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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 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 __
COMMISSION FILE NUMBER 0-22601
AXIOM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0356153
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification Number)
4000 MIDLANTIC DRIVE,
MT. LAUREL, NJ 08054-5476
(Address of principal executive offices) (Zip Code)
(609) 866-1000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each Class on which registered
------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.__
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing price of such stock as reported by the Nasdaq
National Market ("Nasdaq") as of December 24, 1998 was $5,264,611. For
purposes of making this calculation only, registrant has defined affiliates as
including all directors, executive officers and beneficial owners of more than
ten percent of the common stock of the registrant.
The number of outstanding shares of the registrant's Common Stock, par value
$.01 per share ("the Common Stock"), on December 24, 1998 was 7,775,249.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business 3
2. Properties 9
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters 10
6. Selected Financial Data 12
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
7A. Quantitative and Qualitative Disclosures About Market Risk 20
8. Financial Statements and Supplementary Data 21
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42
PART III
10. Directors and Executive Officers of the Registrant 42
11. Executive Compensation 43
12. Security Ownership of Certain Beneficial Owners and Management 43
13. Certain Relationships and Related Transactions 43
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 44
Signatures 46
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PART I
ITEM 1. BUSINESS
DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish statements which 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. Such
statements are generally identified by the use of forward-looking words and
phrases such as "intended," "expects," "anticipates," and "is (or are) expected
(or anticipated)." The Private Securities Litigation Reform Act of 1995 provides
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: (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 obtain financing for operations and growth; (viii) 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 (ix) 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.
DEVELOPMENT OF THE BUSINESS
The Company is the successor to a corporation formed in 1967. The Company was
formed as a Delaware corporation in June 1994 in connection with the acquisition
of the wireline division of TeleSciences, Inc. (the "Predecessor Business"). In
May 1997, the Company changed its name from Securicor Communications Inc. to
Axiom Inc. Through May 1997, the Company's business was conducted through its
wholly-owned subsidiary, Securicor TeleSciences Inc. ("STI"). In May 1997, STI
merged into the Company. The Company completed an initial public offering of
its Common Stock in July 1997 (the "Offering"). Prior to the completion of the
Offering, the Company was a wholly-owned subsidiary of Securicor Communications
Limited ("SCL"), a company based in the United Kingdom, and an indirect wholly-
owned subsidiary of Securicor plc, a multinational company based in the United
Kingdom (collectively with Securicor Communications and other wholly-owned
subsidiaries, other than the Company and its subsidiary, "Securicor"). SCL
currently owns approximately 44.6% of the Company's outstanding Common stock.
Axiom provides systems for billing data collection, transaction data
management, revenue assurance, fraud management and traffic management to
telecommunications service providers. These systems allow telecommunications and
information service providers to maximize the value of the information passing
through their communication networks, providing management of customer
transaction data, network performance, and the reliability of network revenues.
During the twelve months ended September 30, 1998 ("fiscal 1998"), Axiom
expanded its product and systems offerings, as well as its customer base,
through two acquisitions.
. In February 1998, the Company acquired Greendown Software Ltd. ("GSL") in the
UK, a provider of fraud management systems to telecommunications service
providers. In August 1998, the Company changed the name of GSL to Axiom
(Europe) Limited.
. In May 1998, the Company acquired Innovative Data Technology ("IDT"), a
company selling billing data collection systems and other related products to
telecommunications service providers, primarily through strategic
partnerships with companies such as Digital Equipment Corporation (now a part
of Compaq Computer Corporation), IBM, Alcatel and Siemens.
The Company is ISO9001 certified, has 182 employees and is headquartered in
Mount Laurel, New Jersey. The Company also has offices in San Diego and Denver
in the U.S., in Winchester in the UK, Buenos Aires in Argentina and Jakarta in
Indonesia.
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PRODUCTS AND RELATED SERVICES
General
The Company's principal products are billing data collection, transaction
data management systems, revenue assurance, fraud management systems and traffic
management systems. The Company also provides professional engineering services
for telecommunications service providers.
The Company's billing data collection and transaction data management systems
collect and normalize data from telecommunications switches that connect users
of telecommunications networks. These systems provide data to applications
including billing, customer care, marketing, fraud management, data warehousing,
and network management. The Company's systems interface with all major switch
types.
The Company's revenue assurance and fraud management systems help ensure
carriers' ability to bill accurately and completely for the services they render
and guard against fraudulent use of their networks. The need for such systems is
increasing as a result of the complexity in the marketplace introduced by the
growing number of telecommunications carriers and their interconnections. The
Company provides revenue assurance capabilities through its Sterling Fraud
Management System and through certain of its Specialized Processing Modules
("SPMs") running on the Sterling Billing Mediation System.
The Company's traffic management systems capture information on trunk usage.
This information is transmitted to the customer's network planners who use the
information to optimize network performance. This capability helps carriers
avoid problems of too many available trunks, resulting in increased costs, and
too few available trunks, resulting in disconnected calls, poor service and lost
revenue.
The Company provides professional engineering services to integrate the
Company's product lines into customer networks and applications.
Billing Data Collection
The Company offers a wide range of billing data collection (mediation) and
transaction data management products that serve all major switch types with
functions that extend from tape drives for electromechanical switches through
real-time data collection and management systems for all advanced switch types.
These systems also vary from stand-alone systems to fully-integrated, centrally
managed and remotely updated systems.
The Sterling Solution
The "Sterling Solution" is an integrated suite of transaction data
collection products marketed under the Sterling name and additional products
tailored for use on other platforms. The individual products that comprise the
Sterling Solution are designed to work as a system; however, the Company sells
each component separately so that the system can be configured to meet the exact
needs of the customer.
The core components of the Sterling Solution are the Sterling 5XX series of
Data Servers and the Sterling 5000 Host Collector, each of which can be
configured with a variety of SPMs. The Sterling Solution is controlled through
the Company's Sterling Manager software that runs on the Sterling 5001
workstation. The Sterling Manager enables centralized, remote management of the
full Sterling system including remote software upgrades for units in the field.
The Sterling Solution also includes the Sterling 5410 data distribution platform
and a collection of SPMs. These components of the Sterling Solution are
described in further detail below.
5XX Series. Each model of the Sterling 5XX data server series consists of a
processor unit equipped with a UNIX-based operating system. The flagship
product in the series, the Sterling 500, can be configured on a fully redundant
basis and shares many capabilities with the Sterling 5000 described below, such
as the ability to support multiple switches and run SPMs. Other data servers in
the series are tailored for specific switch interfaces, are single input, and
have varying degrees of processing capacity. They offer varying levels of
redundancy and backup tailored to complement specific capabilities in particular
switches and offer more scalability and pricing flexibility for data server
technology. All data server products are compatible with a wide range of
switch inputs and interface to many different local and wide area network
environments.
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One example of the series is the Sterling 510, a new entry-level data server.
This system is designed specifically to reach emerging and competitive markets,
including Competitive Local Exchange Carriers ("CLECs") and international
carriers, that generally require a single-input, low volume, data collection and
processing solution. The Sterling 510 will also be applicable to larger
carriers for low volume exchanges. Like all Sterling Data Servers, the Sterling
510 is a duplex, fully redundant system, and is designed to comply with industry
standards for international and U.S. markets.
Sterling 5000. The Sterling 5000 is a centralized billing data collector that
collects transactional data, primarily call detail records ("CDRs"), from data
servers, such as the Sterling 500, or directly from multiple telecommunications
switches or other CDR generating sources. The Sterling 5000 consists of a
multi-processor Hewlett-Packard Co. ("Hewlett-Packard") computer equipped with
specialized software. The Sterling 5000 is equipped with specialized input
interfaces which permit the unit to collect data from a wide variety of switch
and server types. After the data is collected, the Sterling 5000's resident
preprocessing software reformats the CDRs into a normalized format which
facilitates further processing, storage or delivery to other data management
systems.
The Sterling 5000 processes the normalized CDRs through a number of
applications, some of which are standard features of the Sterling 5000 and some
of which are provided by SPMs that the Company sells separately.
Sterling Manager; Sterling 5001. The Sterling Manager is a workstation
equipped with a graphical-user interface ("GUI") that provides communication,
command and control capabilities for a network of one or more Sterling 5000s and
Sterling 5XXs. The Sterling 5001 is generally used in combination with the
Company's Sterling Manager software product, which can be easily adapted to
interface with additional Sterling and non-Sterling hardware and software
products. With easy-to-use "point and click operation," the Sterling Manager
optimizes systems control and enables remote management of data collecting,
processing and distributing functions performed by equipment installed at fully
automated facilities. By combining the ability to manage remote operations with
the advantages of a user-friendly interface, the Company's products help its
customers to control their personnel-related costs.
Sterling 5410. The Sterling 5410 provides a UNIX-based data distribution
platform designed to receive CDR data from other Sterling Solution products and
perform independent data processing. The Sterling 5410 offers end users full
access to that data while, at the same time, maintaining a security "firewall"
between these external users and the revenue-critical billing system directly
supported by other Sterling Solution products. The platform has the further
advantage of being able to aggregate data from several Sterling 5000s and 5XXs
by communication through a provider's own network file servers. Currently, the
primary application of the Sterling 5410 permits local exchange companies
("LECs") to provide call detail data to their customers using dedicated
switching facilities (generally referred to as Centrex systems). Together, as
part of the overall Sterling Solution, these products provide the Company's
customers with access to near-real time data for both internal and external end-
users.
Specialized Processing Modules. The Company offers purchasers of the Sterling
500 and 5000 the power to build quickly and easily their own applications by
using Company-designed SPMs. SPMs are user-defined transaction processing
functions for use on the Sterling Solution billing data collection products
that offer a rules-based approach to building processing features. Each SPM
performs a unique operation on the transaction data, but SPMs can be implemented
in groups with defined interactions among the separate modules. Configurations
of these groups of modules can be designed, enabled and disabled by customer
personnel using a convenient graphical display, thereby reducing the need for
costly and time-consuming revisions to customers' application software systems.
Traffic Management Products
The Company provides a comprehensive traffic management system under the name
Manifest(TM) (formerly Autrax 5000). This product provides telecommunications
companies with real-time traffic data to quickly detect and locate exchange and
network problems, strategically plan and route traffic through the network,
improve the over-all quality of service and significantly reduce customer
complaints. The Manifest(TM) traffic management system features a GUI-based
system, compliance with the Open Database Connectivity standard, a function to
permit its reports to be accessed by a web browser and an adaptive normalizer
which permits greater customer flexibility ininterfacing with new switch types.
The Company's traffic management system consists of a Hewlett-Packard-based
hardware platform loaded with Company-developed software. The system collects
and processes traffic information from a wide array of switch technologies,
including digital, analog and cellular switches. The system interfaces directly
with the switches to collect traffic data and generate maintenance reports in a
standard database format. The Manifest(TM) traffic management system
centralizes the raw or formatted data into database tables so that standard and
customized reports can be generated. As
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with the Sterling Series billing data collection products, the Manifest(TM)
traffic management system is fully scaleable, permitting easy upgrades to meet
rising system demands.
Professional Engineering Services
The Company's engineers assist telecommunications services providers by
developing customized application programs integrating any of the Company's
products into customer's networks. Services include developing user interfaces,
system interfaces and network and alarm system management interfaces; custom
filters to screen call data used in fraud management and other processing
applications; and software for custom data handling, reformatting and report
generation. The Company believes that its technology services are important in
enabling its customers to fully utilize the range of the Company's products,
helping new CLECs and international customer segments adapt products, and
demonstrating the Company's responsiveness. Work done through professional
services can also lead to feature enhancements in the Company's basic products.
NEW PRODUCTS AND SERVICES
While most of the world's telecommunications needs are being served by the
"public switched network", new telecommunications technologies are emerging.
These include Asynchronous Transfer Mode ("ATM") switching and transmission
technologies in addition to Internet Protocol ("IP") based technologies. As
switching technology evolves, there is a greater need for mediation to assemble
fragmented data into data records meaningful for billing and other business
processes. The Company is currently developing, in cooperation with leading
hardware and software vendors, mediation solutions for these new switching
technologies.
In the area of revenue assurance, the Company is developing a case management
module for its Fraud Management System in response to the growing need for tools
for prosecution and other applications among fraud management professionals.
In conjunction with its acquisition of IDT in May 1998, the Company acquired
several new billing data collection and related products previously offered by
IDT, including:
DCMD (Data Collection Mediation Device), a system designed to interface
directly to local data ports (X.25, Ethernet 802.3 and RS232) to collect data in
near real time or batch mode from digital telephone exchanges (wireline and
wireless) or other network elements.
LTBS (Local Toll Billing System), which provides call detail recording for
electro-mechanical/analog switching systems without modification of the
exchange hardware and allows upgrades of the capabilities of these older
exchanges.
MTE (Magnetic Tape Emulator System) is designed to replace magnetic tape units
and tape media in the telephone company environment and provide a platform for
full automation of data collection from exchange switches.
Magnetic Tape Unit, which provides for collection of call detail records on
tape for applications in which there are no data networking or teleprocessing
capabilities.
Remote Management and Monitoring System, a single point platform that provides
monitoring and management of an entire data collection network consisting of
MTE, DCMD, LTBS, and other SNMP devices.
In the future, the Company will consider introducing new software applications
that are compatible with its other transaction data management, fraud
management, and traffic management products. The Company may also consider
developing interfaces that permit its systems to transmit data from sources
other than telecommunications networks, including possibly other utilities and
cable television systems. There is no assurance, however, that any of these
products will be successfully developed or marketed.
SUPPLY RELATIONSHIPS
The Company purchases and licenses products and technology from a variety of
providers. The Company purchases Hewlett-Packard hardware and software that is
used primarily for its Sterling 5000 and traffic management product through an
agreement with a major Hewlett-Packard distributor. The Company licenses the
real-time operating system used in the Sterling Series from Lynx Real-Time
Systems, Inc., software for its traffic management product from Informix
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Software, Inc. and uses software for the Sterling 7000 fraud management system
from Oracle Corp. The Company also purchases processing boards for its Sterling
5XXs and other products from Motorola, Inc. through a distributor. The Company
believes its relationships with its suppliers are good and there are no issues
related to obtaining product.
CUSTOMERS
The Company has a customer base in many regions of the world. The Company's
domestic U.S. customers include major telecommunications service providers such
as US West, Ameritech, Southwestern Bell, MCI Worldcom and Nextlink. Both US
West and Ameritech have installed the Company's systems extensively throughout
their networks. Both have a combination of many Sterling data servers at central
office sites and a number of Sterling 5000 host collectors at operations centers
in their multi-state regions.
Internationally, the Company's customers include Telecom Argentina, Telesp
of Brazil, Bell Canada, Puerto Rico Telephone Company, CANTV in Venezuela, PT
Telkom of Indonesia, Digitel in the Philippines, Cegetel in France and Cable and
Wireless in Jamaica and the UK, a market where the Company's fraud management
systems have been in place for many years. In many international situations, the
Company works with local agents or distributors.
The Company is adding customers from new market segments including Eastern
Europe and the CLECs. Major CLECs are looking to the Company's Operations
Support Systems and Billing and Customer Care.
In the U.S., most sales are made through a direct sales force.
Internationally, the Company uses a mix of direct sales staff and local
distributors and/or agents. The Company also has relationships with strategic
partners who generally provide a wider solution to the market. The Company's
systems are then incorporated as a part of this solution. These strategic
partners include:
Cisco Systems. The Company and Cisco have developed a solution for billing data
collection for Cisco's ATM switch products.
Steria. Based in France, this major international systems integrator provides
software solutions to a range of markets including telecommunications. The
Company and Steria have partnered successfully in providing billing mediation
and pre-processing solutions into both wireless and long distance
telecommunications providers. Both companies are now actively marketing similar
solutions to other potential customers, particularly in Europe.
Alcatel Telecom Norway. As part of the Alcatel organization, Alcatel Telecom
Norway provides billing and customer care solutions around the globe. In
particular, Alcatel has installed solutions in Eastern Europe which allows
access to greater functionality from older electro-mechanical exchanges. Most of
the technology supplied for this solution is sold by the Company through Alcatel
Telecom Norway.
Digital Equipment Corporation (now part of Compaq Computer Corporation). The
Company supplies its MTE and DCMD products through Digital in Brazil to
telecommunications service providers there as part of a wider operations support
system.
