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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21059
ACE*COMM CORPORATION
(Exact name of registrant as specified in its charter)
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Maryland 52-1283030
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer I.D. No.)
704 Quince Orchard Road
Gaithersburg, Maryland 20878 20878
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (301) 721-3000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
$.01 par value
(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 requirement 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. [ ]
As of September 22, 1998 the aggregate market value of the voting
stock held by non-affiliates of the registrant (i.e. persons who are not
directors, officers or affiliated therewith) was approximately $7,134,310
million (3,567,155 shares of Common Stock at a closing price on the NASDAQ
National Market of $2 on such date). Outstanding as of September 22, 1998 were
8,854,939 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its annual
meeting to be held on November 17, 1998 are incorporated by reference in Part
III.
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ACE*COMM CORPORATION
TABLE OF CONTENTS
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PART I
Item 1. BUSINESS 3
Item 2. PROPERTIES 9
Item 3. LEGAL PROCEEDINGS 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 9
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 10
Item 6. SELECTED FINANCIAL DATA 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 21
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 21
Item 11. EXECUTIVE COMPENSATION 21
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 21
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 21
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 22
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ITEM 1. BUSINESS
This report contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such
statements, investors should specifically consider the various factors
identified in this Report which could cause actual results to differ materially
from those indicated by such forward-looking statements, including the matters
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Additional Factors Affecting Future Operating Results."
GENERAL BUSINESS DEVELOPMENT
ACE*COMM(R), incorporated in Maryland in 1983, develops, markets and
services Operations Support System ("OSS") hardware and software solutions for
data and voice networks operated by post, telephone and telegraph companies
("PTTs"), incumbent and competitive local exchange carriers ("CLEC"), national
and international long distance carriers, wireless carriers and large
enterprises operating internal networks. The Company's products perform
billing data collection, billing, customer care, network surveillance, alarm
processing and network traffic management functions. The Company's fiscal year
ends on June 30. Unless otherwise noted, all references to years in this
document are assumed to be fiscal.
PRODUCTS, SERVICES AND DISTRIBUTION
Data Collection
DCMS(R) - DCMS, Distributed Call Measurement System, is a hardware and
software based microprocessor controlled product which collects call record
data from telephone switches and electronically transmits them to a central
location, where the data can be processed for such purposes as billing, traffic
analysis and fraud management. The DCMS eliminates magnetic tape storage units
and manual data collection, reduces processing costs, increases the accuracy of
billing data and in turn, increases revenue. The most recent version of DCMS
is called Network Element Data Server ("NEDS") which can provide the data on a
real-time basis. The Company also offers the DCMS*PLUS(R), a version of DCMS
which is based on a new technology platform and is targeted at carriers in
emerging economy countries. These products can be adapted to support virtually
all wireline and wireless telephone switches.
N*USAGE - N*USAGE is a software product data collection platform that
enables service providers who operate data networks, including X.25, frame
relay and Asynchronous Transfer Mode ("ATM") to collect billing data and charge
their customers on a usage-sensitive basis. N*USAGE includes a data collection
front-end and a core processing engine which also acts as a mediator. The
front-end captures the data and secures it on disk, verifies it then converts
it to a normalized format. The core processing engine then aggregates the
billing and statistical data, augments any external information and correlates
and reformats the final data before distributing it to the end-user billing and
customer care or network management system. As more ATM and Frame Relay
switches are incorporated into carrier and enterprise networks, it will become
increasingly important for network managers to be able to bill customers based
on actual usage.
UPS-32(R) - UPS-32, Universal Polling System-32, is a software
product, designed to control the collection and transmission of call detail
records transmitted by multiple DCMS units and similar equipment of other
vendors. UPS-32 collects call data from dispersed switch sites, processes and
formats the data on a customer-defined schedule, and distributes the data to
the customer's billing center. The most recent version of UPS-32, CANS(R),
Central Access Network Server, collects and distributes data in real-time.
TREX*COMM(R) - TREX*COMM is a software product designed for local
exchange carriers who use network switches to provide customer premises voice
and data communication services for business customers, under a service concept
called CENTREX. TREX*COMM collects CENTREX call usage data from remote switch
sites and transfers it to the customers' data collection equipment. Records
can then be sorted by customer codes, group codes, or other identifying data
fields. Using standard modem protocols, customers can dial the TREX*COMM system
to retrieve their data. Running on UNIX platforms and used in conjunction with
a data collection product, such as the DCMS,
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TREX*COMM makes network information available to CENTREX subscribers to enable
them to manage and control data.
Surveillance, Alarm and Traffic Reporting
UTS-32(R) - UTS-32, Universal Traffic System-32 is a software product
designed to use information gathered by DCMS products or other providers' data
collection products to provide reports on system traffic and usage on a
periodic basis. UTS-32 produces hourly group traffic reports, multi-day study
reports, multi-day load balancing reports, multi-day group traffic analyses,
weekly historical usage reports, yearly trunk forecasting reports, and other
engineering information used to monitor and maximize the efficiency of the
system and enable the carrier to minimize down-time.
N*VISION(TM) - N*VISION, a successor to the Company's RTMS(R), Real
Time Management System, a system originally developed for use by long distance
carriers, monitors network data in real-time and provides, from a single
database, information for billing, fraud detection, subscriber management and
network management. The heart of N*VISION is a 600 gigabyte data warehouse.
N*VISION operates directly connected to network elements or employs the
Company's NEDS units to capture call records in real-time from remote
switches. N*VISION processing software presents the data for analysis within
seconds of call completion.
ANMS(R) - ANMS, AMAT Network Management System, monitors the elements
of a billing network. ANMS is a software product that collects and reports on
alarms sent by DCMSs, UPS-32s and other network components of the billing
system to assure that no billing data is lost. In addition, ANMS serves as a
user interface and collects system logs from the network elements.
Enterprise Network Management
NetPlus(R) Voice and Data Network Management System - The NetPlus
family of network management products consists of five systems designed to
automate network operations and management functions. These systems employ a
client server architecture and common database that permit them to operate
either independently or as an integrated whole. NetPlus products are
scaleable, providing flexibility to accommodate a broad range of network sizes
and multiple locations. The Company typically provides NetPlus products as
fully integrated hardware and software configurations. These products are
intended to manage private voice and data networks for 1,000 to 50,000 users.
These products allow a network to automate tasks such as alarm processing,
connectivity tracking, automatic cable and channel assignment, creation of
subscriber and circuit records, inventory control, traffic surveillance and
management, work order and trouble ticket processing, directory assistance and
subscriber billing.
Billing and Customer Care
NetPlus PRO*VISION - NetPlus PRO*VISION is an integrated suite of
software applications that addresses the billing, customer care and OSS
requirements of new and emerging carriers. NetPlus PRO*VISION is an advanced,
multi-service (voice, data, cable, long distance, etc.) management offering
that performs automated, integrated customer management, operations support and
network maintenance functions. NetPlus PRO*VISION consists of three major
subsystems, employing a client server architecture and common database that
permit them to operate independently or as an integrated product. The product
is continually enhanced, through tailoring to specific customer needs.
The Company's products have been installed in over 1,900 end user
sites in 55 countries. None of the Company's customers in 1998 contributed 10%
or more of the Company's revenue.
The Company maintains an ISO 9000 standard Quality Management Program
to monitor the quality of its products and detect errors and has an internal
Quality Management Committee to set quality objectives for the Company and a
Quality Assurance Department to implement and monitor compliance with the
applicable procedures. The Company has experienced no product returns in the
past 12 years as a result of undetected errors.
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SALES AND MARKETING
The Company sells products through direct sales and through the
Company's strategic alliance partners. See "Strategic Alliances and Other
Customers." At present, the Company is increasing its sales efforts through
more aggressive sales and marketing strategies. The Company is hiring
additional experienced, direct sales representatives and increasing the number
of strategic alliances by adding non-exclusive third party distribution
channels and alliances with new carriers, communications equipment
manufacturers, computer equipment manufacturers, software developers and
telecom consultants, to market the Company's products.
The sales process for new contracts generally requires a significant
investment of time and money and takes from several months to several years.
This process involves senior executives, sales representatives and support
personnel and typically requires presentations, demonstrations, field trials,
and lengthy negotiations. The Company spends significant time consulting with
strategic partners and end users to adapt its products to meet end user
requirements. Through ongoing sales, maintenance, training and systems
analysis, the Company maintains contact with its partners and end users to
determine their evolving requirements for updates and enhancements. Through
these processes, the Company gains valuable industry expertise, as well as the
ability to identify emerging industry applications and new sales opportunities.
STRATEGIC ALLIANCES AND OTHER CUSTOMERS
To develop, market and distribute its products effectively, the
Company has established strategic alliances with several large organizations:
Telecom equipment manufacturers, computer equipment manufacturers, telecom
systems integrators and other organizations (the "strategic alliance partners"
or "partners") to which the Company sells products for use by them or their
customers. The Company sells products through direct sales and through the
Company's strategic alliance partners. In 1998, sales to strategic alliance
partners and through the direct sales force comprised approximately 40% and 60%
of revenue, respectively. Each alliance is designed to do one or more of the
following: develop products designed to meet the needs of the partner or its
customers, establish a joint marketing relationship to include Company products
in systems sold by the partner, and create a reseller channel for the Company's
products.
A strategic alliance typically involves a formal agreement between the
Company and the strategic alliance partner, pursuant to which the parties agree
to develop and sell products to the partner for use by the partner, or by its
customers who are in such cases the end users of the Company's products. Each
agreement specifies the terms of the alliance, which may include parameters for
product development and product specifications, product pricing, the terms of
intellectual property ownership, and the responsibilities of each partner for
system integration, proposal drafting, sales and marketing. Once the products
are developed, the strategic alliance partner will issue specific orders to the
Company from time to time to purchase products, subject to the terms of the
overall agreement. The products are purchased and paid for by the partner
either for its own use or for resale to its customers directly or as part of a
larger system installation. Sales to a strategic alliance partner may vary
from period to period, depending on the timing of orders, which in turn may
depend on a number of factors, including the completion of the Company's
product development, the partner's marketing and sales efforts to its
customers, the timing of orders from the partner's customers, and various
internal financial, strategic and other factors specific to a partner or any of
its customers. Accordingly, sales to a partner in one period are not
necessarily predictive of sales to the partner in future periods.
The Company plans to continue to develop and expand its strategic
alliances with established, well-recognized industry leaders, as it believes
that these alliances enable the Company to increase sales most cost-effectively
and successfully position it to increase market penetration of its products.
The following is a list of the Company's more significant strategic
alliances:
- - ANSTEC, INC. - teamed with the Company and was selected, through a
competitive procurement process, to install the Company's NetPlus products
at multiple U.S. Air Force bases and other U.S. government installations
throughout the world.
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- - AT&T CORPORATION, FEDERAL SYSTEMS DIVISION - provides telephone systems for
the Executive Branch of the U.S. Government.
- - AT&T WORLD SERVICES, INC. ("AT&T WORLD SERVICES") - selected the DCMS and
UPS-32 as operating components of its billing analysis systems for
international toll gateways, to be sold to customers worldwide. These
systems are used to collect data for traffic analysis and billing.
- - CGH SYSTEMS, INC. - signed a Marketing Agreement to sell the Company's data
collection products into the Chinese market.
- - CINCINNATI BELL INFORMATION SYSTEMS, INC. ("CBIS") - CBIS is the largest
cellular billing service provider in the world. The Company and CBIS
developed a customized version of the DCMS which contains information
management software designed to meet the needs of cellular service
providers.
- - FORE SYSTEMS, INC. - formed an alliance with the Company to develop the
ForeView(R) Accountant, a new network module that will generate billing
information from FORE Systems' line of ATM (Asynchronous Transfer Mode)
switches.
- - GTE GOVERNMENT SYSTEMS - provides telephone systems at military facilities
throughout the world. The Company, as a subcontractor to GTE Government
Systems for network management products, installs and supports NetPlus
products at multiple military facilities.
- - GUANGZHOU RICCSON COMPUTING CO. LTD. - is installing the Company's DCMS
products as part of its own billing system, in the People's Republic of
China.
- - IBM - is marketing the Company's NEDS and CANS products as part of its own
billing system.
- - INTERNATIONAL COMPUTERS LIMITED - is installing the Company's NEDS and CANS
products along with its own billing system for Vodafone Limited in the
United Kingdom and the national cellular carrier in Indonesia.
- - ISI INFORTEXT - worked with the Company to develop a Windows NT Version of
NetPlus and is selling the Company's NetPlus products in the U.S. to
enterprise customers.
- - LUCENT TECHNOLOGIES, INC. (FORMERLY AT&T NETWORK SYSTEMS) - developed an
OEM version of the DCMS to be used in combination with Lucent's BILLDATS(R)
(corresponding to the Company's UPS-32/CANS product) collection software
with the Company. Lucent has deployed BILLDATS systems incorporating the
Company's products in various domestic and international teleprocessing
projects.
- - NEWBRIDGE NETWORKS AND SIEMENS - contracted with the Company to develop
usage sensitive billing software for Frame Relay and ATM products which
will be offered as part of their network and service management products.
- - POLARIS COMMUNICATIONS SERVICES, INC. - partner with the Company to supply
integration and application products/services to automate Regional Bell
Operating Company's ("RBOC's") CENTREX station message accounting services.
- - PRC - system integration contractor to the U.S. Army in Europe that
subcontracts to the Company for maintenance and technical services.
- - SAMSUNG ELECTRONICS COMPANY, LIMITED, LG INFORMATION AND COMMUNICATIONS,
LIMITED AND ILGIN CORPORATION - formed a consortium ("Korean Consortium")
to provide a billing data collection system for Korea Telecom, the national
carrier for the Republic of South Korea. The consortium has purchased
significant quantities of the Company's products for installation in the
Korea Telecom network.
- - STRATUS - sells the Company's N*VISION, UPS-32, and CANS products with its
computer platforms.
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- - TANDEM - is marketing the Company's UPS-32 and CANS products as components
of its hardware products.
- - TELEGLOBE CANADA, INC. - Teleglobe is the government chartered
international long distance provider for Canada. Teleglobe has developed
with the Company a data collection network, data warehouse and operator
display system to capture and monitor international traffic and usage data
and provide information for fraud detection and other OSS functions on a
real-time basis. The result of this cooperative development project was
the Company's N*VISION product, which is being marketed to other carriers
worldwide.
CUSTOMER SUPPORT
The Company believes that a high level of customer support is critical
to the Company's continuing success in developing relationships with its
strategic partners and end users. The Company offers technical customer
support 24 hours per day, seven days per week. Support is provided via
telephone, remote login, e-mail and, if necessary, on-site assistance. In
addition, the Company has established a World Wide Web site on the Internet to
keep customers informed of product developments. International customers are
supported directly by the Company or by local representatives that have been
trained by the Company. These representatives do not represent the Company
exclusively. The Company also conducts training classes for its strategic
partners and other customers.
The Company typically provides new customers with Customer Support for
a period of up to 24 months. This includes 24 hour, seven days per week
support, replacement parts, software upgrades, and Year 2000 enhancements,
when and if available. The Company also offers various levels of continuing
Customer Support after the initial warranty period expires through Technical
Support Agreements. In addition, the Company provides customers with support
on a time and materials basis.
BACKLOG
The Company defines backlog as signed contracts or purchase orders for
delivery of hardware and software products and services within the next year.
Backlog at June 30, 1998, 1997 and 1996 was approximately $11.2 million, $7.0
million and $10.4 million, respectively. Backlog, as defined, does not include
contracts for hardware and software products which require the further issuance
of purchase orders.
The Company's contracts are large and technically complicated and
require a significant commitment of management and financial resources from the
Company's customers. The development of a contract is typically a lengthy
process because it must address a customer's specific technical requirements
and often requires internal approvals that require substantial lead-time.
Accordingly, the Company may experience significant variations in revenue from
quarter to quarter, reflecting delays in contract signing or contract order
deliveries. In addition, contracts that involve software deliveries may
involve tailoring of the product to specific customer requirements, which can
delay final delivery of the order. No assurance can be given that current
backlog will necessarily lead to revenue in any specific future period.
COMPETITION
Competition in the market for the Company's products is driven by
rapidly changing technologies, evolving industry standards, frequent new
product introductions and enhancements and rapid changes in customer
requirements. To maintain and improve its competitive position, the Company
must continue to develop and introduce, on a timely and cost-effective basis,
new products and product features that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers.
The Company expects the continued growth of the traditional carrier
market, new emerging carrier market, and the large enterprise network
management market to encourage new competitors to enter the markets in the
future. The Company believes that the principal competitive factors in these
markets include specialized project management capabilities and technical
expertise, compliance with industry quality standards and protocols, customer
support, product features such as adaptability, scaleability and flexibility,
ability to integrate with other products, functionality
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and ease of use, product reputation, responsiveness to customer needs, and
timeliness of implementation. In the future, the Company will be required to
respond promptly and effectively to the challenges of technological change and
its competitors' innovations.
In the traditional carrier network products market, the Company's
current and prospective competitors include (i) large carriers which internally
develop full system products for themselves, tailored to their particular
specifications, (ii) companies, such as Axiom, Inc., Comptel and CGI, Inc.
("CGI") that can supply individual billing data collection components and (iii)
vendors that supply product components, including Hewlett-Packard Company
("HP"), IBM Corporation ("IBM"), Moscom Corporation ("Moscom"), Objective
System Integrators, Inc. ("OSI") and CGI.
In the new and emerging carrier market, the Company's current and
prospective competitors include (i) telecom equipment manufacturers that
provide network products such as Lucent and Ericsson, (ii) companies that
provide software applications for carriers, such as Stonehouse and Metasolv,
(iii) vendors that supply product components such as HP and IBM, (iv)
companies that provide billing and customer care applications such as Kenan
Systems, Scopus, and Clarify, and (v) companies that develop custom solutions
like AMS, Perot Systems and CSC.
In the enterprise network management products market, the Company's
current and prospective competitors include (i) companies that provide products
for telephony networks, such as Telco Research Corporation, Complimentary
Solutions, Inc., Stonehouse & Company ("Stonehouse"), Switchview, Inc., Moscom
and OSI and (ii) companies that provide products for data networks, such as
Remedy Corporation, Net Manage, Inc., Computer Associates International, Inc.,
FTP Software, Inc., Castle Rock Computing, HP, IBM and Sun Microsystems, Inc.
The Company believes that its ability to compete in its markets
depends in part on a number of competitive factors outside its control,
including the ability of others to develop technology that is competitive with
the Company's products, the price at which competitors offer comparable
products and services, the extent of competitors' responsiveness to customer
needs and the ability of the Company's competitors to hire, retain and motivate
key personnel.
The Company competes with a number of companies that have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition. As a result, the Company's
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
promotion and sale of their products than can the Company. There can be no
assurance that the Company's current or potential competitors will not develop
products comparable or superior to those developed by the Company or adapt more
quickly than the Company to new technologies, evolving industry trends or
changing customer requirements.
RESEARCH AND PRODUCT DEVELOPMENT
The Company's research and development efforts are focused on developing new
products to meet the growing needs of customers and on improving existing
products by incorporating new features and technologies. The Company believes
that the timely development of new products and enhancements is essential to
its maintaining its competitive position in the marketplace. In its research
and development efforts the Company works closely with customers, end users and
leading technology vendors, in tailoring new features which are subsequently
incorporated into future versions of products available to all customers. The
Company continually reviews opportunities to license technologies from third
parties when appropriate based on timing and cost considerations.
During the years 1998, 1997 and 1996, independent research and
development expenses were $2.4 million, $1.5 million and $1.0 million,
respectively.
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PROPRIETARY RIGHTS AND LICENSES
The Company does not currently hold any patents and relies on a
combination of copyright, trademark, contract and trade secret laws and
statutory and/or common law to maintain its proprietary rights to its products.
The Company believes that, because of, among other things, the rapid pace of
technological change in the telecommunication and software industries, patent
protection for its products is a less significant factor in the Company's
success than the knowledge, ability and experience of the Company's employees,
the frequency of product enhancements and the timeliness and quality of support
services provided by the Company.
The Company generally enters into confidentiality agreements with its
employees, consultants, customers and potential customers and limits access to,
and distribution of, its proprietary information. Use of the Company's
software products is usually restricted to specified locations and is subject
to terms and conditions prohibiting unauthorized reproduction or transfer of
the software products. The Company also seeks to protect its software,
including the source code, as a trade secret and as copyrighted work.
EMPLOYEES
At June 30, 1998, the Company employed a total of 175 employees. None
of the Company's employees are represented by a labor union. The Company has
experienced no work stoppages and believes that its employee relations are
good.
ITEM 2. PROPERTIES
The Company leases space at four office locations: Gaithersburg,
Maryland; Montreal, Canada; Flemington, New Jersey; and Orlando, Florida. The
Company believes that its facilities are adequate for its current needs and
that suitable additional space will be available as required. The Gaithersburg
offices are the Company's corporate headquarters and are used for product
assembly, software and engineering development, professional services and
support. The following sets forth information concerning the Company's
Gaithersburg facilities:
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LOCATION FOOTAGE LEASE EXPIRATION ANNUAL RENT
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Gaithersburg, Maryland 37,874 November 30, 2003 $653,000 (subject to
annual increases of
approximately
$19,000 and allocated
operating costs each
year)
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
current executive officers of the Registrant.
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NAME AGE POSITION
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George T. Jimenez 62 President, Chief Executive Officer and Chairman of the
Board
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S. Joseph Dorr 51 Vice President - Sales
Dr. Thomas V. Russotto 53 Vice President - Operations
Loretta L. Rivers 41 Secretary
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George T. Jimenez is the Chief Executive Officer of the Company and
has served as President, Treasurer and a Director of the Company since its
inception in 1983. From 1980 to 1983, Mr. Jimenez served as the President of
the Company's predecessor.
S. Joseph Dorr has been Vice President - Sales since March 1998 and a
Vice President of the Company since 1983. From 1983 to 1989, he served as
Corporate Secretary of the Company. From 1980 to 1983, he served as Director
of the Commercial Systems Division of the Company's predecessor and from 1983
to 1989 was Director of the Network Management Division.
Dr. Thomas V. Russotto has been Vice President - Operations since
March 1998. From 1988 to 1998, Dr. Russotto directed the Carrier Networks
Division and has been a Vice President of the Company since 1985. From 1983 to
1985, he served as Director of Product Development at the Company.
Loretta L. Rivers has been Corporate Secretary and Administrative
Supervisor of the Company since 1989 and has served in various capacities with
the Company since its inception in 1983.
The term of each executive officer will expire at the next annual
meeting of the Board of Directors which is scheduled to be held November 17,
1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS
COMMON STOCK PRICES
The following table sets forth for the periods indicated the highest
and lowest bid prices for the shares of common stock reported on the Nasdaq
National Market.
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YEAR ENDED JUNE 30,
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1998 1997
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HIGH LOW HIGH LOW
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1st Quarter (for 1997, since August 13) $ 23.88 $ 13.38 $ 13.88 $ 7.00
2nd Quarter 24.63 11.00 16.00 9.75
3rd Quarter 14.38 5.88 18.00 7.88
4th Quarter 8.88 5.06 23.13 7.63
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COMMON STOCKHOLDERS
As of September 22, 1998, there were 8,854,939 shares held by 64
shareholders of record.
DIVIDENDS
The Company has never declared or paid cash dividends on the Common
Stock. The Company currently intends to retain earnings, if any, to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. The terms of the Company's bank credit
facilities prohibit the payment of cash dividends. The future payment of cash
dividends, if any, is also within the discretion of the Board of Directors and
will
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depend on the future earnings, capital requirements, financial condition and
future prospects of the Company and such other factors as the Board of
Directors may deem relevant.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
The Company filed a registration statement on Form S-1, Registration
No. 333-06731, which became effective August 12, 1996 (the "Offering")
registering 2,500,000 shares of Common Stock, $.01 par value per share
("shares"). The Company previously reported Use of Proceeds from the Offering
on Forms SR. As a result of a change in the applicable disclosure rules, the
Company is hereby updating the disclosure previously made on such Forms. Item
11 of the Form SR filed for the period ended May 10, 1997 hereby is amended and
restated as follows as of June 30, 1998:
<TABLE>
<S> <C>
Construction of plant, building and facilities -
Purchase and installation of machinery and equipment $ 2,390,229
Purchase of real estate -
Acquisition of other business(es) -
Repayment of indebtedness 4,446,563
Working capital 9,152,817
Other purposes:
Redemption of Preferred Stock 308,000
Directors & Officers Insurance 155,750
</TABLE>
-11-
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each of the Company's
years in the five-year period ended June 30, 1998 and as of June 30, 1998,
1997, 1996, 1995 and 1994 are derived from the audited financial statements of
the Company.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- ------- ------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $ 22,465 $33,684 $19,983 $12,415 $14,523
Costs and operating Expenses:
Cost of products, software licenses
and services 13,325 17,627 10,836 6,579 7,675
--------- ------- ------- --------- ---------
Gross profit 9,140 16,057 9,147 5,836 6,848
Selling, general and administrative 17,029 11,254 6,751 6,049 5,473
Research and development 2,358 1,472 957 1,045 573
--------- ------- ------- --------- ---------
(Loss) income from operations (10,247) 3,331 1,439 (1,258) 802
Interest (income) expense, net (130) (191) 379 335 156
--------- ------- ------- --------- ---------
(Loss) income before income taxes (10,117) 3,522 1,060 (1,593) 646
Income taxes (898) 898 - - -
--------- ------- ------- --------- ---------
Net (loss) income $ (9,219) $ 2,624 $ 1,060 $(1,593) $ 646
========= ======= ======= ========= =========
Net (loss) income per share:
Basic $ (1.06) 0.35 $ 0.26 $ (0.53) $ 0.16
========= ======= ======= ========= =========
Diluted $ (1.06) 0.32 $ 0.18 $ (0.53) $ 0.11
========= ======= ======= ========= =========
Number of shares used in computing
net (loss) income per share
Basic 8,708 7,460 3,472 3,279 3,261
========= ======= ======= ======== =========
Diluted 8,708 8,152 5,829 3,279 5,777
========= ======= ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- ------- ---------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,956 $ 7,920 $ 369 $ 190 $ 147
Working capital (deficit) 5,978 17,864 1,897 (1,374) 590
Total assets 24,593 33,518 14,298 8,293 7,407
Total liabilities 11,808 11,809 12,187 7,414 4,943
Mandatorily redeemable preferred stock - - 2,262 2,122 1,982
Stockholders' equity (deficit) 12,785 21,709 (150) (1,242) 483
</TABLE>
The Company paid no dividend on its capital stock during any of the periods
reported above.
