<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 September 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 November 10, 1999, there were 28,002,953 shares outstanding of the
Registrant's Common Stock, par value $.02 per share.
- --------------------------------------------------------------------------------
<PAGE>
AXENT TECHNOLOGIES, INC.
------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Unaudited Condensed Consolidated Balance Sheets as of 4
September 30, 1999 and December 31, 1998
Unaudited Condensed Consolidated Statements of Operations 5
for the three and nine months ended September 30, 1999 and 1998
Unaudited Condensed Consolidated Statements of Cash Flows 6
for the nine months ended September 30, 1999 and 1998
Unaudited Condensed Consolidated Statements of Comprehensive 7
Income (Loss) for the three and nine months ended September 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 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1.
- -------
FINANCIAL STATEMENTS
The financial statements set forth below at September 30, 1999 and for the three
and nine month periods ended September 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>
September 30, December 31,
1999 1998
----------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 52,491 $ 80,035
Marketable securities 54,987 31,774
Accounts receivable, net 29,916 28,300
Other current assets 3,512 4,128
----------------- ----------------
Total current assets 140,906 144,237
Property and equipment, net 12,242 7,482
Goodwill and other intangible assets 29,164 2,340
Other assets 9,803 7,217
----------------- ----------------
Total assets $ 192,115 $161,276
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 23,394 $ 15,764
Deferred revenue 16,641 11,184
----------------- ----------------
Total liabilities 40,035 26,948
----------------- ----------------
Stockholders' equity:
Common stock, par value $0.02: 27,947,661 and 26,163,284
shares issued and outstanding, respectively 559 523
Additional paid-in capital 189,238 161,386
Accumulated deficit (36,815) (27,211)
Accumulated comprehensive income and other (902) (370)
----------------- ----------------
Total stockholders' equity 152,080 134,328
----------------- ----------------
Total liabilities and stockholders' equity $192,115 $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 Nine Months
Ended September 30, Ended September 30,
------------------------------- -----------------------------
1999 1998 1999 1998
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues:
Product licenses $ 20,029 $ 18,968 $ 52,760 $ 52,643
Services 9,343 5,047 24,485 14,243
-------------- ------------- ------------- ------------
Total net revenues 29,372 24,015 77,245 66,886
Cost of net revenues 4,173 2,341 11,037 6,587
-------------- ------------- ------------- ------------
Gross profit 25,199 21,674 66,208 60,299
Operating expenses:
Sales and marketing 15,255 9,881 44,570 28,619
Research and development 6,647 4,731 19,863 13,440
General and administrative 2,762 1,578 8,131 4,490
Amortization of acquired intangible assets 1,301 131 2,761 295
Acquisition-related charges -- -- 3,753 17,422
-------------- ------------- ------------- ------------
Total operating expenses 25,965 16,321 79,078 64,266
-------------- ------------- ------------- ------------
Income (loss) before royalties, interest and taxes (766) 5,353 (12,870) (3,967)
Interest income and other 1,264 1,228 3,382 3,702
Royalty income -- 383 -- 1,510
Income tax benefit (provision) (570) (2,571) 1,147 (2,749)
-------------- ------------- ------------- ------------
Net income (loss) $ (72) $ 4,393 $ (8,341) $(1,504)
============== ============= ============= ============
Net income (loss) per common share (basic): $ (0.00) $ 0.17 $ (0.30) $(0.06)
============== ============= ============= ============
Number of shares used in computing net income (loss) per
common share outstanding (basic) 27,926 25,510 27,409 25,025
============== ============= ============= ============
Net income (loss) per common share (diluted): $ (0.00) $ 0.16 $(0.30) $(0.06)
============== ============= ============= ============
Number of shares used in computing net income (loss) per
common share outstanding (diluted) 27,926 26,776 27,409 25,025
============== ============= ============= ============
</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 Nine Months
Ended September 30,
-----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
CASH INFLOWS (OUTFLOWS)
Operating activities:
