<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
_______________
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
- ---
1934
For the transition period from ______ to ______.
Commission File Number: 0-28100
_____________
AXENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 87-0393420
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 Research Boulevard
Suite 200
Rockville, Maryland 20850
(Address of principal executive offices)
(301) 258-5043
(Registrant's telephone number including area code)
________________
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes___X___ No______
As of August 12, 1999, there were 27,935,083 shares outstanding of the
Registrant's Common Stock, par value $.02 per share.
<PAGE>
AXENT TECHNOLOGIES, INC.
-----------------------
INDEX
-----
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Unaudited Condensed Consolidated Balance Sheets as of 4
June 30, 1999 and December 31, 1998
Unaudited Condensed Consolidated Statements of Operations 5
for the three and six months ended June 30, 1999 and 1998
Unaudited Condensed Consolidated Statements of Cash Flows 6
for the six months ended June 30, 1999 and 1998
Unaudited Condensed Consolidated Statements of Comprehensive 7
Income (Loss) for the three and six months ended June 30, 1999
and 1998
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 24
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1.
- -------
FINANCIAL STATEMENTS
The financial statements set forth below at June 30, 1999 and for the three and
six month periods ended June 30, 1999 and 1998 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, 1998, which are included in the Company's Annual Report on
Form 10-K as filed with the SEC on March 31, 1999.
3
<PAGE>
AXENT TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 97,985 $ 80,035
Marketable securities 8,774 31,774
Accounts receivable, net 25,818 28,300
Other current assets 3,603 4,128
----------- ------------
Total current assets 136,180 144,237
Property and equipment, net 11,772 7,482
Goodwill and other intangible assets 29,024 2,340
Other assets 10,297 7,217
----------- ------------
Total assets $187,273 $161,276
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 19,760 $ 15,764
Deferred revenue 15,307 11,184
----------- ------------
Total liabilities 35,067 26,948
----------- ------------
Stockholders' equity:
Common stock, par value $0.02: 27,896,264 and 26,163,284
shares issued and outstanding, respectively 558 523
Additional paid-in capital 188,885 161,386
Accumulated deficit (36,554) (27,211)
Accumulated comprehensive income and other (683) (370)
----------- ------------
Total stockholders' equity 152,206 134,328
----------- ------------
Total liabilities and stockholders' equity $187,273 $161,276
=========== ============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
4
<PAGE>
AXENT TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net revenues:
Product licenses $ 17,545 $ 17,392 $32,731 $33,675
Services 8,884 5,148 15,142 9,196
-------- -------- ------- -------
Total net revenues 26,429 22,540 47,873 42,871
Cost of net revenues 3,721 2,209 6,864 4,246
-------- -------- ------- -------
Gross profit 22,708 20,331 41,009 38,625
Operating expenses:
Sales and marketing 15,659 9,597 29,315 18,738
Research and development 6,922 4,551 13,216 8,709
General and administrative 2,667 1,430 5,369 2,912
Amortization of acquired intangible assets 1,309 83 1,460 164
Acquisition-related charges - - 3,753 17,422
-------- -------- ------- -------
Total operating expenses 26,557 15,661 53,113 47,945
-------- -------- ------- -------
Income (loss) before royalties, interest and taxes (3,849) 4,670 (12,104) (9,320)
Interest income and other 1,050 1,022 2,118 2,474
Royalty income - 558 - 1,127
Income tax benefit (provision) 598 (2,283) 1,717 (178)
-------- -------- ------- -------
Net income (loss) $ (2,201) $ 3,967 $(8,269) $(5,897)
======== ======== ======= =======
Net income (loss) per common share (basic): $ (0.08) $ 0.16 $ (0.30) $ (0.24)
-------- -------- ------- -------
Number of shares used in computing net income
(loss) per common share outstanding (basic) 27,843 25,195 27,124 24,779
-------- -------- ------- -------
Net income (loss) per common share (diluted): $ (0.08) $ 0.15 $ (0.30) $ (0.24)
-------- -------- ------- -------
Number of shares used in computing net income
(loss) per common share outstanding (diluted) 27,843 27,234 27,124 24,779
-------- -------- ------- -------
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
5
<PAGE>
AXENT TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net loss $(8,269) $ (5,897)
Non-cash items:
Depreciation and amortization 3,143 1,453
Deferred income taxes (2,141) (2,533)
Write-off of in process research and development 2,000 -
Change in assets and liabilities 3,251 4,052
------------------ -----------------
Net cash used by operating activities (2,016) (2,925)
------------------ -----------------
Investing activities:
Capital expenditures (3,140) (3,422)
Proceeds from the sale of marketable securities - 389
Purchases of short-term investments (2,067) (34,442)
Maturity of short-term investments 25,067 31,503
Payments for business acquisitions, net of cash acquired (2,160) -
------------------ -----------------
Net cash provided (used) by investing activities 17,700 (5,972)
------------------ -----------------
Financing activities:
Proceeds from issuance of common stock 2,579 8,471
------------------ -----------------
Net cash provided by financing activities 2,579 8,471
------------------ -----------------
Effect of exchange rate changes on cash (313) (33)
------------------ -----------------
Net increase (decrease) in cash and cash equivalents 17,950 (459)
Cash and cash equivalents, beginning of period 80,035 51,632
------------------ -----------------
Cash and cash equivalents, end of period $97,985 $ 51,173
================== =================
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
6
<PAGE>
AXENT TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------------- ------------------------------------
1999 1998 1999 1998
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) $(2,201) $3,967 $(8,269) $(5,897)
Other comprehensive income (loss):
Realization of gain on marketable securities - - - (238)
Currency translation effects 59 8 (313) (33)
-------------- --------------- --------------- ---------------
Comprehensive income (loss) $(2,142) $3,975 $(8,582) $(6,168)
============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
7
<PAGE>
AXENT TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
On January 12, 1999 and March 31, 1999, the Company completed the acquisitions
of Internet Tools, Inc. ("ITI") and PassGo(TM) Technologies, Ltd. ("PassGo"),
respectively. ITI was accounted for as a pooling of interests and PassGo was
accounted for using the purchase method of accounting. The Company's unaudited
condensed consolidated financial statements have been restated to reflect the
acquisition of Internet Tools, Inc. ("ITI") and these financial statements
reflect the operations of PassGo since March 31, 1999. These acquisitions were
recorded in accordance with APB No. 16. The Company's historical financial
statements and related financial information included in this report have been
restated to combine earlier financial statements of AXENT and ITI.