-12-
<PAGE> 13
SELECTED QUARTERLY INFORMATION
The following tables present certain unaudited statement of operations
data for each quarter of 1998 and 1997. These data have been derived from
the Company's unaudited financial statements and have been prepared on the same
basis as the Company's audited financial statements, which appear in this
Annual Report on Form 10-K. In the opinion of the Company's management, these
data include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such data. Such quarterly results are not
necessarily indicative of future results of operations. This information is
qualified by reference to, and should be read in conjunction with, the
Company's financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
FISCAL THREE MONTHS ENDED
----------------------------------------------------------------------------------------
1998 1997
-------------------------------------------- ------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1998 1998 1996 1996 1997 1997
--------- ---------- ---------- --------- --------- -------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $8,735 $ 5,491 $ 4,560 $ 3,679 $6,264 $7,258 $8,209 $11,953
Costs and operating expenses:
Costs of products, software
licenses and services 3,684 4,598 2,380 2,663 3,138 3,481 3,951 7,057
--------- ---------- ---------- -------- --------- -------- ----------- ---------
Gross Profit 5,051 893 2,180 1,016 3,126 3,777 4,258 4,896
Selling, general and
Administrative 3,343 3,963 5,437 4,286 2,135 2,511 2,806 3,802
Research and development 449 503 804 602 398 468 300 306
--------- ---------- ---------- -------- --------- -------- ----------- ---------
Income from operations 1,259 (3,573) (4,061) (3,872) 593 798 1,152 788
Interest expense (income),
net (52) (37) (29) (12) 53 (92) (85) (67)
--------- ---------- ---------- -------- --------- -------- ----------- ---------
Income (loss) before income 1,311 (3,536) (4,032) (3,860) 540 890 1,237 855
taxes
Income taxes 512 (1,335) 823 (898) - 266 470 162
--------- ---------- ---------- -------- --------- -------- ----------- ---------
Net income (loss) $ 799 $(2,201) $(4,855) $(2,962) $ 540 $ 624 $ 767 $ 693
========= ========== ========== ======== ========= ======== =========== =========
Net (loss) income per share:
Basic $ 0.09 $ (0.25) $ (0.55) $ (0.34) $ 0.09 $ 0.08 $ 0.10 $ 0.08
========= ========== ========== ======== ========= ======== =========== =========
Diluted $ 0.09 $ (0.25) $ (0.55) $ (0.34) $ 0.07 $ 0.07 $ 0.09 $ 0.08
========= ========== ========== ======== ========= ======== =========== =========
</TABLE>
The Company's quarterly operating results have in the past and will in
the future vary significantly as a result of the timing of contract execution,
orders for products, and completion and delivery of significant product orders.
Large orders typically are preceded by long sales cycles and, accordingly, the
timing of such an order has been and will continue to be difficult to predict.
Certain orders are for products that require additional tailoring to customer
requirements and, accordingly, vary in timing of delivery. The failure to
obtain, or delays in the delivery of, one or more large orders, for any reason,
could have a material adverse effect on the Company's results of operations and
financial condition. The Company's results also vary based on the type and
quantity of products shipped, the timing of product shipments, the relative
revenue mix in a given period and the resulting margins. The variations may be
material.
The timing of large orders depends on a variety of factors affecting
the capital spending decisions of the Company's customers, which in turn, can
affect the Company's quarterly operating results. These factors include
changes in governmental regulation, changes in the customers' competitive
environment, pricing policies by the Company or its competitors, personnel
changes, demand for the Company's products, the number, timing and significance
of new product and product enhancement announcements by the Company and its
competitors, the ability of the Company to develop, introduce and market new
and enhanced versions of its products on a timely basis, and the mix of direct
and indirect sales and general economic factors.
-13-
<PAGE> 14
The Company's sales cycle, from initial contact to contract execution,
orders for products and delivery of product, also varies substantially from
customer to customer and from project to project. The purchase of traditional
carrier network products, new and emerging carrier network products and
enterprise network management products generally involves a significant
commitment of customer capital and management time. The sales cycle associated
with the purchases of the Company's products is subject to a number of
additional significant risks, including customers' budgetary constraints and
internal acceptance reviews, over which the Company has little or no control.
The product delivery cycle varies from product to product depending on the
extent to which it requires tailoring to a customer's requirement and the
extent to which such requirements are fixed in advance or developed over time.
The Company's expense levels are based, in part, on its expectations
as to future revenue levels. If revenue levels are below expectations,
operating results will be materially adversely affected.
Based upon all of the foregoing, the Company believes that quarterly
revenue and operating results are likely to vary significantly in the future
and that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Further, it is likely that in some future quarter the Company's
revenue or operating results will be below the expectation of public market
analysts and investors. In such event, the price of the Common Stock could be
materially adversely affected.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company sells products to carriers and enterprises, both through
direct channels and through strategic alliance partners, for delivery to end
users in the United States and internationally. Since June 1994, the Company,
consistent with its strategic emphasis, has derived significant revenue from
sales of its data collection, surveillance, alarm and traffic reporting
products to traditional carriers. The Company expects such sales to continue
as a significant percentage of its revenue for at least the next several years.
The balance of the Company's revenue is derived from the sale of products and
software licenses to new and emerging carriers and to enterprise customers,
including agencies of the U.S. Government.
The Company's products typically are sold pursuant to contracts having
an aggregate value of several hundred thousand to several million dollars.
Contracts for the Company's data collection, surveillance, alarm and traffic
reporting products typically require the delivery of products, including
hardware and licensed software, along with installation, training and post
contract support services. Contracts for billing and customer care and
enterprise network management products typically require the Company to
license, in perpetuity, software applications and provide for hardware and
services that include installation, training and post contract support.
Software, hardware and services sold pursuant to new and emerging carrier and
enterprise network contracts are separately priced. At the expiration of the
post contract support period, customers are offered the opportunity to purchase
additional support services.
The Company derives revenues from software license fees, hardware
sales, and product related services. Revenue from hardware sales is recognized
upon delivery while revenue from product related services is recognized as the
services are rendered. The Company's software licenses to end users generally
provide for an initial license fee to use the product in perpetuity. Under
certain contracts, the Company licenses the source code of its software to
resellers for subsequent modification and resale. Revenue from software
licenses is recognized after the software has been delivered, significant
uncertainties regarding acceptance have expired and significant obligations
have been fulfilled. Costs relating to insignificant obligations are accrued.
Revenue from contracts with payment terms in excess of one year is recognized
to the extent of payments that are probable and due within one year. Revenue
related to obligations to provide post contract customer support is unbundled
from the license and recognized ratably over the term of the agreement.
Revenue from maintenance services is recognized ratably over the term of the
related agreement. None of the Company's customers in 1998 contributed 10% or
more of the Company's revenue. For contracts involving significant production,
modification or customization of hardware and software, revenue is recognized
using the percentage-of-completion method, based on the relationship of costs
incurred to estimated total costs of the project, which fairly reflects contract
performance milestones.
-14-
<PAGE> 15
The Company sells its products either as components in the products or
systems developed and marketed by its strategic partners or directly to end
users. The Company typically experiences higher margins in connection with its
direct sales contracts, offset in part by relatively higher sales and marketing
expenses.
The Company defines backlog as signed contracts or purchase orders for
delivery of hardware and software products and services within the next year.
Backlog at June 30, 1998, 1997 and 1996 was approximately $11.2 million, $7.0
million and $10.4 million, respectively. Backlog, as defined, does not include
contracts for hardware and software products which require the further issuance
of purchase orders.
The Company's revenue is typically concentrated among certain
customers, the largest of which in 1998 consisted of Logix, Samsung
Electronics, TELMEX, and Winstar. These customers represented approximately
8%, 8%, 7%, and 6% respectively of total revenue for the year ended June 30,
1998. Sales to three customers in Asia representing a single end user
comprised approximately 9% of total revenue for the year ended June 30, 1998.
Substantially all of the Company's revenue is derived from
dollar-denominated sales and in 1998 55% of total revenue was generated from
domestic sales. Although the Company had significant sales in Asia (23% of
total revenue in 1998) and in Canada and Mexico (11% of total revenue in 1998),
the Company does not have significant foreign operations. The Company's
customers are usually contractually obligated to pay for product in U.S.
dollars. All products are shipped from the United States pursuant to terms of
orders issued by customers.
The Company has experienced less favorable cash collection cycles in
both its international sales and its domestic sales in 1998 compared to 1997.
For 1998, days sales outstanding [365/(annual sales/average of year end
accounts receivable)] for sales to U.S. customers was 176 compared to 161 in
1997 (representing a 9% increase). Days sales outstanding for sales to foreign
customers was 182 in 1998 compared to 114 in 1997 (representing a 60%
increase), primarily due to delayed collections associated with the economic
crisis in Korea and the Asia Pacific region.
As a result of the size of most of its contracts and orders, the
significant length of sales cycles and the complexities which arise from time
to time in completing any given contract or order, the Company typically
experiences fluctuations in quarterly and year-to-year results. Marketing in
foreign countries, particularly in Asia and other emerging markets, frequently
requires extensive field testing and may result in delays in the timing and
closing of sales by the Company's strategic alliance partners, which in turn
may delay orders of the Company's products. The Company has experienced
significant delays in timing of revenue related to sales to end users in
overseas markets.
During 1997, the Company reclassified expenses for services provided
by certain strategic alliance partners in connection with the installation and
integration of the Company's products. As a result, certain fiscal 1996
amounts have been reclassified from selling, general and administrative expense
to cost of products, software licenses and services, to conform with 1997
financial statement presentation.
The Company's cost of products, software licenses and services
consists of the cost of product engineering and production, cost of customer
support personnel, license fees paid to third-party software vendors,
amortization of capitalized software development costs, the costs of hardware
purchased by the Company for incorporation into its products and expenses for
services provided by certain alliance partners in connection with the
installation and integration of the Company's products.
Selling, general and administrative expenses consist of costs to
support the Company's sales and administrative functions. Included within
these costs are salaries, bonuses, sales commissions, rent, reserves against
doubtful accounts receivable, insurance, depreciation. Also included are
costs associated with the company's participation in trade shows and industry
conferences, and related travel and other promotional costs.
Research and development expenses consist of personnel costs related
to the design and development of the Company's products. These costs are
expensed as incurred. However, computer software development costs incurred
after the technological feasibility of a product is established and until the
product is available for release to customers
-15-
<PAGE> 16
are capitalized. Capitalized software and purchased technology costs are
amortized on a product by product basis based on the greater of the ratio of
current sales to estimated total future sales or a straight-line basis over the
remaining estimated economic life of the product (no greater than three years)
including the current year.
YEARS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenue decreased 33% from $22.5 million compared to $33.7
million for 1997. The decrease of $11.2 million was caused by several factors.
First, the economic crisis in Korea and the Asia Pacific region significantly
reduced the amount of orders for the Company's DCMS hardware products compared
to the prior year. Secondly, the orders expected in 1998 from the Company's
continuing work as one of the subcontractors to the U.S. Air Force, were
indefinitely delayed in mid-1998. Finally, certain anticipated orders were not
placed until late in the fourth quarter of 1998 and had not been completed by
the end of the year.
Revenue from traditional carrier network products decreased as a percentage of
total revenue from 65% of total revenue in 1997 to 51% of total revenue in 1998
primarily as a result of the decrease in sales to Korea. Revenue from
enterprise network products decreased from 25% of total revenue in 1997 to 22%
of total revenue in 1998 primarily as a result of the decreased sales caused
from the delay in orders from the U.S. Airforce. Revenue from new and emerging
carriers such as Logix, Winstar Telecommunications, and Nextel increased from
10% of revenue in 1997 to 27% of revenue in 1998 primarily as a result of
increased sales of the new NetPlus PRO*VISION product. The Company believes
revenues from sales of its Netplus PRO*VISION products to new and emerging
carriers in North America will continue to increase in the future.
Gross Margins for 1998 were 41% compared to 48% for 1997. The decrease in the
gross margins was caused by the effect of certain fixed costs on lower volume
of revenue, particularly with regard to sales of DCMS hardware products, the
mix of products and services and the addition of approximately $334,000 of
additional reserves for inventory obsolescence. The Company expects gross
margins to improve as sales of the NetPlus PRO*VISION product increase, due to
higher gross margins for this product.
Selling General and Administrative expenses for 1998 were $17 million compared
to $11 million in 1997 (which represented 76% and 33% of revenue for 1998 and
1997 respectively) . A primary cause of the increase was due to the increased
personnel, fringe benefits and facilities costs associated with expansion of
the Company's marketing, sales and administrative functions in anticipation of
receiving significant orders from Korea and the Asia Pacific region before the
economic crisis impacted the Company's business. Additionally, the Company
increased its reserves for doubtful accounts receivables in 1998 by $2.5
million, considering the increased aging of accounts and the Company's
evaluation of the collectibility of its accounts receivable.
In April 1998, the Company completed a general reduction in staffing which
included administrative personnel. As a result of these staff reductions and
ordinary turnover, the Company expects selling, general and administrative
expenses to be lower as a percentage of revenue in 1999.
Research and Development expenses for 1998 were $2.4 million (11% of revenue)
compared to $1.5 million (4% of revenue) in 1997. The increase of $0.9
million was primarily due to the development of the Company's NetPlus
PRO*VISION product line for the new and emerging carrier market. The Company
plans to spend significant resources on research and development in future
periods in order to enhance its technology, which may have an adverse effect on
the Company's earnings.
Benefit for Income Taxes. The Company recognized a $898,000 benefit from
income taxes in 1998 compared to a $898,000 provision for income taxes in
1997. The benefit was recognized as a result of the utilization of the
Company's net operating losses which eliminated its deferred income tax
liability.
YEARS ENDED JUNE 30, 1997 AND 1996
-16-
<PAGE> 17
Revenue. Total revenue increased 69% from $20.0 million in 1996 to $33.7
million in 1997. The increase in revenue was attributable to increased sales
volume of the Company's products and software licenses. Revenue from
traditional carrier network products increased 64%, representing 65% of total
revenues, which growth resulted from increases in sales to foreign strategic
alliance partners that included the Korea Consortium and International
Computers Limited. Revenue from enterprise network products increased 29%,
representing 24% of total revenues, which growth resulted primarily from
increases in sales of software licenses to ISI Infortext, Tubedale
Communications and International Logistics Systems, Inc. Revenue from new and
emerging carriers, such as WinStar Telecommunications and SpectraNet
International, represents 10% of 1997 revenues up from 1% in 1996.
Cost of Products, Software Licenses and Services. Cost of products, software
licenses and services increased 63% to $17.6 million in 1997 from $10.8 million
in 1996 and decreased as a percentage of revenue to 52% from 54%, respectively.
The increase in costs is attributable to increased hardware cost and increased
labor expense associated with the increased annual sales volume and to
increased expenses for services provided by certain alliance partners. Gross
margins were 48% and 46% for years 1997 and 1996, respectively. The
improvement in gross margin was primarily the result of an increase in software
license revenue as a percentage of total revenues in 1997.
Selling, General and Administrative. Selling, general and administrative
expenses increased 67% to $11.0 million in 1997 from $6.8 million in 1996.
These expenses represented 33% and 34% of total revenue in 1997 and 1996,
respectively. The increased expenses were attributable to costs associated
with increased infrastructure required to support the Company's growth, costs
associated with increased sales and marketing efforts that include the cost of
an expanded sales force and increased rent incurred in conjunction with the
Company's relocation to a larger facility.
Research and Development. Research and development expense increased 54% to
$1.5 million in 1997 from approximately $1.0 million in 1996. The increase was
attributable to the addition of software development engineers and technical
consultants required to support the Company's product development activities.
As a percentage of revenue, research and development expense decreased to 4% in
1997 from 5% in 1996.
Provision for Income Taxes. The Company recorded a tax provision of
approximately $898,000 in 1997, representing an effective tax rate of 26%.
This rate was lower than the expected statutory income tax rate primarily due
to a decrease in the valuation allowance and utilization of foreign tax
credits. This provision represents an increase of approximately $898,000 over
1996 when no provision was recorded, the result of the provision being offset
by a similar decrease in the valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company had $2.9 million of cash and cash equivalents,
compared to $7.9 million at June 30, 1997. During 1998, the Company used $2.3
million in operations, $1.2 million for investment in property and equipment,
and $1.3 million for investment in capitalized software. The use of cash for
operations was primarily due to the funding of operating losses. Cash and cash
equivalents available in future periods may be significantly lower than that
available at year end, depending on the results of collections of accounts
receivable and of payments received in connection with contracts.
Accounts receivables, net of allowances for doubtful accounts, declined to
$10.0 million at June 30, 1998 from $16.1 million at June 30, 1997. Accounts
receivables include billed accounts receivables, unbilled accounts receivables
and an allowance for doubtful accounts. Billed accounts receivables declined
to $8.8 million at June 30, 1998 from $13.0 million at June 30, 1997 reflecting
a decline in revenue in 1998 as well as more active management of the
outstanding receivables. Billed accounts receivable at June 30, 1998 also
reflects the conversion of a $1.6 million account receivable which was
outstanding at June 30, 1997 into a secured note receivable. At June 30, 1998
the Company had collected approximately $0.5 million leaving a balance on the
note of $1.1 million, which, under the terms of the note is to be paid in full
by September 1999. Billed accounts receivables, before allowance for doubtful
accounts, at June 30, 1998 included $5.2 million over 90 days. Unbilled
accounts receivables rose slightly to $3.6 million at June 30, 1998 from $3.1
million at June 30, 1997. These receivables primarily represent contractual
payment terms which may not be billed for up to twelve months. During 1998,
the Company increased its allowance for doubtful accounts receivable by
-17-
<PAGE> 18
$2.5 million considering the increased aging of accounts and the Company's
evaluation of the collectibility of its accounts receivables. The Company
believes these reserves are adequate.
Gross inventories increased from $2.8 million at June 30, 1997 to $3.6 million
at June 30, 1998. The increase of $0.8 million was primarily due to the
purchase of hardware for a significant order which was received, but not
completed as of June 30, 1998. In addition the Company increased reserves for
inventory obsolescence from $15,000 at June 30, 1997 to $349,000 at June 30,
1998. This increase recognizes the obsolescence resulting from the rapidly
changing technology of the industry that the Company operates in and the value
of older inventory, which the Company maintains for support of long-term
maintenance contracts.
In April 1998, the Company obtained from Crestar Bank of Maryland ("Crestar") a
revolving credit facility ("line of credit") providing for borrowings of up to
$3.5 million which expires December 31, 1998. Borrowings under the line of
credit are subject to approval by the bank and the bank has the right to refuse
borrowing requests at any time. Interest on outstanding balances under the line
of credit is payable monthly at the LIBOR rate plus 2 1/2%. The line of credit
is secured by the general assets of the Company, requires compliance with
certain financial covenants, including positive net income and minimum tangible
net worth and, in the event of default, permits Crestar to accelerate any
outstanding obligations under the line of credit or under any other loans
outstanding from Crestar. At September 25, 1998, the Company's only borrowings
under the line of credit were letters of credit in the aggregate amount of
$767,000 (see below). In addition, the Company has term loans outstanding from
Crestar in the aggregate principal amount of $888,000 at June 30, 1998 (see
below). The Company also maintains its cash at accounts with Crestar. Crestar
recently notified the Company that it was in default of the line of credit as a
result of the Company's failure to comply with certain financial covenants. The
Company is in the process of seeking alternative financing. In the meantime,
Crestar has stated in writing, without waiving any of its rights, that it is not
taking action to enforce its rights and remedies under the line of credit
agreement. However, if the borrowings outstanding under the line of credit (i.e.
the letters of credit and term loans) are repaid in full on or before November
2, 1998, Crestar has agreed to waive its right to collect approximately $35,000
in termination fees. All amounts due under Crestar borrowings are classified as
current liabilities in the financial statements.
The Company currently is actively seeking alternative financing to replace its
line of credit. George T. Jimenez, the Chief Executive Officer of the Company
and a significant stockholder, has agreed that in the event that alternative
financing can not be obtained in a timely manner and that, at any time during
the next 12 months the Company's working capital becomes inadequate to support
the business at its then current level, he will make available through a loan
guarantee or a loan, for working capital in the principal amount of up to $3.5
million (less any amounts raised by the Company after September 28, 1998 from
financing activities or through the sale or pledge of assets). Such loan, if
any would bear interest at prime plus 2%, would be repayable out of the first
alternate funding available to the Company or upon a change of control, if any,
and would be collateralized by the assets of the Company.
In addition, Mr. Jimenez has agreed to provide an unconditional guarantee,
fully secured by cash or marketable securities, of the Company's reimbursement
obligation for any amounts paid by Crestar in connection with a $450,000 letter
of credit issued in connection with the Company's lease of its headquarters
building (see below). The Company has agreed to reimburse Mr. Jimenez for any
amounts that he is required to pay under such guarantee.
The Company believes that existing cash balances, cash flows from operations
and alternate sources of financing (including the financing referred to above
from Mr. Jimenez) will be sufficient to support the Company's working capital
requirements for at least the next twelve months. The Company's ability to
generate sufficient cash flows for working capital is dependent on the
Company's ability to increase sales and to receive from customers in a timely
fashion adequate payments in connection with its contracts. There is no
assurance that such sales or payment levels will be achieved. If cash flows
from operations are insufficient to satisfy the Company's working capital
requirements, the Company will be required to reduce expenses, raise additional
funds through debt or equity financings or sales of assets and/or consider
strategic alternatives. There can be no assurance that reductions in expenses
would be achievable in a timely manner or, if achieved, that they would not
have a material adverse effect on the Company's ability to generate revenues at
the levels achieved to date. Further, there is no assurance that adequate
additional funds will be available, in a timely manner or on terms favorable to
the Company.
During 1998, the Company paid down debt balances (including its capital lease
obligations) by $488,000. The long-term debt includes two term loans for
capital equipment and a capital lease obligation with monthly repayment terms,
which are due in varying monthly installment through June 2000 and June 2001.
At June 30, 1998, the balance of term loans and the capital lease obligation
was $1 million compared to $1.5 million at June 30, 1997. With the exception
of
-18-
<PAGE> 19
a capital lease for an office telephone system, all of the Company's term loans
are with Crestar. At June 30, 1998, the amount owed to Crestar for the term
loans was $888,000. These loans bear interest at the bank's prime rate and at
1% over the bank's prime rate, and are secured by accounts receivable,
inventory, specific equipment and by the Company's general assets. At June
30, 1998, the amount owed on the capital lease was $164,000 and is due in
monthly installments of principal plus interest (10.03%) through November
2001. As of September 28, 1998, the Company had made all required payments
under the terms of its loans and capital lease agreement.
Under the terms of its office lease, the Company maintains a letter of credit
under its line of credit with Crestar, which names the landlord as the sole
beneficiary and which may be drawn on by the landlord in the event of a
monetary default by the Company. The letter of credit required under the lease
for 1999 is $450,000 decreasing annually through 2003 to $100,000.
The Company maintains other letters of credit under its line of credit with
Crestar which at September 14, 1998 totaled $327,000. These letters of credit
represent performance guarantees under the terms of contracts the Company has
entered into with several of its customers and expire through October 31, 1998.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In October 1998, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which provides guidance in recognizing revenue on contracts with multiple
elements including software licenses and services and superseded the previous
authoritative literature (SOP 91-1). SOP 97-2 is effective for the Company for
transactions entered into after June 30, 1998. In February 1998, the AICPA
proposed deferring, for one year, the implementation date for certain
provisions of SOP 97-2. This standard is expected to result in more
conservative revenue recognition on software transactions than was allowed
under previous guidance.
In June 1997, the FASB issued SFAS No. 131 entitled "Disclosures about Segments
of an Enterprise and Related Information" which will become effective for the
Company's 1999 financial statements and will apply to quarterly reporting
beginning in the first quarter of 1999. This Statement may change the way
public companies, having segments, report information about their business in
annual financial statements and may require them to report selected segment
information in their quarterly reports issued to stockholders. It also
requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenues,
and its major customers. The Company is currently evaluating reporting and
disclosure requirements under this standard.
In June 1997, the FASB issued SFAS No. 130 entitled "Reporting Comprehensive
Income", which will become effective for the Company's 1999 year and will apply
to quarterly reporting beginning in the first quarter of 1999. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and it
components. All items that are required to be recognized under accounting
standards as components of comprehensive income must be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company's principal component of comprehensive income is net
income. This standard is not expected to materially affect the Company's
reporting and disclosure requirements.
ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS
ACE*COMM provides products to a technology driven industry sector.
Therefore, ACE*COMM's success is dependent in part upon factors beyond its
control. This report contains forward-looking statements relating to the
prospective operating results of the Company. The following are factors which
could affect ACE*COMM's future operating results. These factors are intended
to serve as a cautionary statement to statements that may be made, either
verbally or in writing, including those in any other forward-looking statements
made by or on behalf of, the Company:
To date, a significant portion of the Company's revenue has been
derived from substantial orders placed by large organizations. The Company
expects that in the future it will continue to be dependent upon a limited
number of customers in any given period for a significant portion of its
revenue. The Company's future success may depend upon
-19-
<PAGE> 20
the continued demand by such customers for its products and services. The
Company's results of operations and financial condition could be materially
adversely affected by the failure of anticipated orders to materialize and by
deferrals or cancellation of orders.
Sales to traditional carriers have provided and are expected to
continue to provide substantial revenue. The Company's business is dependent
upon the continued growth of the telecommunications industry, in the United
States and internationally, on the continued convergence of voice and data
networks and on the evolution and widespread adoption of emerging network
technologies. Any decline in the growth of the industry, the failure of these
markets to converge or the failure of these network technologies to evolve or
achieve widespread market acceptance could have a material adverse effect on
the Company.
A key element of the Company's business strategy is to develop
strategic alliances with leading companies that provide telecommunications
services or that manufacture and market network equipment in order to expand
the Company's distribution channels and enter new markets. There can be no
assurance that the Company will be able to continue to increase the number of,
or to expand, these types of relationships, in order to market its products
effectively, particularly internationally.
The Company's growth has placed significant demands on the Company's
administrative, operational and financial personnel and systems. Additional
expansion by the Company may further strain the Company's management, financial
and other resources. There can be no assurance that the Company's systems,
procedures, controls and existing space will be adequate to support continued
growth of the Company's operations. If the Company is unable to respond to and
manage changing business conditions, the quality of its products and services
and its results of operations could be materially adversely affected.
The new and emerging carrier market in the United States and overseas
represents a source of growing demand for the Company's products, software
licenses and services. In that this market segment is relatively new and in
that many of these organizations are in the early stages of their development,
financial resources may be limited and may adversely affect their ability to
pay for the Company's products, software licenses and services.
The Company derived approximately $10.2 million, or 45% of its total
revenues, from customers outside of the United States in 1998. The Company
anticipates that a significant amount of future revenues will be derived from
sales to end users in Asia, Europe and other areas of the world. These
revenues may be adversely affected by the changing economic conditions in
foreign countries, which, in turn, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's ability to successfully develop new, and enhance
existing, products, to service its customers, and to remain competitive depends
in large part on its ability to attract and retain highly qualified technical,
sales and marketing and management personnel. Competition for such personnel
is intense, and there can be no assurance that the Company will be able to
continue to attract and retain such personnel.
YEAR 2000
The Company has not completed a thorough assessment of the risks and costs
associated with the Year 2000 issue on internal hardware, software and
non-information technology systems nor has the Company addressed Year 2000
compliance of suppliers providing material incorporated into the Company's
products.
Management believes that risks associated with Year 2000 issues and related
contingency plan arrangements will be resolved such that Year 2000 issues are
adequately mitigated and ongoing operations are not disrupted.
