<S> <C>
Merger Shares..................................................... 1.5(a)
Most Recent Balance Sheet......................................... 2.8
Most Recent Fiscal Quarter End.................................... 2.7
Options........................................................... 1.10(a)
Ordinary Course of Business....................................... 2.4
Party............................................................. Introduction
Permit............................................................ 2.22
Prospectus/Proxy Statement........................................ 4.3(a)
Registration Statement............................................ 4.3(c)
Requisite Shareholder Approval.................................... 2.3
SEC............................................................... 3.5
Securities Act.................................................... 1.10(c)
Security Interest................................................. 2.4
Series A Preferred Stock.......................................... 1.5(a)
Series B Preferred Stock.......................................... 1.5(b)
Series C Preferred Stock.......................................... 1.5(b)
Subsidiary........................................................ 2.4
Surviving Corporation............................................. 1.1
Taxes............................................................. 2.9(a)
Tax Returns....................................................... 2.9(a)
Third Party Intellectual Property Rights.......................... 2.12(a)
Transitory Subsidiary............................................. Introduction
Warrants.......................................................... 1.10(d)
</TABLE>
ARTICLE VIII
MISCELLANEOUS
8.1 Press Releases and Announcements. No Party shall issue any press release
or public disclosure relating to the subject matter of this Agreement without
the prior written approval of the other Parties; provided, however, that any
Party may make any public disclosure specifically contemplated herein or it
believes in good faith is required by law or regulation (in which case the
disclosing Party shall advise the other Parties and provide them with a copy
of the proposed disclosure prior to making the disclosure).
8.2 No Third Party Beneficiaries. Except as set forth herein, this Agreement
shall not confer any rights or remedies upon any person other than the Parties
and their respective successors and permitted assigns; provided, however, that
the provisions in Article I concerning issuance of the Merger Shares are
intended for the benefit of the Company Shareholders.
8.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, with respect to the subject matter hereof.
8.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of the other Parties; provided that the Transitory Subsidiary
may assign its rights, interests and obligations hereunder to an Affiliate of
the Buyer.
8.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
27
<PAGE>
8.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.7 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid, or one business day after it is sent via a
reputable nationwide overnight courier service, in each case to the intended
recipient as set forth below:
If to the Company:
AssureNet Pathways, Inc.
201 Ravendale Drive
Mountain View, CA 94030
Attn: Ainslie Mayberry
Copies to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Attn: Warren T. Lazarow, Esq.
If to the Buyer:
Axent Technologies, Inc.
2400 Research Boulevard
Suite 200
Rockville, MD 20850
Attn: John C. Becker
Copy to:
Piper & Marbury L.L.P.
1200 Nineteenth Street, N.W.
Washington, D.C. 20036
Attn: Edwin M. Martin, Jr.
If to the Transitory Subsidiary:
Axent Technologies, Inc.
2400 Research Boulevard
Suite 200
Rockville, MD 20850
Attn: John C. Becker
Copy to:
Piper & Marbury L.L.P.
1200 Nineteenth Street, N.W.
Washington, D.C. 20036
Attn: Edwin M. Martin, Jr.
Any Party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited
courier, messenger service, telecopy, telex, ordinary mail, or electronic
mail), but no such notice, request, demand, claim, or other communication
shall be deemed to have
28
<PAGE>
been duly given unless and until it actually is received by the party for whom
it is intended. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the State
of Delaware.
8.9 Amendments and Waivers. The Parties may mutually amend any provision of
this Agreement at any time prior to the Effective Time; provided, however,
that any amendment effected subsequent to the Requisite Shareholder Approval
shall be subject to the restrictions contained in the Delaware and California
General Corporation Law. No amendment of any provision of this Agreement shall
be valid unless the same shall be in writing and signed by all of the Parties.
No waiver by any Party of any default, misrepresentation, or breach of
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by
virtue of any prior or subsequent such occurrence.
8.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid
or unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope or
duration of the term or provision, to delete specific words or phrases, or to
replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing
the intention of the invalid or unenforceable term or provision, and this
Agreement shall be enforceable as so modified after the expiration of the time
within which the judgment may be appealed.
8.11 Expenses. If the Merger is consummated, the Buyer shall be responsible
for all costs and expenses of the Parties (including legal, accounting and
investment banking fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby; provided, however, that
the Buyer shall not be responsible for employee termination costs and expenses
related to the Merger which are pursuant to agreements or policies not
disclosed in the Disclosure Schedule or set forth on the Balance Sheet or
pursuant to the Management Agreement, and further provided that the Buyer
shall not be responsible for costs and expenses relating to any fairness
opinion or similar statement that the Company shall request of Smith Barney or
other advisor to the Company. If the Merger is not consummated, each of the
parties shall bear its own costs and expenses (including legal, accounting and
investment banking fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby.
8.12 Specific Performance. Each of the Parties acknowledges and agrees that
one or more of the other Parties would be damaged irreparably in the event any
of the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and provisions hereof in any
action instituted in any court of the United States or any state thereof
having jurisdiction over the Parties and the matter, in addition to any other
remedy to which it may be entitled, at law or in equity. The prevailing party
in any such action shall be entitled to recover from the other party its
reasonable attorneys' fees, costs and expenses incurred in connection with
regard to such action.
8.13 Construction. The language used in this Agreement shall be deemed to be
the language chosen by the Parties hereto to express their mutual intent, and
no rule of strict construction shall be applied against any Party. Any
reference to any federal, state, local, or foreign statute or law shall be
deemed also to refer to all rules and regulations promulgated thereunder,
unless the context requires otherwise.
29
<PAGE>
8.14 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
8.15 Non-Survivability of Provisions. No portion of any of the
representations and warranties or Sections 4.3 and 4.4 provided by any Party
hereto shall survive the Closing. Neither Party nor any of such Party's
stockholders, directors, officers, representatives or agents shall have any
recourse or rights or remedies against the other Party or any of the other
Party's shareholders, stockholders, directors, officers, representatives or
agents regarding any representations or warranties or Sections 4.3 and 4.4 set
forth in this Agreement, absent fraud. The Party alleging fraud shall bear the
burden of proving fraud.
8.16 Indemnification. Buyer shall acquire or continue directors' and
officers' liability insurance in an amount of $2,000,000 for the directors and
officers of the Company as of the Closing and shall keep such insurance in
full force and effect for a period of two (2) years from the Closing. Upon the
expiration or termination of such directors' and officers' liability
insurance, the Buyer shall, up to an aggregate limit of $2,000,000 (including
any amounts paid under such insurance), indemnify, defend and hold harmless
each director and officer of the Company as of the Closing against any claims
made in connection with this Agreement and the transactions contemplated
hereby. The Transitory Subsidiary agrees that, notwithstanding the legal
disappearance of the Company, it will be obligated to indemnify the officers
and directors of the Company pursuant to the indemnification agreements of the
Company, California law, and the Articles of Incorporation and Bylaws of the
Company as if the Company were still a valid and legal corporation.
* * * *
In Witness Whereof, the Parties hereto have executed this Agreement as of
the date first above written.
Axent Technologies, Inc.
By: /s/ John C. Becker
---------------------------------
Name: John C. Becker
-------------------------------
Title: President
------------------------------
Axquisition, Inc.
By: /s/ John C. Becker
---------------------------------
Name: John C. Becker
-------------------------------
Title: President
------------------------------
AssureNet Pathways, Inc.
By: /s/ Ainslie J. Mayberry
---------------------------------
Name: Ainslie J. Mayberry
-------------------------------
Acting President and Chief
Title: Executive Officer
------------------------------
30
<PAGE>
The undersigned, being the duly elected Secretary of the Transitory
Subsidiary, hereby certifies that this Agreement has been adopted by a
majority of the votes represented by the outstanding shares of capital stock
of the Transitory Subsidiary entitled to vote on this Agreement.
/s/ Gary M. Ford
-------------------------------------
Secretary
The undersigned, being the duly elected Secretary or Assistant Secretary of
the Company, hereby certifies that this Agreement has been adopted by the
number of outstanding Company Shares required to vote on this Agreement.
/s/ Warren Lazarow
-------------------------------------
Secretary or Assistant Secretary
31
<PAGE>
EXHIBIT A
AXQUISITION, INC.
CERTIFICATE OF INCORPORATION
First. Name. The name of the corporation is Axquisition, Inc.
Second. Registered Office and Agent. The address of its registered office in
the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the
City of Wilmington, County of New Castle. The name of its registered agent at
such address is The Corporation Trust Company.
Third. Purpose. The purposes for which the corporation is formed are to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware, and to possess and exercise all
of the powers and privileges granted by such law and other law of Delaware.
Fourth. Authorized Capital. The total number of shares of common stock which
the corporation shall have authority to issue is ONE HUNDRED (100), and the
par value of each of such shares is ONE CENT ($.01), amounting in the
aggregate to ONE DOLLAR ($1.00).
Fifth. Incorporator. The name and mailing address of the sole incorporator
is as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
Anastasia E. 1200 Nineteenth Street, N.W.
Sweeney............. Washington, D.C. 20036
</TABLE>
Sixth. Term. The corporation is to have perpetual existence.
Seventh. Bylaws. The bylaws of the corporation may be altered, amended or
repealed by the vote of a majority of all of the directors or by the vote of
holders of a majority of the stock entitled to vote.
Eighth. Limitation on Liability. No director of the corporation shall be
personally liable to the corporation or to any stockholder of the corporation
for monetary damages for breach of fiduciary duty as a director, provided that
this provision shall not limit the liability of a director (i) for any breach
of the director's duty of loyalty to the corporation of its stockholders, (ii)
for acts or omissions not in good faith or which involved intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
General Corporation Law of Delaware, or (iv) for any transaction from which
the director derived an improper personal benefit.
If the General Corporation Law of Delaware or any other statute of the State
of Delaware hereafter is amended to authorize the further elimination or
limitation of the liability of directors of the corporation, then the
liability of a director of the corporation shall be limited to the fullest
extent permitted by the statutes of the State of Delaware, as so amended, and
such elimination or limitation of liability shall be in addition to, and not
in lieu of, the limitation on the liability of a director provided by the
foregoing provisions of this Eighth Article.
Any repeal of or amendment to this Eighth Article shall be prospective only
and shall not adversely affect any limitation on the liability of a director
of the corporation existing at the time of such repeal or amendment.
Ninth. Election of Directors. Elections of directors need not be by written
ballot unless the by-laws of the corporation shall so provide.
Tenth. Meetings of Stockholders. Meetings of stockholders may be held within
or without the State of Delaware, as the bylaws of the corporation may
provide.
Eleventh. Corporate Records. The books of the corporation may be kept
(subject to any provision contained in applicable statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the board of directors or in the bylaws of the corporation.
<PAGE>
Twelfth. Right to Amend. The corporation reserves the right to amend, alter,
change or repeal any provision contained in this certificate of incorporation
and in any certificate amendatory hereof, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders or others
hereunder or thereunder are granted subject to this reservation.
Thirteenth. Indemnification. The corporation shall, to the fullest extent
permitted by Section 145 of the General Corporation Law of Delaware, as
amended from time to time, indemnify each person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he is or was, or has agreed to become, a director
or officer of the corporation, or is or was serving, or has agreed to serve,
at the request of the corporation, as a director, officer or trustee of, or in
a similar capacity with, another corporation, partnership, joint venture,
trust or other enterprise (including any employee benefit plan), or by reason
of any action alleged to have been taken or omitted in such capacity, against
all expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom.
Indemnification may include payment by the corporation of expenses in
defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by the person indemnified
to repay such payment if it is ultimately determined that such person is not
entitled to indemnification under this Thirteenth Article, which undertaking
may be accepted without reference to the financial ability of such person to
make such repayment.
The corporation shall not indemnify any such person seeking indemnification
in connection with a proceeding (or part thereof) initiated by such person
unless the initiation thereof was approved by the board of directors of the
corporation.
The indemnification rights provided in this Thirteenth Article (i) shall not
be deemed exclusive of any other rights to which those indemnified may be
entitled under any law, agreement or vote of stockholders or disinterested
directors or otherwise, and (ii) shall inure to the benefit of the heirs,
executors and administrators of such persons. The corporation may, to the
extent authorized from time to time by its board of directors, grant
indemnification rights to other employees or agents of the corporation or
other persons serving the corporation and such rights may be equivalent to, or
greater or less than, those set forth in this Thirteenth Article.
I, The Undersigned, being the sole incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, do make this certificate, hereby declaring and
certifying that this is my act and deed and the facts herein stated are true,
and accordingly have hereunto set my hand this day of December, 1996.
_____________________________________
Anastasia E. Sweeney
Incorporator
2
<PAGE>
EXHIBIT B
CONTINUITY OF INTEREST AND LOCK UP AGREEMENT
Axent Technologies, Inc., a Delaware corporation ("Axent"), Axquisition,
Inc., a Delaware corporation and a wholly-owned subsidiary of the Buyer
("Sub"), and the undersigned stockholder ("Stockholder") of AssureNet
Pathways, Inc., a California corporation ("AssureNet"), hereby enter into this
Continuity of Interest Agreement on , 199 for the purposes hereinafter
set forth.
