UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
---------------
(Mark One)
_X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from ______ to ______.
Commission File Number: 0-28100
-------------
AXENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 87-0393420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 Research Boulevard
Suite 200
Rockville, Maryland 20850
(Address of principal executive offices)
(301) 258-5043
(Registrant's telephone number including area code)
----------------
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes___X___ No______
As of October 31, 1997, there were 12,265,339 shares outstanding of the
Registrant's Common Stock, par value $.02 per share.
1
<PAGE>
AXENT TECHNOLOGIES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 4
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30,
1997 and 1996 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits 18
SIGNATURES 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
The financial statements set forth below at September 30, 1997 and for the three
month and nine month periods ended September 30, 1997 and 1996 are unaudited and
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to those rules and regulations.
These financial statements should be read in conjunction with the latest audited
consolidated financial statements and the notes thereto for the fiscal year
ended December 31, 1996, which are included in the Company's Annual Report on
Form 10-K as filed with the SEC on March 28, 1997.
3
<PAGE>
<TABLE>
<CAPTION>
AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<S> <C> <C>
September 30, December 31,
1997 1996
(unaudited)
---------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,702 $ 17,261
Short-term investments 18,181 18,629
Accounts receivable, net 8,536 4,826
Prepaid expenses and other current assets 2,142 568
---------------- -----------------
Total current assets 43,561 41,284
---------------- -----------------
Property and equipment, net 2,078 1,417
Other assets 1,861 1,300
---------------- -----------------
Total assets $ 47,500 $ 44,001
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 7,781 $ 6,361
Deferred revenue 4,015 3,029
Net identifiable (assets) liabilities from discontinued operations 194 163
---------------- -----------------
Total liabilities 11,990 9,553
---------------- -----------------
Stockholders' equity:
Common stock, par value $0.02: 12,175,139 and 10,130,064
shares issued and outstanding, respectively 244 203
Additional paid-in capital 72,763 47,909
Accumulated deficit (37,357) (13,597)
Cumulative currency translation adjustments (140) (67)
---------------- -----------------
Total stockholders' equity 35,510 34,448
---------------- -----------------
Total liabilities and stockholders' equity $ 47,500 $ 44,001
================ =================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------- -------------- --------------- --------------
Net revenues:
Product licenses $ 7,314 $ 3,124 $ 21,150 $ 9,727
Services 2,425 1,828 7,005 4,632
------------- -------------- --------------- --------------
Total net revenues 9,739 4,982 27,155 14,359
Cost of net revenues:
Product licenses 567 116 1,573 346
Services 446 340 1,360 973
------------- -------------- --------------- --------------
Total cost of net revenues 1,013 456 2,933 1,319
------------- -------------- --------------- --------------
Gross profit 8,726 4,496 24,222 13,040
Operating expenses:
Sales and marketing 8,672
4,515 2,891 13,245
Research and development 2,003 1,253 5,881 3,510
General and administrative 793 620 2,430 1,772
Write-off of purchased in-process research
and development costs --- --- 27,632 ---
------------- -------------- --------------- --------------
Total operating expenses 7,311 4,764 49,188 13,954
------------- -------------- --------------- --------------
Income (loss) from continuing operations
before royalties, interest and taxes 1,415 (268) (24,966) (914)
Royalty income 741 794 2,267 2,398
Interest income 457 339 1,266 668
Income tax provision (1,045) (365) (2,478) (425)
------------- -------------- --------------- --------------
Income (loss) from continuing operations 1,568 500 (23,911) 1,727
Income from discontinued operations --- 591 255 2,144
------------- -------------- --------------- --------------
Net income (loss) $ 1,568 $ 1,091 $ (23,656) $ 3,871
============= ============== =============== ==============
Net income (loss) per common share:
Continuing operations $ 0.12 $ 0.05 $ (2.02) $ 0.17
Discontinued operations --- $ 0.05 $ 0.02 $ 0.21
------------- -------------- --------------- --------------
Net income (loss) per common share $ 0.12 $ 0.10 $ (2.00) $ 0.38
============= ============== =============== ==============
Weighted average number of
common shares 13,366 10,886 11,810 10,302
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
For the Nine Months
Ended September 30,
------------------------------------
<S> <C> <C>
1997 1996
---------------- ---------------
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net income (loss) from continuing operations $ (23,911) $ 1,727
Non-cash items:
Depreciation and amortization 1,123 443
Write-off of purchased in-process research and development 27,632 ---
Change in assets and liabilities (5,887) (1,371)
---------------- ---------------
Net cash provided/(used) by continuing operations (1,043) 799
Net cash provided/(used) by discontinued operations (614) 750
----------------
---------------
Net cash provided/(used) by operating activities (1,657) 1,549
---------------- ---------------
Investing activities:
Capital expenditures (668) (733)
Payments for corporate acquisition (2,270) (100)
Purchases of short-term investments --- (17,316)
Proceeds from sale of Helpdesk business --- 300
Maturity of short-term investments 448 ---
---------------- ---------------
Net cash used by continuing operations (2,490) (17,849)
Net cash provided by discontinued operations 645 701
---------------- ---------------
Net cash used by investing activities (1,845) (17,148)
---------------- ---------------
Financing activities:
Proceeds from initial public offering of common
stock (net of costs of $838,000) --- 25,132
Proceeds from issuance of common stock 1,818 100
Proceeds from line of credit draws 490 ---
Principal payments on line of credit (1,225) ---
---------------- ---------------
Net cash provided by continuing operations from financing activities 1,083 25,232
---------------- ---------------
Effect of exchange rate changes on cash (140) (56)
---------------- ---------------
Net increase (decrease) in cash and cash equivalents (2,559) 9,577
Cash and cash equivalents, beginning of period 17,261 6,083
---------------- ---------------
Cash and cash equivalents, end of period $ 14,702 $ 15,660
================ ===============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of AXENT Technologies, Inc. and its wholly owned subsidiaries
(collectively, the "Company" or "AXENT"). The Company's condensed consolidated
financial statements reflect the operations of AssureNet Pathways, Inc.