The Company is establishing a program wherein systems will be assessed as to
Year 2000 compliance. This assessment will include internal infrastructure,
supplier readiness and product evaluation including information technology and
non-information technology systems and applications. This assessment will
include identifying areas of non-compliance, plans to address known exposures,
implementation of any system changes, validation of Year 2000 compliance and
contingencies to mitigate unknown risk. The Company has targeted Year 2000
exposures to be
-20-
<PAGE> 21
identified and addressed no later than June 1999. Attention and priority will
be placed on those systems considered critical to the ongoing operations,
requiring integration with other compliant systems and with longer lead-time
anticipated to remediate.
The cost of addressing the Company's Year 2000 issues has not been quantified,
as assessment of Year 2000 compliance has not been completed. However,
management is not aware of any Year 2000 compliance exposures which would
preclude ongoing operations during the next twelve months or which would result
in material short-term cash requirements. There can be no assurance that there
will not be a delay in, or increased costs associated with, the programs
indicated in this section. Since the assessment is ongoing, the potential
impact of these complications on the Company's financial condition and results
of operations cannot be determined at this time. If computer systems used by
the Company or its suppliers, the integrity of products provided to the
Company, or the software applications used in systems manufactured and sold by
the Company, fail or experience significant difficulties related to the Year
2000, the Company's operations and financial results could be materially
affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements, together with the
independent accountants' report thereon, appear at pages F-1
through F-18 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated by
reference to Proxy Statement for the 1998 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by
reference to Proxy Statement for the 1998 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this
report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by
reference to Proxy Statement for the 1998 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this
report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by
reference to Proxy Statement for the 1998 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this
report.
-21-
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) INDEX TO FINANCIAL STATEMENTS
The following Financial Statements of the Registrant are filed as part
of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................................................... F-2
Balance Sheets as of June 30, 1998 and 1997............................................................... F-3
Statements of Operations for the years ended June 30, 1998, 1997
and 1996......................................................................................... F-4
Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1998, 1997 and 1996............................................................... F-5
Statements of Cash Flows for the years
ended June 30, 1998, 1997 and 1996............................................................... F-6
Notes to Financial Statements............................................................................. F-7
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(a)(3) INDEX TO EHIBITS
See attached Index to Exhibits on page X-1 of this form 10-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the fourth quarter of
1998.
-22-
<PAGE> 23
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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.
ACE*COMM CORPORATION
By: /s/George T. Jimenez
------------------------------
George T. Jimenez
Chief Executive Officer
Date: September 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C> <C>
/s/George T. Jimenez President, Chief Executive Officer September 29, 1998
-------------------- and Chairman of the Board
(George T. Jimenez) (Principal Executive Officer and
Principal Financial Officer)
/s/Leslie Oleynik Controller September 29, 1998
----------------- (Principal Accounting Officer)
(Leslie Oleynik)
/s/Gilbert A. Wetzel Director September 29, 1998
--------------------
(Gilbert A. Wetzel)
/s/Paul G. Casner, Jr. Director September 29, 1998
----------------------
(Paul G. Casner, Jr.)
/s/Gary P. Golding Director September 29, 1998
------------------
(Gary P. Golding)
</TABLE>
-23-
<PAGE> 24
ACE*COMM CORPORATION
INDEX TO FINANCIAL STATEMENTS
The following Financial Statements of the Registrant are
filed as part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants............................................F-2
Balance Sheets as of June 30, 1998 and 1997.................................F-3
Statements of Operations for the years ended June 30,
1998, 1997 and 1996..............................................F-4
Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1998, 1997 and 1996...............................F-5
Statements of Cash Flows for the years ended June 30,
1998, 1997 and 1996..............................................F-6
Notes to Financial Statements................................................F-7
</TABLE>
F-1
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ACE*COMM Corporation
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of ACE*COMM
Corporation at June 30, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Washington, D.C.
September 29, 1998
F-2
<PAGE> 26
ACE*COMM CORPORATION
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,956 $ 7,920
Accounts receivable, net 9,985 16,120
Inventories, net 3,232 2,814
Notes receivable 825 -
Prepaid expenses and other 666 1,011
-------------------- --------------------
Total current assets 17,664 27,865
Property and equipment, net 4,069 3,470
Capitalized software development costs, net 2,461 2,077
Notes receivable 310 -
Other assets 89 106
-------------------- --------------------
Total assets $ 24,593 $ 33,518
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings $ 1,030 $ 527
Accounts payable 2,010 2,735
Accrued expenses 739 446
Accrued compensation 2,161 2,129
Accrued contract costs 3,577 3,551
Deferred income taxes - 103
Deferred revenue 2,169 510
-------------------- --------------------
Total current liabilities 11,686 10,001
Noncurrent borrowings 122 1,013
Deferred income taxes - 795
-------------------- --------------------
Total liabilities 11,808 11,809
-------------------- --------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, 0
shares issued and outstanding - -
Common stock, $.01 par value, 45,000,000 shares authorized,
8,807,049 and 8,550,582 shares issued and outstanding 88 85
Additional paid-in capital 19,822 19,530
(Accumulated deficit) retained earnings (7,125) 2,094
-------------------- --------------------
Total stockholders' equity 12,785 21,709
-------------------- --------------------
Total liabilities and stockholders' equity $ 24,593 $ 33,518
==================== ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 27
ACE*COMM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------------
1998 1997 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
Revenue - products, software licenses and services $ 22,465 $33,684 $19,983
Cost of products, software licenses and services 13,325 17,627 10,836
-------- ------- -------
Gross profit 9,140 16,057 9,147
Selling, general and administrative expense 17,029 11,254 6,751
Research and development expense 2,358 1,472 957
-------- ------- -------
(Loss) income from operations (10,247) 3,331 1,439
Interest income (247) (347) -
Interest expense 117 156 379
-------- ------- -------
(Loss) income before income taxes (10,117) 3,522 1,060
Income tax (benefit) provision (898) 898 -
-------- ------- -------
Net (loss) income $ (9,219) $ 2,624 $ 1,060
======== ======= =======
Basic net (loss) income per share $ (1.06) $ 0.35 $ 0.26
======== ======= =======
Diluted net (loss) income per share $ (1.06) $ 0.32 $ 0.18
======== ======= =======
Shares used in computing net (loss) income per share:
Basic 8,708 7,460 3,472
======== ======= =======
Diluted 8,708 8,152 5,829
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 28
ACE*COMM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------ ----------------------- ADDITIONAL
CLASS B PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
--------- ----------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995 1 $ 1 3,297 $ 33 $ 320
Accretion of preferred stock dividends - - - - (140)
Exercise of common stock options - - 293 3 163
Payment of stock subscriptions receivable - - - - -
Net income for the year ended June 30, 1996 - - - - -
--------- ----------- --------- ------------ -------------
Balance, June 30, 1996 1 1 3,590 36 343
Accretion of preferred stock dividends - - - - (17)
Conversion of preferred stock, Class C - - 1,531 15 2,264
Redemption of preferred stock, Class B (1) (1) - - (307)
Issuance of common stock pursuant to
initial public offering - - 2,645 26 16,083
Exercise of common stock options - - 838 8 2,060
Repurchase and retirement
of common stock - - (54) - (896)
Net income for the year ended June 30, 1997 - - - - -
--------- ----------- --------- ------------ -------------
Balance, June 30, 1997 - - 8,550 85 19,530
Exercise of common stock options - - 258 3 313
Repurchase and retirement
of common stock - - (1) - (21)
Net loss for the year ended June 30, 1998 - - - - -
--------- ----------- --------- ------------ -------------
Balance, June 30, 1998 - $ - 8,807 $ 88 $ 19,822
========= =========== ========= ============ =============
<CAPTION>
(ACCUMULATED
STOCK DEFICIT)
SUBSCRIPTIONS RETAINED
RECEIVABLE EARNINGS TOTAL
------------- ----------------- ---------------
<S> <C> <C> <C>
Balance, June 30, 1995 $ (6) $ (1,590) $ (1,242)
Accretion of preferred stock dividends - - (140)
Exercise of common stock options (117) - 49
Payment of stock subscriptions receivable 123 - 123
Net income for the year ended June 30, 1996 - 1,060 1,060
------------- ----------------- ---------------
Balance, June 30, 1996 - (530) (150)
Accretion of preferred stock dividends - - (17)
Conversion of preferred stock, Class C - - 2,279
Redemption of preferred stock, Class B - - (308)
Issuance of common stock pursuant to
initial public offering - - 16,109
Exercise of common stock options - - 2,068
Repurchase and retirement
of common stock - - (896)
Net income for the year ended June 30, 1997 - 2,624 2,624
------------- ----------------- ---------------
Balance, June 30, 1997 - 2,094 21,709
Exercise of common stock options - - 316
Repurchase and retirement
of common stock - - (21)
Net loss for the year ended June 30, 1998 - (9,219) (9,219)
------------- ----------------- ---------------
Balance, June 30, 1998 $ - $ (7,125) $ 12,785
============= ================= ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 29
ACE*COMM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (9,219) $ 2,624 $ 1,060
Adjustments to reconcile net (loss) income to net cash
(used for) provided by operating activities:
Depreciation and amortization 1,563 1,135 822
Changes in operating assets and liabilities:
Accounts receivable, net 6,135 (7,476) (3,941)
Notes receivable (1,135) - -
Inventories, net (418) (978) (872)
Other assets 362 (367) (490)
Accounts payable (725) (387) 1,876
Accrued expenses 319 3,082 623
Accrued compensation 32 996 702
Deferred income taxes (898) 898 -
Deferred revenue 1,659 (1,380) 893
----------------- ----------------- -----------------
Net cash (used for) provided by operating activities (2,325) (1,853) 673
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,203) (2,390) (417)
Additions to capitalized software development costs (1,343) (1,371) (927)
----------------- ----------------- -----------------
Net cash used for investing activities (2,546) (3,761) (1,344)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in line of credit 100 (4,446) 1,175
Other borrowings - 1,000 186
Payments on debt (450) (341) (683)
Principal payments under capital lease obligation (38) (21) -
Net proceeds from common stock issued - 16,109 -
Exercise of common stock options 316 2,068 49
Payment of stock subscriptions receivable - - 123
Repurchase and retirement of common stock (21) (896) -
Redemption of class B preferred shares (308) -
----------------- ----------------- -----------------
Net cash (used for) provided by financing activities (93) 13,165 850
----------------- ----------------- -----------------
Net (decrease) increase in cash and cash equivalents (4,964) 7,551 179
Cash and cash equivalents at beginning of year 7,920 369 190
================= ================= =================
Cash and cash equivalents at end of year $ 2,956 $ 7,920 $ 369
================= ================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 114 $ 164 $ 375
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES:
Accretion of preferred stock dividends $ - $ 17 $ 140
Purchase of equipment under capital lease $ - $ 222 $ -
Conversion of Class C preferred stock $ - $ 2,279 $ -
Exercise of common stock options $ - $ - $ 2
Notes received for exercise of common stock options $ - $ - $ 117
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 30
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
ACE*COMM Corporation ("ACE*COMM" or the "Company") develops, sells and services
Operations Support Systems ("OSS") hardware and software products for data and
voice networks. The Company's customers include telecommunications service
providers and large enterprises operating data and voice networks using
intranets and the Internet. The Company's products perform such functions as
billing data collection, network surveillance, alarm processing and network
management.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts reported in the financial statements. Actual results
could differ from those estimates. Significant estimates inherent in the
preparation of the accompanying financial statements include: management's
forecasts of contract costs and progress towards completion which are used to
determine revenue recognition under the percentage-of-completion method,
estimates of allowances for doubtful accounts receivable and inventory
obsolescence, tax valuation allowances, and estimates of the net realizable
value of capitalized software development costs.
REVENUE RECOGNITION
The Company derives revenues from software license fees, hardware sales and
product related services. Revenue from hardware sales is recognized upon
delivery while revenue from product related services is recognized as the
services are rendered. The Company's software licenses to end users generally
provide for an initial license fee to use the product in perpetuity. Under
certain contracts, the Company licenses the source code of its software to
resellers for subsequent modification and resale. Revenue from software
licenses is recognized after the software has been delivered, significant
uncertainties regarding acceptance have expired and significant obligations
have been fulfilled. Costs relating to insignificant obligations are accrued.
Revenue from contracts with payment terms in excess of one year is recognized
to the extent of payments that are probable and due within one year. Revenue
related to obligations to provide post contract customer support without charge
is unbundled from the license and recognized ratably over the term of the
agreement. Revenue from maintenance services is recognized ratably over the
term of the related agreement. For contracts involving significant production,
modification or customization of hardware and software, revenue is recognized
using the percentage-of-completion method, based on the relationship of costs
incurred to the estimated total costs of the project, which fairly reflects
contract performance milestones.
In October 1998, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which provides guidance in recognizing revenue on contracts with multiple
elements including software licenses and services and superseded the previous
authoritative literature (SOP 91-1). SOP 97-2 is effective for the Company for
transactions entered into after June 30, 1998. In February 1998, the AICPA
proposed deferring, for one year, the implementation date for certain
provisions of SOP 97-2. This standard is expected to result in more
conservative revenue recognition on software transactions than was allowed
under previous guidance.
CASH EQUIVALENTS
The Company considers all investments with an original maturity of three months
or less on their acquisition date to be cash equivalents.
INVENTORIES
F-7
<PAGE> 31
Inventories, which consist principally of purchased materials to be used in the
production of finished goods, are stated at the lower of cost, determined on
the first-in, first-out (FIFO) method, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related
equipment and vehicles of seven years. Leasehold improvements are amortized on
a straight-line method over the shorter of the improvements' estimated useful
lives or related remaining lease terms. Long-lived assets held and used by the
Company are reviewed for impairment whenever changes in circumstances indicate
the carrying value of an asset may not be recoverable.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company owns certain proprietary rights to computer software systems that
the Company has either developed or purchased and licensed to customers.
Purchased computer software and the related copyrights are capitalized at their
costs.
Research and development costs are expensed as incurred. However, computer
software development costs incurred after technological feasibility of a
product is established through the time when the product is available for
release to customers are capitalized. Capitalized software and purchased
technology costs are amortized on a product by product basis based on the
greater of the ratio of current sales to estimated total future sales or a
straight-line basis over the remaining estimated economic life of the product
(no greater than three years), including the current year. The Company
periodically evaluates its capitalized software costs for recoverability
against anticipated future revenues, and writes down or writes off capitalized
software costs if recoverability is in question.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The
Company adopted this statement during the second quarter of 1998, as required.
Accordingly, prior period earnings per share data have been restated to conform
with SFAS 128.
Basic earnings per share excludes dilution and is computed by dividing net
(loss) income by the weighted average of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
INCOME TAXES
Deferred income taxes are recognized for the expected future tax consequences
of temporary differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate fair value because of the
short maturity of these items.
The carrying amounts of debt issued pursuant to the Company's bank credit
agreements approximate fair value because the interest rates on these
instruments change with market interest rates.
RECLASSIFICATION
Certain prior year information has been reclassified to conform with current
year presentation.
F-8
<PAGE> 32
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------------
1998 1997
---------------------------- ----------------------------
<S> <C> <C>
Billed $ 8,829 $ 12,990
Unbilled 3,621 3,140
Allowance for doubtful accounts (2,465) (10)
---------------------------- ----------------------------
$ 9,985 $ 16,120
============================ ============================
</TABLE>
Unbilled receivables include costs and estimated profit on contracts in
progress which have been recognized as revenue but not yet billed to customers
under the provisions of specific contracts. Substantially all unbilled
receivables are expected to be billed and collected within one year. There were
no write-offs of accounts receivable in 1998, 1997 and 1996.
NOTES RECEIVABLE
In March 1998, the Company converted a $1.6 million account receivable,
outstanding from a prime contractor, to a secured interest-bearing promissory
note, payable over a term of 18 months. Principal and interest payments on the
note are due monthly through September 1999 at an interest rate of prime plus
1%. At June 30, 1998, the outstanding principle balance was $1.1 million, and
all principle and interest payments had been made in accordance with the
payment schedule outlined in the note agreement.
NOTE 4 - INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------------
1998 1997
---------------------------- ----------------------------
<S> <C> <C>
Inventories $ 3,581 $ 2,829
Allowance for obsolescence (349) (15)
---------------------------- ----------------------------
$ 3,232 $ 2,814
============================ ============================
</TABLE>
Inventories consist principally of purchased materials to be used in the
production of finished goods. There were no write-offs of inventories in 1998,
1997 and 1996.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------------
1998 1997
---------------------------- ----------------------------
<S> <C> <C>
Computer equipment $ 4,454 $ 3,594
Office equipment 1,153 908
Vehicles 42 42
Leasehold improvements 205 107
---------------------------- ----------------------------
5,854 4,651
Less accumulated depreciation and amortization (1,785) (1,181)
---------------------------- ----------------------------
$ 4,069 $ 3,470
============================ ============================
</TABLE>
Depreciation expense of property and equipment amounted to $604,000, $448,000
and $280,000 in 1998,
F-9
<PAGE> 33
1997 and 1996, respectively. At June 30, 1998 and 1997, office equipment
includes a capitalized lease in the amount of $222,000 and accumulated
depreciation of $35,000 and $13,000, respectively.
NOTE 6 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------
1998 1997
------------------------- -------------------------
<S> <C> <C>
Capitalized software development costs $ 7,282 $ 5,939
Less accumulated amortization (4,821) (3,862)
------------------------- -------------------------
$ 2,461 $ 2,077
========================= =========================
</TABLE>
Amortization expense of capitalized software amounted to $959,000, $687,000 and
$542,000 in 1998, 1997 and 1996, respectively.
NOTE 7 - BORROWINGS
The Company's borrowings consist of the following: (in thousands)
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------
1998 1997
------------------------- -------------------------
<S> <C> <C>
Installment note with Crestar Bank, due in monthly
installments through July 1, 2001, bearing
interest at the bank's prime rate (8.5% at June 30, 1998),
collateralized by general assets of the Company $ 771 $ 1,000
Installment notes with Crestar Bank, due in
monthly installments through June 2000, bearing interest
at the bank's prime rate (8.5% at June 30, 1998) plus
1%, collateralized by accounts receivable, inventory
and specific equipment. 117 339
Capital lease obligation for the use of an office telephone
system, principal plus interest (10.03%), due in monthly
installments through November 2001. 164 201
Line of credit with Crestar Bank, credit limit up to
$3.5 million due December 31, 1998, bearing interest at
LIBOR (5.66% at June 30, 1998) plus 2.5%, collateralized
by general assets of the Company. 100 -
------------------------- -------------------------
Total borrowings 1,152 1,540
Less current portion (1,030) (527)
------------------------- -------------------------
Noncurrent portion $ 122 $ 1,013
========================= =========================
Annual maturities of noncurrent borrowings
are as follows (in thousands):
2000 $ 47
2001 51
2002 24
-------------------------
Total $ 122
=========================
</TABLE>
F-10
<PAGE> 34
LINE OF CREDIT
In April 1998, the Company obtained from Crestar Bank of Maryland ("Crestar") a
revolving credit facility ("line of credit") providing for borrowings of up to
$3.5 million which expires December 31, 1998. Borrowings under the line of
credit are subject to approval by the bank and the bank has the right to refuse
borrowing requests at any time. Interest on outstanding balances under the line
of credit is payable monthly at the LIBOR rate plus 2 1/2%. The line of credit
is secured by the general assets of the Company, requires compliance with
certain financial covenants, including positive net income and minimum tangible
net worth and, in the event of default, permits Crestar to accelerate any
outstanding obligations under the line of credit or under any other loans
outstanding from Crestar. At June 30, 1998 the balance of borrowings under the
line of credit included a $100,000 draw on the line of credit, which was
subsequently paid in August of 1998, and letters of credit in the aggregate
amount of $743,000 (see Note 14). In addition, the Company has term loans
outstanding from Crestar in the aggregate principal amount of $888,000 at June
30, 1998. The Company also maintains its cash accounts with Crestar. Crestar
recently notified the Company that it was in default of the line of credit as a
result of the Company's failure to comply with certain financial covenants. The
Company is in the process of seeking alternative financing. In the meantime,
Crestar has stated in writing, without waiving any of its rights, that it is not
taking action to enforce its rights and remedies under the line of credit
agreement. However, if the borrowings outstanding under the line of credit (i.e.
the letters of credit and term loans) are repaid in full on or before November
2, 1998, Crestar has agreed to waive its right to collect approximately $35,000
in termination fees. All amounts due under Crestar borrowings are classified as
current liabilities in the financial statements.
The Company currently is actively seeking alternative financing to replace its
line of credit. George T. Jimenez, the Chief Executive Officer of the Company
and a significant stockholder, has agreed that in the event that alternative
financing can not be obtained in a timely manner and that, at any time during
the next 12 months the Company's working capital becomes inadequate to support
the business at its current level, he will make available, through a loan
guarantee or loan, working capital in the principal amount of up to $3.5
million (less any amounts raised by the Company after September 28, 1998 from
financing activities or through the sale or pledge of assets). Such loan, if
any would bear interest at prime plus 2%, would be repayable out of the first
alternate funding available to the Company or upon a change of control, if any,
and would be collateralized by the assets of the Company.
In addition, Mr. Jimenez has agreed to provide an unconditional guarantee,
fully secured by cash or marketable securities, of the Company's reimbursement
obligation for any amounts paid by Crestar in connection with a $450,000 letter
of credit issued in connection with the Company's lease of its headquarters
building (see Note 14). The Company has agreed to reimburse Mr. Jimenez for any
amounts that he is required to pay under such guarantee.
The Company believes that existing cash balances, cash flows from operations
and alternate sources of financing (including the financing referred to above
from Mr. Jimenez) will be sufficient to support the Company's working capital
requirements for at least the next twelve months. The Company's ability to
generate sufficient cash flows for working capital is dependent on the
Company's ability to increase sales and to receive from customers in a timely
fashion adequate payments in connection with its contracts. There is no
assurance that such sales or payment levels will be achieved. If cash flows
from operations are insufficient to satisfy the Company's working capital
requirements, the Company will be required to reduce expenses, raise additional
funds through debt or equity financings or sales of assets and/or consider
strategic alternatives. There can be no assurance that reductions in expenses
would be achievable in a timely manner or, if achieved, that they would not
have a material adverse effect on the Company's ability to generate revenues at
the levels achieved to date. Further, there is no assurance that adequate
additional funds will be available, in a timely manner or on terms favorable to
the Company.
NOTE 8 - RETIREMENT PLAN
The Company has a 401(k) plan, under which to be eligible, employees must have
completed six months of service and be at least 21 years of age and be credited
with 1,000 hours of service. No contributions were due or made by the Company
in 1998. During 1997 and 1996, Company contributions were approximately
$103,000 and $97,000, respectively.
F-11
<PAGE> 35
NOTE 9 - INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------
1998 1997 1996
---------------- ------------------- ----------------
<S> <C> <C> <C>
Tax assets:
Costs capitalized to inventory $ 460 $ 245 $ 253
Accruals deducted for tax 808 172 88
Net operating loss carryforwards 6,806 4,190 940
Tax credit carryforwards 572 575 292
Copyrights and patents 18 21 21
Other 97 - 4
---------------- ------------------- ----------------
Gross deferred tax assets 8,761 5,203 1,598
---------------- ------------------- ----------------
Tax liabilities:
Income on contracts (1,846) (1,224) (476)
Software costs deducted for tax (871) (810) (616)
Depreciation (456) (258) (229)
---------------- ------------------- ----------------
Gross deferred tax liabilities (3,173) (2,292) (1,321)
---------------- ------------------- ----------------
Net deferred tax asset 5,588 2,911 277
Valuation allowance (5,588) (3,809) (277)
---------------- ------------------- ----------------
Net deferred tax liability $ - $ (898) $ -
================ =================== ================
Current deferred tax liability $ - $ (103) $ -
Noncurrent deferred tax liability - (795) -
---------------- ------------------- ----------------
Net deferred tax liability $ - $ (898) $ -
================ =================== ================
</TABLE>
The components of the (benefit) provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------
1998 1997 1996
---------------- ------------------ ---------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State - - -
---------------- ------------------ ---------------
Total current - - -
---------------- ------------------ ---------------
Deferred
Federal (745) 745 -
State (153) 153 -
---------------- ------------------ ---------------
Total deferred (898) 898 -
---------------- ------------------ ---------------
Total $ (898) $ 898 $ -
================ ================== ===============
</TABLE>
The Company records a valuation allowance for deferred tax assets when it is
management's judgment that it is more likely than not that all or a portion of
a deferred tax asset will not be realized. In 1998, there was a net increase in
the valuation allowance of $1.8 million. This increase primarily relates to
additional income tax net operating losses generated from the current year
operating loss as well as from the deduction created by the exercise of
non-qualified stock options. Any income tax benefit resulting from the
utilization of operating losses will be recognized as a benefit against future
taxable income. Benefit resulting from the exercise of options will be
reflected in additional paid-in-capital (versus through the tax
F-12
<PAGE> 36
provision) when actually realized for tax purposes. Net operating loss deferred
tax assets generated from operating losses and deductions from option exercises
amounted to approximately $2.0 million and $4.8 million, respectively at June
30, 1998 ($381,000 and $3.8 million, respectively at June 30, 1997).
In 1998, the income tax benefit was comprised of a $898,000 benefit resulting
from the reversal of deferred tax liabilities based on the ability of the
Company to utilize current year losses to reduce future payment of such taxes.
The benefit was net of an increase in the valuation allowance of $825,000. In
1997, the provision for income taxes was comprised of $898,000 including a
reduction in the valuation allowance of $277,000. In 1996, the provision for
income taxes was comprised of a Federal and state provision of $458,000 which
was offset by a reduction in the valuation allowance of the same amount.
At June 30, 1998, the Company has available research credit carryforwards of
approximately $252,000, which are available to offset future income tax and
expire in years through 2007. The Company also has net operating loss
carryforwards for tax purposes of approximately $17.5 million that expire in
years 2007 through 2013. Ownership changes as defined by the Internal Revenue
Code, may limit the amount of net operating loss carryforwards that can be
utilized annually to offset future taxable income or liability.
The total income tax (benefit) provision for each year varied from the amount
computed by applying the statutory U.S. Federal income tax rates to net (loss)
income before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
<S> <C> <C> <C>
Income tax (benefit) provision at statutory rate $ (1,963) $ 1,287 $ 360
State income taxes net of Federal benefit (229) 178 49
Nondeductible expenses 79 70 24
Foreign tax credit - (259) -
Other 390 (101) 25
Change in valuation allowance 825 (277) (458)
------------------ ----------------- -----------------
Actual (benefit) provision $ (898) $ 898 $ -
================== ================= =================
</TABLE>
NOTE 10 - STOCKHOLDERS' EQUITY
STOCK OPTIONS
OMNIBUS STOCK PLAN ("OMNIBUS PLAN")
In connection with the Shareholder approved Omnibus Plan, the Company has
reserved 3,200,000 shares of Common Stock to grant nonqualified and incentive
stock options to officers and employees. The exercise price of each option
granted under the Omnibus Plan is determined by the Compensation Committee, and
is limited to a minimum of the fair market value of the Company's Common Stock
on the date of grant. The Omnibus Plan also provides for the issuance of
restricted stock, stock appreciation rights and phantom stock options. The
Company may grant options under the Omnibus Plan until September 18, 2007.