Witnesseth
Whereas, Axent, Sub and AssureNet entered into an Agreement and Plan of
Merger dated as of , 199 (the "Agreement");
Whereas, pursuant to the Agreement and in accordance with the applicable
provisions of the statutes of the States of Delaware and California, AssureNet
will merge (the "Merger") with and into Sub and, pursuant to the Merger, each
issued and outstanding share of AssureNet Common Stock and Preferred Stock,
shall be converted into the right to receive that number of shares of validly
issued, fully paid and nonassessable common stock of Axent ("Axent Common
Stock") calculated pursuant to Section 1.5 of the Agreement;
Whereas, Axent, Sub, Stockholder and AssureNet are willing to consummate the
Merger only if such transaction will qualify as a tax free reorganization
under Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code");
Now Therefore, the parties agree as follows:
1. The Stockholder represents and warrants that he has, and as of the
Effective Time will have no present plan, intention or arrangement (a "Plan")
to sell, transfer, exchange, pledge or otherwise dispose of (any of the
foregoing, a "Sale") an aggregate number of shares of Axent Common Stock to be
received in the Merger that would reduce the former AssureNet shareholders'
ownership of Axent Common Stock, or any securities that may be paid as a
dividend or otherwise distributed thereon or with respect thereto or issued or
delivered in exchange or substitution therefor, to a number of shares having a
value, as of the Effective Time, of less than 50% of the value of all of the
issued and outstanding capital stock of AssureNet immediately prior to the
Effective Time. For purposes of this representation, shares of AssureNet stock
(i) exchanged for cash or other property, surrendered by dissenters, or
exchanged for cash in lieu of fractional shares of AssureNet Common Stock or
(ii) that are the subject of a Sale occurring prior to but in specific
contemplation of, or related to the Merger will be treated as outstanding
AssureNet stock that are exchanged for Axent Common Stock in the Merger and
then disposed of pursuant to a Plan.
2. The Stockholder represents that as of the date hereof the Stockholder
owns the following shares of AssureNet stock:
<TABLE>
<S> <C>
Common Stock................... Shares
Series A Preferred Stock....... Shares
Series B Preferred Stock....... Shares
Series C Preferred Stock....... Shares
</TABLE>
3. The Stockholder agrees that from the date of this Agreement to the
Effective Time of the Merger, the Stockholder will not sell, transfer or
otherwise dispose of any AssureNet stock.
4. This Continuity of Interest Agreement shall be binding upon and shall be
enforceable against the successors and assigns of the Stockholder.
3
<PAGE>
5. This Continuity of Interest Agreement shall not be modified, amended,
altered or supplemented except by a written agreement executed by all parties
hereto. In the event of the termination of the Agreement pursuant to the terms
of Article IX thereof, this Continuity of Interest Agreement shall also
terminate.
6. This Continuity of Interest Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same document.
7. The Stockholder agrees that, from the Effective Time of the Merger
through December 31, 1997, the Stockholder will not, without the prior written
consent of Axent, directly or indirectly, offer, pledge, sell or contract to
sell or otherwise dispose of or transfer more than 50,000 shares of Axent
Common Stock (subject to adjustment for any stock split, stock dividend, or
other adjustment with respect to the outstanding shares of Common Stock of
Axent) to be received by the Stockholder in the Merger in any consecutive
ninety (90) day period.
8. The Stockholder understands and agrees that the representations and
warranties of the Stockholder set forth herein will be relied upon by Axent
and AssureNet and their respective counsel and accountants.
In Witness Whereof, the parties hereto have caused this Continuity of
Interest Agreement to be duly executed on the date first set forth above.
Axent Technologies, Inc.
By: _________________________________
Name: _______________________________
Title: ______________________________
Axquisition, Inc.
By: _________________________________
Name: _______________________________
Title: ______________________________
Stockholder
_____________________________________
Name: _______________________________
4
<PAGE>
EXHIBIT D
[LETTERHEAD OF PIPER & MARBURY L.L.P.]
, 1997
Shareholders of Arcade, Inc.
c/o Arcade, Inc.
201 Ravendale Drive
Mountain View, CA 94030
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 5.3(d) of the Agreement
and Plan of Merger dated as of December , 1996 (the "Merger Agreement"),
among Antenna Technologies, Inc., a Delaware corporation (the "Buyer"),
Axquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of the
Buyer (the "Transitory Subsidiary"), and Arcade, Inc., a California
corporation (the "Company"). Capitalized terms used herein and not otherwise
defined shall have the respective meanings ascribed to them in the Merger
Agreement.
We have acted as counsel to the Buyer and the Transitory Subsidiary in
connection with the Merger and the preparation of the related Certificate of
Merger to be filed with the Secretary of State of Delaware and California. As
such counsel, we have assisted in the preparation of the Merger Agreement (the
"Merger Agreement") and in the preparation and filing with the Securities and
Exchange Commission (the "Commission") of a Registration Statement on Form S-4
(File No. 333- ), as amended by [description of amendments to be provided],
and including as a part thereof the Proxy Statement/Prospectus, dated ,
199 , in the form contained in Amendment No. to the Registration Statement
(the "Proxy Statement/Prospectus"). Such Registration Statement, as amended by
all pre-effective and post-effective amendments, is referred to herein as the
"Registration Statement."
In our capacity as counsel to the Buyer and the Transitory Subsidiary, we
have reviewed the following documents:
(a) The Amended and Restated Certificate of Incorporation of the Buyer,
as amended (the "Buyer Charter");
(b) The By-laws of the Buyer (the "Buyer By-laws");
(c) The Certificate of Incorporation of the Transitory Subsidiary (the
"Transitory Subsidiary Charter");
(d) The By-laws of the Transitory Subsidiary (the "Transitory Subsidiary
By-laws");
(e) A Certificate of the Secretary of State of Delaware, dated as of a
recent date, certifying as to the legal existence and good standing of the
Buyer in Delaware (the "Buyer Good Standing Certificate");
(f) A Certificate of the Secretary of State of Delaware, dated as of a
recent date, certifying as to the legal existence and good standing of the
Transitory Subsidiary in Delaware (the "Transitory Subsidiary Good Standing
Certificate");
(g) A certificate of the Secretary of the Buyer attesting to the
incumbency of the Buyer's officers and the authenticity of the resolutions
authorizing the transactions contemplated by the Merger Agreement;
(h) A certificate of the Secretary of the Transitory Subsidiary attesting
to the incumbency of the Transitory Subsidiary's officers and the
authenticity of the resolutions authorizing the transactions contemplated
by the Merger Agreement;
5
<PAGE>
(i) Resolutions of the Board of Directors of the Buyer approving the
Merger and authorizing, among other things, the execution, delivery and
performance by the Buyer of the Merger Agreement and related documents;
(j) Resolutions of the Board of Directors and sole stockholder of the
Transitory Subsidiary approving the Merger and authorizing, among other
things, the execution, delivery and performance by the Transitory
Subsidiary of the Merger Agreement and related documents;
(k) The Merger Agreement;
(1) The Certificate of Merger;
(m) The Prospectus/Proxy Statement;
(n) The Registration Statement;
(o) The closing certificate of the Buyer and the Transitory Subsidiary
described in Section 5.3(c) of the Merger Agreement;
(p) The Closing Certificate of the Company described in Section 5.2(e) of
the Merger Agreement; and
(q) Such other documents, opinions, instruments and certificates
(including, but not limited to, certificates of public officials and
officers of the Buyer and the Transitory Subsidiary) as we have considered
necessary for purposes of this opinion, which have been identified and made
available to counsel to the Company.
In our examination of the documents described above, we have assumed the
genuineness of all signatures, the legal capacity of each signatory to such
documents, the authenticity of all documents submitted to us as originals, the
conformity to original documents of documents submitted to us as certified,
facsimile or photostatic copies, and the authenticity of the originals of such
latter documents. We have assumed that the Documents accurately describe and
contain the mutual understanding of the parties as to all matters contained
therein, and that no other agreements or understandings exist between the
parties with respect to the Documents.
Any reference herein to "the best of our knowledge," "our knowledge" or to
any matter "known to us," "of which we are aware" or "coming to our attention"
or any variation of any of the foregoing used herein (i) signify that, in the
course of our representation of the Buyer and the Transitory Subsidiary, no
information has come to our attention that would give us actual knowledge or
actual notice that any facts underlying such opinions are not accurate, and
(ii) the words are intended to be limited to the knowledge of the lawyers
within one firm that have acted as counsel to the Buyer.
For purposes of this opinion, we have assumed that the Agreement has been
duly authorized, executed and delivered by the signatories thereto other than
the Buyer and the Transitory Subsidiary, as the case may be, that the
signatories thereto other than the Buyer and the Transitory Subsidiary, as the
case may be, have the legal capacity and all requisite power and authority to
effect the transactions contemplated by the Agreement and that the Agreement
is the valid, binding and enforceable obligation of the signatories thereto
other than the Buyer and the Transitory Subsidiary, as the case may be,
enforceable against them in accordance with their respective terms. We are
expressing no opinion herein as to the application of or compliance with any
federal, state or local law or regulation relating to the power, authority or
competence of any party to the Documents other than the Buyer and the
Transitory Subsidiary.
Our opinions expressed in paragraph 1 below, insofar as they relate to the
due organization, legal existence and good standing of the Buyer and the
Transitory Subsidiary, are based solely on the Buyer Good Standing Certificate
and the Transitory Subsidiary Good Standing Certificate.
Our opinion in paragraph 2 below as to the number of shares of capital stock
of the Buyer outstanding and held in treasury as of , 1997 and the full
payment therefor is based solely upon a certificate of the Buyer certified by
the Buyer's transfer agent for the Merger Shares, a copy of which is attached
hereto as Exhibit A.
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The opinions hereinafter expressed are qualified to the extent that they may
be subject to or affected by (i) applicable bankruptcy, insolvency,
liquidation, reorganization, and similar laws affecting the rights and
remedies of creditors generally, (ii) general principles of equity (regardless
of whether such enforceability is construed in a proceeding in equity or at
law), and (iii) duties and standards imposed on creditors and parties to
contracts, including without limitation requirements of good faith,
reasonableness and fair dealing. We express no opinion as to the availability
of any equitable or specific remedy or defense upon any breach of any of the
covenants, warranties or other provisions contained in the Documents or any of
the other agreements, instruments or documents referred to herein or therein,
or of any rights granted pursuant to any of such agreements, instruments or
documents, in so much as the availability of such remedies or defenses may be
subject to the discretion of a court.
We express no opinion as to the laws of any state or jurisdiction other than
the State of Delaware and the federal laws of the United States. Accordingly,
to the extent that any other laws govern any of the matters as to which we
express an opinion below, we have assumed with your permission, without
independent investigation, that the laws of such jurisdiction are identical to
the state laws of the State of Delaware, and we express no opinion as to
whether such assumption is reasonable or correct.
We are expressing no opinion as to compliance by the Buyer with the so-
called "Blue Sky" or state securities laws other than those of the State of
Delaware, or with any state or federal antifraud laws, in connection with the
issuance of the Merger Shares in the Merger.
We express no opinion herein as to whether the Merger will qualify for
"pooling treatment" in accordance with applicable accounting rules and
principles or as to the tax consequences of the Merger under applicable
federal, state and local income tax laws and regulations.
In connection with our opinion in paragraph 6 below, we were advised by
[name of SEC examiner] of the Commission by telephone on, , 1997 that the
Commission had declared [Pre/Post-Effective] Amendment No. to the
Registration Statement effective as of a.m./p.m. on , 1997, but we
have not yet received written confirmation from the Commission of the
effectiveness of the Registration Statement [or of Post-Effective Amendment
No. thereto].
On the basis of and subject to the foregoing, we are of the opinion that:
1. Each of the Buyer and the Transitory Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware. The Buyer has all requisite corporate power and authority to
carry on the business in which it is engaged (as described in the Registration
Statement) and to own and use the properties owned and used by it (as
described in the Registration Statement).
2. The authorized capital stock of the Buyer consists of shares of Buyer
Common Stock, of which shares were issued and outstanding and shares
were held in the treasury of the Buyer as of , 1997. All of the issued
and outstanding shares of capital stock of the Buyer are duly authorized,
validly issued, fully paid and nonassessable. All of the Merger Shares will
be, when issued in accordance with the Agreement, duly authorized, validly
issued, fully paid and nonassessable.
3. Each of the Buyer and the Transitory Subsidiary has all requisite
corporate power and authority to execute and deliver the Agreement and to
perform its obligations thereunder. The execution and delivery of the
Agreement and the performance of the Agreement and the consummation of the
transactions contemplated thereby have been duly and validly authorized by all
necessary corporate action on the part of the Buyer and the Transitory
Subsidiary. The Agreement has been duly and validly executed and delivered by
the Buyer and the Transitory Subsidiary and constitutes valid and binding
obligation of the Buyer and the Transitory Subsidiary, enforceable against the
Buyer and the Transitory Subsidiary in accordance with its terms.
4. Neither the execution and delivery by the Buyer or the Transitory
Subsidiary of the Merger Agreement, nor the consummation by the Buyer or the
Transitory Subsidiary of the transactions contemplated thereby, (i)
7
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conflicts with or violates any provision of the Buyer Charter, the Buyer By-
laws, the Transitory Subsidiary Charter or the Transitory Subsidiary By-laws,
(ii) requires on the part of the Buyer or the Transitory Subsidiary any filing
with, or permit, authorization, consent or approval of, any Governmental
Entity which has not been filed or obtained, (iii) to our knowledge, conflicts
with, results in a breach of, constitutes (with or without due notice or lapse
of time or both) a default under, results in the acceleration of, creates in
any party the right to accelerate, terminate, modify or cancel or requires any
notice, consent or waiver (which has not been obtained) under, any contract,
lease, sublease, license, sublicense, franchise, permit, indenture, agreement
or mortgage for borrowed money, instrument of indebtedness, Security Interest
or other agreement or instrument filed as an Exhibit to the Buyer Reports to
which the Buyer is a party, or (iv) violates any statute, rule or regulation,
or any order, writ, injunction or decree known to us that is specifically
applicable to the Buyer or the Transitory Subsidiary or any of their
respective properties or assets.
