<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ---------
Commission file number 0-21059
ACE*COMM CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1283030
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
704 Quince Orchard Road, Gaithersburg, MD 20878
- ----------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
301-721-3000
---------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock outstanding as of May 1, 1998 8,806,374
1
<PAGE>
ACE*COMM CORPORATION
INDEX
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and June 30, 1997 3
Consolidated Statements of Operations (Unaudited) for the
Three and Nine Months Ended March 31, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity as of
March 31, 1998 (Unaudited) and June 30, 1997 5
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
<PAGE>
ACE*COMM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, June 30,
1998 1997
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................. $ 1,981 $ 7,920
Accounts receivable, net .................................. 12,701 16,120
Inventories, net .......................................... 2,409 2,814
Notes receivable .......................................... 1,050 --
Prepaid expenses and other ................................ 1,405 1,011
-------- --------
Total current assets ................................... 19,546 27,865
Property and equipment, net ................................. 4,251 3,470
Capitalized software development costs, net ................. 2,245 2,077
Notes receivable ............................................ 535 --
Other assets ................................................ 81 106
-------- --------
Total assets ........................................... $ 26,658 $ 33,518
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Current borrowings ........................................ $ 403 $ 527
Accounts payable .......................................... 1,113 2,735
Accrued expenses .......................................... 956 184
Accrued compensation ...................................... 2,598 2,129
Accrued contract costs .................................... 3,238 3,551
Deferred income taxes ..................................... 340 395
Deferred revenue .......................................... 763 510
-------- --------
Total current liabilities .............................. 9,411 10,031
Noncurrent borrowings ..................................... 736 1,013
Deferred income taxes ..................................... 765 765
-------- --------
Total liabilities ...................................... 10,912 11,809
Common stock, $.01 par value, 45,000,000 shares authorized,
8,805,249 and 8,550,582 shares issued and outstanding ..... 88 85
Additional paid-in capital ................................ 19,820 19,530
Retained (deficit) earnings ............................... (4,162) 2,094
-------- --------
Total stockholders' equity ............................. 15,746 21,709
-------- --------
Total liabilities and stockholders' equity $ 26,658 $ 33,518
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
March 31, March 31,
-------------------------- --------------------------
1998 1997 1998 1997
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenue - products, software licenses and services.... $ 4,560 $ 8,209 $ 18,787 $ 21,730
Cost of products, software licenses and services ...... 2,380 3,951 10,662 10,569
-------- -------- -------- --------
Gross profit .......................................... 2,180 4,258 8,125 11,161
Selling, general and administrative expense ........... 5,437 2,806 12,744 7,452
Research and development expense ...................... 804 300 1,755 1,166
-------- -------- -------- --------
(Loss) income from operations ......................... (4,061) 1,152 (6,374) 2,543
Interest income, net .................................. 29 85 118 124
-------- -------- -------- --------
(Loss) income before income taxes ..................... (4,032) 1,237 (6,256) 2,667
Income tax provision .................................. 823 470 -- 736
-------- -------- -------- --------
Net (loss) income ..................................... $ (4,855) $ 767 $ (6,256) $ 1,931
-------- -------- -------- --------
-------- -------- -------- --------
Basic (loss) income per share ( pro forma for the
nine months ended March 31, 1997) ..................... ($0.55) $ 0.10 ($0.72) $ 0.26
-------- -------- -------- --------
-------- -------- -------- --------
Diluted (loss) income per share ( pro forma for the
nine months ended March 31, 1997) ..................... ($0.55) $ 0.09 ($0.72) $ 0.23
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing income per share:
Basic ............................................. 8,783 8,068 8,675 7,416
-------- -------- -------- --------
-------- -------- -------- --------
Diluted ........................................... 8,783 9,012 8,675 8,253
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Retained