AG Communication Systems, a joint venture of Lucent Technologies and GTE,
resells the Sterling Solution in domestic and international markets.
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The following tables set forth information with respect to sales to certain
major customers during fiscal 1998 and the year ended September 30, 1997
("fiscal 1997"):
FISCAL 1998
PERCENTAGE OF
CUSTOMER REVENUES TOTAL REVENUES
Ameritech Corporation (1)........... $10.1 million 33%
US West, Inc......................... $ 9.3 million 30%
FISCAL 1997
US West, Inc.......................... $13.8 million 42%
Southwestern Bell Telephone Company.... $ 3.2 million 10%
PT. Telekomunikasi, Indonesia.......... $ 3.1 million 10%
Ameritech Corporation.................. $ 2.9 million 9%
(1) The fiscal 1998 amount for Ameritech Corporation includes $1.0 million of
sales to a subcontractor which was performing work for Ameritech
Corporation.
BACKLOG
The Company's backlog (firm purchase orders for products and services that
have not yet been recognized as revenue) was approximately $8.5 million and $7.5
million at December 1, 1998 and December 1, 1997, respectively. Additionally,
the Company had $7.2 million and $0 in the form of letters of intent at December
1, 1998 and December 1, 1997, respectively. The Company normally has a
relatively small amount of product and service backlog because ongoing informal
communication with its major customers generally enables the Company to
anticipate orders and ship products within a relatively short time after the
customer's order is received. The Company expects to be able to fill
substantially all backlog existing at December 1, 1998 prior to the end of
the twelve months ending September 30, 1999 ("fiscal 1999").
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are directed towards developing
new products and improving existing products by incorporating new features and
technologies. The Company believes that the timely development of new products
and enhancements is critical to maintaining its leadership position in its
current marketplace and in gaining penetration in new markets. During fiscal
1998 and 1997 and the twelve months ended September 30, 1996 (fiscal 1996"),
development and engineering expenses were $8.0 million, $7.6 million and $7.0
million, respectively.
During fiscal 1998, the Company embarked upon a rearchitecture of its core
systems, principally for the Sterling Host Collector. This work is expected to
enable the Company to further enhance its product offerings to its existing
customer base, as well as new and multi-service providers, which will include
companies using new technology such as ATM and IP. The new technology is
expected to use object oriented design tools and the latest proven software
tools and methods.
Due to the nature of this rearchitecture project, the Company is
capitalizing the costs of the effort required and for the fiscal year ended
September 30, 1998, the total amount capitalized was $363,000. Note that those
software development costs are accounted for under Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." No costs were capitalized in
fiscal 1997. In fiscal 1999, the Company expects to capitalize approximately
$3.0 million of costs under SFAS No. 86 associated with this project.
COMPETITION
The markets for billing data collection (mediation), revenue assurance, fraud
management and traffic management systems for the telecommunications service
industry is highly competitive and the Company expects that further growth
within the telecommunications service industry will encourage the entry of new
participants into U.S. and international markets in the future. Many of the
Company's current and potential competitors have significantly greater
financial, technical and marketing resources than the Company.
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The Company believes that the principal basis of competition in the sale of
its products is functionality, including such factors as the ability of products
to provide a high degree of integrity of transaction information while
efficiently performing all preprocessing and delivery functions; the ability to
increase capacity and add functionality cost-effectively; the ability to provide
critical data on a real-time basis; compatibility with telecommunications
switches sold by a number of manufacturers; and the ability to interface
effectively with a variety of billing and other applications. Other significant
bases of competition include price and service.
In the market for its billing data collection and transaction data processing
solutions, the Company's competitors include: (i) large telecommunications
service providers that internally develop full system products for their own
use; (ii) companies, such as Ace*Comm Corporation, CGI, Inc., Comptel, ICL,
Lucent and Northern Telecom, Inc., that can supply billing data collection
components and systems; and (iii) vendors that supply product components or
systems integration services, including Hewlett-Packard and IBM.
In the market for its fraud management systems, the Company's competitors
include: (i) large telecommunications service providers that internally develop
systems for their own use; (ii) companies such as Digital Equipment Corporation
and Northern Telecom that provide fraud management systems as part of a wider
solution; and (iii) companies such as HNC Corporation, Dynamics Research
Corporation and Applied IT who provide separate fraud solutions.
In the market for its traffic management solutions, the Company's competitors
include: (i) large telecommunications service providers that internally develop
full system products for their own use; and (ii) companies such as Hewlett-
Packard and Objective Systems Integrators, Inc. that provide integrated network
management systems.
EMPLOYEES
As of December 28, 1998, the Company had a total of 182 employees. At that
date, the Company also engaged 11 individuals on a consulting basis. None of the
Company's employees is represented by a labor union. The Company believes that
its relations with its employees are good.
ITEM 2. PROPERTIES
In May 1998, the Company relocated its headquarters to a 63,000 square foot
facility in Mount Laurel, New Jersey for which it has signed a 10-year lease
agreement with a renewal option for five additional years. The Company believes
this facility is suitable and adequate for the Company's present and foreseeable
future needs.
The Company's manufacturing group is located in a nearby 34,000 square foot
facility. The Company's lease on this facility expires in August 2003. This
facility is well maintained, in good condition, and, in the Company's opinion,
is suitable and adequate for the Company's present and foreseeable future needs.
The Company is currently leasing a 26,000 square feet facility in San Diego,
California. The lease will terminate in August 1999. This facility is the former
headquarters of IDT which was acquired by the Company in May 1998 (see Note 3 of
Notes to Consolidated Financial Statements). The facility is not fully utilized
and the Company has reserved for its future lease obligations. The Company is
attempting to sublease this facility.
The Company also has offices in Denver in the U.S., in Winchester in the UK,
Buenos Aires in Argentina and Jakarta in Indonesia.
ITEM 3. LEGAL PROCEEDINGS
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 is not
reasonably likely to have a material adverse effect on the Company's financial
position or results of operations.
In August 1997, Acxiom Corporation ("Acxiom") filed suit against the Company
in the United States District Court for the District of Delaware alleging
trademark infringement and dilution under the Lanham Act, as well as related
state law causes of action. Acxiom sought a judgment against the Company
enjoining any future use of the Axiom name and Axiom tradenames and future acts
of unfair competition in the United States, mandating the destruction of all
Company advertising and promotional material using the Axiom name and awarding
treble damages in an unspecified amount because of the alleged willfulness of
the Company's infringement, as well as attorneys' fees.
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On November 16, 1998, the United States District Court for the District of
Delaware rendered its decision that Acxiom was entitled to an order enjoining
the Company from making further use of the Axiom name and related injunctive
relief. The court also concluded that Acxiom is not entitled to any money
damages. The Company and Acxiom have agreed that neither will appeal the court's
decision, and the Company has agreed to reimburse Acxiom for auxiliary costs in
the amount of $50,000. The Company will change its name by the end of March
1999.
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 fourth quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(a) Market Information.
The Common Stock is traded in the Nasdaq National Market under the symbol
"AXIM." As a result of the Acxiom lawsuit (see Item 3 of this Form 10-K and
Note 16 of Notes to Consolidated Financial Statements), the Company is required
to change its name by March 31, 1999. Accordingly, the Company's symbol on the
Nasdaq National Market will also change. The new Company name and Nasdaq symbol
have not been determined. The following table sets forth, for the period
indicated, the high and low closing sales prices per share of Common Stock as
reported by Nasdaq. Regular-way trading in the Common Stock commenced in the
Nasdaq National Market on July 8, 1997.
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FISCAL 1998: HIGH LOW
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First Quarter................................... $15 1/8 $4
Second Quarter.................................. 6 3/8 3 15/16
Third Quarter................................... 4 7/16 2 3/4
Fourth Quarter.................................. 3 1 1/4
FISCAL 1997:
Fourth Quarter.................................. $14 1/2 $9
(from July 8, 1997)
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(b) Holders.
As of December 24, 1998, there were approximately thirty-five record holders
of the Common Stock. This figure does not reflect beneficial ownership of
shares held in street or nominee name.
(c) Dividends.
The Company has not paid any dividends on the Common Stock in the past and
does not anticipate paying dividends in the foreseeable future. The Loan and
Security Agreement, dated December 7, 1998, by and between the Company and
Silicon Valley Bank, prohibits the Company from paying dividends on its stock
(except for dividends paid solely in shares of the Company's stock) without the
consent of Silicon Valley Bank.
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(d) Recent Sales of Unregistered Securities
On May 15, 1998, pursuant to an Agreement of Merger and Plan of Reorganization
(the "Agreement of Merger and Plan of Reorganization"), by and among the
Company, AV Technology, Inc., a Delaware corporation ("Technology") and a
wholly-owned subsidiary of the Company, IDT, and the Shareholders of IDT (the
"Shareholders"), IDT was merged into Technology in accordance with the relevant
provisions of the California General Corporation Law and the Delaware General
Corporation Law (the "Merger"). In connection with the Merger, the Company
issued to the Shareholders, in exchange for their shares of common stock of IDT,
$1.00 par value, which constituted in the aggregate all of the issued and
outstanding common stock of IDT, an aggregate of 1,290,000 shares of the Common
Stock. In November 1998, this number of shares was reduced by 15,056 to
1,274,944 based on certain post closing adjustments, and may be subject to
further adjustment. The Company issued the shares of Common Stock to the
Shareholders without registration under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance upon the exemption from the registration
requirements of the Securities Act contained in Section 4(2) of the Securities
Act and Regulation D promulgated thereunder.
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ITEM 6. SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with the
consolidated financial statements and notes thereto, and the other financial
information included elsewhere in this Form 10-K, as well as "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The following table summarizes selected financial data of the Company and the
Predecessor Business:
<TABLE>
<CAPTION>
AXIOM INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA )
PERIOD FROM PREDECESSOR
JULY 1, 1994 BUSINESS (1)
YEAR ENDED SEPTEMBER 30, TO YEAR ENDED
-------------------------------------------------- SEPTEMBER, 30, JUNE 30,
STATEMENTS OF OPERATIONS DATA: 1998 1997 1996 1995 1994 1994
---------- ----------- ----------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Unrelated third parties:
Equipment.................................. $ 20,429 $25,049 $23,358 $18,000 $ 4,242 $13,963
Services................................... 10,250 7,958 7,739 5,766 1,364 6,266
-------- ------- ------- ------- ------- -------
30,679 33,007 31,097 23,766 5,606 20,229
Related parties............................. -- -- 2,867 1,802 -- --
-------- ------- ------- ------- ------- -------
Total revenues............................. 30,679 33,007 33,964 25,568 5,606 20,229
-------- ------- ------- ------- ------- -------
COST OF REVENUES:
Unrelated third parties:
Equipment.................................. 11,664 13,202 11,639 9,110 2,271 8,785
Services................................... 7,679 4,697 4,580 3,093 1,086 4,018
-------- ------- ------- ------- ------- -------
19,343 17,899 16,219 12,203 3,357 12,803
Related parties............................. -- -- 1,946 1,274 -- --
-------- ------- ------- ------- ------- -------
Total cost of revenues..................... 19,343 17,899 18,165 13,477 3,357 12,803
-------- ------- ------- ------- ------- -------
Gross profit............................... 11,336 15,108 15,799 12,091 2,249 7,426
-------- ------- ------- ------- ------- -------
OPERATING EXPENSES:
Research, development and engineering....... 8,023 7,580 7,003 5,948 1,348 5,450
Selling, general and administrative......... 16,853 9,026 6,711 5,592 1,072 4,985
Charge for purchased research
and development (2)......................... 2,387 -- -- -- 6,700 --
-------- ------- ------- ------- ------- -------
Total operating expenses................... 27,263 16,606 13,714 11,540 9,120 10,435
-------- ------- ------- ------- ------- -------
Operating income (loss).................... (15,927) (1,498) 2,085 551 (6,871) $(3,009)
=======
INTEREST (EXPENSE) INCOME
(includes related party)................... 232 (327) (514) (112) (9)
OTHER INCOME................................. 16 1 430 148 66
EQUITY IN LOSS OF INVESTEE................... -- -- (18) (494) --
GAIN ON SALE OF INVESTMENT................... -- -- 2,061 -- --
-------- ------- ------- ------- -------
Income (loss) before income taxes.......... (15,679) (1,824) 4,044 93 (6,814)
INCOME TAX (EXPENSE) BENEFIT................. -- 645 (1,543) (35) 2,716
-------- ------- ------- ------- -------
NET INCOME (LOSS)............................ $(15,679) $(1,179) $ 2,501 $ 58 $(4,098)
======== ======= ======= ======= =======
BASIC AND DILUTED NET INCOME
(LOSS) PER COMMON SHARE.................... $ (2.25) $ (0.28) $ 0.72 $ 0.02 $ (1.18)
======== ======= ======= ======= =======
SHARES USED IN COMPUTING
BASIC AND DILUTED NET INCOME
(LOSS) PER COMMON SHARE.................... 6,960 4,144 3,477 3,477 3,477
======== ======= ======= ======= =======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AXIOM INC.
(IN THOUSANDS) PREDECESSOR
SEPTEMBER 30, BUSINESS (1)
------------------------------------------------------------------ JUNE 30,
1998 1997 1996 1995 1994 1994
------- -------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,093 $ 7,206 $ 3,326 $ 1,449 $ 225 $ --
Total assets 29,799 37,023 30,336 21,849 15,302 9,027
Working capital, excluding
obligations to Securicor and affiliates (3) 10,344 23,925 14,698 6,671 1,742 330
Obligations to Securicor and affiliates (3) 64 183 23,291 18,461 12,603 --
Long-term debt 499 -- 147 -- -- --
Stockholders' equity (deficit) (3) 18,831 29,687 (1,539) (4,040) (4,098) 2,330
- ---------------------------------------------------
</TABLE>
(1) The statement of operations and balance sheet data presented for the
Predecessor Business represent the information for the Wireline Division of
TeleSciences, Inc. The Predecessor Business data excludes any intercompany
information with its former owner.
(2) Purchased research and development of $2,387 in fiscal 1998 represents a
one-time charge for in-process research and development which was purchased
in the acquisition of IDT by the Company on May 15, 1998. The acquisition
was accounted for under the purchase method of accounting. Purchased
research and development of $6,700 in fiscal 1994 represents a one-time
charge for in-process research and development which was purchased in the
acquisition of the Predecessor Business by the Company on July 1, 1994. The
acquisition was accounted for under the purchase method of accounting.
(3) The Company's acquisition of the Predecessor Business and other financing
requirements through the date of the Offering have been primarily funded
from borrowings from Securicor rather than equity investment. These
borrowings are classified as obligations to Securicor and affiliates.
Additionally, these borrowings were substantially repaid with the proceeds
from the Company's intial public offering of its Common Stock, completed in
July 1997 (the "Offering").
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's principal products are billing data collection, transaction data
management, revenue assurance, fraud management systems and traffic management
systems. The Company also provides professional engineering services for
telecommunications service providers.
The Company's billing data collection and transaction data management systems
collect and normalize data from telecommunications switches that connect users
of telecommunications networks. They provide data to applications including
billing, customer care, marketing, fraud management, data warehousing, and
network management applications. The Company's systems interface with all major
switch types.
The revenue assurance and fraud management systems help ensure carriers'
ability to bill accurately and completely for the services they render and guard
against fraudulent use of their networks. The need for such systems is
increasing as a result of the complexity in the marketplace introduced by the
growing number of telecommunications carriers and their interconnections. The
Company provides revenue assurance capabilities through its Sterling Fraud
Management System and in SPMs running on the Sterling Billing Mediation System.
The Company's traffic management systems capture information on trunk usage.
This information is transmitted to the customer's network planners who use the
information to optimize network performance. This capability helps carriers
avoid problems of too many available trunks, resulting in increased costs, and
too few available trunks, resulting in disconnected calls, poor service and lost
revenue.
The Company provides professional engineering services to integrate the
Company's product lines into customer networks and applications.
During fiscal 1998, the Company expanded its product and systems offerings, as
well as its customer base, through two acquisitions.
. In February 1998, the Company acquired Greendown Software Ltd. ("GSL") in the
UK, a provider of fraud management systems to telecommunications service
providers. In August 1998, the Company changed the name of GSL to Axiom
(Europe) Limited.