5. To our knowledge, all authorizations, consents and approvals of all
Federal and state governmental agencies and authorities required in order to
permit consummation by the Buyer and the Transitory Subsidiary of the
transactions contemplated by the Agreement have been obtained.
6. The Merger Shares to be issued to the Company Stockholders pursuant to
the Agreement have been registered under the Securities Act pursuant to the
Registration Statement.
7. The information with respect to the Buyer and the Transitory Subsidiary
contained in the Prospectus/Proxy Statement and the Registration Statement
complied as to form in all material respects to the requirements of the
Securities Act and the Exchange Act, except that we express no such opinion
with respect to the financial statements, schedules and other financial and
statistical data included in or incorporated into the Prospectus/Proxy
Statement.
8. Assuming due authorization of the Merger by the Company and the Company's
stockholders, upon the filing of the Certificate of Merger with and acceptance
for record by the Secretary of State of Delaware, the Merger will be effective
under Delaware law.
This opinion is based upon currently existing statutes, rules, regulations
and judicial decisions and upon facts known to us on the date hereof, and we
disclaim any obligation to advise you of any change in any of these sources of
law or subsequent legal or factual developments which might affect any matters
or opinions set forth herein.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters.
This opinion is furnished to you pursuant to Section 5.3(d) of the Merger
Agreement and may not be distributed to or relied upon by any other person or
entity or for any other purpose without our express prior written consent.
Very truly yours,
8
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EXHIBIT A
CERTIFICATE OF THE BUYER
9
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EXHIBIT E
AXENT TECHNOLOGIES, INC.
2400 RESEARCH BOULEVARD, SUITE 200
ROCKVILLE, MD 20850
[DATE]
[Name of Optionholder]
[Address]
Re: Assumption of Option
Dear:
This letter will serve to inform you that as of this date Axent
Technologies, Inc., a Delaware corporation ("Axent"), has assumed the
obligations of AssureNet Pathways, Inc., ("AssureNet") under that certain
Notice of Grant of Stock Option, Stock Option Agreement, Stock Purchase
Agreement and 1992 Restated Stock Option Plan and all other related Agreements
evidencing the option to purchase shares of the common stock of AssureNet
for $ per share, between you and AssureNet dated (the "Option"),
subject to the modifications and amendments to the Option set forth herein. In
accordance with the Stock Option Agreement which states that the Option shall
terminate to the extent the Option is unexercised upon the merger of AssureNet
unless it is expressly assumed by the successor corporation or parent
corporation, the Option shall continue and remain subject to the same terms
and conditions after the date hereof as were applicable to such Option
immediately prior to the date hereof; provided, however, that the repurchase
right contained in the Stock Option Agreement and related documentation shall
be of no force or effect and further that the entire Option shall be
exercisable for share(s) of Axent common stock ("Axent Common Stock"), at a
price of $ per share of Axent Common Stock. From and after the date hereof,
the Option shall be exercisable only for shares of Axent Common Stock upon the
terms and conditions set forth herein. If your Option qualified for incentive
stock option treatment prior to the date hereof, it shall continue to be so
qualified.
AXENT TECHNOLOGIES, INC.
By:_________________________________
John C. Becker
President
APPROVED AND ACCEPTED:
_________________________
OPTIONEE
<PAGE>
EXHIBIT F
AXENT TECHNOLOGIES, INC.
2400 RESEARCH BOULEVARD
SUITE 200
ROCKVILLE, MD 20850
[DATE]
[Name of Warrantholder]
[Address]
Re: Assumption of Warrant
Dear Warrantholder:
This letter will serve to inform you that as of this date Axent
Technologies, Inc., a Delaware corporation ("Axent"), has assumed the
obligations of AssureNet Pathways, Inc., ("AssureNet") under that certain
Warrant for the Purchase of Shares of Common Stock of Digital Pathways, Inc.,
by and between you and AssureNet, dated March 5, 1996, giving you the right to
purchase shares of the common stock of AssureNet for an aggregate of $
(the "Warrant"), subject to the modifications and amendments to the Warrant
set forth herein.
In accordance with Section 4.5 of the Warrant, as a condition of the merger
of AssureNet and Axent (the "Merger") you shall have the right, at any time up
until the expiration of the Warrant, to purchase shares of Common Stock of
Axent, the successor corporation in the Merger. The Warrant may be exercised
for the number of shares of Axent common stock ("Axent Common Stock"), as you
would have received if you had exercised the Warrant for common stock of
AssureNet and had exchanged said shares for Axent Common Stock in connection
with the Merger after December 31, 1996.
The Warrant shall continue and remain subject to the same terms and
conditions after the date hereof as were applicable to such Warrant
immediately prior to the date hereof, including your right to receive
notification prior to the expiration of the Warrant; provided, however, that
the entire Warrant shall be exercisable for shares of Axent Common Stock,
for an aggregate price of $ . From and after the date hereof, the Warrant
shall be exercisable only for shares of Axent Common Stock upon the terms and
conditions set forth herein. We will, of course, notify you of the expiration
date of the Warrant prior to the expiration date.
Axent Technologies, Inc.
By: _________________________________
John C. Becker
President
Accepted:
By: _________________________________
Name: _______________________________
Title: ______________________________
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EXHIBIT G
MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT is made as of January 6, 1997, by and between
ASSURENET PATHWAYS, INC., a California corporation (the "Company"), and AXENT
TECHNOLOGIES, INC., a Delaware corporation (the "Manager").
Recitals
1. As of the date hereof, the Company, the Manager and Axquisition, Inc., a
Delaware corporation and a wholly-owned subsidiary of the Manager (the
"Subsidiary"), have entered into an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which the Company will merge into the Subsidiary (the
"Merger").
2. The Company is operating at a substantial loss and needs access to
significant financial resources to maintain its viability pending the
effectiveness of the Merger. The Company also desires to undertake a
significant reorganization and restructuring of its operations, which will
include access to significant technical resources. Manager is able to provide
the Company with such technical and financial resources.
3. The Company desires that the Manager provide management services to the
Company, and the Manager desires to provide such management services to the
Company, all on the terms and subject to the conditions set forth herein.
Agreement
Now, Therefore, in consideration of the promises and the mutual covenants
hereinafter set forth, the parties hereto, intending to be bound legally,
hereby agree as follows:
1. Services to be Provided.
1.1 The Manager and the officers and employees of the Manager shall have
full power and authority to manage and administer the Company's operations
during the Management Period (as defined below) and shall use reasonable
commercial efforts during the term hereof to operate the business of the
Company, in light of the circumstances of the Company as set forth above and
in Sections 5.2 and 5.3 hereof. The Manager and the officers and employees of
the Manager shall use its best efforts to consult with and inform the Chief
Financial Officer and, if the Chief Financial Officer is not available, such
other appropriate officers of the Company, of actions proposed to be taken
pursuant to this Agreement.
Without limiting the generality of the foregoing, and subject to Section 2
of this Agreement, the Manager shall do the following:
1.1.1 Exercise complete power, right and authority with respect to the
administration of all aspects of the Company's financial condition, including
the borrowing and repayment of funds and the disbursement of funds, including,
but not limited to, the payment of the Company's creditors, settlement of
claims and the purchase of supplies and equipment in connection with the
operation of the Company's business.
1.1.2 Manage, supervise and direct the production, enhancement, modification
licensing, distribution and marketing of the Company's products, the
discontinuance of any such activities and products concerning the Company's
hardware products and the related support operations.
1.1.3 Manage, supervise and direct the Company's research and development of
products not currently being manufactured, licensed or marketed by the
Company.
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1.1.4 Administer all loan and borrowing agreements between the Company and
any third party.
1.1.5 Manage, supervise and direct the performance of all of the Company's
existing contractual obligations, and hire, terminate or layoff such staff or
executives as employees of the Company as deemed reasonably appropriate by the
Manager.
1.1.6 Perform such other services as the Manager shall, in its reasonable
discretion and reasonable business judgment, deem necessary to administer the
operation of the Company's business.
1.2 The Manager shall, as an independent manager of the Company, pursuant to
the limited power of attorney attached hereto as Exhibit A, execute and
deliver on behalf of the Company all contracts, instruments, documents and
agreements reasonably necessary to implement the terms of this Agreement and
necessary to manage, supervise and direct the operation of the Company's
business during the Management Period, including without limitation,
extensions, modifications or renewals of any agreements between the Company
and any third parties.
1.3 From time to time, the Company shall promptly reimburse the Manager for
all equipment, reasonable travel costs and related expenses incurred by the
Manager in performing its duties hereunder, provided that the Manager shall
submit evidence of the nature and amount of such costs and expenses to the
Company. Other than as expressly set forth herein, the Manager shall not
receive fees in connection with its provision of services pursuant to this
Agreement.
2. Authority.
2.1 In connection with performing the services described in Section 1 above,
the Manager shall have full authority and power to take all actions which it
may in its sole discretion deem to be necessary, appropriate or desirable in
the management of the Company, including authority to take any action that
might appropriately be taken by an officer of the Company, and shall have the
authority, on behalf of the Company, to negotiate, enter into and execute
contracts that do not individually require the expenditure by the Company of
more than $300,000 during 1997.
2.2 Notwithstanding anything in this Agreement to the contrary, if any
action which Manager proposes the Company to take or which the Manager
proposes to take on behalf of the Company would require the approval of the
Company's Board of Directors under California law or the Company's charter
documents, such approval shall be obtained.
3. Term and Termination.
3.1 The term of the Agreement shall be for the period (the "Management
Period") commencing January 6, 1997 and ending on the effective date of the
Merger (the "Effective Date"), subject to earlier termination of the Agreement
as hereinafter provided.
3.2 The Agreement shall automatically terminate upon the termination of the
Merger Agreement in accordance with Section 6.1 therein.
3.3 The Manager shall have the right to terminate this Agreement at any time
immediately upon written notice given by the Manager to the Company.
4. Representation, Warranties and Agreements of the Company.
The Company hereby represents and warrants to and agrees with the Manager
that:
4.1 The Company has the corporate power to execute and deliver this
Agreement, and this Agreement constitutes the valid and binding obligation of
the Company enforceable against the Company in accordance with its terms.
12
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4.2 The execution, delivery and performance of the Agreement has been duly
authorized and approved by all necessary corporate or other organizational
action of the Company. Neither the execution, delivery nor performance of this
Agreement by the Company will (a) violate any material provision of the
Articles of Incorporation or Bylaws of the Company, (b) with or without the
giving of notice or the passage of time, or both, violate or conflict with, or
result in a default under, or permit the termination of, or cause the
acceleration of the maturity of, or the loss of right under, or result in the
creation or imposition of any security interest, lien, charge, pledge or other
encumbrance pursuant to, the Articles of Incorporation, Bylaws or any
provision of any material agreement to which the Company is a party or by
which the Company or any of its properties or assets is bound, (c) require the
consent of or notification to any party to any material agreement or material
commitment by which the Company is a party, or by which the Company or any of
its properties or assets is bound, or of any governmental agency or body or
(d) violate any material statute, law, judgment, decree, order, regulation or
rule of any court or governmental agency or body to which the Company or any
of its properties or assets are subject.
5. Conflicts of Interest. The Company understands and acknowledges that:
5.1 The Manager is, and certain of the persons employed by Manager or who
may be providing services to the Company on the Manager's behalf hereunder
are, engaged in evaluation, development and marketing of security software
products. It is possible that other companies or products being evaluated by
the Manager or that may be developed by the Manager may compete with one or
more of the business activities conducted by the Company.
5.2 The Agreement is being entered into in the expectation that the Merger
contemplated by the Merger Agreement will be consummated and that the Company
will, from and after the Effective Date, be merged with the Subsidiary. The
Manager is hereby expressly authorized to and agrees to make and implement
good faith decisions during the Management Period that are intended to
integrate the operations and products of the Company with those of the
Manager, notwithstanding that the Manager may benefit therefrom after the
Effective Date.
5.3 During the period prior to the execution of this Agreement and the
Merger Agreement, the Company has operated at a substantial loss. The
directors and officers of the Company have recognized that major changes in
the business and operations of the Company are required, whether or not the
Merger takes place. These changes may include steps to reduce overhead, to
reorganize and reorient the Company's sales and marketing operations, to
discontinue sales and marketing of its hardware products and to integrate the
Company's software products, marketing and research and development with those
of the Manager. The Manager may, in good faith, begin any such changes in the
Company's business and operations as it considers reasonably necessary or
reasonably appropriate in contemplation of the Merger and is not obligated
under this Agreement to maintain the business and operations of the Company on
a stand-alone basis or at the levels or to the extent prevailing prior to the
execution of the Agreement.
6. Independent Companies.
It is understood that the Manager and the Company are separate and
independent corporations and that nothing in the Agreement is intended, or
shall be construed, to establish a relationship of partners or joint venturers
between the parties hereto. None of the parties hereto shall represent
anything to the contrary to any third party.
7. Manager's Standard of Care.
The Manager shall render the services called for hereunder based upon its
reasonable business judgment. The Manager, and its directors, officers,
shareholders and employees, shall not be liable to the Company except by
reason of acts constituting willful misfeasance, gross negligence or reckless
disregard of their duties or for failure to act in accordance with the
provisions of the Agreement. The Manager may accept and rely upon the advice
and opinion of its counsel as to all legal matters. In providing services
hereunder, the Manager shall treat the Company's assets as the Manager treats
its own assets in the course of running the Manager's own business.
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8. Indemnification.
