<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 March 31, 2000
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 May 10, 2000, there were 28,805,753 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
Condensed Consolidated Balance Sheets as of 4
March 31, 2000 (unaudited) and December 31, 1999
Unaudited Condensed Consolidated Statements of Operations 5
for the three months ended March 31, 2000 and 1999
Unaudited Condensed Consolidated Statements of Cash Flows 6
for the three months ended March 31, 2000 and 1999
Unaudited Condensed Consolidated Statements of Comprehensive 7
Income (Loss) for the three months ended March 31, 2000 and 1999
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1.
- -------
FINANCIAL STATEMENTS
The financial statements set forth below at March 31, 2000 and for the three
month periods ended March 31, 2000 and 1999 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, 1999, which are included in the Company's Annual Report on
Form 10-K as filed with the SEC on April 4, 2000.
3
<PAGE>
AXENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
<TABLE>
March 31,
2000 December 31,
(unaudited) 1999
------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 74,478 $ 61,534
Marketable securities 46,341 47,331
Accounts receivable, net 27,787 35,954
Other current assets 4,048 3,696
------------------- ------------------
Total current assets 152,654 148,515
Property and equipment, net 13,708 12,427
Goodwill and other intangible assets 28,021 29,554
Other assets 8,762 8,384
------------------- ------------------
Total assets $203,145 $198,880
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 16,821 $ 23,266
Deferred revenue 19,448 17,935
------------------- ------------------
Total current liabilities 36,269 41,201
Long term debt, net of current maturities 560 620
------------------- ------------------
Total liabilities 36,829 41,821
------------------- ------------------
Stockholders' equity:
Preferred stock, $0.02 par value (5,000,000 shares authorized,
none issued). -- --
Common stock, $0.02 par value (50,000,000 shares authorized,
28,787,223 and 28,047,696 issued and outstanding for the
three months ended March 31, 2000 and year ended
December 31, 1999, respectively). 576 561
Additional paid-in capital 200,530 191,272
Comprehensive income and other (702) (623)
Accumulated deficit (34,088) (34,151)
------------------- ------------------
Total stockholders' equity 166,316 157,059
------------------- ------------------
Total liabilities and stockholders' equity $203,145 $198,880
=================== ==================
</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
Ended March 31,
-----------------------------------------------
2000 1999
-------------------- -------------------
<S> <C> <C>
Net revenues:
Product licenses $19,813 $15,186
Services 10,530 6,258
-------------------- -------------------
Total net revenues 30,343 21,444
Cost of net revenues 4,647 3,143
-------------------- -------------------
Gross profit 25,696 18,301
Operating expenses:
Sales and marketing 15,263 13,656
Research and development 6,796 6,294
General and administrative 3,411 2,702
Amortization of acquired intangible assets 1,479 151
Acquisition-related charges -- 3,753
-------------------- -------------------
Total operating expenses 26,949 26,556
-------------------- -------------------
Loss before interest and taxes (1,253) (8,255)
Interest income 1,329 1,068
Income tax benefit (provision) (43) 1,119
-------------------- -------------------
Net income (loss) $ 33 $(6,068)
==================== ===================
Net income (loss) per common share (basic) $ -- $(0.23)
==================== ===================
Number of shares used in computing net income (loss) per common
share outstanding (basic) 28,441 26,292
==================== ===================
Net income (loss) per common share (diluted) $ -- $(0.23)
==================== ===================
Number of shares used in computing net income (loss) per
common share outstanding (diluted) 29,609 26,292
==================== ===================
</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 Three Months
Ended March 31,
------------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 33 $(6,068)
Non-cash items:
Depreciation and amortization 2,759 1,035
Deferred income taxes -- (1,415)
Write-off of in process research and development -- 2,000
Change in assets and liabilities 1,883 3,983
------------------- -----------------
Net cash provided by (used for) operating activities 4,675 (465)
------------------- -----------------
Investing activities:
Capital expenditures (2,456) (1,681)
Purchases of marketable securities (95,158) (1,783)
Maturity of marketable securities 97,004 14,524
Payments for business acquisitions, net of cash acquired (255) 227
------------------- -----------------
Net cash provided by (used for) investing activities (865) 11,287
------------------- -----------------
Financing activities:
Proceeds from issuance of common stock 9,273 2,333
Principal payments on note payable (60) --