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, 1999 may not necessarily be indicative of the results for the
entire year or any future period. The December 31, 1998 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, 1998, which
are included in the Company's Form 10-K filed with the SEC on March 31, 1999.
Business Combinations
On March 31, 1999, the Company completed the acquisition of United Kingdom-based
CKS Limited, the parent of PassGo, a worldwide leader in centralized user access
and control, and single sign-on and password synchronization products. In
conjunction with the acquisition, the Company issued 1,486,146 shares of common
stock to holders of shares and warrants of CKS Limited and agreed to exchange
stock options to purchase 64,157 AXENT shares for all outstanding CKS Limited
stock options. The transaction was accounted for using the purchase method of
accounting and accordingly, the net assets and operating results of PassGo have
been included in the accompanying financial statements from the date of
acquisition. The purchase price, including transaction costs, was approximately
$30.96 million. The allocation of the purchase price was based on the results of
an independent third party valuation and allocated to assets acquired and
liabilities assumed, based on their respective fair values at the acquisition
date. The purchase price allocation resulted in goodwill and other intangibles
of approximately $28.31 million, which is being amortized, on a straight-line
basis over their useful lives, of between three and seven years. The Company
recorded a charge for acquired in-process research and development of
approximately $2.0 million for the six months ended June 30, 1999. The charge
reflects technology acquired for which technological feasibility had not been
reached and for which there is no alternative future use.
The following unaudited pro forma consolidated results of operations have been
prepared as if the acquisition of CKS Limited had occurred at the beginning of
1998. The unaudited pro forma information is presented for information purposes
only and is not indicative of what would have occurred if the acquisition had
actually been made as of the beginning of 1998. In addition, the unaudited pro
forma information is not intended to be a projection of future results and does
not reflect synergies expected to result from the integration of CKS Limited and
AXENT.
8
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Information:
For the Six Months For the Six Months
Ended June 30, 1999 Ended June 30, 1998
------------------- -------------------
<S> <C> <C>
Net revenues $ 50,176,000 $ 48,964,000
Net loss from operations $(10,906,000) $(10,049,000)
Net loss per common share from operations
(basic & diluted) $ (0.39) $ (0.38)
</TABLE>
On January 12, 1999, the Company consummated its merger with ITI in which it
acquired 100% of the outstanding stock of ITI for 703,194 shares of AXENT common
stock and assumed stock options covering a total of 46,806 shares of AXENT
common stock. The Company incurred approximately $1.75 million in acquisition-
related transaction and other related costs in connection with 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 ITI were combined with the Company's respective accounts at recorded values.
Prior period financial statements have been restated to give effect to the
merger.
On July 21, 1998, the Company completed the acquisition of Secure Network
Consulting, Inc. ("SNCI"), a privately held information security consulting
firm. In conjunction with the acquisition, the Company issued 85,000 shares of
common stock to SNCI's stockholders. The transaction was accounted for using
the purchase method of accounting. The purchase price, including transaction
costs, was $2.3 million. This amount exceeded the fair value of assets acquired
by approximately $2.1 million, which is being treated as goodwill and amortized,
on a straight-line basis, over seven years and is included in goodwill and other
intangible assets. The operating results of SNCI have been included in the
accompanying financial statements from the date of acquisition.
During 1998, the Company consummated its merger with Raptor Systems, Inc.
("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 acquisition-related transaction and other costs
in connection with 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 period financial statements have
been restated to give effect to the merger.
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. Potentially
dilutive securities are not included in the diluted earnings per share
calculations for the periods presented as their inclusion would be anti-dilutive
to the basic loss per share calculations.
Recent Accounting Pronouncements
In December 1998, the AICPA issued Statement of Position (SOP) 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions." SOP 98-9 modifies SOP 97-2 by requiring revenue to be recognized
using the "residual method" if certain conditions are met. SOP 98-9 will be
effective for the Company's 2000 financial statements. Management does not
believe that SOP 98-9 will have a material impact on the Company's results of
operations or financial condition.
9
<PAGE>
Information Concerning Business Segments
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 established standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance.
The Company's approach to information security is to develop, market and support
security software products that perform a broad range of security functions and
to provide consulting services to address customers' security needs. As such,
the Company has two reportable segments: a software product segment and a
consulting services segment. The software product segment includes products
which provide security assessment and policy management, host and network based
intrusion detection, systems and network access control, data confidentiality,
user administration, activity monitoring, secure authentication solutions for
remote network access and virtual private networking capabilities for remote
users and remote sites. The consulting services segment includes training and
"Lifecycle Security Services" designed to help organizations develop a framework
and roadmap for assessing potential vulnerabilities; developing security
policies, guidelines, practices and metrics; selecting and implementing
solutions; conducting training; and ensuring appropriate monitoring and
compliance.
The Company evaluates the performance of its operating segments based on income
before royalty, interest, taxes and gains on the sale of marketable securities.
