-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DfukOGZ7ID+vkOy/Uz+oMXNEXFrvDID4+RXaWIBn8FYQfdxj+T6xFmz6sybeGJ0G VdEtIyshDxeIghrk5ep+hA== 0000950109-99-002976.txt : 19990817 0000950109-99-002976.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950109-99-002976 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXENT TECHNOLOGIES INC CENTRAL INDEX KEY: 0001007997 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 870393420 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28100 FILM NUMBER: 99693745 BUSINESS ADDRESS: STREET 1: 2400 RESEARCH BLVD STREET 2: STE 200 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3012585403 MAIL ADDRESS: STREET 1: 2400 RESEARCH BLVD STREET 2: SUITE 200 CITY: ROCKVILLE STATE: MD ZIP: 20850 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________ FORM 10-Q _______________ (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the quarterly period ended June 30, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF - --- 1934 For the transition period from ______ to ______. Commission File Number: 0-28100 _____________ AXENT TECHNOLOGIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 87-0393420 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2400 Research Boulevard Suite 200 Rockville, Maryland 20850 (Address of principal executive offices) (301) 258-5043 (Registrant's telephone number including area code) ________________ Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes___X___ No______ As of August 12, 1999, there were 27,935,083 shares outstanding of the Registrant's Common Stock, par value $.02 per share. AXENT TECHNOLOGIES, INC. ----------------------- INDEX ----- Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Unaudited Condensed Consolidated Balance Sheets as of 4 June 30, 1999 and December 31, 1998 Unaudited Condensed Consolidated Statements of Operations 5 for the three and six months ended June 30, 1999 and 1998 Unaudited Condensed Consolidated Statements of Cash Flows 6 for the six months ended June 30, 1999 and 1998 Unaudited Condensed Consolidated Statements of Comprehensive 7 Income (Loss) for the three and six months ended June 30, 1999 and 1998 Notes to Unaudited Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of 12 Financial Condition and Results of Operations Item 3. Qualitative and Quantitative Disclosures About Market Risk 22 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 24 2 PART I. FINANCIAL INFORMATION Item 1. - ------- FINANCIAL STATEMENTS The financial statements set forth below at June 30, 1999 and for the three and six month periods ended June 30, 1999 and 1998 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. These financial statements should be read in conjunction with the latest audited consolidated financial statements and the notes thereto for the fiscal year ended December 31, 1998, which are included in the Company's Annual Report on Form 10-K as filed with the SEC on March 31, 1999. 3 AXENT TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (amounts in thousands)
June 30, December 31, 1999 1998 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 97,985 $ 80,035 Marketable securities 8,774 31,774 Accounts receivable, net 25,818 28,300 Other current assets 3,603 4,128 ----------- ------------ Total current assets 136,180 144,237 Property and equipment, net 11,772 7,482 Goodwill and other intangible assets 29,024 2,340 Other assets 10,297 7,217 ----------- ------------ Total assets $187,273 $161,276 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 19,760 $ 15,764 Deferred revenue 15,307 11,184 ----------- ------------ Total liabilities 35,067 26,948 ----------- ------------ Stockholders' equity: Common stock, par value $0.02: 27,896,264 and 26,163,284 shares issued and outstanding, respectively 558 523 Additional paid-in capital 188,885 161,386 Accumulated deficit (36,554) (27,211) Accumulated comprehensive income and other (683) (370) ----------- ------------ Total stockholders' equity 152,206 134,328 ----------- ------------ Total liabilities and stockholders' equity $187,273 $161,276 =========== ============
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 AXENT TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share data)
For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------- ----------------- 1999 1998 1999 1998 -------- -------- ------- ------- Net revenues: Product licenses $ 17,545 $ 17,392 $32,731 $33,675 Services 8,884 5,148 15,142 9,196 -------- -------- ------- ------- Total net revenues 26,429 22,540 47,873 42,871 Cost of net revenues 3,721 2,209 6,864 4,246 -------- -------- ------- ------- Gross profit 22,708 20,331 41,009 38,625 Operating expenses: Sales and marketing 15,659 9,597 29,315 18,738 Research and development 6,922 4,551 13,216 8,709 General and administrative 2,667 1,430 5,369 2,912 Amortization of acquired intangible assets 1,309 83 1,460 164 Acquisition-related charges - - 3,753 17,422 -------- -------- ------- ------- Total operating expenses 26,557 15,661 53,113 47,945 -------- -------- ------- ------- Income (loss) before royalties, interest and taxes (3,849) 4,670 (12,104) (9,320) Interest income and other 1,050 1,022 2,118 2,474 Royalty income - 558 - 1,127 Income tax benefit (provision) 598 (2,283) 1,717 (178) -------- -------- ------- ------- Net income (loss) $ (2,201) $ 3,967 $(8,269) $(5,897) ======== ======== ======= ======= Net income (loss) per common share (basic): $ (0.08) $ 0.16 $ (0.30) $ (0.24) -------- -------- ------- ------- Number of shares used in computing net income (loss) per common share outstanding (basic) 27,843 25,195 27,124 24,779 -------- -------- ------- ------- Net income (loss) per common share (diluted): $ (0.08) $ 0.15 $ (0.30) $ (0.24) -------- -------- ------- ------- Number of shares used in computing net income (loss) per common share outstanding (diluted) 27,843 27,234 27,124 24,779 -------- -------- ------- -------
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 AXENT TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands)
For the Six Months Ended June 30, ----------------------------------------- 1999 1998 ------------------ ----------------- CASH INFLOWS (OUTFLOWS) Operating activities: Net loss $(8,269) $ (5,897) Non-cash items: Depreciation and amortization 3,143 1,453 Deferred income taxes (2,141) (2,533) Write-off of in process research and development 2,000 - Change in assets and liabilities 3,251 4,052 ------------------ ----------------- Net cash used by operating activities (2,016) (2,925) ------------------ ----------------- Investing activities: Capital expenditures (3,140) (3,422) Proceeds from the sale of marketable securities - 389 Purchases of short-term investments (2,067) (34,442) Maturity of short-term investments 25,067 31,503 Payments for business acquisitions, net of cash acquired (2,160) - ------------------ ----------------- Net cash provided (used) by investing activities 17,700 (5,972) ------------------ ----------------- Financing activities: Proceeds from issuance of common stock 2,579 8,471 ------------------ ----------------- Net cash provided by financing activities 2,579 8,471 ------------------ ----------------- Effect of exchange rate changes on cash (313) (33) ------------------ ----------------- Net increase (decrease) in cash and cash equivalents 17,950 (459) Cash and cash equivalents, beginning of period 80,035 51,632 ------------------ ----------------- Cash and cash equivalents, end of period $97,985 $ 51,173 ================== =================
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 AXENT TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (amounts in thousands)
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------------------- ------------------------------------ 1999 1998 1999 1998 -------------- --------------- --------------- --------------- Net income (loss) $(2,201) $3,967 $(8,269) $(5,897) Other comprehensive income (loss): Realization of gain on marketable securities - - - (238) Currency translation effects 59 8 (313) (33) -------------- --------------- --------------- --------------- Comprehensive income (loss) $(2,142) $3,975 $(8,582) $(6,168) ============== =============== =============== ===============
