<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1998.
-----------
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
0-22601
(Commission file number)
AXIOM INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 51-0356153
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
4000 Midlantic Drive
Mount Laurel, NJ 08054-5476
(Address of Principal Executive Offices) (Zip Code)
(609) 866-1000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the 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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
7,756,900 shares of Common Stock, par value $.01 per share, were
outstanding on August 14, 1998
<PAGE>
AXIOM INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I-Financial Information:
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets-June 30, 1998 (unaudited) and September 30, 1997....................................... 3
Consolidated Statements of Operations-Three and Nine Months Ended June 30, 1998 and 1997 (unaudited)............... 4
Consolidated Statements of Cash Flows-Nine Months Ended June 30, 1998 and 1997 (unaudited)......................... 5
Notes to Consolidated Financial Statements (unaudited).............................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 12
Part II-Other Information:
Item 1. Legal Proceedings............................................................................................. 17
Item 2. Changes in Securities......................................................................................... 17
Item 3. Defaults Upon Senior Securities............................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........................................................... 17
Item 5. Other Information............................................................................................. 17
Item 6. Exhibits and Reports on Form 8-K.............................................................................. 17
</TABLE>
(a) Exhibits
(b) Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AXIOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................................................... $2,238 $7,206
Accounts receivable............................................................ 13,083 14,241
Inventories.................................................................... 6,851 7,374
Deferred tax assets............................................................ 833 630
Income tax receivable.......................................................... 772 968
Other.......................................................................... 653 473
--- ---
Total current assets........................................................ 24,430 30,892
------ ------
PROPERTY AND EQUIPMENT:
Computer hardware and software................................................. 4,603 3,229
Production and test equipment.................................................. 2,719 1,995
Furniture, fixtures and leasehold improvements................................. 1,424 553
----- ---
8,746 5,777
Less-Accumulated depreciation and amortization................................. (4,078) (2,785)
------ ------
Net property and equipment.................................................. 4,668 2,992
DEFERRED TAX ASSETS............................................................... 4,732 2,704
RESTRICTED CASH................................................................... 548 -
OTHER ASSETS...................................................................... 539 267
INTANGIBLE ASSETS, net............................................................ 1,326 168
----- ---
$36,243 $37,023
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.............................................. $366 $147
Obligations to affiliates...................................................... 24 183
Accounts payable............................................................... 3,898 3,057
Accrued compensation and related benefits...................................... 1,232 1,066
Accrued agent commissions...................................................... 321 638
Other accrued expenses......................................................... 2,629 613
Deferred tax liabilities....................................................... 29 33
Deferred revenues.............................................................. 2,273 1,413
----- -----
Total current liabilities................................................... 10,772 7,150
------ -----
LONG-TERM LIABILITIES:
Deferred tax liabilities....................................................... 238 186
Long-term debt................................................................. 556 -
--- -----
Total long-term liabilities................................................. 794 186
--- ---
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares
issued and outstanding...................................................... - -
Common stock, $0.01 par value, 25,000,000 shares authorized, 7,756,900 and
6,466,900 shares issued and outstanding..................................... 78 65
Additional paid-in capital..................................................... 37,113 32,340
Accumulated deficit............................................................ (12,514) (2,718)
------- ------
------- ------
Total stockholders' equity.................................................. 24,677 29,687
------ ------
$36,243 $37,023
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
AXIOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months For The Nine Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Equipment............................................................ $7,349 $7,892 $16,131 $16,739
Services............................................................. 3,317 1,657 7,759 4,860
----- ----- ----- -----
Total revenues.................................................... 10,666 9,549 23,890 21,599
------ ----- ------ ------
COST OF REVENUES:
Equipment............................................................ 3,214 3,662 8,024 8,716
Services............................................................. 2,904 492 6,424 3,272
----- --- ----- -----
Total cost of revenues............................................ 6,118 4,154 14,448 11,988
----- ----- ------ ------
Gross profit...................................................... 4,548 5,395 9,442 9,611
----- ----- ----- -----
OPERATING EXPENSES:
Research, development and engineering................................ 1,891 1,810 5,763 5,600
Selling, general and administrative.................................. 6,339 2,119 13,273 6,542
Charge for purchased research and development........................ 2,387 - 2,387 -
----- ----- ----- -----
Total operating expenses.......................................... 10,617 3,929 21,423 12,142
------ ----- ------ ------
Operating income (loss)........................................... (6,069) 1,466 (11,981) (2,531)
INTEREST EXPENSE (INCOME), net (including related party interest)....... (46) 147 (241) 426
OTHER INCOME (EXPENSE).................................................. (9) (55) 5 (1)
------ ----- ------ ------
Income (loss) before income taxes................................. (6,032) 1,264 (11,735) (2,958)
INCOME TAX (EXPENSE) BENEFIT............................................ - (510) 1,939 1,250
--- ---- ----- -----
NET INCOME (LOSS)....................................................... $ (6,032) $754 $ (9,796) $(1,708)
-------- ---- ------- -------
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE.................... $(0.85) $0.22 $ (1.46) $(0.49)
------ ----- ------ ------
------ ----- ------ ------
SHARES USED IN COMPUTING BASIC AND DILUTED NET INCOME (LOSS) INCOME PER
COMMON SHARE......................................................... 7,133 3,477 6,689 3,477
------ ----- ------ ------
------ ----- ------ ------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
AXIOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30,
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................................................... $ (9,796) $ (1,708)
Adjustments to reconcile net loss to net cash used in operating activities -
Depreciation and amortization....................................................................... 1,398 1,088
Provision for doubtful accounts..................................................................... 4,018 -
Charge for purchased research and development....................................................... 2,387 -
Changes in assets and liabilities, net-
Decrease (increase) in-
Accounts receivable............................................................................ 367 3,486
Inventories.................................................................................... 1,459 (3,430)
Other current assets........................................................................... (81) (429)
Other assets................................................................................... (369) 1,122
Deferred taxes................................................................................. 196 128
Income tax receivable.......................................................................... (2,183) -
Increase (decrease) in-
Accounts payable............................................................................... 675 2,087
Accrued compensation and related benefits...................................................... 166 (65)
Accrued agent commissions...................................................................... (317) (335)
Accrued tax payable............................................................................ --- (3,277)
Other accrued expenses......................................................................... 889 (764)
Deferred revenues.............................................................................. 611 956
--- ---
Net cash used in operating activities....................................................... (580) (1,141)
---- ------
INVESTING ACTIVITIES:
Purchases of property and equipment.................................................................... (1,767) (1,158)
Cash paid for acquisitions, net........................................................................ (1,855) -
---- ------
Net cash used in investing activities....................................................... (3,622) (1,158)
------ ------
FINANCING ACTIVITIES:
Payments on long-term debt............................................................................. (59) (170)
Advances on obligations to parent and affiliates....................................................... 470 5,112
Repayment on obligations to parent and affiliates...................................................... (629) (5,118)
---- ------
Net cash used in financing activities....................................................... (218) (176)
----- ----
NET DECREASE IN CASH AND CASH EQUIVALENTS.............................................................. (4,420) (2,475)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................................................... 7,206 3,326
----- -----
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................................... $2,786 $851
------ ----
------ ----
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BACKGROUND:
The Company
Axiom Inc. (the "Company"), a Delaware corporation, changed its name
from Securicor Communications Inc. in May 1997. Through May 23, 1997, the
Company's business was conducted through its wholly-owned subsidiary, Securicor
Telesciences Inc. ("STI"). On that date, STI merged into the Company. Prior
to May 15, 1998, the Company was a majority-owned subsidiary of Securicor
Communications Limited ("SCL"), an entity organized under the laws of the
United Kingdom and a wholly-owned subsidiary of Securicor plc ("Securicor"),
a company organized under the laws of the United Kingdom. As the merger
represented a transaction between entities under common control, the net
assets of STI were transferred at net book value. Prior to the completion of
the Company's initial public offering, Securicor provided the financing
requirements for the Company through advances (See Note 6). SCL currently
owns 44.8% of the Company's outstanding Common Stock.