--------------- ------------------ Add'l Earnings
Par Par Paid-In (Accumulated
Shares Value Shares Value Capital Deficit) Total
------ ------ ------- ------ --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1996 ................ 1 $ 1 3,590 $ 36 $ 343 $ (530) $ (150)
Accretion of preferred stock
dividends .......................... -- -- -- -- (17) -- (17)
Conversion of preferred stock
Class C ............................ -- -- 1,531 15 2,264 -- 2,279
Redemption of preferred stock
Class B ............................ (1) (1) -- -- (307) -- (308)
Issuance of common stock ............. -- -- 2,645 26 16,083 -- 16,109
Exercise of common stock
options ............................ -- -- 838 8 2,060 -- 2,068
Repurchase and retirement
of common stock .................... -- -- (54) -- (896) -- (896)
Net income for the period ended
June 30, 1997 ...................... -- -- -- -- -- 2,624 2,624
---- ------ ----- ------ -------- -------- --------
Balance, June 30, 1997 ............... -- -- 8,550 85 19,530 2,094 21,709
---- ------ ----- ------ -------- -------- --------
Exercise of common stock
options (unaudited) ................ -- -- 256 3 311 -- 314
Repurchase and retirement
of common stock (unaudited) ........ -- -- (1) -- (21) -- (21)
Net income (loss) for the period ended
March 31, 1998 (unaudited) ......... -- -- -- -- -- (6,256) (6,256)
---- ------ ----- ------ -------- -------- --------
Balance March 31, 1998 ............... -- -- 8,805 $ 88 $ 19,820 $ (4,162) $ 15,746
---- ------ ----- ------ -------- -------- --------
---- ------ ----- ------ -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
March 31,
-------------------------
1998 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ (6,256) $ 1,931
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation ..................................... 587 288
Amortization of capitalized software ............. 729 447
Changes in operating assets and liabilities:
Accounts receivable .............................. 3,419 (5,562)
Notes receivable ................................. (1,585) --
Inventories ...................................... 405 (189)
Other assets ..................................... (368) 25
Accounts payable ................................. (1,622) (1,376)
Accrued expenses ................................. 459 (217)
Accrued compensation ............................. 469 332
Deferred income taxes ............................ (55) 736
Deferred revenue ................................. 253 220
------ ------
Net cash used for operating activities ............. (3,565) (3,365)
------ ------
Cash flows from investing activities:
Purchases of property and equipment ................ (1,369) (1,239)
Additions to capitalized software development costs (897) (966)
------ ------
Net cash used for investing activities ............. (2,266) (2,205)
------ ------
Cash flows from financing activities:
Net decrease in line of credit ..................... -- (4,446)
Payments on debt ................................... (373) (271)
Principal payments under capital lease obligation .. (28) (11)
Net proceeds from common stock issued .............. -- 16,109
Exercise of common stock options ................... 314 984
Repurchase and retirement of common stock .......... (21) (273)
Redemption of class B preferred shares ............. -- (308)
------ ------
Net cash (used for) provided by financing activities (108) 11,784
------ ------
Net (decrease) increase in cash and cash equivalents (5,939) 6,214
Cash and cash equivalents at beginning of period ... 7,920 369
------ ------
Cash and cash equivalents at end of period ......... $ 1,981 $ 6,583
------ ------
------ ------
Supplemental disclosure of cash flow information--
Cash paid during the period for:
Interest .................................... $ 91 $ 139
------ ------
------ ------
Income taxes ................................ $ 39 $ 15
------ ------
------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
ACE*COMM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of ACE*COMM Corporation and its subsidiaries ("ACE*COMM" or the
"Company"). The financial statements have been prepared by ACE*COMM in
accordance with generally accepted accounting principles for interim financial
statements and pursuant to the rules of the Securities and Exchange Commission
for Form 10-Q. Accordingly, certain information and footnotes required by
generally accepted accounting principles for complete financial statements have
been omitted. It is the opinion of management that all adjustments considered
necessary for a fair presentation have been included, and that all such
adjustments are of a normal and recurring nature. Operating results for the
periods presented are not necessarily indicative of the results that may be
expected for any future periods. For further information, refer to the audited
financial statements and footnotes included in the Company's Annual Report on
Form 10-K for the year ended June 30, 1997.