("AssureNet") since January 7, 1997 and include a write-off of purchased
in-process research and development (see "Business Combinations"). The Company
develops, markets, licenses and supports enterprise-wide information security
solutions for client/server computing environments and provides related
services.
The accompanying unaudited condensed consolidated financial statements reflect
all the adjustments that, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. The results for
the three month and nine month periods ended September 30, 1997 may not
necessarily be indicative of the results for the entire year. The December 31,
1996 condensed consolidated balance sheet was derived from audited financial
statements as of the same date but does not include all disclosures required by
generally accepted accounting principles.
These financial statements should be read in conjunction with the Company's
annual audited financial statements for the year ended December 31, 1996, which
are included in the Company's Form 10-K filed with the SEC on March 28, 1997.
Business Combinations
On March 25, 1997, AXENT completed the acquisition of AssureNet. In connection
with the acquisition, AXENT agreed to issue 1,550,000 shares of common stock in
exchange for all of the outstanding shares of AssureNet preferred and common
stock and certain outstanding AssureNet stock options and warrants, when
exercised. In addition, AXENT assumed all other AssureNet stock options and
warrants outstanding at the time of the merger.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, a portion of the total purchase price, which was approximately $32
million, was allocated to the net assets acquired, based on their estimated fair
market value. The fair market value of the tangible assets acquired was
approximately $2.9 million. The Company also acquired approximately $1.5 million
in purchased software which is being amortized over three years on a
straight-line basis. In addition, approximately $27.6 million of the purchase
price was allocated to in-process research and development based on the
determination of the products' net present value using a discounted cash flow
model. These products had not reached technological feasibility and had no
probable future uses, and therefore were expensed at the date of the
acquisition. As a result of the signing of a definitive agreement between AXENT
and AssureNet, the transfer of control of AssureNet's operations to AXENT and
the quantification of consideration, AssureNet's operations have been included
in the Company's condensed consolidated financial statements since January 7,
1997.
Before the acquisition, AssureNet developed and marketed certain hardware and
software remote access authentication products (Defender(TM) products) and had
certain other software products under development. AXENT intends to integrate
the existing Defender software technology with the Omniguard(R) family of
products where appropriate. With the exception of hardware tokens, AXENT intends
to cease actively marketing the majority of AssureNet hardware products and
focus its efforts on marketing the Defender software products. The acquisition
is also expected to permit AXENT to expand its indirect distribution
capabilities by adding AssureNet's distributors.
7
<PAGE>
Purchased Software
In 1996, the Company entered into an agreement with an unrelated third party to
pay up to $1,500,000 for a nonexclusive license to the source code of certain
security technology. Pursuant to this agreement, the Company paid the third
party $900,000, of which $500,000 was an acquisition fee upon acceptance of the
source code and $400,000 was a non-refundable royalty pre-payment against future
royalties. The Company may be required to pay up to an additional $600,000 in
royalties based on a percentage of the net revenues derived from the source code
license over a three year period. The acquisition fee is included in purchased
software.
Initial Public Offering
In February 1996, the Company filed a registration statement with the Securities
and Exchange Commission permitting the Company to sell 2,000,000 shares of its
common stock to the public. The registration statement also permitted certain
non-officer stockholders of the Company to sell up to 990,000 shares to the
public, including up to 390,000 shares to cover over-allotments. The
registration statement became effective on April 23, 1996. The initial public
offering resulted in proceeds to the Company of approximately $25.3 million, net
of approximately $2.7 million in underwriting fees and offering expenses. The
Company received no proceeds from the sale of shares by selling stockholders in
the initial public offering.