Intersegment sales and transfers are not significant.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" segment includes the consulting
services segment as it is below the quantitative thresholds, corporate related
items and, as it relates to segment profit (loss), income and expense not
allocated to reportable segments.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------------------- -------------------------------------------
1999 1998 1999 1998
------------------ ----------------- ------------------- ------------------
Net revenues:
<S> <C> <C> <C> <C>
Software products $24,670,000 $21,202,000 $ 44,755,000 $ 40,917,000
Other 1,759,000 1,338,000 3,118,000 1,954,000
------------------ ----------------- ------------------- ------------------
Total net revenues $26,429,000 $22,540,000 $ 47,873,000 $ 42,871,000
================== ================= =================== ==================
Segment operating profit (loss):
Software products $(1,829,000) $ 5,312,000 $ (3,775,000) $ 9,935,000
Other (2,020,000) (642,000) (8,329,000) (19,255,000)
------------------ ----------------- ------------------- ------------------
Total segment operating profit
(loss) $(3,849,000) $ 4,670,000 $(12,104,000) $ (9,320,000)
================== ================= =================== ==================
Total assets:
Software products $ 37,659,000 $ 32,182,000
Other 149,614,000 105,289,000
------------------- ------------------
Total assets $187,273,000 $137,471,000
=================== ==================
</TABLE>
10
<PAGE>
The Company's areas of operations are principally in the United States.
Operations outside of the United States are worldwide but primarily in the
United Kingdom, Europe and Asia. No single foreign country is significant to
the consolidated operations. Foreign operations' revenue, profit and
identifiable assets are shown in the following table.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------------- ------------------------------------------
1999 1998 1999 1998
----------------- ----------------- ------------------ ------------------
Net revenues:
<S> <C> <C> <C> <C>
U.S. $18,646,000 $16,407,000 $ 34,670,000 $ 33,038,000
International 7,783,000 6,133,000 13,203,000 9,833,000
----------------- ----------------- ------------------ ------------------
Total net revenues $26,429,000 $22,540,000 $ 47,873,000 $ 42,871,000
================= ================= ================== ==================
Profit (loss):
U.S. $(2,517,000) $ 2,950,000 $ (8,540,000) $ (6,546,000)
International 316,000 1,017,000 271,000 649,000
----------------- ----------------- ------------------ ------------------
Total profit (loss) $(2,201,000) $ 3,967,000 $ (8,269,000) $ (5,897,000)
================= ================= ================== ==================
Total assets:
U.S. $168,926,000 $136,913,000
International 18,347,000 558,000
------------------ ------------------
Total assets $187,273,000 $137,471,000
================== ==================
</TABLE>
11
<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 within the meaning of Section 21E
of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of
1933, which involve risk and uncertainties. These forward-looking statements are
identified by the use of the words "believes", "expects", "anticipates", "will",
"would" or similar expressions that contemplate future events. 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. The Company assumes no obligation to update or
correct forward-looking statements due to events or changes after the date of
this report.
Overview
AXENT is a global leader in information security and provides e-security
solutions that maximize customers' business advantage. The Company delivers
integrated products and expert services to assess, protect, enable and manage
business processes and information assets. Through the Company's unique
Lifecycle Security methodology combined with Smart Security Architecture,
solutions are provided that permit customers to select the right level of
security for their business needs. The Company's award-winning solutions offer
assessment and policy compliance, firewall, intrusion detection, authentication,
virtual private network capabilities, Web-access, single sign-on and user
administration for the entire enterprise.
To continue the expansion of the Company's revenue base, the Company has focused
its efforts on delivering integrated products and expert services. It is the
Company's desire to continue pursuing growth by creating more solutions for
its customers. During 1999 and 1998, the Company strengthened its focus as
a comprehensive, enterprise-security solutions provider with four important
acquisitions. Within the first quarter of 1999 the Company acquired ITI and
PassGo. The acquisition of ITI will further solidify the Company's role as the
industry leader in intrusion detection and the PassGo acquisition will
strengthen the Company's ability to provide simplified, secure access to
information and centralized user access control for e-business. During the
first and third quarters of 1998, the Company acquired Raptor and SNCI,
respectively. Raptor's product line has enhanced and validated the Company's
security products and services, and SNCI has enhanced the Company's ability to
act as the customers' trusted security partner in offering complete solutions
through the entire security lifecycle.
12
<PAGE>
Results of Operations
The following table sets forth certain unaudited condensed consolidated
statement of operations data expressed as a percentage of total revenues for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues:
Product licenses 66.4% 77.2% 68.4% 78.5%
Services 33.6 22.8 31.6 21.5
--------------- -------------- ------------- -------------
Total net revenues 100.0 100.0 100.0 100.0
Cost of net revenues 14.1 9.8 14.3 9.9
--------------- -------------- ------------- -------------
Gross profit 85.9 90.2 85.7 90.1
Operating expenses:
Sales and marketing 59.2 42.6 61.2 43.7
Research and development 26.2 20.2 27.6 20.3
General and administrative 10.1 6.3 11.2 6.8
Amortization of acquired intangible assets 5.0 0.4 3.0 0.4
Acquisition-related charges -- -- 7.8 40.6
--------------- -------------- ------------- -------------
Total operating expenses 100.5 69.5 110.8 111.8
--------------- -------------- ------------- -------------
Income (loss) before royalties, interest and
taxes (14.6) 20.7 (25.1) (21.7)
Interest income and other 4.0 4.5 4.4 5.8
Royalty income -- 2.5 -- 2.6
Income tax benefit (provision) 2.3 (10.1) 3.6 (0.4)
--------------- -------------- ------------- -------------
Net income (loss) (8.3)% 17.6% (17.1)% (13.7)%
=============== ============== ============= =============
</TABLE>
Three Months Ended June 30, 1999 Compared to
Three Months Ended June 30, 1998
Net Revenues
The Company's total net revenues increased 17.3% or $3.89 million from $22.54
million for the three months ended June 30, 1998 to $26.43 million for the three
months ended June 30, 1999.