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 AXENT TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation AXENT Technologies, Inc. and its wholly owned subsidiaries (collectively, the "Company" or "AXENT") develop, market, license and support enterprise-wide information security solutions for client/server computing environments and provide related services. On January 12, 1999 and March 31, 1999, the Company completed the acquisitions of Internet Tools, Inc. ("ITI") and PassGo(TM) Technologies, Ltd. ("PassGo"), respectively. ITI was accounted for as a pooling of interests and PassGo was accounted for using the purchase method of accounting. The Company's unaudited condensed consolidated financial statements have been restated to reflect the acquisition of Internet Tools, Inc. ("ITI") and these financial statements reflect the operations of PassGo since March 31, 1999. These acquisitions were recorded in accordance with APB No. 16. The Company's historical financial statements and related financial information included in this report have been restated to combine earlier financial statements of AXENT and ITI. The accompanying unaudited condensed consolidated financial statements reflect all the adjustments, consisting of normal recurring adjustments, that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The results for the three and six month periods ended June 30, 1999 may not necessarily be indicative of the results for the entire year or any future period. The December 31, 1998 condensed consolidated balance sheet was derived from audited financial statements as of the same date but does not include all disclosures required by generally accepted accounting principles. These financial statements should be read in conjunction with the Company's annual audited financial statements for the year ended December 31, 1998, which are included in the Company's Form 10-K filed with the SEC on March 31, 1999. Business Combinations On March 31, 1999, the Company completed the acquisition of United Kingdom-based CKS Limited, the parent of PassGo, a worldwide leader in centralized user access and control, and single sign-on and password synchronization products. In conjunction with the acquisition, the Company issued 1,486,146 shares of common stock to holders of shares and warrants of CKS Limited and agreed to exchange stock options to purchase 64,157 AXENT shares for all outstanding CKS Limited stock options. The transaction was accounted for using the purchase method of accounting and accordingly, the net assets and operating results of PassGo have been included in the accompanying financial statements from the date of acquisition. The purchase price, including transaction costs, was approximately $30.96 million. The allocation of the purchase price was based on the results of an independent third party valuation and allocated to assets acquired and liabilities assumed, based on their respective fair values at the acquisition date. The purchase price allocation resulted in goodwill and other intangibles of approximately $28.31 million, which is being amortized, on a straight-line basis over their useful lives, of between three and seven years. The Company recorded a charge for acquired in-process research and development of approximately $2.0 million for the six months ended June 30, 1999. The charge reflects technology acquired for which technological feasibility had not been reached and for which there is no alternative future use. The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of CKS Limited had occurred at the beginning of 1998. The unaudited pro forma information is presented for information purposes only and is not indicative of what would have occurred if the acquisition had actually been made as of the beginning of 1998. In addition, the unaudited pro forma information is not intended to be a projection of future results and does not reflect synergies expected to result from the integration of CKS Limited and AXENT. 8
Unaudited Pro Forma Information: For the Six Months For the Six Months Ended June 30, 1999 Ended June 30, 1998 ------------------- ------------------- Net revenues $ 50,176,000 $ 48,964,000 Net loss from operations $(10,906,000) $(10,049,000) Net loss per common share from operations (basic & diluted) $ (0.39) $ (0.38)
On January 12, 1999, the Company consummated its merger with ITI in which it acquired 100% of the outstanding stock of ITI for 703,194 shares of AXENT common stock and assumed stock options covering a total of 46,806 shares of AXENT common stock. The Company incurred approximately $1.75 million in acquisition- related transaction and other related costs in connection with the merger. The business combination was accounted for by the pooling of interests method of accounting and, accordingly, the assets, liabilities, and stockholders' equity of ITI were combined with the Company's respective accounts at recorded values. Prior period financial statements have been restated to give effect to the merger. On July 21, 1998, the Company completed the acquisition of Secure Network Consulting, Inc. ("SNCI"), a privately held information security consulting firm. In conjunction with the acquisition, the Company issued 85,000 shares of common stock to SNCI's stockholders. The transaction was accounted for using the purchase method of accounting. The purchase price, including transaction costs, was $2.3 million. This amount exceeded the fair value of assets acquired by approximately $2.1 million, which is being treated as goodwill and amortized, on a straight-line basis, over seven years and is included in goodwill and other intangible assets. The operating results of SNCI have been included in the accompanying financial statements from the date of acquisition. During 1998, the Company consummated its merger with Raptor Systems, Inc. ("Raptor") in which it acquired 100% of the outstanding stock of Raptor for 10,952,380 shares of AXENT common stock and exchanged stock options covering a total of 1,725,988 shares of AXENT common stock. The Company incurred approximately $17.42 million in acquisition-related transaction and other costs in connection with the merger. The business combination was accounted for by the pooling of interests method of accounting and, accordingly, the assets, liabilities, and stockholders' equity of Raptor were combined with the Company's respective accounts at recorded values. Prior period financial statements have been restated to give effect to the merger. Net Income Per Common Share During 1997, the Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings per Share," ("SFAS 128") to calculate net income per share. Basic earnings per common share have been computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share have been computed by dividing net income by the weighted average number of common shares outstanding plus an assumed increase in common shares outstanding for dilutive securities. Potentially dilutive securities consist of options and warrants to acquire common stock for a specified price and their dilutive effect is measured using the treasury method. Potentially dilutive securities are not included in the diluted earnings per share calculations for the periods presented as their inclusion would be anti-dilutive to the basic loss per share calculations. Recent Accounting Pronouncements In December 1998, the AICPA issued Statement of Position (SOP) 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9 modifies SOP 97-2 by requiring revenue to be recognized using the "residual method" if certain conditions are met. SOP 98-9 will be effective for the Company's 2000 financial statements. Management does not believe that SOP 98-9 will have a material impact on the Company's results of operations or financial condition. 9 Information Concerning Business Segments In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's approach to information security is to develop, market and support security software products that perform a broad range of security functions and to provide consulting services to address customers' security needs. As such, the Company has two reportable segments: a software product segment and a consulting services segment. The software product segment includes products which provide security assessment and policy management, host and network based intrusion detection, systems and network access control, data confidentiality, user administration, activity monitoring, secure authentication solutions for remote network access and virtual private networking capabilities for remote users and remote sites. The consulting services segment includes training and "Lifecycle Security Services" designed to help organizations develop a framework and roadmap for assessing potential vulnerabilities; developing security policies, guidelines, practices and metrics; selecting and implementing solutions; conducting training; and ensuring appropriate monitoring and compliance. The Company evaluates the performance of its operating segments based on income before royalty, interest, taxes and gains on the sale of marketable securities. Intersegment sales and transfers are not significant. Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" segment includes the consulting services segment as it is below the quantitative thresholds, corporate related items and, as it relates to segment profit (loss), income and expense not allocated to reportable segments.
