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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
_X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the transition period from ______ to ______.
Commission File Number: 0-28100
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AXENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 87-0393420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 Research Boulevard
Suite 200
Rockville, Maryland 20850
(Address of principal executive offices)
(301) 258-5043
(Registrant's telephone number including area code)
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Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes___X___ No______
As of August 11, 1998, there were 24,806,993 shares outstanding of the
Registrant's Common Stock, par value $.02 per share.
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<TABLE>
<CAPTION>
AXENT TECHNOLOGIES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets as of 4
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations 5
for the three and six months ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows for the 6
six months ended June 30, 1998 and 1997
Condensed Consolidated Statements of Comprehensive 7
Income (Loss) for the three and six months ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits 18
SIGNATURES 19
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
The financial statements set forth below at June 30, 1998 and for the three and
six month periods ended June 30, 1998 and 1997 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, 1997, which are included in the Company's Annual Report on
Form 10-K as filed with the SEC on March 31, 1998.
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<TABLE>
<CAPTION>
AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
June 30,
1998 December 31,
(unaudited) 1997
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ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 51,170 $ 51,618
Marketable securities 43,821 40,882
Accounts receivable, net 22,023 18,223
Other current assets 5,861 4,337
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Total current assets 122,875 115,060
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Property and equipment, net 5,815 4,263
Other assets 8,738 5,458
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Total assets $ 137,428 $ 124,781
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 17,095 $ 13,120
Deferred revenue 7,830 7,396
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Total liabilities 24,925 20,516
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Stockholders' equity:
Common stock, par value $0.02: 24,709,105 and 23,268,657
shares issued and outstanding, respectively 495 466
Additional paid-in capital 151,057 139,612
Accumulated deficit (38,692) (33,389)
Accumulated other comprehensive income (357) (85)
Unearned compensation -- (2,339)
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Total stockholders' equity 112,503 104,265
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Total liabilities and stockholders' equity $ 137,428 $ 124,781
================ =================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------- ------------------------------
1998 1997 1998 1997
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
Net revenues:
Product licenses $ 17,392 $ 12,635 $ 33,675 $ 23,513
Services 5,148 3,275 9,196 6,192
------------ ----------- ------------ -------------
Total net revenues 22,540 15,910 42,871 29,705
Cost of net revenues 2,292 1,533 4,410 2,823
------------ ----------- ------------ -------------
Gross profit 20,248 14,377 38,461 26,882
Operating expenses:
Sales and marketing 9,597 7,563 18,738 14,695
Research and development 4,360 2,924 8,327 5,760
General and administrative 1,430 1,834 2,912 3,515
Non-recurring charges -- 6,522 17,422 34,154
------------ ----------- ------------ -------------
Total operating expenses 15,387 18,843 47,399 58,124
------------ ----------- ------------ -------------
Income (loss) from continuing operations before royalties,
interest and taxes 4,861 (4,466) (8,938) (31,242)
Royalty income 558 868 1,127 1,526
Interest income 1,022 1,165 2,085 2,244
Gain on sale of marketable securities -- -- 389 --
Income tax (provision) benefit (2,283) 728 (178) (234)
------------ ----------- ------------ -------------
Income (loss) from continuing operations 4,158 (1,705) (5,515) (27,706)
Income from discontinued operations -- 82 -- 255
------------ ----------- ------------ -------------
Net income (loss) $ 4,158 $ (1,623) $ (5,515) $(27,451)
============ =========== ============ =============
Net income (loss) per common share (basic):
Continuing operations $ 0.17 $ (0.08) $ (0.23) $ (1.24)
Discontinued operations -- 0.01 -- 0.01
------------ ----------- ------------ -------------
Net income (loss) per common share (basic) $ 0.17 $ (0.07) $ (0.23) $ (1.23)
============ =========== ============ =============
Number of shares used in computing net income (loss) per
common share outstanding (basic) 24,492 22,360 24,076 22,309
Net income (loss) per common share (diluted):
Continuing operations $ 0.16 $ (0.08) $ (0.23) $ (1.24)
Discontinued operations -- 0.01 -- 0.01
------------ ----------- ----------- -------------
Net income (loss) per common share (diluted) $ 0.16 $ (0.07) $ (0.23) $ (1.23)
============ =========== ============ =============
Number of shares used in computing net income (loss) per
common share outstanding (diluted) 26,484 22,360 24,076 22,309
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