------------------- -----------------
Net cash provided by financing activities 9,213 2,333
------------------- -----------------
Effect of exchange rate changes on cash (79) (372)
------------------- -----------------
Net increase in cash and cash equivalents 12,944 12,783
Cash and cash equivalents, beginning of period 61,534 80,035
------------------- -----------------
Cash and cash equivalents, end of period $ 74,478 $92,818
=================== =================
</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
Ended March 31,
------------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Net income (loss) $ 33 $(6,068)
Currency translation effects (79) (372)
------------------ ------------------
Comprehensive loss $ (46) $(6,440)
================== ==================
</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
March 31, 2000
Basis of Presentation
AXENT Technologies, Inc. and its wholly owned subsidiaries (collectively, the
"Company" or "AXENT") is a global leader in information security, provides e-
security solutions that maximize our customers' business advantage. AXENT
delivers integrated products and expert services to assess, protect, enable and
manage business processes and information assets. Through our unique Lifecycle
Security methodology combined with Smart Security Architecture, we deliver the
"right" level of security for customers. Award-winning solutions offer
assessment and policy compliance, firewall, intrusion detection, authentication,
VPN, Web-access, single sign-on and user administration for the entire
enterprise.
The accompanying unaudited condensed consolidated financial statements reflect
all the adjustments, consisting of normal recurring adjustments, that, in the
opinion of management, are necessary for a fair presentation of the results for
the interim periods presented. The results for the three month period ended
March 31, 2000 may not necessarily be indicative of the results for the entire
year or any future period. The December 31, 1999 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, 1999, which
are included in the Company's Form 10-K filed with the SEC on April 4, 2000.
Business Combinations
On March 31, 1999, the Company completed the acquisition of United Kingdom-based
CKS Limited, the parent of PassGo Technologies Limited, 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 AXENT 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 of $6.0 million, 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 $27.8 million, which is being amortized, on a straight-line
basis over their useful lives, of between three and seven years. During 1999,
the Company recorded a charge for acquired in-process research and development
of approximately $2.0 million related to PassGo. The charge reflects technology
acquired for which technological feasibility had not been reached and for which
there is no alternative future use.
On January 12, 1999, the Company completed its merger with Internet Tools, Inc.
("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 This acquisition did not meet the criteria for a significant
business combination and as such pro forma disclosures are not included herein.
Net Income Per Common 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
8
<PAGE>
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 first quarter of 1999 as their inclusion would be anti-dilutive to the basic
loss per share calculations.
Recent Accounting Pronouncements
On January 1, 1999, the Company adopted the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants (the
"AICPA" Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of
Start-Up Activities," issued by the Accounting Standards Executive Committee of
the AICPA. SOP No. 98-5 established standards on accounting for start-up and
organization costs and, in general, requires such costs to be expensed as
incurred. The adoption of SOP No. 98-5 did not impact the Company's financial
position or results of operations.
In December 1998, the AICPA issued 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 is effective for the Company's
2000 financial statements. The Company has adopted SOP 98-9 on January 1, 2000.
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes a reporting standard for
derivative instruments which will require the Company to record all derivatives
as either assets or liabilities and requires that those instruments are recorded
at their fair value. During June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of SFAS No. 133." This statement defers the effective date of
SFAS 133 to 2001. The Company plans to adopt SFAS No. 133 for fiscal year
beginning January 1, 2001. The Company believes the adoption of SFAS 133 will
not have a material effect on the consolidated financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 became effective
January 1, 1999. The adoption of SOP 98-1 did not impact the Company's financial
position or results of operations.
Information Concerning Business Segments
In June 1997, the FASB issued 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.