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------------------------- ------------------------------------------- 1999 1998 1999 1998 ------------------ ----------------- ------------------- ------------------ Net revenues: Software products $24,670,000 $21,202,000 $ 44,755,000 $ 40,917,000 Other 1,759,000 1,338,000 3,118,000 1,954,000 ------------------ ----------------- ------------------- ------------------ Total net revenues $26,429,000 $22,540,000 $ 47,873,000 $ 42,871,000 ================== ================= =================== ================== Segment operating profit (loss): Software products $(1,829,000) $ 5,312,000 $ (3,775,000) $ 9,935,000 Other (2,020,000) (642,000) (8,329,000) (19,255,000) ------------------ ----------------- ------------------- ------------------ Total segment operating profit (loss) $(3,849,000) $ 4,670,000 $(12,104,000) $ (9,320,000) ================== ================= =================== ================== Total assets: Software products $ 37,659,000 $ 32,182,000 Other 149,614,000 105,289,000 ------------------- ------------------ Total assets $187,273,000 $137,471,000 =================== ==================
10 The Company's areas of operations are principally in the United States. Operations outside of the United States are worldwide but primarily in the United Kingdom, Europe and Asia. No single foreign country is significant to the consolidated operations. Foreign operations' revenue, profit and identifiable assets are shown in the following table.
For the Three Months For the Six Months Ended June 30, Ended June 30, ---------------------------------------- ------------------------------------------ 1999 1998 1999 1998 ----------------- ----------------- ------------------ ------------------ Net revenues: U.S. $18,646,000 $16,407,000 $ 34,670,000 $ 33,038,000 International 7,783,000 6,133,000 13,203,000 9,833,000 ----------------- ----------------- ------------------ ------------------ Total net revenues $26,429,000 $22,540,000 $ 47,873,000 $ 42,871,000 ================= ================= ================== ================== Profit (loss): U.S. $(2,517,000) $ 2,950,000 $ (8,540,000) $ (6,546,000) International 316,000 1,017,000 271,000 649,000 ----------------- ----------------- ------------------ ------------------ Total profit (loss) $(2,201,000) $ 3,967,000 $ (8,269,000) $ (5,897,000) ================= ================= ================== ================== Total assets: U.S. $168,926,000 $136,913,000 International 18,347,000 558,000 ------------------ ------------------ Total assets $187,273,000 $137,471,000 ================== ==================
11 Item 2. - ------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, which involve risk and uncertainties. These forward-looking statements are identified by the use of the words "believes", "expects", "anticipates", "will", "would" or similar expressions that contemplate future events. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those identified in "Certain Factors Affecting Future Performance" (see below) and those discussed in the "Risk Factors" set forth in the Company's Prospectus/Joint Proxy Statement dated January 2, 1998, as filed with the SEC on January 5, 1998. The Company assumes no obligation to update or correct forward-looking statements due to events or changes after the date of this report. Overview AXENT is a global leader in information security and provides e-security solutions that maximize customers' business advantage. The Company delivers integrated products and expert services to assess, protect, enable and manage business processes and information assets. Through the Company's unique Lifecycle Security methodology combined with Smart Security Architecture, solutions are provided that permit customers to select the right level of security for their business needs. The Company's award-winning solutions offer assessment and policy compliance, firewall, intrusion detection, authentication, virtual private network capabilities, Web-access, single sign-on and user administration for the entire enterprise. To continue the expansion of the Company's revenue base, the Company has focused its efforts on delivering integrated products and expert services. It is the Company's desire to continue pursuing growth by creating more solutions for its customers. During 1999 and 1998, the Company strengthened its focus as a comprehensive, enterprise-security solutions provider with four important acquisitions. Within the first quarter of 1999 the Company acquired ITI and PassGo. The acquisition of ITI will further solidify the Company's role as the industry leader in intrusion detection and the PassGo acquisition will strengthen the Company's ability to provide simplified, secure access to information and centralized user access control for e-business. During the first and third quarters of 1998, the Company acquired Raptor and SNCI, respectively. Raptor's product line has enhanced and validated the Company's security products and services, and SNCI has enhanced the Company's ability to act as the customers' trusted security partner in offering complete solutions through the entire security lifecycle. 12 Results of Operations The following table sets forth certain unaudited condensed consolidated statement of operations data expressed as a percentage of total revenues for the periods indicated:
Three Months Six Months Ended June 30, Ended June 30, ------------------------------------- ---------------------------------- 1999 1998 1999 1998 --------------- -------------- ------------- ------------- Net revenues: Product licenses 66.4% 77.2% 68.4% 78.5% Services 33.6 22.8 31.6 21.5 --------------- -------------- ------------- ------------- Total net revenues 100.0 100.0 100.0 100.0 Cost of net revenues 14.1 9.8 14.3 9.9 --------------- -------------- ------------- ------------- Gross profit 85.9 90.2 85.7 90.1 Operating expenses: Sales and marketing 59.2 42.6 61.2 43.7 Research and development 26.2 20.2 27.6 20.3 General and administrative 10.1 6.3 11.2 6.8 Amortization of acquired intangible assets 5.0 0.4 3.0 0.4 Acquisition-related charges -- -- 7.8 40.6 --------------- -------------- ------------- ------------- Total operating expenses 100.5 69.5 110.8 111.8 --------------- -------------- ------------- ------------- Income (loss) before royalties, interest and taxes (14.6) 20.7 (25.1) (21.7) Interest income and other 4.0 4.5 4.4 5.8 Royalty income -- 2.5 -- 2.6 Income tax benefit (provision) 2.3 (10.1) 3.6 (0.4) --------------- -------------- ------------- ------------- Net income (loss) (8.3)% 17.6% (17.1)% (13.7)% =============== ============== ============= =============
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Net Revenues The Company's total net revenues increased 17.3% or $3.89 million from $22.54 million for the three months ended June 30, 1998 to $26.43 million for the three months ended June 30, 1999. The Company's net revenues from product licenses increased approximately 1.0%, or $153,000 from $17.39 million for the three months ended June 30, 1998 to $17.54 million for the three months ended June 30, 1999. For those periods in 1998 and 1999, net revenues from product licenses represented 77.2% and 66.4%, respectively, of total net revenues. The Company's revenues are subject to a number of risks and uncertainties, including but not limited to, the level of demand for the Company's products', the volume and timing of customer orders, many of which come at the end of a quarter; product and price competition; the Company's ability to maintain and expand its domestic and international sales and marketing organizations; the Company's ability to develop new and enhanced products; the availability of personnel and the Company's ability to attract and retain key personnel; the mix of distribution channels through which the Company's products are sold; the extent to which unauthorized access and use of online information is perceived as a threat to information security; customer budgets and priorities; Year 2000 issues; seasonal trends in customer purchasing; foreign currency exchange rates; general economic factors; and risks associated with the rapid change in technology. In addition, the value of individual transactions as a percentage of the Company's actual or anticipated quarterly revenues can be substantial, and the inability to close such transactions may have a material adverse impact on the operating results of the Company. 