The Company shall indemnify and hold harmless the Manager, and its officers,
directors, employees and shareholders (each an "Indemnified Person") against
any and all claims, demands, liabilities, obligations, damages, causes of
action, judgments, losses, costs and expenses (including attorney's fees) that
any Indemnified Person may incur or suffer by reason of or in connection with
any matter arising from the Company's failure to perform terms and provisions
of this Agreement to which the Company is subject. The Manager agrees to
indemnify the Company, and its officers, directors, employees and shareholders
against any and all claims, demands, liabilities, obligations, damages, causes
of action, judgments, losses, costs and expenses (including attorneys' fees)
that any of them may incur or suffer by reason of or in connection with any
matter arising from the Manager's failure to perform in accordance with the
terms and provisions of this Agreement or by reason of acts of the Manager
constituting willful misfeasance, gross negligence or reckless disregard of
its duties or failure to act in accordance with the provisions of the
Agreement.
9. Miscellaneous.
9.1 Notices. All notices, requests, demands and other communication required
or permitted hereunder shall be in writing and shall be deemed to have been
duly given (i) when delivered by hand, (ii) when mailed by registered or
certified mail, postage prepaid, (iii) when given by telex or facsimile
transmission (promptly confirmed in writing) or (iv) when sent by commercial
overnight courier (e.g., Federal Express, DHL, etc.) (confirmation of receipt
requested), as follows:
(a) If to the Company:
AssureNet Pathways, Inc.
201 Ravendale Drive
Mountain View, CA 94030
Attn: Ainslie Mayberry
with a copy to:
Brobeck, Phleger & Harrison LLP
2200 Geng Road
Two Embarcadero Place
Palo Alto, CA 94303
Attn: Warren T. Lazarow, Esq.
(b) If to the Manager:
AXENT Technologies, Inc.
2400 Research Boulevard
Suite 200
Rockville, MD 20850
Attn: Gary Ford, Esq.
with a copy to:
Piper & Marbury L.L.P.
1200 Nineteenth Street, N.W.
Suite 800
Washington, D.C. 20036
Attn: Edwin M. Martin, Jr., Esq.
or to such other person as a party shall designate in writing, such writing to
be delivered to the other party in the manner provided in this Section 9.1.
9.2 Successors and Assigns.
Neither party to this Agreement shall assign or transfer this Agreement or
any interest, right, duty or obligation with respect to this Agreement without
the prior written consent of the other party.
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9.3 Required Actions.
The parties agree to execute all instruments and documents and to take all
such further actions as may be required in order to consummate the
transactions contemplated by this Agreement.
9.4 Entire Agreement.
Except for the Merger Agreement, this Agreement contains the entire
agreement between the parties as to the matters set forth herein, and no
obligation or modification or amendment of any term or provision shall be
effective unless set forth in writing and signed by all of the parties hereto.
9.5 Severability.
In the event any portion of this Agreement shall be declared by a court of
competent jurisdiction to be invalid, illegal or unenforceable, such portion
shall be deemed severed from this Agreement and the remaining part of this
Agreement shall remain in full force and effect, as fully as though such
invalid, illegal or unenforceable portion had never been part of this
Agreement.
9.6 Headings.
Headings at the beginning of each section and subsection are solely for the
convenience of the parties and are not part of this Agreement.
9.7 Execution in Counterparts.
This Agreement may be executed in any number of counterparts, each of which
when so executed and delivered, shall be an original, but such counterparts
shall together constitute one and the same Agreement.
9.8 Remedies Cumulative; No Waivers.
All rights and remedies provided for in this Agreement shall be cumulative
and in addition to any other rights or remedies which the parties hereto may
have at law or in equity. The failure of any party hereto to enforce, or the
delay by any party in enforcing, any rights under this Agreement shall not be
deemed a continuing waiver or modification hereof.
9.9 Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Maryland.
[Rest of page intentionally left blank. Signature page follows]
15
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In Witness Whereof, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
MANAGER:
Axent Technologies, Inc.
By: _________________________________
Name: _______________________________
Title: ______________________________
COMPANY:
AssureNet Pathways, Inc.
By: _________________________________
Name: _______________________________
Title: ______________________________
16
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EXHIBIT A
POWER OF ATTORNEY
Know All Men by These Presents, that the undersigned does hereby constitute
and appoint AXENT Technologies, Inc., a Delaware corporation ("Axent"), from
and after January 6, 1997, the true and lawful attorney-in-fact of the
undersigned with full power of substitution to take any and all actions which,
pursuant to that certain Management Agreement (the "Management Agreement"),
dated January 6, 1997, between the undersigned and Axent, Axent is empowered
to take, including without limitation, the execution, delivery and performance
on behalf of AssureNet Pathways, Inc. of all contracts, instruments, documents
and agreements and all actions contemplated by the Management Agreement.
In Witness Whereof, the undersigned has caused this Power of Attorney to be
duly executed as of the 6th day of January, 1997.
AssureNet Pathways, Inc.
By: _________________________________
Name: _______________________________
Title: ______________________________
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ANNEX B
SHAREHOLDERS AGREEMENT
<PAGE>
SHAREHOLDER AGREEMENT
This Shareholder Agreement ("Agreement") is made and entered into as of
, 199 by and among Axent Technologies, Inc., a Delaware corporation
("Parent"), AssureNet Pathways, Inc., a California corporation (the
"Company"), and the undersigned shareholder of the Company (the
"Shareholder").
Recitals
A. Shareholder owns the number and class of shares of capital stock of the
Company shown on the attached Exhibit A. Said shares, including any shares
into which the shares shown on Exhibit A are converted or exchanged and any
Company shares subsequently acquired by shareholder, are referred to in this
Agreement as the "Shares."
B. Parent, Axquisition, Inc., a Delaware corporation and a wholly owned
subsidiary of Parent ("Merger Sub") and the Company are entering into an
Agreement and Plan of Merger of even date herewith (the "Merger Agreement"),
providing for the merger of Merger Sub and the Company (the "Merger").
C. Parent has required, in connection with entering into the Merger
Agreement, that Shareholder execute and deliver this Agreement.
Agreement
In order to induce Parent to enter into the Merger Agreement, and for other
good and valuable consideration, Shareholder hereby agrees as follows:
1. Representations and Warranties. Shareholder represents and warrants to
Parent as follows:
(a) Shareholder is the holder and beneficial owner of the Shares and
has (and at all times through the date of consummation of the Merger
will have) good and valid title to the Shares as his, her or its
separate property, free and clear of any liens, pledges, security
interests, adverse claims, equities, options, proxies, community
property interests, charges, encumbrances or restrictions of any
nature, except securities laws restrictions. The Shares are the only
shares of the capital stock of the Company held by Shareholder. Subject
to Section 3 of this Agreement, Shareholder has (and at all times
through the date of consummation of the Merger will have) the ability
to vote all of the Shares in accordance with Section 2 of this
Agreement. Except as provided in Section 3 of this Agreement and except
as set forth in Schedule 1(a) hereto, Shareholder has not appointed or
granted any proxy or entered into any agreement, contract, commitment
or understanding with respect to any of the Shares.
(b) Shareholder has the absolute and unrestricted right, power and
capacity to execute, deliver and perform all of his, her or its
obligations under this Agreement, the Proxy (as defined below) and all
other agreements and documents executed and delivered or to be executed
and delivered by Shareholder in connection with the transactions
contemplated by the Merger Agreement, (this Agreement, the Proxy and
such other agreements and documents being referred to collectively in
this Agreement as the "Transactional Agreements"). Each of the
Transactional Agreements (i) has been (or will when executed by
Shareholder be) duly and validly executed by Shareholder, and
(ii) constitutes (or will when executed by Shareholder constitute) a
valid and binding obligation of Shareholder, enforceable against
Shareholder in accordance with its terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of
debtors, and to rules of law governing specific performance, injunctive
relief and other equitable remedies.
(c) Neither the execution, delivery or performance of any of the
Transactional Agreements, nor the consummation of the Merger or any of
the other transactions contemplated by the Merger Agreement, will
directly or indirectly: (i) result in any violation or breach of any
agreement or other
<PAGE>
instrument to which Shareholder is a party or by which Shareholder or
any of the Shares is bound; or (ii) result in a violation of any law,
rule, regulation, order, judgment or decree to which Shareholder or any
of the Shares is subject. No authorization, instruction, consent or
approval of any person or entity is required to be obtained by
Shareholder in connection with the execution, delivery or performance
of any of the Transactional Agreements.
(d) There is no action, suit, proceeding, dispute, litigation, claim,
complaint or investigation by or before any court, tribunal,
governmental body, governmental agency or arbitrator pending or, to the
best of the knowledge of Shareholder, threatened against Shareholder
that challenges or would challenge the execution and delivery of any of
the Transactional Agreements or the taking of any of the actions
required to be taken by Shareholder under any of the Transactional
Agreements.
(e) Shareholder is aware that the closing of the Merger is
conditioned upon the Common Stock of Parent ("Parent Common Stock") to
be issued in the Merger being registered and issued pursuant to a
registration statement under the Securities Act of 1933, as amended
(the "Act").
(f) Shareholder is aware that any transfer of the Parent Common Stock
he, she or it is receiving in the Merger may also be subject to the
restrictions contained in the Continuity of Interest and Lock Up
Agreement to be executed by certain Shareholders in favor of the
Company.
(g) The representations and warranties contained in this Agreement
are accurate in all material respects as of the date of this Agreement,
will be accurate in all material respects at all times through the
consummation of the Merger and will be accurate in all material
respects as of the date of the consummation of the Merger as if made on
that date.
2. Agreement to Vote Shares. Shareholders shall vote all of the Shares at
every meeting of the shareholders of the Company (and every adjournment or
postponement of each such meeting), or (to the extent requested by Parent)
by executing a written consent in lieu of such a meeting (or otherwise):
(a) in favor of approval of the Merger Agreement, the Merger, and the
other transactions contemplated by the Merger Agreement; and
(b) against (i) any proposal made in opposition to or in competition
with the consummation of the Merger, (ii) any proposal contemplating
any transaction involving: (A) the sale, license, deposition or
acquisition of all or a material portion of the Company's business or
assets; (B) the issuance, disposition or acquisition of (1) any capital
stock or other equity security of the Company, (2) any option, call,
warrant or right (whether or not immediately exercisable) to acquire,
or otherwise relating to, any capital stock or other equity security of
the Company, or (3) any security, instrument or obligation that is or
may become convertible into or exchangeable for any capital stock or
other equity security of the Company; or (C) any merger (other than the
Merger), consolidation, business combination, share exchange,
reorganization or similar transaction involving the Company; and
(iii) any other action or agreement that could reasonably be expected
to result in a breach of any material representation, warranty,
covenant or obligation of the Company or Shareholder under any of the
Transactional Agreements or that could reasonably be expected to result
in any of the conditions to the Company's or Parent's obligations under
the Merger Agreement not being satisfied.
Shareholder further agrees not to take any action, whether at a meeting
of shareholders, by written consent in lieu of a meeting or otherwise: (x)
to modify or rescind any prior action approving the Merger Agreement, the
Merger or any of the other transactions contemplated by the Merger
Agreement; (y) that is inconsistent with the Merger Agreement or any of the
transactions contemplated thereby; or (z) that could reasonably be expected
to result in the breach of any material representation, warranty, covenant
or obligation of the Company or Shareholder under any of the Transactional
Agreements or that could reasonably be expected to result in any of the
conditions to the Company's or Parent's obligations under the Merger
Agreement not being satisfied.
3. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Shareholder shall deliver to Parent a proxy in the form attached hereto as
Exhibit B (the "Proxy"), which shall be deemed to be coupled with an
interest and shall be irrevocable to the extent provided in Section 705 of
the California
2
<PAGE>
General Corporation Law. Shareholder understands and agrees that such proxy
shall be used by Parent in the event that Shareholder fails or is unable to
vote the Shares in accordance with Section 2 of this Agreement.
4. Transfer and Encumbrance. Shareholder agrees not to transfer, sell or
otherwise dispose of or to pledge or otherwise encumber any of the Shares
or make any offer or agreement relating thereto until such time, if ever,
as the Merger shall have occurred or the Merger Agreement shall have been
validly terminated in accordance with its terms.
5. Additional Purchases. Shareholder agrees that any shares of the
capital stock of the Company acquired by Shareholder on or after the date
of this Agreement shall be subject to the terms of this Agreement to the
same extent as if they constituted Shares.
6. Specific Performance. Shareholder agrees that in the event of any
breach or threatened breach by Shareholder of any covenant, obligation or
other provision contained in this Agreement, Parent shall be entitled (in
addition to any other remedy that may be available to Parent) to (i) a
decree or order of specific performance or mandamus to enforce the
observance and performance of such covenant, obligation or other provision,
and (ii) an injunction restraining such breach or threatened breach.
7. Other Agreements. Nothing in this Agreement shall limit Shareholder's
obligations or the rights and remedies of Parent under any of the other
Transactional Agreements, and nothing in any of the other Transactional
Agreements shall limit Shareholder's obligations or the rights and remedies
of Parent under this Agreement.
8. Notices. Any notice or other communication required or permitted to be
delivered to Shareholder or Parent under this Agreement shall be in writing
and shall be deemed properly delivered, given and received when delivered
(by hand, by registered mail, by courier or express delivery service or by
facsimile) to the address or facsimile telephone number set forth beneath
the name of such party below (or to such other address or facsimile
telephone number as such party shall have specified in a written notice
given to the other party hereto):
<TABLE>
<S> <C>
if to Parent: Axent Technologies, Inc.
2400 Research Boulevard
Suite 200
Rockville, MD 20850
Attention: John C. Becker
Facsimile: (301) 670-3584
with a copy to: Piper & Marbury LLP
1200 Nineteenth Street, N.W.
Washington, D.C. 20036l
Attention: Edwin M. Martin, Jr.