. In May 1998, the Company acquired Innovative Data Technology ("IDT"), a
company selling billing data collection systems and other related products to
telecommunications service providers, primarily through strategic
partnerships with companies such as Digital Equipment Corporation (now a part
of Compaq Computer Corporation), IBM, Alcatel and Siemens.
A significant portion of the Company's revenues have been, and are expected to
continue to be, derived from substantial orders placed by large organizations,
and in particular three Regional Bell Operating Companies ("RBOCs"). Aggregate
revenues from U S West, Inc. , Southwestern Bell Telephone Company and Ameritech
Corporation accounted for 65.2%, 60.2% and 61.6% of the Company's total revenues
for fiscal 1998, 1997 and 1996, respectively. During fiscal 1997, an additional
9.5% of the Company's revenues was attributable to sales to PT Telekomunikasi,
Indonesia. During fiscal 1996, 9.4% of the Company's revenues was attributable
to sales to Puerto Rico Telephone Co.
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 U.S. dollars. Since
the acquisition of Axiom (Europe) Limited in February 1998, its sales are
denominated in pounds Sterling. However, this activity has been insignificant to
date. 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 due primarily to
the Company's concentration of customers and the timing of orders received. The
timing of orders is, in part, dependent on the timing of the Company's
customers' annual budget process. Prior to fiscal 1998, 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
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<PAGE>
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. The majority of these costs are charged to expense
as incurred. During fiscal 1998, the Company embarked upon a rearchitecture of
its core systems, principally for the Sterling Host Collector. This work will
enable the Company to further enhance its product offerings to its existing
customer base, as well as new and multi-service providers, which will include
companies using new technology such as ATM and IP. The new technology will use
object oriented design tools and the latest proven software tools and methods.
Due to the nature of this rearchitecture project, the Company is capitalizing
the costs of the effort required and for the fiscal year ended September 30,
1998, the total amount capitalized was $363,000. Note that these software
development costs are accounted for under SFAS No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." No costs were
capitalized in fiscal 1997. In fiscal 1999, the Company expects to capitalize
approximately $3.0 million of costs under SFAS No. 86 associated with this
project.
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.
Certain prior year amounts have been reclassified to conform with current
year presentation.
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
Revenues
Revenues decreased 7.1% from $33.0 million in fiscal 1997 to $30.1 million
in fiscal 1998. Equipment revenues decreased 18.4% from $25.0 million in fiscal
1997 to $20.4 million in fiscal 1998. This decrease resulted primarily from the
economic instability related to the Company's international business. Services
revenues increased 28.8% from $8.0 million in fiscal 1997 to $10.3 million in
fiscal 1998 primarily due to certain engineering services provided to one of the
RBOCs.
Gross Profit
Gross profit was 37.0% of revenues in fiscal 1998, reflecting a decrease
from 45.8% of revenues in fiscal 1997. Gross profit related to equipment
revenues was 42.9% in fiscal 1998 and 47.3% in fiscal 1997. The decrease in
equipment gross margin was due to the Company's fixed cost base and the decrease
in equipment revenues. Gross profit related to service revenues was 25.1% and
41.0% in fiscal 1998 and fiscal 1997, respectively. The decrease in gross profit
related to service revenues was affected by an engineering service project at a
lower than normal margin.
Research, Development and Engineering
Research, development and engineering expenses increased 5.8% from $7.6
million in fiscal 1997 to $8.0 million in fiscal 1998 and increased as a
percentage of revenues from 23.0% in fiscal 1997 to 26.2% in fiscal 1998. The
increase resulted primarily from the addition of engineering staff and
subcontractors to support the increasing development requirements and demanding
timetables of the Company's customers.
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<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses increased 86.7% from $9.0 million
in fiscal 1997 to $16.9 million in fiscal 1998. As a percentage of revenues,
selling, general and administrative expenses increased from 27.3% in fiscal 1997
to 54.9% in fiscal 1998. This increase is largely attributable to an increase
in the Company's accounts receivable reserve of $4.0 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 legal costs of
$600,000 related to the lawsuit filed by Acxiom (see Item 3 of this Form 10-K
and Note 16 of Notes to Consolidated Financial Statements). The increase is
also the result of additional personnel brought on earlier in fiscal 1998,
increased sales and marketing efforts and the costs associated with being a
public company.
Charge for Purchased Research and Development
The charge for purchased research and development of $2.4 million for the year
ended September 30, 1998 represents a one-time charge related to purchased
research and development in connection with the acquisition of IDT. 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 Income and Expense
Net interest income was $232,000 in fiscal 1998. Net interest expense was
$327,000 in fiscal 1997. Interest expense has decreased as a result of the
repayment of the Company's outstanding borrowings from Securicor with the
proceeds of the Offering. Interest income is the result of the investment of
the cash proceeds from the Company's initial public offering in July 1997.
Income Taxes
Due to continued losses throughout 1998, the Company did not record an income
tax benefit during fiscal 1998. However, as of September 30, 1998, the Company
has recorded net deferred tax assets of $2,718,000. Based on an assessment of
the Company's taxable earnings history and expected future taxable income,
management has determined that it is more likely than not that the net deferred
tax assets will be realized in future periods. The Company may be required to
provide an additional valuation allowance for this asset in the future if it
does not generate sufficient taxable income as planned. Additionally, the
ultimate realization of this asset could be negatively impacted by market
conditions and other variables not known or anticipated at this time.
The Company's effective tax rate was 35.4% for fiscal 1997. An income tax
benefit of $645,000 was recorded in fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
Revenues
All revenues during fiscal 1997 were revenues attributable to unrelated third
parties ("Third-party Revenues"). Third-party Revenues increased by 6.1% from
$31.1 million in fiscal 1996 to $33.0 million in fiscal 1997. Equipment revenues
increased 7.2% from $23.4 million in fiscal 1996 to $25.0 million in fiscal
1997. This increase resulted primarily from the addition of several new
customers in Asia and Europe. Services revenues increased 2.8% from $7.7 million
in fiscal 1996 to $8.0 million in fiscal 1997. This increase is mainly due to
increased system installation services during the year. Additionally, the
Company generated $1.2 million and $792,000 of Third-party Revenues in fiscal
1997 and fiscal 1996, respectively, related to sales of an affiliate's products
which are not expected to recur in the future. See Note 13 of Notes to
Consolidated Financial Statements. For fiscal 1996, the Company recognized $2.3
million of one-time related-party revenues attributable to sales to a Securicor
affiliate. The remaining $544,000 of related-party revenues for fiscal 1996 are
from the sale of equipment to an entity in which the Company had an equity
investment from January 1995 to May 1996. See Note 13 of Notes to Consolidated
Financial Statements.
16
<PAGE>
Gross Profit
Gross profit was 45.8% of Third-party Revenues in fiscal 1997, reflecting a
decrease from 47.8% of such revenues in fiscal 1996. Gross profit related to
equipment revenues was 47.3% in fiscal 1997 and 50.2% in fiscal 1996. Gross
profit was 41.0% of services revenues in fiscal 1997 and 40.8% of such revenues
in fiscal 1996. The decrease in gross profit as a percentage of Third-party
Revenues and of equipment revenues is primarily due to increases in fixed costs
incurred in order to support the Company's growing customer base. 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. The
increase in gross profit related to services revenues is attributable to the
benefit of spreading higher revenues over the Company's fixed cost base. Total
gross profit as a percentage of total revenues was 45.8% for fiscal 1997 and
46.5% in fiscal 1996.
Research, Development and Engineering
Research, development and engineering expenses increased 8.2% from $7.0
million in fiscal 1996 to $7.6 million in fiscal 1997 and increased as a
percentage of Third-party Revenues from 22.5% in fiscal 1996 to 23.0% in fiscal
1997. The increase resulted primarily from the addition of engineering staff
and subcontractors to support the increasing development requirements and
demanding timetables of the Company's customers.
Selling, General and Administrative
Selling, general and administrative expenses increased 34.5% from $6.7 million
in fiscal 1996 to $9.0 million in fiscal 1997. As a percentage of Third-party
Revenues, selling, general and administrative expenses increased from 21.6% in
fiscal 1996 to 27.3% in fiscal 1997. The increase resulted primarily from the
addition of staff in the marketing and sales departments of the Company. The
increase in marketing and sales staff was a result of the Company's increased
focus on developing new markets and expanding existing markets for the Company's
products.
Interest Income and Expense
Interest expense in fiscal 1997 and fiscal 1996 was $327,000 and $514,000,
respectively. This decrease resulted from the repayment of the Company's
outstanding borrowings from Securicor with the proceeds of the Offering.
Other Income
Other income decreased from $430,000 in fiscal 1996 to $1,000 in fiscal 1997.
A litigation settlement gain of $350,000 was recognized in the first quarter of
fiscal 1996.
Equity In Loss of Investee
The Company recorded a $18,000 loss in fiscal 1996 as a result of its
investment in Metapath Corporation which was accounted for under the equity
method. This investment was sold in May 1996 and resulted in a gain on sale of
this investment of $2,061,000. See Note 13 of Notes to Consolidated Financial
Statements.
Gain On Sale of Investment
In May 1996, the Company sold its interest in Metapath Corporation in which it
had made an initial investment of $512,000. A gain of $2,061,000 was reported
related to this sale. See Note 13 of Notes to Consolidated Financial
Statements.
Income Taxes
The Company's effective tax rate was 35.4% for fiscal 1997 and was 38.2% for
fiscal 1996. An income tax benefit was recorded in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed the Offering in July 1997. Prior to the Offering, the
Company 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
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deducting underwriters' discounts and commissions and other offering expenses).
In August 1997, the Company repaid $28.5 million in Company borrowings from
Securicor. As of September 30, 1998, the Company had $1.1 million of cash, $11.3
million in net trade accounts receivable and $10.3 million of working capital.
Net cash used in operating activities was $2.0 million, $3.7 million and $4.1
in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998, the net loss of
$15.7 million, offset by $8.5 million in non-cash charges, a $2.1 million
decrease in accounts receivable, a $1.8 million decrease in inventories and a
$1.7 million increase in accounts payable were the primary reasons for the $2.0
million used in operating activities. In fiscal 1997, the net loss, an increase
in inventories of $4.2 million, a decrease in accrued tax payable of $2.3
million and a decrease of $655,000 in other accrued expenses were only partially
offset by $1.5 million decrease in accounts receivable and a $764,000 increase
in accounts payable. In fiscal 1996, increases in accounts receivable of $8.3
million were only partially offset by the cash provided by the sum of net
income, adjusted for $158,000 in non-cash charges, and a $1.1 million increase
in accrued tax payable.
Net cash used in investing activities was $3.7 million and $1.5 million in
fiscal 1998 and 1997, respectively. Net cash provided by investing activities
was $1.2 million in fiscal 1996. In fiscal 1998, 1997 and 1996, purchases of
property and equipment were $1.9 million, $1.5 million and $818,000,
respectively. In fiscal 1998, the Company used $1.9 million in cash to acquire
IDT and GSL. In fiscal 1996, the cash provided was the result of the Company
completing a sale of an investment.
Net cash used in financing activities was $372,000 in fiscal 1998 primarily as
a result of the repayment of the Company's long-term debt. Net cash provided by
financing activities was $9.1 million and $4.7 million in fiscal 1997 and fiscal
1996, respectively. In fiscal 1997, the net cash provided by financing
activities resulted primarily from the proceeds of the Offering after repayment
of outstanding borrowings from Securicor. In fiscal 1996, the net cash provided
by financing activities resulted primarily from funding which the Company
received from Securicor.
As discussed above, as of September 30, 1998, the Company had $1.1 million of
cash, incurred a significant net loss and utilized $2.0 million in operating
activities in fiscal 1998. As a result, on December 7, 1998, the Company entered
into an agreement with Silicon Valley Bank to establish a $5,000,000 line of
credit which the Company anticipates using to meet short-term borrowing
requirements. The amount available under the line of credit will be based upon a
percentage of eligible accounts receivable, as defined. Interest will be charged
at Silicon Valley Bank's prime rate plus 1%. Borrowings under the agreement are
secured by an interest in substantially all of the Company's assets and require
the Company to comply with specified financial and nonfinancial covenants.
The Company believes that its existing cash balances, cash generated from
operations and borrowings under its line of credit will be sufficient to meet
the Company's cash requirements into fiscal 2000. However, depending upon
profitability, its rate of growth and 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, if available, on terms satisfactory to the Company.
Year 2000 Readiness Disclosure
Background
In the past, many computer software programs were written using two digits
rather than four to define the applicable year. As a result, date-sensitive
computer software may recognize a date using "00" as the year 1900 rather than
the year 2000. This is generally referred to as the Year 2000 issue. If this
situation occurs, the potential exists for computer system failures or
miscalculations by computer programs, which could disrupt operations.
Approach
The Company has established a group to coordinate the Company's response to
the Year 2000 issue, both as to its internal systems and as to its products.
This group includes the Company's Vice President - Operations Support, Director
of Quality, Director of Product Line Management, Manager of Engineering
Operations, Purchasing Manager and Manager of Information Technology, as well as
support staff. The Company is in the process of implementing a Year 2000
compliance program consisting of the following: (i) compiling a list of internal
information technology ("IT") and non-IT systems, as well as Company products,
that may require adaptation, remediation or replacement with respect to the Year
2000 issue; (ii) identifying and prioritizing critical systems and products from
the list compiled in part (i) and making inquiries of third parties with whom
the Company does significant business (i.e., vendors and service providers) as
to the
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state of their Year 2000 readiness; (iii) analyzing critical systems and
products to determine which systems or products are not Year 2000 compliant and
evaluating the costs of adapting, repairing or replacing those systems; and (iv)
adapting, repairing or replacing noncompliant systems or products and testing of
the adapted, repaired or replaced systems.
The Company intends to complete the above process and to be Year 2000
compliant in all material respects by mid-1999. The Company has not yet
formulated contingency plans for use if such goal is not met.
Status
The Company believes that all of its internal systems are currently Year
2000 compliant or will be Year 2000 compliant by mid-1999. It has recently
replaced the hardware and software comprising its internal business systems and
has successfully tested the new systems for Year 2000 compliance.
The Company believes that its internal telephone system is Year 2000
compliant. The Company expects to complete Year 2000 compliance testing on the
telephone system by March 1999. The Company does not expect that there will be
a material cost to the Company in the event that software must be upgraded.
The Company believes that the products which will be supported beyond the
year 2000 are currently Year 2000 compliant. It continues to test all such
products on an ongoing basis. Certain products sold by the Company in the past
that have been discontinued are not Year 2000 compliant. Most customers of these
products have been notified of such noncompliance. The Company does not intend
to repair or replace such products. The Company does not expect any of such
customers to assert that the Company has an obligation to repair or replace such
products, but there can be no assurance that such an assertion will not be made.
Costs
The total cost to the Company of making its systems Year 2000 compliant is
currently estimated to be less than $500,000, of which the Company has already
incurred approximately $250,000. The cost for replacement of the equipment and
software will be capitalized and depreciated over their respective expected
useful lives. The Company will recognize a loss currently for any undepreciated
balance of existing hardware or software to the extent they are replaced. This
loss is included in the above cost estimate. Furthermore, all costs related to
software modification, as well as all costs associated with the Company's
administration of its Year 2000 project, are being expensed as incurred and are
likewise included in the cost estimate above.
Risks Associated with the Year 2000 Problem
The Company utilizes computer systems in many aspects of its business. As
noted, the Company's critical systems are Year 2000 compliant, or are expected
to be so no later than mid-1999.
The Company is also exposed to the risk that one or more of its vendors or
service providers could experience Year 2000 problems that impact the ability of
such vendor or service provider to provide goods and services. Though this is
not considered as significant a risk with respect to the suppliers of goods, due
to the availability of alternative suppliers, the disruption of certain
services, such as utilities, could, depending upon the nature and extent of the
disruption, have a material adverse impact on the Company's operations. The
Company is in the process of contacting all vendors and suppliers with whom the
Company has a material relationship to determine whether they will be
sufficiently Year 2000 compliant so as not to cause any material adverse effect
on the Company. To date, the Company is not aware of any vendor or service
provider Year 2000 issue that management believes would have a material adverse
impact on the Company's operations. However, the Company has no means of
guaranteeing that its vendors or service providers will be Year 2000 ready. The
inability of vendors or service providers to complete their Year 2000 resolution
process in a timely fashion could have a material adverse impact on the Company.
The effect of non-compliance by vendors or service providers is not determinable
at this time.