Pro forma income (loss) per share is computed using the weighted average number
of shares of common stock, adjusted for the dilutive effect of common stock
options and assuming the conversion of redeemable preferred stock as of the
beginning of the period presented. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock and common stock
equivalent shares issued by the Company at prices below its initial public
offering price during the twelve month period prior to the initial public
offering date (using the treasury stock method and an offering price of $7.00
per share) have been included in the calculation of pro forma income per share
for the nine months ended March 31, 1997, as if they were outstanding for all of
the period regardless of whether they are dilutive.
Reclassifications
Certain prior year information has been reclassified to conform with current
year presentation.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
ACE*COMM Corporation ("ACE*COMM" or the "Company") develops, markets and
services operations support systems ("OSS") products for networks deployed by
telecommunications service providers. These include telephone companies, other
public carriers and large enterprises operating data and voice networks. The
Company's products perform such functions as billing data collection, network
surveillance, alarm processing and network management for some of the largest
carriers and enterprises in the world.
The Company sells and licenses hardware and software products through direct
channels and through strategic alliance partners, for delivery to end-users in
the United States and internationally. Since June 1994, the Company historically
derived most of its revenue from sales of carrier network products to
traditional carriers. The Company expects such sales to continue to represent a
significant portion of its revenue for at least the next several years. An
increasing proportion of the Company's revenue is derived from the sale of
products to new and emerging carriers and the balance of the Company's revenue
is derived from the sale of products to enterprise customers, including agencies
of the U.S. government. The proportion of revenue derived from each of these
markets is expected to vary from time to time based on the timing of contracts
and on developments within the telecommunications industry. The Company
experiences relatively higher gross margins in connection with product sales in
which a software license comprises a substantial portion of the sales price,
such as are typical of the Company's sales to new and emerging carriers and to
its enterprise customers.
The Company sells its products directly to end users, or as components in the
products or systems developed and marketed by its strategic partners. The
Company typically experiences higher margins offset in part by relatively higher
sales and marketing expenses, in connection with its direct sales contracts.
Substantially all of the Company's revenue is derived from dollar-denominated
sales and, although the Company has had significant sales to Mexico and the
Republic of South Korea, the Company does not have significant foreign
operations. The Company's customers are usually contractually obligated to pay
for products in U.S. dollars. All products are shipped from the United States
pursuant to terms of orders issued by customers.
Results of Operations
The following table sets forth, for the periods indicated, certain items on the
Company's statement of operations as a percentage of revenue:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
March 31, March 31,
-------------------------- -------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue - products, software licenses
and services .............................. 100.0% 100.0% 100.0% 100.0%
Costs and operating expenses:
Cost of products, software licenses
and services ............................. 52.2% 48.1% 56.8% 48.6%
----- ----- ------ -----
Gross margin ............................... 47.8% 51.9% 43.2% 51.4%
Selling, general and administrative 119.2% 34.2% 67.8% 34.3%
Research and development ................... 17.6% 3.7% 9.3% 5.4%
----- ----- ------ -----
(Loss) income from operations ................ (89.0)% 14.0% (33.9)% 11.7%
----- ----- ------ -----
----- ----- ------ -----
</TABLE>
8
<PAGE>
Revenues. Revenues for the three- and nine-month periods ended March 31, 1998
were $4.6 million and $18.8 million, respectively, representing a decrease of
$3.6 million (44%) and $2.9 million (13%) when compared to revenues of $8.2
million and $21.7 million, respectively, for the comparable three- and
nine-month periods in 1997. The substantial decrease in revenues in the current
quarter was attributable to several factors. Revenues from the traditional
carrier market were adversely affected by continuing economic instability in the
Asia Pacific region, from which the Company has received, and expected to
receive in the future, substantial orders, and from the long lead times typical
of sales in the traditional carrier market. Revenues from the Company's
enterprise product offerings continue to be impacted by the stop work order
issued under the contract with the U.S. Air Force. Although the Company has seen
some indications that the Korea Telecom and U.S. Air Force contracts eventually
may be funded and reinstated, these contracts are currently excluded from
internal Company forecasts. Revenues in the emerging carrier market were lower
than expected primarily due to unanticipated customer delays in orders.
