<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 DECEMBER 31, 1997.
---------------------
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)
<TABLE>
<CAPTION>
DELAWARE 51-0356153
<S> <C>
(State or Other Jurisdiction of Incorporation (IRS Employer Identification Number)
or Organization)
</TABLE>
351 NEW ALBANY ROAD,
MOORESTOWN, NJ 08057-1177
(Address of Principal Executive Offices) (Zip Code)
(609) 866-1000
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.)
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.
<TABLE>
<CAPTION>
COMMON STOCK, PAR VALUE $.01 PER SHARE 6,466,900
<S> <C>
Class Outstanding at February 17, 1998
</TABLE>
<PAGE>
AXIOM INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Part I--Financial Information:
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets--December 31, 1997 (unaudited) and September 30, 1997..................... 3
Consolidated Statements of Operations--Three Months Ended December 31, 1997 and 1996 (unaudited)...... 4
Consolidated Statements of Cash Flows--Three Months Ended December 31, 1997 and 1996 (unaudited)...... 5
Notes to Consolidated Financial Statements (unaudited)................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 13
Part II--Other Information:
Item 1. Legal Proceedings............................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders............................................. 17
Item 6. Exhibits and Reports on Form 8-K................................................................ 17
</TABLE>
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
2
<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>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 8,363 $ 7,206
Accounts receivable............................................................... 11,132 14,241
Inventories....................................................................... 6,907 7,374
Deferred tax assets............................................................... 630 630
Income tax receivable............................................................. 1,583 968
Other............................................................................. 891 473
------------- -------------
Total current assets............................................................ 29,506 30,892
------------- -------------
PROPERTY AND EQUIPMENT:
Computer hardware and software.................................................... 3,493 3,229
Production and test equipment..................................................... 2,019 1,995
Furniture, fixtures and leasehold improvements.................................... 554 553
------------- -------------
6,066 5,777
Less--Accumulated depreciation and amortization................................... (3,165) (2,785)
------------- -------------
Net property and equipment...................................................... 2,901 2,992
DEFERRED TAX ASSETS................................................................. 2,704 2,704
OTHER ASSETS........................................................................ 276 267
INTANGIBLE ASSETS, net.............................................................. 157 168
------------- -------------
$ 35,544 $ 37,023
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................................. $ 115 $ 147
Obligations to parent and affiliates.............................................. 122 183
Accounts payable.................................................................. 1,532 3,057
Accrued compensation and related benefits......................................... 1,184 1,066
Accrued agent commissions......................................................... 545 638
Other accrued expenses............................................................ 1,180 613
Accrued tax payable............................................................... -- --
Deferred tax liabilities.......................................................... 33 33
Deferred revenues................................................................. 1,924 1,413
------------- -------------
Total current liabilities....................................................... 6,635 7,150
------------- -------------
DEFERRED TAX LIABILITIES............................................................ 186 186
------------- -------------
COMMITMENTS AND CONTINGENCIES
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, 6,466,900 shares
issued and outstanding.......................................................... 65 65
Additional paid-in capital........................................................ 32,340 32,340
Accumulated deficit............................................................... (3,682) (2,718)
------------- -------------
Total stockholders' equity...................................................... 28,723 29,687
------------- -------------
$ 35,544 $ 37,023
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
AXIOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
<S> <C> <C>
ENDED DECEMBER 31,
--------------------
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
REVENUES:
Equipment.............................................................................. $ 4,748 $ 3,053
Services............................................................................... 2,180 1,728
--------- ---------
Total revenues....................................................................... 6,928 4,781
--------- ---------
COST OF REVENUES:
Equipment.............................................................................. 2,344 2,375
Services............................................................................... 1,495 1,417
--------- ---------
Total cost of revenues............................................................... 3,839 3,792
--------- ---------
Gross profit......................................................................... 3,089 989
--------- ---------
OPERATING EXPENSES:
Research, development and engineering.................................................. 1,954 1,943
Selling, general and administrative.................................................... 2,814 2,211
Parent charges......................................................................... -- 96
--------- ---------
Total operating expenses............................................................. 4,768 4,250
--------- ---------
Operating loss....................................................................... (1,679) (3,261)
INTEREST EXPENSE (INCOME), net (including related party interest)........................ (99) 150
OTHER INCOME............................................................................. -- 27
--------- ---------
Loss before income taxes............................................................. (1,580) (3,384)
INCOME TAX BENEFIT....................................................................... 616 1,442
--------- ---------
NET LOSS................................................................................. $ (964) $ (1,942)
--------- ---------
--------- ---------
BASIC AND DILUTED NET LOSS PER COMMON SHARE.............................................. $ (0.15) $ (0.56)
--------- ---------
--------- ---------
SHARES USED IN COMPUTING BASIC AND DILUTED NET
LOSS PER COMMON SHARE.................................................................. 6,467 3,477
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
AXIOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED DECEMBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................................... $ (964) $ (1,942)
Adjustments to reconcile net loss to net cash provided by operating activities--
Depreciation and amortization.............................................................. 391 730
Changes in assets and liabilities, net--
Decrease (increase) in--
Accounts receivable.................................................................... 3,109 7,858
Inventories............................................................................ 467 (1,009)
Other current assets................................................................... (418) (253)
Other assets........................................................................... (9) (4)
Deferred taxes......................................................................... -- 78
Income tax receivable.................................................................. (615) (2,890)
Increase (decrease) in--
Accounts payable....................................................................... (1,525) (84)
Accrued compensation and related benefits.............................................. 118 (40)
Accrued agent commissions.............................................................. (93) (144)
Other accrued expenses................................................................. 567 (336)
Deferred revenues...................................................................... 511 (421)
--------- ---------
Net cash provided by operating activities............................................ 1,539 1,543
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................................................... (289) (360)
--------- ---------
Net cash used in investing activities................................................ (289) (360)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................................................... (32) (21)
Advances on obligations to parent and affiliates............................................. 236 1,594
Repayment on obligations to parent and affiliates............................................ (297) (3,702)
--------- ---------
Net cash used in financing activities................................................ (93) (2,129)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................................... 1,157 (946)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................... 7,206 3,326
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................................................... $ 8,363 $ 2,380
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<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. The
Company is 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).
STOCK SPLIT AND INITIAL PUBLIC OFFERING
On June 27, 1997, the Company amended its Certificate of Incorporation to
authorize 5,000,000 shares of Preferred Stock and 25,000,000 shares of Common
Stock. On July 2, 1997, the Company effected a 34,769-for-one stock split of
each outstanding share of Common Stock by means of a stock dividend. All share
and stock option data have been restated to reflect this stock split.
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 December 31, 1997 and for the three months
ended December 31, 1997 and 1996 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 months ended December 31, 1997 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.
6
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
INVENTORIES
Inventories are valued at the lower of cost, determined on the first-in,
first-out method or market.
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 "Liquidity and Capital Resources"). 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.
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 recognized from "bill and hold" transactions were $0 for the three
months ended December 31, 1997 and 1996. Accounts receivable relating to "bill
and hold" transactions were $0 at December 31, 1997 and September 30, 1997.
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 has only had nominal separate software license fee revenues for the
three months ended December 31, 1997 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
7
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
PARENT CHARGES
Prior to the Offering, parent charges were allocated to the Company from
Securicor and consist 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.
The Company has not incurred nor will incur any parent charges subsequent to
the Offering. The Company and Securicor have entered into an agreement for
international marketing services (See Note 7).
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 supersedes APB 15. 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 replaces 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 replaces 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.
8
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 DECEMBER 31
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996
---------------------------------------- -----------------------------------------
<CAPTION>
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........................... $ (964,000) 6,466,900 $ (0.15) $ (1,942,000) 3,476,900 $ (0.56)
----------- -----------
----------- -----------
Effect of dilutive securities..........
Stock Options...................... -- -- -- --
------------ ------------- ------------- -------------
DILUTED LOSS PER COMMON SHARE..........
NET LOSS AND ASSUMED CONVERSIONS... $ (964,000) 6,466,900 $ (0.15) $ (1,942,000) 3,476,900 $ (0.56)
------------ ------------- ----------- ------------- ------------- -----------
------------ ------------- ----------- ------------- ------------- -----------
</TABLE>
Options to purchase 321,366 shares of Common stock at $12 per share were
outstanding during the three months ended December 31, 1997, but were not
included in the respective computations of diluted loss per Common share because
the options' exercise prices were greater than the average market price of the
Common shares during the period. The options, which expire May 2007, were still
outstanding as of December 31, 1997.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For the three months ended December 31, 1997 and 1996, the Company paid
interest of $3,000 and $182,000, respectively. For the three months ended
December 31, 1997 and 1996, the Company paid income taxes, net of refunds, of $0
and $1,652,000, respectively.
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>
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Billed................................................. $ 9,373,000 $ 12,265,000
Unbilled............................................... 1,859,000 2,076,000
----------------- ------------------
11,232,000 14,341,000
Less--allowance for doubtful accounts.................. (100,000) (100,000)
----------------- ------------------
$ 11,132,000 $ 14,241,000
----------------- ------------------
----------------- ------------------
</TABLE>
9
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. ACCOUNTS RECEIVABLE: (CONTINUED)
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. Substantially all
unbilled accounts receivables are expected to be billed and collected within one
year.
4. INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Raw materials.......................................... $ 3,130,000 $ 4,718,000
Work-in-process........................................ 884,000 538,000
Finished goods......................................... 2,893,000 2,118,000
----------------- ------------------
$ 6,907,000 $ 7,374,000
----------------- ------------------
----------------- ------------------
</TABLE>
5. LINE OF CREDIT
The Company has a $2,500,000 line of credit with a local bank with interest
at the bank's prime rate. As of December 31, 1997, no funds have been advanced
against this line of credit. Borrowings under the agreement are secured by an
interest in substantially all of the Company's assets and require the Company to
maintain certain financial and nonfinancial covenants, as defined. As of
December 31, 1997, the Company was not in compliance with certain of its
financial covenants. The Company received a waiver from the bank relating to
such noncompliance.
6. OBLIGATIONS TO PARENT AND AFFILIATES:
Information relative to the Company's obligations to parent and affiliates
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Obligations to Parent...................................................... $ 126,000 $ 289,000
-------- --------
Obligation to affiliates:
Receivables from affiliates............................................ (11,000) (119,000)
Payables to affiliates................................................. 7,000 13,000
-------- --------
Total obligations to affiliates, net............................... (4,000) (106,000)
-------- --------
Total obligations to parent and affiliates................................. $ 122,000 $ 183,000
-------- --------
-------- --------
</TABLE>
Prior to the completion of the Offering, the Company was funded through
advances from its parent (Securicor). 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 three months ended December 31, 1997. For the three
months ended December 31, 1996, the interest rate charged on these obligations
ranged from 6.75% to 7.0%. Interest expense for the three months ended December
31, 1997 and 1996, was $0 and $165,000, respectively. As these obligations to
parent and affiliates are due on demand, this net amount is included in current
liabilities.
10
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. RELATED PARTY TRANSACTIONS:
In May 1997, the Company and Securicor entered into an agreement pursuant to
which Securicor provides international sales and marketing services to the
Company. For the three months ended December 31, 1997, total charges from
Securicor for these services were $20,000. In addition, the Company pays each of
its directors an annual directors fee of $20,000 each. For the three months
ended December 31, 1997, the Company expensed $5,000 related to such fees. The
directors fees paid to employees 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. Currently, this loan is being renegotiated under the
same terms and conditions. Also, in July 1997, the Company advanced $20,400 to a
member of the Company's Board of Directors which is repayable in monthly
principal installments of $1,666. At December 31, 1997 and September 30, 1997,
$10,404 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 three months ended December
31, 1997 was $14,000.
During the three months ended December 31, 1996, 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 three months ended December 31, 1996, 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 three months ended
December 31, 1996, the Company recognized revenues of $1,070,000 and cost of
revenues of $631,000 relating to such activities. Cost of revenues includes
$267,000 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.
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. The Company does not expect to
make these payments other than in the normal course of business.
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
11
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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 intends to vigorously defend against
these claims and believes that they are 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.
12
<PAGE>
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 an increasing volume of 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
56.9% and 57.0% of the Company's total revenues for the three months ended
December 31, 1997 and 1996, respectively.
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. 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 the majority is
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.
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.
13
<PAGE>
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 does not currently have
any 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.
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1997 COMPARED TO QUARTER ENDED DECEMBER 31, 1996
REVENUES
Revenues increased 44.9% to $6.9 million for the quarter ended December 31,
1997 from $4.8 million for the quarter ended December 31, 1996. Equipment
revenues were $4.7 million for the quarter ended December 31, 1997, an increase
of 55.5% over the $3.1 million of equipment revenues for the quarter ended
December 31, 1996. This increase resulted primarily from larger shipments to
existing RBOC customers. Services revenues increased 26.2% to $2.2 million for
the quarter ended December 31, 1997. This increase is mainly due to increased
hardware and software maintenance contracts during the quarter. Additionally,
the Company generated $1.1 million of revenues in the quarter ended December 31,
1996 related to sales of an affiliate's product which did not recur. See Note 7
of Notes to Consolidated Financial Statements.
GROSS PROFIT
Gross profit increased to 44.6% of revenues for the quarter ended December
31, 1997 from 20.7% for the quarter ended December 31, 1996. Gross profit
related to equipment revenues increased to 50.6% for the quarter ended December
31, 1997 from 22.2% for the quarter ended December 31, 1996. This increase
resulted primarily from the increase in revenues. The Company has a relatively
high fixed cost base which is included in cost of revenues. As a result,
fluctuations in revenues may have a significant effect on
14
<PAGE>
margins. Gross profit from services revenues increased to 31.4% for the quarter
ended December 31, 1997 from 18.0% for the quarter ended December 31, 1996. This
increase is attributable to the benefit of spreading higher revenues over the
Company's fixed cost base.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses remained unchanged at $2.0
million for the quarters ended December 31, 1997 and 1996. As a percentage of
revenues, research, development and engineering expenses decreased during the
quarter ended December 31, 1997 to 28.2% from 40.6% for the quarter ended
December 31, 1996 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 $2.8 million for the
quarter ended December 31, 1997, an increase of 27.3% compared to $2.2 million
for the same period in 1996. As a percentage of revenues, selling, general and
administrative expenses decreased during the quarter ended December 31, 1997 to
40.6% from 46.2% for the same period in 1996. This decrease is primarily
attributable to the increase in revenues. The absolute increase is primarily
attributable to additional legal cost incurred related to the law suit filed by
Acxiom Corporation and general and administrative cost associated with being a
public company. In addition, the increase is attributable to the addition of
staff in the marketing and sales departments of the Company as a result of the
Company's increased focus on developing new markets and expanding existing
markets for the Company's products.