Discontinued Operations
In mid-1994 the Company made a strategic decision to focus its business on the
information security market and to divest itself of products and services
unrelated to such business. The following businesses have been divested by the
Company: (i) the storage management products business, which was sold in 1994
for cash, notes and the assumption of certain liabilities, (ii) the OpenVMS
utility software distribution business, which was conveyed to Raxco Software,
Inc. ("Raxco") in a spin-off effective December 31, 1995 and (iii) the Helpdesk
products business, which was sold in February 1996, for cash, a note, royalties
and the assumption of certain liabilities. The results of operations for these
divested businesses have been accounted for as discontinued operations in
accordance with Accounting Principles Bulletin No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30").
Income Tax
The Company files a consolidated federal income tax return in the U.S. with its
U.S. subsidiaries. Deferred income taxes have been established by each entity
based upon its temporary differences, the reversal of which will result in
taxable or deductible amounts in future years when the related asset or
liability is recovered or settled.
For the three months ended September 30, 1997, the Company recorded a tax
provision on the income from continuing and discontinued operations. The
effective tax rate for the three months ended September 30, 1997 approximates
the statutory tax rate. As of September 30, 1997, the Company has general
business credits of approximately $95,000, expiring in 2009. The Company also
has alternative minimum tax credits of approximately $199,000, which do not
expire. In addition, the Company's newly acquired subsidiary, AssureNet, has net
operating losses and credits that expire at various dates through 2011. As of
September 30, 1997, those net operating losses were approximately $7.1 million
and general business credit carryforwards were approximately $369,000. Due to
the greater than 50% change in AssureNet's ownership, the annual utilization of
the AssureNet net operating loss carryforwards and credits is limited to the
lesser of the future taxable income of AssureNet or approximately $1,375,000.
8
<PAGE>
Stock Option Plan
In January 1996, the Company adopted the 1996 Stock Option Plan and the 1996
Directors' Stock Option Plan, providing for the issuance of up to 1,000,000 and
200,000 shares, respectively. At the Company's Annual Meeting of Stockholders on
May 21, 1997, stockholders approved to increase the number of shares of common
stock reserved for issuance under the 1996 Stock Option Plan to 1,975,000. In
addition, the plan was amended to limit the total number of options that may be
granted during any fiscal year of the Company, to any one individual, to
500,000. Of the 1,975,000 shares provided in the amended 1996 Stock Option Plan,
options covering an aggregate of 461,500 and 1,497,842 shares were issued during
1996 and the first nine months of 1997, respectively. Of the options granted
during 1997, 264,000 were repriced from grants originally made in October 1996
and January 1997. Of the 200,000 shares provided in the 1996 Directors' Stock
Option Plan, options covering 29,000 shares were issued during the first nine
months of 1997.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which is
required to be adopted for financial statements issued after December 15, 1997.
SFAS 128 specifies revised guidelines for computation, presentation and
disclosure requirements for an entity's Earnings per Share.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which is effective for the fiscal years beginning after December 15, 1997. SFAS
130 establishes standards for reporting comprehensive income and its components
in a full set of general-purpose financial statements.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segment of an Enterprise and
Related Information" ("SFAS 131), which is effective for the fiscal years
beginning after December 15, 1997. SFAS 131 specifies revised guidelines for
determining an entity's operating segments and the type and level of financial
information to be disclosed.
The Company does not expect the adoption of these standards to have a material
impact on the Company's financial position or results of operations.
Subsequent Event
As part of the consideration for the sale of its storage management products
effective as of December 31, 1994, the Company received a warrant to purchase
250,000 shares of common stock of MTI Technology Corporation ("MTI"). On October
15, 1997, the Company effected a cashless exercise of that warrant and received
161,830 shares of MTI common stock. These shares are considered to be available
for sale as of the exercise of the warrant. Based upon the closing price of
$11.375 for MTI common stock on November 10, 1997, the market value of these MTI
shares was approximately $1.8 million.
9
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risk and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those identified in "Certain
Factors Affecting Future Performance" (see below) and those discussed in the
"Risk Factors" set forth in Amendment No. 2 to the Company's Registration
Statement on Form S-4 (File No. 333-20207), as filed with the SEC on March 6,
1997.
Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996
Net Revenues
The Company's net revenues from product licenses increased approximately 134.2%,
or $4.19 million, from $3.12 million for the three months ended September 30,
1996 to $7.31 million for the three months ended September 30, 1997. For those
periods in 1996 and 1997, net revenues from product licenses represented 63.1%
and 75.1% of total net revenues, respectively. The increase in product license
revenue is primarily attributable to the continued broader acceptance of the
Company's products, the introduction and general release of new products and the
expansion of available products running on new or additional platforms. The
Company has also benefited since January 7, 1997 from the licensing of the
Defender products acquired through the AssureNet transaction.
The Company's net revenues from services increased approximately 32.7%, or
$597,000, from $1.83 million for the three months ended September 30, 1996 to
$2.43 million for the three months ended September 30, 1997. The increase in
services revenues is primarily attributable to growth in the customer base
purchasing maintenance, as well as the addition of the Defender customers on
maintenance acquired through the AssureNet transaction. For those periods in
1996 and 1997, net revenues from services represented 36.9% and 24.9% of total
net revenues, respectively.