The Company anticipates that its revenues from customers in the Asia Pacific
region will continue to be adversely affected at least for the duration of the
period of economic instability in that region. The Company's strategy is to seek
to offset such adverse effects through increased sales in the traditional
carrier market outside of the affected areas of the Asia Pacific market, as well
as in the emerging and alternative carrier and enterprise markets in the United
States, Canada and Western Europe.
The decrease in revenues for the nine months ended March 31, 1998 reflected the
factors discussed above.
Gross Margins. Gross margins for the three- and nine- month periods ended March
31, 1998 were 47.8% and 43.2%, respectively, compared to gross margins of 51.9%
and 51.4% for the comparable three- and nine-month periods in 1997. The
reduction in gross margin, in both the current quarter and the nine-month
period, when compared to the comparable periods in 1997, was primarily due to a
change in the mix of products sold and the effect of certain fixed costs on a
lower volume of revenue.
Selling, General and Administrative. Selling, general and administrative
expenses for the three- and nine-month periods ended March 31, 1998 were $5.4
million and $12.7 million, respectively, representing increases of $2.6 million
(93%) and $5.3 million (72%), when compared to selling, general and
administrative expenses of $2.8 million and $7.4 million, respectively, for the
comparable three- and nine-month periods in 1997. The increase in the current
three-month period was due in part to increased personnel, fringe benefits and
facilities costs associated with expansion of the Company's marketing, sales and
administrative functions and, more significantly, to the addition of reserves of
$1 million for potentially uncollectible receivables, and $500,000 for certain
operating charges including certain employee severance costs. The increase for
the nine-month period was primarily due to increased personnel, fringe benefits
and facilities costs referred to above and, to the addition of approximately
$1.4 million in reserves for potentially uncollectible receivables, and the
other reserves referred to above.
Research and Development. Research and development expenses for the three- and
nine-month periods ended March 31,1998 were $804,000 and $1.8 million,
respectively, representing increases of $504,000 (168%) and $600,000 (50%) when
compared to research and development expenses of $300,000 and $1.2 million,
respectively, for the comparable three- and nine-month periods in 1997. The
increases in both the current three- and nine-month periods were primarily
attributable to the addition of software development engineers required to
support the continuing development of the Company's Pro*Vision product line for
the new and emerging carrier market, as well as other ongoing development
activities.
Provision for Income Taxes. As a result of the current quarter loss of over $4
million, the Company expects to show a cumulative loss for the 1998 fiscal year.
The tax benefits associated with this loss have been offset entirely by a
valuation allowance and therefore the previously recorded benefit was reversed
during the current quarter. The resulting tax benefits should be available to
offset any future profits of the Company.
9
<PAGE>
Liquidity and Capital Resources
As of March 31, 1998, the Company had approximately $2.0 million of cash and
cash equivalents and $10 million of working capital. These balances represent
decreases of $5.9 million in cash and cash equivalents and $7.7 million in
working capital when compared to the Company's cash and cash equivalents and
working capital balances as of June 30, 1997, the end of its most recently
completed fiscal year. The decreases during the most recent nine-month period
are primarily due to the funding of operating losses, capital expenditures for
computer equipment, and a relatively high accounts receivable balance (when
compared to current period revenues) as of March 31, 1998.
The relatively high level of accounts receivable at March 31, 1998, was
primarily comprised of approximately $4.1 million of unbilled accounts
receivable (32% of total accounts receivable as of March 31, 1998) which, under
contractual payment terms, may not be billed for up to twelve months, and
approximately $4.8 million of accounts receivable (38% of total accounts
receivable as of March 31, 1998) which represent invoices outstanding for more
than 90 days, which the Company is actively pursuing. In March 1998, the Company
converted an approximately $1.6 million past due account receivable, outstanding
from a prime contractor, to a secured interest-bearing promissory note payable
over a term of 18 months. In addition, the Company has provided $1.4 million in
reserves for potentially uncollectible amounts.