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AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------------------------
1998 1997
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CASH INFLOWS (OUTFLOWS)
<S> <C> <C>
Operating activities:
Net loss from continuing operations $ (5,515) $ (27,706)
Non-cash items:
Depreciation and amortization 1,448 1,124
Non-recurring merger costs 17,422 27,632
Gain on sale of marketable securities (389) --
Income tax benefit -- (1,199)
Payments for corporate acquisition (8,830) (2,180)
Change in assets and liabilities (7,070) (4,183)
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Net cash used by continuing operations (2,934) (6,512)
Net cash used by discontinued operations -- (685)
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Net cash used by operating activities (2,934) (7,197)
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Investing activities:
Capital expenditures (3,402) (1,165)
Proceeds from the sale of marketable securities 389 --
Purchases of short-term investments (34,442) (3,319)
Maturity of short-term investments 31,503 85
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Net cash used by continuing operations (5,952) (4,399)
Net cash provided by discontinued operations -- 430
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Net cash used by investing activities (5,952) (3,969)
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Financing activities:
Proceeds from issuance of common stock 8,471 1,404
Proceeds from line of credit draws -- 490
Principal payments on line of credit -- (1,225)
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Net cash provided by continuing operations from financing activities 8,471 669
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Effect of exchange rate changes on cash (33) (94)
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Net decrease in cash and cash equivalents (448) (10,591)
Cash and cash equivalents, beginning of period 51,618 54,828
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Cash and cash equivalents, end of period $ 51,170 $ 44,237
================ ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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<TABLE>
<CAPTION>
AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
(unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $ 4,158 $ (1,623) $ (5,515) $ (27,451)
Other comprehensive income (loss)
Currency translation effects 8 (51) (33) (94)
-------------- ------------- ------------- ---------------
Comprehensive income (loss) $ 4,166 $ (1,674) $ (5,548) $ (27,545)
============== ============= ============= ===============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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AXENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Basis of Presentation
AXENT Technologies, Inc. and its wholly owned subsidiaries (collectively, the
"Company" or "AXENT") develop, market, license and support enterprise-wide
information security solutions for client/server computing environments and
provide related services.
The Company's condensed consolidated financial statements have been restated to
reflect consummation of the acquisition of Raptor Systems, Inc. ("Raptor"),
which was accounted for as a pooling-of-interests and consummated on February 5,
1998, in accordance with APB No. 16. AXENT's historical financial statements and
related selected and financial information have been restated to combine earlier
financial statements of AXENT and Raptor.
The accompanying unaudited condensed consolidated financial statements reflect
all the adjustments, consisting of normal recurring 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 and six month periods
ended June 30, 1998 may not necessarily be indicative of the results for the
entire year. The December 31, 1997 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, 1997, which
are included in the Company's Form 10-K filed with the SEC on March 31, 1998.
Business Combinations
On February 5, 1998, the Company consummated its merger with Raptor in which it
acquired 100% of the outstanding stock of Raptor for 10,952,380 shares of AXENT
common stock and exchanged stock options covering a total of 1,725,988 shares of
AXENT common stock. The Company incurred approximately $17.42 million in
non-recurring transaction and other related costs in relation to the merger. The
business combination was accounted for by the pooling of interests method of
accounting, and accordingly, the assets, liabilities, and stockholders' equity
of Raptor were combined with the Company's respective accounts at recorded
values. Prior statements have been restated to give effect to the merger.
The following is a reconciliation of revenues and net loss previously reported
by the Company for the three and six month periods ended June 30, 1997, with the
combined amounts currently presented in the financial statements for those two
periods:
<TABLE>
<CAPTION>
(in thousands) For the Three Months Ended For the Six Months Ended
June 30, 1997 June 30, 1997
--------------------------------------------- ------------------------------------------------
AXENT Raptor Combined AXENT Raptor Combined
----------- ------------ -------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $9,261 $ 6,649 $15,910 $ 17,416 $ 12,289 $ 29,705
Net income (loss) 1,461 (3,084) (1,623) (25,224) (2,227) (27,451)
</TABLE>
During 1997, AXENT acquired AssureNet Pathways, Inc ("AssureNet") by issuing
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.