Revenues from North American and International operations were 83% and 17% of
total revenues, respectively, for the three months ended September 30, 1997 as
compared to 78% and 22%, respectively, for the same period in 1996.
Cost of Net Revenues
The Company's cost of net revenues for product licenses includes cost of media,
product packaging, documentation and other production costs, amortization of
purchased software costs, and product royalties. Cost of net revenues associated
with product licenses increased approximately 388.8%, or $451,000, from $116,000
for the three months ended September 30, 1996 to $567,000 for the three months
ended September 30, 1997. For those periods in 1996 and 1997, cost of net
revenues for product licenses represented 3.7% and 7.8% of net revenues from
product licenses, respectively. The increase in the cost of net revenues for
product licenses is primarily attributable to the commencement of amortization
on the purchased software acquired through the AssureNet transaction, plus the
increased cost of producing the hardware products associated with the Defender
product line. Cost of net revenues for product licenses, as a percentage of
revenues from product licenses, may fluctuate from period to period due to a
change in product mix, a change in the number or size of transactions recorded
in a quarter, or an increase or decrease in licenses of royalty-bearing
products.
The Company's cost of net revenues from services includes the direct and
indirect costs of providing technical support, training and consulting services
to the Company's customers. Cost of net revenues from services increased 31.2%,
or $106,000 from $340,000 for the three months ended September 30, 1996 to
$446,000 for the three months ended September 30, 1997. For those periods in
1996 and 1997, cost of net revenues from services represented 18.6% and 18.4% of
net revenues from services, respectively. The dollar increase in cost of net
revenues from services is directly related to the increase in staff of the
Company's customer support operations necessary to support a larger installed
customer base as well as additional products offered by the Company, including
the Defender product line acquired from AssureNet.
10
<PAGE>
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 56.1%, or $1.62 million, from $2.89 million for the three
months ended September 30, 1996 to $4.52 million for the three months ended
September 30, 1997. For those periods in 1996 and 1997, sales and marketing
expenses represented 58.4% and 46.4% of total net revenues, respectively. The
increase in dollar amount was due to the additional investment in staff to
support the company's growth associated with the Defender product line, acquired
from AssureNet. The decrease in sales and marketing expenses as a percentage of
total net revenues was due primarily to the greater increase in total net
revenues. The Company currently anticipates that the dollar amount of sales and
marketing expenses will increase as the Company continues to hire additional
staff to support the Company's growth in future periods.
Research and Development
Research and development expenses consist primarily of personnel costs,
including salaries, benefits and bonuses, travel and other personnel-related
expenses of the employees engaged in ongoing research and development projects
and third-party development contracts. Costs related to research and development
of products are expensed as incurred. Research and development expenses
increased 59.9%, or $750,000, from $1.25 million for the three months ended
September 30, 1996 to $2.00 million for the three months ended September 30,
1997. For those periods in 1996 and 1997, research and development expenses
represented 25.3% and 20.6% of total net revenues, respectively. The increase in
dollar amount resulted from the addition of staff needed to develop, maintain
and enhance the OmniGuard family of software products including
OmniGuard/Enterprise Resource Manager and the Defender product line acquired
from AssureNet. The decrease in research and development expenses as a
percentage of total net revenues was due primarily to the increase in total net
revenues. The Company currently anticipates that the dollar amount of research
and development expenses will increase as the Company continues to commit
substantial resources to research and development in future periods.
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 27.9%, or $173,000, from $620,000 for the
three months ended September 30, 1996 to $793,000 for the three months ended
September 30, 1997. For those periods in 1996 and 1997, general and
administrative expenses represented 12.5% and 8.1% of total net revenues,
respectively. The increase in dollar amount is primarily a result of increased
staffing to support organizational growth and the integration of AssureNet. The
decrease in general and administrative expenses as a percentage of total net
revenues was due primarily to the greater increase in total net revenues. The
Company currently anticipates that the dollar amount of general and
administrative expenses will increase as the Company continues to hire
additional staff to support the Company's growth in future periods.
Income from Continuing Operations before Royalties, Interest and Taxes
Income from continuing operations before royalties, interest and taxes increased
$1.68 million from a loss of $268,000 to income of $1.42 million, for the three
months ended September 30, 1996 and 1997, respectively. The increase is
primarily attributable to the overall increase in world-wide revenues offset in
part by the investments required to generate such revenues.
11
<PAGE>
Royalty Income
The Company recorded royalty income of $741,000 for the three months ended
September 30, 1997, a decrease of $53,000 or 6.7%, from $794,000 for the same
three month period during 1996. This royalty is pursuant to the Exclusive
Distributor License Agreement with Raxco that provides for payment by Raxco to
the Company of the greater of (i) a 30% royalty on license and services fees
related to the OpenVMS utility software products owned by the Company and
marketed by Raxco or (ii) $1.5 million for 1997 and $1.0 million for 1998.
For the three month period ended September 30, 1997, Raxco reported to the
Company gross revenues of $3.0 million, which included approximately $2.5
million of OpenVMS utility revenues.