PARENT CHARGES
Prior to the Offering, Securicor charged the Company an allocated portion of
group and divisional overhead costs (the "Parent Charges"). The Parent Charges
for the quarter ended December 31, 1996 were $96,000. The Company did not incur
any Parent Charges after the Offering and is not expected to incur any
significant expenses in lieu of these Parent Charges. The Company entered into
an agreement effective May 1997 whereby Securicor is providing international
marketing services to the Company. For the three months ended December 31, 1997,
total changes from Securicor for these services were $20,000. In addition, the
Company pays each of its directors who are employees of Securicor annual
directors fees of $20,000, which the directors remit to Securicor. For the three
months ended December 31, 1997, the Company expensed $5,000 related to such
fees. See Note 7 of Notes to Consolidated Financial Statement.
INTEREST EXPENSE (INCOME)
Interest income was $99,000 for the quarter ended December 31, 1997.
Interest expense was $150,000 for the quarter ended December 31, 1996. 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 39.0% and 42.6% for the quarters ended
December 31, 1997 and 1996, respectively. Income tax expense was recorded based
upon the expected annual effective income tax rate.
15
<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 realized 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 December 31, 1997, the Company had $8.4 million
of cash and cash equivalents, $11.1 million in net trade accounts receivable,
and $22.9 million of working capital. Included in accounts receivable as of
December 31, 1997 are receivables from a customer located in Indonesia, which
are subject to uncertainties that presently exist in that market.
Net cash provided by operating activities was $1.5 million for both the
three months ended December 31, 1997 and 1996. In the three months ended
December 31, 1997, amortization and depreciation of $391,000, a decrease in
accounts receivable of $3.1 million, a decrease in inventories of $467,000, an
increase in deferred revenues of $511,000 and an increase in other accrued
expenses of $567,000 were offset by the net loss, an increase in other current
assets of $418,000, a $1.5 million decrease in accounts payable and a decrease
in income tax receivable of $615,000. In the three months ended December 31,
1996, amortization and depreciation of $730,000 and a decrease in accounts
receivable of $7.9 million were offset by an increase in inventory of $1.0
million, an increase in other current assets of $253,000, a decrease in accounts
payable, accrued compensation and related benefits, accrued agent commissions
and other accrued expenses of $604,000, a decrease in deferred revenues of
$421,000, an increase in income tax receivable of $2.9 million and the net loss
of $1.9 million.
Net cash used in investing activities relating to purchases of property and
equipment was $289,000 and $360,000 for the three months ended December 31, 1997
and 1996, respectively.
Net cash used in financing activities was $93,000 and $2.1 million for the
three months ended December 31, 1997 and 1996, respectively. During the three
months ended December 31, 1996, cash used in financing activities resulted
primarily from the net repayments of obligations to Securicor of $2.1 million.
The Company has a $2.5 million credit facility with a bank which will be
used to meet short-term borrowing requirements. As of February 17, 1998, the
Company had not yet made any borrowings under this facility. In December 1997,
the Company obtained a $1.5 million leasing facility to finance its purchases of
capital equipment. At February 17, 1998, approximately $1.4 million was
available under this facility.
The Company believes that its existing cash balances, cash generated from
operations, borrowings under the credit facility and the net proceeds from the
Offering will be sufficient to meet the Company's cash requirements during the
next twelve months. However, depending upon its rate of growth and
profitability, 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 AND FOREIGN EXCHANGE
To date, inflation and foreign currency fluctuations have not had a material
impact on the Company's financial condition and results of operations. All sales
arrangements with third-party international customers are denominated in US
dollars.
16
<PAGE>
PART II. OTHER INFORMATION
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 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 intends to vigorously defend against
these claims and believes that they are 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.
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 first quarter of fiscal 1998.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AXIOM INC.
Dated: February 17, 1998 By: /s/ ANDREW P. MAUNDER
-----------------------------------------
Andrew P. Maunder
CHAIRMAN OF THE BOARD,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Dated: February 17, 1998 By: /s/ MARK J. KADISH
-----------------------------------------
Mark J. Kadish
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
18
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