Initial Public Offering
On July 8, 1997, the Company completed its initial public offering of
2,600,000 shares of Common Stock at a price of $12.00 per share. The Company
received net cash proceeds of approximately $28,053,000 from the public
offering. In addition, on August 6, 1997, the underwriters exercised their
over-allotment option of 390,000 shares of Common Stock at a price of $12.00 per
share. The Company received net cash proceeds of $4,352,400. Collectively, both
transactions are herein referred to as the "Offering."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information and Summary Financial Information
The financial statements as of June 30, 1998 and for the three and nine
months ended June 30, 1998 and 1997 are unaudited and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for the fair presentation of results for these interim
periods. The results for the three and nine months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the entire year. While
the Company believes that the disclosures presented are adequate to make the
information not misleading, these Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and the notes
included in the Company's Form 10-K for the fiscal year ended September 30,
1997.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Cash and Cash Equivalents
For the purposes of the Statements of Cash Flows, the Company considers
all highly liquid investment instruments purchased with an original maturity of
three months or less to be cash equivalents. Cash and cash equivalents are
comprised of investments in various money market funds.
Restricted Cash
Restricted cash consists of funds to support a standby letter of
credit required under a contractual arrangement with one of the Company's
major customers.
Inventories
Inventories are valued at the lower of cost, determined on the
first-in, first-out method, or market.
<PAGE>
Agent Commissions
In certain contracts, particularly large international contracts, the
Company may utilize an agent, who will work directly with the customer. The
Company is typically charged a commission based on the total revenues of the
contract. These charges are recorded when the revenues are recognized and
included in cost of revenues. Any earned but unpaid commissions are recorded in
accrued agent commissions.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk are accounts receivable. The Company's customer
base principally comprises the Regional Bell Operating Companies ("RBOCs"), as
well as international telephone companies (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"). The Company
typically does not require collateral from its customers. In addition, the
Company has begun to sell its products to system integrators and resellers.
The Company has significant activity with international customers,
particularly in Asia. The current economic and currency situation affecting
certain Asian countries, which includes currency devaluation, external support
and economic reorganization programs to reduce growth and credit demand could
have a material adverse effect on the Company's operating results.
Revenue Recognition
Revenues are generally recognized upon shipment of the equipment. In
"bill and hold" transactions, the Company recognizes revenues when the following
conditions are met: the equipment is complete, ready for shipment and segregated
from other inventory; the Company has no further significant performance
obligations in connection with the completion of the transaction; the commitment
and delivery schedule is fixed; the customer requested the transaction be
completed on this basis; and the risks of ownership have passed to the customer.
Revenues from installation and engineering activities are recognized as services
are provided.
Depending on contract terms and conditions, software license fees are
recognized upon delivery of the product if no significant vendor obligations
remain and collection of the resulting receivable is deemed probable. The
Company had $1,184,000 and $0 of separate software license fee revenues for the
nine months ended June 30, 1998 and 1997, respectively, and these amounts are
included in equipment revenues. If significant vendor obligations exist at
delivery and/or the product is subject to customer acceptance, revenue is
deferred until no significant obligations remain and/or acceptance has occurred.
If the payment of the license fee is coincident to services which are deemed to
be essential to the transaction, the license fee is deferred and recognized
using contract accounting over the period during which the services are
performed. The Company's software licensing agreements provide for customer
support (typically 90 days). The portion of the license fee associated with
customer support is unbundled from the license fee and is recognized ratably
over the warranty period as services revenue.
The Company offers support agreements to its customers. Revenues from
customer support are recognized as services are provided. Services are generally
provided ratably over the term of the customer support agreement and are
included in services revenue in the accompanying statements of operations.
Research, Development and Engineering Expenses
Research, development and engineering expenses are charged to expense
as incurred. Engineering expenses consist of costs related to the development of
new products, enhancements to existing products and the integration of existing
products into application specific systems.
Software Development Costs
The Company accounts for software development costs in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed". Under SFAS No. 86, costs incurred to create a computer software
product are charged to research and development expense as incurred until
technological feasibility has been established. The Company establishes
technological feasibility upon completion of a detailed program design. At
that point, computer software costs are capitalized until the product is
available for general release to customers. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not
limited to, anticipated future revenues, estimated economic life, and changes
in technology.
Amortization will begin when the product is released. Capitalized
software development costs are amortized on a product-by-product basis using
the straight-line method over the estimated life of the product enhancement.
Capitalized software development costs consist primarily of salary,
consulting, and computer costs incurred to develop new products. During the
three and nine months ended June 30, 1998, software development costs of
$112,000 were capitalized. No costs were capitalized in 1997. Amortization
has not yet begun.
Charge for Purchased Research and Development
The charge for purchased research and development of $2,387,000 for
the quarter ended June 30, 1998 represents a one-time charge related to
purchased research and development in connection with the acquisition of
Innovative Data Technology. This charge relates to incomplete development
projects which had not yet reached technological feasibility as of the
acquisition date and had no alternate future uses.
<PAGE>
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No.
109 requires the liability method of accounting for deferred income taxes.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities.
Deferred tax assets or liabilities at the end of each period are determined
using the enacted tax rates.
Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share," which superseded Accounting Principles Board
Opinion No. 15, "Earnings per Share." SFAS No. 128 requires dual presentation of
basic and diluted earnings per share for complex capital structures on the face
of the statements of operations. According to SFAS No. 128, basic earnings per
share, which replaced primary earnings per share, is calculated by dividing net
income available to Common shareholders by the weighted average number of Common
shares outstanding for the period. Diluted earnings per share, which replaced
fully diluted earnings per share, reflects the potential dilution from the
exercise or conversion of securities into Common stock, such as stock options.
The Company was required to and did adopt SFAS No. 128 during the
period ended December 31, 1997, as earlier application was not permitted. As
required by SFAS No. 128, all prior-period loss per Common share data has been
restated to conform with the provisions of this statement.
The following is a reconciliation of the numerators and denominators of
the basic and diluted loss per Common share computations:
<TABLE>
<CAPTION>
For the Three Months Ended June 30
1998 1997
---- ----
Loss Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic income (loss) per Common
share.......................... $(6,032,000) 7,133,164 $(0.85) $754,000 3,476,900 $.22
Net income (loss)............
Effect of dilutive securities....
Stock Options _ _ _ _ _ _
----------- --------- ------- -------- --------- ----
Diluted income (loss) per Common
share.......................... $(6,032,000) 7,133,164 $(0.85) $754,000 3,476,900 $.22
Net income (loss) and
assumed conversions........ ----------- --------- ------- -------- --------- ----
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended June 30
1998 1997
---- ----
Loss Shares Per Share Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic loss per Common
share.................
Net loss........... $(9,796,000) 6,688,988 $(1.46) $(1,708,000) 3,476,900 $(0.49)
Effect of dilutive
securities............
Stock Options...... _ _ _ _
---------- --------- ----------- ---------
Diluted loss per Common
share.................
Net loss and $(9,796,000) 6,688,988 $(1.46) $(1,708,000) 3,476,900 $(0.49)
assumed
conversions...... ---------- --------- ------ ----------- --------- ------
</TABLE>
Diluted loss per Common share is the same as basic loss per Common
share as no additional shares for the potential dilution from the exercise or
conversion of securities into Common stock are included in the denominator as
the result is anti-dilutive due to the Company's losses. Options to purchase
359,915 shares of Common stock at $5.50 per share and 563,000 shares of Common
stock at $3.375 per share were outstanding during the nine months ended June 30,
1998, but were not included in the computation of diluted loss per Common share.
No options were outstanding during the nine months ended June 30, 1997. As a
result of the July 30, 1998 Company work force reduction, 114,000 options
were cancelled.
Supplemental Disclosures of Cash Flow Information
For the nine months ended June 30, 1998 and 1997, the Company paid
interest of $18,000 and $513,000, respectively. For the nine months ended June
30, 1998 and 1997, the Company paid income taxes, net of refunds, of $31,000 and
$2,054,000, respectively.
The Company has entered into three capital lease obligations during
the nine months ended June 30, 1998 totaling $961,000. No capital leases were
entered into during the nine months ended June 30, 1997.
<PAGE>
Supplemental Information regarding Non-cash Investing and Financing Activities
On May 15, 1998, the Company acquired Innovative Data
Technology ("IDT") in a business combination accounted for as a purchase. IDT
is primarily engaged in the manufacture and sale of telecommunications switch
interface technology. The Company (i) issued 1,290,000 shares of its Common
stock valued at $4,434,000, (ii) cash of $2,707,000 and (iii) options to
purchase 132,000 shares of Common stock (issued in connection with certain
employment agreements) valued at $352,000 using the Black-Scholes option
pricing model. The results of the operations of IDT have been included in the
accompanying financial statements from the date of acquisition. The total
purchase price of $8,272,000 (subject to adjustment), including transaction
costs of $779,000, was allocated to the assets acquired and liabilities
assumed based on their respective fair values. The Company recorded
$2,387,000 of the purchase price as a charge to the consolidated statement of
operations on the acquisition date as it was related to the fair value of
incomplete research and development projects. The remaining amount by which
the purchase price exceeded the net assets purchased was allocated to the
following intangible assets and each is being amortized on a straight-line
basis over the period indicated:
<TABLE>
<CAPTION>
Amortization
Amount Period (yrs.)
- --------------------------------------------------------------------------------
<S> <C> <C>
Non-compete covenant $500,000 2
Acquired technology 432,000 4
Goodwill 31,000 7
- --------------------------------------------------------------------------------
Total $963,000
</TABLE>
The following table presents the non-cash assets and liabilities that
were consolidated as a result of the acquisition of IDT. Note that these
amounts are preliminary and subject to change:
<TABLE>
<CAPTION>
1998
<S> <C>
Non-cash assets (liabilities):
Accounts receivable......................................................................................... $3,147,000
Inventories................................................................................................. 936,000
Other current assets........................................................................................ 99,000
Property and equipment...................................................................................... 341,000
Other assets................................................................................................ 15,000
Charge for purchased research and development............................................................... 2,387,000
Intangible assets........................................................................................... 1,006,000
Accounts payable............................................................................................ (123,000)
Other accrued expenses...................................................................................... (1,074,000)
Deferred revenues........................................................................................... (184,000)
--------
Non cash assets acquired.................................................................................... 6,550,000
Less - Common Stock and options issued...................................................................... (4,786,000)
----------
Cash paid, net of cash acquired............................................................................. $1,764,000
----------
----------
</TABLE>
If the acquisition of IDT had occurred on October 1, 1996, the
unaudited pro forma information, after giving effect to the pro forma
adjustments described below, would have been as follows:
<TABLE>
<CAPTION>
Nine Months Ended
June 30, June 30,
1998 1997
<S> <C> <C>
Unaudited pro forma revenues........ $ 31,611 $ 28,823
-------- ---------
Unaudited pro forma net loss........ $ (7,606) $ (2,112)
-------- ---------
Unaudited pro forma net loss
per Common Share.................. $ (0.98) $ (0.44)
-------- ---------
</TABLE>
The unaudited pro forma information does not purport to be
indicative of the results that would have been attained if the operations had
actually been combined for the periods presented and is not necessarily
indicative of the operating results to be expected in the future.
The pro forma adjustments consist of compensation adjustments for
certain executive officers of IDT who are now employed by the Company under
specified employment contracts, interest income adjustments for the aggregate
net cash used to acquire IDT, interest expense adjustments relating to
repayment of an IDT note payable to a shareholder and the amortization of the
intangible assets. The amount of the compensation pro forma adjustment was
$121,000 and $34,000 for the nine months ended June 30, 1998 and 1997,
respectively. The amount of the interest income pro forma adjustment was $85,000
and $101,000 for the nine months ended June 30, 1998 and 1997, respectively. The
amount of the interest expense pro forma adjustment was $50,000 and $0 for the
nine months ended June 30, 1998 and 1997, respectively. The amount of the
intangible amortization pro forma adjustment was $71,000 and $84,000 for nine
months ended June 30, 1998 and 1997, respectively. Additionally, the above
unaudited pro forma information excludes the one-time charge of $2,387,000
associated with the write-off of purchased research and development costs in
connection with the IDT acquisition.