Facsimile: (202) 861-6317
if to Shareholder: _______________________________
_______________________________
_______________________________
_______________________________
with a copy to: AssureNet Pathways, Inc.
201 Ravendale Drive
Mountain View, CA 94030
Attention: Ainslie Mayberry
Facsimile: (415) 961-7487
</TABLE>
B-3
<PAGE>
<TABLE>
<S> <C>
with a copy to: Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
Attention: Warren T. Lazarow, Esq.
Facsimile: (415) 496-2733
</TABLE>
9. Severability. If any provision of this Agreement or any part of any
such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (a) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be
deemed amended to conform to applicable laws so as to be valid and
enforceable to the fullest possible extent, (b) the invalidity or
unenforceability of such provision or part thereof under such circumstances
and in such jurisdiction shall not affect the validity or enforceability of
such provision or part thereof under any other circumstances or in any
other jurisdiction, and (c) the invalidity or unenforceability of such
provision or part thereof shall not affect the validity or enforceability
of the remainder of such provision or the validity or enforceability of any
other provision of the Agreement. Each provision of the Agreement is
separable from every other provision of the Agreement, and each part of
each provision of the Agreement is separable from every other part of such
provision.
10. Governing Law. This Agreement shall be construed in accordance with,
and governed in all respects by, the laws of the State of Delaware (without
giving effect to principles of conflicts of laws).
11. Waiver. No failure on the part of Parent to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part
of Parent in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right,
privilege or remedy shall preclude any other or further exercise thereof or
of any other power, right, privilege or remedy. Parent shall not be deemed
to have waived any claim arising out of this Agreement, or any power,
right, privilege or remedy under this Agreement, unless the waiver of such
claim, power, right, privilege or remedy is expressly set forth in a
written instrument duly executed and delivered on behalf of Parent; and any
such waiver shall not be applicable or have any effect except in the
specific instance in which it is given.
12. Captions. The captions contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction
or interpretation of this Agreement.
13. Further Assurances. Shareholder shall execute and/or cause to be
delivered to Parent instruments and other documents and shall take such
other action as Parent may reasonably request to effectuated the intent and
purposes of this Agreement.
14. Entire Agreement. This agreement and the other Transactional
Agreements set forth the entire understanding of Parent and Shareholder
relating to the subject matter hereof and thereof and supersede all other
prior agreements and understandings between Parent and Shareholder relating
to the subject matter hereof and thereof.
15. Non-Exclusivity. The rights and remedies of Parent hereunder are not
exclusive of or limited by any other rights or remedies which Parent may
have, whether at law, in equity, by contract or otherwise, all of which
shall be cumulative (and not alternative).
16. Amendments. This agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Parent and Shareholder.
17. Assignment. This Agreement and all obligations hereunder are personal
to Shareholder and may not be transferred or delegated by Shareholder at
any time. Parent may freely assign any or all of its rights under this
Agreement, in whole or in part, to any other person or entity without
obtaining the consent or approval of Shareholder.
B-4
<PAGE>
18. Binding Nature. Subject to Section 17, this Agreement will inure to
the benefit of Parent and the Company and their respective successors and
assigns and will be binding upon Shareholder and his representatives,
executors, administrators, estate, heirs, successors and assigns. Without
limiting the generality of anything contained in Section 4, if any person
or entity shall acquire any of the Shares from Shareholder in any manner,
whether by operation of law or otherwise, such Shares shall be held subject
to all the terms and provisions of this Agreement, and by taking and
holding such Shares, such person or entity shall be conclusively deemed to
have agreed to be bound and to comply with all the terms and provisions of
this Agreement. Without limiting the generality of the foregoing,
Shareholder agrees that the obligations of Shareholder hereunder shall not
be terminated by the death or incapacity of Shareholder or otherwise by
operation of law.
19. Attorneys' Fees and Expenses. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Agreement
is brought against Shareholder, the prevailing party shall be entitled to
recover reasonable attorneys' fees, costs and disbursements (in addition to
any other relief to which the prevailing party may be entitled).
20. Termination; Survival. This Agreement shall terminate at such time
(if ever) as the Merger Agreement shall have been validly terminated in
accordance with its terms. Provided that this Agreement has not been
terminated, each of the representations, warranties, covenants and
obligations contained in this Agreement shall survive the consummation of
the Merger.
21. Legending of Shares. If so requested by Parent, Shareholder agrees
that the Shares shall bear a legend stating that they are subject to this
Agreement and to an irrevocable proxy. The Shareholder agrees that he shall
not Transfer the Shares without first having the aforementioned legend
affixed to the certificates representing the Shares.
22. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall
constitute one and the same agreement.
[Remainder of page intentionally left blank. Signature page follows]
B-5
<PAGE>
In Witness Whereof, the parties have caused this Agreement to be duly
executed as of the date first above written.
Axent Technologies, Inc. Shareholder
_____________________________________ _____________________________________
(Signature)
By: _________________________________
Printed Name: _______________________
Title: ______________________________
AssureNet Pathways, Inc.
_____________________________________
By: _________________________________
Title: ______________________________
B-6
<PAGE>
SCHEDULE 1(A)
DESCRIPTION OF ANY PROXY, AGREEMENT, CONTRACT, COMMITMENT OR UNDERSTANDING
WITH RESPECT TO ANY OF THE SHARES: ____________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
B-7
<PAGE>
EXHIBIT A
DESCRIPTION OF SHARES
<TABLE>
<CAPTION>
DESCRIPTION OF SHARES NUMBER OF SHARES HELD
--------------------- ---------------------
<S> <C>
Common Stock.....................................
-----
Series A Preferred Stock.........................
-----
Series B Preferred Stock.........................
-----
Series C Preferred Stock.........................
-----
Shares of Company Common Stock issuable upon
exercise of outstanding options and warrants....
-----
</TABLE>
B-8
<PAGE>
EXHIBIT B
IRREVOCABLE PROXY
B-9
<PAGE>
IRREVOCABLE PROXY
The undersigned ("Shareholder"), a shareholder of AssureNet Pathways, Inc.,
a California corporation (the "Company"), hereby irrevocably appoints Axent
Technologies, Inc., a Delaware corporation ("Parent"), and Axquisition, Inc.,
a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"),
and each of them, the sole and exclusive attorneys and proxies of the
undersigned, with full power of substitution and resubstitution, pursuant to
and to the extent set forth in California law, to vote the shares of voting
capital stock of the Company owned of record by Shareholder as shown on
Exhibit A of the Shareholders Agreement executed by the Shareholder on even
date herewith, or any shares into which the shares shown on Exhibit A are
converted or exchanged or any Company shares subsequently acquired by
Shareholder (the "Shares") with respect to the following matters (the
"Identified Matters"):
(a) the Merger Agreement (as herein defined), the Merger (as herein
defined), and the other transactions contemplated by the Merger Agreement;
(b) any proposal made in opposition to or in competition with the
consummation of the Merger;
(c) any proposal contemplating any transaction involving: (i) the sale,
license, disposition or acquisition of all or a material portion of the
Company's business or assets; or (ii) the issuance, disposition or
acquisition of (A) any capital stock or other equity security of the
Company, (B) any option, call, warrant or right (whether or not immediately
exercisable) to acquire, or otherwise relating to, any capital stock or
other equity security of the Company, or (C) any security, instrument or
obligation that is or may become convertible into or exchangeable for any
capital stock or other equity security of the Company; or
(d) any merger, consolidation, business combination, share exchange,
reorganization or similar transaction involving the Company; and
(e) any other action or agreement that could reasonably be expected to
result in (i) a breach of any representation, warranty, covenant or
obligation of any party under the Merger Agreement, or any other agreement
executed on behalf of the Company or Shareholder, or (ii) any of the
conditions to the Company's or Parent's obligations under the Merger
Agreement not being satisfied.
This Proxy shall terminate at such time (if ever) as that certain Agreement
and Plan of Merger (the "Merger Agreement") among Parent, Merger Sub and the
Company, providing for the merger of Merger Sub and the Company (the
"Merger"), shall have been validly terminated in accordance with its terms.
Upon the execution hereof, all prior proxies given by Shareholder with respect
to the Shares are hereby revoked, and no subsequent proxies will be given.
This Proxy is irrevocable and is coupled with an interest and is granted in
connection with that certain Shareholder Agreement dated of even date
herewith, executed by Shareholder in favor of Parent and the Company, and is
granted in consideration of Parent entering into the Merger Agreement. The
attorneys and proxies appointed pursuant to this Proxy will be empowered (at
all times prior to the termination of the Merger Agreement) to exercise (in
their discretion and in such manner as they may deem appropriate) all voting
and other rights of Shareholder with respect to the Shares (including, without
limitation, the power to execute and deliver written consents with respect to
the Shares), with respect to the Identified Matters, at every meeting of the
shareholders of the Company (and every adjournment or postponement thereof) or
by written consent in lieu of such a meeting, or otherwise.
This Proxy shall be binding upon the Shareholder and his personal
representatives, executors, administrators, estates, heirs, successors and
assigns (if any). This Proxy shall inure to the benefit of Parent, Merger Sub
and the Company and their respective successors and assigns (if any).
Dated: , 199
_____________________________________
(Signature)
Printed Name: _______________________
B-10
<PAGE>
ANNEX C
CHAPTER 13
GENERAL CORPORATION LAW OF CALIFORNIA
DISSENTERS RIGHTS
Section 1300. RIGHT TO REQUIRE PURCHASE; "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair
market value the shares owned by the Shareholder which are dissenting shares
as defined in subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to five percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
Section 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300 subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within ten (10) days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the
1
<PAGE>
procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes an
offer by the corporation to purchase at the price stated any dissenting shares
as defined in subdivision (b) of Section 1300, unless they lose their status
as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within thirty (30) days after the
date on which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
Section 1302. ENDORSEMENT OF SHARES.
Within thirty (30) days after the date on which notice of the approval by
the outstanding shares or the notice pursuant to subdivision (i) of Section
1110 was mailed to the shareholder, the shareholder shall submit to the
corporation at its principal office or at the office of any transfer agent
thereof, (a) if the shares are certificated securities, the shareholder's
certificates representing any shares which the shareholder demands that the
corporation purchase, to be stamped or endorsed with a statement that the
shares are dissenting shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed or (b) if the shares are
uncertificated securities, written notice of the number of shares which the
shareholder demands that the corporation purchase. Upon subsequent transfers
of the dissenting shares on the books of the corporation, the new
certificates, initial transaction statement, and other written statements
issued therefor shall bear a like statement, together with the name of the
original dissenting holder of the shares.
Section 1303. AGREED PRICE; TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within thirty (30) days after the
amount thereof has been agreed or within thirty (30) days after any statutory
or contractual conditions to the reorganization are satisfied, whichever is
later, and in the case of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
Section 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six (6) months after
the date on which notice of the approval by the outstanding shares (Section
152) or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the
2
<PAGE>
court to determine whether the shares are dissenting shares or the fair market
value of the dissenting shares or both or may intervene in any action pending
on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
Section 1305. APPRAISER'S REPORT; PAYMENT; COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of
any party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within ten (10) days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the
court, the court shall determine the fair market value of the dissenting
shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
Section 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
Section 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
3
<PAGE>
Section 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
Section 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six (6) months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
Section 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
Section 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect
to such shares in the event of a reorganization or merger.
Section 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event
of a reorganization or short-form merger is entitled to payment in accordance
with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the
4
<PAGE>
reorganization or short-form merger set aside or rescinded shall not restrain
or enjoin the consummation of the transaction except upon ten (10) days' prior
notice to the corporation and upon a determination by the court that clearly
no other remedy will adequately protect the complaining shareholder or the
class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack, the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable
as to the shareholders of any party so controlled.
5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. The
Registrant's Bylaws include provisions to require the Registrant to indemnify
its directors and officers to the fullest extent permitted by Section 145,
including circumstances in which indemnification is otherwise discretionary.
Section 145 also empowers the Registrant to purchase and maintain insurance
that protects its officers, directors, employees and agents against any
liabilities incurred in connection with their service in such positions.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may
result in claims for indemnification by any officer or director.
21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger among the Registrant, Axent
Technologies, Inc., Acquisition, Inc., and AssureNet Pathways, Inc.,
dated as of January 6, 1996 (Included as Annex A of this Registration
Statement).
3.1+ Amended and Restated Certificate of Incorporation of the Registrant.
3.2+ Amended and Restated Bylaws of the Registrant.
4.1++ Specimen stock certificate for shares of Common Stock of the
Registrant.
5.1* Opinion of Piper & Marbury L.L.P. regarding legality of securities
being registered.
8.1* Opinion of Piper & Marbury L.L.P. as to certain tax matters.
10.1++ Registrant's 1991 Amended and Restated Stock Option Plan.
10.2 Registrant's 1996 Amended and Restated Stock Option Plan.
10.3 Registrant's 1996 Amended and Restated Directors' Stock Option Plan.
10.7++ Registration Rights Agreement dated as of December 10, 1992, by and
among the Registrant and the parties thereto.
10.7.1* Amendment No. 1 to Registration Rights Agreement.
10.8++ Settlement Agreement effective as of September 13, 1991, by and among
the Registrant and the parties thereto.
10.9++ Form of Indemnification Agreement between the Registrant and its
directors and executive officers.
10.10++ Agreement of Merger dated as of November 17, 1994, among Raxco, Inc.,
Datamedia Corporation and Raxco Acquisition Corporation.
10.11++ Lease Agreement dated as of September 6, 1995, by and between
Research Grove Associates and the Registrant.
10.12++ Lease of Real Property dated as of March 7, 1995, by and between TNK
Associates and the Registrant.
10.13++ Deed of Lease dated as of March 14, 1995, by and between Bill Harris
Music, Inc., and the Registrant.