Net loss $(8,341) $ (1,504)
Non-cash items:
Depreciation and amortization 5,967 2,245
Deferred income taxes (1,571) (1,076)
Write-off of in process research and development 2,000 --
Change in assets and liabilities 3,287 4,850
---------------- ---------------
Net cash provided by operating activities 1,342 4,515
---------------- ---------------
Investing activities:
Capital expenditures (4,676) (5,218)
Proceeds from the sale of marketable securities -- 389
Purchases of marketable securities (66,822) (64,034)
Maturity of marketable securities 43,609 62,661
Payments for business acquisitions, net of cash acquired (3,398) (238)
---------------- ---------------
Net cash used by investing activities (31,287) (6,440)
---------------- ---------------
Financing activities:
Proceeds from issuance of common stock 2,933 9,876
---------------- ---------------
Net cash provided by financing activities 2,933 9,876
---------------- ---------------
Effect of exchange rate changes on cash (532) (73)
---------------- ---------------
Net increase (decrease) in cash and cash equivalents (27,544) 7,878
Cash and cash equivalents, beginning of period 80,035 51,632
---------------- ---------------
Cash and cash equivalents, end of period $ 52,491 $ 59,510
================ ===============
</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 Nine Months
Ended September 30, Ended September 30,
------------------------------ -------------------------------
1999 1998 1999 1998
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ (72) $ 4,393 $ (8,341) $ (1,504)
Other comprehensive income (loss):
Realization of gain on marketable securities -- -- -- (238)
Currency translation effects (219) (40) (532) (73)
------------ -------------- ------------- --------------
Comprehensive income (loss) $ (291) $ 4,353 $(8,873) $ (1,815)
============ ============== ============= ==============
</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 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 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 nine month periods
ended September 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 consolidated 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 nine months ended September 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>
Unaudited Pro Forma Information:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------------------------------------
1999 1998
-------------------------- -------------------------
<S> <C> <C>
Net revenues $ 79,548,000 $ 76,280,000
Net loss from operations $ (10,978,000) $ (7,554,000)
Net loss per common share from operations
(basic & diluted) $ (0.39) $ (0.28)
</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 consolidated financial statements included
herein 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 consolidated 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 consolidated financial
statements included herein 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 Nine Months
Ended September 30, Ended September 30,
----------------------------------- -------------------------------------
1999 1998 1999 1998
--------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net revenues:
Software products $ 27,234,000 $ 22,831,000 $ 71,989,000 $ 63,748,000
Other 2,138,000 1,184,000 5,256,000 3,138,000
--------------- ---------------- ----------------- ----------------
Total net revenues $ 29,372,000 $ 24,015,000 $ 77,245,000 $ 66,886,000
=============== ================ ================= ================
Segment operating profit (loss):
Software products $ 13,000 $ 4,706,000 $ (7,704,000) $ 10,838,000
Other (779,000) 647,000 (5,166,000) (14,805,000)
--------------- ---------------- ----------------- ----------------
Total segment operating profit (loss) $ (766,000) $ 5,353,000 $(12,870,000) $ (3,967,000)
=============== ================ ================= ================
Total assets:
Software products $ 45,084,000 $ 35,276,000
Other 147,031,000 110,309,000
----------------- ----------------
Total assets $ 192,115,000 $ 145,585,000
================= ================
</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. Foreign operations' revenue, profit and
identifiable assets are shown in the following table.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------- --------------------------------------
1999 1998 1999 1998
--------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net revenues:
U.S. $ 19,669,000 $ 14,545,000 $ 54,341,000 $ 47,490,000
International 9,703,000 9,470,000 22,904,000 19,396,000