The Company's net revenues from product licenses increased approximately 1.0%,
or $153,000 from $17.39 million for the three months ended June 30, 1998 to
$17.54 million for the three months ended June 30, 1999. For those periods in
1998 and 1999, net revenues from product licenses represented 77.2% and 66.4%,
respectively, of total net revenues. The Company's revenues are subject to a
number of risks and uncertainties, including but not limited to, the level of
demand for the Company's products', the volume and timing of customer orders,
many of which come at the end of a quarter; product and price competition; the
Company's ability to maintain and expand its domestic and international sales
and marketing organizations; the Company's ability to develop new and enhanced
products; the availability of personnel and the Company's ability to attract and
retain key personnel; the mix of distribution channels through which the
Company's products are sold; the extent to which unauthorized access and use of
online information is perceived as a threat to information security; customer
budgets and priorities; Year 2000 issues; seasonal trends in customer
purchasing; foreign currency exchange rates; general economic factors; and
risks associated with the rapid change in technology. In addition, the value of
individual transactions as a percentage of the Company's actual or anticipated
quarterly revenues can be substantial, and the inability to close such
transactions may have a material adverse impact on the operating results of the
Company.
13
<PAGE>
The Company's net revenues from services increased approximately 72.6%, or $3.74
million, from $5.14 million for the three months ended June 30, 1998 to $8.88
million for the three months ended June 30, 1999. The increase in services
revenues is primarily attributable to the increases in implementation consulting
services, customer training courses and customers under maintenance contracts.
For those periods in 1998 and 1999, net revenues from services represented 22.8%
and 33.6%, respectively, of total net revenues.
The Company's net revenues from North American and international operations were
71% and 29% of total revenues, respectively, for the three months ended June 30,
1999 as compared to 73% and 27%, respectively, for the same period in 1998. The
increase in the international revenues as a percentage of total revenue from
1998 to 1999 is attributable to increased sales due to the expansion of the
Company's operations in European and Asian markets and the acquisition of UK
based PassGo.
Cost of Net Revenues
The Company's cost of net revenues includes costs of media, product packaging,
documentation and other production 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 68.4%,
or $1.51 million, from $2.21 million for the three months ended June 30, 1998 to
$3.72 million for the three months ended June 30, 1999. For those periods in
1998 and 1999, cost of net revenues represented 9.8% and 14.1% 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. The increase in the
cost of net revenues as a percentage of revenues is primarily attributable to
the increased costs associated with consulting services, which have lower
margins. Cost of net revenues, as a percentage of revenues, may fluctuate from
period to period due to a change in the mix of license revenues and consulting
service revenues, 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 63.2%, or $6.06 million, from $9.60 million for the three
months ended June 30, 1998 to $15.66 million for the three months ended June 30,
1999. For those periods in 1998 and 1999, sales and marketing expenses
represented 42.6% and 59.2% of total net revenues, respectively. The increase
in dollar amount and percentage of total net revenues was due to an increase in
staff and marketing programs to support the Company's sales and marketing
activities plus the addition of costs associated with PassGo. The Company
currently anticipates that the dollar amount of sales and marketing expenses
will increase as the Company continues to hire necessary staff and expand its
marketing activities to promote expansion of the Company's business.
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 52.1%, or $2.37 million, from $4.55 million for the three
months ended June 30, 1998 to $6.92 million for the three months ended June 30,
1999. For those periods in 1998 and 1999, research and development expenses
represented 20.2% and 26.2% of total net revenues, respectively. The increase
in dollar amount and percentage of total net revenues resulted from the addition
of staff, the use of outside consultants needed to develop, maintain and enhance
the Company's software products plus the addition of costs associated with
PassGo. 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.
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General and Administrative
General and administrative expenses consist primarily of personnel costs,
including salaries, benefits and bonuses and related costs for management,
finance and accounting, legal and other professional services. General and
administrative expenses increased 86.5%, or $1.24 million, from $1.43 million
for the three months ended June 30, 1998 to $2.67 million for the three months
ended June 30, 1999. For those periods in 1998 and 1999, general and
administrative expenses represented 6.3% and 10.1% of total net revenues,
respectively. The increase in dollar amount and percentage of total net
revenues is primarily a result of additional staff and investments in corporate
infrastructure and information systems needed to support the Company's
operations and the integration of PassGo and ITI. The Company currently
anticipates that the dollar amount of general and administrative expenses will
increase as the Company continues to invest in the corporate infrastructure.
Amortization of Acquired Intangible Assets
Amortization of acquired intangible assets consist primarily of the amortization
of purchased goodwill and other purchased intangible assets. Amortization of
intangible assets expenses increased $1.23 million, from $83,000 for the three
months ended June 30, 1998 to $1.31 million for the three months ended June 30,
1999. The increase in dollar amount is primarily due to the amortization of
goodwill resulting from the acquisition of PassGo.
Income (Loss) before Royalties, Interest and Taxes
Loss from continuing operations before royalties, interest and taxes increased
$8.52 million from a profit of $4.67 million for the three months ended June 30,
1998 to a loss of $3.85 million for the three months ended June 30, 1999. The
increase is primarily attributable to the increases in operating expenses.
Royalty Income
Royalty income in 1998 consisted of amounts payable to AXENT pursuant to the
Exclusive Distributor License Agreement with Raxco Software, Inc. ("Raxco")
related to certain OpenVMS utility software products owned by AXENT. Raxco has
experienced declining revenues for these products as a result of the erosion of
market share that the OpenVMS platform has experienced world-wide. Royalty
income declined to zero from $558,000 for the three months ended June 30, 1999
and 1998, respectively, as a result of the transfer of those products and all
related liabilities to Raxco and termination of the Exclusive Distributor
License Agreement during the first quarter in 1999.
Interest Income and Other
Interest income and other increased 2.7%, or $28,000, from $1.02 million for the
three month period ended June 30, 1998 to $1.05 million for the three month
period ended June 30, 1999. Interest income and other 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.
The Company recorded a tax provision related to its taxable income from
operations of $2.28 million for the three months ended June 30, 1998 and a tax
benefit related to its taxable loss from operations of $598,000 for the three
months ended June 30, 1999.