<PAGE>
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
------------- ------------------
<S> <C> <C>
Billed..................................................... $14,714,000 $12,265,000
Unbilled................................................... 2,276,000 2,076,000
--------- ---------
16,990,000 14,341,000
Less-allowance for doubtful accounts....................... (3,907,000) (100,000)
---------- --------
$13,083,000 $14,241,000
----------- -----------
</TABLE>
Unbilled accounts receivable includes costs and estimated earnings on
contracts in progress which have been recognized as revenues but not yet billed
to customers under the provisions of specified contracts. The increase in the
allowance for doubtful accounts relates to the uncertainty surrounding the
Company's Asian and other international customer base.
4. INVENTORIES:
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
<S> <C> <C>
Raw materials.............................................. $3,302,000 $4,718,000
Work-in-process............................................ 1,176,000 538,000
Finished goods............................................. 2,373,000 2,118,000
---------- ----------
$6,851,000 $7,374,000
---------- ----------
</TABLE>
<PAGE>
5. LINE OF CREDIT:
The Company had a $2,500,000 line of credit with a local bank with
interest at the bank's prime rate which expired on March 31, 1998. No funds
were advanced against this line of credit. Currently, the Company does not
have a line of credit and is seeking to obtain a new bank credit facility.
6. OBLIGATIONS TO AFFILIATES:
Information relative to the Company's obligations to affiliates is as
follows:
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
<S> <C> <C>
Obligations to Securicor........................................................... $17,000 $289,000
Obligations to affiliates:
Receivables from affiliates.................................................. (10,000) (119,000)
Payables to affiliates....................................................... 17,000 13,000
------ ------
Total obligations to affiliates, net.................................... 7,000 (106,000)
----- --------
Total obligations to affiliates.................................................... $24,000 $183,000
------- --------
</TABLE>
Prior to the completion of the Offering, the Company was funded
through advances from Securicor, which was previously its parent. Certain
advances were interest bearing and were loaned to the Company at a base rate
plus 1%. There were no interest bearing advances for the nine months ended
June 30, 1998. For the nine months ended June 30, 1997, the interest rate
charged on these obligations ranged from 6.75% to 7.50% and interest expense
for the nine months ended June 30, 1998 and 1997, was $0 and $491,000,
respectively. As these obligations to Securicor and affiliates are due on
demand, this net amount is included in current liabilities.
7. RELATED PARTY TRANSACTIONS:
Prior to the Offering, certain amounts were allocated to the Company
from Securicor and consisted of charges for certain support and services.
These charges were based on Securicor's estimate of its total relevant costs
for the applicable fiscal year, allocated pro rata based on estimated
revenues of each applicable business unit. Management believed the method of
allocation was reasonable. These charges were $102,000 and $295,000 for the
three and nine months ended June 30, 1997 and are included in selling,
general and administrative expense. There were no such charges for the three
and nine months ended June 30, 1998. The Company has not incurred nor will
incur any parent charges subsequent to the Offering.
In May 1997, the Company and Securicor entered into an agreement
pursuant to which Securicor provides international sales and marketing
services to the Company. Total charges from Securicor for these services were
$61,000 for the nine months ended June 30, 1998. In addition, the Company
pays each of its directors an annual directors fee of $20,000 each. For the
nine months ended June 30, 1998, the Company expensed $15,000 related to such
fees. The directors fees paid to an employee of Securicor are remitted to
Securicor.
In July 1997, the Company made a loan to an officer of the Company
in the amount of $20,000 which was to be repaid in January 1998 with accrued
interest at a rate of 7% per annum. The officer is no longer with the Company
and arrangements are being made for the repayment of the loan. Also, in July
1997, the Company advanced $20,400 to a member of the Company's Board of
Directors which was repayable in monthly principal installments of $1,666. At
June 30, 1998 and September 30, 1997, $0 and $15,402 remained outstanding on
this loan, respectively. Both of these receivables are included in other
current assets.
The Company obtains its Directors and Officers insurance through
Securicor. Total Director and Officer insurance expense for the nine months
ended June 30, 1998 was $49,000. This insurance was not maintained by the
Company prior to its Offering in July 1997.
During the nine months ended June 30, 1997, the Company's results
included the business activities related to an Integrated Services Digital
Network ("ISDN") product. The Company's business activities related to the ISDN
product were performed through its wholly-owned subsidiary, Securicor 3Net, Inc.
During the nine months ended June 30, 1997, the Company sold certain products
related to this technology and recognized certain costs and realized all of the
revenue related to such activities. For the nine months ended June 30, 1997, the
Company recognized revenues of $1,167,000 and cost of revenues of $794,000
relating to such activities. Cost of revenues includes $386,000 of amortization
of acquired development costs related to the development of the ISDN product.
These amounts are included in revenues and cost of revenues. In May 1997, the
Company transferred all of its stock in Securicor 3Net, Inc. to an affiliate of
Securicor at net book value due to the related party nature of the transaction.
From time to time, the Company and Securicor process miscellaneous
transactions on behalf of each other which are payable the month following the
month incurred. These transactions have been immaterial to date.
<PAGE>
8. COMMITMENTS AND CONTINGENCIES:
The Company is obligated to make certain payments, as defined, to
certain key Company employees if these employees are terminated. In addition,
certain key employees have performance incentives in the form of cash and equity
(in the parent or an affiliate) related compensation. On July 30, 1998, the
Company instituted a reorganization and cost reduction program that included
immediate work force reductions across all departments by 14%. A charge for
severance costs of approximately $400,000 will be taken in the fourth quarter
ending September 30, 1998.
The Company is party to various claims arising in the ordinary course
of business. Although the ultimate outcome of these matters is presently not
determinable, management believes that the resolution of these matters will not
have a material adverse effect on the Company's financial position or results of
operations.
The Company received a letter dated June 19, 1997 from Acxiom
Corporation ("Acxiom") requesting that the Company cease using the name "Axiom".
Acxiom filed suit against the Company in the United States District Court for
the District of Delaware on August 1, 1997 alleging trademark infringement and
dilution under the Lanham Act, as well as related state law causes of action.