The terms of option grants and issuances of restricted stock, stock appreciation
rights and phantom stock options, including vesting and exerciseability, are
determined by the Compensation Committee. Options and phantom stock options
granted to date vest either immediately or over a period of one to eight years
from the date of grant, subject to accelerated vesting in certain events such as
a change of control, and expire upon the earlier of the employee's termination
or five or ten years from the date of grant. Certain options and phantom stock
options granted in 1997 and 1998 are further subject to accelerated vesting
within one year from the date of grant based on achievement of certain
pre-determined performance goals. Vested options and phantom stock options
become exercisable immediately upon vesting or within three years from the date
of grant. In connection with grants through June 30 1998, the Company had
772,621, 770,510, and 543,744 options and phantom stock options outstanding
subject to performance-based accelerated vesting arrangements at June 30, 1998,
1997 and 1996, respectively. As of June 30, 1998, 1997 and 1996, there were
outstanding phantom stock options totaling 8,082,
F-13
<PAGE> 37
3,082 and 0, respectively, and no restricted stock or stock appreciation
rights had been granted. Compensation cost associated with the 1998 and 1997
phantom stock option grants was immaterial.
During 1998, the Company re-priced 80,000 options with an original exercise
price of $17.75 to the $6.38 fair market value on the date of re-pricing. No
other terms of the options were modified. There were no modifications of
option terms in 1997 or 1996.
In July 1998, the Company re-priced 122,984 options and phantom stock options
with original exercise and base unit prices of $12.00 to the $5.00 fair market
value on the date of re-pricing. No other terms of the options or phantom
stock options were modified.
STOCK OPTION PLAN FOR DIRECTORS ("DIRECTORS' PLAN")
In connection with the Shareholder approved Directors' Plan, the Company has
reserved 200,000 shares of Common Stock to grant nonqualified stock options to
non-employee members of the Company's Board of Directors. The exercise price of
each option granted under the Directors' Plan is limited to a minimum of the
fair market value of the Company's Common Stock on the date of grant. The
Company may grant options under the Directors' Plan until July 1, 2000.
Options granted to directors through June 30, 1997 vest 4,500 shares each year
from the date of grant. Options granted subsequent to June 30, 1997 vest 3,000
shares each year from the date of grant. Vested options become exercisable
immediately upon vesting. Options granted under the Directors' Plan expire the
earlier of five years from date of grant, six months after death, resignation,
or removal without cause, or immediately upon removal for cause.
Information relating to all the plans is summarized as follows:
<TABLE>
<CAPTION>
OMNIBUS PLAN DIRECTORS' PLAN
----------------- ------------------ --------------------------------------------
WEIGHTED AVG WEIGHTED AVG
NUMBER OF SHARES SHARE PRICE NUMBER OF SHARES SHARE PRICE
----------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Outstanding Options at June 30, 1995 1,137,907 $ 0.54 63,000 $ 0.51
Granted 164,503 4.20 9,000 7.00
Exercised (266,206) 0.63 (27,000) 0.50
Expired (2,993) 0.82 (4,500) 0.62
----------------- ------------------ ------------------- -------------------
Outstanding Options at June 30, 1996 1,033,211 1.40 40,500 1.92
Granted 744,677 8.86 13,500 7.00
Exercised (806,960) 2.55 (31,500) 0.50
Expired (5,250) 12.00 - -
----------------- ------------------ ------------------- -------------------
Outstanding Options at June 30, 1997 965,678 6.13 22,500 7.00
Granted 689,883 7.67 9,000 17.50
Exercised (257,871) 1.22 - -
Expired (286,908) 10.48 - -
----------------- ------------------ ------------------- -------------------
Outstanding Options at June 30, 1998 1,110,782 $ 7.10 31,500 $ 10.00
================= ================== =================== ===================
Options exercisable at June 30, 1996 907,211 $ 0.62 31,500 $ 0.50
================= ================== =================== ===================
Options exercisable at June 30, 1997 584,697 $ 3.41 9,000 $ 7.00
================= ================== =================== ===================
Options exercisable at June 30, 1998 444,354 $ 6.18 18,000 $ 7.00
================= ================== =================== ===================
Options available for granting 749,181 - 105,500 -
================= ================== =================== ===================
</TABLE>
FINANCIAL ACCOUNTING STANDARDS NO. 123
F-14
<PAGE> 38
Effective June 30, 1997, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In
accordance with the standard, the Company has elected to continue to measure
compensation expense for its stock option plans using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company recorded no compensation cost
associated with stock options in 1998, 1997 and 1996.
The following table summarizes information about stock options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at June 30, 1998 Life (yrs) Exercise Price at June 30, 1998 Exercise Price
- ------------------ ------------------ ------------ -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.41 to $ 1.78 100,850 1.8 $ 0.69 100,850 $ 0.68
$ 5.33 to $ 7.10 811,109 7.7 $ 6.56 300,610 $ 6.86
$10.65 to $12.43 216,139 8.7 $ 11.95 55,710 $ 11.96
$14.20 to $15.98 5,184 3.6 $ 14.75 5,184 $ 14.74
$15.98 to $17.75 9,000 4.4 $ 17.50 0 $ 0.00
------------------ ----------------
1,142,282 462,354
================== ================
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes model. The weighted-average assumptions included in the
Company's fair value calculations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Expected life (years) 3-8 3-8 3
Risk-free interest rate 5-6 % 6 % 5-6 %
Expected volatility 81 % 77 % 0 %
Dividend yield 0 % 0 % 0 %
</TABLE>
The weighted average fair value of stock options granted under the stock option
plans during 1998, 1997 and 1996 was $5.48, $5.83 and $0.73 respectively. If
the Company determined compensation costs for these plans in accordance with
SFAS 123, the Company's net (loss) income and earnings per share would have
been:
<TABLE>
<CAPTION>
(amounts in thousands except
per share amounts) 1998 1997 1996
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Pro-forma amounts
Net (loss) income $ (9,893) $ 1,212 $ 1,004
======================= ======================= =======================
Basic (loss) income per share $ (1.14) $ 0.16 $ 0.25
======================= ======================= =======================
Diluted (loss) income per share $ (1.14) $ 0.15 $ 0.17
======================= ======================= =======================
</TABLE>
The SFAS 123 method of accounting does not apply to options granted prior to
January 1, 1995 and, accordingly, the resulting pro forma compensation cost may
not be representative of that to be expected in the future.
F-15
<PAGE> 39
NOTE 11 - MANDATORILY REDEEMABLE PREFERRED STOCK
On October 31, 1991, in connection with an investment agreement, the Company
sold 340,211 shares of Class C Preferred Stock at $5.14 per share. The Class C
Preferred stock consisted of two series. Series 1 stock (211,727 shares)
provided voting rights equal to the same number of shares of Common Stock and
Series 2 stock (128,484 shares) provided no voting rights but, if elected by a
majority of the holders of the Class C Preferred Stock, would become voting
shares on a one-to-one basis. Each share of Class C Preferred Stock could be
converted into Common Stock at any time by the holder.
Any shares not converted by designated dates were redeemable by the Company as
follows: one third of the shares on September 15, 1995, one-half of the
remaining shares on September 15, 1996, and all the remaining shares on
September 15, 1997. The redemption price was equal to $5.14 per share plus
accrued dividends. In the case of redemption, the holders were entitled to
receive accrued dividends, at a semi-annual rate of four percent, from November
1, 1992. The Company also had the right to force redemption, if certain
triggering events occur, at a price of $5.14 per share plus accrued dividends
from November 1, 1992, calculated at an annual rate of twelve percent.
In connection with the Company's initial public offering in August 1996, and
pursuant to the terms of the investment agreement, the shares were converted
into 1,530,950 shares of the Company's common stock.
Activity with respect to Class C Preferred Stock is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance, June 30, 1995 $ 2,122
Accretion of dividends 140
-----------------------------
Balance, June 30, 1996 2,262
Accretion of dividends 17
Conversion upon initial public offering (2,279)
-----------------------------
$
Balance, June 30, 1997 -
=============================
</TABLE>
NOTE 12 - EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following is a reconciliation of the numerators and denominators of basic
net (loss) income per common share ("basic EPS") and diluted net (loss) income
per common share ("Diluted EPS"):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
BASIC EPS:
Income (Numerator):
Net (loss) income $ (9,219) $ 2,624 $ 1,060
Less: Preferred stock dividends - (17) (140)
------------------ ------------------ ------------------
Net (loss) income available to common stockholders $ (9,219) $ 2,607 $ 920
================== ================== ==================
Shares (Denominator):
Weighted average common shares 8,708 7,460 3,472
================== ================== ==================
Basic EPS $ (1.06) $ 0.35 $ 0.26
================== ================== ==================
DILUTED EPS:
Income (Numerator):
</TABLE>
F-16
<PAGE> 40
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net (loss) income $ (9,219) $ 2,624 $ 1,060
Less: Preferred stock dividends - (17) (140)
Effect of dilutive securities:
Convertible preferred stock - 17 140
------------------ ------------------ ------------------
Net (loss) income available to common stockholders $ (9,219) $ 2,624 $ 1,060
================== ================== ==================
Shares (Denominator):
Weighted average common shares 8,708 7,460 3,472
Stock options - 486 826
Convertible preferred stock - 206 1,531
================== ================== ==================
Total weighted shares and equivalents 8,708 8,152 5,829
================== ================== ==================
Diluted EPS $ (1.06) $ 0.32 $ 0.18
================== ================== ==================
</TABLE>
Options to purchase 288,455 shares of Common Stock were outstanding during
1998, but were not included in the computation of diluted EPS because the
effect would have been anti-dilutive.
NOTE 13 - INITIAL PUBLIC OFFERING
On August 13, 1996, in connection with the Company's initial public offering,
2,875,000 shares of Common Stock, 2,645,000 of which were offered by the
Company, were sold at $7.00 per share. The net proceeds raised by the Company
totaled approximately $16.1 million.
The Mandatorily Redeemable Class C Preferred Stock was automatically converted
into 1,530,950 shares of the Company's Common Stock upon the completion of the
Company's initial public offering. No dividends were payable with respect to
the converted shares.
On August 28, 1996, the Company redeemed the Class B Preferred Stock for
$308,000 in accordance with its terms that required redemption upon transfer of
substantially all assets or of majority control of the Company.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
As collateral for performance on a long-term contract and to a ceding insurer,
the Company entered into a bond on November 28, 1995 under which the Company is
contingently liable in the amount of $1,175,000. This bond is in force until
November 28, 1998.
At June 30, 1998 the Company had a $450,000 letter of credit arrangement with
Crestar which guarantees the Company's performance to its landlord (see Note
7). The letter of credit requirement decreases annually through 2003 to
$100,000.
Additionally, at June 30, 1998, the Company had letter of credit arrangements
with Crestar totaling $293,000 which guarantee the Company's performance under
contracts (see Note 7). Subsequent to June 30, 1998, the Company entered letter
of credit arrangements totaling $34,000 with Crestar, which guarantee the
Company's performance under contracts (see Note 7). These letter of credit
arrangements expire through October 1998.
The Company leases certain office space under non-cancelable operating leases.
Lease terms range from two to seven years and include renewal options for
additional periods. Management expects that in the normal course of business,
leases will be renewed or replaced by other leases. The Company is committed
for the payment of minimum rentals under operating lease agreements through the
year 2004 in the following amounts (in thousands):
F-17
<PAGE> 41
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
- ------------------------------------------------------- -----------------------------
<S> <C>
1999 $ 772
2000 736
2001 693
2002 714
2003 736
Thereafter 310
-----------------------------
$ 3,961
=============================
</TABLE>
The total rental expense under operating leases was $813,000, $728,000 and
$330,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
NOTE 15 - EXPORT SALES AND SALES TO MAJOR CUSTOMERS
EXPORT SALES
The Company sells its products worldwide from its headquarters in Gaithersburg,
Maryland. The Company has no foreign operations. The following is a breakdown
of the Company's revenue by geographic area (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C>
U.S. $ 12,314 $ 12,770 $ 9,393
Canada and Mexico 2,557 7,746 7,993
Asia 5,178 11,186 1,998
Europe 858 1,203 599
South America 815 699 --
Africa and Middle East 743 80 --
-------------------- -------------------- --------------------
Total Revenue $ 22,465 $ 33,684 $ 19,983
==================== ==================== ====================
</TABLE>
SALES TO MAJOR CUSTOMERS
During 1998, there was no single customer or group of customers under common
control that represented 10% or more of total revenue. Sales to three customers
representing a single end-user in Asia comprised approximately 9%, 21% and 0%
of total revenue for 1998, 1997 and 1996, respectively. Sales to an end user in
Mexico comprised approximately 7%, 17% and 29% of the Company's revenues in
1998, 1997 and 1996, respectively.
F-18
<PAGE> 42
INDEX TO EXHIBITS
3.2* Articles of Amendment and Restatement dated November 18,
1991.
3.3* Articles of Amendment dated August 6, 1996.
3.5* Form of Articles of Amendment and Restatement of the
Company.
3.6* By-laws of the Company as amended to date.
4.1* Form of Specimen of Common Stock Certificate.
10.1* Supplier Agreement dated December 16, 1992 between the
Registrant and AT&T World Services, Inc.
10.2* Marketing Agreement dated June 18, 1990 between the
Registrant and AT&T World Services, Inc.
10.3* Subcontract Agreement dated February 24, 1994 between
Registrant and AT&T Corporation, Government Integrated
Solutions.
10.4** Authorized Distributor Agreement dated July 23, 1991 between
the Registrant and AmerInd, Inc.
10.5* Supply Contract dated August 17, 1994 between the Registrant
and Teleglobe Canada, Inc.
10.6* License Agreement dated August 1, 1995 between the
Registrant and Teleglobe Canada, Inc.
10.7* Subcontract No. 95-1350-01 dated November 8, 1995 between
the Registrant and ANSTEC, Inc.
10.8* Agreement of Subcontract dated April 24, 1994 between the
Registrant and the Communications Systems Division of GTE
Government Systems Corporation.
10.9* Agreement to Purchase Hardware, Render Services and License
and Sublicense the Use of Software dated October 11, 1995
between the Registrant and Telefonos de Mexico, S.A. de C.V.
*** Amended and Restated Omnibus Stock Plan.
*** Amended and Restated Stock Option Plan for Directors
(as amended as of 1997)
10.12** Form of Term Loan Note entered into Between the Company and
two Officers in Fiscal 1997
10.13** Form of Non-Qualified Stock Option Grant Agreement (certain
executive officers - fiscal 1997)
10.14** Form of Non-Qualified Stock Option Grant Agreement (certain
executive officers - fiscal 1997)
10.15** Executive Bonus Plan
10.16** Lease Between Principal Mutual Life Insurance Company and
the Company as Tenant dated August 6, 1996
10.17**** Collateral Assignment, Patent Mortgage and Security
Agreement between the Company and Crestar
Bank dated April 23,1998
10.18**** Loan and Security Agreement between the Company and Crestar
Bank dated April 23, 1998
10.19**** Revolving Note between the Company and Crestar Bank dated
April 23, 1998
23 **** Consent of Independent Accountants
27.1 **** Financial Data Schedule
99.1 **** Separation Agreement and General release
- ---------------------------
* Incorporated by reference to identically numbered exhibit filed as an
exhibit to the Registrant's Registration Statement on Form S-1 No.
333-06731
** Incorporated by reference to identically numbered exhibit filed as an
exhibit on Form 10-K filed September 30, 1997
*** Incorporated by reference in the Company's Proxy Statement filed on
October 21, 1997
**** Filed herewith.
X-1
<PAGE> 1
COLLATERAL ASSIGNMENT, PATENT MORTGAGE
AND SECURITY AGREEMENT
This Collateral Assignment, Patent Mortgage and Security Agreement (the
"Assignment") is made as of the 23rd day of April, 1998, by and between ACE*COMM
CORPORATION, a Maryland corporation ("Assignor"), and CRESTAR BANK ("Assignee").
RECITALS
Assignee has entered into a Loan and Security Agreement of even date
herewith (as amended, modified or supplemented from time to time, the "Loan
Agreement," the terms defined therein and not otherwise defined herein being
used herein as therein defined) with Assignor. It is a condition precedent to
the making of Loans by Assignee under the Loan Agreement that Assignor shall
have assigned certain property to Assignee in accordance with this Assignment.
NOW, THEREFORE, FOR VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF
WHICH ARE ACKNOWLEDGED, THE PARTIES HERETO AGREE AS FOLLOWS:
1. Assignment, Patent Mortgage and Grant of Security Interest. As
collateral security for the prompt and complete payment and performance of the
Obligations (as defined below), Assignor hereby assigns, transfers, conveys and
grants a security interest and mortgage to Assignee, as security, but not as an
ownership interest, in and to Assignor's entire right, title and interest in, to
and under the following (all of which shall collectively be called the
"Collateral"):
(a) All present and future United States registered copyrights and
copyright registrations, including, without limitation, the registered
copyrights listed in Exhibit A-1 to this Agreement (and including all of the
exclusive rights afforded a copyright registrant in the United States under 17
U.S.C. Section 106 and any exclusive rights which may in the future arise by act
of Congress or otherwise) and all present and future applications for copyright
registrations (including applications for copyright registrations of derivative
works and compilations) (collectively, the "Registered Copyrights"), and any and
all royalties, payments, and other amounts payable to Assignor in connection
with the Registered Copyrights, together with all renewals and extensions of the
Registered Copyrights, the right to recover for all past, present, and future
infringements of the Registered Copyrights, and all computer programs, computer
databases, computer program flow diagrams, source codes, object codes and all
tangible property embodying or incorporating the Registered Copyrights, and all
other rights of every kind whatsoever accruing thereunder or pertaining thereto;
(b) All present and future copyrights, or contract or license rights
arising from agreements by which Assignor is a licensee, which are not
registered in the United States Copyright Office (the "Unregistered Rights"),
whether now owned or hereafter acquired, including without limitation the
Unregistered Rights listed in Exhibit A-2 to this Agreement, and any and all
royalties, payments, and other amounts payable to Assignor in connection with
the
<PAGE> 2
Unregistered Rights, together with all renewals and extensions of the
Unregistered Rights, the right to recover for all past, present, and future
infringements of the Unregistered Rights, and all computer programs, computer
databases, computer program flow diagrams, source codes, object codes and all
tangible property embodying or incorporating the Unregistered Rights, and all
other rights of every kind whatsoever accruing thereunder or pertaining thereto.
The Registered Copyrights and the Unregistered Rights collectively are referred
to herein as the "Copyrights";
(c) All right, title and interest in and to any and all present and
future license agreements with respect to the Copyrights, including without
limitation the license agreements listed in Exhibit A-3 to this Agreement (the
"Licenses");
(d) All present and future accounts, accounts receivable and other
rights to payment arising from, in connection with or relating to the
Copyrights;
(e) Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, owned by Assignor;
(f) Any and all design rights which may be owned by Assignor now or
hereafter existing, created, acquired or held;
(g) All patents, patent applications and like protections including,
without limitation, improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same, including without limitation
the patents and patent applications set forth on Exhibit B attached hereto
(collectively, the "Patents"), and any and all royalties, payments, and other
amounts payable to Assignor in connection with the Patents, together with all
renewals and extensions of the Patents, the right to recover for all past,
present, and future infringements of the Patents, and all computer programs,
computer databases, computer program flow diagrams, source codes, object codes
and all tangible property embodying or incorporating the Patents, and all other
rights of every kind whatsoever accruing thereunder or pertaining thereto;
(h) Any trademark and servicemark rights, whether registered or not,
applications to register, and the entire goodwill of the business of Assignor
connected with and symbolized by such trademarks, including without limitation
those set forth on Exhibit C attached hereto (collectively, the "Trademarks"),
and any and all royalties, payments, and other amounts payable to Assignor in
connection with the Trademarks, together with all renewals and extensions of the
Trademarks, and the right to recover for all past, present, and future
infringements of the Trademarks;
(i) Any and all claims for damages by way of past, present and future
infringements of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
2
<PAGE> 3
(j) All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
(k) All amendments, extensions, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
(l) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
THE INTEREST IN THE COLLATERAL BEING ASSIGNED HEREUNDER SHALL NOT BE CONSTRUED
AS A CURRENT ASSIGNMENT, BUT AS A CONTINGENT ASSIGNMENT TO SECURE ASSIGNOR'S
OBLIGATIONS TO ASSIGNEE.
This Assignment secures the payment of all obligations of Assignor now or
hereafter existing under the Loan Agreement, including, but not limited to, the
Loans, the Revolving Notes, and all obligations, indebtedness and liabilities of
Assignor under this Assignment and each other Loan Document, and all other
obligations, indebtedness and liabilities of Assignor to Assignee, whether now
existing or hereafter arising, whether or not evidenced by notes or other
instruments, and whether such obligations, indebtedness and liabilities are
direct or indirect, fixed or contingent, liquidated or unliquidated, due or to
become due, joint, several, or joint and several (all such obligations of
Assignor being the "Obligations"). Without limiting the generality of the
foregoing, this Assignment secures the payment of all amounts that constitute
part of the Obligations and would be owed by Assignor to Assignee but for the
fact that they are unenforceable or not allowable due to the existence of a
bankruptcy, reorganization or similar proceeding involving Assignor.
2. Authorization and Request. Assignor authorizes and requests that the
Register of Copyrights and the Commissioner of Patents and Trademarks record
this conditional assignment.
3. Covenants and Warranties. Assignor represents, warrants, covenants and
agrees as follows:
(a) Assignor is now the sole owner of its Collateral, except for
non-exclusive licenses granted by Assignor to its Customers in the ordinary
course of business.
(b) Listed on Exhibits A-1 and A-2 are all material Copyrights owned
by Assignor, in which Assignor has an interest (excluding off-the-shelf licensed
software and databases), or which are used in Assignor's business. Listed on
Exhibit A-3 are all material Licenses pursuant to which Assignor has a right to
use the Collateral, in which Assignor has an interest (excluding off-the-shelf
licensed software and databases), or which are used in Assignor's business.
Listed on Exhibit B are all material Patents owned by Assignor, in which
Assignor has an interest, or which are licensed to Assignor for use in
Assignor's business. Listed on Exhibit C are all material Trademarks owned by
Assignor, in which Assignor has an interest, or which are used in Assignor's
business.
3
<PAGE> 4
(c) Each employee, agent and/or independent contractor of Assignor
who has participated in the creation of the property constituting the Collateral
has either executed an assignment of his or her rights of authorship to Assignor
or is an employee of Assignor acting within the scope of his or her employment
and was such an employee at the time of said creation.
(d) All of Assignor's present and future Collateral (including,
without limitation, software, computer programs and other works of authorship)
subject or entitled to United States copyright, patent or trademark protection,
the sale, licensing or other disposition of which results in royalties
receivable, license fees receivable, accounts receivable or other sums owing to
Assignor (collectively, "Receivables"), have been and shall be registered with
the United States Copyright Office or the United States Patent and Trademark
Office, as applicable, prior to the date Assignor includes any such Receivables
in the Borrowing Base, and Assignor shall provide to Assignee copies of all such
registrations promptly upon the receipt of the same.
(e) Assignor shall undertake all reasonable measures to cause its
employees, agents and independent contractors to assign to Assignor all rights
of authorship to any copyrighted material in which Assignor has or may
subsequently acquire any right or interest.
(f) Performance of this Assignment does not conflict with or result
in a breach of any agreement to which Assignor is bound, except to the extent
that certain intellectual property agreements prohibit the disclosure of
information or the assignment of the rights thereunder to a third party without
the licensor's or other party's consent and this Assignment constitutes an
assignment or requires such disclosure.
(g) During the term of this Assignment, without the prior written
consent of Assignee, Assignor will not transfer or otherwise encumber any
interest in the Collateral, except for non-exclusive licenses granted by
Assignor in the ordinary course of business or as set forth in this Assignment.
(h) Each part of the Collateral is valid and enforceable, and no part
of the Collateral has been judged invalid or unenforceable, in whole or in part,
and no claim has been made that any part of the Collateral violates the rights
of any third party.
(i) Assignor shall promptly advise Assignee of any material change in
the composition of the Collateral, including but not limited to any subsequent
ownership right of Assignor in or to any Trademark, Patent or Copyright not
specified in this Assignment.
(j) Assignor shall (1) protect, defend and maintain the validity and
enforceability of the Trademarks, Patents and Copyrights, subject to Assignor's
reasonable business judgment as to the value of the Trademark, Patent or
Copyright, and the cost of such defense, (2) use commercially reasonable efforts
to detect infringements of the Trademarks, Patents and Copyrights and promptly
advise Assignee in writing of material infringements detected, and (3) not allow
any Trademarks, Patents, or Copyrights to be abandoned, forfeited or dedicated
to the public without the written consent of Assignee, which shall not be
unreasonably withheld, unless Assignor determines that reasonable business
practices suggest that abandonment is appropriate.
4
<PAGE> 5
(k) Assignor shall promptly register the most recent version of any
of Assignor's Copyrights, Trademarks or Patents, if not so already registered,
that are material to Assignor's business, and shall, from time to time, execute
and file such other instruments, and take such further actions as Assignee may
reasonably request from time to time to perfect or continue the perfection of
Assignee's interest in the Collateral.
(l) This Assignment creates, and in the case of after acquired
Collateral, this Assignment will create at the time Assignor first has rights in
such after acquired Collateral, in favor of Assignee a valid and perfected first
priority security interest in the Collateral in the United States securing the
payment and performance of the Obligations upon making the filings referred to
in clause (m) below.
(m) To its knowledge, except for, and upon, the filing with the
United States Patent and Trademark office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights
necessary to perfect the security interests and assignment created hereunder and
except as has been already made or obtained, no authorization, approval or other
action by, and no notice to or filing with, any U.S. governmental authority or
U.S. regulatory body is required either (1) for the grant by Assignor of the
security interest granted hereby or for the execution, delivery or performance
of this Assignment by Assignor in the U.S. or (2) for the perfection in the
United States or the exercise by Assignee of its rights and remedies thereunder.
(n) All information heretofore, herein or hereafter supplied to
Assignee by or on behalf of Assignor with respect to the Collateral is accurate
and complete in all material respects.
(o) Assignor shall not enter into any agreement that would materially
impair or conflict with Assignor's obligations hereunder without Assignee's
prior written consent. Assignor shall not permit the inclusion in any material
contract to which it becomes a party of any provisions that could or might in
any way prevent the creation of a security interest in Assignor's rights and
interest in any property included within the definition of the Collateral
acquired under such contracts.
(p) Upon any executive officer of Assignor obtaining actual knowledge
thereof, Assignor will promptly notify Assignee in writing of any event that
materially adversely affects the value of any material Collateral, the ability
of Assignor to dispose of any material Collateral or the rights and remedies of
Assignee in relation thereto, including the levy of any legal process against
any of the Collateral.
4. Assignee's Rights. Assignee shall have the right, but not the
obligation, to take, at Assignor's sole expense, any actions that Assignor is
required under this Assignment to take but which Assignor fails to take, after
fifteen (15) days' notice to Assignor. Assignor shall reimburse and indemnify
Assignee for all reasonable costs and reasonable expenses incurred in the
reasonable exercise of its rights under this Section 4.