The effective tax rate for the three months ended June 30, 1999 is 21.4%,
compared to an effective tax rate of 36.5% for the three months ended June 30,
1998. The decrease in the effective tax rate for 1999 is principally due to the
amortization of acquired intangibles, which is not deductible for tax purposes.
Excluding the amortization of acquired intangibles, the effective tax rate for
both periods is approximately 36%.
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<PAGE>
Net Income (Loss)
As a result of the above, the Company recorded a loss of $2.20 million for the
three months ended June 30, 1999 compared to a profit of $3.97 million for the
three months ended June 30, 1998.
Six Months Ended June 30, 1999 Compared to
Six Months Ended June 30, 1998
Net Revenues
The Company's total net revenues increased approximately 11.7 % or $5.0 million
from $42.87 million for the six months ended June 30, 1998 to $47.87 million for
the six months ended June 30, 1999.
The Company's net revenues from product licenses decreased approximately 2.8%,
or $944,000, from $33.67 million for the six months ended June 30, 1998 to
$32.73 million for the six months ended June 30, 1999. For those periods in
1998 and 1999, net revenues from product licenses represented 78.5% and 68.4%,
respectively, of total net revenues. The Company's revenues are subject to a
number of risks and uncertainties, including but not limited to, the level of
demand for the Company's products', the volume and timing of customer orders,
many of which come at the end of a quarter; product and price competition; the
Company's ability to maintain and expand its domestic and international sales
and marketing organizations; the Company's ability to develop new and enhanced
products; the availability of personnel and the Company's ability to attract and
retain key personnel; the mix of distribution channels through which the
Company's products are sold; the extent to which unauthorized access and use of
online information is perceived as a threat to information security; customer
budgets and priorities; Year 2000 issues; seasonal trends in customer
purchasing; foreign currency exchange rates; general economic factors; and
risks associated with the rapid change in technology. In addition, the value of
individual transactions as a percentage of the Company's actual or anticipated
quarterly revenues can be substantial and the inability to close such
transactions may have a material adverse impact on the operating results of the
Company.
The Company's net revenues from services increased approximately 64.7%, or $5.95
million, from $9.19 million for the six months ended June 30, 1998 to $15.14
million for the six months ended June 30, 1999. The increase in services
revenues is primarily attributable to the increases in implementation consulting
services, customer training courses and customers under maintenance contracts.
For those periods in 1998 and 1999, net revenues from services represented 21.5%
and 31.6%, respectively, of total net revenues.
The Company's net revenues from North American and international operations were
72% and 28% of total revenues, respectively, for the six months ended June 30,
1999 as compared to 77% and 23%, respectively, for the same period in 1998. The
increase in the international revenues as a percentage of total revenue from
1998 to 1999 is attributable to increased sales due to the expansion of the
Company's operations in European and Asian markets and the acquisition of UK
based PassGo.
Cost of Net Revenues
Cost of net revenues increased approximately 61.7%, or $2.62 million, from $4.24
million for the six months ended June 30, 1998 to $6.86 million for the six
months ended June 30, 1999. For those periods in 1998 and 1999, cost of net
revenues represented 9.9% and 14.3% 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. The increase in the cost of net revenues as a
percentage of revenues is primarily attributable to the increased costs
associated with consulting services, which have lower margins. Cost of net
revenues, as a percentage of revenues, may fluctuate from period to period due
to a change in the mix of license revenues and consulting service revenues, 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.
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Sales and Marketing
Sales and marketing expenses increased 56.4%, or $10.58 million, from $18.74
million for the six months ended June 30, 1998 to $29.32 million for the six
months ended June 30, 1999. For those periods in 1998 and 1999, sales and
marketing expenses represented 43.7% and 61.2% of total net revenues,
respectively. The increase in dollar amount and percentage of total net
revenues was due to an increase in staff and marketing programs to support the
Company's sales and marketing activities plus the addition of costs associated
with PassGo. The Company currently anticipates that the dollar amount of sales
and marketing expenses will increase as the Company continues to hire necessary
staff and expand its marketing activities to promote expansion of the Company's
business.
Research and Development
Costs related to research and development of products are expensed as incurred.
Research and development expenses increased 51.8%, or $4.51 million, from $8.71
million for the six months ended June 30, 1998 to $13.22 million for the six
months ended June 30, 1999. For those periods in 1998 and 1999, research and
development expenses represented 20.3% and 27.6% of total net revenues,
respectively. The increase in dollar amount and percentage of total net
revenues resulted from the addition of staff, the use of outside consultants
needed to develop, maintain and enhance the Company's software products plus the
addition of costs associated with PassGo. The Company currently anticipates that
the dollar amount of research and development expenses will increase as the
Company continues to commit substantial resources to research and development in
future periods.
General and Administrative
General and administrative expenses increased 84.4%, or $2.46 million, from
$2.91 million for the six months ended June 30, 1998 to $5.37 million for the
six months ended June 30, 1999. For those periods in 1998 and 1999, general and
administrative expenses represented 6.8% and 11.2% of total net revenues,
respectively. The increase in dollar amount and percentage of total net
revenues is primarily a result of additional staff and investments in corporate
infrastructure and information systems needed to support the Company's
operations, the integration of acquisitions plus the addition of costs
associated with PassGo. The Company currently anticipates that the dollar
amount of general and administrative expenses will increase as the Company
continues to invest in the corporate infrastructure.
Amortization of Acquired Intangible Assets
Amortization of intangible assets consist primarily of the amortization of
purchased goodwill and other purchased intangible assets. Amortization of
intangible assets expenses increased $1.30 million, from $164,000 for the six
months ended June 30, 1998 to $1.46 million for the six months ended June 30,
1999. The increase in dollar amount is primarily due to the amortization of
goodwill resulting from the acquisition of PassGo.