Acxiom seeks a judgment against the Company enjoining any future use of the
Axiom name and Axiom tradenames, future acts of unfair competition in the United
States, and destruction of all advertising and promotional material and awarding
treble damages in an unspecified amount because of the alleged willfulness of
the Company's infringement. The Company has vigorously defended against these
claims and believes that the claim is without merit because of the lack of
correspondence between the products, services and customers of the two
companies. There is no assurance, however, that these claims will be resolved on
terms favorable to the Company. In February 1998, these claims were tried in a
bench trial. The court has not yet issued a ruling.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company develops, markets and supports integrated hardware and
software systems that are able to collect and process transaction information
from a wide variety of wireline switches and transmit the information to the
customer's information management networks. The Company is developing systems
that process transaction information from wireless, Asynchronous Transfer
Mode (ATM) and other specialized telecommunications switches. The Company's
customers use this information to bill their subscribers, to implement
customized marketing programs and to perform other data management functions.
The Company also provides traffic management solutions to telecommunications
companies. The Company recently introduced its first applications software
product, a fraud detection and management system. The Company provides
installation, ongoing maintenance, support and training, as well as
customized engineering services, related to the Company's systems.
A significant portion of the Company's revenues has been, and is
expected to continue to be, derived from substantial orders placed by large
organizations, and in particular three RBOCs. Aggregate revenues from U S
West, Inc., Southwestern Bell Telephone Company and Ameritech Corporation
accounted for 61.4% and 67.5% of the Company's total revenues for the nine
months ended June 30, 1998 and 1997, respectively. The Company has significant
international sales, particularly in Asia. IDT, acquired by the Company in May
1998, generates a significant portion of sales from international customers.
The current economic and currency situation affecting certain Asian countries,
which includes currency devaluation, external support and economic
reorganization programs to reduce growth and credit demand, could have a
material adverse effect on the Company's operating results. Due to this
situation, the Company's international sales may be negatively impacted.
Domestic revenues are typically generated under cancelable general
purchase agreements which provide for the continuing supply of products and
services over future years. Pricing is based upon the volume of products
ordered. Internationally, the Company typically enters into long-term
contracts for the delivery of turn-key systems which include products and
services. All sales arrangements with international customers are denominated
in US dollars. The Company's revenues are difficult to forecast because the
purchase of its systems generally involves a significant commitment of
capital and management time, which generally results in lengthy sales cycles.
Quarterly revenues are subject to substantial fluctuations primarily
resulting from the Company's concentration of customers and the timing of orders
received. The timing of orders is dependent, to a large extent, on the timing of
the Company's customers' annual budget process. Historically, the Company's
first and second fiscal quarters have generated a lower level of revenues
compared to the Company's third and fourth fiscal quarters, by which time the
Company's customers have typically approved their budgets. Historically, product
and service backlog has been a relatively small amount and most orders are
fulfilled within three months. Because of its close links to, and ongoing
communications with, its customers, the Company generally is able to plan for
product demand and, when the order is received, ship its products within a
relatively short time period thereafter.
<PAGE>
Cost of revenues includes the direct cost of hardware and software
modules, other manufacturing costs related to the assembly and testing of
products, customer service costs, agent commissions where applicable, and other
variable costs such as freight, scrap and installation materials. The Company
has a relatively high fixed cost base which is included in cost of revenues. As
a result, any significant decline in revenues would likely have a significant
adverse effect on margins.
Research, development and engineering expenses consist of payroll and
related expenses and other costs associated with the design and development of
the Company's products. These costs are charged to expense as incurred.
Selling, general and administrative expenses consist of costs to
support the Company's sales, marketing and administrative functions. Included
within these costs are payroll and related expenses, supplies, travel, outside
services, as well as the cost of the Company's participation in trade shows,
industry conferences and related travel and promotional costs.
The Company is currently in the process of evaluating its
information technology infrastructure for Year 2000 compliance. The Company
does not expect that the cost to modify such infrastructure to Year 2000
compliance will be material to its financial condition or results of
operations. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance. The
Company is currently evaluating information concerning the Year 2000
compliance status of its suppliers and customers. In the event that any of
the Company's significant suppliers or customers does not successfully and
timely achieve Year 2000 compliance, the Company's business or operations
could be adversely affected.
Safe Harbor for Forward-Looking Statements
From time to time, the Company may publish statements that are not
historical facts but are forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Litigation Reform Act of 1995 provided a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements. The
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include, but are not limited to the
following important factors: (i) reliance on a limited number of significant
customers and dependence on Sterling Series products; (ii) difficulty in
predicting quarterly revenues because of long sales cycles and customer
budgetary constraints; (iii) competition in the market for billing data
collection and traffic management systems; (iv) rapid and unexpected changes in
the telecommunications markets and technologies; (v) the success of the
Company's sales and marketing strategies; (vi) the ability of the Company to
manage its growth; (vii) the ability of the Company to motivate, and retain the
services of, its key management and technical personnel and continue to hire
additional qualified personnel to meet the Company's evolving staffing needs;
and (viii) risks related to sales to international customers, including, but not
limited to, currency fluctuations, instability in financial markets and
unanticipated shifts in economic policies of foreign governments,
particularly as it relates to Asia.
Results of Operations
Quarter ended June 30, 1998 Compared to Quarter ended June 30, 1997
Revenues
Revenues increased 11.7% to $10.7 million for the quarter ended June
30, 1998 from $9.5 million for the quarter ended June 30, 1997. Equipment
revenues were $7.3 million for the quarter ended June 30, 1998, a decrease of
6.9% from the $7.9 million of equipment revenues for the quarter ended June
30, 1997. A significant portion of the decrease in equipment revenues
resulted from a delay in orders, primarily related to the Company's
international business. Services revenues increased 100.0% to $3.3 million
for the quarter ended June 30, 1998 from $1.7 million for the quarter ended
June 30, 1997 primarily due to certain engineering services provided to one
of the RBOCs.
<PAGE>
Gross Profit
Gross profit decreased to 42.6% of revenues for the quarter ended
June 30, 1998 from 56.5% for the quarter ended June 30, 1997. Gross profit
related to equipment revenues increased to 56.3% for the quarter ended June
30, 1998 from 53.6% for the quarter ended June 30, 1997. The Company has a
relatively high fixed cost base which is included in cost of revenues. As a
result, fluctuations in revenues have a significant effect on margins. Gross
profit from services revenues was 12.5% for the quarter ended June 30, 1998,
a decrease from gross profit of 70.3% for the quarter ended June 30, 1997.
This decrease is due primarily to a large engineering services project for
one of the RBOCs with low margins.
Research, Development and Engineering
Research, development and engineering expenses were $1.9 million and
$1.8 million for the quarter ended June 30, 1998 and 1997, respectively. As a
percentage of revenues, research, development and engineering expenses
decreased during the quarter ended June 30, 1998 to 17.7% from 19.0% for the
quarter ended June 30, 1997 due to increased revenues.