13 The Company's net revenues from services increased approximately 72.6%, or $3.74 million, from $5.14 million for the three months ended June 30, 1998 to $8.88 million for the three months ended June 30, 1999. The increase in services revenues is primarily attributable to the increases in implementation consulting services, customer training courses and customers under maintenance contracts. For those periods in 1998 and 1999, net revenues from services represented 22.8% and 33.6%, respectively, of total net revenues. The Company's net revenues from North American and international operations were 71% and 29% of total revenues, respectively, for the three months ended June 30, 1999 as compared to 73% and 27%, respectively, for the same period in 1998. The increase in the international revenues as a percentage of total revenue from 1998 to 1999 is attributable to increased sales due to the expansion of the Company's operations in European and Asian markets and the acquisition of UK based PassGo. Cost of Net Revenues The Company's cost of net revenues includes costs of media, product packaging, documentation and other production costs, product royalties, and the direct and indirect costs of providing technical support, training and consulting services to the Company's customers. Cost of net revenues increased approximately 68.4%, or $1.51 million, from $2.21 million for the three months ended June 30, 1998 to $3.72 million for the three months ended June 30, 1999. For those periods in 1998 and 1999, cost of net revenues represented 9.8% and 14.1% of net revenues, respectively. The increase in the cost of net revenues is primarily attributable to the increase in staff of the Company's customer support and consulting services operations necessary to support a larger installed customer base as well as additional products offered by the Company. The increase in the cost of net revenues as a percentage of revenues is primarily attributable to the increased costs associated with consulting services, which have lower margins. Cost of net revenues, as a percentage of revenues, may fluctuate from period to period due to a change in the mix of license revenues and consulting service revenues, a change in the number or size of transactions recorded in a quarter, integration of acquired operations or products, or an increase or decrease in licenses of royalty-bearing products. Sales and Marketing Sales and marketing expenses consist primarily of personnel costs, including commissions, salaries, benefits and bonuses, travel, telephone, costs of advertising, public relations seminars and trade shows. Sales and marketing expenses increased 63.2%, or $6.06 million, from $9.60 million for the three months ended June 30, 1998 to $15.66 million for the three months ended June 30, 1999. For those periods in 1998 and 1999, sales and marketing expenses represented 42.6% and 59.2% of total net revenues, respectively. The increase in dollar amount and percentage of total net revenues was due to an increase in staff and marketing programs to support the Company's sales and marketing activities plus the addition of costs associated with PassGo. The Company currently anticipates that the dollar amount of sales and marketing expenses will increase as the Company continues to hire necessary staff and expand its marketing activities to promote expansion of the Company's business. Research and Development Research and development expenses consist primarily of personnel costs, including salaries, benefits and bonuses, travel and other personnel-related expenses of the employees engaged in ongoing research and development projects and third-party development contracts. Costs related to research and development of products are expensed as incurred. Research and development expenses increased 52.1%, or $2.37 million, from $4.55 million for the three months ended June 30, 1998 to $6.92 million for the three months ended June 30, 1999. For those periods in 1998 and 1999, research and development expenses represented 20.2% and 26.2% of total net revenues, respectively. The increase in dollar amount and percentage of total net revenues resulted from the addition of staff, the use of outside consultants needed to develop, maintain and enhance the Company's software products plus the addition of costs associated with PassGo. The Company currently anticipates that the dollar amount of research and development expenses will increase as the Company continues to commit substantial resources to research and development in future periods. 14 General and Administrative General and administrative expenses consist primarily of personnel costs, including salaries, benefits and bonuses and related costs for management, finance and accounting, legal and other professional services. General and administrative expenses increased 86.5%, or $1.24 million, from $1.43 million for the three months ended June 30, 1998 to $2.67 million for the three months ended June 30, 1999. For those periods in 1998 and 1999, general and administrative expenses represented 6.3% and 10.1% of total net revenues, respectively. The increase in dollar amount and percentage of total net revenues is primarily a result of additional staff and investments in corporate infrastructure and information systems needed to support the Company's operations and the integration of PassGo and ITI. The Company currently anticipates that the dollar amount of general and administrative expenses will increase as the Company continues to invest in the corporate infrastructure. Amortization of Acquired Intangible Assets Amortization of acquired intangible assets consist primarily of the amortization of purchased goodwill and other purchased intangible assets. Amortization of intangible assets expenses increased $1.23 million, from $83,000 for the three months ended June 30, 1998 to $1.31 million for the three months ended June 30, 1999. The increase in dollar amount is primarily due to the amortization of goodwill resulting from the acquisition of PassGo. Income (Loss) before Royalties, Interest and Taxes Loss from continuing operations before royalties, interest and taxes increased $8.52 million from a profit of $4.67 million for the three months ended June 30, 1998 to a loss of $3.85 million for the three months ended June 30, 1999. The increase is primarily attributable to the increases in operating expenses. Royalty Income Royalty income in 1998 consisted of amounts payable to AXENT pursuant to the Exclusive Distributor License Agreement with Raxco Software, Inc. ("Raxco") related to certain OpenVMS utility software products owned by AXENT. Raxco has experienced declining revenues for these products as a result of the erosion of market share that the OpenVMS platform has experienced world-wide. Royalty income declined to zero from $558,000 for the three months ended June 30, 1999 and 1998, respectively, as a result of the transfer of those products and all related liabilities to Raxco and termination of the Exclusive Distributor License Agreement during the first quarter in 1999. Interest Income and Other Interest income and other increased 2.7%, or $28,000, from $1.02 million for the three month period ended June 30, 1998 to $1.05 million for the three month period ended June 30, 1999. Interest income and other may fluctuate from period to period due to changes in investment mix, varying cash balances and fluctuations in interest rates. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities for financial statement purposes and their respective tax basis. The Company's subsidiaries have a history of net operating losses making the realization of its tax credit carryforwards uncertain. Accordingly, the Company placed a partial valuation allowance against the deferred tax assets of its subsidiaries. The Company recorded a tax provision related to its taxable income from operations of $2.28 million for the three months ended June 30, 1998 and a tax benefit related to its taxable loss from operations of $598,000 for the three months ended June 30, 1999. The effective tax rate for the three months ended June 30, 1999 is 21.4%, compared to an effective tax rate of 36.5% for the three months ended June 30, 1998. The decrease in the effective tax rate for 1999 is principally due to the amortization of acquired intangibles, which is not deductible for tax purposes. Excluding the amortization of acquired intangibles, the effective tax rate for both periods is approximately 36%. 15 Net Income (Loss) As a result of the above, the Company recorded a loss of $2.20 million for the three months ended June 30, 1999 compared to a profit of $3.97 million for the three months ended June 30, 1998. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Net Revenues The Company's total net revenues increased approximately 11.7 % or $5.0 million from $42.87 million for the six months ended June 30, 1998 to $47.87 million for the six months ended June 30, 1999. The Company's net revenues from product licenses decreased approximately 2.8%, or $944,000, from $33.67 million for the six months ended June 30, 1998 to $32.73 million for the six months ended June 30, 1999. For those periods in 1998 and 1999, net revenues from product licenses represented 78.5% and 68.4%, respectively, of total net revenues. The Company's revenues are subject to a number of risks and uncertainties, including but not limited to, the level of demand for the Company's products', the volume and timing of customer orders, many of which come at the end of a quarter; product and price competition; the Company's ability to maintain and expand its domestic and international sales and marketing organizations; the Company's ability to develop new and enhanced products; the availability of personnel and the Company's ability to attract and retain key personnel; the mix of distribution channels through which the Company's products are sold; the extent to which unauthorized access and use of online information is perceived as a threat to information security; customer budgets and priorities; Year 2000 issues; seasonal trends in customer purchasing; foreign currency exchange rates; general economic factors; and risks associated with the rapid change in technology. In addition, the value of individual transactions as a percentage of the Company's actual or anticipated quarterly revenues can be substantial and the inability to close such transactions may have a material adverse impact on the operating results of the Company. The Company's net revenues from services increased approximately 64.7%, or $5.95 million, from $9.19 million for the six months ended June 30, 1998 to $15.14 million for the six months ended June 30, 1999. The increase in services revenues is primarily attributable to the increases in implementation consulting services, customer training courses and customers under maintenance contracts. For those periods in 1998 and 1999, net revenues from services represented 21.5% and 31.6%, respectively, of total net revenues. The Company's net revenues from North American and international operations were 72% and 28% of total revenues, respectively, for the six months ended June 30, 1999 as compared to 77% and 23%, respectively, for the same period in 1998. The increase in the international revenues as a percentage of total revenue from 1998 to 1999 is attributable to increased sales due to the expansion of the Company's operations in European and Asian markets and the acquisition of UK based PassGo. Cost of Net Revenues Cost of net revenues increased approximately 61.7%, or $2.62 million, from $4.24 million for the six months ended June 30, 1998 to $6.86 million for the six months ended June 30, 1999. For those periods in 1998 and 1999, cost of net revenues represented 9.9% and 14.3% of net revenues, respectively. The increase in the cost of net revenues is primarily attributable to the increase in staff of the Company's customer support and consulting services operations necessary to support a larger installed customer base as well as additional products offered by the Company. The increase in the cost of net revenues as a percentage of revenues is primarily attributable to the increased costs associated with consulting services, which have lower margins. Cost of net revenues, as a percentage of revenues, may fluctuate from period to period due to a change in the mix of license revenues and consulting service revenues, a change in the number or size of transactions recorded in a quarter, integration of acquired operations or products, or an increase or decrease in licenses of royalty-bearing products. 16 Sales and Marketing Sales and marketing expenses increased 56.4%, or $10.58 million, from $18.74 million for the six months ended June 30, 1998 to $29.32 million for the six months ended June 30, 1999. For those periods in 1998 and 1999, sales and marketing expenses represented 43.7% and 61.2% of total net revenues, respectively. The increase in dollar amount and percentage of total net revenues was due to an increase in staff and marketing programs to support the Company's sales and marketing activities plus the addition of costs associated with PassGo. The Company currently anticipates that the dollar amount of sales and marketing expenses will increase as the Company continues to hire necessary staff and expand its marketing activities to promote expansion of the Company's business. Research and Development Costs related to research and development of products are expensed as incurred. Research and development expenses increased 51.8%, or $4.51 million, from $8.71 million for the six months ended June 30, 1998 to $13.22 million for the six months ended June 30, 1999. For those periods in 1998 and 1999, research and development expenses represented 20.3% and 27.6% of total net revenues, respectively. The increase in dollar amount and percentage of total net revenues resulted from the addition of staff, the use of outside consultants needed to develop, maintain and enhance the Company's software products plus the addition of costs associated with PassGo. The Company currently anticipates that the dollar amount of research and development expenses will increase as the Company continues to commit substantial resources to research and development in future periods. General and Administrative General and administrative expenses increased 84.4%, or $2.46 million, from $2.91 million for the six months ended June 30, 1998 to $5.37 million for the six months ended June 30, 1999. For those periods in 1998 and 1999, general and administrative expenses represented 6.8% and 11.2% of total net revenues, respectively. The increase in dollar amount and percentage of total net revenues is primarily a result of additional staff and investments in corporate infrastructure and information systems needed to support the Company's operations, the integration of acquisitions plus the addition of costs associated with PassGo. The Company currently anticipates that the dollar amount of general and administrative expenses will increase as the Company continues to invest in the corporate infrastructure. Amortization of Acquired Intangible Assets Amortization of intangible assets consist primarily of the amortization of purchased goodwill and other purchased intangible assets. Amortization of intangible assets expenses increased $1.30 million, from $164,000 for the six months ended June 30, 1998 to $1.46 million for the six months ended June 30, 1999. The increase in dollar amount is primarily due to the amortization of goodwill resulting from the acquisition of PassGo. Acquisition-Related Charges In the six months ended June 30, 1999, the Company incurred charges of approximately $1.75 million for severance, investment banking, legal and accounting fees, and other costs related to the merger with ITI, and approximately $2.00 million of in-process research and development expense in connection with the acquisition of PassGo. In the six months ended June 30, 1998, the Company incurred a charge of $17.42 million, $13.3 million net of taxes, for severance, investment banking, legal and accounting fees, and other costs related to the merger with Raptor. Income (Loss) before Royalties, Interest and Taxes Loss from continuing operations before royalties, interest and taxes increased $2.78 million from a loss of $9.32 million for the six months ended June 30, 1998 to a loss of $12.10 million for the six months ended June 30, 1999. The increase is primarily attributable to the increase in operating expenses. Royalty Income Royalty income in 1998 consisted of amounts payable to AXENT pursuant to the Exclusive Distributor License Agreement with Raxco Software, Inc. ("Raxco") related to certain OpenVMS utility software products owned by AXENT. Raxco has experienced declining revenues for these products as a result of the erosion of market share that 17 the OpenVMS platform has experienced world-wide. Royalty income declined to zero from $1.13 million for the six months ended June 30, 1999 and 1998, respectively, as a result of the transfer of those products and all related liabilities to Raxco and termination of the Exclusive Distributor License Agreement during the first quarter in 1999. Interest Income and Other Interest income and other decreased 14.4%, or $356,000, from $2.47 million for the six month period ended June 30, 1998 to $2.11 million for the six month period ended June 30, 1999. The decrease relates primarily to the sale of marketable securities in 1998 and there were no such sales of this type in 1999. It is the Company's policy to hold securities until they mature. Interest income and other may fluctuate from period to period due to changes in investment mix, varying cash balances and fluctuations in interest rates. Income Taxes The Company accounts for income taxes under SFAS 109. Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities for financial statement purposes and their respective tax basis. The Company's subsidiaries have a history of net operating losses making the realization of its tax credit carryforwards uncertain. Accordingly, the Company placed a partial valuation allowance against the deferred tax assets of its subsidiaries. The Company recorded a tax provision related to its taxable income from operations of $178,000 for the six months ended June 30, 1998 and a tax benefit related to its taxable loss from operations of $1.72 million for the six months ended June 30, 1999. The effective tax rate for the six months ended June 30, 1999 is 17.2%, compared to an effective tax rate of 3.1% for the six months ended June 30, 1998. The difference between the effective tax rate and the statutory rate is principally due to the amortization of acquired intangibles and the write off of certain acquisition costs, which are not deductible for tax purposes. Excluding these items from income, the effective tax rate for both periods is approximately 36%. Net Income (Loss) As a result of the above, the Company recorded a loss of $8.27 million for the six months ended June 30, 1999 compared to a loss of $5.90 million for the six months ended June 30, 1998. Certain Risks and Uncertainties - ------------------------------- Year 2000 The Company is assessing the impact of Year 2000 compliance on the current and prior versions of its products, internal information systems, other internal computer systems and equipment containing embedded systems, and is implementing corrective actions, which are complete or substantially complete in many instances. The Company is using an approach to Year 2000 compliance that involves preparing an inventory of all business disruption problems that the Company regards as reasonably possible, prioritizing those possible problems to allocate appropriate resources to the most critical areas, remediating or replacing systems and equipment to solve or mitigate Year 2000 problems and, if necessary, developing contingency plans if the Company or its key distributors, resellers and suppliers will not be Year 2000 compliant and such noncompliance is expected to have a material adverse effect on the Company's operations. The Company is substantially complete in its process of assessing Year 2000 compliance of its software products. The Company believes that the current version of each of its products has been designed and tested to process Year 2000 date data without interruption or error, and that the current version of each of its product offerings is Year 2000 compliant assuming no error after 1999 in the operating system or other management software products operating on the same computer system as the Company's product. The Company expects to continue Year 2000 testing of the current and new versions of its products and of any products it acquires or distributes. 18 The Company believes it has identified its equipment and systems that are critical to its operations, such as communications and networking equipment, related software and certain hardware and software systems, and has completed its assessment of the Year 2000 compliance of substantially all of such equipment and systems, although it is continuing to assess and test. The Company also is continuing to assess and test the Year 2000 compliance of various items of equipment, computer systems, applications software, and equipment containing embedded systems that the Company does not consider critical to its operations. The Company has replaced or is replacing several internal information systems critical to its operations as part of its normal development and expansion of salesforce automation, accounting and customer service-related information systems. The Company has received product warranties that those systems are Year 2000 compliant, and expects that installation and Year 2000 testing will be completed by September 1999. The Company is continuing to assess the Year 2000 compliance of systems used by distributors, resellers and suppliers, whom the Company expects may be material to its business after 1999. This assessment process generally consists of obtaining completed questionnaires or written assurances regarding anticipated Year 2000 compliance. The Company expects that this process will continue through 1999. The Company anticipates that costs to be incurred in Year 2000 testing and remediation or replacement of noncompliant systems will not be material to its financial condition or results of operations. The cost of continued testing of the Company's products will be included in the Company's research and development expenses, and testing of internal equipment, hardware and software systems generally will be included in general and administrative expense. Even with those efforts, there can be no assurance that undetected errors or defects may not cause Year 2000 problems in the Company's products. The Company provides limited warranties as to Year 2000 compliance on current versions of its products, but the Company does not believe that it is legally responsible otherwise for costs incurred by its customers in achieving Year 2000 compliance. Year 2000 problems in or affecting the Company's products probably would result in litigation and contractual claims by customers and increased expenses negatively affecting the Company's future operating results. In the worst case, litigation, claims and increased expenses could have a material adverse effect on the Company's business, results of operations and financial condition, although the Company currently believes such a result to be unlikely. In addition, Year 2000 problems in older versions of the Company's products may result in increased expense levels for the Company and defocus in development of new products and enhancement of existing products. The Company expects that Year 2000 issues may alter the purchasing patterns of some of its customers or prospective customers, which could have a material adverse effect on the Company's business and results of operations. There also can be no assurance that equipment, hardware and software systems used internally in the Company's business will be free of Year 2000 problems. Failure of internal information systems, equipment or other vendors' software to operate properly after 1999 could disrupt or interfere with the Company's business and result in unanticipated expense, which could adversely affect the Company's business, operating results and financial condition. Year 2000 problems experienced by distributors, resellers and suppliers of the Company may result in disruption of the Company's business and may require the Company to obtain alternative sources of distribution and supply, if possible. The Company is developing certain contingency plans in the event of Year 2000 problems in its products, critical equipment, hardware and software systems and equipment with embedded systems, or in the event that key distributors or resellers or critical suppliers experience Year 2000 problems. The Company expects to continue development and focus of those contingency plans throughout 1999. The foregoing statements are based upon management's best estimates at the present time, which were derived utilizing numerous assumptions of future events and conditions. There can be no assurance that these assumptions will be accurate and that estimates will be achieved. The Company's evaluation and assessment is ongoing and it expects that new or different information may become available as its assessment and evaluation continue. Euro Currency The European Union's adoption of the Euro currency raises a variety of issues associated with the Company's European operations. Although the transition from national currencies to the Euro will be phased in over several 19 years, the