5. Inspection Rights. Assignor hereby grants to Assignee and its
employees, representatives and agents the right to visit, during reasonable
hours upon prior reasonable
5
<PAGE> 6
written notice to Assignor, any of Assignor's plants and facilities that
manufacture, install or store products (or that have done so during the prior
six-month period) that are sold utilizing any of the Collateral, and to inspect
the products and quality control records relating thereto upon reasonable
written notice to Assignor and as often as may be reasonably requested, but not
more than one (1) in every six (6) months.
6. Further Assurances; Attorney in Fact.
(a) Assignor will make, execute, acknowledge and deliver, and file
and record in the proper filing and recording places in the United States, all
such instruments, including, appropriate financing and continuation statements
and collateral agreements and filings with the United States Patent and
Trademarks Office and the Register of Copyrights, and take all such action as
may reasonably be deemed necessary or advisable, or as requested by Assignee, to
perfect Assignee's security interest in all Copyrights, Patents and Trademarks
and otherwise to carry out the intent and purposes of this Assignment, or for
assuring and confirming to Assignee the grant or perfection of a security
interest in all Collateral.
(b) Upon an Event of Default, Assignor hereby irrevocably appoints
Assignee as Assignor's attorney-in-fact, with full authority in the place and
stead of Assignor and in the name of Assignor, Assignee or otherwise, from time
to time in Assignee's discretion, upon Assignor's failure or inability to do so,
to take any action and to execute any instrument which Assignee may deem
necessary or advisable to accomplish the purposes of this Assignment, including:
(i) To modify, in its sole discretion, this Assignment without
first obtaining Assignor's approval of or signature to such modification by
amending Exhibit A-1, Exhibit A-2, Exhibit A-3, Exhibit B and Exhibit C,
thereof, as appropriate, to include reference to any right, title or interest in
any Copyrights, Patents or Trademarks acquired by Assignor after the execution
hereof or to delete any reference to any right, title or interest in any
Copyrights, Patents or Trademarks in which Assignor no longer has or claims any
right, title or interest; and
(ii) To file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral without the signature of Assignor where permitted by law.
7. Events of Default. The occurrence of any of the following shall
constitute an Event of Default under the Assignment:
(a) An Event of Default occurs under the Loan Agreement; or
(b) Assignor breaches or fails to perform or observe in any material
respect any representation, warranty or agreement made by Assignor in this
Assignment.
6
<PAGE> 7
8. Remedies. Upon the occurrence and continuance of an Event of Default,
Assignee shall have the right to exercise all the remedies of a secured party
under the UCC, including without limitation the right to:
(a) require Assignor to assemble any tangible property in which the
Collateral is embodied and in which Assignee has a security interest and to make
it available to Assignee at a place designated by Assignee,
(b) exercise any and all rights as beneficial and legal owner of the
Collateral, including, without limitation, any and all consensual rights and
powers with respect to the Collateral, and
(c) sell or assign or grant a license to use, or cause to be sold or
assigned or grant a license to use any or all of the Collateral or any part
thereof, in each case, free of all rights and claims of Assignor therein and
thereto, except to the extent such actions would violate restrictions against
assignments contained in any Collateral in which Assignor's rights arise by
contract or license. In that connection, Assignee shall have the right to cause
any or all of the Collateral to be transferred of record into the name of
Assignee or its nominee and the right to impose (i) such limitations and
restrictions on the sale or assignment of the Collateral as Assignee may deem to
be necessary or appropriate to comply with any law, rule or regulation having
applicability to such sale or assignment and (ii) requirements for any necessary
governmental approvals. To the extent not inconsistent with any license or
contract under which Assignor's rights arise, Assignee shall have a
nonexclusive, royalty-free license to use the Copyrights, Patents and Trademarks
to the extent reasonably necessary to permit Assignee to exercise its rights and
remedies upon the occurrence of an Event of Default. Assignor will pay any
expenses (including reasonable attorney's fees) incurred by Assignee in
connection with the exercise of any of Assignee's rights hereunder, including
without limitation any expense incurred in disposing of the Collateral. All of
Assignee's rights and remedies with respect to the Collateral shall be
cumulative.
9. Indemnity. Assignor agrees to defend, indemnify and hold harmless
Assignee and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Assignment, and (b) all
losses or expenses in any way suffered, incurred, or paid by Assignee as a
result of or in any way arising out of, following or consequential to
transactions between Assignee and Assignor, whether under this Assignment or
otherwise (including without limitation, reasonable attorneys fees and
reasonable expenses), except for losses arising from or out of Assignee's gross
negligence or willful misconduct.
10. Release. At such time as Assignor shall completely satisfy all of the
Obligations, Assignee shall execute and deliver to Assignor all assignments and
other instruments as may be reasonably necessary or proper to terminate
Assignee's security interest and any conditional assignment in the Collateral,
subject to any disposition of the Collateral which may have been made by
Assignee pursuant to this Assignment. For the purpose of this Assignment, the
Obligations shall be deemed to continue if Assignor enters into any bankruptcy
or similar proceeding at a time when any amount paid to Assignee could be
ordered to be repaid as a
7
<PAGE> 8
preference or pursuant to a similar theory, and shall continue until it is
finally determined that no such repayment can be ordered.
11. No Waiver. No course of dealing between Assignor and Assignee, nor any
failure to exercise nor any delay in exercising, on the part of Assignee, any
right, power, or privilege under this Agreement or under the Loan Agreement or
any other agreement, shall operate as a waiver. No single or partial exercise of
any right, power, or privilege under this Assignment or under the Loan Agreement
or any other agreement by Assignee shall preclude any other or further exercise
of such right, power, or privilege or the exercise of any other right, power, or
privilege by Assignee.
12. Rights Are Cumulative. All of Assignee's rights and remedies with
respect to the Collateral whether established by this Assignment, the Loan
Agreement, or any other documents or agreements, or by law shall be cumulative
and may be exercised concurrently or in any order.
13. Course of Dealing. No course of dealing, nor any failure to exercise,
nor any delay in exercising any right, power or privilege hereunder shall
operate as a waiver thereof.
14. Attorneys' Fees. If any action relating to this Assignment is brought
by either party hereto against the other party, the prevailing party shall be
entitled to recover reasonable attorneys fees, costs and disbursements.
15. Amendments. This Assignment may be amended only by a written
instrument signed by both parties hereto. To the extent that any provision of
this Agreement conflicts with any provision of the Loan Agreement, the provision
giving Assignee greater rights or remedies shall govern, it being understood
that the purpose of this Assignment is to add to, and not detract from, the
rights granted to Assignee under the Loan Agreement. This Assignment, the Loan
Agreement, and the documents relating thereto comprise the entire agreement of
the parties with respect to the matters addressed in this Assignment.
16. Severability. The provisions of this Assignment are severable. If any
provision of this Assignment is held invalid or unenforceable in whole or in
part in any jurisdiction, then such invalidity or unenforceability shall affect
only such provision, or part thereof, in such jurisdiction, and shall not in any
manner affect such provision or part thereof in any other jurisdiction, or any
other provision of this Assignment in any jurisdiction.
17. Counterparts. This Assignment may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute the same instrument.
18. Governing Law and Jurisdiction. This Assignment shall be governed by
the laws of the State of Maryland, without regard for choice of law provisions.
Assignor and Assignee consent to the nonexclusive jurisdiction of any state or
federal court located in Montgomery County, Maryland.
19. Confidentiality. In handling any confidential information, each of
Assignee and its agents shall exercise the same degree of care that its exercise
with respect to its own
8
<PAGE> 9
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Assignment
except that the disclosure of this information may be made (a) to the affiliates
of Assignee, (b) to prospective transferee or purchasers of an interest in the
obligations secured hereby, provided that they have entered into a comparable
confidentiality agreement in favor of Assignor and have delivered a copy to
Assignor, (c) as required by law, regulation, rule or order, subpoena judicial
order or similar order and (d) as may be required in connection with the
examination, audit or similar investigation of Assignee.
20. WAIVER OF RIGHT TO JURY TRIAL. ASSIGNEE AND ASSIGNOR EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO: (a) THIS AGREEMENT; OR (b) ANY OTHER PRESENT OR
FUTURE INSTRUMENT OR AGREEMENT BETWEEN ASSIGNEE AND ASSIGNOR; OR (c) ANY
CONDUCT, ACTS OR OMISSIONS OF ASSIGNEE OR ASSIGNOR OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
ASSIGNEE OR ASSIGNOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE.
[SIGNATURES ON FOLLOWING PAGE]
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Assignment on
the day and year first above written.
ADDRESS OF ASSIGNOR: ASSIGNOR:
ACE*COMM CORPORATION,
704 Quince Orchard Road a Maryland corporation
Gaithersburg, Maryland 20878
By:
---------------------------
Name:
-------------------------
Title:
------------------------
ADDRESS OF ASSIGNEE: ASSIGNEE:
CRESTAR BANK
6410 Rockledge Drive
Bethesda, Maryland 20817
By:
---------------------------
Name:
-------------------------
Title:
------------------------
10
<PAGE> 11
___________ OF ____________ )
) ss.
COUNTY OF _________________ )
On _____________________, 1998, before me, _____________________________
_______________________________________, Notary Public, personally appeared
_______________________________________________________________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
Witness my hand and official seal.
-------------------------------
Notary Public
(Seal)
______________ OF _________ )
) ss.
COUNTY OF _________________ )
On _____________________, 1998, before me, _______________________________
___________________________________, Notary Public, personally appeared
_______________________________________________________________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
Witness my hand and official seal.
-------------------------------
Notary Public
(Seal)
11
<PAGE> 12
Exhibit "A-1" attached to that certain Collateral Assignment, Patent Mortgage
and Security Agreement
EXHIBIT "A-1"
REGISTERED COPYRIGHTS
REG. NO. REG. DATE COPYRIGHT
- -------- --------- ---------
<PAGE> 13
Exhibit "A-2" attached to that certain Collateral Assignment, Patent Mortgage
and Security Agreement
EXHIBIT "A-2"
UNREGISTERED RIGHTS
DESCRIPTION OF COPYRIGHTS
<PAGE> 14
Exhibit "A-3" attached to that certain Collateral Assignment, Patent Mortgage
and Security Agreement
EXHIBIT "A-3"
DESCRIPTION OF LICENSE AGREEMENTS
<PAGE> 15
Exhibit "B" attached to that certain Collateral Assignment, Patent Mortgage and
Security Agreement
EXHIBIT "B"
PATENTS
<TABLE>
<S> <C> <C> <C> <C>
DOCKET NO. COUNTRY SERIAL NO. FILING DATE STATUS
- ---------- ------- ---------- ----------- -------
</TABLE>
<PAGE> 16
Exhibit "C" attached to that certain Collateral Assignment, Patent Mortgage and
Security Agreement
EXHIBIT "C"
TRADEMARKS
<TABLE>
<S> <C> <C> <C>
MARK COUNTRY SERIAL NO. STATUS
- ---- ------- ---------- ------
</TABLE>
<PAGE> 1
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT, dated as of the 23rd day of April, 1998,
is made by and between CRESTAR BANK, a Virginia banking corporation (the
Lender), and ACE*COMM CORPORATION, a Maryland corporation (the Borrower).
RECITALS
The Lender has agreed to provide working capital to the Borrower, subject
to the terms and conditions of this Agreement. Accordingly, for good and
valuable consideration, the receipt and sufficiency of which are acknowledged,
the Lender and the Borrower agree as follows:
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms
shall have the meanings assigned to them below, which meanings shall be equally
applicable to the singular and plural forms of the terms defined.
"Accounts Receivable" means, collectively, and includes all of the
following, whether now owned or hereafter acquired by the Borrower: all property
included within the definitions of "accounts," "chattel paper," "documents" and
"instruments" set forth in the UCC; all present and future rights to payments
for goods sold or leased or for services rendered, whether or not represented by
instruments or chattel paper, and whether or not earned by performance; contract
rights; all present and future rights to payments for computer software,
computer hardware or computer systems sold, leased or licensed; proceeds of any
letter of credit of which the Borrower is a beneficiary; all forms of
obligations whatsoever owed to the Borrower, together with all instruments and
documents of title representing any of the foregoing; all rights in any goods
that any of the foregoing may represent; any and all rights in any returned or
repossessed goods; and all rights, security and guaranties with respect to any
of the foregoing, including, without limitation, any right of stoppage in
transit.
"Affiliate" means, with respect to any specified Person, any other Person
that, directly or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of common stock, by contract or otherwise.
"Aging" means a schedule of all outstanding Receivables of the Borrower
showing the age of such Receivables in intervals of 30 days.
"Agreement" means this Loan and Security Agreement, as the same may be
amended, modified or supplemented from time to time.
<PAGE> 2
"Assignment of Claims Act" means, collectively, the Assignment of Claims
Act of 1940, as amended, 31 U.S.C. Section 3727, 41 U.S.C. Section 15, any
applicable rules, regulations and interpretations issued pursuant thereto, and
any amendments to any of the foregoing.
"Borrowing Base" means, at the time in question, 80% of Eligible Billed
Receivables.
"Borrowing Base Certificate" means a certificate of the Borrower
containing a computation of the Borrowing Base and certifying that no Default or
Event of Default has occurred and is continuing, in form and substance
satisfactory to the Lender.
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks are authorized or required to close under the laws of the
State, and, with respect to the determination of LIBOR, on which banks are open
for business in the London interbank market.
"Capital Lease" means any lease that has been or should be capitalized on
the books of the lessee in accordance with GAAP.
"Canada" means Ace*Comm Canada Corporation, a corporation organized and
existing under the laws of the Province of Quebec, Canada.
"Cash Management Agreement" means any applicable agreement between the
Borrower and the Lender pursuant to which funds are transferred automatically to
and from the Borrower's operating account or controlled disbursement account
with the Lender, as any such agreement may be amended, modified or supplemented
from time to time.
"Closing" means the initial disbursement of the Loans.
"Closing Date" means the date of the Closing.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and all regulations issued pursuant thereto.
"Collateral" means, collectively, and includes all Accounts Receivable,
Deposit Accounts, Equipment, General Intangibles, Intellectual Property,
Inventory, Investment Property and all other property of the Borrower in which a
Lien is granted to the Lender pursuant to this Agreement or any other Loan
Document.
"Communications" means Ace*Comm Communications, Inc., a Barbados
corporation.
"Covenant Compliance Certificate" means a certificate executed by a
Principal Officer of the Borrower, substantially in the appropriate form of
Exhibit A attached to this Agreement, containing a calculation of the financial
covenants contained in Section 5.8 below and certifying that no Default or
Event of Default has occurred.
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<PAGE> 3
"Customer" means any Person obligated on a Receivable.
"Customer List" means a schedule of all Customers of the Borrower, showing
the address of each Customer and a listing of the active contracts between the
Borrower and such Customer, which is otherwise in form and substance
satisfactory to the Lender.
"Date Affected Information Technology" means a system comprised of one or
more components including computer hardware, computer software or equipment with
computerized functions, which reads, produces or processes date data by input,
output or otherwise.
"Debt" means, collectively, and includes, without duplication, with
respect to any specified Person, (a) indebtedness or liability for borrowed
money (whether by loan, the issuance and sale of debt securities or the sale of
assets to another Person subject to an understanding or agreement, contingent or
otherwise, to repurchase such assets from such Person) or for the deferred
purchase price of property or services; (b) obligations as a lessee under a
Capital Lease; (c) obligations to reimburse the issuer of letters of credit or
acceptances; (d) all guaranties, endorsements (other than for collection or
deposit in the ordinary course of business) and other contingent obligations to
purchase, to provide funds for payment, to supply funds to invest in any other
Person or otherwise to assure a creditor against loss; (e) obligations under
interest rate swap, cap or collar agreements or similar agreements or
arrangements designed to protect that Person against fluctuations in interest
rates; (f) obligations under any foreign exchange contract, currency swap or
other similar agreements or arrangements designed to protect that Person against
fluctuations in currency values; and (g) obligations secured by any Lien on
property owned by the specified Person, whether or not the obligations have been
assumed.
"Default" means any event that, with the giving of notice, the lapse of
time, or both, would constitute an Event of Default.
"Default Rate" means the rate at which interest accrues on the loans upon
the occurrence of an Event of Default, determined in accordance with the
provisions of Section 2.2.
"Deposit Account" means any "deposit account", as defined in Section 9-105
of the UCC, whether now owned or hereafter acquired by the Borrower.
"Dollars" and "$" means the lawful currency of the United States of
America.
"Eligible Billed Receivables" means Eligible Receivables that have been
billed to the appropriate Customer, are aged not greater than 90 days from the
date of the initial invoice. For the purposes of this definition, the term
"initial invoice" shall mean the first invoice relating to the applicable goods
shipped or services rendered, and not any subsequent invoice relating thereto.
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<PAGE> 4
"Eligible Receivables" means Accounts Receivable of the Borrower (a) that
represent valid obligations incurred by a Customer for software, goods, services
licensed, shipped and delivered, installed or completed under valid contracts of
license, sale, or service that have been formally awarded to the Borrower for
which all required contract documents have been executed by the Borrower, and,
if the Government is the Customer, for which funds have been appropriated and
allocated; (b) that are due and payable not more than 30 days from the initial
invoice; (c) on which the Customer is not an Affiliate or Subsidiary of the
Borrower; (d) with respect to which the Borrower has no knowledge or notice of
any inability of the Customer to make full payment; (e) from the face amounts of
which have been deducted all payments, setoffs, amounts subject to adverse
claims made in writing to the Borrower, contractual allowances, bad debt
reserves and other credits applicable thereto; (f) that are subject to no Liens
other than those permitted by this Agreement; (g) that continue to be in full
conformity with the representations and warranties made by the Borrower to the
Lender in this Agreement; (h) with respect to which the Lender is and continues
to be satisfied with the credit standing of the Customer; (i) on which the
Customer is not a creditor of the Borrower; and (j) on which the Customer is not
a Foreign Customer, unless the Foreign Customer's obligations are secured by a
letter of credit acceptable to the Lender; (k) that are not subject to any
dispute; (l) with respect to which the applicable software, goods or services
have been accepted by the applicable Customer on an absolute sale basis and not
on a bill and hold sale basis, a consignment sale basis, a guaranteed sale
basis, a sale or return basis or on the basis of any other similar understanding
pursuant to which the Borrower would repurchase or accept a return of, or give a
credit for, any such software, goods or services; and (m) that are not subject
to any contingencies; provided, however, and without limiting any other
provisions of this Agreement with respect to the exclusion of Accounts
Receivable from the category of Eligible Receivables and the Borrowing Base,
that (1) if the Lender reasonably determines that the collectibility of any
Account Receivable makes it unacceptable for inclusion in the Borrowing Base and
gives written notice to the Borrower indicating the reasons for such
determination, then such Account Receivable shall thereafter be excluded from
the category of Eligible Receivables, (2) if more than 50% of the aggregate face
amount of Accounts Receivable owed by a Customer are aged 120 days or more, then
all Accounts Receivable owed by such Customer shall be excluded from the
category of Eligible Receivables, (3) in no case shall Eligible Receivables
include any Accounts Receivable representing or arising out of retainages,
holdbacks, progress billings, the final payment due under a Government Contract,
revenues recognized or costs incurred in excess of approved or allowed
reimbursement rates, cost overruns, unauthorized work or work beyond the scope
of a contract, rebillings or contracts secured by surety bonds; and (4) an
Account Receivable arising out of the sale, installation, licensing or other
disposition of Intellectual Property entitled to United States copyright, patent
or trademark protection shall not be an Eligible Receivable unless such
Intellectual Property, and an appropriately completed Intellectual Property
Assignment with respect thereto, shall be duly registered and filed with the
United States Copyright Office and the United States Patent and Trademark
Office, as applicable. If required by the Lender, no Eligible Receivable shall
be included in more than three month-end Borrowing Base calculations.
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"Equipment" means collectively and includes all of the following, whether
now owned or hereafter acquired by the Borrower: equipment and fixtures,
including, without limitation, computer hardware, computer software, computer
systems, furniture, machinery, vehicles and trade fixtures together with any and
all accessories, accessions, parts and appurtenances thereto, substitutions
therefor and replacements thereof, together with all other such items that are
included within the definitions of "equipment" and "fixtures" as set forth in
the UCC.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and all regulations issued pursuant thereto.
"Existing Notes" means the promissory notes made by the Borrower and held
by the Lender that are outstanding on the date hereof, as described on Schedule
1 to this Agreement.
"Event of Default" means any of the events specified as an "Event of
Default" under this Agreement, provided that any requirement for the giving of
notice, the lapse of time, or both, or any other condition, has been satisfied.
"Foreign Customer" means a Customer that is a foreign government, an
entity organized under the laws of a country other than the United States or an
individual who is not a United States citizen.
"Fully Date Capable" means the ability to correctly process date data
(including, but not limited to, reading, producing, calculating, comparing, and
sequencing date data) from, into, and between the twentieth and twenty-first
centuries) without material degradation in performance and without unusual
intervention, including correct and continuous processing during the transition
between 1999 and 2000, and correct processing of leap years.
"GAAP" means generally accepted accounting principles consistently
applied.
"General Intangibles" means, collectively, and includes all of the
following, whether now owned or hereafter acquired by the Borrower: all property
that is included within the definition of "general intangibles" as set forth in
the UCC; choses in action, causes of action and all other intangible property of
every kind and nature, including, without limitation, corporate or other
business records, inventions, designs, patents, patent applications, trademarks,
trademark applications, trade names, trade secrets, good will, registrations,
copyrights, licenses, franchises, customer lists, tax refunds, tax refund
claims, rights of claims against carriers and shippers, leases and rights to
indemnification.
"Government" means the United States of America or any agency or
instrumentality thereof.
"Government Contract" means any contract with the Government under which
the Borrower is a prime contractor or a subcontractor.
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<PAGE> 6
"Increased Costs" means any reserve, special deposit, capital adequacy
guideline or similar requirement relating to any extensions of credit or other
assets of the Lender, or the deposits with or other liabilities of the Lender,
that (a) is imposed as a result of any Regulatory Change or as a result of the
application of existing capital adequacy guidelines (including, without
limitation, any Regulatory Change or capital adequacy guideline that requires
that letters of credit issued, or lines of credit established, by the Lender be
classified as "risk assets" for purposes of, or otherwise be subject to the
provisions of, any capital adequacy guidelines applicable to the Lender), and
(b) increases the cost to the Lender of making, issuing or maintaining any Loan,
reduces the amount receivable by the Lender in connection with any Loan, or
reduces the rate of return on the Lender's capital as a consequence of its
obligations under this Agreement.
"Intellectual Property" means all copyrights (whether registered or
unregistered), copyright registrations, trademarks, servicemarks, patents,
patent applications and other property described as the "Collateral" in the
Intellectual Property Assignment.
"Intellectual Property Assignment" means a Collateral Assignment, Patent
Mortgage and Security Agreement, in substantially the form of Exhibit B attached
hereto, as the same may be amended, modified or supplemented from time to time.
"Interest Payment Date" means the first day of each calendar month.
"Inventory" means collectively and includes all of the following, whether
now owned or hereafter acquired by the Borrower: all goods, computer hardware,
computer software and computer systems held or intended for sale, lease,
installation or licensing by the Borrower, or furnished or to be furnished under
contracts of service, all raw materials, work in process, finished goods,
materials and supplies of every nature used or usable in connection with the
manufacture, packing, shipping, advertising or sale of any such goods, together
with all property including within the definition of "inventory" set forth in
the UCC.
"Investment Property" means all of the following, whether now owned or
hereafter acquired by the Borrower: all property that is included within the
definition of "investment property" as set forth in the UCC, including all
securities, whether certificated or uncertificated, security entitlements,
securities accounts, commodity contracts and commodity accounts, and all
financial assets held in any securities account or otherwise, and any commercial
paper, securities, repurchase agreements, deposit accounts or other instruments
or obligations purchased for the Borrower pursuant to a Cash Management
Agreement.
"LIBOR" means for each calendar month, the rate at which dollar deposits
with a one-month maturity are offered to leading banks in the London interbank
market at 11:00 a.m. (London time) on the first Business Day of such calendar
month, based on the British Bankers Association quotations published by an
On-Line Information Service, selected by the Lender, plus adjustments (expressed
as a percentage) for reserve requirements, deposit insurance
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<PAGE> 7
premium assessments, broker's commissions and other regulatory costs, all of the
foregoing as determined by the Lender's Funds Management Division in accordance
with its customary practices.
"Lien" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority or other security agreement, or preferential
arrangement, charge or encumbrance of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement, any
Capital Lease and the filing of any financing statement under the UCC or
comparable law of any jurisdiction to evidence any of the foregoing).
"Loans" means the loans to be made to the Borrower under this Agreement.
"Loan Documents" means this Agreement, the Revolving Note, the
Intellectual Property Assignment, any Cash Management Agreement, and any other
document now or hereafter executed or delivered in connection with the
Obligations, in evidence thereof or as security therefor, including, without
limitation, any life insurance assignment, pledge agreement, security agreement,
deed of trust, mortgage, guaranty, promissory note or subordination agreement.
"Maximum Amount" means $3,500,000; provided, however, that the Maximum
Amount shall be reduced by an amount equal to the aggregate of the undrawn
amounts of any letters of credit issued by the Lender for the account of the
Borrower and outstanding at any time.
"Net Income" means, for any Person for any period, the consolidated gross
revenues of such Person and its Subsidiaries for such period less all
consolidated operating and non-operating expenses (including taxes) of such
Person and its Subsidiaries for such period, all as determined in accordance
with GAAP.
"Obligations" means the Loans, the Revolving Note, the Existing Notes and
all other indebtedness and obligations of the Borrower under this Agreement and
the other Loan Documents, now existing or hereafter arising, of every kind and
description, direct or indirect, fixed or contingent, liquidated or
unliquidated, due or to become due, secured or unsecured, joint, several or
joint and several, as amended, modified, renewed, extended or increased from
time to time, including, without limitation, any overdrafts in any Deposit
Account maintained by the Borrower.
"On-Line Information Service" means a text line or other on-line
information service provided to the Lender by any of Reuters Information
Services, Inc., Knight-Ridder Financial/Americas, Dow Jones Telerate, Inc. or
Bloomberg Financial Markets News Services, or any comparable reporting service
selected by the Lender.
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<PAGE> 8
"Person" means an individual, partnership, corporation, business trust,
joint stock Borrower, trust, unincorporated association, joint venture,
governmental authority, limited liability company or other entity of whatever
nature.
"Primary Operating Account" means any deposit account or controlled
disbursement account on which the Borrower draws to pay all or substantially all
of its operating expenses.
"Prime Rate" means the rate of interest established and announced from
time to time by the Lender and recorded in its Central Credit Administration
Division as its Prime Rate, it being understood and agreed that the Prime Rate
is used as a reference for fixing the lending rate on commercial loans and is
not necessarily the lowest or most favorable rate of interest charged by the
Lender on such loans.
"Principal Officer" means the President, the Chief Executive Officer or
the Chief Financial Officer of the Borrower.