9
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
(amounts in thousands) Ended March 31,
-------------------------------------------------
<S> <C> <C>
2000 1999
---------------------- --------------------
Net revenues:
Software products $ 28,433 $ 20,085
Other 1,910 1,359
---------------------- --------------------
Total net revenues $ 30,343 $ 21,444
====================== ====================
Segment operating loss:
Software products $ 250 $ (1,946)
Other (1,503) (6,309)
---------------------- --------------------
Total segment operating loss $ (1,253) $ (8,255)
====================== ====================
Total assets:
Software products $ 41,253 $ 43,698
Other 161,892 150,459
---------------------- --------------------
Total assets $203,145 $194,157
====================== ====================
</TABLE>
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
(amounts in thousands) Ended March 31,
------------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
Net revenues:
U.S. $ 22,097 $ 16,024
International 8,246 5,420
--------------------- --------------------
Total net revenues $ 30,343 $ 21,444
===================== ====================
Profit (loss):
U.S. $ 1,247 $ (6,022)
International (1,214) (46)
--------------------- --------------------
Total profit (loss) $ 33 $ (6,068)
===================== ====================
Total assets:
U.S. $178,603 $177,083
International 24,542 17,074
--------------------- --------------------
Total assets $203,145 $194,157
===================== ====================
</TABLE>
10
<PAGE>
Item 2.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Portions of this report contain 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. Our 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 below in
"Certain Factors Affecting Future Performance" and in AXENT's Form 10-K for
the year ended December 31, 1999 filed with the SEC on April 4, 2000 under the
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Certain Factors Affecting Future Performance" and
"Business--Certain Factors That May Affect Future Results". The Company
assumes no obligation to update or correct forward-looking statements due to
events or changes after the date of this report.
Overview
We are a global leader in information security and provides e-security solutions
that maximize our customers' business advantage. We deliver integrated
products and expert services to assess, protect, enable and manage business
processes and information assets. Through our unique Lifecycle Security
methodology, combined with our Smart Security Architecture, solutions are
provided that permit customers to select the right level of security for their
business needs. Our 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.
11
<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
Ended March 31,
--------------------------------------------
2000 1999
------------------- -----------------
<S> <C> <C>
Net revenues:
Product licenses 65.3% 70.8%
Services 34.7 29.2
------------------- -----------------
Total net revenues 100.0 100.0
Cost of net revenues 15.3 14.7
------------------- -----------------
Gross profit 84.7 85.3
Operating expenses:
Sales and marketing 50.3 63.7
Research and development 22.4 29.4
General and administrative 11.2 12.5
Amortization of acquired intangible assets 4.9 0.7
Acquisition-related charges -- 17.5
------------------- -----------------
Total operating expenses 88.8 123.8
------------------- -----------------
Loss before interest and taxes (4.1) (38.5)
Interest income 4.3 5.0
Income tax benefit (provision) (0.1) 5.2
------------------- -----------------
Net income (loss) 0.1% (28.3)%
=================== =================
</TABLE>
Three Months Ended March 31, 2000 Compared to
Three Months Ended March 31, 1999
Net Revenues
Our net revenues increased approximately 41.5%, or $8.90 million from $21.44
million for the three months ended March 31, 1999 to $30.34 million for the
three months ended March 31, 2000. Our revenues are subject to a number of risks
and uncertainties, including but not limited to, the level of demand for our
products; the volume and timing of customer orders, many of which come at the
end of a quarter; product and price competition; our ability to maintain and
expand our domestic and international sales and marketing organizations; our
ability to develop new and enhanced products; the availability of personnel and
our ability to attract and retain key personnel; the mix of distribution
channels through which our 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; 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 our actual or anticipated quarterly
revenues can be substantial and the failure to close such transactions may have
a material adverse impact on our operating results.