Acquisition-Related Charges
In the six months ended June 30, 1999, the Company incurred charges of
approximately $1.75 million for severance, investment banking, legal and
accounting fees, and other costs related to the merger with ITI, and
approximately $2.00 million of in-process research and development expense in
connection with the acquisition of PassGo. In the six months ended June 30,
1998, the Company incurred a 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 merger with Raptor.
Income (Loss) before Royalties, Interest and Taxes
Loss from continuing operations before royalties, interest and taxes increased
$2.78 million from a loss of $9.32 million for the six months ended June 30,
1998 to a loss of $12.10 million for the six months ended June 30, 1999. The
increase is primarily attributable to the increase in operating expenses.
Royalty Income
Royalty income in 1998 consisted of amounts payable to AXENT pursuant to the
Exclusive Distributor License Agreement with Raxco Software, Inc. ("Raxco")
related to certain OpenVMS utility software products owned by AXENT. Raxco has
experienced declining revenues for these products as a result of the erosion of
market share that
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the OpenVMS platform has experienced world-wide. Royalty income declined to zero
from $1.13 million for the six months ended June 30, 1999 and 1998,
respectively, as a result of the transfer of those products and all related
liabilities to Raxco and termination of the Exclusive Distributor License
Agreement during the first quarter in 1999.
Interest Income and Other
Interest income and other decreased 14.4%, or $356,000, from $2.47 million for
the six month period ended June 30, 1998 to $2.11 million for the six month
period ended June 30, 1999. The decrease relates primarily to the sale of
marketable securities in 1998 and there were no such sales of this type in 1999.
It is the Company's policy to hold securities until they mature. Interest
income and other 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 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
operations of $178,000 for the six months ended June 30, 1998 and a tax benefit
related to its taxable loss from operations of $1.72 million for the six months
ended June 30, 1999.
The effective tax rate for the six months ended June 30, 1999 is 17.2%, compared
to an effective tax rate of 3.1% for the six months ended June 30, 1998. The
difference between the effective tax rate and the statutory rate is principally
due to the amortization of acquired intangibles and the write off of certain
acquisition costs, which are not deductible for tax purposes. Excluding these
items from income, the effective tax rate for both periods is approximately 36%.
Net Income (Loss)
As a result of the above, the Company recorded a loss of $8.27 million for the
six months ended June 30, 1999 compared to a loss of $5.90 million for the six
months ended June 30, 1998.
Certain Risks and Uncertainties
- -------------------------------
Year 2000
The Company is assessing the impact of Year 2000 compliance on the current and
prior versions of its products, internal information systems, other internal
computer systems and equipment containing embedded systems, and is implementing
corrective actions, which are complete or substantially complete in many
instances. The Company is using an approach to Year 2000 compliance that
involves preparing an inventory of all business disruption problems that the
Company regards as reasonably possible, prioritizing those possible problems to
allocate appropriate resources to the most critical areas, remediating or
replacing systems and equipment to solve or mitigate Year 2000 problems and, if
necessary, developing contingency plans if the Company or its key distributors,
resellers and suppliers will not be Year 2000 compliant and such noncompliance
is expected to have a material adverse effect on the Company's operations.
The Company is substantially complete in its process of assessing Year 2000
compliance of its software products. The Company believes that the current
version of each of its products has been designed and tested to process Year
2000 date data without interruption or error, and that the current version of
each of its product offerings is Year 2000 compliant assuming no error after
1999 in the operating system or other management software products operating on
the same computer system as the Company's product. The Company expects to
continue Year 2000 testing of the current and new versions of its products and
of any products it acquires or distributes.
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The Company believes it has identified its equipment and systems that are
critical to its operations, such as communications and networking equipment,
related software and certain hardware and software systems, and has completed
its assessment of the Year 2000 compliance of substantially all of such
equipment and systems, although it is continuing to assess and test. The
Company also is continuing to assess and test the Year 2000 compliance of
various items of equipment, computer systems, applications software, and
equipment containing embedded systems that the Company does not consider
critical to its operations. The Company has replaced or is replacing several
internal information systems critical to its operations as part of its normal
development and expansion of salesforce automation, accounting and customer
service-related information systems. The Company has received product
warranties that those systems are Year 2000 compliant, and expects that
installation and Year 2000 testing will be completed by September 1999.
The Company is continuing to assess the Year 2000 compliance of systems used by
distributors, resellers and suppliers, whom the Company expects may be material
to its business after 1999. This assessment process generally consists of
obtaining completed questionnaires or written assurances regarding anticipated
Year 2000 compliance. The Company expects that this process will continue
through 1999.
The Company anticipates that costs to be incurred in Year 2000 testing and
remediation or replacement of noncompliant systems will not be material to its
financial condition or results of operations. The cost of continued testing of
the Company's products will be included in the Company's research and
development expenses, and testing of internal equipment, hardware and software
systems generally will be included in general and administrative expense.
Even with those efforts, there can be no assurance that undetected errors or
defects may not cause Year 2000 problems in the Company's products. The Company
provides limited warranties as to Year 2000 compliance on current versions of
its products, but the Company does not believe that it is legally responsible
otherwise for costs incurred by its customers in achieving Year 2000 compliance.
Year 2000 problems in or affecting the Company's products probably would result
in litigation and contractual claims by customers and increased expenses
negatively affecting the Company's future operating results. In the worst case,
litigation, claims and increased expenses could have a material adverse effect
on the Company's business, results of operations and financial condition,
although the Company currently believes such a result to be unlikely. In
addition, Year 2000 problems in older versions of the Company's products may
result in increased expense levels for the Company and defocus in development of
new products and enhancement of existing products. The Company expects that
Year 2000 issues may alter the purchasing patterns of some of its customers or
prospective customers, which could have a material adverse effect on the
Company's business and results of operations.
There also can be no assurance that equipment, hardware and software systems
used internally in the Company's business will be free of Year 2000 problems.