Widespread disruptions in the national or international economy, including
disruptions affecting the financial markets, resulting fromYear 2000 issues or
in certain industries, such as disruptions affecting the financial industry and
commercial or investment banks, could also have a material adverse impact on the
Company. The likelihood and effect of such disruptions is not determinable at
this time.
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INFLATION
To date, inflation has not had a material impact on the Company's
financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company does not
have any derivative financial instruments in its portfolio. The Company places
its investments in instruments that meet high credit quality standards. The
Company is adverse to principal loss and ensures the safety and preservation of
its invested funds by limiting default risk, market risk and reinvestment risk.
As of September 30, 1998, the Company's investments consisted of a money market
account and an overnight repurchase agreement. The Company does not expect any
material loss with respect to its investment portfolio.
FOREIGN CURRENCY RISK
The Company does not use foreign currency forward exchange contracts or
purchased currency options to hedge local currency cash flows or for trading
purposes. All sales arrangements with international customers are denominated in
U.S. dollars. Since the acquisition of Axiom (Europe) Limited in February 1998,
its sales are denominated in pounds Sterling. However, this activity has been
insignificant to date.
Through its subsidiary, Axiom (Europe) Limited, the Company has limited
operations in the United Kingdom. Due to this limited activity, the Company
does not expect any material loss with respect to foreign currency risk.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS OF AXIOM INC. AND SUBSIDIARIES:
<S> <C>
Report of Independent Public Accountants................................................................... 22
Consolidated Balance Sheets................................................................................ 23
Consolidated Statements of Operations...................................................................... 24
Consolidated Statements of Stockholders' Equity (Deficit).................................................. 25
Consolidated Statements of Cash Flows...................................................................... 26
Notes to Consolidated Financial Statements................................................................. 27
Schedule II-Valuation and Qualifying Accounts.............................................................. 42
</TABLE>
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Axiom Inc.:
We have audited the accompanying consolidated balance sheets of Axiom Inc. and
subsidiaries as of September 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended September 30, 1998. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Axiom Inc. and subsidiaries as
of September 30, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1998,
in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to the
Consolidated Financial Statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, PA
November 17, 1998
22
<PAGE>
AXIOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 1,093 $ 7,206
Accounts receivable, net of allowance
for doubtful accounts of $3,985 and $100.......................................... 11,325 14,241
Inventories.......................................................................... 6,561 7,374
Deferred tax assets.................................................................. 436 630
Income tax receivable................................................................ 722 968
Other................................................................................ 392 473
-------- -------
Total current assets.............................................................. 20,529 30,892
-------- -------
PROPERTY AND EQUIPMENT:
Computer hardware and software....................................................... 4,354 3,229
Production and test equipment........................................................ 3,016 1,995
Furniture, fixtures and leasehold improvements....................................... 1,636 553
-------- -------
9,006 5,777
Less--Accumulated depreciation and amortization...................................... (4,569) (2,785)
-------- -------
Net property and equipment........................................................ 4,437 2,992
DEFERRED TAX ASSETS.................................................................... 2,502 2,704
RESTRICTED CASH........................................................................ 548 --
OTHER ASSETS........................................................................... 334 267
SOFTWARE DEVELOPMENT COSTS............................................................. 363 --
INTANGIBLE ASSETS, net................................................................. 1,086 168
-------- -------
$ 29,799 $37,023
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................................................... $ 330 $ 147
Obligations to Securicor and affiliates.............................................. 64 183
Accounts payable..................................................................... 4,930 3,057
Accrued compensation and related benefits............................................ 1,085 1,066
Accrued agent commissions............................................................ 353 638
Other accrued expenses............................................................... 1,885 646
Deferred revenues.................................................................... 1,602 1,413
-------- -------
Total current liabilities 10,249 7,150
-------- -------
LONG-TERM LIABILITIES:
Deferred tax liabilities............................................................. 220 186
Long-term debt....................................................................... 499 --
-------- -------
Total long-term liabilities....................................................... 719 186
-------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 16)
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, 7,790,305 and 6,466,900
shares issued and outstanding....................................................... 78 65
Additional paid-in capital........................................................... 37,156 32,340
Accumulated deficit.................................................................. (18,397) (2,718)
Cumulative translation adjustment.................................................... (6) --
-------- -------
Total stockholders' equity........................................................ 18,831 29,687
-------- -------
$ 29,799 $37,023
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
AXIOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Unrelated third parties:
Equipment................................ $ 20,429 $25,049 $23,358
Services................................. 10,250 7,958 7,739
-------- ------- -------
30,679 33,007 31,097
Related parties............................. -- -- 2,867
-------- ------- -------
Total revenues........................... 30,679 33,007 33,964
-------- ------- -------
COST OF REVENUES:
Unrelated third parties:
Equipment................................ 11,664 13,202 11,639
Services................................. 7,679 4,697 4,580
-------- ------- -------
19,343 17,899 16,219
Related parties............................. -- -- 1,946
-------- ------- -------
Total cost of revenues................... 19,343 17,899 18,165
-------- ------- -------
Gross profit............................. 11,336 15,108 15,799
-------- ------- -------
OPERATING EXPENSES:
Research, development and engineering....... 8,023 7,580 7,003
Selling, general and administrative......... 16,853 9,026 6,711
Charge for purchased research and
development................................ 2,387 -- --
-------- ------- -------
Total operating expenses................. 27,263 16,606 13,714
-------- ------- -------
Operating income (loss).................. (15,927) (1,498) 2,085
INTEREST (EXPENSE) INCOME, net
(including related party)................... 232 (327) (514)
OTHER INCOME.................................. 16 1 430
EQUITY IN LOSS OF INVESTEE.................... -- -- (18)
GAIN ON SALE OF INVESTMENT.................... -- -- 2,061
-------- ------- -------
Income (loss) before income taxes........... (15,679) (1,824) 4,044
INCOME TAX (EXPENSE) BENEFIT.................. -- 645 (1,543)
-------- ------- -------
NET INCOME (LOSS)............................. (15,679) (1,179) 2,501
======== ======= =======
NET INCOME (LOSS) PER COMMON SHARE............ $ (2.25) $ (0.28) $ 0.72
======== ======= =======
SHARES USED IN COMPUTING BASIC AND DILUTED
NET INCOME (LOSS) PER COMMON SHARE........... 6,960 4,144 3,477
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
AXIOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN ACCUMULATED TRANSLATION
STOCK CAPITAL DEFICIT ADJUSTMENTS TOTAL
------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995........................ $-- $ -- $ (4,040) $-- $ (4,040)
Net income....................................... -- -- 2,501 -- 2,501
--- ------- -------- --- --------
BALANCE, SEPTEMBER 30, 1996........................ -- -- (1,539) -- (1,539)
Stock split and initial public offering,
net of expenses................................. 65 32,340 -- -- 32,405
Net loss......................................... -- -- (1,179) -- (1,179)
--- ------- -------- --- --------
BALANCE, SEPTEMBER 30, 1997........................ 65 32,340 (2,718) -- 29,687
Issuance of Common Stock under employee
Stock purchase plan............................. -- 43 -- -- 43
Issuance of Common Stock in connection with
Acquisition of Innovative Data Technology....... 13 4,773 -- -- 4,786
Cumulation translation adjustments............... -- -- -- (6) (6)
Net loss......................................... -- -- (15,679) -- (15,679)
--- ------- -------- --- --------
BALANCE, SEPTEMBER 30, 1998........................ $78 $37,156 $(18,397) $(6) $ 18,831
=== ======= ======== === ========
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
<TABLE>
<CAPTION>
AXIOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................................................... $(15,679) $ (1,179) $ 2,501
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization........................................... 2,020 1,465 1,885
Provision for doubtful accounts......................................... 4,048 -- --
Charge for purchased research and development........................... 2,387 -- --
Equity in loss of investee.............................................. -- -- 18
Gain on sale of investment.............................................. -- -- (2,061)
Changes in assets and liabilities, net-
Decrease (increase) in-
Accounts receivable................................................. 2,095 1,499 (8,346)
Inventories......................................................... 1,749 (4,207) 1,077
Other current assets................................................ 180 (119) 162
Other assets........................................................ (963) 940 (68)
Deferred taxes...................................................... 430 203 (1)
Income tax receivable............................................... 246 -- --
Increase (decrease) in-
Accounts payable.................................................... 1,708 764 (39)
Accrued compensation and related benefits........................... 19 (140) 27
Accrued agent commissions........................................... (285) (168) (310)
Other accrued expenses.............................................. 112 (655) 402
Accrued tax payable................................................. -- (2,316) 1,148
Deferred revenues................................................... (60) 181 (452)
-------- -------- -------
Net cash used in operating activities............................... (1,993) (3,732) (4,057)
-------- -------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment..................................... (1,883) (1,500) (818)
Sale of investment...................................................... -- -- 2,061
Cash paid for acquisitions, net......................................... (1,859) -- --
-------- -------- -------
Net cash provided by (used in) investing activities................. (3,742) (1,500) 1,243
-------- -------- -------
FINANCING ACTIVITIES:
Proceeds from the issuance of common stock under the
employee stock purchase plan.......................................... 43 -- --
Proceeds from sale of common stock...................................... -- 32,405 --
Payments on long-term debt.............................................. (296) (185) (139)
Advances on obligations to Securicor and affiliates..................... 510 5,388 12,743
Repayment on obligations to Securicor and affiliates.................... (629) (28,496) (7,913)
-------- -------- -------
Net cash provided by (used in) financing activities..................... (372) 9,112 4,691
-------- -------- -------
Effect of exchange rate changes on cash................................. (6) -- --
-------- -------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................... (6,113) 3,880 1,877
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................ 7,206 3,326 1,449
-------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR.................................. $ 1,093 $ 7,206 $ 3,326
======== ======== =======
The accompanying notes are an integral part of these statements.
</TABLE>
26
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND:
THE COMPANY
Axiom Inc. (the "Company"), a Delaware corporation, changed its name from
Securicor Communications Inc. in May 1997. Through May 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 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. SCL's capital contribution was $100. As the
financial statements are presented in "thousands," no amounts are presented in
Common Stock and additional paid-in capital at September 30, 1996. Prior to the
completion of the Company's initial public offering, Securicor provided the
financing requirements for the Company through advances (See Note 8). SCL
currently owns 44.6% of the Company's outstanding Common Stock.
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 to acquire 390,000 shares of Common Stock at a price of $12.00
per share. The Company received net cash proceeds of approximately $4,352,000.
Collectively, both transactions are herein referred to as the "Offering".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 include
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 customers.
Based upon the contractual agreement, this amount will be released on December
31, 1999.
INVENTORIES
Inventories are valued at the lower of cost, determined on the first-in,
first-out method or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Significant improvements are
capitalized and expenditures for maintenance and repairs are charged to expense
as incurred. Upon the sale or retirement of these assets, the applicable
27
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
cost and related accumulated depreciation are removed from the accounts and any
gain or loss is included in the statements of operations.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives of the assets as follows:
Computer hardware and software................................ 3 years
Production and test equipment................................. 4 to 5 years
Furniture, fixtures and leasehold improvements................ 5 years
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 or the enhancement.
Capitalized software development costs consist primarily of salary,
consulting, and computer costs incurred to develop new products and enhancements
to existing products. During the year ended September 30, 1998, software
development costs of $363,000 were capitalized. No costs were capitalized in
fiscal 1997 or fiscal 1996. Amortization has not yet begun.
INTANGIBLE ASSETS
Intangible assets consist of acquired technology, a non-compete agreement and
goodwill. Acquired technology, the non-compete agreement and goodwill are
amortized over 2 1/2 to 4, 2 and 2 to 7 years, respectively, on a straight-line
basis (see Note 6). The Company evaluates the realizability of intangible
assets based on estimates of undiscounted future cash flows over the remaining
useful life of the asset. If the amount of such estimated undiscounted future
cash flows is less than the net book value of the asset, the asset is written
down to its net realizable value. As of September 30, 1998, no such write-down
was required.
DEFERRED REVENUES
Deferred revenues represent amounts collected from the Company's customers in
excess of revenues recognized. This is primarily due to annual customer support
contracts. Such amounts are recognized as revenues over the contract term.
PRODUCT WARRANTY
The Company provides for the estimated cost to repair or replace products
under warranty when the revenues from product sales are recorded.
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.
28
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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, as well as international
telephone companies. The Company typically does not require collateral from its
customers. See Note 15.
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. See Note 4.
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.
There were no outstanding accounts receivable balances relating to "bill and
hold" transactions at September 30, 1998 or 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 had nominal separate software license fee revenues for the year ended
September 30, 1998 and 1997, and these amounts are included in equipment
revenues. The Company did not have any separate software license fee revenues
for the year ended September 30, 1996. 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 this
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. Beginning in fiscal 1998, certain
costs were capitalized. See "Software Development Costs."
CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT
In connection with the acquisition of Innovative Data Technology, $2,387,000
of the purchase price was allocated to incomplete research and development
projects. Accordingly, these costs were charged to expense as of the
acquisition
29
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
date. The development of the projects had not yet reached technological
feasibility and the technology had no alternative future use. The technology
acquired in the acquisition required substantial additional development by the
Company.
INCOME TAXES
The Company accounts for income taxes under 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 year are
determined using the enacted tax rates.
NET INCOME (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
("APB") No. 15 , "Earnings per Share". SFAS No. 128 requires dual presentation
of basic and diluted net income (loss) per common share for complex capital
structures on the face of the statements of operations. According to SFAS No.
128, basic net income (loss) per common share, which replaced primary earnings
per share, is calculated by dividing net income by the weighted-average number
of common shares outstanding for the period. Diluted net income (loss) per
common 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 quarter ended December 31, 1997; as earlier application was
not permitted. As required by SFAS No. 128, all prior-period income (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 the diluted net income (loss) per Common share computations:
<TABLE>
<CAPTION>
For the Year Ended September 30,
Income (Loss) Shares Per Share
1998 (Numerator) (Denominator) Amount
- ---------------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Basic net loss per Common share........................... $(15,679,000) 6,960,000 $(2.25)
------------------
Dilutive effect of stock options........................ -- --
------------------- -------------------
Diluted net loss per Common share......................... $(15,679,000) 6,960,000 $(2.25)
=================== =================== ===================
</TABLE>
<TABLE>
<CAPTION>
1997
- ----------------------------------------------------------
<S> <C> <C> <C>
Basic net loss per Common share........................... $(1,179,000) 4,144,000 $(0.28)
-------------------
Dilutive effect of stock options........................ -- --
------------------- -------------------
Diluted net loss per Common share......................... $(1,179,000) 4,144,000 $(0.28)
=================== =================== ===================
</TABLE>
<TABLE>
<CAPTION>
1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Basic net income per Common share......................... $2,501,000 3,477,000 $0.72
-------------------
Dilutive effect of stock options........................ -- --
------------------- -------------------
Diluted net income per Common share....................... $2,501,000 3,477,000 $0.72
=================== =================== ===================
</TABLE>
For the years ended September 30,1998 and 1997, diluted net loss per Common
share is the same as basic net 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 552,246 and 107,122 shares of Common stock
with a weighted average exercise price of $5.03 and $12.00 per share were
outstanding during the years ended September 30, 1998 and 1997, respectively,
but were not included in the computation of diluted net loss per Common share.
No options were outstanding during the year ended September 30, 1996.
30
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
COMPREHENSIVE INCOME:
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and presentation of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements and requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
equal prominence as other financial statements. The comprehensive loss for 1998
was $15,685,000. There were no comprehensive income adjustments in 1997 or 1996.
Cumulative
Translation
Adjustments
------------
Beginning balance............................. $--
Current period change......................... (6)
------------
Ending Balance................................ $(6)
============
FOREIGN CURRENCY
The Company's sales arrangements with international customers are fixed in the
amount of U.S. dollars to be received. Since the acquisition of Axiom (Europe)
Limited in February 1998, its sales are denominated in pounds Sterling. However,
this activity has been insignificant to date. Relative to the activity with
obligations to Securicor and affiliates, the Company charges the related foreign
exchange gains and losses to the statements of operations.
The assets and liabilities of foreign operations are translated in U.S.
dollars using the rates of exchange at year end. The results of operations are
translated in U.S. dollars at the average daily exchange rates for the period.