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
Registrant and William R. Davy.
10.16++ Agreement dated as of November 7, 1991, by and between the Company
and Wiulliam R. Davy.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
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++ Registrant'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.
11.1 Statement of computation of loss per share.
16.1 Letter from Frank, Rimerman & Co. LLP regarding the change in
certifying accountant of AssureNet.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Arthur Andersen L.L.P.
23.3 Consent of Frank, Rimerman & Co. LLP.
23.4* Consent of Piper & Marbury L.L.P. (to be included as part of Exhibit
5 hereto).
24.1 Power of Attorney (included in signature pages).
27.1 Financial Data Schedule.
99.1* Form of Proxy for AssureNet's Special Meeting of Shareholders.
</TABLE>
(b) Financial Statement Schedules
- --------
+ Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 1996.
++ Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-1368).
* To be filed by amendment.
22. UNDERTAKINGS
A. The Registrant hereby undertakes as follows:
1. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
2. That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to this Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
B. The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11, or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of this Registration Statement through the
date of responding to the request.
C. The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in this
Registration Statement when it became effective.
D. The Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represents a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent not more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
COMPANY HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ROCKVILLE,
COUNTY OF MONTGOMERY, STATE OF MARYLAND, ON THE 21ST DAY OF JANUARY, 1997.
Axent Technologies, Inc.
By: /s/ Richard A. Lefebvre
---------------------------------
RICHARD A. LEFEBVRE
Chief Executive Officer
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
EACH PERSON WHOSE SIGNATURE APPEARS BELOW IN SO SIGNING ALSO MAKES,
CONSTITUTES AND APPOINTS RICHARD A. LEFEBVRE AND EDWIN M. MARTIN, JR., AND
EACH OF THEM ACTING ALONE, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT, WITH FULL
POWER OF SUBSTITUTION, FOR HIM IN ANY AND ALL CAPACITIES, TO EXECUTE AND CAUSE
TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ANY AND ALL AMENDMENTS
AND POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT, WITH EXHIBITS
THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, AND HEREBY RATIFIES AND
CONFIRMS ALL THAT SAID ATTORNEY-IN-FACT OR HIS SUBSTITUTE OR SUBSTITUTES MAY
DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard A. Lefebvre Chief Executive January 21, 1997
- ------------------------------------- Officer, Chairman
RICHARD A. LEFEBVRE of the Board and
Director (Principal
Executive Officer)
/s/ John C. Becker President, Chief January 21, 1997
- ------------------------------------- Operating Officer
JOHN C. BECKER and Director
/s/ Robert B. Edwards, Jr. Vice President, January 21, 1997
- ------------------------------------- Chief Financial
ROBERT B. EDWARDS, JR. Officer and
Treasurer
(Principal
Financial and
Accounting Officer)
/s/ Gabriel A. Battista Director January 21, 1997
- -------------------------------------
GABRIEL A. BATTISTA
/s/ Richard A. Hosley II Director January 21, 1997
- -------------------------------------
RICHARD A. HOSLEY II
/s/ Jacqueline C. Morby Director January 21, 1997
- -------------------------------------
JACQUELINE C. MORBY
/s/ Arthur C. Patterson Director January 21, 1997
- -------------------------------------
ARTHUR C. PATTERSON
/s/ Richard W. Smith Director January 21, 1997
- -------------------------------------
RICHARD W. SMITH
</TABLE>
II-4
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
EXHIBITS
TO
FORM S-4
----------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
AXENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
----------------
AXENT TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 Agreement and Plan of Merger among the Registrant, Axent
Technologies, Inc., Acquisition, Inc., and AssureNet Pathways,
Inc., dated as of January 6, 1996 (Included as Annex A of this
Registration Statement).
3.1+ Amended and Restated Certificate of Incorporation of the
Registrant.(2)
3.2+ Amended and Restated Bylaws of the Registrant.
4.1++ Specimen stock certificate for shares of Common Stock of the
Registrant.
5.1* Opinion of Piper & Marbury L.L.P. regarding legality of securities
being registered.
8.1* Opinion of Piper & Marbury L.L.P. as to certain tax matters.
10.1++ Registrant's 1991 Amended and Restated Stock Option Plan.
10.2 Registrant's 1996 Amended and Restated Stock Option Plan.
10.3 Registrant's 1996 Amended and Restated Directors' Stock Option
Plan.
10.7++ Registration Rights Agreement dated as of December 10, 1992, by
and among the Registrant and the parties thereto.
10.7.1* Amendment No. 1 to Registration Rights Agreement.
10.8++ Settlement Agreement effective as of September 13, 1991, by and
among the Registrant and the parties thereto.
10.9++ Form of Indemnification Agreement between the Registrant and its
directors and executive
officers.
10.10++ Agreement of Merger dated as of November 17, 1994, among Raxco,
Inc., Datamedia Corporation and Raxco Acquisition Corporation.
10.11++ Lease Agreement dated as of September 6, 1995, by and between
Research Grove Associates and the Registrant.
10.12++ Lease of Real Property dated as of March 7, 1995, by and between
TNK Associates and the Registrant.
10.13++ Deed of Lease dated as of March 14, 1995, by and between Bill
Harris Music, Inc., and the Registrant.
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
Registrant and William R. Davy.
10.16++ Agreement dated as of November 7, 1991, by and between the Company
and Wiulliam 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++ Registrant'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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
11.1 Statement of computation of loss per share.
16.1 Letter from Frank, Rimerman & Co. LLP regarding the change in
certifying accountant of AssureNet.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Arthur Andersen L.L.P.
23.3 Consent of Frank, Rimerman & Co. LLP
23.4* Consent of Piper & Marbury L.L.P. (to be included as part of
Exhibit 5 hereto).
24.1 Power of Attorney (included in signature pages).
27.1 Financial Data Schedule.
99.1* Form of Proxy for AssureNet's Special Meeting of Shareholders.
</TABLE>
- --------
+ Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 1996.
++ Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No.
333-1368).
*To be filed by amendment.
<PAGE>
Exhibit 2.1
[See Annex A]
<PAGE>
Exhibit 10.2
AXENT TECHNOLOGIES, INC.
AMENDED AND RESTATED
1996 STOCK OPTION PLAN
1. Purpose.
-------
The purpose of this Stock Option Plan (the "Plan") is to secure for AXENT
Technologies, Inc. (the "Company") and its stockholders the benefits arising
from capital stock ownership by key employees, officers and consultants of the
Company who are expected to contribute to the Company's future growth and
success. Notwithstanding anything to the contrary contained herein, stock
options may be granted only to employees (including officers who are employees)
and consultants of the Company. Non-employee members of the Company's Board of
Directors are ineligible to receive an award of options under the Plan. Except
where the context otherwise requires, the term "Company" shall include the
parent and all subsidiaries of the Company as defined in Section 424(e) and
424(f) of the Internal Revenue Code of 1986, as amended (the "Code").
2. Type of Options and Administration.
----------------------------------
a. Types of Options. Options granted pursuant to the Plan may be either
----------------
incentive stock options ("Incentive Stock Options") meeting the requirements of
Section 422 of the Code or non-statutory options, which are not intended to meet
the requirements of Section 422 of the Code.
b. Administration. The Board of Directors shall, to the full extent
--------------
permitted by law, delegate any and all of its powers under the Plan to a
committee (the "Committee") appointed by the Board of Directors. The Committee
shall consist of not less than two (2) members, and each such member of the
Committee shall be a "disinterested person" for purposes of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Plan will be administered by the Committee, whose construction and
interpretation of the terms and provisions of the Plan shall be final and
conclusive. The Committee shall, in its sole discretion, grant options to
purchase shares of the Company's common stock (the "Common Stock") as provided
in the Plan. The Board of Directors shall have authority, subject to the
express provisions of the Plan: (i) to amend the Plan and (ii) to prescribe,
amend and rescind rules and regulations relating to the Plan. The Committee
shall have authority, subject to the express provisions of the Plan: (i) to
amend and construe the respective option agreements executed pursuant to the
Plan, including the authority to
-1-
<PAGE>
amend any such option agreement executed prior to the adoption of the Plan; (ii)
to establish and determine all of the terms and provisions of the respective
option agreements, which need not be identical; and (iii) to make any other
determination in the judgment of the Committee necessary or desirable for the
administration of the Plan. The Committee may correct any defect or supply any
omission or reconcile any inconsistency in the Plan or in any option agreement
in the manner and to the extent it shall deem expedient to carry the Plan into
effect and it shall be the sole and final judge of such expediency. No member of
the Committee or Director of the Company shall be liable for any action or
determination made in good faith.
3. Eligibility.
-----------
Options shall be granted only to persons who are, at the time of grant,
employees (including officers who are employees) or consultants of the Company.
A person who has been granted an option may, if he or she is otherwise eligible,
be granted an additional option or options if the Committee shall so determine.
4. Stock Subject to Plan.
---------------------
Subject to adjustment as provided in Section 15 below, the maximum number of
shares of Common Stock of the Company which may be issued under the Plan is
1,000,000 shares. Such shares may be authorized and unissued shares or may be
shares issued and thereafter acquired by the Company. If an option granted
under the Plan shall expire or terminate for any reason without having been
exercised in full, the unpurchased shares subject to such option shall again be
available for subsequent option grants under the Plan.
5. Forms of Option Agreements.
--------------------------
Each option granted under the Plan shall be evidenced by an option agreement
in such form not inconsistent with the Plan as shall be specified by the
Committee. Each option agreement shall state whether the options granted
thereby are intended to be Incentive Stock Options (to the maximum extent
possible) or non-statutory options.
6. Purchase Price.
--------------
-2-
<PAGE>
a. General. The purchase price per share of stock deliverable upon the
-------
exercise of an option shall be determined by the Committee, provided, however,
-------- -------
that in the case of an Incentive Stock Option, the purchase price shall not be
less than 100% of the "fair market value" (as defined herein) of such stock at
the time of grant of such option, or less than 110% of such "fair market value"
in the case of options described in paragraph (b) of Section 11. For purposes
of this Section 6, the "fair market value" of the stock shall be determined in
good faith by the Committee at the time of the grant using any reasonable method
based on market quotations on the principal stock exchange or market upon which
the Company's stock is traded.
b. Payment of Purchase Price. Options granted under the Plan may provide
-------------------------
for the payment of the purchase price by delivery of cash or a check to the
order of the Company in an amount equal to the purchase price of such options,
or, to the extent allowed by the Committee, by delivery to the Company of shares
of Common Stock of the Company having a fair market value equal in amount to the
purchase price of the options being exercised, or by any combination of such
methods of payment or any other method that the Committee may authorize.
-3-
<PAGE>
7. Option Period.
-------------
Each option and all rights thereunder shall expire on such date as the
Committee shall determine, but, in the case of Incentive Stock Options, in no
event after the expiration of ten (10) years from the day on which the option is
granted (or five (5) years in the case of options described in paragraph (b) of
Section 11) and, in the case of non-statutory options, in no event after the
expiration of ten (10) years from the day on which the option is granted, and in
either case, shall be subject to earlier termination as provided in the Plan and
the relevant option agreement.
8. Exercise of Options.
-------------------
Each option granted under the Plan shall be exercisable either in full or in
installments at such time or times and during such period as shall be determined
by the Committee and set forth in the agreement evidencing such option, subject
to the provisions of Section 7 above.
9. Nontransferability of Stock Options.
-----------------------------------
No Incentive Stock Option granted under the Plan shall be assignable or
transferable by the person to whom it is granted, either voluntarily or by
operation of law, except by will or the laws of descent and distribution.
During the life of the optionee, an Incentive Stock Option shall be exercisable
only by such person. A non-statutory stock option may be assigned or
transferred in whole or in part only if so provided in the relevant agreement or
if permitted by the Committee.
10. Effect of Termination of Employment or Consulting Services.
----------------------------------------------------------
No option may be exercised unless, at the time of such exercise, the
optionee is, and has been continuously since the date of grant of his or her
option, in the case of an optionee who is an employee of the Company, employed
by the Company, or in the case of an optionee who is a consultant to the
Company, rendering services to the Company, except that if and to the extent the
option agreement so provides:
a. an Incentive Stock Option may be exercised within the period of three
(3) months and a non-statutory option may be exercised within the period ending
on the tenth anniversary of the date
-4-
<PAGE>
of grant after the optionee ceases to be employed by or in the service of the
Company (or within such lesser period as may be specified in the applicable
option agreement);
b. if the optionee dies while employed by or in the service of the
Company, the option may be exercised by the person to whom it is transferred by
will or the laws of descent and distribution within the period of one (1) year
after the date of death (or within such lesser period as may be specified in the
applicable option agreement); and
c. if the optionee becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provision thereto) while employed by or in
the service of the Company, the option may be exercised within the period of one
(1) year after the date the optionee ceases to be employed by or in the service
of the Company because of such disability (or within such lesser period as may
be specified in the applicable option agreement); provided, however, that in no
-------- -------
event may any option be exercised after the expiration date of the option.
11. Incentive Stock Options.
-----------------------
Options granted under the Plan which are intended to be Incentive Stock
Options shall be specifically designated as Incentive Stock Options and shall be
subject to the following additional terms and conditions:
a. Dollar Limitation. Incentive Stock Options granted to any employee
-----------------
under the Plan (and any other incentive stock option plans of the Company) shall
not, in the aggregate, become exercisable for the first time in any one (1)
calendar year for shares of Common Stock with an aggregate fair market value
(determined as of the respective date or dates of grant) of more than $100,000.