"Receivables" means the Accounts Receivable and the General Intangibles.
"Regulatory Change" means any change, after the date of this Agreement, in
any federal or state laws, rules and regulations, or interpretations thereof, or
the adoption after the date of this Agreement of any rules, interpretations,
directives or requests, applying to a class of financial institutions including
the Lender, under any federal or state laws or regulations by any court or
regulatory authority charged with the interpretation or administration thereof.
"Revolving Note" means the $3,500,000 promissory note, of even date
herewith, made by the Borrower and payable to the order of the Lender, as
amended, modified or supplemented from time to time.
"State" means the State of Maryland.
"Subsidiary" as to any Person, means a corporation, partnership, limited
partnership, limited liability company or other entity of which shares of stock
or other ownership interests having ordinary voting power (other than stock or
such other ownership interests having such power only by reason of the happening
of a contingency) to elect a majority of the board of directors or other
managers of such entity are at the time owned, or the management of which is
otherwise controlled, directly or indirectly through one or more intermediaries,
or both, by such Person. Unless otherwise qualified, all references to a
"Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary
or Subsidiaries of the Borrower.
"Tangible Net Worth" means, at any time, amounts that would be included
under stockholders' equity on the consolidated balance sheet of the Borrower and
its Subsidiaries, provided that, in any event, such amounts are to be net of
amounts carried on the books of the Borrower and its Subsidiaries for
capitalized software costs.
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<PAGE> 9
"Termination Date" means December 31, 1998, and any extension or
extensions thereof granted by the Lender in accordance with the provisions of
Section 2.1((f)) below.
"UCC" means the Uniform Commercial Code as adopted in the State, and all
amendments thereto.
SECTION 2. LOANS.
SECTION 2.1. AMOUNT AND PURPOSE.
(a) Subject to the terms and conditions of this Agreement, the Lender
may, in its sole and absolute discretion, make Loans to the Borrower from time
to time until the Termination Date in an aggregate principal amount not to
exceed at any one time outstanding the Maximum Amount. Up to the Maximum Amount,
the Borrower may borrow, repay without penalty and reborrow hereunder from the
date of this Agreement until the Termination Date; provided, however, that no
Loan will be disbursed by the Lender if, after such disbursement the aggregate
principal amount of the Loans would exceed the Borrowing Base. The Borrower
acknowledges and agrees that the Lender has no obligation to make Loans, even if
the Borrower is in compliance with all terms of the Loan Documents, and the
Lender may refuse to make a Loan at any time, and for any reason, without notice
to the Borrower.
(b) The proceeds of the Loans shall be used for short-term working
capital purposes and for no other purposes.
(c) The Borrower authorizes the Lender to make Loans from time to
time in amounts sufficient to pay checks drawn on the Borrower's operating
accounts with the Lender, subject to the limitation set forth in Section Section
2.1((a)) above, all as more particularly described in the Cash Management
Agreement. In addition, the Borrower may request that a Revolving Loan be made.
Any request for a Revolving Loan must be received by the Lender no later than
12:00 noon (Washington, D.C. time) on the date on which the Revolving Loan is to
be made. Each request must specify the amount of the Revolving Loan and, at the
option of the Lender, shall be accompanied by a current Borrowing Base
Certificate and a current Aging. The Lender, in its sole discretion, may accept
requests from the Borrower by telephone. If required by the Lender, any request
made by telephone shall include all of the information required by a current
Borrowing Base Certificate and a current Aging. Requests made by telephone shall
be confirmed in writing and delivered to the Lender, and if requested by the
Lender, accompanied by the current Borrowing Base Certificate and the current
Aging, within two Business Days after the date of the request. Loans may be
requested by those individuals designated by the Borrower from time to time in
written instruments delivered to the Lender; provided, however, that the
Borrower shall remain liable with respect to any Loan disbursed by the Lender in
good faith hereunder, even if such Loan is requested by an individual who has
not been so designated. The proceeds of each Loan will be credited to a Deposit
Account maintained with the Lender by the
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<PAGE> 10
Borrower pursuant to a Cash Management Agreement. The Borrower agrees to confirm
in writing from time to time, when and as requested by the Lender, the purpose
for which the proceeds of each Loan were used.
(d) The unpaid principal balance of the Loans shall bear interest at
a rate per annum equal to LIBOR plus 2.50%. The interest rate on the Loans shall
be determined based on LIBOR in effect as of the Closing Date and shall be
adjusted on the first Business Day of each calendar month thereafter to reflect
LIBOR then in effect, with each adjustment to be effective as of the first day
of such calendar month if not a Business Day. Payments of interest on each Loan
shall be made on each Interest Payment Date, beginning on the Interest Payment
Date next succeeding the date of disbursement of such Loan.
(e) The obligation of the Borrower to repay the Loans, together with
interest thereon, shall be evidenced by the Revolving Note. The unpaid principal
balance of the Revolving Note shall be payable on demand, or if demand is not
sooner made, on the Termination Date. The Borrower acknowledges that the Lender
may demand payment at any time, even if an Event of Default has not occurred.
(f) The Lender from time to time may agree, in its sole discretion,
to extend the Termination Date or increase the amount of Loans to be provided
under this Agreement, or both. During any such periods of extension, the
remaining terms and conditions of this Agreement shall remain in full force and
effect, and the Borrower shall execute and deliver any amendments or
modifications to the Loan Documents that the Lender may require in connection
with any such extension or increase. Nothing in this Section 2.1((f)) shall
obligate the Lender to grant such extensions or to increase the amount of
credit provided under this Agreement.
SECTION 2.2. PAYMENTS AND COMPUTATIONS. All payments due under this
Agreement (including any payment or prepayment of principal, interest, fees and
other charges) or with respect to the Revolving Note or the Loans shall be made
in lawful money of the United States of America, in immediately available funds,
without defense, setoff or counterclaim, to the Lender at its office at
Commercial Loan Services, P.O. Box 26202, Richmond, Virginia 23260-6202, or at
such other place as the Lender may designate, and shall be applied first to
accrued fees, next to accrued late charges, next to accrued interest and then to
principal. If any payment of principal, interest or fees is due on a day other
than a Business Day, then the due date will be extended to the next succeeding
full Business Day and interest and fees will be payable with respect to the
extension. If any payment of principal, interest or fees is not made within ten
days of its due date, the Borrower agrees to pay to the Lender a late charge
equal to 5% of the amount of the payment; provided, however, that as long as the
Borrower makes payments of principal, interest and fees through the Lender's
automatic debit service, no late charge shall be payable if the Lender fails to
debit any such payment when it is due (if sufficient collected funds are on
deposit in the Borrower's account with the Lender), and such failure shall not
constitute an Event of Default hereunder. Upon the occurrence of an Event of
Default and during the continuation of such Event of Default, interest shall
accrue on the Loans at a per annum rate of 2% above the rate
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<PAGE> 11
of interest that otherwise would be applicable. Interest and fees shall be
computed on the basis of a year of 360 days and actual days elapsed. The Lender
may, but shall not be obligated to, debit the amount of any payment due from the
Borrower under this Agreement to any deposit or investment account of the
Borrower maintained with the Lender or any Affiliate of the Lender. No setoff,
claim, counterclaim, reduction or diminution of any obligation of any defense of
any kind or nature that the Borrower has or may have against the Lender (other
than the defense of payment) shall be available against the Lender in any suit
or action brought by the Lender to enforce this Agreement or any other Loan
Document. The foregoing shall not be construed as a waiver by the Borrower of
any rights or claims that the Borrower may have against the Lender, but any
recovery upon such rights and claims shall be had from the Lender separately, it
being the intent of this Agreement and the other Loan Documents that the
Borrower shall be obligated to pay, absolutely and unconditionally, all amounts
due hereunder and under the other Loan Documents.
SECTION 2.3. INCREASED COSTS. If, as a result of any Regulatory Change or
for any other reason, the Lender incurs Increased Costs, the Borrower agrees to
pay such Increased Costs to the Lender within ten Business Days after receipt by
the Borrower of the Lender's invoice therefor. The invoice will be accompanied
by a written statement of the Lender setting forth in reasonable detail the
basis and the calculation of the Increased Costs. The Lender's calculation shall
include reasonable averaging and attribution methods to determine the Increased
Costs attributable to the Loans.
SECTION 2.4. FEES.
(a) In consideration of the expenses incurred by the Lender in
connection with administering the Loans and monitoring the Borrowing Base, the
Borrower agrees to pay to the Lender and administrative fee of $17,000, of which
$9,000 shall be paid on or prior to the Closing Date and the balance of which
shall be payable in monthly installments of $1,000 per month, due on the first
day of each month, beginning on June 2, 1998.
(b) If, prior to the Termination Date, the Borrower requests that the
Lender terminate the Credit Facility provided for in this Agreement and release
it security interest in the Collateral, the Borrower shall pay to the Lender,
upon such release, a fee equal to $35,000.
SECTION 2.5. PRIMARY DEPOSITORY RELATIONSHIP. If the Borrower fails to
maintain its Primary Operating Account with the Lender, interest shall accrue on
the Loans of the Borrower at a per annum rate of 1.0% above the rate of interest
that otherwise would be applicable, effective as of the first day following the
day on which the Borrower moves its Primary Operating Account.
SECTION 2.6. MANDATORY PREPAYMENT. The Borrower shall prepay the Loans
upon the Lender's demand therefor to the extent that the aggregate amount of
outstanding Loans exceeds the Borrowing Base at any time.
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<PAGE> 12
SECTION 3. COVENANTS, REPRESENTATIONS AND OTHER TERMS REGARDING
COLLATERAL.
SECTION 3.1. SECURITY INTEREST. To secure the Obligations, the Borrower
(a) grants to the Lender, its successors and assigns, a first priority security
interest in the Accounts Receivable, the Deposit Accounts, the Equipment, the
General Intangibles, the Inventory and the Investment Property, all additions
and accessions thereto and replacements thereof, all proceeds and products
thereof, all books of account and records, including all computer software
relating thereto, all policies of insurance on any property of the Borrower and
all proceeds of such policies, and (b) shall execute and deliver to the Lender
an Intellectual Property Assignment to grant to the Lender, its successors and
assigns, a first priority security interest in all Intellectual Property now
owned or hereafter acquired by the Borrower.
SECTION 3.2. RECEIVABLES.
(a) The Borrower represents and warrants as to each and every
Eligible Receivable now existing that: (1) it is a bona fide existing
obligation, valid and enforceable against the Customer, for software installed
or licensed, goods sold or leased or services rendered in the ordinary course of
business; (2) it is subject to no dispute, defense or offset except as disclosed
in writing to the Lender; (3) all instruments, chattel paper and other evidence
of indebtedness issued to the Borrower with respect to any Eligible Receivable
have been delivered to the Lender, and, together with all supporting documents
delivered to the Lender, are genuine, complete, valid and enforceable in
accordance with their terms; (4) it is not subject to any discount, allowance or
special terms of payment except as disclosed in writing to the Lender; and (5)
it is not and shall not be subject to any prohibition or limitation upon
assignment. The Borrower covenants and agrees that each Eligible Receivable
arising after the date of this Agreement will be in conformance with the
foregoing representations.
(b) The Borrower shall immediately notify the Lender of (1) any
dispute in excess of $50,000 with a Customer and (2) the bankruptcy, insolvency,
receivership, assignment for the benefit of creditors or suspension of business
of any Customer of which the Borrower has knowledge. The Borrower shall not
compromise or discount any Receivable without the prior written consent of the
Lender except for (i) ordinary trade discounts or allowances for prompt payment,
and (ii) prior to the occurrence of a Default or an Event of Default, such
compromises or discounts that, after giving effect thereto, will not cause the
Borrowing Base to be less than the unpaid principal balance of the Loans then
outstanding.
(c) The Borrower shall establish and maintain a lockbox with the
Lender and shall direct all Customers to make payments on Receivables to such
lockbox by printing such direction on all invoices given to Customers. The
Borrower also shall remit to such lockbox or deliver to the Lender all payments
on Receivables received by the Borrower. Such payments shall be remitted or
delivered in their original form on the day of receipt. All notes, checks and
other instruments so received by the Borrower shall be duly endorsed to the
order of the Lender. The payments remitted to the lockbox and all payments
delivered to the Lender shall be credited
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to a cash collateral account maintained by the Lender in the name of the
Borrower over which the Lender shall have the exclusive power of withdrawal. All
funds in the cash collateral account shall be held as security for the
Obligations, and, after final collection, funds in the cash collateral account
shall be applied to the repayment of the Obligations.
(d) Upon the occurrence of an Event of Default, to facilitate direct
collection of the Receivables, the Lender shall have the right to take over the
post office boxes of the Borrower or make other arrangements, with which the
Borrower shall cooperate, to receive the Borrower's mail containing payments on
the Receivables.
(e) The Borrower shall execute all other agreements, instruments and
documents and shall perform all further acts that the Lender may require with
respect to Receivables owing by the Government to ensure compliance with the
Assignment of Claims Act.
SECTION 3.3. INVENTORY AND EQUIPMENT.
(a) All of the Inventory and Equipment will be kept only at the
places of business listed on Schedule 2 to this Agreement. The Borrower shall
give the Lender prior written notice before any Inventory or Equipment is moved
or delivered to a location other than such designated places of business, and
the Lender's lien and security interest will be maintained despite the location
of the Inventory or Equipment. Without the prior written consent of the Lender,
the Borrower shall not move or deliver the Inventory or Equipment to a location
outside of the United States of America.
(b) The Borrower shall keep and maintain the Equipment in good
operating condition and repair, reasonable wear and tear excepted. The Borrower
shall not permit any of the Equipment to become a fixture to any real estate
unless subordination agreements satisfactory to the Lender are obtained by any
owner or mortgagee of such real estate. The Borrower, immediately on demand
therefore by the Lender, shall deliver to the Lender any and all evidence of
ownership of any of the Equipment. None of the Equipment shall be sold,
transferred, leased or otherwise disposed of without the prior written consent
of the Lender, except for (1) sales or dispositions of obsolete Equipment, and
(2) sales or dispositions of any item of Equipment that is replaced
contemporaneously with Equipment of comparable value and utility.
(c) The Lender's security interest shall extend and attach to
Inventory that is presently in existence and is owned by the Borrower or in
which the Borrower purchases or acquires an interest at any time and from time
to time in the future, whether such Inventory is in transit or in the Borrower's
constructive, actual or exclusive occupancy or possession or not and wherever
the same may be located, including, without limitation, all Inventory that may
be located at the premises of the Borrower or upon the premises of any carriers,
forwarding agents, truckers, warehousemen, vendors, selling agents, finishers,
convertors or other third parties who may have possession of the Inventory.
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(d) Upon the sale, exchange, lease or disposition of the Inventory,
the security interest of the Lender, without break in continuity and without
further formality or act, shall continue in and attach to all cash and non-cash
proceeds of such sale, exchange, lease or disposition, including Inventory
returned or rejected by Customers or repossessed by either the Borrower or the
Lender. As to any such sale, exchange, lease or disposition, the Lender shall
have all of the rights of an unpaid seller, including stoppage in transit,
replevin, detinue and reclamation.
(e) Except for licenses, sales or leases made in the ordinary course
of business and Liens permitted by this Agreement, the Borrower shall not sell,
lease, encumber, license or dispose of, or permit the sale, lease, encumbrance
or disposal of, any Inventory without the prior written consent of the Lender.
(f) The Borrower shall have the Equipment and Inventory insured
against loss or damage by fire, theft, burglary, pilferage, loss in
transportation and such other hazards as the Lender shall specify, by insurers
satisfactory to the Lender, in amounts satisfactory to the Lender and under
policies containing loss payable clauses satisfactory to the Lender. Any such
insurance policies, or evidence thereof satisfactory to the Lender, shall be
deposited with the Lender. The Borrower agrees that the Lender shall have a
security interest in such policies and the proceeds thereof, and, if any loss
should occur, the proceeds may be applied to the payment of the Obligations or
to the replacement or restoration of the Inventory or Equipment damaged or
destroyed, as the Lender may elect or direct. After the occurrence of an Event
of Default, the Lender shall have the right to file claims under any insurance
policies, to receive, receipt and given acquittance for any payments that may be
made thereunder, and to execute any and all endorsements, receipts, releases,
assignments, reassignments or other documents that may be necessary to effect to
the collection, compromise, or settlement of any claims under any of the
insurance policies.
SECTION 3.4. DEFENSE OF COLLATERAL. The Borrower, at its expense, will
defend the Collateral against any claims or demands adverse to the Lender's
security interest and will promptly pay when due all taxes or assessments levied
against the Borrower on the Collateral.
SECTION 3.5. INFORMATION REGARDING COLLATERAL. The Borrower shall provide
the Lender such information as the Lender from time to time reasonably may
request with respect to the Collateral, including, without limitation,
statements describing, designating, identifying and evaluating all Collateral.
SECTION 3.6. PERFECTION OF SECURITY INTEREST. The Borrower shall perform
any and all steps in all relevant or appropriate jurisdictions as may be
necessary or reasonably requested by the Lender to perfect, maintain and protect
the Lender's security interest in the Collateral. All instruments and chattel
paper that are part of the Collateral shall be delivered to the Lender, duly
endorsed to the order of the Lender. The Borrower shall pay the taxes and costs
of, or incidental to, any recording or filing of any financing statements
concerning the Lender's security interests.
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The Borrower agrees that a carbon, photographic, photostatic or other
reproduction of this Agreement or of a financing statement is sufficient as a
financing statement.
SECTION 3.7. POWER OF ATTORNEY. The Borrower appoints the Lender and any
officer, employee or agent of the Lender, as the Lender from time to time may
designate, as attorneys-in-fact for the Borrower to perform all actions
necessary or desirable in the discretion of the Lender to effect the provisions
of this Agreement and to carry out the intent of this Agreement, to do any act
that the Borrower is required to do pursuant to the terms of this Agreement and
to exercise such rights and powers as the Borrower might exercise with respect
to the Collateral, all at the cost and expense of the Borrower. The Borrower
agrees that neither the Lender nor any other such attorney-in-fact will be
liable for any acts of omission or commission, unless such acts were willful
misconduct or grossly negligent, nor for any error of judgment or mistake of law
or fact. This power is coupled with an interest and is irrevocable so long as
any Obligations are outstanding. The Lender agrees that it shall not be entitled
to exercise its rights under this Section 3.7 prior to the occurrence of a
Default or an Event of Default.
SECTION 3.8. LIMITATIONS ON OBLIGATIONS. It is expressly agreed by the
Borrower that, notwithstanding any other provision of this Agreement, the
Borrower shall remain liable under each Receivable and contract giving rise to
each Receivable to observe and perform all the conditions and obligations to be
observed and performed by the Borrower in accordance with and pursuant to the
terms and provisions of each such Receivable and contract. The Lender shall not
have any obligation or liability under any Receivable or contract by reason of
or arising out of this Agreement or the assignment of such Receivable or
contract to the Lender or the receipt by the Lender of any payment relating to
the Receivable pursuant to this Agreement, nor shall the Lender be required or
obligated in any manner to perform or fulfill any of the obligations of the
Borrower under or pursuant to any Receivable or contract, or to make any
payment, or to make any inquiry as to the nature or the sufficiency of any
payment received by it or the sufficiency of any performance by any party under
any Receivable, or to present or file any claim, or to take any action to
collect or enforce any performance or the payment of any amounts that may have
been assigned to it or to which it may be entitled at any time or times.
SECTION 3.9. INDEMNIFICATION. In any suit, proceeding or action brought by
or against the Lender relating to the Collateral, the Borrower will save,
indemnify and keep the Lender harmless from and against all expense, loss or
damage suffered by reason of any defense, setoff, counterclaim, recoupment or
reduction of liability whatsoever of any obligor thereunder, arising out of a
breach by the Borrower of any obligation thereunder or arising out of any other
agreement, indebtedness or liability at any time owing to or in favor of such
obligor or its successors from the Borrower, and all such obligations of the
Borrower shall be and remain enforceable against and only against the Borrower
and shall not be enforceable against the Lender. The foregoing obligation of the
Borrower to indemnify the Lender shall not extend to any suit, proceeding or
action arising out of the Lender's gross negligence or willful or malicious
misconduct.
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SECTION 4. REPRESENTATIONS AND WARRANTIES. The Borrower represents and
warrants that:
SECTION 4.1. INCORPORATION, GOOD STANDING AND DUE QUALIFICATION. The
Borrower (a) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation; (b) has the
power and authority to own its assets and to transact the business in which it
is now engaged or in which it is proposed to be engaged; and (c) is duly
qualified as a foreign corporation and in good standing under the laws of each
other jurisdiction in which such qualification is required, except where such
failure to be so qualified would not have a material adverse effect on the
business operation of the Borrower. As of the date of this Agreement, the
Borrower has no Subsidiaries other than Canada and Communications. Neither
Canada nor Communications generates revenues or owns material assets.
SECTION 4.2. POWER AND AUTHORITY. The execution, delivery and performance
by the Borrower of the Loan Documents have been duly authorized by all necessary
corporate actions and do not and will not (a) require any consent or approval
of, or filing or registration with, any governmental agency or authority or the
stockholders of the Borrower; (b) contravene the Borrower's articles of
incorporation or bylaws; (c) result in a breach of or constitute a default under
any material agreement or instrument to which the Borrower is a party or by
which it or its properties may be bound or affected; (d) result in or require
the creation or imposition of any Lien upon or with respect to any of the
properties now owned or hereafter acquired by the Borrower; or (e) cause the
Borrower to be in default under any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award applicable to the Borrower.
SECTION 4.3. LEGALLY ENFORCEABLE AGREEMENT. This Agreement is, and each of
the other Loan Documents when delivered under this Agreement will be, legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms.
SECTION 4.4. FINANCIAL STATEMENTS. The financial statements of the
Borrower that have been furnished to the Lender in connection with this
Agreement are complete and correct and fairly present the financial condition of
the Borrower as of the dates of such statements. Since the dates of such
statements, there has been no material adverse change in the condition
(financial or otherwise), business or operations of the Borrower.
SECTION 4.5. LITIGATION. There is no pending or, to the Borrower's
knowledge, threatened action or proceeding against or affecting the Borrower
before any court, governmental agency or arbitrator, that, in any one case or in
the aggregate, may affect the financial condition, operations, properties or
business of the Borrower in a materially adverse manner.
SECTION 4.6. OWNERSHIP AND LIENS. The Borrower has title to all of its
assets, including the Collateral, and none of the Collateral or such assets is
subject to any Lien, except Liens permitted by this Agreement.
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SECTION 4.7. ERISA. The Borrower has not incurred any material
"accumulated funding deficiency" within the meaning of Section 302 of ERISA or
Section 412 of the Code, nor has the Borrower incurred any material liability to
the PBGC in connection with any "employee pension benefit plan" (as defined in
Section 3(2) of ERISA) established or maintained by the Borrower. None of the
employee pension benefit plans (as defined above) of the Borrower, nor any
trusts created thereunder, nor any trustee or administrator thereof, has engaged
in a "prohibited transaction," as such term is defined in Section 406 of ERISA
or Section 4975 of the Code, that could subject such plans or any of them, any
such trust, or any trustee or administrator thereof, or any party dealing with
such plans or any such trust to any material liability or tax or penalty on
prohibited transactions imposed by such Sections 406 or 4975. Neither the
Borrower nor any Affiliate of the Borrower is now, or at any time in the past
has been, obligated to make contributions to a "multiemployer plan," as such
term is defined in Section 4001(a)(3) of ERISA.
SECTION 4.8. TAXES. The Borrower has filed all tax returns (federal, state
and local) required to be filed and has paid all taxes, assessments and
governmental charges and levies thereon to be due, including interest and
penalties.
SECTION 4.9. DEBT. The Borrower is in no manner directly or contingently
obligated with respect to any Debt that is not permitted by this Agreement. The
Borrower is not in default with respect to any Debt.
SECTION 4.10. CORPORATE NAME; CHIEF EXECUTIVE OFFICE. During the five
years immediately preceding the date of this Agreement, neither the Borrower nor
any predecessor of the Borrower has used any name other than its current
corporate name and "American Computer and Electronics Corporation." The chief
executive office of the Borrower, within the meaning of Section 9.103(3)(d) of
the UCC, is now at 704 Quince Orchard Road, Gaithersburg, Maryland 20878. Since
April 23, 1993, the only other chief executive office of the Borrower was
maintained at 209 Perry Parkway, Gaithersburg, Maryland 20877.
SECTION 4.11. DEBARMENT AND SUSPENSION. No event has occurred and no
condition exists that is likely to result in the debarment or suspension of the
Borrower from any contracting with the Government, and neither the Borrower nor
any Affiliate of the Borrower has been subject to any such debarment or
suspension prior to the date of this Agreement.
SECTION 4.12. YEAR 2000. The Borrower has undertaken reasonable efforts to
determine whether all material Date Affected Information Technology used in the
business operations of the Borrower is Fully Date Capable, and, to the extent
necessary, the Borrower has initiated efforts to make its material Date Affected
Information Technology Fully Date Capable prior to the date that the failure to
be Fully Date Capable would materially and adversely affect the operation
thereof.
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SECTION 5. AFFIRMATIVE COVENANTS. The Borrower covenants and agrees that:
SECTION 5.1. MAINTENANCE OF EXISTENCE. The Borrower will preserve and
maintain its corporate existence and good standing in the jurisdiction of its
formation, and qualify and remain qualified, as a foreign corporation in each
jurisdiction in which such qualification is required, except where the failure
to be so qualified would not have a material adverse effect on the business
operations of the Borrower.
SECTION 5.2. MAINTENANCE OF RECORDS. The Borrower will keep adequate
records and books of account, in which complete entries will be made in
accordance with GAAP, reflecting all financial transactions of the Borrower. The
principal records and books of account, including those concerning the
Collateral, shall be kept at the chief executive office of the Borrower
described above. The Borrower will not move such records and books of account or
change its chief executive office or the name under which it does business
without (a) giving the Lender at least 30 days' prior written notice, and (b)
executing and delivering financing statements satisfactory to the Lender prior
to such move or change.
SECTION 5.3. MAINTENANCE OF PROPERTIES. The Borrower will maintain, keep
and preserve all of its properties (tangible and intangible) necessary or useful
in the proper conduct of its business in good working order and condition,
ordinary wear and tear excepted.
SECTION 5.4. CONDUCT OF BUSINESS. The Borrower will continue to engage in
a business of the same general type as conducted by it on the date of this
Agreement.
SECTION 5.5. MAINTENANCE OF INSURANCE. The Borrower will maintain
insurance with financially sound and reputable insurance companies or
associations in such amounts and covering such risks as are usually carried by
companies engaged in the same or a similar business and similarly situated,
including, without limitation, insurance covering the Inventory and Equipment as
required hereby.
SECTION 5.6. COMPLIANCE WITH LAWS. The Borrower will comply in all
material respects with all applicable laws, rules, regulations and orders
(including, without limitation, ERISA), such compliance to include, without
limitation, paying, before the same become delinquent, all taxes, assessments
and governmental charges imposed upon it or upon its property.