Our net revenues from product licenses increased approximately 30.5%, or $4.62
million, from $15.19 million for the three months ended March 31, 1999 to $19.81
million for the three months ended March 31, 2000. For those three-month periods
ended March 31, 1999 and 2000, net revenues from product licenses represented
70.8% and 65.3%, respectively, of total net revenues. The increase in product
licenses is primarily attributable to the acquisition of PassGo, increase in the
number and size of transactions, multiple product transactions and growth in our
core products (vulnerability assessment, intrusion detection and firewalls).
12
<PAGE>
Our net revenues from services increased approximately 68.3%, or $4.27 million,
from $6.26 million for the three months ended March 31, 1999 to $10.53 million
for the three months ended March 31, 2000, representing 29.2% and 34.7% of total
net revenues for the three months ended March 31, 1999 and 2000, respectively.
The increase in services revenues is primarily attributable to the increases in
consulting services, customer training courses and customers under maintenance
contracts.
Revenues derived from North American and international operations as a percent
of total revenues were 73% and 27%, respectively for the three months ended
March 31, 2000 as compared to 75% and 25%, respectively for the three months
ended March 31, 1999. The increase in international revenues as a percentage of
total revenues from 1999 to 2000 is attributable to increased sales due to the
expansion of our operations, primarily in European markets, and the acquisition
of UK-based PassGo.
Cost of Net Revenues
Our cost of net revenues includes the cost 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 our customers. Cost of net revenues increased approximately 47.9%, or $1.51
million, from $3.14 million for the three months ended March 31, 1999 to $4.65
million for the three months ended March 31, 2000, representing 14.7% and 15.3%
of net revenues for the three months ended March 31, 1999 and 2000,
respectively. The increase in the cost of net revenues is primarily attributable
to the increase in staff of our customer support and consulting services
operations necessary to support a larger installed customer base as well as
additional products offered by our company, including PassGo. The modest
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 the increased percentage of net revenues derived from consulting
services. Cost of net revenues, as a percentage of revenues, may fluctuate from
period to period due, among other things, 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 11.8%, or $1.60 million, from $13.66 million for the three
months ended March 31, 1999 to $15.26 million for the three months ended March
31, 2000, representing 63.7% and 50.3% of total net revenues for 1999 and 2000,
respectively. The increase in dollar amount of is due to an increase in staff
and marketing programs to support our sales and marketing activities plus the
addition of costs associated with PassGo. The decrease in sales and marketing
as a percentage of total net revenues is primarily due to a greater increase in
the growth of total net revenues in the first three months of 2000. We
currently anticipate that the dollar amount of sales and marketing expenses will
increase as we continue to hire necessary staff and expand our marketing
activities to promote expansion of our 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 8.0%, or $502,000, from $6.29 million for the three months ended March
31, 1999 to $6.79 million for the three months ended March 31, 2000,
representing 29.4% and 22.4% of total net revenues for the three months ended
March 31, 1999 and 2000, respectively. The increase in dollar amount resulted
from the addition of staff, the addition of costs associated with the acquired
operations of Internet Tools and PassGo, and use of outside consultants needed
to develop, maintain and enhance our software products. The decrease in research
and development as a percentage of total net revenues is primarily due to a
greater increase in the growth of total net revenues in the first three months
of 2000. We currently anticipate that the dollar amount of research and
development expenses will increase as we continue to commit substantial
resources to research and development in future periods.
13
<PAGE>
General and Administrative
General and administrative expenses consist primarily of personnel costs,
including salaries, benefits and bonuses, travel and related costs for
management, finance and accounting, legal and other professional services.
General and administrative expenses increased 26.2%, or $709,000, from $2.70
million for the three months ended March 31, 1999 to $3.41 million for the three
months ended March 31, 2000, representing 12.5% and 11.2% of total net revenues
for 1999 and 2000, respectively. The increase in dollar amount is primarily a
result of additional staff and investments in corporate infrastructure and
information systems needed to support our operations, the integration of
acquisitions plus the addition of costs associated with PassGo. The decrease in
the percentage of net revenues is primarily due to a greater increase in the
growth of total net revenues in the first three months of 2000. We currently
anticipate that the dollar amount of general and administrative expenses will
increase as we continue to invest in the corporate infrastructure.