--------------- --------------- ----------------- -----------------
Total net revenues $ 29,372,000 $ 24,015,000 $ 77,245,000 $ 66,886,000
=============== =============== ================= =================
Profit (loss):
U.S. $ (2,192,000) $ (1,887,000) $ (10,052,000) $ (12,940,000)
International 2,120,000 6,280,000 1,711,000 11,436,000
--------------- --------------- ----------------- -----------------
Total profit (loss) $ (72,000) $ 4,393,000 $ (8,341,000) $ (1,504,000)
=============== =============== ================= =================
Total assets:
U.S. $ 171,320,000 $ 142,363,000
International 20,795,000 3,222,000
----------------- -----------------
Total assets $ 192,115,000 $ 145,585,000
================= =================
</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 its 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 security, 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. During the first quarter of 1999 the Company acquired ITI and
PassGo. The Company believes 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 Nine Months
Ended September 30, Ended September 30,
-------------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net revenues:
Product licenses 68.2% 79.0% 68.3% 78.7%
Services 31.8 21.0 31.7 21.3
------------- ------------ ----------- -----------
Total net revenues 100.0 100.0 100.0 100.0
Cost of net revenues 14.2 9.7 14.3 9.8
------------- ------------ ----------- -----------
Gross profit 85.8 90.3 85.7 90.2
Operating expenses:
Sales and marketing 51.9 41.2 57.7 42.8
Research and development 22.6 19.7 25.7 20.1
General and administrative 9.4 6.6 10.5 6.7
Amortization of acquired intangible assets 4.5 0.5 3.6 0.4
Acquisition-related charges -- -- 4.9 26.0
------------- ------------ ----------- -----------
Total operating expenses 88.4 68.0 102.4 96.1
------------- ------------ ----------- -----------
Income (loss) before royalties, interest and taxes (2.6) 22.3 (16.7) (5.9)
Interest income and other 4.3 5.1 4.4 5.5
Royalty income -- 1.6 -- 2.3
Income tax benefit (provision) (1.9) (10.7) 1.5 (4.1)
------------- ------------ ----------- -----------
Net income (loss) (0.2)% 18.3% (10.8)% (2.2)%
============== ============ ============ ============
</TABLE>
Three Months Ended September 30, 1999 Compared to
Three Months Ended September 30, 1998
Net Revenues
The Company's total net revenues increased 22.3% or $5.36 million from $24.01
million for the three months ended September 30, 1998 to $29.37 million for the
three months ended September 30, 1999.
The Company's net revenues from product licenses increased approximately 5.6%,
or $1.06 million from $18.97 million for the three months ended September 30,
1998 to $20.03 million for the three months ended September 30, 1999. The growth
in license revenue was attributable to the addition of revenue as a result of
the PassGo acquisition. For those periods in 1998 and 1999, net revenues from
product licenses represented 79.0% and 68.2%, 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 failure 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 85.1%, or $4.30
million, from $5.04 million for the three months ended September 30, 1998 to
$9.34 million for the three months ended September 30, 1999. The increase in
services revenues is primarily attributable to the increases in consulting
services, customer training courses, the addition of revenue as a result of the
PassGo acquisition and customers under maintenance contracts. For those periods
in 1998 and 1999, net revenues from services represented 21.0% and 31.8%,
respectively, of total net revenues.
The Company's net revenues from North American and international operations were
67% and 33% of total revenues, respectively, for the three months ended
September 30, 1999 as compared to 70% and 30%, 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, primarily in European 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 78.3%,
or $1.83 million, from $2.34 million for the three months ended September 30,
1998 to $4.17 million for the three months ended September 30, 1999. For those
periods in 1998 and 1999, cost of net revenues represented 9.7% and 14.2% of net
revenues, respectively. The increase in the cost of net revenues is primarily
attributable to the increase in staff of the Company's customer support and
consulting services operations necessary to support a larger installed customer
base as well as additional products offered by the Company, including PassGo.