AssureNet's operations have been included in the Company's condensed
consolidated financial statements since January 7, 1997, and the acquisition was
accounted for using the purchase method of accounting. The total purchase price
of $32 million was allocated to the net assets acquired based on their estimated
fair market value, which included approximately $2.9 million of tangible assets;
$1.5 million in purchased software which is being amortized over three years on
a straight-line basis; and approximately $27.6 million of in-process research
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and development based on the products' net present value using a discounted cash
flow model. The in-process research and development was expensed at the date of
the acquisition. After the acquisition, AXENT ceased to actively market the
majority of AssureNet hardware products and has focused its efforts on marketing
the Defender software products and related hardware tokens.
Net Income Per Common Share
During 1997, the Company adopted Financial Accounting Standards Board Statement
No. 128, "Earnings per Share," ("SFAS 128") to calculate net income per share.
Basic earnings per common share have been computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share have been computed by dividing net income by the weighted
average number of common shares outstanding plus an assumed increase in common
shares outstanding for dilutive securities. Potentially dilutive securities
consist of options and warrants to acquire common stock for a specified price
and their dilutive effect is measured using the treasury method. These
potentially dilutive securities have been excluded from the diluted earnings per
share calculation for each period presented in which they were anti-dilutive.
Earnings per share for all periods presented have been restated to conform to
SFAS 128.
The following table reconciles the weighted average number of common shares
during each period for basic earnings per share with the comparable amount for
diluted earnings per share.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months
(amounts in thousands) June 30 Ended June 30,
- ---------------------- ----------------------------- -----------------------------
1998 1997 1998 1997
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding - (basic) 24,492 22,360 24,076 22,309
Stock options and warrants 1,992 -- -- --
------------- ----------- ------------ ------------
Weighted average shares outstanding - (diluted) 26,484 22,360 24,076 22,309
============= =========== ============ ============
</TABLE>
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.
Stock Option Plan
The Company has adopted certain fixed stock option plans. AXENT's Amended and
Restated 1996 Stock Option Plan (the "Employee Plan"), together with a
predecessor stock option plan, provides for a total of 3,476,714 shares of
common stock to be issued. Of the authorized shares provided in the Employee
Plan and the predecessor plan, options covering an aggregate of 0 and 522,600
shares were issued within the three and six month periods ended June 30,1998,
respectively.
The 1996 Directors' Stock Option Plan (the "Director Plan") provides for a total
of 200,000 shares of common stock to be issued. Of the authorized shares
provided in the Director Plan, options covering an aggregate of 17,000 and
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44,000 shares were issued within the three and six month periods ended June 30,
1998 respectively.
In February 1998, the Company adopted the 1998 Incentive Stock Plan ("98 Plan")
and reserved 1,800,000 shares for issuance thereunder. Of the authorized shares
provided in the 98 Plan, options covering an aggregate of 165,300 and 897,700
were issued within the three and six month periods ended June 30, 1998,
respectively.
Adoption of Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which is effective for fiscal years beginning after December 15, 1997. SFAS 130
requires additional disclosures with respect to certain changes in assets and
liabilities that previously were not required to be reported as results of
operations for the period. Effective for the fiscal year ending December 31,
1998, the Company has adopted SFAS 130.
The American Institute of Certified Public Accountants has issued Statement of
Position 97-2 ("SOP 97-2"), "Software Revenue Recognition". SOP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997, and provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. The Company adopted
SOP 97-2 at the beginning of January 1, 1998 and the Company does not expext the
adoption of this standard to have a material impact on the Company's financial
position or results of operations.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), which is effective for 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 this standard to
have a material impact on the Company's financial position or results of
operations. .
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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 the Company's Prospectus/Joint Proxy Statement dated
January 2, 1998, as filed with the SEC on January 5, 1998.
Three Months Ended June 30, 1998 Compared to
Three Months Ended June 30, 1997
Net Revenues
The Company's net revenues from product licenses increased approximately 37.6%,
or $4.75 million, from $12.64 million for the three months ended June 30, 1997
to $17.39 million for the three months ended June 30, 1998. For those periods in
1997 and 1998, net revenues from product licenses represented 79.4% and 77.2% 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 or versions and
the expansion of available products running on new or additional platforms.
The Company's net revenues from services increased approximately 57.2%, or $1.87
million, from $3.28 million for the three months ended June 30, 1997 to $5.15
million for the three months ended June 30, 1998. The increase in services
revenues is primarily attributable to growth in the customer base purchasing
maintenance and increased implementation consulting services. For those periods
in 1997 and 1998, net revenues from services represented 20.6% and 22.8% of
total net revenues, respectively.