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.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For the years ended September 30, 1998, 1997 and 1996, the Company paid
interest of $56,000, $686,000 and $459,000, respectively. For the years ended
September 30, 1998, 1997 and 1996, the Company paid income taxes, net of
refunds, of $0, $2,066,000 and $495,000, respectively. In 1998, the Company was
refunded $667,000 relating to income taxes. The Company entered into capital
lease obligations of $978,000, $148,000 and $177,000 for the years ended
September 30, 1998, 1997 and 1996, respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current year
presentation.
3. ACQUISITIONS:
Innovative Data Technology
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)
31
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED):
valued at $352,000 using the Black-Scholes option pricing model. The results of
the operations of IDT have been included in the accompanying consolidated
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............................... $500,000 2
Acquired technology....................... 432,000 3 to 4
Goodwill.................................. 31,000 7
--------------------
$963,000
====================
</TABLE>
The following table presents the non-cash assets and liabilities that were
consolidated as a result of the acquisition of IDT:
<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............................................ 1,005,000
Accounts payable............................................. (122,000)
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>
(IN THOUSANDS, EXCEPT SHARE DATA) Year Ended
September 30,
---------------------------------------------
1998 1997
----------------- ---------------------
<S> <C> <C>
Unaudited pro forma revenues............................. $ 38,400 $45,421
======== =======
Unaudited pro forma net income (loss).................... $(13,053) $ 370
======== =======
Unaudited pro forma net income (loss) per common share... $ (1.68) $ 0.07
======== =======
</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.
32
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED):
The unaudited 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
$2,179,000 for the years ended September 30, 1998 and 1997, respectively. The
amount of the interest income pro forma adjustment was $85,000 and $135,000 for
the years ended September 30, 1998 and 1997, respectively. The amount of the
interest expense pro forma adjustment was $50,000 and $7,000 for the years ended
September 30, 1998 and 1997, respectively. The amount of the intangible
amortization pro forma adjustment was $71,000 and $112,000 for the years ended
September 30, 1998 and 1997, respectively. Additionally, the above 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.
Greendown Software Limited
On February 17, 1998, the Company acquired Greendown Software Limited
("GSL") in a business combination accounted for as a purchase. In August 1998,
the Company changed the name of GSL to Axiom (Europe) Limited. Axiom (Europe)
Limited is primarily engaged in the development of fraud management software.
The results of the operations of Axiom (Europe) Limited are included in the
accompanying consolidated financial statements since the date of acquisition.
The total purchase price of $194,000 was allocated to the assets acquired and
liabilities assumed based on their respective fair values. The excess of the
purchase price over the fair value of the net assets acquired (goodwill) was
$149,000 and is being amortized on a straight-line basis over 2 years.
The following table presents the non-cash assets and liabilities that were
consolidated as a result of the acquisition of Axiom (Europe) Limited :
<TABLE>
<CAPTION>
Non-cash assets (liabilities):
<S> <C>
Accounts receivable....................................... $ 80,000
Property and equipment.................................... 27,000
Goodwill.................................................. 149,000
Accounts payable.......................................... (43,000)
Other accrued expenses.................................... (53,000)
Deferred revenues......................................... (65,000)
-----------
Cash paid, net of cash acquired............................. $ 95,000
===========
</TABLE>
Pro forma information for the acquisition of Axiom (Europe) Limited is not
presented as its activity was immaterial to the consolidated financial
statements of the Company.
4. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
Billed.............................................................. $13,970,000 $12,265,000
Unbilled............................................................ 1,340,000 2,076,000
------------------ -------------------
15,310,000 14,341,000
Less-allowance for doubtful accounts................................ (3,985,000) (100,000)
------------------ -------------------
$11,325,000 $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.
33
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORIES:
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1998 1997
---------------- ------------------
<S> <C> <C>
Raw materials.................................................. $4,323,000 $4,718,000
Work-in-process................................................ 581,000 538,000
Finished goods................................................. 1,657,000 2,118,000
---------------- ------------------
$6,561,000 $7,374,000
================ ==================
</TABLE>
6. INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------
1998 1997
----------------- -------------------
<S> <C> <C>
Acquired technology............................................ $ 2,274,000 $ 1,800,000
Non-compete.................................................... 500,000 --
Goodwill....................................................... 488,000 308,000
----------------- -------------------
3,262,000 2,108,000
Less-Accumulated amortization.................................. (2,176,000) (1,940,000)
----------------- -------------------
$ 1,086,000 $ 168,000
================= ===================
</TABLE>
7. DEBT:
LONG-TERM DEBT
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1998 1997
----------------- --------------------
<S> <C> <C>
Term note payable............................................... $ -- $ 98,000
Capitalized lease obligations................................... 829,000 49,000
----------------- --------------------
829,000 147,000
Less: Current portion........................................... (330,000) (147,000)
----------------- --------------------
$ 499,000 $ --
================= ====================
</TABLE>
The Company entered into four capital lease obligations during fiscal 1998
totaling $978,000 for computer hardware and furniture and fixtures. The leases
are payable over two to three years. The interest rates charged on these
obligations range from 6.8% to 11.8%. Interest expense for the years ended
September 30, 1998, 1997 and 1996 was $30,000, $15,000 and $10,000,
respectively. Assets acquired under capital leases at a cost of $1,126,000 and
$148,000 less accumulated amortization of $271,000 and $74,000 are included in
property and equipment at September 30, 1998 and 1997, respectively. The
principal payments on these capital lease obligations as of September 30, 1998
are as follows: $330,000 in 1999, $297,000 in 2000 and $202,000 in 2001.
In March 1996, the Company entered into a $294,000 term note payable with an
equipment vendor for the purchase of computer hardware and software and the
related maintenance agreements. Included in this amount is $249,000 of computer
hardware and software which has been recorded in property and equipment and the
related $45,000 maintenance contract prepayment which has been recorded in other
current assets. This term note payable was payable in three equal annual
principal installments of $98,000. The interest rate charged on this term note
payable was 5.3%. Interest expense for the years ended September 30, 1998, 1997
and 1996 was $5,000, $7,000 and $6,000, respectively. The final installment
payment of $98,000 was made in May 1998.
LINE OF CREDIT
Subsequent to September 30, 1998, the Company entered into an agreement with
Silicon Valley Bank to establish a $5,000,000 line of credit which the Company
anticipates using to meet short-term borrowing requirements. The amount
available under the line of credit will be based upon a percentage of eligible
accounts receivable, as defined. Interest will
34
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED):
be charged at Silicon Valley Bank's prime rate plus 1%. Borrowings under the
agreement are secured by an interest in substantially all of the Company's
assets and require the Company to comply with specified financial and
nonfinancial covenants, as defined. Additionally, the line of credit prohibits
the Company from paying dividends on its Common Stock (except for dividends paid
solely in shares of Common Stock) without the consent of Silicon Valley Bank.
8. OBLIGATIONS TO SECURICOR AND AFFILIATES:
Information relative to the Company's obligations to Securicor and affiliates
is as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Obligations to Securicor:
Interest free............................................... $ -- $ --
Interest bearing............................................ -- --
Other....................................................... 64,000 289,000
---------------- -----------------
Total obligations to Securicor............................ 64,000 289,000
---------------- -----------------
Obligation to affiliates:
Receivables from affiliates................................. -- (119,000)
Payables to affiliates...................................... -- 13,000
---------------- -----------------
Total obligations to affiliates, net...................... -- (106,000)
---------------- -----------------
Total obligations to Securicor and affiliates................. $64,000 $ 183,000
================ =================
</TABLE>
Prior to the completion of the Offering, the Company was funded through
advances from Securicor. Certain advances were interest bearing and were loaned
to the Company at a base rate plus 1%. For the years ended September 30, 1997
and 1996, the interest rate charged on these obligations ranged from 6.75% to
7.50% and 6.75% to 7.75%, respectively. Interest expense for the years ended
September 30, 1997 and 1996 was $552,000 and $578,000, respectively. As these
obligations to Securicor and affiliates are due on demand, this net amount is
included in current liabilities. In connection with the Offering, a significant
portion of the total obligations to Securicor and affiliates was repaid.
9. INTEREST INCOME (EXPENSE), NET:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
1998 1997 1996
----------------- --------------- ---------------
<S> <C> <C> <C>
Interest expense on obligations to Securicor................. $ -- $(552,000) $(578,000)
Interest expense............................................. (56,000) (22,000) (16,000)
Interest income.............................................. 288,000 247,000 80,000
----------------- --------------- ---------------
$232,000 $(327,000) $(514,000)
================= =============== ===============
</TABLE>
10. OTHER INCOME:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1998 1997 1996
----------------- --------------- ---------------
<S> <C> <C> <C>
Litigation settlement gain.................................... $ -- $ -- $350,000
Miscellaneous................................................. 16,000 1,000 80,000
----------------- --------------- ---------------
$16,000 $1,000 $430,000
================= =============== ===============
</TABLE>
On December 6, 1995, the Company entered into a litigation settlement
agreement whereby the Company was awarded $350,000. This settlement was paid
over three years.
35
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY:
1997 STOCK INCENTIVE PLAN
In May 1997, the Company established the 1997 Stock Incentive Plan (the "1997
Plan") which authorized 450,000 shares of Common Stock to be issued. The 1997
Plan was amended in May 1998 to authorize the issuance of 1,050,000 shares of
Common Stock and again in December 1998 to authorize the issuance of 2,000,000
shares of Common stock (both such amendments subject to shareholders approval at
the Annual Meeting of Shareholders in 1999). Under the 1997 Plan, a variety of
awards, including stock options, stock appreciation rights and restricted and
unrestricted stock grants may be made to the Company's employees, officers,
consultants and advisors. Common stock options may be granted either in the
form of incentive stock options or non-statutory stock options. The option
exercise price of incentive stock options may not be less than the fair market
value of the Common Stock on the date of the grant. In general, one third of
granted options are exercisable six months from the date of grant. The
remaining two-thirds vest on the first and second anniversaries of the date of
grant, respectively. The maximum term of the options is ten years.
Information with respect to the stock options granted under the 1997 Plan is
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
----------------- --------------------
<S> <C> <C>
Balance, September 30, 1996................................. -- $ --
Granted..................................................... 321,366 12.00
Exercised................................................... -- --
Cancelled................................................... -- --
----------------- --------------------
Balance, September 30, 1997................................. 321,366 $12.00
Granted..................................................... 994,675 4.20
Exercised................................................... -- --
Cancelled................................................... (386,627) 10.79
----------------- --------------------
Balance, September 30, 1998................................. 929,414 $ 4.16
================= ====================
</TABLE>
In January 1998, all of the outstanding options, or 300,433 of the 321,366
granted in fiscal 1997, were cancelled and new options were granted at an
exercise price of $5.50 per share, which was equal to the fair market value on
the grant date. In addition, these 300,433 options can only be exercised if the
fair market value of the Company's Common stock is equal to or greater than
$9.00 per share. The expiration dates for options at September 30, 1998 range
from May 29, 2007 to July 23, 2008.
The following table summarizes information about options outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------- -----------------------------------
RANGE WEIGHTED AVERAGE WEIGHTED WEIGHTED
OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE PRICE
- ------------------- ---------------- -------------------- ---------------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
$2.31-$5.50 929,414 9.5 $4.16 25,622 $5.50
=================== ================ ==================== ================ =================== ===========
</TABLE>
As of September 30, 1998, 120,586 options were available for future grant
under the Plan.
The Company accounts for the 1997 Plan under APB No. 25, "Accounting for Stock
Issued to Employees", under which deferred compensation expense would be
recorded for options granted with exercise prices below fair value. The
deferred compensation would then be charged to expense ratably over the vesting
period. As the Company has not granted options with exercise prices below fair
value, no compensation expense has been recognized. In 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a fair value based method of accounting
for stock-based employee compensation arrangements regardless
36
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED):
of the method used to account for the plan. Had compensation cost for the
Company's 1997 Plan been determined consistent with SFAS No. 123 , the Company's
net loss for the years ended September 30, 1998 and 1997 would have been
$16,466,000 and $2,419,000, respectively, and the basic and diluted net loss per
Common share would have been $2.37 and $0.58, respectively. The weighted average
fair value of the options granted during 1998 and 1997 was $2.92 and $7.96 per
share, respectively. The fair value of each option grant is estimated on the
date of grant using the Black- Scholes option pricing model with the following
weighted average assumptions: risk- free interest rate of 5.60% in 1998 and
6.73% in 1997; expected dividend yield of 0% in 1998 and 1997; expected life of
5 years in 1998 and 1997; and expected volatility of 75% in 1998 and 1997.
EMPLOYEE STOCK PURCHASE PLAN
In September 1997, the Company established the Axiom Inc. Employee Stock
Purchase Plan ("the Purchase Plan"). The number of shares available to purchase
under the Purchase Plan is 300,000 shares of Common stock. As of September 30,
1998, the Company has issued 35,071 shares under the Purchase Plan. The
employee's purchase price is the lower of (a) 85% of the fair market value of a
share of the Company's Common stock on the first day of the Purchase period (as
defined) and (b) 85% of the fair market value of a share of the Company's Common
stock on the last day of the Purchase period (as defined).
12. EMPLOYEE BENEFIT PLAN:
Prior to July 1994, the Predecessor Business had a profit-sharing retirement
plan and a thrift plan which covered substantially all employees. In
connection with the acquisition on July 1, 1994, all balances in the profit-
sharing retirement plan were transferred into the thrift plan. The thrift
plan's name is now Axiom Inc. Thrift/401(k) Plan (the "Plan"). Upon this
transfer, all balances were 100% vested. With respect to the Plan, eligible
employees must have one year of service with the Company and be 18 years of age.
An employee may contribute both pre- and post-tax dollars to the Plan, subject
to certain limitations, as defined by the Plan. The employer contributions to
the Plan are equal to 75% of the employee's basic pre-tax contribution up to
certain limits, as defined. The Company's contribution to the Plan for the
years ended September 30, 1998, 1997 and 1996 was $365,000, $264,000 and
$277,000, respectively.
13. RELATED PARTY TRANSACTIONS:
Prior to the Offering, charges 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.
For the years ended September 30, 1997 and 1996, Securicor charged the Company
$295,000 and $403,000, respectively. These charges are included in selling,
general and administrative expenses on the accompanying consolidated statements
of operations. The Company did not incur any parent charges subsequent to the
Offering. The Company and Securicor have entered into an agreement for
international marketing services (see below).
During and prior to the year ended September 30, 1996, the Company entered
into two separate agreements with Securicor Radiocoms Ltd., an affiliate of
Securicor. The first agreement provided that the Company construct product for
Securicor Radiocoms Ltd. and bill for all costs incurred in addition to a
certain profit percentage, as defined. The second agreement provided for the
construction of additional product for Securicor Radiocoms Ltd., which was
billed at a fixed price per unit. The Company recognized revenues from
Securicor Radiocoms Ltd. for the year ended September 30, 1996 of $2,323,000.
The Company recognized cost of revenues related to these revenues for the year
ended September 30, 1996 of $1,732,000.
During the year ended September 30, 1996, certain key executive officers were
granted options to purchase the common stock of Securicor. The aggregate number
of options granted to these executive officers which are outstanding as of
September 30, 1998 is 85,690. The exercise price of these options is
(Pounds)2.45 per share, which was the fair market value of Securicor common
stock on the date of grant. These options vest on the third anniversary of the
date of grant. These options expire in June 2006 which is ten years from the
date of grant.
37
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS (CONTINUED):
In May 1997, the Company and Securicor entered into an agreement pursuant to
which Securicor will provide international sales and marketing services to the
Company. For the years ended September 30, 1998 and 1997, total charges from
Securicor for these services were $74,000 and $149,000, respectively. In
addition, the Company pays each of its directors an annual directors fee of
$20,000 each. The directors fees paid to employees of Securicor are remitted to
Securicor. For the years ended September 30, 1998 and 1997, the Company paid
$20,000 and $5,000, respectively, related to such fees.
The Company obtains its Directors and Officers insurance through Securicor.
Total Director and Officer insurance expense for the years ended September 30,
1998 and 1997 was $65,000 and $46,000, respectively.
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.
In October 1995, the Company purchased the rights to an Integrated Services
Digital Network ("ISDN") product, which was sold in the United States, from
Securicor 3Net Ltd. ("3Net"), an affiliate of Securicor. Amortization was
computed by multiplying the ratio of current revenues for the product to total
and anticipated future revenues for the product by acquired costs. Amortization
expense was $386,000 and $250,000 for the years ended September 30, 1997 and
1996, respectively. The Company's business activities related to the ISDN
product were performed through its wholly-owned subsidiary, Securicor 3Net, Inc.