The increase in the cost of net revenues as a percentage of revenues is
primarily attributable to the increased costs associated with supporting a
larger customer base and increased consulting services. 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 54.4%, or $5.37 million, from $9.88 million for the three
months ended September 30, 1998 to $15.25 million for the three months ended
September 30, 1999. For those periods in 1998 and 1999, sales and marketing
expenses represented 41.2% and 51.9% 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 40.5%, or $1.92 million, from $4.73 million for the three months ended
September 30, 1998 to $6.65 million for the three months ended September 30,
1999. For those periods in 1998 and 1999, research and development expenses
represented 19.7% and 22.6% of total net revenues, respectively. The increase in
dollar amount and percentage of total net revenues resulted from the addition of
staff and the use of outside consultants needed to develop, maintain and enhance
the Company's software products plus the addition of costs associated with ITI
and 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.
14
<PAGE>
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 75.0%, or $1.18 million, from $1.58 million
for the three months ended September 30, 1998 to $2.76 million for the three
months ended September 30, 1999. For those periods in 1998 and 1999, general and
administrative expenses represented 6.6% and 9.4% 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 $1.17 million, from $131,000 for the three
months ended September 30, 1998 to $1.30 million for the three months ended
September 30, 1999. The increase in dollar amount is primarily due to the
amortization of goodwill resulting from the acquisition of PassGo, which is
being amortized ratably over three to seven years.
Income (Loss) before Royalties, Interest and Taxes
Loss from continuing operations before royalties, interest and taxes increased
$6.12 million from a profit of $5.35 million for the three months ended
September 30, 1998 to a loss of $766,000 for the three months ended September
30, 1999. The increase is primarily attributable to the increases in operating
expenses.
Interest Income and Other
Interest income and other increased 2.9%, or $36,000, from $1.23 million for the
three month period ended September 30, 1998 to $1.26 million for the three month
period ended September 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.
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 $383,000 for the three months ended September 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.
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 $2.57 million and $570,000 for the three months ended September
30, 1998 and 1999, respectively.
Excluding the amortization of acquired intangibles from income, the effective
tax rate is approximately 37% and 34% for the three months ended September 30,
1998 and 1999, respectively. The decrease in the effective tax rate is primarily
due to the net operating loss carryforward from PassGo.
15
<PAGE>
Net Income (Loss)
As a result of the above, the Company recorded a loss of $72,000 for the three
months ended September 30, 1999 compared to a profit of $4.39 million for the
three months ended September 30, 1998.
Nine Months Ended September 30, 1999 Compared to
Nine Months Ended September 30, 1998
Net Revenues
The Company's total net revenues increased approximately 15.5 % or $10.36
million from $66.89 million for the nine months ended September 30, 1998 to
$77.25 million for the nine months ended September 30, 1999.
The Company's net revenues from product licenses increased approximately 0.2%,
or $117,000, from $52.64 million for the nine months ended September 30, 1998 to
$52.76 million for the nine months ended September 30, 1999. For those periods
in 1998 and 1999, net revenues from product licenses represented 78.7% and
68.3%, 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 failure 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 71.9%, or
$10.24 million, from $14.24 million for the nine months ended September 30, 1998
to $24.48 million for the nine months ended September 30, 1999. The increase in
services revenues is primarily attributable to the increases in consulting
services, customer training courses and customers under maintenance contracts.
For those periods in 1998 and 1999, net revenues from services represented 21.3%
and 31.7%, 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 nine months ended September
30, 1999 as compared to 72% and 28%, 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, primarily in European markets, and the acquisition of
UK-based PassGo.
Cost of Net Revenues
Cost of net revenues increased approximately 67.6% or $4.45 million, from $6.59
million for the nine months ended September 30, 1998 to $11.04 million for the
nine months ended September 30, 1999. For those periods in 1998 and 1999, cost
of net revenues represented 9.8% 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, including PassGo. The increase in the cost of
net revenues as a percentage of revenues is primarily attributable to the
increased costs associated with supporting a larger customer base and increased
consulting services. 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.