Revenues from North American and International operations were 73% and 27% of
total revenues, respectively, for the three months ended June 30, 1998 as
compared to 81% and 19%, respectively, for the same period in 1997.
Cost of Net Revenues
The Company's cost of net revenues includes cost of media, product packaging,
documentation and other production costs, amortization of purchased software
costs, product royalties, and the direct and indirect costs of providing
technical support, training and consulting services to the Company's customers.
Cost of net revenues increased approximately 49.5%, or $759,000, from $1.53
million for the three months ended June 30, 1997 to $2.29 million for the three
months ended June 30, 1998. For those periods in 1997 and 1998, cost of net
revenues represented 9.6% and 10.2% of net revenues, respectively. The increase
in the cost of net revenues is primarily attributable to the increase in staff
of the Company's customer support and consulting services operations necessary
to support a larger installed customer base as well as additional products
offered by the Company. Cost of net revenues, as a percentage of revenues, 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, integration of acquired
operations or products, 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 26.9%, or $2.04 million, from $7.56 million for the three
months ended June 30, 1997 to $9.60 million for the three months ended June 30,
1998. For those periods in 1997 and 1998, sales and marketing expenses
represented 47.5% and 42.6% of total net revenues, respectively. The increase in
dollar amount was due to the additional sales staff to support the Company's
growth. 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,
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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 49.1%, or $1.44 million, from $2.92 million for the three months ended
June 30, 1997 to $4.36 million for the three months ended June 30, 1998. For
those periods in 1997 and 1998, research and development expenses represented
18.4% and 19.3% of total net revenues, respectively. The increase in dollar
amount resulted from the addition of staff needed to develop, maintain and
enhance the Company's software products in an effort to keep pace in a dynamic
market where security needs and demands are constantly changing. 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 decreased 22.0%, or $404,000, from $1.83 million for the
three months ended June 30, 1997 to $1.43 million for the three months ended
June 30, 1998. For those periods in 1997 and 1998, general and administrative
expenses represented 11.5% and 6.3% of total net revenues, respectively. The
decrease is primarily a result of the synergies gained from the elimination of
overlapping administration functions associated with the Raptor acquisition. 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.
Non-Recurring Charges
In the three months ended June 30 1997, the Company incurred a one-time charge
of $6.52 million, $4.24 million net of taxes, for the write-off of purchased
in-process technology associated with the acquisition of a perpetual license and
its underlying products from Open Market, Inc.
Income (Loss) from Continuing Operations before Royalties, Interest and Taxes
Income from continuing operations before royalties, interest and taxes increased
$9.33 million from a loss of $4.47 million for the three months ended June 30,
1997 to a profit of $4.86 million for the three months ended June 30, 1998. The
increase is primarily attributable to the decrease in non-recurring charges as
well as the overall increase in world-wide revenues offset in part by the
investments required to generate such revenues.
Royalty Income
Royalty income consists of amounts payable to AXENT pursuant to the Exclusive
Distributor License Agreement with Raxco related to the OpenVMS utility software
products owned by AXENT. Royalty income declined 35.7%, or $310,000, from
$868,000 for the three months ended June 30, 1997 to $558,000 for the three
month period ended June 30, 1998. This decline is primarily attributable to
declining revenues recognized by Raxco for these products as a result of erosion
of market share that the OpenVMS platform has experienced world-wide. AXENT
expects that the amount of royalty income will continue to decline in future
periods. For the three month period ended June 30, 1998, Raxco reported to the
Company approximately $1.86 million of Open VMS utility revenues.
Interest Income
Interest income decreased 12.3%, or $143,000, from $1.17 million for the three
month period ended June 30, 1997 to $1.02 million for the three month period
ended June 30, 1998. Interest income may fluctuate from period to period due to
changes in investment mix, varying cash balances and fluctuations 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 carrying amounts of
existing assets and liabilities for financial statement purposes and their
respective tax basis. The Company's subsidiaries have a history of net operating
losses making the realization of its tax credit carryforwards uncertain.
Accordingly, the Company placed a partial valuation allowance against the
deferred tax assets of its subsidiaries.
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The Company recorded a tax benefit related to its taxable loss from continuing
and discontinued operations for the three months ended June 30, 1997. The
Company recorded a tax provision related to its taxable income from continuing
operations for the three months ended June 30, 1998. The effective rate for the
three months ended June 30, 1998 was approximately 35%.