During the years ended September 30, 1997 and 1996, the Company sold certain
products related to this technology and recognized certain costs and realized
all of the revenues related to such activities. For the year ended September 30,
1997, the Company recognized revenues of $1,167,000 and cost of revenues of
$794,000 relating to such activities. For the year ended September 30, 1996,
the Company recognized revenues of $792,000 and cost of revenues of $714,000
relating to such activities. These amounts are included in unrelated third
party 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.
On January 20, 1995, the Company invested approximately $500,000 in exchange
for an initial 44.4% ownership interest in Metapath Corporation ("Metapath").
In a series of transactions which took place from January 20, 1995 through May
2, 1996, the Company's ownership interest was reduced, first to 23.7%, then to
19.9%, and on May 2, 1996, its ownership interest was purchased by Metapath for
the original amount of approximately $500,000. In addition, on May 2, 1996,
Metapath acquired certain technology from the Company for $1,500,000. This
investment was accounted for using the equity method of accounting.
Accordingly, the Company reduced the carrying value of its investment for its
portion of the investee's loss. The Company's equity in loss of Metapath was $0
and $18,000 for the years ended September 30, 1997 and 1996, respectively. The
Company had related party sales to Metapath for the time periods during which
the investment was held of $544,000 for the period from October 1, 1995 to May
2, 1996.
14. INCOME TAXES:
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Current:
Federal.......................................... $ (335,000) $(605,000) $1,170,000
State............................................ (62,000) (114,000) 374,000
------------------ ------------------ ------------------
(397,000) (719,000) 1,544,000
------------------ ------------------ ------------------
Deferred:
Federal.......................................... (4,342,000) 62,000 (1,000)
State............................................ (806,000) 12,000 --
------------------ ------------------ ------------------
(5,148,000) 74,000 (1,000)
------------------ ------------------ ------------------
(5,545,000) (645,000) 1,543,000
Increase in valuation allowance provision.......... 5,545,000 -- --
------------------ ------------------ ------------------
$ -- $(645,000) $1,543,000
================== ================== ==================
</TABLE>
38
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED):
Income tax expense differs from the amount currently payable because certain
expenses, primarily depreciation and accruals, are reported in different periods
for financial reporting and income tax purposes.
The federal statutory income tax is reconciled to the effective income tax
rate as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
1998 1997 1996
----------------- -------------- ----------------
<S> <C> <C> <C>
Federal statutory rate................................ (34.0)% (34.0)% 34.0%
State income taxes, net of federal benefit............ (5.9) (5.9) 5.9
Other................................................. -- 4.5 (1.7)
Increase in net operating loss carryforwards.......... 39.9 -- --
----------------- -------------- ----------------
-- % (35.4)% 38.2%
================= ============== ================
</TABLE>
The components of the net current and long-term deferred tax assets and
liabilities, measured under SFAS No. 109, are as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Deferred tax assets
Charge for purchased research and development.............. $ 2,502,000 $2,704,000
Allowance for doubtful accounts............................ 1,554,000 --
Inventories................................................ 708,000 --
Net operating loss......................................... 3,123,000 --
Accrued expenses........................................... 577,000 375,000
Other...................................................... 19,000 255,000
---------------- -----------------
8,483,000 3,334,000
Deferred tax liabilities
Depreciation and amortization.............................. (220,000) (186,000)
Other...................................................... -- (33,000)
---------------- -----------------
(220,000) (219,000)
Valuation allowance.......................................... (5,545,000) --
---------------- -----------------
Net deferred tax assets...................................... $ 2,718,000 $3,115,000
================ =================
</TABLE>
Due to continued losses throughout 1998, the Company did not record an income
tax benefit during the year ended September 30, 1998. However, as of September
30, 1998, the Company has recorded net deferred tax assets of $2,718,000. Based
on an assessment of the Company's taxable earnings history and expected
future taxable income, management has determined that it is more likely than not
that the net deferred tax assets will be realized in future periods. The
Company may be required to provide an additional valuation allowance for this
asset in the future if it does not generate sufficient taxable income as
planned. Additionally, the ultimate realization of this asset could be
negatively impacted by market conditions and other variables not known or
anticipated at this time.
39
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. CUSTOMER AND GEOGRAPHIC INFORMATION:
The Company's operations are conducted in one business segment. The Company's
revenues originated from the following geographic destinations:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
North America............................................ $25,142,000 $25,889,000 $28,282,000
Asia..................................................... 2,130,000 3,741,000 --
South America............................................ 1,700,000 2,241,000 2,471,000
Europe................................................... 1,707,000 1,136,000 --
United Kingdom (related party)........................... -- -- 2,323,000
Other.................................................... -- -- 888,000
----------------- ------------------ ------------------
$30,679,000 $33,007,000 $33,964,000
================= ================== ==================
</TABLE>
The following table summarizes significant customers with revenues which are
at least 10% of the Company's revenues:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------
Customer 1998 1997 1996
------------------ ------------------- -------------------
<S> <C> <C> <C>
U S West, Inc............................................ $ 9,268,000 $13,812,000 $10,219,000
Ameritech Corporation.................................... 10,097,000 * 4,431,000
PT Telekomunikasi, Indonesia............................. * 3,128,000 --
Puerto Rico Telephone Co................................. * * 3,199,000
Southwestern Bell Telephone Company...................... * 3,169,000 6,289,000
- ------
* Less than 10%
</TABLE>
The fiscal 1998 amount for Ameritech Corporation includes $1,029,000 of sales
to a subcontractor which was performing work for Ameritech Corporation. The
failure of any of the Company's significant customers to continue to purchase
products and services from the Company, or any significant delay in orders from
such customers, could have a material adverse effect on the Company's results of
operations and financial condition.
16. COMMITMENTS AND CONTINGENCIES:
The Company has entered into noncancelable operating leases for its office and
manufacturing facilities, production and test equipment and fixtures. The total
rental for production and test equipment and fixtures for the years ended
September 30, 1998, 1997 and 1996 was $97,000, $153,000 and $266,000,
respectively.
In addition, the Company leases its office and manufacturing facilities under
long-term operating leases. The rental on the office and manufacturing
facilities for the years ended September 30, 1998, 1997 and 1996 was $908,000,
$342,000 and $322,000, respectively. The amounts payable under these leases are
subject to renegotiation at various intervals specified in the leases.
In May 1998, the Company entered into a lease agreement for new office space
for an initial period of ten years with a renewal option for an additional five
years. The 63,000 square foot facility, located in Mount Laurel, New Jersey,
serves as the Company's headquarters.
40
<PAGE>
AXIOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Future minimum rental payments as of September 30, 1998 are as follows:
FISCAL YEAR
- -----------
1999......................................... $ 1,648,000
2000......................................... 1,581,000
2001......................................... 1,351,000
2002......................................... 1,363,000
2003......................................... 1,373,000
Thereafter................................... 5,119,000
-----------
$12,435,000
===========
The Company is obligated to make certain payments, as defined, to certain key
ACompany employees if these employees are terminated. In addition, certain key
employees have performance incentives in the form of cash and equity (in
Securicor 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.
In August 1997, Acxiom Corporation ("Acxiom") filed suit against the Company
in the United States District Court for the District of Delaware alleging
trademark infringement and dilution under the Lanham Act, as well as related
state law causes of action. Acxiom sought a judgment against the Company
enjoining any future use of the Axiom name and Axiom tradenames and future acts
of unfair competition in the United States, mandating the destruction of all
Company advertising and promotional material using the Axiom name and awarding
treble damages in an unspecified amount because of the alleged willfulness of
the Company's infringement, as well as attorneys' fees.
On November 16, 1998, the United States District Court for the District of
Delaware rendered its decision that Acxiom was entitled to an order enjoining
the Company from making further use of the Axiom name and related injunctive
relief. The court also concluded that Acxiom is not entitled to any money
damages. The Company and Acxiom have agreed that neither will appeal the court's
decision, and the Company has agreed to reimburse Acxiom for auxiliary costs in
the amount of $50,000. The Company will change its name by the end of March
1999.
41
<PAGE>
<TABLE>
<CAPTION>
AXIOM INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT
DESCRIPTION YEAR EXPENSES ACCOUNTS (DEDUCTIONS) END OF YEAR
- ----------------------------------------- --------------- -------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
For the Year Ended September 30, 1996:
Allowance for doubtful accounts........ $100,000 $ -- $ -- $ -- $ 100,000
======== ========== ======= ========= ==========
For the Year Ended September 30, 1997:...
Allowance for doubtful accounts........ $100,000 $ -- $ -- $ -- $ 100,000
======== ========== ======= ========= ==========
For the Year Ended September 30, 1998:...
Allowance for doubtful accounts........ $100,000 4,048,000 48,000(1) (211,000) $3,985,000
======== ========== ======= ========= ==========
(1) Represents balance of the accounts receivable reserve of IDT on the
acquisition date.
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The directors of the Company are as follows:
<TABLE>
<CAPTION>
FIRST
ELECTED
AS
NAME AGE DIRECTOR POSITIONS WITH THE COMPANY
- ---- --- -------- --------------------------
<S> <C> <C> <C>
C. Thomas Faulders, III................ 49 1998 Chairman of the Board
Andrew P. Maunder...................... 42 1996 President, Chief Executive
Officer and Treasurer
Robert B. Kelly (1).................... 42 1997 Director
Sammy W. Pearson (1),(2)............... 53 1996 Director
Trevor Sokell (1),(2).................. 57 1994 Director
Michael G. Wilkinson (2)............... 48 1994 Director
</TABLE>
C. THOMAS FAULDERS, III was appointed Chairman of the Company's Board of
Directors in July 1998. Most recently, Mr. Faulders was Executive Vice
President, Treasurer and Chief Financial Officer for BDM International. Inc., as
well as President of its Integrated Supply Chain Solutions business unit. Mr.
Faulders directed the information technology company's first and second public
offerings, as well as several commercial acquisitions and subsequent merger with
TRW, Inc. From 1992 to 1995, Mr. Faulders was Vice President and Chief
Financial Officer for COMSAT Corporation, a global provider of satellite
services and digital networking services and technology. During a seven-year
tenure with MCI Communications Corporation beginning in 1985, Mr. Faulders
garnered senior level experience in finance, sales and management. His last
position was as a Senior Vice President in Business Marketing. Mr. Faulders
began his business career in 1981 at Satellite Business Systems where he rose to
the position of treasurer. Mr. Faulders earned an MBA from The Wharton School
and graduated from the University of Virginia with a BA in Economics. A former
United States Navy officer with a distinguished eight-year service record, Mr.
Faulders also serves on the Board of Directors of MLC Group, Inc., James Martin
& Co., TruePoint, Inc., Roku Technologies, LLC., and Universal Systems &
Technology Corporation. Among his non-profit work, Mr. Faulders serves on the
board of the Ronald Reagan Institute for Emergency Medicine at George Washington
University Hospital, the Northside Hospital Advisory Board in Atlanta, and the
Leukemia Society of America.
ANDREW P. MAUNDER has served as the Company's President and Chief Executive
Officer since October 1994 and as the Company's Treasurer since March 1995. Mr.
Maunder was Chairman of the Board of Directors from August 1997 through July
1998 and has been a Director of the Company since October 1996. From March 1994
until he joined the Company, Mr. Maunder served as Chief Financial Officer of
Oxford Molecular Group plc, a biotechnology company based in the United Kingdom.
From April 1987 until February 1994, Mr. Maunder was Finance and Operations
Director of Securicor 3Net, Ltd.("3Net"), a communications company based in the
United Kingdom. From October 1996 to May 1997, Mr. Maunder also served as a
Director of Securicor 3Net, Inc. ("3Net Delaware"), which until September 1997
was a wholly-owned indirect subsidiary of Securicor. Mr. Maunder is also on the
board of the Computer and Communications Industry Association (CCIA).
ROBERT B. KELLY has served as a member of the Company's Board of Directors since
July 1997. Mr. Kelly has been a partner in the Washington, DC law firm of
Squire, Sanders & Dempsey, LLP since May 1998. Mr. Kelly was a principal in the
Washington, DC law firm of Kelly & Povich, P.C. from October 1994 to April 1998.
Mr. Kelly was a partner in the Washington DC firm of Piper & Marbury from
January 1989 to March 1992, was a sole practitioner from March 1992 to February
1993 and was a principal in the firm of Kelly, Hunter, Mow & Povich, P.C. from
February 1993 to October 1994. Mr. Kelly is a Director of Intek Global
Corporation ("Intek"), a wireless communications company.
SAMMY W. PEARSON has been a Director of the Company since October 1996. Mr.
Pearson has been Vice President of Software Sales of Baan Company since February
1998. From February 1994 to February 1998, Mr. Pearson was Vice President,
Enterprise Solutions of Oracle Government Services, a business unit of Oracle
Corporation, a provider of advanced software products, services and management
solutions. From May 1992 until February 1994, Mr. Pearson was Vice President of
Oracle Federal Consulting, where he managed Oracle's Federal government
consulting business. From May 1991 to May 1992, Mr. Pearson was the principal
of TechSales Limited, a software marketing company.
TREVOR SOKELL has served as a Director of the Company since July 1994. Mr.
Sokell has been a Director of Ridgeway Systems & Software, Inc., a developer of
multimedia software products, since March 1998. Mr. Sokell served as the
Company's President and Chief Executive Officer from July 1994 until October
1994 and served as the Company's Treasurer and Secretary from July 1994 until
March 1995. From November 1996 until May 1997, Mr. Sokell was the Chairman of
the Board of Directors of 3Net. From January 1987 until November 1996, Mr.
Sokell served as Managing Director of 3Net. From November 1996 until May 1997,
Mr. Sokell was Chairman of Securicor Telecoms Ltd., an affiliate of Securicor
based in the United Kingdom.
MICHAEL G. WILKINSON has been a Director of the Company since July 1994. Mr.
Wilkinson has been the Finance Director of the Communications Division of
Securicor since September 1992. From 1987 to September 1992, Mr. Wilkinson was
Finance Director of Securicor's Business Services Division. Prior to joining
Securicor in 1980, Mr. Wilkinson served as a Finance Director of RCA Limited, an
electronics company based in the United Kingdom. Mr. Wilkinson is a Director of
Intek.
42
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Andrew P. Maunder...................................... 42 Chief Executive Officer, President and Treasurer
Michael L. Moore....................................... 42 Executive Vice President, Sales
William J. Rahe, Jr.................................... 52 Executive Vice President, Engineering and Product Management
Frances Penfold........................................ 54 Vice President, Finance
Greg R. Fegley......................................... 43 Vice President, Operations Support
</TABLE>
MICHAEL L. MOORE was appointed Executive Vice President of Sales in July 1998.
Mr. Moore joined the Company from IDT, which was acquired by the Company in May
1998. Mr. Moore served as Chairman of IDT since 1997, as President and Chief
Executive Officer since 1994, and as Vice President of Sales from 1985 to 1994.
Previously, Mr. Moore held positions with Ampex, Applied Digital Data Systems,
and NCR Corporation. Mr. Moore has over twenty years experience in
telecommunications and extensive experience in billing mediation in
international markets.
WILLIAM J. RAHE, JR. was appointed Executive Vice President, Engineering and
Product Management, in November 1998. Mr. Rahe was the Company's Vice President,
Engineering from April 1995 until October 1998. From August 1994 until April
1995, Mr. Rahe served as Director, Business Development of Cable & Wireless,
Inc., a telecommunications services company. From June 1991 until August 1994,
Mr. Rahe had served as Director, Product Development at Cable & Wireless, Inc.
Prior to joining Cable & Wireless, Inc., Mr. Rahe was Vice President of
Engineering of Lightnet, a partnership between CSX Corporation and Southern New
England Telephone Co.
FRANCES PENFOLD was appointed Vice President of Finance in September 1998. Ms.
Penfold joined the Company from IDT, which was acquired by the Company in May
1998. Ms. Penfold served as Chief Financial Officer of IDT since 1988 and a
Director since 1990. From 1985 until 1988, Ms. Penfold was IDT's Vice President
of Finance. Ms. Penfold has thirty years experience in the manufacturing
industry.