Failure of internal information systems, equipment or other vendors' software to
operate properly after 1999 could disrupt or interfere with the Company's
business and result in unanticipated expense, which could adversely affect the
Company's business, operating results and financial condition. Year 2000
problems experienced by distributors, resellers and suppliers of the Company may
result in disruption of the Company's business and may require the Company to
obtain alternative sources of distribution and supply, if possible.
The Company is developing certain contingency plans in the event of Year 2000
problems in its products, critical equipment, hardware and software systems and
equipment with embedded systems, or in the event that key distributors or
resellers or critical suppliers experience Year 2000 problems. The Company
expects to continue development and focus of those contingency plans throughout
1999.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future events
and conditions. There can be no assurance that these assumptions will be
accurate and that estimates will be achieved. The Company's evaluation and
assessment is ongoing and it expects that new or different information may
become available as its assessment and evaluation continue.
Euro Currency
The European Union's adoption of the Euro currency raises a variety of issues
associated with the Company's European operations. Although the transition from
national currencies to the Euro will be phased in over several
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years, the Euro became the single currency for most European countries on
January 1, 1999. The Company is assessing Euro issues related to its treasury
operations, product pricing, contracts and accounting systems. Although the
evaluation of these issues is still in process, management currently believes
that the Company's existing or planned hardware and software systems will
accommodate the transition to the Euro and any required operating changes will
not have a material effect on future results of operations or financial
condition.
Financial Condition-Liquidity and Capital Resources
- ---------------------------------------------------
The Company's overall cash and cash equivalents were $97.99 million at June 30,
1999, an increase of approximately $17.95 million from $80.04 million at
December 31, 1998. During the six month periods ended June 30, 1998 and 1999,
respectively, the Company financed its operations primarily through cash
reserves and available working capital. The Company's operating activities used
cash of $2.93 million and $2.02 million for the six month periods ended June
30, 1998 and 1999, respectively. Net cash used by operating activities in the
six months ended June 30, 1999 was primarily a result of the payments for
transaction related costs associated with the acquisitions of Raptor and ITI.
The Company made capital expenditures of approximately $3.42 million and $3.14
million for the six month periods ended June 30, 1998 and 1999, 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, 1999.
During the six month periods ended June 30, 1999, the Company's cash position
was also affected by the following: 1) the Company had cash outlays of
approximately $448,000 and $1.50 million for transaction costs associated with
the acquisitions of Raptor and ITI, respectively; 2) the Company received
proceeds of $2.58 million from the issuance of common stock upon stock option
exercises and under its employee stock purchase plan; 3) the Company purchased
$2.07 million of marketable securities; 4) the Company received $25.07 million
from the maturity of short-term investments; and 5) the Company paid $2.16
million for the PassGo acquisition-related expenses offset by cash acquired.
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.
Certain Factors Affecting Future Performance
- --------------------------------------------
Factors Affecting the Company's Business and Prospects
Although the Company historically has experienced significant growth in revenues
from its software products, the Company does not believe prior growth rates and
past performance are necessarily indicative of future operating results. The
Company expects increased competition and intends to invest significantly in
product development, sales, marketing and administrative functions as it pursues
its business strategy. As a result, there can be no assurance that the Company
will be profitable on a quarterly or annual basis. Due to the Company's
relatively 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, but not limited 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; seasonal trends in customer purchasing; 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 and financial condition may also be
affected if it fails to recognize the anticipated benefits of its acquisitions
on the timetable projected by the Company. Those benefits include, among
others, integration of product offerings and coordination of their sales,
marketing and research and development teams without disruption or unanticipated
expense, elimination of duplicative functions and increased name and product
recognition. The Company's future results of operations and financial condition
may also be adversely affected if the anticipated integration of operations of
acquired companies produces unexpected expenses, delays,
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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 the
Company expects that it will face increasing pricing 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 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 enterprise-wide licensing of the Company's 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, may expend
significant resources pursuing potential sales that will not be consummated.
Many of the Company's operating expenses are based on anticipated revenue levels
and are fixed or cannot quickly be adjusted if the anticipated level of revenues
are not achieved. Therefore delays in the receipt of orders or the failure to
achieve the anticipated level of revenues can cause a significant variation in
the operating results of the Company from quarter to quarter. The Company also
may choose to increase spending in response to competition or to pursue new
market opportunities, which may significantly reduce its operating results.
Factors Affecting International Operations
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, import
restrictions, 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.
Based upon our overall currency rate exposure at June 30, 1999, a 10% change in
foreign exchange rates would have had an immaterial effect on our financial
position, results of operations and cash flows. On January 1, 1999 the Euro was
introduced as a common currency for members of the European Monetary Union. We
have not determined what impact, if any, the Euro will have on our foreign
exchange exposure. To date, we have not hedged the risks associated with
foreign exchange exposure. 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. To date, our foreign currency gains and losses have been immaterial.
Factors Affecting Marketable Securities
The fair value of the Company's investments in marketable securities at June 30,
1999 was $8.8 million. The Company's investment policy is to manage its
marketable securities portfolio to preserve principal and liquidity while
maximizing the return on the investment portfolio through the full investment of
available funds. The Company diversifies the marketable securities portfolio by
investing in multiple types of investment-grade securities. The Company's
marketable securities portfolio is primarily invested in short-term securities
with at least an investment grade rating to minimize interest rate and credit
risk as well as to provide for an immediate source of funds. If market interest
rates were to increase immediately and uniformly by 10% from the levels at June
30, 1999, the fair market value of the portfolio would decline by an immaterial
amount. We have the ability to hold our fixed income investments until
maturity, and therefore we do not expect our operating results or cash flows to
be materially affected by a sudden change in market interest rates on our
investment portfolio. Although changes in interest rates may affect the fair
value of the marketable securities portfolio and cause unrealized gains or
losses, such gains or losses would not be realized unless the investments are
sold.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Response to this item is included in "Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Certain Factors
that May Affect Future Performance" above.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At the 1999 annual meeting of AXENT's stockholders on June 4, 1999, stockholders
of record at the close of business on April 9, 1999 re-elected Richard A.