Income (Loss) from Continuing Operations
As a result of the above, the Company recorded a loss from continuing operations
of $1.71 million for the three months ended June 30, 1997 compared to a profit
of $4.16 million for the three months ended June 30, 1998.
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 $82,000 for the three month period ended June 30, 1997 to $0 for
the three month period ended June 30, 1998. The Company currently anticipates no
further income from discontinued operations.
Six Months Ended June 30, 1998 Compared to
Six Months Ended June 30, 1997
Net Revenues
The Company's net revenues from product licenses increased approximately 43.2%,
or $10.16 million, from $23.51 million for the six months ended June 30, 1997 to
$33.68 million for the six months ended June 30, 1998. For those periods in 1997
and 1998, net revenues from product licenses represented 79.2% and 78.5% 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 or versions and
the expansion of available products running on new or additional platforms.
The Company's net revenues from services increased approximately 48.5%, or $3.01
million, from $6.19 million for the six months ended June 30, 1997 to $9.2
million for the six months ended June 30, 1998. The increase in services
revenues is primarily attributable to growth in the customer base purchasing
maintenance and increased implementation consulting services. For those periods
in 1997 and 1998, net revenues from services represented 20.8% and 21.5% of
total net revenues, respectively.
Revenues from North American and International operations were 77% and 23% of
total revenues, respectively, for the six months ended June 30, 1998 as compared
to 78% and 22%, respectively, for the same period in 1997.
Cost of Net Revenues
The Company's cost of net revenues includes cost of media, product packaging,
documentation and other production costs, amortization of purchased software
costs, product royalties, and the direct and indirect costs of providing
technical support, training and consulting services to the Company's customers.
Cost of net revenues increased approximately 56.2%, or $1.59 million, from $2.82
million for the six months ended June 30, 1997 to $4.41 million for the six
months ended June 30, 1998. For those periods in 1997 and 1998, cost of net
revenues represented 9.5% and 10.3% of net revenues, respectively. The increase
in the cost of net revenues is primarily attributable to the increase in staff
of the Company's customer support and consulting services operations necessary
to support a larger installed customer base as well as additional products
offered by the Company. Cost of net revenues, as a percentage of revenues, 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, integration of acquired
operations or products, 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 27.5%, or $4.04 million, from $14.7 million for the six
months ended June 30, 1997 to $18.74 million for the six months ended June 30,
1998. For those periods in 1997 and 1998, sales and marketing expenses
represented 49.5% and 43.7% of total net revenues, respectively. The increase in
dollar amount was due to the additional sales staff to support the company's
growth. The decrease in sales and marketing expenses as a percentage of total
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<PAGE>
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 44.6%, or $2.57 million, from $5.76 million for the six months ended
June 30, 1997 to $8.33 million for the six months ended June 30, 1998. For those
periods in 1997 and 1998, research and development expenses represented 19.4%
and 19.4% of total net revenues, respectively. The increase in dollar amount
resulted from the addition of staff needed to develop, maintain and enhance the
Company's software products in an effort to keep pace in a dynamic market where
security needs and demands are constantly changing. 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 decreased 17.2%, or $603,000, from $3.52 million for the
six months ended June 30, 1997 to $2.91 million for the six months ended June
30, 1998. For those periods in 1997 and 1998, general and administrative
expenses represented 11.8% and 6.8% of total net revenues, respectively. The
decrease is primarily a result of the synergies gained from the elimination of
overlapping administration functions associated with the Raptor acquisition. 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.
Non-Recurring Charges
In the six months ended June 30, 1997, the Company incurred a one-time charge
associated with the acquisition of AssureNet of approximately $27.63 million to
expense the purchased in-process research and development that had not reached
technological feasibility and had no probable future uses, as well as a one-time
charge of $6.52 million, $4.24 million net of taxes, for the write-off of
purchased in-process technology associated with the acquisition of a perpetual
license and its underlying products from Open Market, Inc. In the six months
ended June 30, 1998, the Company incurred a one-time charge of $17.42 million,
$13.3 million net of taxes, for severance, investment banking, legal, and
accounting fees, and other costs related to the acquisition of Raptor.
Income (Loss) from Continuing Operations before Royalties, Interest and Taxes
Loss from continuing operations before royalties, interest and taxes decreased
$22.3 million from a loss of $31.24 million for the six months ended June 30,
1997 to a loss of $8.94 million for the six months ended June 30, 1998. The
decrease is primarily attributable to the decrease in non-recurring charges as
well as the overall increase in world-wide revenues offset in part by the
investments required to generate such revenues.