GREG R. FEGLEY has been with the Company and the Predecessor Business since
January 1988 and was appointed Vice President, Operations Support in October
1997. From January 1988 to September 1997, he held several positions, most
recently Director, Operations. From January 1986 to December 1987, Mr. Fegley
served as Marketing Manager for Northern Telecom's Spectron Division.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the directors and certain officers of the Company and persons who own more than
ten percent of the Common Stock, to file with the Securities and Exchange
Commission initial statements of beneficial ownership and statements of changes
in beneficial ownership of Common Stock of the Company. Such directors,
officers and more than ten percent stockholders are required by regulation to
furnish the Company with copies of all Section 16(a) statements they file.
To the Company's knowledge, based solely on a review of the copies of such
statements furnished to the Company and written representations of such
directors and officers that no other statements were required, all fiscal 1998
Section 16(a) filing requirements applicable to its directors, officers and more
than ten percent stockholders were complied with, except that a Form 3 required
to be filed by Frances Penfold upon becoming an executive officer of the Company
was filed late, on December 9, 1998, and Form 4s required to be filed by Ms.
Penfold and Michael Moore, with respect to the return to the Company of shares
of the Common Stock, in accordance with certain post-closing adjustment provided
for in the Merger Agreement, will be filed upon completion of such post-closing
adjustments.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid or accrued during each of the last three fiscal years to the "Named
Executive Officers," as defined by Item 402(a)(3) of Regulation S-K promulgated
by the Securities and Exchange Commission (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------ -------------------------
Fiscal Bonus Securities Underlying All Other
Name and Principal Position Year Salary /Commission Options Compensation(6)
- ------------------------------------------- --------- --------- ----------- ------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Andrew P. Maunder......................... 1998 $202,308 $18,000 40,000 (4) $8,783
President, Chief Executive Officer..... 1997 175,252 6,000 53,333 (4) 5,423
1996 158,924 23,380 48,970 (5) 296
William J. Rahe, Jr....................... 1998 $151,283 $17,340 30,000 (4) $6,685
Executive Vice President,
Engineering and Product Management..... 1997 139,475 12,282 27,560 (4) 5,592
1996 131,800 24,840 18,360 (5) 5,880
Michael S. Farina (1)..................... 1998 $149,904 $38,607 30,000 (4) $7,229
Vice President, Marketing and Sales.... 1997 84,039 38,205 27,000 (4) 2,240
Mark J. Kadish (2)........................ 1998 $106,212 $ 4,200 30,000 (4) $2,484
Chief Financial Officer................ 1997 91,868 2,100 21,000 (4) 2,067
1996 77,490 10,061 -0- 1,827
Greg R. Fegley............................ 1998 $104,240 $ 5,025 24,877 (4) $4,097
Vice President, Operations............. 1997 93,455 -0- 15,323 (4) 3,505
1996 87,174 -0- 18,360 (5) 3,269
Donald Hoffman (3)........................ 1998 $ 93,193 $15,371 -0- $5,109
Senior Vice President.................. 1997 144,846 40,760 12,000 (4) 7,193
1996 146,339 52,338 -0- 7,547
</TABLE>
__________________________
(1) Mr. Farina left the Company on July 31, 1998.
(2) Mr. Kadish left the Company on October 9, 1998.
(3) Mr. Hoffman left the Company on December 4, 1998.
(4) Consists of options to purchase the Common Stock granted pursuant to the
Company's 1997 Stock Incentive Plan (the "Plan"). Options granted in
fiscal 1997 were repriced in January 1998. After the repricing, the
options held by the Named Executive Officers become exercisable at a price
of $5.50 per share in July 1999 and cannot be exercised unless on the date
of exercise the closing market price of the Common Stock on the Nasdaq
National Market equals or exceeds $9.00 per share. The repricing of the
options was accomplished by means of canceling outstanding options and
issuing new options on the revised terms.
(5) Consists of options to purchase the Common Stock of Securicor, a company
traded on the London Stock Exchange. At the close of business on September
30, 1998, the price of Securicor Common Stock as reported on the London
Stock Exchange was (Pounds)3.8125 per share. At the noon exchange rate of
1.6995 U.S. Dollars per British Pound Sterling reported by the Federal
Reserve Bank of New York on September 30, 1998, the price of such shares in
U.S. Dollars was $6.48 per share. The exercise price of such options is
(Pounds)2.45 per share or $4.16 per share at the above-described exchange
rate.
(6) Includes amounts paid by the Company with respect to life insurance
premiums for the benefit of the Named Executive Officers and Company
contributions to the 401(k) accounts of such officers as follows: (i) Mr.
Maunder: $5,127 and $8,487 in 401(k) contributions in fiscal 1997 and 1998,
respectively, and $296 for life insurance premiums in each of fiscal 1996,
1997 and 1998, respectively; (ii) Mr. Rahe: $5,333, $5,320 and $6,323 in
401(k) contributions in fiscal 1996, 1997 and 1998, respectively, and $296,
$362 and $362 in insurance premiums in fiscal 1996, 1997 and 1998,
respectively; (iii) Mr. Farina: $2,240 and $7,069 in 401(k) contributions
in fiscal 1997 and 1998, respectively and $160 in life insurance premiums
in fiscal 1997 and fiscal 1998; (iv) Mr. Kadish: $1,827, $2,067 and $2,484
in 401(k) contributions in fiscal 1996, 1997 and 1998, respectively; (v)
Mr. Fegley: $3,269, $3,505 and $4,097 in 401(k) contributions in fiscal
1996, 1997 and 1998, respectively; and (vi) Mr. Hoffman: $1,038 for life
insurance premiums in each of fiscal 1996, 1997 and 1998, respectively, and
$5,471, $6,155 and $4,071 in 401(k) contributions in fiscal 1996, 1997 and
1998, respectively. Excludes any amounts based upon Mr. Maunder's right to
sell to Securicor (at a price based on operating results in fiscal 1996 of
certain Securicor businesses) shares of 3Net previously held by him that he
acquired prior to his service with the Company.
STOCK OPTION GRANTS IN FISCAL 1998
The following table sets forth certain information with respect to
individual grants of new options to purchase the Common Stock made during
fiscal 1998 to the Named Executive Officers.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Rates of Stock
Price Appreciation for
Individual Grants Option Term
------------------------------------------------------------------------------------------- -------------------------------
Number of Percent of Total
Shares Options Granted
Underlying to Company Exercise
Options Employees in Price Expiration
Name Granted (1) Fiscal Year ($/share) Date 5% 10%
--------------------------- --------------- ---------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Andrew P. Maunder......... 40,000 5.9% 3.375 5/15/08 $84,901 $215,155
William J, Rahe, Jr....... 30,000 4.4% 3.375 5/15/08 $63,676 $161,366
Michael C. Farina......... 30,000 4.4% 3.375 5/15/08 $63,676 $161,366
Mark J. Kadish............ 30,000 4.4% 3.375 5/15/08 $63,676 $161,366
Greg R. Fegley............ 20,000 2.9% 3.375 5/15/08 $42,450 $107,578
4,877 0.7% 5.500 1/12/08 $16,869 $ 42,750
Donald Hoffman............ -0- -- -- -- -- --
</TABLE>
__________________________
(1) All options granted to Named Executive Officers in fiscal 1998 were granted
under the Plan.
AGGREGATE OPTION EXERCISES IN FISCAL 1998 AND YEAR-END OPTION VALUES
The following table sets forth a summary of options to purchase shares of
the Common Stock ("Company Options") exercised during fiscal 1998 and presents
the value of unexercised Company Options at September 30, 1998 held by the Named
Executive Officers at such date.
AGGREGATED COMPANY OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END 1998 COMPANY OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Securities Underlying Value of Unexercised In the
Acquired on Value Unexercised Options at FY-End Money Options at FY-End (1)
----------------------------------- --------------------------------
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------ -------------- --------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Andrew P. Maunder....... -0- -0- -0- 93,333 -0- -0-
William J. Rahe, Jr..... -0- -0- -0- 57,560 -0- -0-
Michael C. Farina....... -0- -0- -0- 57,000 -0- -0-
Mark J. Kadish.......... -0- -0- -0- 51,000 -0- -0-
Greg R. Fegley.......... -0- -0- 1,625 38,575 -0- -0-
Donald Hoffman.......... -0- -0- -0- 12,000 -0- -0-
</TABLE>
__________________________
(1) The price of the Common Stock as reported on the Nasdaq National Market at
September 30, 1998 was $1.375 per share. The exercise price of the options
granted in fiscal 1998 to the Named Executive Officers was $3.375 per
share. Mr. Fegley received an additional option grant for 4,877 shares in
January 1998 with an exercise price of $5.50 per share.
The following table sets forth a summary of options to purchase ordinary
shares of Securicor ("Securicor Options") exercised during fiscal 1998 and
presents the value of unexercised Securicor options at September 30, 1998 held
by the Named Executive Officers at such date.
AGGREGATE SECURICOR OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END 1998 SECURICOR OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Securities Underlying Value of Unexercised In the
Acquired on Value Unexercised Options at FY-End Money Options at FY-End (1)
----------------------------------- --------------------------------
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------ -------------- --------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Andrew P. Maunder....... -0- -0- -0- 48,970 -0- $113,610
William J. Rahe, Jr..... -0- -0- -0- 18,360 -0- $ 42,595
Michael C. Farina....... -0- -0- -0- -0- -0- -0-
Mark J. Kadish.......... -0- -0- -0- -0- -0- -0-
Greg R. Fegley.......... -0- -0- -0- 18,360 -0- $ 42,595
Donald Hoffman.......... -0- -0- -0- -0- -0- -0-
</TABLE>
__________________________
(1) All amounts reflect the conversion of British Pounds Sterling to U.S.
Dollars at the rate of 0.59 British Pounds Sterling to one U.S. Dollar, the
noon exchange rate reported by the Federal Reserve Bank of New York on
September 30, 1998.
COMPENSATION OF DIRECTORS
Each of the Company's Directors, other than Mr. Maunder, is entitled to
receive an annual fee for his service on the Board of Directors. Mr. Faulders,
Chairman of the Board of Directors, receives an annual fee of $75,000. Messrs.
Pearson, Sokell, Wilkinson and Kelly each receive an annual fee of $20,000. In
addition, each director is entitled to reimbursement of travel and other
expenses incurred in connection with his service as a Director. Pursuant to
employment arrangements between Securicor and Mr. Wilkinson, his director's fee
is paid to Securicor. Mr. Faulders has been granted options to purchase 25,000
shares of Common Stock under the Company's 1997 Stock Incentive Plan (the
"Plan"). Messrs. Pearson, Sokell, Kelly and Wilkinson have each been granted
options to purchase 10,000 shares of Common Stock under the Plan.
EMPLOYMENT AGREEMENTS
In 1994, the Company and Mr. Maunder entered into an agreement regarding
Mr. Maunder's employment with the Company, the principal terms of which were set
forth in a definitive employment agreement executed on February 10, 1995.
Pursuant to this agreement, the Company agreed to employ Mr. Maunder as Chief
Executive Officer, subject to the right of the Company to terminate the
employment relationship immediately for cause or at any time without cause upon
12 months prior written notice. Mr. Maunder has the right to terminate the
agreement upon six months prior notice to the Company. The agreement provides
that the Company pay Mr. Maunder an annual base salary ($207,500 as of September
30, 1998) which is subject to annual review. Mr. Maunder is entitled to
participate in an incentive bonus program pursuant to which cash payments are
calculated based upon performance of the Company and upon individual performance
targets and are subject to a maximum payment of 40% of his annual salary. The
agreement also entitles Mr. Maunder to standard health and other insurance
benefits. As part of his employment agreement, Mr. Maunder is required not to
disclose any proprietary information at any time and agreed to non-competition
and non-interference covenants that expire 12 months after the termination of
his employment. Mr. Maunder's agreement also contains a covenant restricting him
from soliciting the Company's customers for a period of six months after
termination of his employment.
The Company has entered into an employment agreement with Mr. Rahe pursuant
to which the Company has agreed to employ Mr. Rahe subject to the Company's
right to terminate the employment relationship immediately for cause or without
cause, upon 12 months prior written notice. The agreement is terminable by Mr.
Rahe upon six months prior notice. The agreement specifies that Mr. Rahe shall
be paid an annual base salary ($162,000 as of September 30, 1998) that is
subject to review by the Company on an annual basis. The agreement also entitles
Mr. Rahe to incentive compensation, standard health and other insurance
benefits. As part of the agreement, Mr. Rahe has agreed to non-disclosure, non-
interference and non-competition covenants, which expire 12 months after
termination of employment. The agreement also contains a covenant restricting
Mr. Rahe from soliciting the Company's customers for a period of six months
after the termination of employment.
Messrs. Farina and Hoffman were employed under employment agreements until
their terminations in July 1998 and December 1998,respectively.
1997 Stock Incentive Plan
Under the Plan, a variety of awards, including stock options, stock
appreciation rights and restricted and unrestricted stock grants may be made to
the Company's employees, officers, consultants and advisors who are expected to
contribute to the Company's future growth and success. The Company reserved
450,000 shares of Common Stock for issuance under the Plan. On May 12, 1998, the
Board of Directors amended the Plan to increase the number of shares autorized
for issuance under the Plan from 450,000 to 1,050,000, and on December 18, 1998,
the Board of Directors further amended the Plan to authorize the issuance of
2,000,000 shares of Common Stock, such amendments subject to the approval of
stockholders at the Meeting. The Compensation Committee administers the Plan and
determines the price and other terms upon which awards shall be made. Stock
options may be granted either in the form of incentive stock options or non-
qualified stock options. The option exercise price of incentive stock options
may not be less than the fair market value of the Common Stock on the date of
the grant.
While the Company currently anticipates that most grants under this Plan
will consist of stock options, the Company may grant stock appreciation rights,
which represent rights to receive any excess in value of shares of Common Stock
over the exercise price; restricted stock awards, which entitle recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or a part of such shares at their purchase price in the event
that the conditions specified in the award are not satisfied; or unrestricted
stock awards, which represent grants of shares to participants free of any
restrictions under the Plan. Options or other awards that are granted under the
Plan but expire unexercised are available for future grants. Under the terms of
the Plan, the Company may not grant options to purchase in excess of 150,000
shares of Common Stock to any one grantee during any fiscal year.
Employee Stock Purchase Plan
In July 1997, the Board of Directors adopted an Employee Stock Purchase
Plan (the "Stock Purchase Plan") pursuant to which the Company's employees are
permitted to purchase an aggregate of up to 300,000 shares of Common Stock. The
employee's purchase price is the lower of (a) 85% of the fair market value of a
share of the Common Stock on the first day of the Purchase period (as defined)
and (b) 85% of the fair market value of a share of the Common stock on the last
day of the Purchase period.
OPTION REPRICINGS
The following table sets forth a summary of options that were repriced
during fiscal 1998 held by the Named Executive Officers. Options granted during
the twelve months ended September 30, 1997 ("fiscal 1997") were repriced in
January 1998. As a result of the repricing, the options held by the Named
Executive Officers become exercisable at a price of $5.50 per share in July 1999
and cannot be exercised unless on the date of exercise the closing price of the
Common Stock on the Nasdaq National Market equals or exceeds $9.00 per share.
10-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
Length of Original
Number of Market Price Exercise Option Term
Securities of Stock at Price at Time Remaining at Date
Underlying Time of of Repricing New of Repricing or
Options Repriced Repricing or or Exercise Amendment
Name Date or Amended Amendment Amendment Price (In Years)
- --------------------------- ----------- ------------------ --------------- --------------- ---------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Andrew P. Maunder......... 01/12/98 53,333 $5.50 $12.00 $5.50 9.4
William J. Rahe, Jr....... 01/12/98 27,560 $5.50 $12.00 $5.50 9.4
Michael C. Farina......... 01/12/98 27,000 $5.50 $12.00 $5.50 9.4
Mark J. Kadish............ 01/12/98 21,000 $5.50 $12.00 $5.50 9.4
Greg R. Fegley............ 01/12/98 15,323 $5.50 $12.00 $5.50 9.4
Donald Hoffman............ 01/12/98 12,000 $5.50 $12.00 $5.50 9.4
</TABLE>
THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS:
Robert B. Kelly Sammy W. Pearson Trevor Sokell
January 22, 1999
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From July 1994 to March 1995, Mr. Sokell served as an executive officer of
the Company. In addition, from January 1987 until he ended his employment
relationship with Securicor in June 1997, Mr. Sokell served in senior management
positions with 3Net, first as Managing Director and then as Chairman of its
Board of Directors.