Lefebvre and Gabriel A. Battista as directors to serve until the annual meeting
of stockholders in 2002. There were 22,194,015 shares voted at the meeting; for
Mr. Lefebvre, 21,914,739 shares (98.74% of the shares voted) were voted for re-
election and 279,276 shares were voted against; for Mr. Battista, 21,901,511
shares (98.68% of the shares voted) were voted for election and 292,504 shares
were voted against; there were no abstentions or broker non-votes with respect
to either candidate. Messrs. Lefebvre and Battista join John C. Becker, John F.
Burton, Timothy A. Davenport and Kevin A. McNerney, whose terms as directors of
AXENT continued after the 1999 annual meeting.
At that meeting, AXENT's stockholders also approved AXENT's 1999 Incentive Stock
Plan (the "Option Plan") and the reservation of 1,300,000 shares of AXENT common
stock for issuance thereunder. Of the 22,194, 015 shares voted at the meeting,
18,487,609 shares voted to approve the Option Plan, 3,634,051 shares voted
against approval, and 72,355 shares abstained; there were no "broker non-votes"
on that matter. The Option Plan was approved by 83.30% of the shares voting at
the meeting and 66.41% of the shares outstanding on the record date of the
meeting.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) The following exhibits are filed or incorporated by reference, as stated
below:
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.
10.9 (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.
10.11A Second Amendment dated September 18, 1998 to Lease
Agreement 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.
10.17 (4) Memorandum of Understanding regarding certain
compensation and severance matters relating to Richard
A. Lefebvre, dated July 22, 1997.
10.17A (8) First Amendment to Memorandum of Understanding relating
to Richard Lefebvre.
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.
10.34 (6) AXENT's Executive Severance General Guidelines.
22
<PAGE>
10.35 (6) Lease Agreement dated as of April 23, 1998 by and
between Pracvest and AXENT.
10.36 (6) Lease Agreement dated as of May 6, 1997 by and between
CC&F Second Avenue Trust and Raptor Systems, Inc.
10.36A (6) First Amendment to Lease dated as of December 15, 1997
by and between CC&F Second Avenue Trust and Raptor
Systems, Inc.
10.37 (7) Share Exchange Agreement dated as of March 29, 1999 by
and during AXENT and the holders of all of the shares of
capital stock, share capital and warranty of CKS
Limited.
10.38 (8) Software Product Purchase and License Agreement dated as
of March 31, 1999 by and between AXENT and Raxco
Software, Inc.
10.39 (10) AXENT'S 1999 Incentive Stock Plan.
10.40 (11) AXENT'S 1999 PassGo Technologies Exchange Option Plan.
21.1 (9) Subsidiaries of the Registrant.
27.1 * Financial Data Schedule
27.2 * Financial Data Schedule (1998 Restated)
- -------------------------------------------------------------------------------
(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 September 30, 1997.
(5) Previously filed and incorporated herein by reference 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 Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 and incorporated herein by reference.
(7) Previously filed as an exhibit to AXENT's Current Report on Form 8-K filed
in April 1999 and incorporated herein by reference.
(8) Previously filed as an exhibit to AXENT's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999 and incorporated herein by reference.
(9) Previously filed as an exhibit to AXENT's Annual Report on Form 10-K for
the year ended December 31, 1998 (File No. 0-28100) and incorporated herein
by reference.
(10) Previously filed as an appendix to AXENT's definitive proxy statement dated
April 30, 1999 and incorporated herein by reference.
(11) Previously filed as an exhibit to AXENT's Registration Statement on Form S-
8 (File No. 333-83329) and incorporated herein by reference.
* Filed herewith.
(b)AXENT filed two reports on Form 8-K during the three month period ended June
30, 1999. A report on Form 8-K was filed in April 1999 reporting information
under item 2 regarding the acquisition of CKS Limited and PassGo; item 7
financial statements were filed by amendment to that report on June 14, 1999.
23
<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 13, 1999 By:
--------------------------------
Robert B. Edwards, Jr.
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF AXENT
TECHNOLOGIES, INC. AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 97,985,000
<SECURITIES> 8,774,000
<RECEIVABLES> 29,336,000
<ALLOWANCES> 3,518,000
<INVENTORY> 422,000
<CURRENT-ASSETS> 136,180,000
<PP&E> 20,917,000
<DEPRECIATION> 9,145,000
<TOTAL-ASSETS> 187,273,000
<CURRENT-LIABILITIES> 35,067,000
<BONDS> 0
0
0
<COMMON> 558,000
<OTHER-SE> 151,648,000
<TOTAL-LIABILITY-AND-EQUITY> 187,273,000
<SALES> 0
<TOTAL-REVENUES> 47,873,000
<CGS> 0
<TOTAL-COSTS> 6,864,000
<OTHER-EXPENSES> 53,113,000
<LOSS-PROVISION> 310,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,104,000)
<INCOME-TAX> 1,717,000
<INCOME-CONTINUING> (8,269,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,269,000)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF AXENT
TECHNOLOGIES, INC. AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 51,173,000
<SECURITIES> 43,821,000
<RECEIVABLES> 25,564,000
<ALLOWANCES> 3,541,000
<INVENTORY> 131,000
<CURRENT-ASSETS> 122,886,000
<PP&E> 10,934,000
<DEPRECIATION> 5,087,000
<TOTAL-ASSETS> 137,471,000
<CURRENT-LIABILITIES> 24,982,000
<BONDS> 0
0
0
<COMMON> 508,000
<OTHER-SE> 111,981,000
<TOTAL-LIABILITY-AND-EQUITY> 137,471,000
<SALES> 0
<TOTAL-REVENUES> 42,871,000
<CGS> 0
<TOTAL-COSTS> 4,246,000
<OTHER-EXPENSES> 47,945,000
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,320,000)
<INCOME-TAX> (178,000)
<INCOME-CONTINUING> (5,897,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,897,000)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
