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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 March 31, 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)
----------------
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 May 12, 1998, there were 24,475,723 shares outstanding of the Registrant's
Common Stock, par value $.02 per share.
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<PAGE>
AXENT TECHNOLOGIES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets as of 4
March 31, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations 5
for the three months ended March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows for the 6
three months ended March 31, 1998 and 1997
Condensed Consolidated Statements of Comprehensive 7
Income for the three months ended March 31, 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 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits 17
SIGNATURES 18
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
The financial statements set forth below at March 31, 1998 and for the three
month periods ended March 31, 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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<PAGE>
<TABLE>
<CAPTION>
AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<S> <C> <C>
March 31,
1998 December 31,
(unaudited) 1997
---------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 35,682 $ 51,618
Marketable securities 56,326 40,882
Accounts receivable, net 16,832 18,223
Other current assets 5,440 4,337
---------------- -----------------
Total current assets 114,280 115,060
---------------- -----------------
Property and equipment, net 4,916 4,263
Purchased software and other assets 5,975 5,458
---------------- -----------------
Total assets $ 125,171 $ 124,781
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 20,073 $ 13,120
Deferred revenue 8,032 7,396
---------------- -----------------
Total liabilities 28,105 20,516
---------------- -----------------
Stockholders' equity:
Common stock, par value $0.02: 24,138,258 and 23,268,657
shares issued and outstanding, respectively 483 466
Additional paid-in capital 139,665 139,612
Accumulated deficit (42,718) (33,389)
Accumulated other comprehensive income (364) (85)
Unearned compensation -- (2,339)
---------------- -----------------
Total stockholders' equity 97,066 104,265
---------------- -----------------
Total liabilities and stockholders' equity $ 125,171 $ 124,781
================ =================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
<S> <C> <C>
For the Three Months
Ended March 31,
-------------------------------
1998 1997
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Net revenues:
Product licenses $ 16,283 $ 10,878
Services 4,048 2,917
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Total net revenues 20,331 13,795
Cost of net revenues 2,118 1,290
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Gross profit 18,213 12,505
Operating expenses:
Sales and marketing 9,141 7,132
Research and development 3,967 2,836
General and administrative 1,482 1,681
Non-recurring charges 17,422 27,632
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Total operating expenses 32,012 39,281
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Income (loss) from continuing operations before royalties, interest and taxes (13,799) (26,776)
Royalty income 569 658
Interest income 1,079
1,063
Gain on sale of marketable securities 389 --
Income tax (provision) benefit 2,105 (962)
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Income (loss) from continuing operations (9,673) (26,001)
Income from discontinued operations --- 173
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Net income (loss) $ (9,673) $ (25,828)
============= ==============
Net income (loss) per common share (basic):
Continuing operations $ (0.41) $ (1.17)
Discontinued operations --- $ 0.01
============= ==============
Net income (loss) per common share (basic) $ (0.41) $ (1.16)
============= ==============
Number of shares used in computing net income (loss) per common
share outstanding (basic) 23,654 22,136
Net income (loss) per common share (diluted):
Continuing operations $ (0.41) $ (1.17)
Discontinued operations --- $ 0.01
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Net income (loss) per common share (diluted) $ (0.41) $ (1.16)
============= ==============
Number of shares used in computing net income (loss) per common
share outstanding (diluted) 23,654 22,136
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<S> <C> <C>
For the Three Months
Ended March 31,
------------------------------------
1998 1997
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CASH INFLOWS (OUTFLOWS)
Operating activities:
Net loss from continuing operations $ (9,673) $ (26,001)
Non-cash items:
Depreciation and amortization 673 517
Non-recurring charges 17,422 27,632
Payments for corporate acquisition (7,462) --
Gain on sale of marketable securities (389) --
Change in assets and liabilities (2,674) (1,736)
---------------- ---------------
Net cash provided by continuing operations (2,103) 412
Net cash used by discontinued operations -- (250)
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Net cash provided by operating activities (2,103) 162
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Investing activities:
Capital expenditures (1,862) (624)
Proceeds from the sale of marketable securities 389 --
Purchases of short-term investments (30,093) (11,062)
Maturity of short-term investments 14,649 282
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Net cash used by continuing operations (16,917) (11,404)
Net cash provided by discontinued operations -- 215
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Net cash used by investing activities (16,917) (11,189)
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Financing activities:
Proceeds from issuance of common stock 3,125 358
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 3,125 (377)
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Effect of exchange rate changes on cash (41) (43)
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Net decrease in cash and cash equivalents (15,936) (11,447)
Cash and cash equivalents, beginning of period 51,618 54,828
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Cash and cash equivalents, end of period $ 35,682 $ 43,381
================ ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(amounts in thousands)
(unaudited)
<S> <C> <C>
For the Three Months
Ended March 31,
------------------------------------
1998 1997
---------------- ---------------
Net loss $ (9,673) $ (25,828)
Other comprehensive loss
Currency translation effects (41) (43)
================ ===============
Comprehensive loss $ (9,714) $ (25,871)
================ ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
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<PAGE>
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 month period ended
March 31, 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 quarter ended March 31, 1997, with the combined amounts
currently presented in the financial statements for that quarter:
<TABLE>
<CAPTION>
Quarter Ended March 31, 1997
<S> <C> <C> <C>
(in thousands) AXENT Raptor Combined
--------------------- ----------------- ---------------
Revenues $ 8,155 $ 5,640 $ 13,795
Net income (loss) (26,685) 857 (25,828)
</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.