In the event Section 422(d) of the Code is amended to alter the limitation set
forth therein so that following such amendment such limitation shall differ from
the limitation set forth in this paragraph (a), the limitation of this paragraph
(a) shall be automatically adjusted accordingly.
b. 10% Shareholder. If any employee to whom an Incentive Stock Option is
---------------
to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
-5-
<PAGE>
(i) The purchase price per share of the Common Stock subject to
such Incentive Stock Option shall not be less than 110% of the fair
market value of one (1) share of Common Stock at the time of grant; and
(ii) The option exercise period shall not exceed five (5) years
from the date of grant.
12. Additional Provisions.
---------------------
a. Additional Option Provisions. The Committee may, in its sole
----------------------------
discretion, include additional provisions in any option granted under the Plan,
including, without limitation, restrictions on transfer, repurchase rights,
reload options, commitments to pay cash bonuses, make or arrange for loans or
transfer other property to optionees upon exercise of options, or such other
provisions as shall be determined by the Committee; provided that such
-------- ----
additional provisions shall not be inconsistent with any other term or condition
of the Plan and such additional provisions shall not cause any Incentive Stock
Option granted under the Plan to fail to qualify as an Incentive Stock Option
within the meaning of Section 422 of the Code.
b. Acceleration. The Committee may, in its sole discretion, accelerate
------------
the date or dates on which all or any particular option or options granted under
the Plan may be exercised.
13. General Restrictions.
--------------------
a. Investment Representations. The Company may require any person to
--------------------------
whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option for
his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws.
b. Compliance With Securities Laws. Each option shall be subject to the
-------------------------------
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or
-6-
<PAGE>
the consent or approval of any governmental or regulatory body, is necessary as
a condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval shall have been
effected or obtained on conditions acceptable to the Committee. Nothing herein
shall be deemed to require the Company to apply for or to obtain such listing,
registration or qualification.
14. Rights as a Shareholder.
-----------------------
The holder of an option shall have no rights as a stockholder with respect
to any shares covered by the option until the date of issue of a stock
certificate to him or her for such shares. No adjustment shall be made for
dividends or other rights for which the record date is prior to the date such
stock certificate is issued.
15. Adjustments.
-----------
a. General. If, as a result of a merger, consolidation, sale of all or
-------
substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other distribution or adjustment with respect to the outstanding shares
of Common Stock or other securities, the outstanding shares of Common Stock are
increased or decreased, or are exchanged for a different number or kind of
shares or other securities, or additional shares or new or different shares or
other securities are distributed with respect to such shares of Common Stock or
other securities, an appropriate and proportionate adjustment may be made in (i)
the maximum number and kind of shares reserved for issuance under the Plan, (ii)
the number and kind of shares or other securities subject to then outstanding
options under the Plan, and (iii) the price for each share subject to any then
outstanding options under the Plan, without changing the aggregate purchase
price as to which such options remain exercisable.
b. Committee Authority to Make Adjustments. Adjustments under this
---------------------------------------
Section 15 will be made by the Committee, whose determination as to what
adjustments, if any, will be made and the extent thereof will be final, binding
and conclusive. No fractional shares will be issued under the Plan on account
of any such adjustments.
16. Reorganization.
---------------
-7-
<PAGE>
a. General. In the event of a consolidation or merger in which the
-------
Company is not the surviving corporation, or which results in the acquisition of
substantially all of the Company's outstanding Common Stock by a single person,
entity or group of persons or entities acting in concert, or in the event of the
sale or transfer of all or substantially all of the assets of the Company, or in
the event of a reorganization or liquidation of the Company, the Committee, or
the Board of Directors of any corporation assuming the obligations of the
Company, shall, as to outstanding options, either (i) provide that such options
shall be assumed, or equivalent options shall be substituted, by the acquiring
or succeeding corporation (or an affiliate thereof), provided that any such
--------
options substituted for Incentive Stock Options shall meet the requirements of
Section 424(a) of the Code, (ii) upon written notice to the optionees, provide
that all unexercised options will terminate immediately prior to the
consummation of such merger, consolidation, acquisition, reorganization,
liquidation, sale or transfer unless exercised by the optionee within a
specified number of days following the date of such notice, or (iii) in the
event of a merger under the terms of which holders of the Common Stock of the
Company will receive upon consummation thereof a cash payment for each share
surrendered in the merger (the "Merger Price"), make or provide for a cash
payment to the optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such outstanding options
(to the extent exercisable) and (B) the aggregate purchase price of all such
outstanding options in exchange for the termination of such options. In any
such case, the Committee may, in its discretion, advance the lapse of any
waiting or installment periods and exercise dates.
b. Substitute Options. The Committee may grant options under the Plan in
------------------
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation.
Substitute options may be granted on such terms and conditions as the Committee
considers appropriate in the circumstances.
17. Change in Control.
-----------------
Notwithstanding any other provision of the Plan, in the event of a
"Change in Control of the Company" (as defined below), any restrictions on
exercising outstanding options issued pursuant to the Plan prior to any given
date shall terminate with respect to the number of whole
-8-
<PAGE>
shares constituting 50% of the shares subject to any such restriction. For
purposes of the Plan, a "Change in Control of the Company" shall occur or be
deemed to have occurred only if:
a. any "person", as such term is used in Sections 13(d) and 14(d) of the
Exchange Act (other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any corporation
owned directly or indirectly by the stockholders of the Company in substantially
the same proportion as their ownership of stock of the Company), is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding securities;
b. during any period of two consecutive years ending during the term of
the Plan (not including any period prior to the adoption of the Plan),
individuals who at the beginning of such period constitute the Board of
Directors of the Company, and any new Director (other than a Director designated
by a person who has entered into an agreement with the Company to effect any
transaction described in clause (a), (c) or (d) of this Section 17) whose
election by the Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the Directors then
still in office who were either Directors at the beginning of the period or
whose election or whose nomination for election was previously so approved
(collectively, the "Disinterested Directors"), cease for any reason to
constitute a majority of the Board of Directors;
c. the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than (A) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no "person"
(as hereinabove defined) acquires more than 50% of the combined voting power of
the Company's then outstanding securities; or
-9-
<PAGE>
d. the stockholders of the Company approve a plan of complete liquidation
of the Company or the sale of all or substantially all of the Company's assets
which, in either case, has not previously been approved by a majority of the
Disinterested Directors.
18. No Special Employment Rights.
----------------------------
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
or service to the Company or interfere in any way with the right of the Company
at any time to terminate such employment or service or to increase or decrease
the compensation of the optionee.
-10-
<PAGE>
19. Amendment of the Plan.
---------------------
The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect, except that, without the approval of the
stockholders of the Company the Board of Directors may not increase the maximum
number of shares that may be issued under the Plan (except for adjustments
specifically provided in the Plan) or, except to the extent the Board of
Directors determines otherwise, amend the Plan in any manner that would, to the
extent applicable, require stockholder approval under Rule 16b-3, Section 422 of
the Code or Section 162(m) of the Code, as each may be in effect at the time of
such amendment. The termination or any modification or amendment of the Plan
shall not, without the consent of an optionee, affect his or her rights under an
option previously granted to him or her. With the consent of the optionee
affected, the Committee may amend outstanding option agreements in a manner not
inconsistent with the Plan.
20. Withholding.
-----------
The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, such obligations may be
satisfied, in whole or in part, (i) by withholding shares of Common Stock
otherwise issuable pursuant to the exercise of an option, (ii) by delivering to
the Company shares of Common Stock already owned by the optionee or (iii) by
such other means as the Company may require or approve. The shares so delivered
or withheld shall have a fair market value equal to such withholding obligation.
The fair market value of the shares used to satisfy such withholding obligation
shall be determined as set forth in Section 6.
-11-
<PAGE>
21. Cancellation and New Grant of Options.
-------------------------------------
The Committee shall have the authority to effect, at any time and from time
to time, with the consent of the affected optionees to the extent required, the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock, having an option purchase price per
share that may be lower or higher than the purchase price per share of the
canceled options and having such other terms as the Committee may approve.
22. Effective Date and Duration of the Plan.
---------------------------------------
a. Effective Date. The Plan shall become effective when adopted by the
--------------
Board of Directors, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the date of the Board's adoption of the Plan, any
Incentive Stock Options previously granted under the Plan shall terminate and no
further Incentive Stock Options shall be granted. Amendments to the Plan not
requiring stockholder approval shall become effective when adopted by the Board
of Directors; amendments requiring stockholder approval under Section 422 of the
Code shall become effective when adopted by the Board of Directors, but no
Incentive Stock Option issued after the date of such amendment shall become
exercisable (to the extent that such amendment to the Plan was required to
enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve (12) months of the Board of Directors' adoption of such amendment, any
Incentive Stock Options granted on or after the date of such amendment shall
terminate to the extent that such amendment to the Plan was required to enable
the Company to grant such option to a particular optionee. Subject to this
limitation, options may be granted under the Plan at any time after the
effective date and before the date fixed for termination of the Plan.
b. Termination. The Plan shall terminate upon the earlier of (i) the
-----------
close of business on the day next preceding the tenth anniversary of the date of
its adoption by the Board of Directors, or (ii) the date on which all shares
available for issuance under the Plan shall have been issued pursuant to the
exercise or cancellation of options granted under the Plan. If the date of
termination is
-12-
<PAGE>
determined under (i) above, then options outstanding on such date shall continue
to have force and effect in accordance with the provisions of the instruments
evidencing such options.
Amended and Restated on October 14, 1996
-13-
<PAGE>
Exhibit 10.3
AXENT TECHNOLOGIES, INC.
AMENDED AND RESTATED
1996 DIRECTORS' STOCK OPTION PLAN
1. Purpose.
The purpose of this 1996 Directors' Option Plan (the "Plan") of AXENT
Technologies, Inc. (the "Company") is to promote the recruiting and retention of
highly qualified outside Directors and to strengthen the commonality of interest
between Directors and stockholders.
2. Administration.
The Plan will be administered by the Board of Directors of the
Company, whose construction and interpretation of the terms and provisions of
the Plan shall be final and conclusive. Grants of stock options under the Plan
and the amount and nature of the awards to be granted shall be automatic and
non-discretionary in accordance with Section 5. However, all questions of
interpretation of the Plan or of any options issued under it shall be determined
by the Board of Directors and such determination shall be final and binding upon
all persons having an interest in the Plan. No Director shall be liable for any
action or determination under the Plan made in good faith.
3. Participation in the Plan.
Directors of the Company other than (1) employees of the Company or
any subsidiary of the Company and (2) persons who are not "disinterested
persons" within the meaning of Rule 16b-3(c)(2)(i) promulgated under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") shall be
granted options under the Plan.
4. Stock Subject to the Plan.
(a) The maximum number of shares which may be issued under the Plan
shall be 200,000 shares of the Company's Common Stock, $0.02 par value per share
("Common Stock"), subject to adjustment as provided in Section 9.
- 1 -
<PAGE>
(b) If any outstanding option under the Plan for any reason expires
or is terminated without having been exercised in full, the shares allocable to
the unexercised portion of such option shall again become available for grant
pursuant to the Plan.
(c) All options granted under the Plan shall be non-statutory options
which are not intended to meet the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
5. Terms, Conditions and Form of Options.
Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the following
terms and conditions:
(a) Option Grant Dates. Following approval of the Plan by
the holders of a majority of the shares of Common Stock present or
represented at a meeting of the Company's stockholders duly called and
held in accordance with the Company's by-laws and applicable law,
options shall be granted automatically to all eligible Directors as
follows: (i) each person who becomes an eligible Director after the
date of the Company's initial public offering of shares of its Common
Stock (the "Initial Public Offering") shall be granted an option to
purchase 9,000 shares of Common Stock on the close of business on the
date of his or her initial election or appointment to the Board of
Directors; and (ii) each eligible Director shall be granted an
additional option to purchase 2,000 shares of Common Stock (an "Annual
Grant") on the date of the first meeting of the Board of Directors in
1997 and on the date of each annual stockholders' meeting, including
the meeting at which such Director is initially elected, commencing
with the 1997 annual stockholders' meeting.
(b) Option Exercise Price. The option exercise price per
share for each option granted under the Plan shall equal the closing
price per share of the Company's Common Stock on NASDAQ, or the
principal exchange on which the Common Stock is then listed, on the
date of grant, and if no such price is reported on such date, such
price as reported on the nearest preceding date on which such price is
reported; if any options are granted prior to the date of the
Company's Common Stock is listed on an exchange, the option exercise
price per share shall be the fair market value of the Common Stock
determined by the Board of Directors.
- 2 -
<PAGE>
(c) Options Non-Transferable. Each option granted under
the Plan by its terms shall not be transferable by the optionee
otherwise than by will or by the laws of descent and distribution, or
pursuant to a qualified domestic relations order (as defined in
Section 414(p) of the Code) and shall be exercised during the lifetime
of the optionee only by such optionee.
(d) Exercise Period. Each option to purchase 9,000 shares
of Common Stock on the date of the Director's election to the Board of
Directors shall become vested and exercisable with respect to one-
third of the shares upon each of the first, second, and third
anniversaries of his or her initial election or appointment to the
Board of Directors (or the date of the annual meeting of stockholders
in such year, if earlier), and may be exercised thereafter from time
to time, in whole or in part, prior to the earlier of (i) 60 days
after an optionee ceases to serve as a Director (180 days if the
optionee ceased to serve because of his or her death or permanent
disability) or (ii) the ninth anniversary of the date of grant. Each
Annual Grant shall become fully vested upon the earlier of (a) the
next annual stockholders' meeting or (b) the first anniversary of the
date of grant and may be exercised thereafter from time to time, in
whole or in part, prior to the earlier of (i) 60 days after an
optionee ceases to serve as a Director (180 days if the optionee
ceased to serve because of his or her death or permanent disability)
or (ii) the ninth anniversary of the date of grant.