SECTION 5.7. RIGHT OF INSPECTION. At any reasonable time and from time to
time, with reasonable notice, the Borrower will permit the Lender or any agent
or representative of the Lender to audit, examine and verify the Collateral,
examine and make copies of and abstracts from the records and books of account
of, and visit the properties of, the Borrower, and to discuss the affairs,
finances and accounts of the Borrower with any of its officers and directors and
the Borrower's independent accountants. The Borrower agrees to reimburse the
Lender for all reasonable audit and Collateral verification and examination
expenses incurred by it.
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SECTION 5.8. REPORTING REQUIREMENTS. The Borrower will furnish to the
Lender:
(a) Monthly Financial Statements of the Borrower. As soon as
available and in any event within 30 days after the end of each of the first two
monthly accounting periods during each fiscal quarter of the Borrower, and
within 45 days after the end of the last such monthly accounting period during
each fiscal quarter, unaudited financial statements consisting of consolidated
and consolidating balance sheets of the Borrower and its Subsidiaries as of the
end of such month and a consolidated and consolidating statements of income and
stockholder's equity of the Borrower and its Subsidiaries for the period
commencing at the end of the previous fiscal year and ending with the end of
such month, all in reasonable detail and stating in comparative form the
respective consolidated figures for the corresponding date and period in the
previous fiscal year, and all prepared in accordance with the GAAP. Such
financial statements shall be certified to be accurate by a Principal Officer of
the Borrower (subject to year-end adjustments) and shall be accompanied by a
Covenant Compliance Certificate for such period;
(b) Annual Financial Statements of the Borrower. As soon as available
and, in any event, within 90 days after the end of each fiscal year of the
Borrower, audited financial statements consisting of the consolidated and
consolidating balance sheets of the Borrower and its Subsidiaries as of the end
of such fiscal year, and consolidated and consolidating statements of income,
stockholders' equity and cash flows of the Borrower and its Subsidiaries for
such fiscal year, all in reasonable detail and all prepared in accordance with
GAAP, accompanied by an opinion thereon acceptable to the Lender of Price
Waterhouse LLP, or any other independent certified public accounting firm
selected by the Borrower and acceptable to the Lender;
(c) Management Letters. Promptly upon receipt thereof, copies of any
reports submitted to the Borrower by independent certified public accountants in
connection with examination of the financial statements of the Borrower made by
such accountants;
(d) Notice of Litigation. Promptly after the commencement thereof,
notice of all actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, affecting the Borrower, that, if determined adversely to the Borrower,
could have a material adverse effect on the financial condition, properties or
operations of the Borrower;
(e) Notice of Defaults and Events of Default. As soon as possible
and, in any event, within ten days after the occurrence of each Default and
Event of Default, a written notice setting forth the details of such Default or
Event of Default and the action that is proposed to be taken by the Borrower
with respect thereto;
(f) Proxy Statements, etc. Promptly after the sending or filing
thereof, copies of all proxy statements, financial statements and reports that
the Borrower sends to its stockholders, other than routine notices concerning
the annual meetings of the Borrower;
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(g) Borrowing Base Certificate and Receivables Detail. As soon as
available and, in any event, (1) within 15 days after the end of each calendar
week, a Borrowing Base Certificate appropriately completed and executed by a
Principal Officer of the Borrower and including a computation of the Borrowing
Base as of the last day of such calendar week, and (2) within 30 days after the
end of each monthly accounting period, (i) an Aging as of the last day of the
previous monthly accounting period, (ii) such other supporting documents as the
Lender from time to time reasonably may request, and (iii) such invoices,
instruments, chattel paper and other evidence of indebtedness representing any
Receivables, duly endorsed to the Lender, as the Lender may request; and (iv) an
unbilled Receivables report and a contract backlog report reflecting all
contracts of the Borrower, each as of the end of the previous monthly accounting
period and each in form and detail acceptable to the Lender. A copy of each item
described in this Section 5.8((g)) shall be delivered within the deadline
specified (A) to the Lender's Government Contracts Administration Division at
8245 Boone Boulevard, 3rd Floor, Vienna, Virginia 22182-3871, Attention: Betty
Lillard, and (B) to Curtis L. Withrow, Jr., at the address specified in Section
9.3 below;
(h) Customer List. If required by the Lender, within 90 days after
the end of each fiscal quarter of the Borrower, a current Customer List;
(i) Tax Returns. As soon as available and, in any event within 10
Business Days of filing, copies of the filed federal income tax returns of the
Borrower; and
(j) General Information. Such other information respecting the
condition or operations, financial or otherwise, of the Borrower as the Lender
from time to time reasonably may request.
SECTION 5.9. YEAR 2000 COMPLIANCE. The Borrower shall initiate and
maintain a program to identify any Date Affected Information Technology used in
the business operations of the Borrower that is not Fully Date Capable, and, in
connection therewith, undertake in good faith to make all material Date Affected
Information Technology used in such business operations Fully Date Capable prior
to the date that the failure to be Fully Date Capable would adversely affect the
operation thereof. The Borrower shall advise the Lender in the event that the
Borrower has reason to believe that any material Date Affected Information
Technology will not be Fully Date Capable prior to the date that the failure to
be Fully Date Capable would adversely affect the operation thereof, and advise
the Lender in the event that the Borrower has reason to believe that it will be
adversely affected by the failure of any affiliated or nonaffiliated entity to
have its Date Affected Information Technology Fully Date Capable. The Borrower
agrees to provide the Lender, upon request, access to and copies of information
necessary to permit the Lender to determine whether the Borrower's Date Affected
Information Technology is, or will be, Fully Date Capable, including, without
limitation, (i) minutes, resolutions and reports to and from the Borrower's
Board of Directors or committee thereof, (ii) internally generated reports,
consultant reports or auditor's reports regarding the status of the Borrower's
Date Affected Information Technology, (iii) all documents relating to a "Year
2000" program, and (iv) officer
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certificates or other statements requested by the Lender regarding the status of
Date Affected Information Technology. The Borrower acknowledges that the
Lender's right to receive, or the Lender's receipt of, the foregoing information
does not impose any obligation on the Lender to assess the accuracy or effect of
such information, or to recommend or require remedial action of any kind. The
Borrower hereby acknowledges that the actual or potential failure or degradation
of any material Date Affected Information Technology due to its failure to be
Fully Date Capable may constitute a material adverse change in the Borrower's
business or financial condition.
SECTION 6. NEGATIVE COVENANTS. The Borrower agrees that, without first
obtaining the prior written consent of the Lender:
SECTION 6.1. LIENS. The Borrower will not create, incur, assume or permit
to exist, any Lien upon or with respect to any of their properties, now owned or
hereafter acquired, except: (a) Liens in favor of the Lender; (b) Liens that are
incidental to the conduct of the business of the Borrower, are not incurred in
connection with the obtaining of credit and do not materially impair the value
or use of assets of the Borrower; and (c) purchase-money Liens, whether now
existing or hereafter arising (including those arising out of a Capital Lease)
on any fixed assets provided that (1) any property subject to a purchase-money
Lien is acquired by the Borrower in the ordinary course of its respective
business and the Lien on any such property is created contemporaneously with
such acquisition, (2) each such Lien shall attach only to the property so
acquired, (3) the Debt secured by all such Liens shall not exceed the aggregate
at any time outstanding $100,000.
SECTION 6.2. DEBT. The Borrower will not create, incur, assume or permit
to exist, any Debt, except: (a) the Obligations; (b) Debt of the Borrower
subordinated to the Obligations on terms satisfactory to the Lender; (c)
ordinary trade accounts payable; and (d) Debt of the Borrower (including Debt
arising out of a Capital Lease) secured by purchase-money Liens permitted by
this Agreement.
SECTION 6.3. MERGERS, ETC. The Borrower will not merge or consolidate with
any Person.
SECTION 6.4. SALE AND LEASEBACK. The Borrower will not sell, transfer or
otherwise dispose of, any real or personal property to any Person and
thereafter, directly or indirectly, lease back the same or similar property.
SECTION 6.5. DIVIDENDS AND DISTRIBUTIONS. The Borrower will not declare or
pay any dividends or distributions; or purchase, redeem, retire or otherwise
acquire for value any of its capital stock now or hereafter outstanding; or make
any distribution of assets to its stockholders as such whether in cash, assets
or obligations of the Borrower; or allocate or otherwise set apart any sum for
the payment of any dividend or distribution on, or for the purchase, redemption
or retirement of, any shares of its capital stock; or make any other
distribution by reduction of capital or otherwise in respect of any shares of
its capital stock.
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SECTION 6.6. SALE OF ASSETS. The Borrower will not sell, lease, assign,
transfer or otherwise dispose of, any of its now owned or hereafter acquired
assets, except for (a) Inventory sold or leased in the ordinary course of
business and (b) the sale or other disposition of assets other than Inventory no
longer used or useful in the conduct of its business and not exceeding $100,000
in the aggregate for the Borrower during any fiscal year.
SECTION 6.7. LOANS. The Borrower will not make any loan or advance to any
Person, or purchase any notes or other Debt issued by any Person, except for
travel advances or other advances in an aggregate amount not to exceed $100,000
at any one time outstanding, which are made to any employee of the Borrower in
the ordinary course of the Borrower's business and in furtherance of such
employee's performance under a contract with a Customer.
SECTION 6.8. GUARANTIES, ETC. The Borrower will not assume, guarantee,
endorse or otherwise be or become directly or contingently responsible or liable
(including, but not limited to, any liability arising out of any agreement to
purchase any obligation, stock, assets, goods or services, or to supply or
advance any funds, assets, goods or services, or to maintain or cause such
Person to maintain a minimum working capital or net worth or otherwise to assure
the creditors of any Person against loss) for obligations of any Person, or
permit any such guaranties or liabilities to exist, except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business.
SECTION 6.9. ACQUISITIONS. The Borrower will not form or acquire a
Subsidiary, become a partner or joint venturer with any person, or purchase or
acquire all or substantially all of the assets of any Person, or any capital
stock of, ownership interest in or equity securities issued by any other Person.
The Borrower will not permit Canada or Communications to generate revenues or
own assets without the Lender's consent. If the Lender consents to the
acquisition or formation of a Subsidiary by the Borrower, or to the generation
of revenues or ownership of assets by Canada or Communications, the Borrower
will cause such Subsidiary to (a) execute and deliver to the Lender a written
instrument, in form and substance satisfactory to the Lender, pursuant to which
such Subsidiary shall (1) become jointly and severally with the Borrower liable
for all of the Obligations, (2) grant a security interest to the Lender in all
of its assets on the same terms as are set forth in this Agreement and the
Intellectual Property Assignment, and (3) agrees to perform, observe and comply
with all of the representations, warranties, covenants and agreements contained
in the Loan Documents, and (b) satisfy all of the conditions set forth in
Section 7.1 as though such conditions were applicable to such Subsidiary.
SECTION 6.10. TRANSACTIONS WITH AFFILIATES. The Borrower will not enter
into any transaction, including, without limitation, the purchase, sale or
exchange of property or the rendering of any service, with any Affiliate, except
in the ordinary course of and pursuant to the reasonable requirements of the
Borrower's business and upon fair and reasonable terms no less favorable to the
Borrower than would be applicable in a comparable arm's-length transaction with
a Person not an Affiliate.
22
<PAGE> 23
SECTION 6.11. TANGIBLE NET WORTH. The Borrower shall not permit, as of the
end of each of its fiscal quarters, Tangible Net Worth to be less than
$13,400,000.
SECTION 6.12. NET INCOME. The Borrower shall not permit its Net Income for
any fiscal quarter, beginning with the fiscal quarter ending on June 30, 1998,
to be less than $0.00.
SECTION 7. CONDITIONS OF LENDING. The making of the Loans shall be subject
to the following conditions:
SECTION 7.1. CONDITIONS PRECEDENT TO CLOSING. The initial disbursement
of the Loans shall be subject to the following conditions precedent:
(a) The Loan Documents shall have been appropriately completed, duly
executed by the parties thereto, recorded where necessary and delivered to the
Lender.
(b) No Default or Event of Default shall have occurred and be
continuing.
(c) All representations and warranties contained herein shall be true
and correct in all material respects at the Closing Date.
(d) All legal matters incident to the Loans shall be reasonably
satisfactory to counsel for the Lender, and the Borrower agrees to execute and
deliver to the Lender such additional documents and certificates relating to the
Loans as the Lender reasonably may request.
(e) Financing statements in form and substance satisfactory to the
Lender shall have been properly filed in each office where necessary to perfect
the Lender's security interest in the Collateral, termination statements shall
have been filed with respect to any other financing statements covering all or
any portion of the Collateral and all taxes and fees with respect to such
recording and filing shall have been paid by the Borrower.
(f) All Intellectual Property subject to United States copyright,
patent or trademark protection, and an Intellectual Property Assignment with
respect thereto, shall have been duly registered with the United States Patent
and Trademarks Office or the Register of Copyrights, as applicable, and the
Lender shall have received a search report confirming that it has a perfected
first priority lien with respect thereto.
(g) The Borrower shall have delivered to the Lender (1) certified
copies of evidence of all corporate action taken by the Borrower to authorize
the execution and delivery of the Loan Documents, (2) certified copies of the
article of incorporation and bylaws of the Borrower, (3) a certificate of
incumbency for the officers of the Borrower executing the Loan Documents, (4) a
good standing certificate, dated not more than 30 days prior to the Closing
Date, from the appropriate state official of any state in which the Borrower is
incorporated or
23
<PAGE> 24
qualified to do business, and (5) such additional supporting documents as the
Lender or counsel for the Lender reasonably may request.
(h) The Lender shall have received (1) a Borrowing Base Certificate,
(2) an Aging, and (3) the financial statements of the Borrower for the period
ended on March 31, 1998.
(i) The Lender shall have received a field examination report of the
Collateral in form and substance acceptable to it.
(j) If required by the Lender, it shall have received the written
opinion of counsel to the Borrower, in form and substance satisfactory to the
Lender.
(k) The Lender shall have received financing statement, judgment and
tax lien searches reflecting that there are no Liens outstanding against the
Collateral other than those permitted by the Agreement.
SECTION 7.2. CONDITIONS PRECEDENT TO SUBSEQUENT DISBURSEMENTS. The
disbursement and issuance of subsequent Loans shall be subject to the following
conditions precedent:
(a) No Default or Event of Default shall have occurred and be
continuing.
(b) No material adverse change shall have occurred in the financial
condition of the Borrower since March 31, 1998.
(c) All representations and warranties shall be true and correct in
all material respects at the date of such disbursement.
(d) No change shall have occurred in any law or regulations
thereunder or interpretations thereof that, in the opinion of counsel for the
Lender, would make it illegal for the Lender to make Loans hereunder.
(e) If required by the Lender, the Borrower shall have delivered to
the Lender a current Borrowing Base Certificate and a current Aging, duly
executed by the president or treasurer of the Borrower and appropriately
completed, and such other supporting data and documentation relating to the
Collateral as may be required by the Lender in its reasonable discretion.
SECTION 8. DEFAULT.
SECTION 8.1. EVENTS OF DEFAULT. Each of the following shall constitute an
Event of Default under this Agreement:
(a) Failure of the Borrower to pay any Obligation to the Lender,
including, without limitation, the principal of or interest on the Revolving
Note or the Loans, when the
24
<PAGE> 25
same shall become due and payable, whether at maturity, or otherwise, and such
failure shall continue for a period of ten days after written notice to the
Borrower from the Lender, which may be a computer generated late payment notice;
or
(b) If the Borrower refuses to permit the Lender to inspect, examine,
verify or audit the Collateral in accordance with the provisions of this
Agreement; or
(c) Failure of the Borrower to perform or observe any covenant
contained in Section 6 of this Agreement; or
(d) Failure of the Borrower to perform or observe any other term,
condition, covenant, warranty, agreement or other provision contained in this
Agreement (except any such failure resulting in the occurrence of another Event
of Default described in this Section), within 30 days after the earlier of
actual knowledge thereof by the Borrower or written notice from the Lender to
the Borrower specifying such failure; or
(e) If any representation or warranty made or deemed made by the
Borrower in this Agreement, any Loan Document or any statement or representation
made in any certificate, report or opinion delivered pursuant to this Agreement
(including any Borrowing Base Certificate or financial statements) or in
connection with any borrowing under this Agreement was materially untrue or is
breached in any material respect; or
(f) If, as a result of default, any other obligation of the Borrower
for the payment of any Debt becomes or is declared to be due and payable prior
to the expressed maturity thereof, unless and to the extent that the declaration
is being contested in good faith in a court of appropriate jurisdiction; or
(g) The Borrower makes an assignment for the benefit of creditors,
files a petition in bankruptcy, petitions or applies to any tribunal for any
receiver or any trustee of the Borrower or any substantial part of its property,
or commences any proceeding relating to the Borrower under any reorganization,
arrangement, readjustments of debt, dissolution or liquidation law or statute of
any jurisdiction, whether now or hereafter in effect; or
(h) If, within 60 days after the filing of a bankruptcy petition or
the commencement of any proceeding against the Borrower seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, the
proceeding shall not have been dismissed, or, if, within 60 days after the
appointment, without the consent or acquiescence of the Borrower, of any
trustee, receiver or liquidator of the Borrower or of all or any substantial
part of the properties of the Borrower, the appointment shall not have been
vacated; or
(i) Any judgment against the Borrower in excess of $50,000 or any
attachment in excess of $50,000 against any property of the Borrower that
remains unpaid,
25
<PAGE> 26
undischarged, unbonded or undismissed for a period of 30 days, unless and to the
extent that the judgment or attachment is appealed in good faith in a court of
higher jurisdiction and the appeal remains pending; or
(j) If the Lender, in good faith, deems itself insecure or determines
that material adverse change has occurred in the financial or business condition
of the Borrower, and the cause for such determination is not cured to the
Lender's satisfaction within 30 days after notice from the Lender to the
Borrower specifying the Lender's basis therefor; or
(k) The dissolution, liquidation or termination of existence of the
Borrower; or
(l) If the Borrower fails to give the Lender any notice required by
this Agreement within ten days after the occurrence of the event giving rise to
the obligation to give such notice, provided that such failure to give notice
shall not constitute an Event of Default if the applicable Event of Default or
breach is cured within any grace period that otherwise would have been
applicable had the notice been timely given; or
(m) If there is a material change in the executive management of the
Borrower that is not acceptable to the Lender; or
(n) The occurrence of an event of default under any other Loan
Document and the expiration of all applicable cure periods.
SECTION 8.2. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of
Default, the following provisions shall be applicable:
(a) The Lender, at its option, may terminate its obligation to make
Loans under this Agreement and declare all Obligations, whether incurred prior
to, contemporaneous with or subsequent to the date of this Agreement, and
whether represented in writing or otherwise, immediately due and payable and may
exercise all of its rights and remedies against the Borrower and any Collateral.
(b) The Lender may foreclose its lien and security interest in the
Collateral in any way permitted by law and shall have, without limitation, the
remedies of a secured party under the UCC. The Lender may enter the premises of
the Borrower without legal process and without incurring liability to the
Borrower and remove the Collateral to such place or places as the Lender may
deem advisable, or the Lender may require the Borrower to assemble the
Collateral and make the Collateral available to the Lender at a convenient place
and, with or without having the Collateral at the time or place of sale, the
Lender may sell or otherwise dispose of all or any part of the Collateral
whether in its then condition or after further preparation or processing, either
at public or private sale or at any broker's board, in lots or in bulk, for cash
or for credit, at any time or place, in one or more sales and upon such terms
and conditions as the Lender may elect. The Lender shall give not less than ten
Business Days' prior
26
<PAGE> 27
written notice to the Borrower of the time and place of any public sale of the
Collateral or the time after which the Collateral may be sold in a private sale,
which the Borrower agrees constitutes commercially reasonable notice. At any
such sale the Lender may be the purchaser, subject to the applicable provisions
of the UCC.
(c) The proceeds from any sale of the Collateral by the Lender shall
first be applied to any costs and expenses in securing possession of the
Collateral and to any expenses in connection with the sale. The net proceeds
will be applied toward the payment of the Obligations. Application of the net
proceeds as to particular Obligations or as to principal, interest and fees
shall be in the Lender's absolute discretion. Any deficiency will be paid to the
Lender by the Borrower forthwith upon demand, and any surplus will be paid to
the Borrower, as applicable.
(d) To the extent that the Obligations are now or hereafter secured
by property other than the Collateral described herein or by the guarantee,
endorsement or property of any other Person, the Lender shall have the right to
proceed against such other guarantee, endorsement or property upon the
occurrence of an Event of Default, and the Lender shall have the right, in its
sole discretion, to determine which rights, security, liens, security interests
or remedies the Lender shall at any time pursue, relinquish, subordinate, modify
or take any other action with respect thereto, without in any way modifying or
affecting any of them or any of the Lender's rights hereunder.
(e) The Lender is hereby authorized at any time or from time to time,
without notice to the Borrower (any such notice being expressly waived by the
Borrower), to setoff and apply any deposit (general or special, time or demand,
provisional or final) or investment account at any time held, including any
certificate of deposit, and other indebtedness at any time owed by the Lender or
any of its affiliates, whether or not any such deposit or indebtedness is then
due, to or for the credit or account of the Borrower against any and all of the
Obligations.
(f) THE BORROWER, HAVING KNOWLEDGE THAT IT MAY BE ENTITLED TO NOTICE
AND A HEARING PRIOR TO REPOSSESSION OF THE COLLATERAL, WAIVES ANY RIGHT THAT IT
MAY HAVE UNDER EXISTING OR FUTURE LAW TO NOTICE OF FORECLOSURE AND ANY OTHER ACT
DESCRIBED HEREIN, TO ANY HEARING THAT MAY BE HELD RELATING TO FORECLOSURE OR ANY
OTHER SUCH ACTS, AND TO ANY NOTICE THAT MAY BE REQUIRED TO BE GIVEN BY THE
LENDER PRIOR TO SUCH HEARING, OTHER THAN THE NOTICES REQUIRED BY THE LOAN
DOCUMENTS OR THE UCC. THE LENDER AND THE BORROWER EXPRESSLY WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION RELATING TO
THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.
27
<PAGE> 28
(g) The Lender itself may perform or comply, or otherwise cause
performance or compliance, with the obligations of the Borrower contained in
this Agreement, including, without limitation, the obligations of the Borrower
to defend and insure the Collateral. The expenses of the Lender incurred in
connection with such performance or compliance, together with interest thereon
at the Prime Rate plus 2%, shall be payable by the Borrower to the Lender on
demand and shall constitute Obligations.
SECTION 9. MISCELLANEOUS.
SECTION 9.1. COLLECTION COSTS. The Borrower shall pay all of the
reasonable costs and expenses incurred by the Lender in connection with the
enforcement of this Agreement and the other Loan Documents, including, without
limitation, reasonable attorneys' fees and expenses.
SECTION 9.2. MODIFICATION AND WAIVER. Except for the other documents
expressly referred to in this Agreement, this Agreement contains the entire
agreement between the parties and supersedes all prior agreements between the
Lender and the Borrower concerning the subject matter hereof. No modification or
waiver of any provision of this Agreement or any other Loan Document and no
consent by the Lender to any departure therefrom by the Borrower shall be
effective unless such modification or waiver shall be in writing and signed by
an officer of the Lender with a title of vice president or any higher office,
and the same shall then be effective only for the period and on the conditions
and for the specific instances and purposes specified in such writing. No notice
to or demand on the Borrower in any case shall entitle the Borrower to any other
or further notice or demand in similar or other circumstances. No failure or
delay by the Lender in exercising any right, power or privilege hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies of the Lender contained in
this Agreement and the other Loan Documents are cumulative and not exclusive of
any rights or remedies otherwise provided by law.
SECTION 9.3. NOTICES. All notices, requests, demands or other
communications provided for in this Agreement (except for requests for Loans
made by telephone as described in Section 2.1 above) shall be in writing and
shall be delivered by hand, sent prepaid by Federal Express (or a comparable
overnight delivery service) or sent by the United States mail, certified,
postage prepaid, return receipt requested, to the Lender, at Crestar Bank, 6410
Rockledge Drive, Bethesda, Maryland 20817, Attention: Curtis L. Withrow, Jr., or
to the Borrower at 704 Quince Orchard Road, Suite 100, Gaithersburg, Maryland
20878, Attention: Joseph F. Greeves, Vice President and Chief Financial Officer.
Any notice, request, demand or other communication delivered or sent in the
foregoing manner shall be deemed given or made (as the case may be) upon the
earliest of (a) the date it is actually received, (b) the business day after the
day on which it is delivered by hand, (c) the business day after the day on
which it is properly delivered to Federal Express (or a comparable overnight
delivery service), or (d) the third business day after the day on which it is
deposited in the United States mail. The Borrower or the Lender may
28
<PAGE> 29
change its address by notifying the other party of the new address in any manner
permitted by this Section 9.3. Rejection or other refusal to accept or the
inability to deliver because of a changed address of which no notice was given
shall not affect the date of such notice, election or demand sent in accordance
with the foregoing provisions.
SECTION 9.4. COUNTERPARTS. This Agreement may be executed by the parties
hereto individually or in any combination, in one or more counterparts, each of
which shall be an original and all of which together constitute one and the same
agreement.
SECTION 9.5. CAPTIONS. The captions of the various sections and paragraphs
of this Agreement have been inserted only for the purposes of convenience; such
captions are not a part of this Agreement and shall not be deemed in any manner
to modify, explain, enlarge or restrict any of the provisions of this Agreement.
SECTION 9.6. SURVIVAL OF AGREEMENTS. All agreements, representations and
warranties made herein shall survive the delivery of this Agreement and the
making and renewal of the Loans hereunder.
SECTION 9.7. FEES AND EXPENSES. Whether or not any Loans are made
hereunder, the Borrower shall pay on demand all reasonable out-of-pocket costs
and expenses incurred by the Lender in connection with the preparation,
negotiation, execution, delivery, filing, recording and enforcement of this
Agreement and any of the documents executed or delivered in connection herewith,
including, without limitation, the reasonable fees and expenses of counsel to
the Lender, and local counsel who may be retained by the Lender, with respect to
this Agreement and such documents and any amendments thereof and with respect to
advising the Lender as to its rights and responsibilities thereunder.
SECTION 9.8. USE OF DEFINED TERMS. All terms defined in this Agreement
shall have the defined meanings when used in certificates, reports or other
documents made or delivered pursuant to this Agreement, unless the context shall
otherwise require.
SECTION 9.9. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and bind the respective parties hereto and their successors and
assigns; provided, however, that no Borrower may assign its rights hereunder
without the prior written consent of the Lender.
SECTION 9.10. ACCOUNTING TERMS. All accounting terms used herein that are
not otherwise expressly defined in this Agreement shall have the meanings
respectively given to them in accordance with GAAP in effect on the date of this
Agreement. Except as otherwise provided herein, all financial computations made
pursuant to this Agreement shall be made in accordance with GAAP and all balance
sheets and other financial statements shall be prepared in accordance with GAAP.
Except as otherwise provided herein, whenever reference is made in any provision
of this Agreement to a balance sheet or other financial statement or financial
29
<PAGE> 30
computation with respect to the Borrower, such terms shall mean a consolidated
balance sheet or other financial statement or financial computation, as the case
may be, with respect to the Borrower and its Subsidiaries.