Royalty Income
Royalty income consists of amounts payable to AXENT pursuant to the Exclusive
Distributor License Agreement with Raxco related to the OpenVMS utility software
products owned by AXENT. Royalty income declined 26.1%, or $399,000, from $1.53
million for the six months ended June 30, 1997 to $1.13 million for the six
months ended June 30, 1998. This decline is primarily attributable to declining
revenues recognized by Raxco for these products as a result of erosion of market
share that the OpenVMS platform has experienced world-wide. AXENT expects that
the amount of royalty income will continue to decline in future periods. For the
six month period ended June 30, 1998, Raxco reported to the Company
approximately $3.76 million of Open VMS utility revenues.
Interest Income
Interest income decreased 7.1%, or $159,000, from $2.24 million for the six
month period ended June 30, 1997 to $2.09 million for the six month period ended
June 30, 1998. Interest income may fluctuate from period to period due to
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<PAGE>
changes in investment mix, varying cash balances and fluctuations 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 carrying amounts of
existing assets and liabilities for financial statement purposes and their
respective tax basis. The Company's subsidiaries have a history of net operating
losses making the realization of its tax credit carryforwards uncertain.
Accordingly, the Company placed a partial valuation allowance against the
deferred tax assets of its subsidiaries.
The Company recorded a tax provision related to its taxable loss from continuing
and discontinued operations for the six months ended June 30, 1997 and 1998. The
effective rate for the six months ended June 30, 1998 was approximately 3%.
Income (Loss) from Continuing Operations
As a result of the above, the Company recorded a loss from continuing operations
of $27.71 million for the six months ended June 30, 1997, which was $22.19
million greater than the loss of $5.52 million recorded for the six months ended
June 30, 1998.
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 $255,000 for the six month period ended June 30, 1997 to $0 for
the six month period ended June 30, 1998. 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 $51.17 million at June 30,
1998, a decrease of approximately $448,000 from $51.62 million at December 31,
1997. During the six month periods ended June 30, 1997 and 1998, respectively,
the Company financed its operations primarily through cash reserves and
available working capital. The Company's continuing operating activities used
cash of $6.51 million and $2.93 million for the six month periods ended June 30,
1997 and 1998, respectively. During the six months ended June 30, 1998, the
Company's use of cash from continuing operating activities was primarily a
result of the payment of transaction related costs associated with the
acquisition of Raptor.
The Company made capital expenditures of approximately $1.17 million and $3.4
million for the six month periods ended June 30, 1997 and 1998, 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 June 30, 1998.
During the six month period ended June 30, 1998, the Company's cash position was
also affected by the following: 1) the Company had cash outlays of approximately
$8.83 million for transaction costs associated with the acquisition of Raptor;
2) the Company received proceeds of $8.47 million from the issuance of common
stock for stock option exercises; 3) the Company purchased $34.44 million of
marketable securities; 4) the Company received $31.5 million from the maturity
of short-term investments; and 5) the Company received proceeds of $389,000 from
the sale of common stock of MTI Technology Corporation.
The Company believes that cash generated from operations, together with existing
sources of liquidity, will be sufficient to meet its capital expenditures,
working capital and other cash requirements for the next twelve months and the
foreseeable future.
Certain Factors Affecting Future Performance
Although the Company has experienced significant growth in revenues from its
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
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<PAGE>
operating history with respect to many of its 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 number of competitors and the breadth and
functionality of their 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; the availability of services personnel to demonstrate,
install, configure and implement products; changes in the level of operating
expenses; competitive conditions in the industry; and changes in technologies
affecting computing, networking, communications, systems and applications
management and data security. The Company's future operating results also may be
affected if it fails to recognize the anticipated benefits of recent and future
acquisitions (including that of Raptor) on the timetable projected by AXENT;
those benefits include, among others, integration of product offerings and
coordination of sales, marketing and research and development teams without
disruption or unanticipated expense. The Company's future results of operations
may also be adversely affected if the anticipated integration of acquired
companies' (including Raptor's) operations produces unexpected expenses, delays,
inefficiencies, loss of key personnel, loss of resellers or distributors or loss
of consultants or if it leads to adverse effects on customer purchasing
decisions.