The Company purchased $405,000 worth of products from 3Net during fiscal
1997. In May 1997, the Company transferred all of the stock of 3Net Delaware to
3Net for its nominal book value. Included in the net assets transferred was an
obligation to Securicor in the amount of approximately $1.1 million. 3Net
Delaware utilized certain office space and systems of the Company for which it
has been charged approximately $7,000 per month since its formation. In
connection with the Offering, the Company entered into an agreement with 3Net
Delaware pursuant to which the Company continued to make available such space
and systems in consideration of the payment of $4,500 per month for
administrative services and $650 per month for each 3Net Delaware employee
located on the Company's premises. These amounts were based upon an estimate of
the Company's cost of the space and personnel utilized by 3Net Delaware. This
agreement became effective as of May 23, 1997, was renewed on September 30, 1997
and was terminated on December 31, 1997. During fiscal 1998, the Company
received payments in the amount of $18,000 from 3Net Delaware.
3Net was a subsidiary of Securicor until September 1997, at which time
Securicor sold 3Net together with 3Net Delaware to an unaffiliated company.
Mr. Kelly serves as a director of Intek, an affiliate of Securicor, for
which he also acts as telecommunications counsel.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of Axiom Inc. (the "Committee") is pleased to
present its report on executive compensation. The report describes the
underlying philosophy and objectives of the Company's executive compensation
program, the various elements of the program, and the basis for the compensation
determinations made by the Committee with respect to executive officers for
fiscal 1998.
EXECUTIVE COMPENSATION PHILOSOPHY AND OBJECTIVES
The fundamental philosophy of the Company is to ensure that executive
compensation is linked directly to continuous improvements in corporate
performance, the achievement by officers of corporate objectives which are
linked to the Company's annual operating plan, and increases in long-term
stockholder value.
The compensation of the Company's top executives is established and
reviewed annually by the Committee, which is comprised entirely of non-employee
directors. The following guidelines have been adopted by the Committee in
making its compensation decisions:
. Providing a competitive total compensation package that enables the
Company to attract and retain key executives.
. Focusing executive behavior on fulfillment of both short and longer-
term business objectives and strategies.
. Emphasizing stockholders' interest by maintaining variable
compensation opportunities directly linked to corporate performance
and stock appreciation.
COMPENSATION PROGRAM ELEMENTS FOR FISCAL 1998
The Company's executive compensation is comprised of three components, as
described below. Each component is intended to serve the Company's compensation
philosophy and guidelines.
Base Salary: Base salary levels are established each year through a review
of the executive's performance and experience, against industry comparisons
including telecommunications equipment companies and other comparable firms in
the Mid-Atlantic region. The Committee believes that salaries for the Company's
key executives are generally in the median range within this comparison group.
The base salaries of Messrs. Maunder and Rahe are established pursuant to
employment agreements between these executives and the Company.
Annual Incentive Compensation: The executive officers of the Company are
eligible to receive annual incentive payments. The Compensation Committee
generally makes these decisions in October with respect to the upcoming fiscal
year. The objective of annual incentive compensation is to deliver competitive
levels of total cash compensation (base salary and incentive award) when annual
financial and operational accomplishments are made. The specific areas used to
measure key executive performance are described below:
(1) Individual performance during the year;
(2) Progress made by the Company in product development, improvements in
customer service and sales of products and services; and
(3) Achievement in reaching Company goals for profitability.
Each of these factors is considered in evaluating the performance of the
Chief Executive Officer ("CEO") and each executive officer. These performance
evaluations are reviewed by the Committee for final determination of incentive
awards. The performance of the CEO is evaluated by the Committee and based on
the overall progress of the CEO and the Company in the specific areas described
above viewed retrospectively by the Committee. The Committee set actual
incentive awards for fiscal 1998 at a maximum of 40% of base salary for the CEO
and 20% of base salary for other executive officers.
Stock Option Programs: The Committee strongly believes that the interests
of stockholders are best served by linking executives' financial success with
the Company's stock performance. Therefore, the Company maintains a stock
option program pursuant to which the Committee grants stock options to
executives with an exercise price equal to the fair market value on the date of
grant. The target award for each executive position is based on competitive
norms for awarding of stock options. Whether an individual receives more or
less than his target grant is based on the result of an individual performance
review which measures such individual's overall job performance.
COMPENSATION OF THE CEO AND OTHER EXECUTIVE OFFICERS
In October 1997, the Committee set salary levels for fiscal 1998 for the
Company's executive officers. During fiscal 1998, the Committee awarded Andrew
P. Maunder, the Company's CEO, a bonus with respect to fiscal 1998 of 8.9% of
his base salary. Mr. Maunder's bonus was determined based on an assessment of
the factors described above.
The Committee reviewed the performance of the other executive officers
against the same key elements that were considered significant in the evaluation
of the CEO. Certain of the executive officers were awarded annual bonuses
ranging from 4.0% to 11.5% of base salary. Mr. Farina and Mr. Hoffman were
awarded bonuses each month based largely on the level of orders for and sales of
the Company's products and services during the previous month. Bonuses awarded
to these executive officers during fiscal 1998 were 25.8% and 16.5% of base
salary, respectively.
THE LEGISLATIVE CAP ON DEDUCTIBILITY OF PAY
The Internal Revenue Code of 1986, as amended (the "Code") imposes a $1
million dollar limit on the deductibility of pay for executives. The Company's
cash compensation level is far below the limit. Therefore, this legislation
will not impact current pay levels.
The Company believes that the stock options granted to their executives are
exempt from the limitations of the regulation, because they are a form of
"qualified performance-based compensation."
The foregoing report has been furnished by the members of the Committee who
are listed below. No member of the Committee is a current officer or employee
of the Company.
THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS:
Robert B. Kelly Sammy W. Pearson Trevor Sokell
January 22, 1999
STOCK PERFORMANCE GRAPH
Regular-way trading in the Common Stock commenced in the Nasdaq National
Market on July 8, 1997. The following graph compares the Company's cumulative
total stockholder return on the Common Stock for a 15 month period (July 8, 1997
to September 30, 1998) with the cumulative total stockholder return of a the
Nasdaq Composite Index, the Standard & Poor's 500 Index and an index of peer
group companies consisting of providers of billing data systems and related
products and services. This peer group is one with which management believes
the Company to be most aligned. The graph assumes that $100 was invested in the
Common Stock and each index at July 8, 1997 and that any dividends have been
reinvested.
<TABLE>
<CAPTION>
Cumulative Total Return
-----------------------
7/8/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98
------ ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Axiom Inc. 100 98 33 52 23 11
Peer Group 100 103 114 146 165 119
Nasdaq Stock Market (U.S.) 100 114 106 125 128 116
</TABLE>
__________________________
(1) The Peer Index includes the common stock of the following companies:
ACE*COMM Corp., CSG Systems International, Inc., ITDS, Inc., LHS Group,
Inc., Lightbridge Inc., Saville Systems plc and USCS International,
Inc.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth certain information, as of December 31, 1998,
regarding the holdings of Common Stock of (i) each person who is known to the
Company to be the beneficial owner of more than 5% of the outstanding shares of
the Common Stock, (ii) each director of the Company, (iii) each nominee for
director, (iv) the Company's Chief Executive Officer and each of the Company's
other "Named Executive Officers," as defined in Item 402(a)(3) of Regulation S-K
promulgated by the Securities and Exchange Commission (collectively with the
Company's Chief Executive Officer, the "Named Executive Officers") and (v) all
directors and executive officers as a group. Unless otherwise specified, the
named beneficial owner has sole voting and investment power. The information in
the table below was furnished by the persons listed, and constitutes beneficial
ownership as defined in regulations of the Securities and Exchange Commission.
Shares issuable pursuant to the exercise of stock options are included in the
table below if such options were currently exercisable or exercisable by March
1, 1999.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL % OF
OWNERSHIP COMMON
NAME OF BENEFICIAL OWNER (4) STOCK
- ------------------------ ------------ --------
<S> <C> <C>
Securicor Communications Limited (1).................... 3,476,900 44.7%
Michael L. Moore (2).................................... 491,535 6.3%
Frances Penfold (2)..................................... 463,366 6.0%
C. Thomas Faulders, III................................. 49,333 *
Andrew P. Maunder....................................... 24,477 *
Sammy W. Pearson........................................ 13,833 *
Trevor Sokell........................................... 9,333 *
William J. Rahe, Jr..................................... 14,744 *
Mark J. Kadish (3)...................................... 10,100 *
Michael S. Farina....................................... 6,532 *
Michael G. Wilkinson (1)................................ 3,333 *
Robert B. Kelly......................................... 3,333 *
Donald Hoffman.......................................... -0- --
Greg R. Fegley.......................................... 8,291 *
All directors and executive officers as a group
(13 persons)............................................ 1,098,210 14.0%
</TABLE>
__________________________
* Less than one percent.
(1) The address of Securicor Communications Limited ("Securicor
Communications") is Sutton Park House, 15 Carshalton Road, Sutton Surrey,
United Kingdom. Mr. Wilkinson may be deemed to own beneficially the shares
of Common Stock owned by Securicor Communications by virtue of his role as
Director of Securicor Communications. Mr. Wilkinson disclaims beneficial
ownership of these shares. Securicor Communications is an indirect wholly-
owned subsidiary of Securicor plc, a multinational company based in the
United Kingdom ("Securicor").
(2) The number of shares of the Common Stock owned by Mr. Moore and Ms. Penfold
is subject to adjustment based on the provisions of the Agreement of Merger
and Plan of Reorganization (the "Merger Agreement"), dated May 15, 1998, by
and among the Company, AV Technology, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Company ("Technology"), Innovative Data
Technology, a California corporation ("IDT") and the Shareholders of IDT,
pursuant to which IDT was merged into Technology. The Merger Agreement
provides that a certain number of the shares of Common Stock issuable to
Mr. Moore and Ms. Penfold thereunder may be returned to the Company
pursuant to certain post-closing adjustments.
(3) Includes 100 shares of indirect beneficial ownership.
(4) Shares issuable upon the exercise of options to purchase the Common Stock:
Mr. Moore 19,000; Ms. Penfold 13,333; Mr. Faulders 8,333; Mr. Maunder
13,333; Mr. Pearson 3,333; Mr. Sokell 3,333; Mr. Rahe 10,000; Mr. Kadish
10,000; Mr. Wilkinson 3,333; Mr. Kelly 3,333; and Mr. Fegley 8,291.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the completion of the Company's initial public offering of its
Common Stock in July 1997 (the "Offering"), the Company operated as an indirect
wholly-owned subsidiary of Securicor and was a member of the Telecoms Sector of
the Communications Division of Securicor. Accordingly, Securicor assessed the
Company intercompany charges related to group and divisional costs and sales and
marketing activities. 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. Upon completion of the
Offering, the Company was no longer liable to Securicor for any group or
divisional charges. In May 1997, the Company and Securicor entered into an
agreement pursuant to which Securicor will provide international sales and
marketing services to the Company. For fiscal 1998, total charges from
Securicor for these services were $74,000.
Prior to the completion of the Offering, Securicor, from time to time,
advanced funds to the Company to meet the Company's needs for working capital
and for other corporate purposes. Such advances were treated as indebtedness of
the Company to Securicor, a portion of which bore interest at varying rates
ranging from a low of 6.25% per annum to a high of 7.75% per annum. In July
1997, the Company used proceeds of the Offering to repay $22.9 million in
Company borrowings from Securicor. At September 30, 1998, the balance of
indebtedness to Securicor was $64,000.
In connection with the Offering, the Company entered into a Registration
Rights Agreement pursuant to which Securicor has the right, subject to customary
limitations, to: (i) demand registration of the resale of its Common Stock once
during each twelve month period at the expense of Securicor for so long as
Securicor owns at least 10% of the outstanding Common Stock; and (ii) include
its Common Stock in registration statements filed by the Company.
43
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The following is a list of the Consolidated
Financial Statements of the Company and its subsidiaries and
supplementary data filed as part of Item 8 hereof:
Report of Independent Public Accountants
Consolidated Balance Sheets as of September 30, 1998 and 1997
Consolidated Statements of Operations for the years ended September 30,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended September 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
(2) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------ -----
<C> <S>
2.1 Agreement and Plan of Merger between STI and the Company, dated May 23, 1997 (incorporated by
reference to Exhibit 2 to the Company's Registration Statement on form S-1, File No. 333-25439).
2.2 Agreement of Merger and Plan of Reorganization by and among the Company, Technology, IDT and the
Shareholders, dated May 15, 1998 (incorporated by reference to the Company's Current Reporting
Form 8-K, filed with the Securities and Exchange Commission on May 23, 1998.
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit
3.1 to the Company's Registration Statement on form S-1, File No. 333-25439).
3.2 Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on form S-1, File No. 333-25439).
10.1 1997 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on form S-1, File No. 333-25439).
10.2 Employment Agreement between STI and Andrew Maunder, dated July 1, 1994 (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on form S-1, File No. 333-25439).
* 10.3 Employment Agreement between the Company and Michael L. Moore, dated May 15, 1998.
10.4 Employment Agreement between STI and William J. Rahe, Jr., dated February 15, 1995 (incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement on form S-1, File No. 333-25439).
* 10.5 Employment Agreement between the Company and Frances Penfold, dated May 15, 1998.
* 10.6 Employment Agreement between the Company and John Lesinski, dated May 15, 1998.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
------ -----
<C> <S>
10.7 Consultant agreement between the Company and C. Thomas Faulders III, dated July 23, 1998,
(incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998, File No. 333-25439).
10.8 Lease agreement between the Company and Brandywine Operating Partnership, L.P., dated August 26, 1997
(incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998, File No. 333-25439).
* 10.9 Loan and Security Agreement by and between the Company and Silicon Valley Bank, dated December 7, 1998.
* 10.10 General Purchase Agreement between the Company and Ameritech Services, Inc. dated June 24, 1998.
* 10.11 General Procurement Agreement between the Company and US West Communications, Inc. dated March 31,
1998.
10.12 Revised Form of Services Agreement between the Company and 3Net Delaware (incorporated by reference to
Exhibit 10.12 to the Company's Registration Statement on form S-1, File No. 333-25439).
10.13 Form of Registration Rights Agreement by and between the Company and Securicor (incorporated by
reference to Exhibit 10.13 to the Company's Registration Statement on form S-1, File No. 333-25439).
10.14 Stock Purchase Agreement between the Company and Securicor 3Net Limited dated May 22, 1997
(incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on form S-1, File
No. 333-25439).
* 21 Subsidiaries of the Registrant.
* 23.1 Consent of Arthur Andersen LLP.
* 27 Financial Data Schedule.
(EDGAR version only)
</TABLE>
________________
* Exhibits previously filed.
(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) and Item 7 (Exhibits, Pro
Forma Financial Information and Financial Statements) that the Company had
acquired all of the outstanding stock of IDT pursuant to the Agreement of
Merger and Plan of Reorganization.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Amendment No. 1 to be signed on its
behalf by the undersigned, thereunto duly authorized.
AXIOM INC.
<TABLE>
<CAPTION>
<S> <C>
Date: January 26, 1999 By: /s/ ANDREW P. MAUNDER
-----------------------------------------
Andrew P. Maunder
President and
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
Date: January 26, 1999 By: /s/ C. THOMAS FAULDERS, III
-----------------------------------------
C. Thomas Faulders, III
Chairman of the Board
Date: January 26, 1999 By: /s/ ANDREW P. MAUNDER
-----------------------------------------
Andrew P. Maunder
President and
Chief Executive Officer
(Principal Executive Officer)
Date: January 27, 1999 By: /s/ FRANCES PENFOLD
-----------------------------------------
Frances Penfold
Vice President, Finance
(Principal Financial and
(Accounting Officer)
Date: January 27, 1999 By: /s/ ROBERT B. KELLY
-----------------------------------------
Robert B. Kelly
Director
Date: January __, 1999 By:
-----------------------------------------
Sammy W. Pearson
Director
Date: January 27, 1999 By: /s/ TREVOR SOKELL
-----------------------------------------
Trevor Sokell
Director
Date: January ___, 1999 By:
-----------------------------------------
Michael J. Wilkinson
Director
</TABLE>
46