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<PAGE>
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
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 entirely of options 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
calculations for each period presented because they would be antidilutive.
Earnings per share for all other 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>
<S> <C> <C>
(amounts in thousands) For the Three Months
Ended March 31,
------------------------------------
1998 1997
---------------- ---------------
Weighted average shares outstanding - (basic) 23,654 22,136
Stock options -- --
================ ===============
Weighted average shares outstanding - (diluted) 23,654 22,136
================ ===============
</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.
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<PAGE>
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 522,600 shares
were issued during the first three months of 1998.
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 27,000 shares
were issued during the first three months of 1998.
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 732,400 were issued
during the first three months of 1998.
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 the 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 ("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. Effective for the fiscal year
ending December 31, 1998, the Company has adopted SOP 97-2.
Recent Accounting Pronouncements
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 this standard to have a material
impact on the Company's financial position or results of operations.
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<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 the Company's Prospectus/Joint Proxy Statement dated
January 2, 1998, as filed with the SEC on January 5, 1998.
Three Months Ended March 31, 1998 Compared to
Three Months Ended March 31, 1997
Net Revenues
The Company's net revenues from product licenses increased approximately 49.6%,
or $5.40 million, from $10.88 million for the three months ended March 31, 1997
to $16.28 million for the three months ended March 31, 1998. For those periods
in 1997 and 1998, net revenues from product licenses represented 78.9% and 80.1%
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 or versions and
the expansion of available products running on new or additional platforms.
The Company's net revenues from services increased approximately 38.7%, or $1.13
million, from $2.92 million for the three months ended March 31, 1997 to $4.05
million for the three months ended March 31, 1998. The increase in services
revenues is primarily attributable to growth in the customer base purchasing
maintenance. For those periods in 1997 and 1998, net revenues from services
represented 21.1% and 19.9% of total net revenues, respectively.
Revenues from North American and International operations were 79% and 21% of
total revenues, respectively, for the three months ended March 31, 1998 as
compared to 82% and 18%, 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 64.2%, or $828,000, from $1.29
million for the three months ended March 31, 1997 to $2.12 million for the three
months ended March 31, 1998. For those periods in 1997 and 1998, cost of net
revenues represented 9.4% and 10.4% 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 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 28.2%, or $2.01 million, from $7.13 million for the three
months ended March 31, 1997 to $9.14 million for the three months ended March
31, 1998. For those periods in 1997 and 1998, sales and marketing expenses
represented 51.7% and 45.0% 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.
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<PAGE>
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 39.8%, or $1.13 million, from $2.84 million for the three months ended
March 31, 1997 to $3.97 million for the three months ended March 31, 1998. For
those periods in 1997 and 1998, research and development expenses represented
20.6% and 19.5% 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 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 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 11.9%, or $200,000, from $1.68 million for the
three months ended March 31, 1997 to $1.48 million for the three months ended
March 31, 1998. For those periods in 1997 and 1998, general and administrative
expenses represented 12.2% and 7.3% 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 1997, the Company incurred a one-time charge associated with the acquisition
of AssureNet of approximately $27.6 million to expense the purchased in-process
research and development that had not reached technological feasibility and had
no probable future uses. In 1998, the Company incurred a one-time charge of
$17.4 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 from Continuing Operations before Royalties, Interest and Taxes
Income from continuing operations before royalties, interest and taxes increased
$12.98 million from a loss of $26.78 million to a loss of $13.80 million, for
the three months ended March 31, 1997 and 1998, respectively. 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.