Selling, General and Administrative
Selling, general and administrative expenses were $6.3 million for
the quarter ended June 30, 1998, an increase of 199.2% compared to $2.1
million for the same period in 1997. As a percentage of revenues, selling,
general and administrative expenses increased during the quarter ended June
30, 1998 to 59.4% from 22.2% for the same period in 1997. This increase is
primarily due to an increase in the Company's accounts receivable reserve of
$3.2 million as a result of the continued uncertainty surrounding the
Company's Asian and other international customer base. The increase is also
attributable to additional personnel, the costs associated with being a public
company and increased sales and marketing efforts.
Charge for Purchased Research and Development
The charge for purchased research and development of $2.4 million
for the quarter ended June 30, 1998 represents a one-time charge related to
purchased research and development in connection with the acquisition of
Innovative Data Technology. This charge relates to incomplete development
projects which had not yet reached technological feasibility as of the
acquisition date and had no alternate future uses.
Interest Expense (Income)
Net interest income was $46,000 for the quarter ended June 30, 1998.
Interest expense was $147,000 for the quarter ended June 30, 1997. Upon the
consummation of the Offering, a significant portion of the borrowings from
Securicor was repaid. As a result, the Company's interest expense has decreased.
Additionally, the Company has invested a portion of the proceeds of the Offering
which has resulted in interest income.
Income Taxes
The Company's effective tax rate was 40.3% for the quarter ended
June 30, 1997. No provision was recorded for the quarter ended June 30, 1998
given the Company's net loss.
Nine Months Ended June 30, 1998 compared to June 30, 1997
Revenues
Revenues increased 10.6% to $23.9 million for the nine months ended
June 30, 1998 from $21.6 million for the nine months ended June 30, 1997.
Equipment revenues were $16.1 million and $16.7 million for the nine months
ended June 30, 1998 and 1997, respectively. A significant portion of the
decrease in equipment revenues resulted from a delay in orders, primarily
related to the Company's international business. Services revenues increased
59.7% to $7.8 million for the nine months ended June 30, 1998 from $4.9
million for the nine months ended June 30, 1997. This increase is mainly due
to engineering services provided to one of the RBOCs and increased hardware
and software maintenance contracts received during the nine months ended June
30, 1998.
<PAGE>
Gross Profit
Gross profit decreased to 39.5% of revenues for the nine months
ended June 30, 1998 from 44.5% for the nine months ended June 30, 1997. Gross
profit related to equipment revenues increased to 50.3% for the nine months
ended June 30, 1998 from 47.9% for the nine months ended June 30, 1997. The
Company has a relatively high fixed cost base which is included in cost of
revenues. As a result, fluctuations in revenues have a significant effect on
margins. Gross profit from services revenues decreased to 17.2% for the nine
months ended June 30, 1998 from 32.7% for the nine months ended June 30,
1997. This decrease is due primarily to a large engineering services project
for one of the RBOCs with low margins.
Research, Development and Engineering
Research, development and engineering expenses were $5.8 million and
$5.6 million for the nine months ended June 30, 1998 and 1997, respectively.
As a percentage of revenues, research, development and engineering expenses
decreased during the nine months ended June 30, 1998 to 24.1% from 25.9% for
the nine months ended June 30, 1997 due to increased revenues. Research,
development and engineering expenditures have remained relatively consistent
between periods as the Company continues the development and enhancement of
its products.
Selling, General and Administrative
Selling, general and administrative expenses were $13.3 million for
the nine months ended June 30, 1998, an increase of 102.9% compared to $6.5
million for the same period in 1997. As a percentage of revenues, selling,
general and administrative expenses increased during the nine months ended
June 30, 1998 to 55.6% from 30.3% for the same period in 1997. This increase
is attributable to an increase in the Company's accounts receivable reserve
of $3.9 million as a result of the continued uncertainty surrounding the
Company's Asian and other international customer base. In addition, the
increase is attributable to additional legal costs of $600,000 related to the
law suit filed by Acxiom Corporation (See Part II Item 1). The increase is
also the result of additional personnel, the costs associated with being a
public company and increased sales and marketing efforts.
Charge for Purchased Research and Development
The charge for purchased research and development of $2.4 million
for the quarter ended June 30, 1998 represents a one-time charge related to
purchased research and development in connection with the acquisition of
Innovative Data Technology. This charge relates to incomplete development
projects which had not yet reached technological feasibility as of the
acquisition date and had no alternate future uses.
Interest Expense (Income)
Net interest income was $241,000 for the nine months ended June 30,
1998. Net interest expense was $426,000 for the nine months ended June 30, 1997.
Upon the consummation of the Offering, a significant portion of the borrowings
from Securicor was repaid. As a result, the Company's interest expense has
decreased. Additionally, the Company has invested a portion of the proceeds of
the Offering which has resulted in interest income.
Income Taxes
The Company's effective tax rate was 16.4% and 42.2% for the nine
months ended June 30, 1998 and 1997, respectively. The effective tax rate is
lower in 1998 due to the 1998 net loss.
<PAGE>
Liquidity and Capital Resources
Prior to the Offering, the Company had financed its operations
primarily with cash generated from operations and borrowings from Securicor. In
July 1997, the Company received net proceeds from the Offering of approximately
$32.4 million (after deducting underwriters discounts and commissions and other
offering expenses). In July 1997, the Company repaid $22.9 million in Company
borrowings from Securicor. As of June 30, 1998, the Company had $2.2 million of
cash and cash equivalents, $13.1 million in net trade accounts receivable, and
$13.7 million of working capital.
Net cash used in operating activities was $580,000 and $1.1 million
for the nine months ended June 30, 1998 and 1997, respectively. For the nine
months ended June 30, 1998, the major contributors to the net cash used in
operating activities were the net loss of $9.8 million and the increase in
income tax receivable of $2.2 million partially offset by amortization and
depreciation of $1.4 million, provision for doubtful accounts of $4.0
million, charge for purchased research and development relating to the IDT
acquisition of $2.4 million and the decrease in inventories of $1.5 million.
In the nine months ended June 30, 1997, the net loss of $1.7 million,
increase in inventory of $3.4 million and the decrease in accrued tax payable
of $3.3 million were partially offset by amortization and depreciation of
$1.1 million, a decrease in accounts receivable of $3.5 million, a decrease
of other assets of $1.1 million and an increase to accounts payable of $2.0
million.
Net cash used in investing activities relating to purchases of
property and equipment was $1.8 million and $1.2 million for the nine months
ended June 30, 1998 and 1997, respectively. During the nine months ended June
30, 1998, the Company acquired Innovative Data Technology for a net cash
outlay (net of cash acquired) of $1,764,000 and Greendown Software Limited
for a net cash outlay of $91,000.
Net cash used in financing activities was $218,000 and $176,000 for
the nine months ended June 30, 1998 and 1997, respectively.