Interest Income
Interest income increased 34.8%, or $118,000, from $339,000 for the three month
period ended September 30, 1996 to $457,000 for the three month period ended
September 30, 1997. The increase is attributable primarily to having the
proceeds from the Company's initial public offering fully invested over the
course of the quarter and a general increase in interest rates.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
basis. The Company's history of net operating losses has made the realization of
its tax credit carryforwards uncertain. Accordingly, the Company placed a
partial valuation allowance against its deferred tax assets.
The Company recorded a tax provision related to its income from continuing and
discontinued operations for the three months ended September 30, 1996 and
September 30, 1997.
Income from Continuing Operations
As a result of the above the Company recorded income from continuing operations
of $1.57 million for the three months ended September 30, 1997, an increase of
213.6% or $1.07 million, from $500,000 for the three months ended September 30,
1996.
Income from Discontinued Operations
Income from discontinued operations consists of the net results of operations
from the divested businesses of the Company, which for financial statement
purposes have been accounted for in accordance with APB No. 30 and classified as
discontinued operations. The Company's income from discontinued operations
decreased from $591,000 for the three month period ended September 30, 1996 to
$0 for the three month period ended September 30, 1997. The Company currently
anticipates no further income from discontinued operations.
12
<PAGE>
Nine Months Ended September 30, 1997 Compared to
Nine Months Ended September 30, 1996
Net Revenues
The Company's net revenues from product licenses increased approximately 107.2%,
or $10.42 million, from $9.73 million for the nine months ended September 30,
1996 to $20.15 million for the nine months ended September 30, 1997. For those
periods in 1996 and 1997, net revenues from product licenses represented 67.8%
and 74.2% of total net revenues, respectively. The increase in product license
revenue is primarily attributable to broader acceptance of the Company's
products, the introduction and general release of new products and the expansion
of available products running on new or additional platforms. The Company has
also benefited since January 7, 1997 from the licensing of the Defender products
acquired through the AssureNet transaction.
The Company's net revenues from services increased approximately 51.2%, or $2.37
million, from $4.63 million for the nine months ended September 30, 1996 to
$7.00 million for the nine months ended September 30, 1997. The increase in
services revenues is primarily attributable to growth in the customer base
purchasing maintenance, as well as the addition of the Defender customers on
maintenance acquired through the AssureNet transaction. For those periods in
1996 and 1997, net revenues from services represented 32.3% and 25.8% of total
net revenues, respectively.
Revenues from North American and International operations were 80% and 20% of
total revenues, respectively, for the nine months ended September 30, 1997 as
compared to 74% and 26%, respectively for the same period in 1996.
Cost of Net Revenues
The Company's cost of net revenues for product licenses increased approximately
354.6%, or $1.23 million, from $346,000 for the nine months ended September 30,
1996 to $1.57 million for the nine months ended September 30, 1997. For those
periods in 1996 and 1997, cost of net revenues for product licenses represented
3.6% and 7.8% of net revenues from product licenses, respectively. The increase
in the cost of net revenues for product licenses is primarily attributable to
the commencement of amortization on the purchased software acquired through the
AssureNet transaction, plus the increased cost of producing the hardware
products associated with the Defender product line. Cost of net revenues for
product licenses, as a percentage of revenues from product licenses, may
fluctuate from period to period due to a change in product mix, a change in the
number or size of transactions recorded in a quarter, or an increase or decrease
in licenses of royalty bearing products.
The Company's cost of net revenues from services increased 39.8%, or $387,000
from $973,000 for the nine months ended September 30, 1996 to $1.36 million for
the nine months ended September 30, 1997. For those periods in 1996 and 1997,
cost of net revenues from services represented 21.0% and 19.4% of net revenues
from services, respectively. The dollar increase in cost of net revenues from
services is directly related to the increase in staff of the Company's customer
support operations necessary to support a larger installed customer base as well
as additional products offered by the Company, including the Defender product
line acquired from AssureNet.
Sales and Marketing
Sales and marketing expenses increased 52.7%, or $4.57 million, from $8.67
million for the nine months ended September 30, 1996 to $13.25 million for the
nine months ended September 30, 1997. For those periods in 1996 and 1997, sales
and marketing expenses represented 60.4% and 48.8% of total net revenues,
respectively. The increase in dollar amount was due to the additional investment
in staff to support the company's growth as well as the addition of costs
associated with the Defender product line. The decrease in sales and marketing
expenses as a percentage of total net revenues was due primarily to the greater
increase in total net revenues. The Company currently anticipates that the
dollar amount of sales and marketing expenses will increase as the Company
continues to hire additional staff to support the Company's growth in future
periods.
13
<PAGE>
Research and Development
Research and development expenses increased 67.6%, or $2.37 million, from $3.51
million for the nine months ended September 30, 1996 to $5.88 million for the
nine months ended September 30, 1997. For those periods in 1996 and 1997,
research and development expenses represented 24.5% and 21.7% of total net
revenues, respectively. The increase in dollar amount resulted from the addition
of staff needed to develop, maintain and enhance the OmniGuard family of
software products including OmniGuard/Enterprise Resource Manager, in addition
to the costs associated with the Defender product line acquired from AssureNet.