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<PAGE>
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 13.5%, or $89,000, from
$658,000 for the three months ended March 31, 1997 to $569,000 for the same
three month period during 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 March 31, 1998, Raxco reported to the Company
gross revenues of $2.67 million, which included approximately $1.90 million of
OpenVMS utility revenues.
Interest Income
Interest income decreased 1.5%, or $16,000, from $1.08 million for the three
month period ended March 31, 1997 to $1.06 million for the three month period
ended March 31, 1998.
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 income from
continuing and discontinued operations for the three months ended March 31,
1997. The Company recorded a tax benefit related to its taxable loss from
continuing operations for the three months ended March 31, 1998. The effective
rate for the three months ended March 31, 1998 was approximately 35%.
Income from Continuing Operations
As a result of the above the Company recorded a loss from continuing operations
of $9.67 million for the three months ended March 31, 1998, a decrease of 62.8%
or $16.33 million, from a loss of $26.00 million for the three months ended
March 31, 1997.
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 $173,000 for the three month period ended March 31, 1997 to $0
for the three month period ended March 31, 1998. The Company currently
anticipates no further income from discontinued operations.
- 13 -
<PAGE>
Financial Condition- Liquidity and Capital Resources
The Company's overall cash and cash equivalents were $35.68 million at
March 31, 1998, a decrease of approximately $15.94 million from $51.62 million
at December 31, 1997. During the three month periods ended March 31, 1997 and
1998, respectively, the Company financed its operations primarily through cash
reserves and available working capital. The Company's continuing operating
activities generated cash of $412,000 and used cash of $2.10 million for the
three month periods ended March 31, 1997 and 1998, respectively. During the
three months ended March 31, 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 $624,000 and $1,862,000
for the three month periods ended March 31, 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 March 31, 1998.
During the three month period ended March 31, 1998, the Company's cash
position was also affected by the following: 1) the Company had cash outlays of
approximately $7.46 million for transaction costs associated with the
acquisition of Raptor; 2) the Company received proceeds of $3.12 million from
the issuance of common stock for stock option exercises; 3) the Company
purchased $30.09 million of marketable securities; 4) the Company received
$14.65 million from the maturity of short-term investments; 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 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 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
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 its acquisition of
Raptor on the timetable projected by AXENT; those benefits include, among
others, integration of AXENT and Raptor product offerings and coordination of
their respective 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 Raptor
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.
- 14 -
<PAGE>
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 anticiaptes 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 AssurNet acquisition mitigated
that historic trend. The Company believes that the fourth calendar quarter
revenues are positively affected 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; this is expected to continue for the forseeable future as the
portion of revenues from indirect distribution channels increases.
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 o 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 filed from
time to time with the Securities and Exchange Commission, 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.
- 15 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On December 4, 1997, an action entitled Usher Fisher v. William Kaiser, et
al. was filed in the Delaware Court of Chancery in and for New Castle County
(the "Court"), purportedly as a class action on behalf of stockholders of
Raptor, against Raptor, the members of Raptor's Board and AXENT, which sought,
among other things, to enjoin consummation of the merger of Raptor and AXENT
(the "Merger").
Raptor and the Raptor Board believed that the plaintiff's allegations were
without merit, but also believed that the possibility of delay and possible
uncertainty with respect to consummation of the Merger relating to the
litigation were not in the best interests of Raptor and its stockholders.
Representatives of Raptor and AXENT and counsel for the plaintiff reached an
agreement in principle to settle the litigation on January 20, 1998. In that
agreement in principle, Raptor and the Raptor Board made no admission of
liability but agreed to circulate certain additional information to Raptor's
stockholders, and the plaintiff agreed generally to refrain from further
proceedings pending approval of a final settlement agreement by the Court and
approval of the Merger by Raptor's stockholders. Defendants agreed not to oppose
an application by plaintiff's counsel for an award of counsel fees and expenses
not to exceed $250,000, which will be payable by Raptor if the fee application
is approved. The Merger was approved by the requisite vote of Raptor
stockholders on February 5, 1998 and was consummated on that date.