The Company had a $2.5 million credit facility with a bank which
expired March 31, 1998. Currently, the Company does not have a line of credit
and is seeking to obtain a new bank credit facility. In December 1997, the
Company entered into a $1.5 million leasing arrangement to finance its
purchases of capital equipment. The arrangement requires that the Company
qualify for each lease based on its financial position. At August 14, 1998,
approximately $1.2 million was available under this facility. Not all of the
Company's capital lease obligations are financed through this arrangement.
The Company believes that its existing cash balances and cash
generated from operations will be sufficient to meet the Company's cash
requirements during the next twelve months. However, depending upon
profitability, the timing of its collections and other operating factors,
the Company may require additional equity or debt financing to meet its
working capital requirements or capital expenditure needs. There can be no
assurance that additional financing, if needed, will be available when
required or on terms satisfactory to the Company.
Inflation
To date, inflation has not had a material impact on the Company's
financial condition and results of operations.
PART II. OTHER INFORMATION
<PAGE>
ITEM 1. LEGAL PROCEEDINGS
The Company received a letter dated June 19, 1997 from Acxiom
Corporation ("Acxiom") requesting that the Company cease using the name "Axiom."
Acxiom filed suit against the Company in the United States District Court for
the District of Delaware on August 1, 1997 alleging trademark infringement and
dilution under the Lanham Act, as well as related state law causes of action.
Acxiom seeks a judgment against the Company enjoining any future use of the
Axiom name and Axiom tradenames, future acts of unfair competition in the United
States, destruction of all advertising and promotional material, and awarding
treble damages in an unspecified amount because of the alleged willfulness of
the Company's infringement. The Company has vigorously defended against these
claims and believes that the claim is without merit because of the lack of
correspondence between the products, services and customers of the two
companies. There is no assurance, however, that these claims will be resolved on
terms favorable to the Company. In February 1998, these claims were tried in a
bench trial. The court has not yet issued a ruling.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security
holders during the third quarter of fiscal 1998.
ITEM 5. OTHER INFORMATION
On July 27, 1998, the Company announced the appointment of C. Thomas
Faulders, III as Chairman.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 Consultant agreement between Axiom Inc. and C.
Thomas Faulders III
27 Financial Data Schedule
(b) Reports on Form 8-K
On May 27, 1998, the Company filed a Current Report on Form
8-K and an amendment thereto on Form 8-K/A on July 29, 1998
announcing under Item 2 (Acquisition or Disposition of Assets)
that the Company had acquired all of the outstanding stock of
Innovative Data Technology pursuant to the Agreement of Merger
and Plan of Reorganization dated as of May 15, 1998.
<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.
AXIOM INC.
Dated: August 14, 1998 By: /s/ Andrew P. Maunder
-----------------------------
Andrew P. Maunder
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: August 14, 1998 By: /s/ Mark J. Kadish
-----------------------------
Mark J. Kadish
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
Exhibit 10
CONSULTANT AGREEMENT
This AGREEMENT made this twenty-third day of July 1998, between AXIOM INC.
(the Company) and C. Thomas Faulders III, (the Consultant).
WHEREAS, the Consultant is desirous of obtaining the protections and benefits
contained in this Agreement, in return for which he agrees to the restrictive
covenants contained herein.
NOW THEREFORE in consideration of the facts, mutual promises, and covenants
contained herein, and intending to be legally bound hereby, the Company and
the Consultant agree as follows:
1. RETENTION AND DUTIES
The Company hereby retains the Consultant and the Consultant hereby
agrees to serve as a consultant to the Company. The Consultant shall
initially serve as a director of the Company and as such, Chairman of the
Company's Board of Directors. In such capacity, the Consultant shall have
such powers and shall perform duties and services consistent with such
capacity as may be assigned or delegated to him from time-to-time by the
Board of the Company. The Board of Directors of the Company shall be
entitled to remove Consultant from his position as Chairman of the
Company's Board of Directors at any time with or without cause (such
removal shall not alter the provisions of Section 4 hereof with respect
to the timing and terms by which the Company shall be entitled to
terminate this Agreement.) and the Company shall not be obligated to
nominate or cause the election of Consultant as a director of the
Company. The Consultant shall devote such business time and attention as
is agreed from time to time to the business and affairs of the Company,
such time not to be less than five days per calendar month and will use
his best efforts to promote the interests of the Company,
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<PAGE>
2. COMPENSATION AND BENEFITS
(a) The Company shall pay the Consultant a fee of $75,000 per annum prorated
for partial years, payable monthly in equal installments as invoiced by
the Consultant, which amount includes compensation to the Consultant in
his capacity as a director of the Company.
(b) The Consultant shall be eligible for participation in the Share Option
Plan run by the Company as approved from time to time by the Board.
4. TERMINATION OF AGREEMENT BY THE COMPANY.
Notwithstanding any other provision of this Agreement and any and all
of the Company's obligations or liabilities under this Agreement shall
be terminated immediately, in any of the following circumstances:
(a) DEATH:
If the Consultant dies, the further accrual of all payments and benefits
thereunder shall cease at the end of the month in which Consultant's
death shall occur. All payments and benefits thereunder which have
accrued prior to the end of such month shall be promptly paid to the
executor or administrator of Consultant's estate or pursuant to such
other specific directions as Consultant has previously provided to the
Company in writing.
(b) DISCHARGE FOR CAUSE:
The Company may discharge the Consultant at any time, for "cause", which
shall include but not be limited to criminal conduct (whether or not
related to the Consultant's employment) other that minor traffic
offenses; any material breach by the Consultant of this Agreement; gross
negligence or malfeasance by the Consultant in the performance of his
duties for the Company; self-dealing; and/or any violation of any
expressed direction or any reasonable rule or regulation established by
the Company from time-to-time regarding the conduct of its business.
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<PAGE>
(c) DISCHARGE FOR OTHER REASONS
The Company may discharge the Consultant at any time, for any or no
reason, by providing three (3) months' prior written notice. At the
Company's option, the Company may elect to sever the Agreement with the
Consultant at any time during this three (3) month period, in which
event the Consultant shall be compensated for the remainder or said
three (3) month period.
5. TERMINATION OF EMPLOYMENT BY THE CONSULTANT:
This Agreement may be terminated by the Consultant upon not less than
one (1) month's written notice to the Company. Upon the effective date
of such voluntary termination, any and all of the Company's obligations
under this Agreement shall terminate.