16
<PAGE>
Sales and Marketing
Sales and marketing expenses increased 55.7%, or $15.95 million, from $28.62
million for the nine months ended September 30, 1998 to $44.57 million for the
nine months ended September 30, 1999. For those periods in 1998 and 1999, sales
and marketing expenses represented 42.8% and 57.7% 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 47.8%, or $6.42 million, from $13.44
million for the nine months ended September 30, 1998 to $19.86 million for the
nine months ended September 30, 1999. For those periods in 1998 and 1999,
research and development expenses represented 20.1% and 25.7% of total net
revenues, respectively. The increase in dollar amount and percentage of total
net revenues resulted from the addition of staff and the use of outside
consultants needed to develop, maintain and enhance the Company and software
products plus the addition of costs associated with ITI and 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 81.1%, or $3.64 million, from
$4.49 million for the nine months ended September 30, 1998 to $8.13 million for
the nine months ended September 30, 1999. For those periods in 1998 and 1999,
general and administrative expenses represented 6.7% and 10.5% 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 $2.47 million, from $295,000 for the nine
months ended September 30, 1998 to $2.76 million for the nine months ended
September 30, 1999. The increase in dollar amount is primarily due to the
amortization of goodwill resulting from the acquisition of PassGo, which is
being amortized ratably over three to seven years.
Acquisition-Related Charges
In the nine months ended September 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 nine months ended September
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
$8.90 million from a loss of $3.97 million for the nine months ended September
30, 1998 to a loss of $12.87 million for the nine months ended September 30,
1999. The increase is primarily attributable to the increase in operating
expenses.
17
<PAGE>
Interest Income and Other
Interest income and other decreased 8.6%, or $320,000, from $3.70 million for
the nine month period ended September 30, 1998 to $3.38 million for the nine
month period ended September 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.
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 $1.51 million for the nine months ended September
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.
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 $2.75 million for the nine months ended September 30, 1998 and a
tax benefit related to its taxable loss from operations of $1.15 million for the
nine months ended September 30, 1999.
Excluding the amortization of acquired intangibles and the write off of certain
acquisition costs from income, the effective tax rate is approximately 37% and
34% for the nine months ended September 30, 1998 and 1999, respectively. The
decrease in the effective tax rates is primarily due to the net operating loss
carryforward from PassGo.
Net Income (Loss)
As a result of the above, the Company recorded a loss of $8.34 million for the
nine months ended September 30, 1999 compared to a loss of $1.50 million for the
nine months ended September 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
18
<PAGE>
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.
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 the installation and Year 2000 testing for these systems
have been completed.
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.
19
<PAGE>
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 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 $52.49 million at September
30, 1999, a decrease of approximately $27.55 million from $80.04 million at
December 31, 1998. As discussed below, marketable securities increased $23.21
million from $31.77 million at December 31, 1998 to $54.98 million at September
30, 1999. During the nine month periods ended September 30, 1998 and 1999,
respectively, the Company financed its operations primarily through cash
reserves and available working capital. The Company's operating activities
provided cash of $4.52 million and $1.34 million for the nine month periods
ended September 30, 1998 and 1999, respectively. Net cash provided by operating
activities in the nine months ended September 30, 1999, consisted primarily of
net income net of amortization of intangible assets and payments for transaction
related costs associated with the acquisitions of Raptor and ITI.
The Company made capital expenditures of approximately $5.22 million and $4.68
million for the nine month periods ended September 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 September 30, 1999.
During the nine month period ended September 30, 1999, the Company's cash
position was also affected by the following: 1) the Company had cash outlays of
approximately $448,000 and $1.52 million for transaction costs associated with
the acquisitions of Raptor and ITI, respectively; 2) the Company received
proceeds of $2.93 million from the issuance of common stock upon stock option
exercises and under its employee stock purchase plan; 3) the Company purchased
$66.82 million of marketable securities; 4) the Company received $43.61 million
from the maturity of marketable securities; and 5) the Company paid $3.40
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. The Company also expects to continue amortizing
intangible assets, which increases operating expenses significantly. 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; Year 2000 issues; 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
20
<PAGE>
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 or businesses
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 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, providing customer support
across time zones and in different languages, 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 September 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
September 30, 1999 was $54.99 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 September 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
21
<PAGE>
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.