The decrease in research and development expenses as a percentage of total net
revenues was due primarily to the greater increase in total net revenues. The
Company currently anticipates that the dollar amount of research and development
expenses will increase as the Company continues to commit substantial resources
to research and development in future periods.
General and Administrative
General and administrative expenses increased 37.1%, or $658,000, from $1.77
million for the nine months ended September 30, 1996 to $2.43 million for the
nine months ended September 30, 1997. For those periods in 1996 and 1997 general
and administrative expenses represented 12.3% and 9.0% of total net revenues,
respectively. The increase in dollar amount is primarily a result of increased
staffing to support organizational growth and the integration of AssureNet. The
decrease in general and administrative expenses as a percentage of total net
revenues was due primarily to the greater increase in total net revenues. The
Company currently anticipates that the dollar amount of general and
administrative expenses will increase as the Company continues to hire
additional staff to support the Company's growth in future periods.
Write-off of purchased in-process research and development
The Company incurred a one-time charge associated with the acquisition of
AssureNet of approximately $27.63 million for the write-off of purchased
in-process research and development that had not reached technological
feasibility and had no probable future use.
Income from Continuing Operations before Royalties, Interest and Taxes
As a result of the approximately $27.63 million write-off of purchased
in-process research and development, the Company recorded a loss from continuing
operations before royalties, interest and taxes of $24.97 million for the nine
months ended September 30, 1997 compared to a loss of $914,000 for the nine
months ended September 30, 1996. Excluding the one-time charge, income from
continuing operations before royalties, interest and taxes increased $3.58
million, or 391.7%, from a loss of $914,000 to income of $2.67 million, for the
nine months ended September 30,1996 and 1997, respectively. The increase is
primarily attributable to the overall increase in world-wide revenues offset in
part by the investments required to generate such revenues.
Royalty Income
The Company recorded royalty income of $2.27 million for the nine months ended
September 30, 1997, a decline of $131,000 or 5.5%, from $2.40 million for the
same period during 1996. This royalty is pursuant to the Exclusive Distributor
License Agreement with Raxco.
For the nine month period ended September 30, 1997, Raxco reported to the
Company gross revenues of $8.50 million, which included approximately $7.55
million of OpenVMS utility revenues.
14
<PAGE>
Interest Income
Interest income increased 89.5%, or $598,000, from $668,000 for the nine month
period ended September 30, 1996 to $1.27 million for the nine month period ended
September 30, 1997. The increase is attributable primarily to having the
proceeds from the Company's initial public offering fully invested over the
course of the nine month period and a general increase in interest rates.
Income Taxes
The Company accounts for income taxes under SFAS 109. The Company's history of
net operating losses has made the realization of its tax credit carryforwards
uncertain. Accordingly, the Company placed a partial valuation allowance against
its deferred tax assets.
The Company recorded a tax provision related to its income from continuing and
discontinued operations for the nine months ended September 30, 1996 and
September 30, 1997.
Income (Loss) from Continuing Operations
As a result of the approximately $27.63 million write-off of purchased
in-process research and development, the Company recorded a loss from continuing
operations of $23.91 million for the nine months ended September 30, 1997
compared to income of $1.73 million for the nine months ended September 30,
1996. Excluding the write-off, income from continuing operations increased $1.99
million, or 115.5%, from $1.73 million to $3.72 million, for the nine months
ended September 30, 1996 and 1997, respectively.
Income from Discontinued Operations
Income from discontinued operations consists of the net results of operations
from the divested businesses of the Company, which for financial statement
purposes have been accounted for in accordance with APB No. 30 and classified as
discontinued operations. The Company's income from discontinued operations
decreased 88.1% , or $1.89 million, from $2.14 million for the nine month period
ended September 30, 1996 to $255,000 for the nine month period ended September
30, 1997. For those periods in 1996 and 1997, income from discontinued
operations represented 14.9% and .9% of total net revenues, respectively. The
Company currently anticipates no further income from discontinued operations.
Financial Condition- Liquidity and Capital Resources
The Company's overall cash and cash equivalents were $14.70 million at September
30, 1997, a decrease of approximately $2.56 million from $17.26 million at
December 31, 1996. During the nine month period ended September 30, 1997, the
Company financed its operations primarily through cash reserves and available
working capital. For the nine month period ended September 30, 1996, the Company
financed its operations primarily through cash flows generated from discontinued
operations and available working capital. The Company's continuing operating
activities generated cash of $800,000 and used $1.04 million for the nine month
periods ended September 30, 1996 and 1997, respectively. During the nine months
ended September 30, 1997, the Company's use of cash from continuing operating
activities was primarily a result of the payment of transaction costs related to
the acquisition of AssureNet, the payment of severance and accrued expenses
assumed through the AssureNet acquisition and the payment of accrued bonuses,
value-added tax (VAT), commissions and other accrued expenses associated with
the Company's performance in the previous calendar quarters.