Item 4. Submission of Matters to a Vote of Security Holders.
At a special meeting of AXENT's stockholders on February 5, 1998,
stockholders of record at the close of business on December 31, 1997 approved
the issuance of shares of AXENT common stock in connection with the Agreement
and Plan of Merger dated as of December 1, 1997 (the "Merger Agreement") by and
among AXENT, Raptor and a wholly-owned subsidiary of AXENT, and the 1998 Raptor
Option Exchange Plan. On that matter, 8,573,200 shares voted to approve the
issuance of shares in the merger, 36,008 shares voted against approval of the
issuance, 46,172 shares abstained from voting on the matter and there were
32,590 "broker non-votes" on that matter. At that meeting, AXENT's stockholders
also approved AXENT's Incentive Stock Plan (the "Option Plan") and AXENT's 1998
Employee Stock Purchase Plan ( the "Purchase Plan"), and the reservation of
1,800,000 and 500,000 shares of AXENT common stock, respectively, for issuance
thereunder. On approval of the Option Plan, 5,726,876 shares voted to approve
the Option Plan, 2,869,154 shares voted against approval, 59,350 shares
abstained and there were 32,590 "broker non-votes" on that matter. On approval
of the Purchase Plan, 7,625,423 shares voted to approve the Purchase Plan,
1,007,726 shares voted against approval, 56,795 shares abstained and there were
1,974 "broker non-votes" on that matter.
<TABLE>
<CAPTION>
- 16 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed or incorporated by reference, as stated below:
<S> <C>
Exhibit Number Description
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.
10.7 (1) Registration Rights Agreement dated as of December 10, 1992, by and among AXENT and the
parties thereto.
10.7.1(3) Amendment No. 1 to Registration Rights Agreement dated as of February 26, 1997, by and
among AXENT and the parties thereto.
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.
10.10(1) Agreement of Merger dated as of November 17, 1994, among AXENT, Datamedia Corporation
and Raxco Acquisition Corporation.
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.
</TABLE>
(b) AXENT filed a report on Form 8-K dated February 5, 1998 that reported
information under items 2, 5 and 7 (which incorporated financial statements of
Raptor and pro forma information by reference to the Prospectus/Joint Proxy
Statement of AXENT dated January 2, 1998) with respect to the closing of the
merger with Raptor Systems, Inc., certain related matters and the action taken
by AXENT's stockholders at the special meeting on February 5, 1998.
- 17 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AXENT TECHNOLOGIES, INC.
Date: May 15, 1998 By: /s/ Robert B. Edwards, Jr.
------------------------------
Robert B. Edwards, Jr.
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
- 18 -
<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 three months ended March 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> Dec-31-1998 Dec-31-1997
<PERIOD-END> Mar-31-1998 Mar-31-1997
<CASH> 35,682,000 43,381,000
<SECURITIES> 56,326,000 26,477,000
<RECEIVABLES> 18,497,000 10,355,000
<ALLOWANCES> 1,665,000 1,587,000
<INVENTORY> 100,000 0
<CURRENT-ASSETS> 114,280,000 99,418,000
<PP&E> 9,654,000 7,439,000
<DEPRECIATION> 4,738,000 3,548,000
<TOTAL-ASSETS> 125,171,000 109,930,000
<CURRENT-LIABILITIES> 28,105,000 17,350,000
<BONDS> 0 0
0 0
0 0
<COMMON> 483,000 448,000
<OTHER-SE> 96,583,000 92,132,000
<TOTAL-LIABILITY-AND-EQUITY> 125,171,000 109,930,000
<SALES> 0 0
<TOTAL-REVENUES> 20,331,000 13,795,000
<CGS> 0 0
<TOTAL-COSTS> 2,118,000 1,290,000
<OTHER-EXPENSES> 32,012,000 39,281,000
<LOSS-PROVISION> 30,000 30,000
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (13,799,000) (26,776,000)
<INCOME-TAX> 2,105,000 (962,000)
<INCOME-CONTINUING> (9,673,000) (26,001,000)
<DISCONTINUED> 0 173,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,673,000) (25,828,000)
<EPS-PRIMARY> (0.41) (1.16)
<EPS-DILUTED> (0.41) (1.16)
</TABLE>