SECTION 9.11. CONFIDENTIALITY. Except as otherwise provided by applicable
law, the Lender shall utilize all non-public information obtained pursuant to
the requirements of this Agreement which has been identified as confidential or
proprietary by the Borrower in accordance with its customary procedure for
handling confidential information of this nature and in accordance with safe and
sound banking practices but in any event may make disclosure: (a) to any of its
affiliates (provided they shall agree to keep such information confidential in
accordance with the terms of this Section); (b) as reasonably required by any
bona fide assignee, participant or other transferee in connection with the
contemplated transfer of any Loan or participations therein (provided they shall
agree to keep such information confidential in accordance with the terms of this
Section); (c) as required by any governmental authority or representative
thereof or pursuant to legal process; (d) to the Lender's independent auditors,
counsel and other professional advisors (provided they shall be notified of the
confidential nature of the information); and (e) after the happening and during
the continuance of an Event of Default, to any other Person, in connection with
the exercise by the Lender of rights hereunder or under any of the other Loan
Documents.
SECTION 9.12. INTERPRETATION. This Agreement and the rights and
obligations of the parties hereunder shall be construed and interpreted in
accordance with the laws of the State of Maryland, without reference to conflict
of laws principles.
SECTION 9.13. NATURE OF CREDIT FACILITY. The Borrower acknowledges and
agrees that the enumerated Events of Default are merely examples of the types of
occurrences that may cause the Lender to make a demand for payment or to refuse
to make a Loan, and neither they nor any other provision of this Agreement shall
limit the Lender's rights to demand payment or refuse to make a Loan whenever it
chooses.
[SIGNATURES ON FOLLOWING PAGE]
30
<PAGE> 31
IN WITNESS WHEREOF, the Borrower and the Lender have caused this Agreement
to be signed by their duly authorized representatives all as of the day and year
first above written.
LENDER:
CRESTAR BANK,
a Virginia banking corporation
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
BORROWER:
ACE*COMM CORPORATION,
a Maryland corporation
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
31
<PAGE> 32
LIST OF SCHEDULES & EXHIBITS
Exhibit A - Covenant Compliance Certificate
Exhibit B - Intellectual Property Assignment
Schedule 1 - Existing Notes
Schedule 2 - Equipment and Inventory Locations
32
<PAGE> 33
EXHIBIT A
COVENANT COMPLIANCE CERTIFICATE
In connection with the terms of the Loan and Security Agreement, dated as
of April 23, 1998 (as amended, supplemented or modified from time to time, the
Agreement), between ACE*COMM Corporation, a Maryland corporation (the Borrower)
and Crestar Bank, a Virginia banking corporation (the Lender), the undersigned
certifies that the following information is true and correct as of the date of
this Covenant Compliance Certificate:
1. No Default or Event of Default has occurred and is continuing;
2. Tangible Net Worth as of _______________________ was $__________,
calculated as follows:
3. Net Income for the fiscal quarter ended on ________________ was
$__________, calculated as follows:
Capitalized terms used in this Covenant Compliance Certificate shall have
the same meanings as those assigned to them in the Agreement. The foregoing is
true and correct as of _______________, 19___.
Dated ______________, 19___.
---------------------------------
Name:
---------------------------
Title:
---------------------------
<PAGE> 34
SCHEDULE 1
EXISTING NOTES
<TABLE>
<CAPTION>
DATE ORIGINAL AMOUNT
---- ---------------
<S> <C>
June 27, 1997 $1,000,000
May 16, 1996 $80,000
January 2, 1996 $50,000
April 29, 1994 $323,493.19
</TABLE>
<PAGE> 35
SCHEDULE 2
EQUIPMENT AND INVENTORY LOCATIONS
<PAGE> 1
REVOLVING NOTE
$3,500,000 April 23, 1998
McLean, Virginia
FOR VALUE RECEIVED, ACE*COMM CORPORATION, a Maryland corporation (the
Borrower), hereby promises to pay to the order of CRESTAR BANK, a Virginia
banking corporation (the Lender), at Commercial Loan Services, P.O. Box 26202,
Richmond, Virginia 23260-6202, or such other location as the holder hereof may
in writing designate, the principal sum of THREE MILLION FIVE HUNDRED THOUSAND
AND NO/100 DOLLARS ($3,500,000) (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Loans made by the Lender to the
Borrower under the Loan Agreement described below), in lawful money of the
United States of America in immediately available funds, on demand, without
defense, offset or counterclaim, and to pay interest on the unpaid principal
amount of the Loans, at such office, in like money and funds, for the period
commencing on the date of each Loan until such Loan shall be paid in full, at
the rate per annum and on the dates provided in the Loan Agreement. The Borrower
may borrow, prepay without penalty, and reborrow hereunder in accordance with
the provisions of the Loan Agreement.
The Lender is hereby authorized by the Borrower to maintain records of the
amount of each Loan made by the Lender, the date such Loan is made, and the
amount of each payment or prepayment of principal of such Loan received by the
Lender. The Borrower agrees that the amounts so evidenced in such records,
absent manifest error, shall constitute conclusive evidence of the amount owed
hereunder.
This Revolving Note is the Revolving Note referred to in the Loan and
Security Agreement (as amended, modified or supplemented from time to time, the
Loan Agreement), of even date herewith, between the Borrower and the Lender, and
evidences Loans made by the Lender thereunder. Capitalized terms used in this
Revolving Note have the respective meanings assigned to them in the Loan
Agreement.
Upon the occurrence and continuation of an Event of Default, the principal
hereof and accrued interest hereon may be declared to be, or may become,
forthwith due and payable in the manner, upon the conditions and with the effect
provided in the Loan Agreement.
The Borrower, every guarantor and endorser hereof hereby waive
presentment, demand, notice of dishonor, protest and all other demands and
notices in connection with the delivery, acceptance, performance and enforcement
of this Revolving Note.
Upon the occurrence of an Event of Default, the Borrower hereby authorizes
any attorney designated by the Lender or any Clerk of any court of record to
appear for the Borrower in any court of record and to confess judgment without
prior hearing against the Borrower in favor of
<PAGE> 2
the Lender for and in the amount of the unpaid principal balance hereof, all
interest accrued and unpaid thereon, all other amounts payable by the Borrower
to the Lender under the terms of this Note or any of the other Loan Documents,
costs of suit, and attorneys' fees of $7,500 (if judgment be entered without
contest). If confession of judgment is contested, attorneys' fees under this
paragraph shall be ten percent (10%) of the unpaid principal balance hereof and
interest then due hereunder. The Borrower hereby releases, to the extent
permitted by applicable law, all errors and all rights of exemption, appeal,
stay of execution, inquisition, and other rights to which the Borrower may
otherwise be entitled under the laws of the United States of America or of any
state or possession of the United States of America now in force or which may
hereafter be enacted. The authority and power to appear for and enter judgment
against the Borrower shall not be exhausted by one or more exercises thereof or
by any imperfect exercise thereof and shall not be extinguished by any judgment
entered pursuant thereto. Such authority may be exercised on one or more
occasions or from time to time in the same or different jurisdictions as often
as the Lender shall deem necessary or desirable, for all of which this Note
shall be a sufficient warrant. Notwithstanding any provision of this paragraph,
the Borrower retains its rights pursuant to Maryland Rules of Civil Procedure
Rule 2-611.
This Revolving Note shall be governed by and construed in accordance with
the laws of the State of Maryland, without reference to conflict of laws
principles.
IN WITNESS WHEREOF, the Borrower has caused this Revolving Note to be
executed by its duly authorized representative as of the day and year first
above written.
BORROWER:
ACE*COMM CORPORATION,
a Maryland corporation
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
2
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-12107 and 333-15237) of our report dated
September 29, 1998, appearing on page F-2 of ACE*COMM Corporation's Annual
Report on Form 10-K for the year ended June 30, 1998.
PricewaterhouseCoopers LLP
Washington, D.C.
September 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,956
<SECURITIES> 0
<RECEIVABLES> 9,985
<ALLOWANCES> 2,465
<INVENTORY> 3,232
<CURRENT-ASSETS> 17,664
<PP&E> 4,069
<DEPRECIATION> 1,785
<TOTAL-ASSETS> 24,593
<CURRENT-LIABILITIES> 11,686
<BONDS> 0
0
0
<COMMON> 88
<OTHER-SE> 12,697
<TOTAL-LIABILITY-AND-EQUITY> 24,593
<SALES> 22,465
<TOTAL-REVENUES> 22,465
<CGS> 13,325
<TOTAL-COSTS> 13,325
<OTHER-EXPENSES> 19,387
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117
<INCOME-PRETAX> (10,117)
<INCOME-TAX> (898)
<INCOME-CONTINUING> (9,219)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,219)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SEPARATION AGREEMENT AND GENERAL RELEASE
This Separation Agreement and General Release (hereinafter
"Agreement") is hereby entered into January 2, 1998, effective as of January 1,
1998, between ACE*COMM Corporation (hereinafter "the Company") and James M.
Moore (hereinafter "Mr. Moore"), who are collectively referred to herein as the
"Parties."
WHEREAS, Mr. Moore has served as Vice President - Marketing of the
Company; and
WHEREAS, for personal reasons, Mr. Moore is resigning as officer of the
Company; and
WHEREAS, the Parties desire to enter into this Agreement on the date
hereof to set forth their agreement with respect to Mr. Moore's resignation and
certain other matters in connection therewith; and
WHEREAS, the Parties desire that this Agreement supersede any
agreement, arrangement or understanding with respect to Mr. Moore's terms of
employment by the Company to the extent set forth herein.
NOW, THEREFORE, In consideration of the mutual promises contained
herein, and other good and valuable consideration as hereinafter recited, the
receipt and adequacy of which is hereby acknowledged, the Parties, intending to
be legally bound, agree as follows:
1. Resignation; Termination of employment. The Company and Mr. Moore have
agreed that, effective immediately, he hereby tenders his resignation as an
officer of the Company, and that he will remain as an active status
employee of the Company until May 30, 1998 (or such earlier time as he
breaches a term of this Agreement), whereupon his employment with the
Company shall terminate.
2. Special Projects. During the balance of the term of his employment, Mr.
Moore shall perform such special projects as may be assigned to him from
time to time by the Chief Executive Officer of the Company.
3. Non-competition, non-solicitation and confidentiality. Mr. Moore agrees
that, for a period of three (3) years from the date of this Agreement, he
will not, either within or without the United States, directly or
indirectly, as a stockholder, partner, investor, director, officer,
employee, consultant, contractor, agent or in any other capacity, engage
any business that is in competition with the business presently conducted
by the Company (the "Business"), provided that the foregoing shall not
prohibit Mr. Moore from owning beneficially less than 5% of the outstanding
stock of any class of
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<PAGE> 2
stock of a corporation the securities of which are regularly traded or
quoted on a national securities exchange or on an inter-dealer quotation
system. Specifically, but without limiting the generality of the
foregoing, Mr. Moore shall not directly or indirectly:
(a) Contract with, represent, solicit business or engage in the
Business to develop, market or sell billing data collection or network
management systems;
(b) Solicit business or in any other way interfere with or disrupt
the Company's business relationships with any persons in the Business;
(c) Solicit, hire, contract with or enter into any business dealings
with, entice or aid, or cooperate with others in soliciting or
enticing any current or future employees of the Company to leave the
Company and join any other company in the Business;
(d) Divulge any confidential information regarding the business to
anyone not connected with the Company;
(e) "indirect" competition shall include any competition undertaken
through an entity owned in whole or in part by Mr. Moore or any agent
or affiliate thereof.
Mr. Moore shall at all times hold in confidence any and all
confidential information that may have come into his possession or within
his knowledge concerning research activities, products and services offered
or being considered, mergers and other major corporate transactions being
considered, inventions, innovations, designs, ideas, plans, trade secrets,
proprietary information, advertising, distribution and sales methods and
systems, customer lists, and relationships between, or information about,
the Company and its employees, consultants, dealers, distributors,
customers and others who have had or will have business dealings with the
Company ("Confidential Information"). Mr. Moore acknowledges that such
Confidential Information is a valuable and unique asset and shall not
disclose any such Confidential Information directly or indirectly unless
such information has become generally available to the public other than as
a result of a breach of contract or fiduciary duty or unless required to do
so by court order.
Mr. Moore acknowledges that there is no adequate remedy at law for a
breach of this Paragraph 3 and that, in the event of such breach, or
attempted breach, the Company shall be entitled to injunctive or other
equitable relief to prevent any such breach, attempted breach or continuing
breach, without prejudice to any other remedies for damages or otherwise.
Mr. Moore agrees that the covenants in this Paragraph are separate and
reasonable in their scope and duration and that he shall not raise any
issue of reasonableness as a defense in any proceeding to enforce this
covenant. Notwithstanding the foregoing, should any court determine that
this Paragraph shall be unenforceable with respect to scope, duration or
geographic area, the Parties agree
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<PAGE> 3
that such court shall be empowered to substitute, to the extent
enforceable, provisions similar hereto or other provisions so as to provide
to the Company, to the fullest extent permitted by applicable law, the
benefits intended by this Agreement. The validity, legality or
enforceability of any remaining provisions of this Agreement shall not be
affected by any such modification.
4. Salary and loan forgiveness. As consideration for his continued employment
and the agreements in Paragraph 3, the Company agrees (i) to continue to
pay Mr. Moore through the date of termination of his employment his salary
at the rate in effect on the date of this Agreement, on a bi-weekly basis,
and (ii) to forgive on each of the next three anniversaries of the date of
this Agreement repayment of one third of the outstanding principal and
interest of that certain Note dated June 5, 1997 in the principal amount of
$133,000 (the "Note"), subject to Mr. Moore's continuing compliance with
the terms and conditions of this Agreement. In the event that Mr. Moore
breaches one or more of the provisions of this Agreement, without limiting
the Company's other remedies, including any right to damages, the
unforgiven amounts under the Note shall remain due and payable in full in
accordance with the terms of the Note.
Mr. Moore will have no other benefits of employment, including
compensation, access to premises, use of equipment and contact with
suppliers, employees and customers, except to the extent otherwise
expressly set forth herein. Mr. Moore agrees that, but for this Agreement,
he is not otherwise entitled to the above-described consideration from the
Company.
5. Stock options. Attached as Exhibit A is an Amended and Restated Stock
Option Agreement dated as of August 14, 1996 exercisable for 63,000 shares
and as Exhibit B, an Amended and Restated Stock Option Agreement dated as
of April 30, 1997 exercisable for 4,500 shares (together, these option
agreements are referred to as the "Option Agreements"). The Option
Agreements shall become exercisable in full on May 14, 1998.
For purposes of Section 4.1 of the Option Agreements, Mr. Moore will
be deemed to be employed by the Company until the earlier of May 30, 1998,
or such earlier time, if any, as he breaches a term of this Agreement. The
Option Agreements are subject to the terms of the Company's Amended and
Restated Omnibus Stock Plan, as amended from time to time, (the "Plan")
and, to the extent the terms of the Option Agreements are inconsistent with
the terms of the Plan, the terms of the Plan shall prevail as, interpreted
in good faith by the Board of Directors of the Company. Section 5.3 of the
Option Agreements is hereby deleted. The Option Agreements shall be
nontransferable otherwise than by will or the laws of descent and
distribution. Until the Option Agreements are terminated (which shall
occur no later than May 30, 1998), in the event of a change of control of
the Company, the options granted thereunder shall be treated in
substantially the same manner as those of other officers and directors of
the Company.
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<PAGE> 4
The Parties agree that Mr. Moore is not entitled to any other stock options
and that any agreements with respect to stock options other than the Option
Agreements hereby are terminated and are superseded by the terms of this
Agreement. The Option Agreements shall otherwise continue in full force
and effect in accordance with their terms except to the extent otherwise
modified pursuant to the terms of this Agreement.
6. Taxes. Mr. Moore agrees that he is solely responsible for any and all
taxes on payments or other compensation described herein, subject to any
required withholding by the Company, as to which Mr. Moore hereby consents.
Mr. Moore further agrees to indemnify and hold harmless the Company from
any and all costs, expenses, including but not limited to, reasonable
attorneys' fees, judgments, liabilities, tax liabilities or penalties,
interest, claims, payment of moneys, demands, losses, damages, and
penalties, except for the Company's share of FICA payments, which the
Company may hereafter sustain, incur or be required to pay as a consequence
of, for or by reason of, resulting from, arising out of, or relating in any
way to this payment to Mr. Moore. While the payments made herewith are
intended by the parties to be other than back pay, Mr. Moore understands
and acknowledges that the Company makes no representations to him regarding
the income tax treatment or consequences of any consideration paid in
connection herewith.
7. Health, life and disability insurance. The Company further agrees to
provide Mr. Moore and his dependents continuing coverage under the
Company's health, life and disability policies at his current level of
benefits until May 30, 1998, to the extent permitted under these policies
and, thereafter, only to the extent expressly required under the
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), as amended.
Mr. Moore recognizes that for purposes of the continuation coverage
requirements of group health plans under and the group health provisions of
the Maryland Annotated Code, a "qualifying event" and "applicable change in
status" occurs at the earlier of May 30, 1998 or the date that Mr. Moore is
earlier terminated as an employee of the Company.
8. Surrender of Company property and no authority. Mr. Moore agrees that upon
the termination of his employment with the Company, he will surrender to
the Company every item and every document that came into Mr. Moore's
possession in the course of his employment at the Company or that is the
Company's property (including but not limited to keys, records, computers,
peripherals, computer files and disks, notes, memoranda, models, inventory
and equipment) or contains Company information, in whatever form. All of
these materials are the sole and absolute property of the Company. In
addition, Mr. Moore shall not represent to any third party that he is an
employee or agent of the Company and he acknowledges that as of the date
hereof, he has no authority to, and will not attempt to, legally bind or
otherwise obligate the Company.
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<PAGE> 5
9. References. All reference requests from Mr. Moore's prospective employers
shall be made in writing addressed to the attention of George Jimenez, and
shall include a written authorization signed by Mr. Moore for the release
of the information. The Company will provide to prospective employers the
following information: Mr. Moore's dates of employment; Mr. Moore's job
title; and Mr. Moore's last annual compensation.
10. Release of the Company. Mr. Moore agrees that, in consideration of the
payments and consideration described above, on behalf of himself and anyone
claiming through him, he will, and hereby does, forever and irrevocably,
release and discharge the Company, its officers, directors, stockholders,
employees, agents, affiliates, predecessors, purchasers, assigns,
representatives, successors, successors in interest, and customers from any
and all grievances, claims, demands, debts, defenses, actions or causes of
action, obligations, contracts, promises, damages, judgments, expenses, and
liabilities, known or unknown, whatsoever, which he now has, has had, or
may have, whether the same be at law, in equity, or mixed, in any way
arising from or relating to any act, occurrence, or transaction before the
date of this Agreement, including without limitation his anticipated
separation of employment. This is a General Release. Mr. Moore expressly
acknowledges that this General Release includes, but is not limited to, Mr.
Moore's intent to release the Company from any claim relating to his
employment at the Company, including, but not limited to, tort and contract
claims, arbitration claims, statutory claims, claims under any state or
federal wage and hour law or wage collection law, and claims of age, race,
color, sex, religion, handicap, disability, national origin, ancestry,
citizenship, marital status, retaliation, or any other claim of employment
discrimination under the Age Discrimination In Employment Act (29 U.S.C.
Sections 626 et seq., "ADEA"), Title VII of the Civil Rights Acts of 1964
and 1991 as amended (42 U.S.C. Sections 2000e et seq.), the Moore
Retirement Income Security Act (29 U.S.C. Sections 1001 et seq.), the
Consolidated Omnibus Budget Reconciliation Act of 1985 (29 U.S.C. Sections
1161 et seq.), the Americans With Disabilities Act (42 U.S.C. Sections
12101 et seq.), the Rehabilitation Act of 1973 (29 U.S.C. Sections 701 et
seq.), the Family and Medical Leave Act (29 U.S.C. Sections 2601 et seq.),
the Fair Labor Standards Act (29 U.S.C. Sections 201 et seq.), the
Annotated Code of Maryland, and any other law prohibiting employment
discrimination.
Mr. Moore represents that he has not heretofore assigned or
transferred, or purported to assign or transfer, to any person or entity,
any claim against the Company or portion thereof or interest therein, and
that any such claim is not assignable or transferable.
11. Agreement not to sue. Mr. Moore agrees not to sue the Company or to join
in any lawsuit against the Company, or any other person or entity specified
in Paragraph 10, concerning any matter which arose prior to the date of
this Agreement. Mr. Moore further agrees and covenants not to make, file,
assist or encourage others in making or filing any lawsuits, complaints, or
other proceedings, including but not limited to any
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<PAGE> 6
suits in the local or state courts, the United States Federal District
Courts or any other court, against the Company, or any other person or
entity specified in Paragraph 10.
12. No wrongdoing. Mr. Moore agrees that the consideration set forth herein is
not to be construed as an admission of any wrongdoing or liability on the
part of the Company under any statute or otherwise, but that on the
contrary, any such wrongdoing or liability is expressly denied by the
Parties.
13. No prevailing party. Mr. Moore agrees that neither this Agreement nor the
negotiations in pursuance thereof shall be construed or interpreted to
render Mr. Moore a prevailing party for any reason, including but not
limited to an award of attorney's fees or costs under any statute or
otherwise.
14. Confidentiality. Mr. Moore agrees that the terms, provisions, and
conditions of this Agreement and the negotiations in pursuance thereof are
strictly confidential, that he may not disclose them to any person or
entity and that the Company will not disclose them except as required by
law, provided that Mr. Moore agrees that he will provide, and the Company
may provide, a copy of Paragraph 3 to any future employer. Mr. Moore
further agrees that a violation of the terms of this Paragraph regarding
the confidentiality of this Agreement is a material breach of this
Agreement, entitling the Company to recover any payments made to Mr. Moore
under this Agreement, to stop any payments or obligations owing under this
Agreement, to recover the costs and attorneys' fees the Company incurs to
recover under this paragraph and to obtain injunctive, monetary or other
relief permitted by law.
15. No comment on Company. Mr. Moore agrees that after the date of the
execution of this Agreement, he will not, either by conversation or any
other oral expression, by letter or any other written expression, or by any
other deed or act of communication (including, but not limited to allowing
himself to be referred to or quoted as the source of information) to the
public or to any individual person or entity or groups of persons or
entities, specifically including but not limited to such persons or
entities as are, have been, or may be, employees, customers, or business
associates of the Company, disparage, criticize, condemn or impugn the
reputation or character of the Company or any of the actions or writings,
specifically including but not limited to any of the policies, practices,
procedures or advertisements, which are, have been or may be taken or
produced by the Company or its predecessors, subsidiaries, parents,
successors, successors in interest, assigns, trustees, officers, directors,
agents, attorneys, servants or employees on behalf of the Company. Mr.
Moore understands that by agreeing to the provisions of this Paragraph, he
is waiving rights guaranteed by the First Amendment of the United States
Constitution and State counterparts. Mr. Moore further agrees that a
violation of the terms of this Paragraph is a material breach of this
Agreement, entitling the Company to recover any payments made to Mr. Moore
under this Agreement, to stop any payments, benefits or obligations owing
under this Agreement, to recover the costs and attorneys' fees the Company
incurs to
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<PAGE> 7
recover under this Paragraph and to obtain injunctive, monetary or other
relief permitted by law.
16. Binding on successors and permitted assigns; amendments. The Parties
further agree that this Agreement shall be binding upon and inure to the
benefit of the personal representatives, heirs, executors, and
administrators of Mr. Moore (who may not assign this Agreement) and the
assigns, affiliates, successors, officers, purchasers, agents,
representatives, directors and employees of the Company, that this
Agreement contains and comprises the entire agreement and understanding of
the Parties, that there are no additional promises or terms of the
Agreement among the Parties other than those contained herein, and that
this Agreement shall not be modified except in writing signed by each of
the Parties hereto.
17. Governing law. The Parties further agree that this Agreement and the
rights and obligations hereunder shall be governed by, and construed in
accordance with, the laws of the State of Maryland regardless of any
principles of conflicts of laws or choice of laws of any jurisdiction. The
state courts of the State of Maryland and, if the jurisdictional
prerequisites exist at the time, the United States District Court for the
District of Maryland, shall have sole and exclusive jurisdiction to hear
and determine any dispute or controversy arising under or concerning this
Agreement. Mr. Moore consents to the jurisdiction of such courts in any
such suit, action or proceeding and waives any objection he may have to
venue in such courts.
18. Interpretation. If any terms of the above provisions of this Agreement are
found null, void or inoperative, for any reason, the remaining provisions
will remain in full force and effect. The language of all parts of this
Agreement shall in all cases be construed as a whole, according to its fair
meaning, and not strictly for or against either of the Parties.
19. Cost of enforcement. If the Company seeks a restraining order, injunction
or any other relief, including but not limited to damages, against Mr.
Moore as a result of his breach of any provision of this Agreement, and
recovers any such relief, Mr. Moore shall reimburse the Company for the
attorney's fees, costs and other expenses it incurred obtaining that relief
(even if other relief were denied).
20. Understanding of agreement. Mr. Moore represents that he has read this
Agreement, that he understands all of its terms, that he had a reasonable
amount of time to consider his decision to sign it, that he had the
opportunity to discuss the terms of this Agreement with an attorney of his
choice, that in executing this Agreement he does not rely and has not
relied upon any representation or statements made by any of the Company's
agents, representatives, or attorneys with regard to the subject matter,
basis, or effect of the Agreement, and that he enters into this Agreement
voluntarily, of his own free will and with knowledge of its meaning and
effect.
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<PAGE> 8
21. Consideration of agreement. Mr. Moore understands that he has up to
twenty-two (22) days from the date of his receipt of this Agreement, which
was December 19, 1997, to consider his decision to sign it. By signing
this Agreement, Mr. Moore expressly acknowledges that his decision to sign
this Agreement was knowing and voluntary and of his own free will.
22. Limited right to revoke. Mr. Moore acknowledges that he may revoke this
Agreement only as it pertains to claims under the ADEA for up to and
including seven (7) days after his execution of this Agreement, and that
the aspects of this Agreement regarding his release of claims under the
ADEA shall not become effective until the expiration of seven (7) days from
the date of his execution of this Agreement. This provision regarding
revocation shall have no effect on the validity and enforceability of any
other term, condition or provision of this Agreement, which becomes
effective when signed by the Parties.
23. Counsel. THE COMPANY HEREBY ADVISES MR. MOORE TO CONSULT WITH AN ATTORNEY
PRIOR TO EXECUTING THIS AGREEMENT.
24. Headings. All Paragraph headings are for convenience only.
25. Entire agreement. Mr. Moore acknowledges and agrees that payments made or
to be made and benefits provided or to be provided under this Agreement are
in lieu of any and all compensation and benefits of any nature which may
otherwise have been due to Mr. Moore under the terms of any agreement,
arrangement or understanding (whether written or oral) binding upon the
Company and Mr. Moore.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day
and year first above written.
- ---------------------------- ---------------
James M. Moore Date
ACE*COMM CORPORATION
By:
---------------------------- -----------------
Date
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