The Company made capital expenditures of approximately $733,000 and $668,000 for
the nine month periods ended September 30, 1996 and 1997, respectively. These
purchases have generally consisted of computer workstations, networking
equipment, office furniture and equipment. The Company had no firm commitments
for capital expenditures as of September 30, 1997.
15
<PAGE>
During the nine month period ended September 30, 1997, the Company's cash
position was also affected by the following: 1) the Company had cash outlays of
approximately $2.27 million for transaction costs associated with the
acquisition of AssureNet; 2) the Company made payments totaling $2.79 million in
severance and assumed liabilities from the AssureNet acquisition; 3) the Company
paid-off the $1.23 million balance for the line of credit carried by AssureNet,
which included draws of $490,000; 4) the Company received proceeds of $1.82
million from the issuance of common stock; 5) the Company received payments
totaling $645,000 on the note receivable related to the sale of the Company's
storage management products in 1994; 6) the Company received $47,000 in proceeds
from the sale of leasehold improvements; and 7) the Company received $448,000
from the maturity of short-term investments.
The Company believes that the net proceeds from the initial public offering,
cash generated from operations, together with existing sources of liquidity,
will be sufficient to meet its capital expenditures, working capital and other
cash requirements both for the next twelve months and for the foreseeable
future.
Certain Factors Affecting Future Performance
Although the Company has experienced significant growth in revenues from the
OmniGuard family of software products, the Company does not believe prior growth
rates are necessarily indicative of future operating results. In addition, the
Company expects increased competition and intends to invest significantly in its
product development. As a result, there can be no assurance that the Company
will remain profitable on a quarterly or annual basis. Due to the Company's
limited operating history with respect to the OmniGuard family of software
products, predictions as to future operating results are difficult. Future
operating results may fluctuate due to factors such as: demand for the Company's
products; the size and timing of customer orders; the integration of AssureNet
operations and products into the Company's operations and product offerings; the
introduction of new products and product enhancements by the Company or its
competitors; the budgeting cycle of customers; changes in the proportion of
revenues attributable to license fees and consulting services; changes in the
level of operating expenses; and competitive conditions in the industry.
The market for the Company's software products is highly competitive, and the
Company expects that it will face increasing price pressures from its current
competitors and new market entrants. Any material reduction in the price of the
Company's software products would negatively affect gross margins and could have
a material adverse effect on the Company's financial condition and results of
operations.
The sales of the Company's security products generally involve significant
testing by, and education of, prospective customers as well as a commitment of
resources by both parties. For these and other reasons, the sales cycle
associated with the sales of the Company's security products is typically long
and subject to a number of significant risks over which the Company has little
or no control and, as a result, the Company may expend significant resources
pursuing potential sales that will not be consummated.
The Company anticipates that international sales will continue to represent a
significant percentage of revenue in the foreseeable future. International sales
are subject to a number of risks, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, political and economic
instability in foreign markets, restrictions on exporting or importing certain
technologies, difficulty in the staffing, management and integration of foreign
operations, longer payment cycles, greater difficulty in accounts receivable
collection, currency fluctuations and potentially adverse tax consequences. The
uncertainty of the monetary exchange values has caused, and may in the future,
contribute to fluctuations in the Company's financial condition and results of
operations. Although the Company's results of operations have not been
materially adversely affected to date as a result of currency fluctuations, the
long-term impact of currency fluctuations, including any possible effect on the
business outlook in other developing countries, cannot be predicted.
16
<PAGE>
The foregoing Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements which involve risk and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed above and in
the "Risk Factors" set forth in Amendment No. 2 to the Company's Registration
Statement on Form S-4 (File No. 333-20207), as filed with the SEC on March 6,
1997.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In August 1997, all claims against the Company and Raxco contained in a
lawsuit filed by Advanced Systems Concepts Inc. ("ASCI") in the U.S. District
Court for the District of New Jersey in November 1995 were dismissed with
prejudice pursuant to a settlement agreement among the Company, Raxco and ASCI.
The settlement of claims against Raxco and the Company did not affect ASCI's
claims in the lawsuit against the other parties defendant. The settlement had no
financial effect on the Company.
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K.
<S> <C>
Exhibit Number Exhibit Description
3.1* Amended and Restated Certificate of Incorporation of the Company.
3.2+ Amended and Restated Bylaws of the Company.
4.1* Specimen stock certificate for shares of Common Stock of the Company.
10.1* The Company's 1991 Amended and Restated Stock Option Plan.
10.2*** The Company's 1996 Amended and Restated Stock Option Plan.
10.3** The Company's 1996 Amended and Restated Directors' Stock Option Plan.
10.7* Registration Rights Agreement dated as of December 10, 1992, by and
among the Company and the parties thereto.
10.7.1** Amendment No. 1 to Registration Rights Agreement dated as of
February 26, 1997, by and among the Company and the parties thereto.