Euro became the single currency for most European countries on January 1, 1999. The Company is assessing Euro issues related to its treasury operations, product pricing, contracts and accounting systems. Although the evaluation of these issues is still in process, management currently believes that the Company's existing or planned hardware and software systems will accommodate the transition to the Euro and any required operating changes will not have a material effect on future results of operations or financial condition. Financial Condition-Liquidity and Capital Resources - --------------------------------------------------- The Company's overall cash and cash equivalents were $97.99 million at June 30, 1999, an increase of approximately $17.95 million from $80.04 million at December 31, 1998. During the six month periods ended June 30, 1998 and 1999, respectively, the Company financed its operations primarily through cash reserves and available working capital. The Company's operating activities used cash of $2.93 million and $2.02 million for the six month periods ended June 30, 1998 and 1999, respectively. Net cash used by operating activities in the six months ended June 30, 1999 was primarily a result of the payments for transaction related costs associated with the acquisitions of Raptor and ITI. The Company made capital expenditures of approximately $3.42 million and $3.14 million for the six month periods ended June 30, 1998 and 1999, respectively. These purchases have generally consisted of computer workstations, networking equipment, office furniture and equipment. The Company had no firm commitments for capital expenditures as of June 30, 1999. During the six month periods ended June 30, 1999, the Company's cash position was also affected by the following: 1) the Company had cash outlays of approximately $448,000 and $1.50 million for transaction costs associated with the acquisitions of Raptor and ITI, respectively; 2) the Company received proceeds of $2.58 million from the issuance of common stock upon stock option exercises and under its employee stock purchase plan; 3) the Company purchased $2.07 million of marketable securities; 4) the Company received $25.07 million from the maturity of short-term investments; and 5) the Company paid $2.16 million for the PassGo acquisition-related expenses offset by cash acquired. The Company believes that cash generated from operations, together with existing sources of liquidity, will be sufficient to meet its capital expenditures, working capital and other cash requirements for the next twelve months. Certain Factors Affecting Future Performance - -------------------------------------------- Factors Affecting the Company's Business and Prospects Although the Company historically has experienced significant growth in revenues from its software products, the Company does not believe prior growth rates and past performance are necessarily indicative of future operating results. The Company expects increased competition and intends to invest significantly in product development, sales, marketing and administrative functions as it pursues its business strategy. As a result, there can be no assurance that the Company will be profitable on a quarterly or annual basis. Due to the Company's relatively limited operating history with respect to many of its software products, predictions as to future operating results are difficult. Future operating results may fluctuate due to, but not limited to, factors such as: demand for the Company's products; the size and timing of customer orders; the number of competitors and the breadth and functionality of their product offerings; the introduction of new products and product enhancements by the Company or its competitors; the budgeting cycle of customers; changes in the proportion of revenues attributable to license fees and consulting services; the availability of services personnel to demonstrate, install, configure and implement products; seasonal trends in customer purchasing; changes in the level of operating expenses; competitive conditions in the industry; and changes in technologies affecting computing, networking, communications, systems and applications management and data security. The Company's future operating results and financial condition may also be affected if it fails to recognize the anticipated benefits of its acquisitions on the timetable projected by the Company. Those benefits include, among others, integration of product offerings and coordination of their sales, marketing and research and development teams without disruption or unanticipated expense, elimination of duplicative functions and increased name and product recognition. The Company's future results of operations and financial condition may also be adversely affected if the anticipated integration of operations of acquired companies produces unexpected expenses, delays, 20 inefficiencies, loss of key personnel, loss of resellers or distributors or loss of consultants or if it leads to adverse effects on customer purchasing decisions. The market for the Company's software products is highly competitive, and the Company expects that it will face increasing pricing pressures from its current competitors and new market entrants. As a result of increasing consolidation in the information security industry, the Company expects that it will become subject to increased competition, which may negatively impact existing collaborative, marketing, reselling, distribution or marketing agreements or relationships and thereby materially adversely affect the Company's financial condition and results of operations. Any material reduction in the price of the Company's software products would negatively affect gross margins and could materially adversely affect the Company's financial condition and results of operations. The licensing of many of the Company's software products generally involve significant testing by and education of prospective customers as well as a commitment of resources by both parties. For these and other reasons, the sales cycle associated with the enterprise-wide licensing of the Company's security software products is typically long and subject to a number of significant risks over which the Company has little or no control and, as a result, may expend significant resources pursuing potential sales that will not be consummated. Many of the Company's operating expenses are based on anticipated revenue levels and are fixed or cannot quickly be adjusted if the anticipated level of revenues are not achieved. Therefore delays in the receipt of orders or the failure to achieve the anticipated level of revenues can cause a significant variation in the operating results of the Company from quarter to quarter. The Company also may choose to increase spending in response to competition or to pursue new market opportunities, which may significantly reduce its operating results. Factors Affecting International Operations The Company anticipates that international sales will continue to represent a significant percentage of revenue in the foreseeable future. International sales are subject to a number of risks, including unexpected changes in regulatory requirements, export limitations on encryption technologies, import restrictions, tariffs and other trade barriers, political and economic instability in foreign markets, difficulty in the staffing, management and integration of foreign operations, longer payment cycles, greater difficulty in accounts receivable collection, currency fluctuations and potentially adverse tax consequences. The uncertainty of the monetary exchange values has caused, and may in the future cause, some foreign customers to delay new orders or delay payment for existing orders. These factors may, in the future, contribute to fluctuations in the Company's financial condition and results of operations. Based upon our overall currency rate exposure at June 30, 1999, a 10% change in foreign exchange rates would have had an immaterial effect on our financial position, results of operations and cash flows. On January 1, 1999 the Euro was introduced as a common currency for members of the European Monetary Union. We have not determined what impact, if any, the Euro will have on our foreign exchange exposure. To date, we have not hedged the risks associated with foreign exchange exposure. Although the Company's results of operations have not been materially adversely affected to date as a result of currency fluctuations, the long-term impact of currency