Amortization of Acquired Intangible Assets
Amortization of intangible assets consists primarily of the amortization of
purchased goodwill and other purchased intangible assets. Amortization of
intangible assets expenses increased $1.33 million, from $151,000 for the three
months ended March 31, 1999 to $1.48 million for the three months ended March
31, 2000. The increase in dollar amount is primarily due to the amortization of
goodwill and intangibles resulting from the acquisition of PassGo and
amortization of technology purchased from Compaq Computer Corporation in the
third quarter of 1999, which is being amortized ratably over three to seven
years.
Acquisition-Related Charges
For the three months ended March 31, 1999, we incurred charges of approximately
$1.75 million for severance, investment banking, legal and accounting fees, and
other costs related to the merger with Internet Tools, and approximately $2.0
million of in-process research and development expense in connection with the
acquisition of PassGo.
Loss from Continuing Operations before Interest and Taxes
Loss from continuing operations before interest and taxes was $1.25 million and
$8.26 million for the three months ended March 31, 2000 and 1999, respectively.
The loss in the first quarter of 2000 is primarily attributable to amortization
charges of $1.48 million, while the loss in the first quarter of 1999 was
primarily attributable to a decrease in license revenues (compared to the
increase in operating expenses) and acquisition-related charges of $3.75
million.
Interest Income
Interest income increased 24.4%, or $261,000, from $1.07 million for the three
months ended March 31, 1999 to $1.33 million for the three months ended March
31, 2000. The increase in interest income is primarily due to the increase in
cash and cash equivalents and our investments are yielding a higher return due
to an increase in interest rates. It is currently our 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
We account 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 records
a valuation allowance for deferred tax assets when in management's judgement it
is more likely than not that all or a portion of the deferred asset will not be
realized.
We recorded a tax benefit of $1.12 million in 1999 related to our taxable loss
from operations and a tax provision of $43,000 in 2000 related to our taxable
income from operations.
14
<PAGE>
Net Income (Loss)
As a result of the above, we recorded a profit of $33,000 for the three months
ended March 31, 2000 compared to a loss of $6.07 million for the three months
ended March 31, 1999. This increase is primarily attributable to the growth in
net revenues.
Certain Risks and Uncertainties
- -------------------------------
Year 2000
We approached Year 2000 compliance by preparing an inventory of all business
disruption problems that we regarded 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. We have assessed the
impact of Year 2000 compliance on the current and prior versions of our
products, internal information systems, other internal computer systems and
equipment containing embedded systems, and we have implemented corrective
actions where appropriate. Although we have not yet received any complaints from
our customers about the Year 2000 readiness of our products, our products may
contain undetected errors or defects associated with Year 2000 date functions.
Such errors could result in delay or loss of revenue, diversion of development
resources and possible litigation, which might materially adversely affect our
business, financial condition or results of operations.
We believe that the current version of each of our products 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 our
product. Information on the Year 2000 compliance of our products is available on
our Web site (www.axent.com/y2k.htm).
We believe we have tested our equipment and systems have remediated or replaced
equipment or systems that may not have been Year 2000 compliant. To date, we
have not experienced any significant problems due to non-Year 2000 ready
equipment or software.
Costs we incurred in Year 2000 testing and remediation or replacement of
noncompliant systems are not material to our financial condition or results of
operations. The cost of continued testing of our products will be included in
our research and development expenses, and testing of internal equipment,
hardware and software systems generally is included in general and
administrative expense. In the case of prior product releases that are not Year
2000 ready, if any, we expect to devote internal engineering and customer
support resources to resolving any issues for existing customers of those
products.
We have made representations and warranties, both in contracts and in written
communications, to certain of our customers regarding the Year 2000 readiness of
our products. With respect to any contractual representation we made regarding
Year 2000 readiness that was not accurate, we will seek to upgrade the affected
customer to our current Year 2000 compliant version of the product being used by
the customer. If we have made a materially inaccurate statement regarding the
Year 2000 readiness of our products and the customer chooses not to upgrade to a
Year 2000 compliant version of the product, we may face the risk of one or more
lawsuits from customers alleging breach of representation.