10.8* Settlement Agreement effective as of September 13, 1991, by and
among the Company and the parties thereto.
10.9* Form of Indemnification Agreement between the Company and its
directors and executive officers.
10.10* Agreement of Merger dated as of November 17, 1994, among the
Company, Datamedia Corporation and Raxco Acquisition Corporation.
10.11* Lease Agreement dated as of September 6, 1995, by and between
Research Grove Associates and the Company.
10.12* Lease of Real Property dated as of March 7, 1995, by and between
TNK Associates and the Company.
10.13* Deed of Lease dated as of March 14, 1995 by and between Bill
Harris Music, Inc. and the Company.
10.14* Agreement dated as of December 30, 1987, by and between the
Company and William R. Davy.
10.15* Agreement dated as of September 20, 1990, by and between the
Company and William R. Davy.
10.16* Agreement dated as of November 7, 1991, by and between the
Company and William R. Davy.
10.17++ Memorandum of Understanding regarding certain compensation and severance
matters relating to Richard A. Lefebvre, dated July 22, 1997.
10.18* Severance Arrangement for John C. Becker, dated October 16, 1992.
10.19* Severance Arrangement for Brett Jackson, dated October 16, 1992.
10.20* The Company's Officer/Vice President Severance Policy.
10.21* Exclusive Distributor License Agreement, effective as of December 31,
1995, between the Company and Raxco Software, Inc.
10.22* Administrative Services Agreement, effective
as of December 31, 1995, between the Company
and Raxco Software, Inc.
10.24* Agreement and Plan of Separation, effective
as of December 31, 1995, between the Company
and Raxco Software, Inc.
18
<PAGE>
10.29** Amended Agreement and Plan of Merger among the Company,
Axquisition, Inc., and AssureNet Pathways,
Inc., dated as of January 6, 1997 and
amended February 26, 1997.
11.1 Computation of Net Income Per Share for the
nine months ended September 30, 1996 and
1997.
21.1* Subsidiaries of the Registrant.
27 Financial Data Schedule
There were no reports on Form 8-K filed by the Company during the three month
period ended September 30, 1997.
- --------------------------------------------------------------------------------------------
* Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (File
No. 333-01368) and incorporated herein by reference.
** Previously filed as an exhibit to the Company's Registration Statement on Form S-4 (File
No. 333-20207) and incorporated herein by reference.
*** Previously filed as an exhibit to the Company's proxy
statement dated April 25, 1997 regarding the Company's 1997
Annual Meeting of Stockholders.
+ Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
++ Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
</TABLE>
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AXENT TECHNOLOGIES, INC.
Date: November 11, 1997 By: /s/ Robert B. Edwards, Jr.
--------------------------
Robert B. Edwards, Jr.
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
<PAGE>
EXHIBIT 11.1
<TABLE>
<CAPTION>
AXENT TECHNOLOGIES, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
For the Three Months For the Nine months
Ended September 30, Ended September 30,
--------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
-------------- --------------- ---------------- --------------
Income (loss) from continuing operations $ 1,568,000 $ 500,000 $ (23,911,000) $ 1,727,000
Income from discontinued operations --- $ 591,000 $ 255,000 $ 2,144,000
-------------- --------------- ---------------- --------------
Net income $ 1,568,000 $ 1,091,000 $ (23,656,000) $ 3,871,000
============== =============== ================ ==============
Weighted average common shares
outstanding 13,365,785 10,886,465 11,809,955 10,301,807
Net income (loss) per common share and
common share equivalents:
Continuing operations $ 0.12 $ 0.05 $ (2.02) $ 0.17
Discontinued operations --- $ 0.05 $ 0.02 $ 0.21
-------------- ---------------- ----------------- -------------
$ 0.12 $ 0.10 $ (2.00) $ 0.38
============== ================ ================= ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
AXENT TECHNOLOGIES, INC.
FINANCIAL DATA SCHEDULE
The schedule contains summary financial information extracted from the condensed
consolidated balance sheet and statement of operations of AXENT Technologies,
Inc. as of and for the three months ended September 30, 1997 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,702,000
<SECURITIES> 18,181,000
<RECEIVABLES> 9,237,000
<ALLOWANCES> 701,000
<INVENTORY> 0
<CURRENT-ASSETS> 43,561,000
<PP&E> 5,302,000
<DEPRECIATION> 3,224,000
<TOTAL-ASSETS> 47,500,000
<CURRENT-LIABILITIES> 11,990,000
<BONDS> 0
0
0
<COMMON> 244,000
<OTHER-SE> 35,266,000
<TOTAL-LIABILITY-AND-EQUITY> 47,500,000
<SALES> 0
<TOTAL-REVENUES> 9,730,000
<CGS> 0
<TOTAL-COSTS> 1,013,000
<OTHER-EXPENSES> 7,311,000
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,415,000
<INCOME-TAX> 1,045,000
<INCOME-CONTINUING> 1,568,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,568,000
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