(e) Exercise Procedure. Options may be exercised only by
written notice (in a form provided by or acceptable to the Company) to
the Company at its principal office accompanied by payment of the full
consideration for the shares as to which they are exercised.
(f) Payment of Purchase Price. Payment of the exercise
price may be made, at the election of the optionee, (i) by delivery of
cash or check to the order of the Company in an amount equal to the
exercise price, (ii) by delivery to the Company of shares of Common
Stock of the Company already owned and held by the optionee for at
least twelve months and having a fair market value equal in amount to
the exercise price of the options being exercised, or (iii) by any
combination of such methods of payment. The fair market value of any
shares of Common Stock which may be delivered upon exercise of an
option shall be determined by the Company as of the date that such
shares are delivered.
6. Assignments.
- 3 -
<PAGE>
The rights and benefits under the Plan may not be assigned except as
provided in Section 5.
7. Time for Granting Options.
All options for shares subject to the Plan shall be granted, if at
all, not later than ten years after the date of the Board's adoption of the
Plan.
8. Limitation of Rights.
(a) No Right to Continue as a Director. Neither the Plan, nor the
granting of an option nor any other action taken pursuant to the Plan, shall
constitute or be evidence of any agreement or understanding, express or implied,
that the Company will retain a Director for any period of time.
(b) No Stockholder Rights for Options. An optionee shall have no
rights as a stockholder with respect to the shares covered by his or her option
until the date that the optionee delivers all materials to exercise such option
to the Company in proper form with payment of the exercise price, and no
adjustment will be made for dividends or other rights for which the record date
is prior to the date on which such materials and payment are delivered.
9. Adjustment Provisions.
(a) Recapitalizations. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar transaction, (i) the outstanding shares of
Common Stock are increased or decreased or are exchanged for a different number
or kind of shares or other securities of the Company, or (ii) additional shares
or new or different shares or other securities of the Company or other non-cash
assets are distributed with respect to such shares of Common Stock or other
securities, an appropriate and proportionate adjustment may be made in (x) the
maximum number and kind of shares reserved for issuance under the Plan, (y) the
number and kind of shares or other securities subject to then outstanding
options under the Plan, and (z) the price for each share subject to any then
outstanding options under the Plan, without changing the aggregate purchase
price as to which such options remain exercisable, provided that no adjustment
shall be made pursuant to this Section 9 if such adjustment would cause the Plan
to fail to comply with Rule 16b-3 under the Exchange Act, or any successor rule
("Rule 16b-3").
- 4 -
<PAGE>
(b) Mergers. In the event of a consolidation or merger or sale of
all or substantially all of the assets of the Company in which outstanding
shares of Common Stock are exchanged for securities, cash or other property of
any other corporation or business entity or in the event of a liquidation of the
Company, the Board of Directors of the Company, or the board of Directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions, as to outstanding options: (i)
provide that such options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), (ii) upon written notice to the optionees, provide that all
unexercised options will terminate immediately prior to the consummation of such
transaction unless exercised by the optionee within a specified period following
the date of such notice, and (iii) in the event of a merger under the terms of
which holders of the Common Stock of the Company will receive upon consummation
thereof a cash payment for each share surrendered in the merger (the "Merger
Price"), make or provide for a cash payment to the optionees equal to the
difference between (a) the Merger Price times the number of shares of Common
Stock subject to such outstanding options (to the extent then exercisable at
prices not in excess of the Merger Price) and (b) the aggregate exercise price
of all such outstanding options in exchange for the termination of such options.
10. Change in Control.
Notwithstanding any other provision of the Plan, in the event of a
"Change in Control of the Company" (as defined below), any outstanding options
issued pursuant to the Plan prior to the date of such Change in Control of the
Company shall vest and be exercisable as to 50% of the number of shares that
remain unvested on the date of such Change in Control of the Company. For
purposes of the Plan, a "Change in Control of the Company" shall occur or be
deemed to have occurred only if :
(i) any "person", as such term is used in Sections 13(d) and 14(d) of
the Exchange Act (other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, or any
corporation owned directly or indirectly by the stockholders of the Company
in substantially the same proportion as their ownership of stock of the
Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing 50% or more of the combined voting power of the
Company's then outstanding securities;
(ii) during any period of two consecutive years ending during the term
of the Plan (not including any period prior to the adoption of the Plan),
individuals who at the beginning of such period constitute the Board of
Directors of the Company, and any new Director (other than a Director
designated by a person who has entered into an agreement with the
- 5 -
<PAGE>
Company to effect any transaction described in clause (i), (iii) or (iv) of
this Section 10) whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds of the Directors then still in office who were either Directors
at the beginning of the period or whose election or whose nomination for
election was previously so approved (collectively, the "Disinterested
Directors"), cease for any reason to constitute a majority of the Board of
Directors;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (A) a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation or (B) a merger
or consolidation effected to implement a recapitalization of the Company
(or similar transaction) in which no "person" (as hereinabove defined)
acquires more than 50% of the combined voting power of the Company's then
outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or the sale of all or substantially all of the
Company's assets which, in either case, has not previously been approved by
a majority of the Disinterested Directors.
11. Amendment of the Plan.
(a) The provisions of Sections 3, 5(a) and 5(b) of the Plan shall not
be amended more than once every six months, other than to comport with changes
in the Code, the Employee Retirement Income Security Act of 1974, the rules
thereunder, or Rule 16b-3. Subject to the foregoing, the Board of Directors may
at any time, and from time to time, modify or amend the Plan in any respect,
except that if at any time the approval of the stockholders of the Company is
required as to such modification or amendment under Rule 16b-3, the Board of
Directors may not effect such modification or amendment without such approval.
(b) The termination or any modification or amendment of the Plan
shall not, without the consent of an optionee, affect his or her rights under an
option previously granted to him or her. With the consent of the optionees
affected (if so required hereby), the Board of Directors may amend outstanding
option agreements in a manner not inconsistent with the Plan. The Board of
Directors shall have the right to amend or modify the terms and provisions of
the Plan and of any outstanding
- 6 -
<PAGE>
option to the extent necessary to ensure the qualification of the Plan and
outstanding options under Rule 16b-3.
12. Notice.
Any written notice to the Company required by any of the provisions of
the Plan shall be addressed to the Chief Financial Officer of the Company and
shall become effective when it is received.
13. Effective Date and Duration of the Plan.
(a) Effective Date. The Plan shall become effective when adopted by
the Board of Directors, but no option granted under the Plan shall become
exercisable unless and until the Plan shall have been approved by the Company's
stockholders. If such stockholder approval is not obtained within twelve months
after the date of the Board's adoption of the Plan, all options granted under
the Plan shall terminate and no further options shall be granted under the Plan.
Amendments to the Plan not requiring stockholder approval shall become effective
when adopted by the Board of Directors; amendments requiring stockholder
approval (as provided in Section 11(a)) shall become effective when adopted by
the Board of Directors, but no option issued after the date of such amendment
shall become exercisable (to the extent that such amendment to the Plan was
required to enable the Company to grant such option to a particular optionee)
unless and until such amendment shall have been approved by the Company's
stockholders. If such stockholder approval is not obtained within twelve months
of the Board's adoption of such amendment, any options granted on or after the
date of such amendment to the Plan shall terminate (to the extent that such
amendment to the Plan was required to enable the Company to grant such option to
a particular optionee). Subject to this limitation, options may be granted
under the Plan at any time after the effective date and before the date fixed
for termination of the Plan.
(b) Termination. Unless earlier terminated pursuant to Section 9,
the Plan shall terminate upon the earlier of (i) February 1, 2006, or (ii) the
date on which all shares available for issuance under the Plan shall have been
issued pursuant to the exercise of options granted under the Plan. If the date
of termination is determined under (i) above, then options outstanding on such
date shall continue to have force and effect in accordance with the provisions
of the instruments evidencing such options.
14. General Restrictions.
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<PAGE>
(a) Investment Representations. The Company may require any person
to whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option for
his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws.
(b) Compliance With Securities Laws. Each option shall be subject to
the requirement that if, at any time, counsel to the Company shall determine
that the listing, registration or qualification of the shares subject to such
option upon any securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, or that the
disclosure of non-public information or the satisfaction of any other condition
is necessary as a condition of, or in connection with, the issuance or purchase
of shares thereunder, such option may not be exercised, in whole or in part,
unless such listing, registration, qualification, consent or approval, or
satisfaction of such conditions is effected in a manner acceptable to the Board
of Directors. Nothing herein shall be deemed to require the Company to apply
for or to obtain such listing, registration or qualification, or to satisfy such
condition.
15. Governing Law.
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Delaware.
Amended and Restated by the Board of Directors
on October 22, 1996
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<PAGE>
EXHIBIT 11.1
AXENT TECHNOLOGIES, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended Nine Months
December 31, Ended September 30,
- -------------------------------------------------------------------------------------------------------------------
1995 1996 (unaudited) 1995
------------ ----------------------------
<S> <C> <C> <C>
Income (loss) from continuing operations $(2,695,000) $ 1,727,000 $(3,044,000)
Income from discontinued operations 5,050,000 2,144,000 3,970,000
------------------------------------------------
Net income $ 2,355,000 $ 3,871,000 $ 926,000
================================================
Weighted average common shares outstanding 9,007,831 10,301,807 9,007,831
Common shares issued within one year of initial filing 9,075 -- 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 -- 108,958
------------------------------------------------
Weighted average number of common shares outstanding 9,125,864 10,301,807 9,125,864
Net income (loss) per common share
and common share equivalents:
Continuing operations $ (0.30) $ 0.17 $ (0.33)
Discontinued operations $ 0.56 0.21 0.43
------------------------------------------------
$ 0.26 $ 0.38 $ 0.10
================================================
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 16.1
January 21, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: "Change in Independent Auditors" paragraph for S-4 filing
-------------------------------------------------------------
Ladies and Gentlemen:
We have read the wording of the "Change in Independent Auditors" paragraph for
the AXENT Technologies, Inc. filing on Form S-4. We agree with all statements
made therein with respect to Frank, Rimerman & Co. LLP in its capacity as the
predecessor independent auditors of AssureNet Pathways, Inc.
Very truly yours,
Frank, Rimerman & Co. LLP
<PAGE>
Exhibit 21.1
SUBSIDIARIES
------------
Subsidiary Name Stockholder State of Incorporation
- --------------- ----------- ----------------------
RAXCO Sarl AXENT Technologies, Inc. France
AXENT Technologies Ltd. AXENT Technologies, Inc. United Kingdom
Datamedia Corporation AXENT Technologies, Inc. Delaware
AXENT Technologies BV AXENT Technologies, Inc. Holland
Axquisition, Inc. AXENT Technologies, Inc. Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
our report dated February 13, 1996, on our audits of the financial statements
and financial statement schedule of AXENT Technologies, Inc., as of December 31,
1994 and 1995 and for each of the three years ended December 31, 1995. We also
consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Washington, D.C.
January 22, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report for AssureNet Pathways, Inc. (formerly Digital Pathways, Inc.) and to all
references to our Firm included in or made a part of this Registration
Statement.
/s/ Arthur Andersen LLP
San Jose, California
January 17, 1997
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use of our report dated March 15, 1996 with respect to the
consolidated financial statements of AssureNet Pathways, Inc. and subsidiaries
and to all references to our firm included in Form S-4 of AXENT Technologies,
Inc.
FRANK, RIMERMAN & CO. LLP
San Jose, California
January 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This 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 nine months ended September 30, 1996, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 15,660,000
<SECURITIES> 17,316,000
<RECEIVABLES> 4,793,000
<ALLOWANCES> (456,000)
<INVENTORY> 0
<CURRENT-ASSETS> 38,195,000
<PP&E> 4,464,000
<DEPRECIATION> (3,034,000)
<TOTAL-ASSETS> 39,639,000
<CURRENT-LIABILITIES> 7,547,000
<BONDS> 0
0
0
<COMMON> 200,000
<OTHER-SE> 31,823,000
<TOTAL-LIABILITY-AND-EQUITY> 39,639,000
<SALES> 0
<TOTAL-REVENUES> 14,359,000
<CGS> 0
<TOTAL-COSTS> 1,319,000
<OTHER-EXPENSES> 13,954,000
<LOSS-PROVISION> 28,000
<INTEREST-EXPENSE> 39,000
<INCOME-PRETAX> (914,000)
<INCOME-TAX> 425,000
<INCOME-CONTINUING> 1,727,000
<DISCONTINUED> 2,144,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,871,000
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial informtion extracted from the condensed
consolidated balance sheet and statement of operations of AXENT Technologies,
Inc. as of and for the year ended December 31, 1995, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,083,000
<SECURITIES> 0
<RECEIVABLES> 5,368,000
<ALLOWANCES> (297,000)
<INVENTORY> 0
<CURRENT-ASSETS> 11,492,000
<PP&E> 3,578,000
<DEPRECIATION> (2,481,000)
<TOTAL-ASSETS> 12,646,000
<CURRENT-LIABILITIES> 9,544,000
<BONDS> 0
0
0
<COMMON> 159,000
<OTHER-SE> 2,817,000
<TOTAL-LIABILITY-AND-EQUITY> 12,646,000
<SALES> 0
<TOTAL-REVENUES> 14,728,000
<CGS> 0
<TOTAL-COSTS> 1,747,000
<OTHER-EXPENSES> 17,693,000
<LOSS-PROVISION> (18,000)
<INTEREST-EXPENSE> 129,000
<INCOME-PRETAX> (4,712,000)
<INCOME-TAX> (2,146,000)
<INCOME-CONTINUING> (2,695,000)
<DISCONTINUED> 5,050,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,355,000
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