The foregoing shall be considered a Year 2000 readiness disclosure to the
maximum extent allowed under the Year 2000 Information and Readiness Disclosure
Act.
Euro Currency
The European Union's adoption of the Euro currency raises a variety of issues
associated with our 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. We have assessed
Euro issues related to our treasury operations, product pricing, contracts and
accounting systems. We believe that our existing or planned hardware and
software systems have and will accommodate the transition to the Euro and any
future required operating changes will not have a material effect on future
results of operations or financial condition.
15
<PAGE>
Financial Condition-Liquidity and Capital Resources
- ---------------------------------------------------
Our overall cash and cash equivalents were $74.48 million at March 31 2000, an
increase of approximately $12.95 million from $61.53 million at December 31,
1999. As discussed below, marketable securities decreased $990,000 to $46.34
million at March 31, 2000 from $47.33 million at March 31, 1999. During the
three month periods ended March 31, 2000 and 1999, respectively, we financed our
operations primarily through cash reserves and available working capital. Our
operating activities provided cash of $4.68 million for the three month period
ended March 31, 2000 and used cash of $465,000 for the three month period ended
March 31, 1999, respectively. Net cash provided by operating activities in the
three months ended March 31, 2000, consisted primarily of net income net of
amortization of intangible assets.
We made capital expenditures of approximately $2.46 million and $1.68 million
for the three month periods ended March 31, 2000 and 1999, respectively. These
purchases have generally consisted of computer workstations, networking
equipment, office equipment, office furniture and equipment and leasehold
improvements. We had no material firm commitments for capital expenditures at
March 31, 2000.
During the three month period ended March 31, 2000, our financial position was
also affected by the following: 1) we had cash outlays of approximately $100,000
for transaction costs associated with the acquisition of ITI; 2) we received
proceeds of $9.27 million from the issuance of common stock for stock option
exercises and employee stock purchase plan; 3) we purchased $95.16 million of
marketable securities; 4) we received $97.0 million from the maturity of short-
term investments; and 5) we paid $255,000 for the PassGo acquisition-related
expenses.
We believe that our working capital at March 31, 2000 and cash generated from
operations will be sufficient to meet our capital expenditures, working capital
and other cash requirements both for the next twelve months and for the
foreseeable future.
Certain Factors Affecting Future Performance
- --------------------------------------------
Factors Affecting Our Business and Prospects
Although we have experienced significant growth in revenues from our software
products and consulting services, we do not believe current or prior growth
rates are necessarily indicative of future operating results and enhanced
services offerings. In addition, we expect increased competition and intend to
invest significantly in development of products and services methodologies. As a
result, there can be no assurance that we will remain profitable on a quarterly
or annual basis. Due to our relatively limited operating history with respect to
many of our software products and consulting services, predictions as to future
operating results are difficult. Future operating results may fluctuate due to
factors such as: demand for our products and consulting services; the volume,
size and timing of customer orders; the number of competitors and the breadth
and functionality of their product offerings and services; the introduction by
us or our competitors of new products, product enhancements and services
offerings; 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
and perform vulnerability assessments and managed services offerings; 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. Our future operating results also
may be affected if we fail to recognize the anticipated benefits of our
acquisitions on the timetable we project; those benefits include, among others,
integration of product and services offerings and coordination of their sales,
marketing and research, development and services teams without disruption or
unanticipated expense. Our future results of operations may also be adversely
affected if the anticipated integration of operations of acquired companies
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 our software products is highly competitive, and we expect that
we will face increasing pricing pressures from its current competitors and new
market entrants. As a result of increasing consolidation in the information
security industry, we expect 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 our financial condition and results of operations.
Any material reduction in the price of our software products and services
offerings would negatively affect gross margins and could materially adversely
affect our financial condition and results of operations.