The market for the Company's software products is highly competitive, and AXENT
expects that it will face increasing price pressures from its current
competitors and new market entrants. As a result of increasing consolidation in
the information security industry, the Company expects that it will become
subject to increased competition, which may negatively impact existing
collaborative, marketing, reselling, distribution or marketing agreements or
relationships and thereby materially adversely affect the Company's financial
condition and results of operations. Any material reduction in the price of the
Company's software products would negatively affect gross margins and could
materially adversely affect the Company's financial condition and results of
operations.
The licensing of many of the Company's enterprise-class software 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 licensing of the Company's
enterprise-class security software 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, 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 the Company's
financial condition and results of operations. Although the Company's results of
operations have not been materially adversely affected to date as a result of
currency fluctuations, the long-term impact of currency fluctuations, including
any possible effect on the business outlook in other developing countries,
cannot be predicted.
The Company has experienced significant quarterly fluctuations in its operating
results and anticipates such fluctuations in the future. Generally, revenues,
operating income and net income have been higher in the fourth quarter of each
year than in the first quarter of the following year with the exception of 1997,
when the accounting treatment of the AssureNet acquisition mitigated that
historic trend. The Company 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 the Company's sales compensation
plans. Revenues also tend to be lower in the summer months, particularly in
Europe, when businesses often defer purchase decisions. Quarterly revenues and
operating results depend on the volume and timing of orders received, which may
be affected by large individual transactions and which sometimes are difficult
to predict, especially with regard to orders received through indirect
distribution channels. The Company historically has recognized a substantial
portion of its license revenues in the last month of each quarter, and often in
the last week of each quarter; this is expected to continue for the foreseeable
future as the portion of revenues from indirect distribution channels increases.
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<PAGE>
This Form 10-Q and the foregoing Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially. Factors that might cause or contribute to such differences
include, but are not limited to those discussed in this section ("Factors that
May Affect Future Performance") and the section of the Company's
Prospectus/Joint Proxy Statement dated January 2, 1998 entitled "Risk Factors".
Readers should carefully review the risks described in other documents the
Company has filed from time to time with the SEC, including the annual report on
Form 10-K and the other quarterly reports on Form 10-Q filed or to be filed by
the Company in 1998. Readers are cautioned not to rely on forward-looking
statements. The Company has no obligation to publicly release any revisions to
forward-looking statements or reflect events or circumstances after the date of
filing of this Form 10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At the 1998 annual meeting of AXENT's stockholders on May 20, 1998,
stockholders of record at the close of business on April 10, 1998 elected
Timothy A. Davenport and re-elected Robert A. Steinkrauss as directors to serve
until the annual meeting of stockholders in 2001. There were 19,065,023 shares
voted at the meeting; for Mr. Steinkrauss, 18,939,986 shares (99.3% of the
shares voted) were voted for re-election and 125,037 shares were voted against;
for Mr. Davenport, 18,942,639 shares (99.4% of the shares voted) were voted for
election and 122,384 shares were voted against; there were no abstentions or
broker non-votes with respect to either candidate. Messrs. Steinkrauss and
Davenport join Richard A. Lefebvre, John C. Becker, Gabriel A. Battista, Shaun
McConnon and John F. Burton, whose terms as directors of AXENT continued after
the 1998 annual meeting. Shaun McConnon resigned as a director of AXENT
effective May 21, 1998.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) The following exhibits are filed or incorporated by reference, as stated below:
Exhibit Number Description
<S> <C>
3.1 (1) Amended and Restated Certificate of Incorporation of AXENT.
3.2 (2) Amended and Restated Bylaws of AXENT.
4.1 (1) Specimen stock certificate for shares of Common Stock of AXENT.
10.1 (1) AXENT's 1991 Amended and Restated Stock Option Plan.
10.2 (3) AXENT's 1996 Amended and Restated Stock Option Plan.
10.3 (3) AXENT's 1996 Amended and Restated Directors' Stock Option Plan.
10.8 (1) Settlement Agreement effective as of September 13, 1991, by and among
AXENT and the parties thereto.
10.9 (1) Form of Indemnification Agreement between AXENT and its directors and executive
officers.
10.11(1) Lease Agreement dated as of September 6, 1995, by and between Research Grove Associates and
AXENT.
10.12(1) Lease of Real Property dated as of March 7, 1995, by and between TNK Associates and AXENT.
10.13(1) Deed of Lease dated as of March 14, 1995 by and between Bill Harris Music, Inc. and AXENT.
10.14(1) Agreement dated as of December 30, 1987, by and between AXENT and William R. Davy.