fluctuations, including any possible effect on the business outlook in other developing countries, cannot be predicted. To date, our foreign currency gains and losses have been immaterial. Factors Affecting Marketable Securities The fair value of the Company's investments in marketable securities at June 30, 1999 was $8.8 million. The Company's investment policy is to manage its marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio through the full investment of available funds. The Company diversifies the marketable securities portfolio by investing in multiple types of investment-grade securities. The Company's marketable securities portfolio is primarily invested in short-term securities with at least an investment grade rating to minimize interest rate and credit risk as well as to provide for an immediate source of funds. If market interest rates were to increase immediately and uniformly by 10% from the levels at June 30, 1999, the fair market value of the portfolio would decline by an immaterial amount. We have the ability to hold our fixed income investments until maturity, and therefore we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates on our investment portfolio. Although changes in interest rates may affect the fair value of the marketable securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments are sold. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Response to this item is included in "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations -- Certain Factors that May Affect Future Performance" above. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. At the 1999 annual meeting of AXENT's stockholders on June 4, 1999, stockholders of record at the close of business on April 9, 1999 re-elected Richard A. Lefebvre and Gabriel A. Battista as directors to serve until the annual meeting of stockholders in 2002. There were 22,194,015 shares voted at the meeting; for Mr. Lefebvre, 21,914,739 shares (98.74% of the shares voted) were voted for re- election and 279,276 shares were voted against; for Mr. Battista, 21,901,511 shares (98.68% of the shares voted) were voted for election and 292,504 shares were voted against; there were no abstentions or broker non-votes with respect to either candidate. Messrs. Lefebvre and Battista join John C. Becker, John F. Burton, Timothy A. Davenport and Kevin A. McNerney, whose terms as directors of AXENT continued after the 1999 annual meeting. At that meeting, AXENT's stockholders also approved AXENT's 1999 Incentive Stock Plan (the "Option Plan") and the reservation of 1,300,000 shares of AXENT common stock for issuance thereunder. Of the 22,194, 015 shares voted at the meeting, 18,487,609 shares voted to approve the Option Plan, 3,634,051 shares voted against approval, and 72,355 shares abstained; there were no "broker non-votes" on that matter. The Option Plan was approved by 83.30% of the shares voting at the meeting and 66.41% of the shares outstanding on the record date of the meeting. Item 6. Exhibits and Reports on Form 8-K. - ------ -------------------------------- (a) The following exhibits are filed or incorporated by reference, as stated below: Exhibit Number Description - -------------- ----------- 3.1 (1) Amended and Restated Certificate of Incorporation of AXENT. 3.2 (2) Amended and Restated Bylaws of AXENT. 4.1 (1) Specimen stock certificate for shares of Common Stock of AXENT. 10.1 (1) AXENT's 1991 Amended and Restated Stock Option Plan. 10.2 (3) AXENT's 1996 Amended and Restated Stock Option Plan. 10.3 (3) AXENT's 1996 Amended and Restated Directors' Stock Option Plan. 10.9 (1) Form of Indemnification Agreement between AXENT and its directors and executive officers. 10.11 (1) Lease Agreement dated as of September 6, 1995, by and between Research Grove Associates and AXENT. 10.11A Second Amendment dated September 18, 1998 to Lease Agreement by and between Research Grove Associates and AXENT. 10.12 (1) Lease of Real Property dated as of March 7, 1995, by and between TNK Associates and AXENT. 10.17 (4) Memorandum of Understanding regarding certain compensation and severance matters relating to Richard A. Lefebvre, dated July 22, 1997. 10.17A (8) First Amendment to Memorandum of Understanding relating to Richard Lefebvre. 10.29 (3) Amended Agreement and Plan of Merger among AXENT, Axquisition, Inc., and AssureNet Pathways, Inc, dated as of January 6, 1997 and amended February 26, 1997. 10.30 (5) AXENT's 1998 Employee Stock Purchase Plan. 10.31 (5) AXENT's 1998 Incentive Stock Plan. 10.32 (5) AXENT's Exchange Option Plan for Optionees of Raptor Systems, Inc. 10.33 (5) Agreement and Plan of Merger among AXENT, Axquisition Two, Inc. and Raptor Systems, Inc. dated as of December 1, 1997. 10.34 (6) AXENT's Executive Severance General Guidelines. 22 10.35 (6) Lease Agreement dated as of April 23, 1998 by and between Pracvest and AXENT. 10.36 (6) Lease Agreement dated as of May 6, 1997 by and between CC&F Second Avenue Trust and Raptor Systems, Inc. 10.36A (6) First Amendment to Lease dated as of December 15, 1997 by and between CC&F Second Avenue Trust and Raptor Systems, Inc. 10.37 (7) Share Exchange Agreement dated as of March 29, 1999 by and during AXENT and the holders of all of the shares of capital stock, share capital and warranty of CKS Limited. 10.38 (8) Software Product Purchase and License Agreement dated as of March 31, 1999 by and between AXENT and Raxco Software, Inc. 10.39 (10) AXENT'S 1999 Incentive Stock Plan. 10.40 (11) AXENT'S 1999 PassGo Technologies Exchange Option Plan. 21.1 (9) Subsidiaries of the Registrant. 27.1 * Financial Data Schedule 27.2 * Financial Data Schedule (1998 Restated) - ------------------------------------------------------------------------------- (1) Previously filed as an exhibit to AXENT's Registration Statement on Form S- 1 (File No. 333-01368) and incorporated herein by reference. (2) Previously filed as an exhibit to AXENT's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1996. (3) Previously filed as an exhibit to AXENT's Registration Statement on Form S- 4 (File No. 333-20207) and incorporated herein by reference. (4) Previously filed as an exhibit to AXENT's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1997. (5) Previously filed and incorporated herein by reference as an exhibit to AXENT's Registration Statement on Form S-4 (File No. 444-43265) and incorporated herein by reference. (6) Previously filed as an exhibit to AXENT's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference. (7) Previously filed as an exhibit to AXENT's Current Report on Form 8-K filed in April 1999 and incorporated herein by reference. (8) Previously filed as an exhibit to AXENT's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference. (9) Previously filed as an exhibit to AXENT's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-28100) and incorporated herein by reference. (10) Previously filed as an appendix to AXENT's definitive proxy statement dated April 30, 1999 and incorporated herein by reference. (11) Previously filed as an exhibit to AXENT's Registration Statement on Form S- 8 (File No. 333-83329) and incorporated herein by reference. * Filed herewith. (b)AXENT filed two reports on Form 8-K during the three month period ended June 30, 1999. A report on Form 8-K was filed in April 1999 reporting information under item 2 regarding the acquisition of CKS Limited and PassGo; item 7 financial statements were filed by amendment to that report on June 14, 1999. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AXENT TECHNOLOGIES, INC. Date: August 13, 1999 By: -------------------------------- Robert B. Edwards, Jr. Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 24 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF AXENT TECHNOLOGIES, INC. AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 97,985,000 8,774,000 29,336,000 3,518,000 422,000 136,180,000 20,917,000 9,145,000 187,273,000 35,067,000 0 0 0 558,000 151,648,000 187,273,000 0 47,873,000 0 6,864,000 53,113,000 310,000 0 (12,104,000) 1,717,000 (8,269,000) 0 0 0 (8,269,000) (0.30) (0.30)
EX-27.2 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF AXENT TECHNOLOGIES, INC. AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 51,173,000 43,821,000 25,564,000 3,541,000 131,000 122,886,000 10,934,000 5,087,000 137,471,000 24,982,000 0 0 0 508,000 111,981,000 137,471,000 0 42,871,000 0 4,246,000 47,945,000 60,000 0 (9,320,000) (178,000) (5,897,000) 0 0 0 (5,897,000) (0.24) (0.24)
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