6. PROPRIETARY RIGHTS, CONFIDENTIALITY, NON-COMPETITION, INVENTIONS, ETC.
The Company designs and manufactures various electronic equipment and
systems (hereinafter referred to as "Products"), and the Company is
unique in that it possesses expertise and "Know-How" in the design,
manufacture, and sale of Products. During the course of this Agreement
with the Company, the Consultant will have access to trade secrets, and
proprietary and confidential information pertaining to the Company and
its Products, such as, but not limited to, its short and long range
business plans, its processes and procedures, sales and distribution
methods, suppliers and customer lists, customer prospects, personnel
records, research and development projects, manufacturing processes, and
"Know-How" (all the foregoing hereinafter referred to as "Proprietary
Information"). This Proprietary Information was designed and developed
by the Company, at great expense and over lengthy periods of time, is
unique, secret, and confidential, and constitutes the exclusive property
and trade secrets of the Company, and any use of such property and trade
secrets by the Consultant, other than for the sole benefit of the
Company, would be wrongful and would cause irreparable injury to the
Company.
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<PAGE>
However, Proprietary Information shall not include information which has
become publicly known through no wrongful act of Consultant,
information which has been rightfully received from a third party
authorized to make such information available without restriction,
information which has been approved for release by written authorization
of the Company, and information which must be disclosed pursuant to
applicable law or in connection with the enforcement of the Agreement.
(a) The Consultant shall not, at any time, without the expressed written
consent of the Company, publish, disclose or divulge to any person,
firm, corporation, or use directly, indirectly or for his own benefit or
the benefit of any person, firm, or corporation other than the Company,
Proprietary Information, property, trade secrets, or confidential
information of the Company, its subsidiaries, and its affiliates learned
or obtained by the Consultant from the Company, including, but not limited
to, the information and things set forth above. This obligation shall be
continuing and shall not end with the termination of this Agreement.
Consultant further agrees that, immediately upon the termination of this
Agreement, for any reason, he shall return to the Company all property
of the Company including, but not limited to, Proprietary Information.
(b) The Consultant shall not, during the term of this Agreement and for
twelve (12) months after:
(i) Directly or indirectly induce or attempt to influence employee the
Company to terminate his employment with the Company, if such
employee was employed by the Company at the time of the termination
of this Agreement or if such employee terminated his employment
for any reason during the six (6) months preceding the termination
of this Agreement.
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<PAGE>
(ii) Engage in (as a principal, partner, director, officer, agent,
consultant, employee, independent contractor, or otherwise) or be
financially interested in, any business which is involved in business
activities which are the same as, similar to, or in competition with
the Products. However, nothing contained in this sub-paragraph shall
prevent the Consultant from being the holder or beneficial owner for
investment purposes only of any class or equity securities of a
company whose securities are traded on a national securities exchange
or NASDAQ if the Consultant (together with his spouse, children,
siblings, and parents) neither holds, nor is beneficially interested
in, more that five percent (5%) of any single class of the securities
in the company.
(c) The Consultant shall not, for six (6) months after the termination of
this Agreement for any reason, without the prior written approval of the
Company, either solely or jointly with, or as manager or agent for, any
person, corporation, trust, joint venture, partnership, or other
business entity, directly or indirectly, solicit any customers or
accounts that were customers or accounts (or legal successors to
customers or accounts) of the Company during the term of this Agreement.)
(d) The Consultant shall fully and promptly disclose and assign to the
Company for its sole benefit, to be utilized in any manner it sees fit,
and without additional compensation, all ideas, discoveries, inventions
and improvements, patentable or not, and all writings (including the
Copyright) which are made, conceived or reduced to practice by the
Consultant, alone or with others, during or after working hours, either
on or off the job during the term of his employment, or within six (6)
months thereafter, which are related to the Products, or which results
from tasks assigned to the Consultant by the Company. The Company may,
but is shall not be required to, obtain at its own expense and for its
sole benefit, patents or statutory copyright for any patentable idea or
copyrightable writing referred to above, and he shall co-operate with
the Company in executing any documents required in connection therewith.
5
<PAGE>
(e) The Consultant acknowledges that the restrictions contained in this
Paragraph 6, in view of the nature of the business in which the Company
is engaged, are reasonable and necessary to protect the legitimate
interests of the Company, and that any violation of those restrictions
would result in irreparable injury to the Company. The Consultant
therefore agrees that in the event of his violation of any of those
restrictions, the Company shall be entitled to obtain from any court of
competent jurisdiction preliminary and permanent injunctive relief
against the Consultant, in addition to damages from the Consultant
and an equitable accounting of all commissions, earnings, profits, and
other benefits arising from such violation, which rights shall be
cumulative and in addition to any other rights or remedies to which the
Company may be entitled.
(f) The Consultant agrees that if any or any portion of the foregoing
covenants or the application thereof, is construed to be invalid or
unenforceable, the remainder of such covenant or covenants or the
application thereof shall not be affected and the remaining covenant
or covenants will then be given full force and effect without regard
to the invalid or unenforceable portions. If any covenant is held to be
unenforceable because of the area covered, the duration thereof, or the
scope thereof, the Consultant agrees that the Court making such
determination shall have the power to reduce the area and/or the
duration, and/or limit the scope thereof, and the covenant shall then be
enforceable in its reduced form.
7. COMPLETE UNDERSTANDING.
-----------------------
This Agreement constitutes the complete understanding between the
parties in respect to the subject matter hereof and supersedes all prior
and contemporary agreements and understandings, inducements or
conditions, expressed or implied, written or oral, between the Company
and the Consultant, and cannot or modified except by written agreement
signed by the parties.
8. BINDING EFFECT.
---------------
This Agreement shall be binding upon and shall inure to the benefit of
of the Company and its successors, and shall be binding upon the
Consultant, his heirs and legal representatives.
6
<PAGE>
9. NO ASSIGNMENT BY THE CONSULTANT.
This Agreement is personal to the Consultant, and the Consultant may not
assign or delegate any of his rights or obligations hereunder without
first obtaining the express written consent of the Company.
10. WAIVER OF RIGHTS. If in one or more instances either party fails to
insist that the other party perform any of the terms of this Agreement,
such failure shall not be construed as a waiver by such party of any
past, present, or future right granted under this Agreement; the
obligations of both parties under this Agreement shall continue in full
force and effect.
11. PRESUMPTIONS.
This Agreement shall be interpreted without regard to any presumption or
rule requiring construction against the party who caused this Agreement
to be drafted.
12. GOVERNING LAW.
This Agreement and all questions relating to its validity,
interpretation, performance, and enforcement shall be governed by and
construed in accordance with the law of New Jersey.
IN WITNESS WHEREOF, the parties hereto intending to be legally bound, have
executed this Agreement as of the date first above written.
Axiom Inc.
/s/ C. Thomas Faulders III /s/ Andrew P. Maunder
- ------------------------------- ------------------------------------
C. Thomas Faulders III Andrew P. Maunder
President & CEO
7
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