10.15(1) Agreement dated as of September 20, 1990, by and between AXENT and William R. Davy.
10.16(1) Agreement dated as of November 7, 1991, by and between AXENT and William R. Davy.
10.17(4) Memorandum of Understanding regarding certain compensation and severance matters relating to
Richard A. Lefebvre, dated July 22, 1997.
10.18(1) Severance Arrangement for John C. Becker, dated October 16, 1992.
10.19(1) Severance Arrangement for Brett Jackson, dated October 16, 1992.
10.20(1) AXENT's Officer/Vice President Severance Policy.
10.21(1) Exclusive Distributor License Agreement, effective as of December 31, 1995, between AXENT and
Raxco Software, Inc.
10.22(1) Administrative Services Agreement, effective as of December 31, 1995, between the Company and
Raxco Software, Inc.
10.24(1) Agreement and Plan of Separation, effective as of December 31, 1995, between AXENT and Raxco
Software, Inc.
10.29(3) Amended Agreement and Plan of Merger among AXENT,
Axquisition, Inc., and AssureNet Pathways, Inc, dated as
of January 6, 1997 and amended February 26, 1997.
10.30(5) AXENT's 1998 Employee Stock Purchase Plan.
10.31(5) AXENT's 1998 Incentive Stock Plan.
10.32(5) AXENT's Exchange Option Plan for Optionees of Raptor Systems, Inc.
10.33(5) Agreement and Plan of Merger among AXENT, Axquisition Two, Inc. and Raptor Systems, Inc. dated
as of December 1, 1997.
21.1 (6) Subsidiaries of the Registrant.
27 * Financial Data Schedule
- -------------------------------------------------------------------------------------------------------------------
(1) Previously filed as an exhibit to AXENT's Registration Statement on Form S-1 (File No. 333-01368) and
incorporated herein by reference.
(2) Previously filed as an exhibit to AXENT's Quarterly Report on Form 10-Q for the Quarter Ended September
30, 1996.
(3) Previously filed as an exhibit to AXENT's Registration Statement on Form S-4 (File No. 333-20207) and
incorporated herein by reference.
(4) Previously filed as an exhibit to AXENT's Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1997.
(5) Previously filed as an exhibit to AXENT's Registration Statement on Form S-4 (File No. 444-43265) and
incorporated herein by reference.
(6) Previously filed as an exhibit to AXENT's Annual Report on Form 10-K for the year ended December 31,
1997 (File No. 0-28100) and incorporated herein by reference.
* Filed herewith.
(b) AXENT filed no reports on Form 8-K during the three month period ended June
30, 1998.
</TABLE>
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<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: August 14, 1998 By:
Robert B. Edwards, Jr.
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the condensed
consolidated balance sheet and statement of operations of AXENT Technologies,
Inc. as of and for the six months ended June 30, 1998 and 1997, respectively,
and is qualified in its entirety by reference to such financial statements.
June 30, June 30,
1998 1997
---- ----
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 51,170,000 44,237,000
<SECURITIES> 43,821,000 37,255,000
<RECEIVABLES> 25,564,000 14,867,000
<ALLOWANCES> 3,541,000 1,539,000
<INVENTORY> 131,000 0
<CURRENT-ASSETS> 122,875,000 99,194,000
<PP&E> 10,897,000 7,987,000
<DEPRECIATION> 5,082,000 4,078,000
<TOTAL-ASSETS> 137,428,000 109,119,000
<CURRENT-LIABILITIES> 24,925,000 18,409,000
<BONDS> 0 0
0 0
0 0
<COMMON> 495,000 452,000
<OTHER-SE> 112,008,000 90,258,000
<TOTAL-LIABILITY-AND-EQUITY> 137,428,000 109,119,000
<SALES> 0 0
<TOTAL-REVENUES> 42,871,000 29,705,000
<CGS> 0 0
<TOTAL-COSTS> 4,410,000 2,823,000
<OTHER-EXPENSES> 47,399,000 58,124,000
<LOSS-PROVISION> 0 61,000
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (8,938,000) (31,242,000)
<INCOME-TAX> (178,000) (234,000)
<INCOME-CONTINUING> (5,515,000) (27,706,000)
<DISCONTINUED> 0 255,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,515,000) (27,451,000)
<EPS-PRIMARY> (0.23) (1.23)
<EPS-DILUTED> (0.23) (1.23)
</TABLE>