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 1. Legal Proceedings.
- ------- ------------------
As reported in AXENT's Form 10-Q for the quarter ended March 31, 1999, a venture
capital entity and a small former stockholder owning a less than majority share
of CKS Limited, the parent company of PassGo Technologies, commenced an action
in the Suffolk County Superior Court in Boston, Massachusetts against AXENT and
its directors on May 12, 1999. The action alleges violations of the
Massachusetts Uniform Securities Act, negligent misrepresentations, and unfair
trade practices. AXENT believes the claims are without merit and intends to
defend the action vigorously.
Item 6. Exhibits and Reports on Form 8-K.
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(a) The following exhibits are filed or incorporated by reference, as
stated below:
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -------------
<S> <C>
3.1 (1) Amended and Restated Certificate of Incorporation of AXENT.
3.2 (2) Amended and Restated Bylaws of AXENT.
4.1 (1) Specimen stock certificate for shares of Common Stock of AXENT.
10.1 (1) AXENT's 1991 Amended and Restated Stock Option Plan.
10.2 (3) AXENT's 1996 Amended and Restated Stock Option Plan.
10.3 (3) AXENT's 1996 Amended and Restated Directors' Stock Option Plan.
10.9 (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, Acquisition, 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, Acquisition Two, Inc. and Raptor Systems, Inc. dated as
of December 1, 1997.
10.34 (6) AXENT's Executive Severance General Guidelines.
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)
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE>
<TABLE>
<S> <C>
(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.
</TABLE>
(b) AXENT filed no reports on Form 8-K during the three month period
ended September 30, 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: November 12, 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>
The schedule contains summary financial information extracted from the condensed
consolidation balance sheet and statement of operations of AXENT Technologies,
Inc. as of and for the nine months ended September 30, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 52,491,000
<SECURITIES> 54,987,000
<RECEIVABLES> 33,548,000
<ALLOWANCES> 3,632,000
<INVENTORY> 263,000
<CURRENT-ASSETS> 140,906,000
<PP&E> 21,303,000
<DEPRECIATION> 9,061,000
<TOTAL-ASSETS> 192,115,000
<CURRENT-LIABILITIES> 40,035,000
<BONDS> 0
0
0
<COMMON> 559,000
<OTHER-SE> 151,521,000
<TOTAL-LIABILITY-AND-EQUITY> 192,115,000
<SALES> 0
<TOTAL-REVENUES> 77,245,000
<CGS> 0
<TOTAL-COSTS> 11,037,000
<OTHER-EXPENSES> 79,078,000
<LOSS-PROVISION> 468,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,870,000)
<INCOME-TAX> 1,147,000
<INCOME-CONTINUING> (8,341,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,341,000)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the condensed
consolidated balance sheet and statement of opertions of AXENT Technologies,
Inc. as of and for the nine months ended September 30, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<RESTATED>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 59,510,000
<SECURITIES> 42,255,000
<RECEIVABLES> 26,840,000
<ALLOWANCES> 4,171,000
<INVENTORY> 96,000
<CURRENT-ASSETS> 129,250,000
<PP&E> 12,552,000
<DEPRECIATION> 5,755,000
<TOTAL-ASSETS> 145,585,000
<CURRENT-LIABILITIES> 26,165,000
<BONDS> 0
0
0
<COMMON> 511,000
<OTHER-SE> 118,908,000
<TOTAL-LIABILITY-AND-EQUITY> 145,585,000
<SALES> 0
<TOTAL-REVENUES> 66,886,000
<CGS> 0
<TOTAL-COSTS> 6,587,000
<OTHER-EXPENSES> 64,266,000
<LOSS-PROVISION> 120,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,967,000)
<INCOME-TAX> (2,749,000)
<INCOME-CONTINUING> (1,504,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,504,000)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