The licensing of many of our 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
16
<PAGE>
cycle associated with the enterprise-wide licensing of our security software
products is typically long and subject to a number of significant risks over
which we have little or no control and, as a result, may expend significant
resources pursuing potential sales that will not be consummated.
Factors Affecting International Operations
We anticipate 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 consulting services and 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 our financial condition and results of operations. Based upon
our overall currency rate exposure at March 31, 2000, 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 our 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 our investments in marketable securities at March 31, 2000 was
$46.34 million. Our investment policy is to manage our marketable securities
portfolio to preserve principal and liquidity while maximizing the return on the
investment portfolio through the full investment of available funds. We
diversify the marketable securities portfolio by investing in multiple types of
investment-grade securities. Our 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 March 31, 2000, 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.
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 previously in our Form 10-Q for the first quarter of 1999 and in our
Form 10-K for 1999, a venture capital entity and a small former stockholder
owning less than a majority share of CKS Limited, which AXENT acquired in March
1999, commenced an action in the Suffolk County Superior Court in Boston,
Massachusetts against AXENT and its directors in May 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.
We are subject to legal proceedings and claims that arise in the ordinary course
of our business. In the opinion of management, the amount of ultimate liability
with respect to these actions will not materially effect our financial position
or results of operations.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) The following exhibits are filed or incorporated by reference, as stated
below:
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------------- ------------------------------------------------------------------------------------------------
<C> <S>
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(6) 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.
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(9) AXENT's 1999 Incentive Stock Plan.
10.40(10) AXENT's 1999 PassGo Technologies Exchange Option Plan.
27.1* Financial Data Schedule
===================================================================================================================
</TABLE>
- ----------------
(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 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.
18
<PAGE>
(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 appendix to AXENT's definitive proxy statement dated
April 30, 1999 and incorporated herein by reference.
(10) 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 one report on Form 8-K during the three month period ended March
31, 2000. On February 23,2000, AXENT filed a report on Form 8-K reporting
information under item 4 regarding AXENT's dismissal of PricewaterhouseCoopers
LLP as our auditors after PricewaterhouseCoopers could not be determined to meet
requirements for "independence" to audit our financial statements at December
31, 1999 and for the year then ended. That report also reported that AXENT
engaged Ernst & Young LLP to be our independent auditors for 1999.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AXENT TECHNOLOGIES, INC.
Date: May 12, 2000 By:
--------------------------------------
Phillip A. Salopek, Jr.
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the condensed
consolidated balance sheet and statement of operations of AXENT Technologies,
Inc. as of and for the three months ended March 31, 2000 and 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 74,478,000 92,818,000
<SECURITIES> 46,341,000 19,033,000
<RECEIVABLES> 30,893,000 29,304,000
<ALLOWANCES> 3,106,000 2,696,000
<INVENTORY> 0 449,000
<CURRENT-ASSETS> 152,654,000 4,202,000
<PP&E> 24,842,000 17,710,000
<DEPRECIATION> 11,134,000 6,597,000
<TOTAL-ASSETS> 203,145,000 194,157,000
<CURRENT-LIABILITIES> 36,269,000 39,539,000
<BONDS> 560,000 0
0 0
0 0
<COMMON> 576,000 557,000
<OTHER-SE> 165,740,000 154,061,000
<TOTAL-LIABILITY-AND-EQUITY> 203,145,000 194,157,000
<SALES> 0 0
<TOTAL-REVENUES> 30,343,000 21,444,000
<CGS> 0 0
<TOTAL-COSTS> 4,647,000 3,143,000
<OTHER-EXPENSES> 26,949,000 26,556,000
<LOSS-PROVISION> 257,000 150,000
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,253,000) (8,255,000)
<INCOME-TAX> (43,000) 1,119,000
<INCOME-CONTINUING> 33,000 (6,068,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 33,000 (6,068,000)
<EPS-BASIC> 0.00 (0.23)
<EPS-DILUTED> 0.00 (0.23)
</TABLE>