The Company had two lines of credit with Crestar Bank of Maryland ("Crestar"),
with total borrowing capacity of $3.5 million, both of which expired in January
1998. During April 1998, the Company completed negotiations with respect to a
replacement revolving credit facility from Crestar expiring December 31, 1998,
with maximum borrowing capacity equal to the lesser of (i) $3.5 million, or (ii)
80% of the value of eligible billed receivables (approximately $2.0 million at
May 1, 1998) less any outstanding borrowings and letters of credit, and subject
further to the bank's ability to withhold funding from time to time and to
recall outstanding borrowings in its sole discretion. The line bears interest at
a variable rate equal to 2.5% above the 30-day LIBOR rate, with accrued interest
payable monthly, is secured by the general assets of the Company, requires the
Company to comply with certain financial covenants measured at the end of each
fiscal quarter, including positive net income and a minimum tangible net worth,
and contains cross-default provisions with respect to borrowings currently
outstanding under other agreements with Crestar.
Considering the losses experienced in the last two quarters, the Company is
seeking additional funding to meet its anticipated short and long-term needs.
The Company is evaluating potential sources of debt or equity financing, other
possible sources of financing and certain strategic alternatives. No assurance
can be given that such additional financing or alternatives will be available in
a timely manner or at all or, if available, that such financing will be on terms
favorable to the Company. In the event that additional financing is not
available at all or on favorable terms, the Company's business could be
materially adversely affected in the event that cash flow from operations is
inadequate to support the Company's requirements.
Recent Events
As a result of recent revenue performance the Company is implementing plans for
expense reductions and cash management, including continuing aggressive
collection of outstanding accounts receivable, staff reductions involving
non-essential personnel, and curtailment of non-essential capital spending. The
Company also has reassigned staff to increase the effectiveness of its core
market, sales and product development efforts. Finally, the Company is seeking
to address its short-term and long-term liquidity needs. See " Liquidity and
Capital Resources."
The results of operations for the periods ended March 31, 1998, are not
necessarily indicative of operating results to be expected for the full year.
Until the Company's liquidity situation is resolved, and in view of continuing
uncertainty in the timing of receipt of additional revenues, the Company is
unable, at this time, to predict its future results of operations, including
results for the fourth quarter.
10
<PAGE>
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, qualifying 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 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, including, but
not limited to, the Korean Telecom and U.S. Air Force contracts. See "Results of
Operations."
Sales to traditional carriers have been and are expected to continue to
represent a significant portion of the Company's 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 has expanded its operation rapidly, which has placed significant
demands on the Company's administrative, operational, including customer service
and sales, and financial personnel and systems. Any further 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 expansion of the
Company's operations. If the Company is unable to respond to and manage
expansion and 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 is relatively new and in that many of these
organizations are in the early stages of their development, financial resources
may be limited and such limitations may impact their ability to pay for the
Company's products, software licenses and services. Substantial portions of the
Company's research and development expenditures are required to develop products
for this market.
Additional risks and uncertainties that could cause actual results to differ
from those anticipated by forward-looking statements made by or on behalf of the
Company include, but are not limited to, accounting adjustments during the final
closing of the books; delays or cancellations of orders due to various factors,
including business and economic conditions in the U.S. and foreign countries or
industry-wide slowdowns; uncertainties associated with collection of amounts due
to the Company; pricing pressures and the impact of competitive products; the
time and cost to develop and achieve acceptance of new products; and
manufacturing efficiencies.
11
<PAGE>
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). This
statement establishes standards for computing and presenting earnings per share;
simplifying previous standards for computing earnings per share ("EPS") and
making them comparable to international standards. It replaces the presentation
of primary EPS with a presentation of basic EPS, and requires dual presentation
of basic and diluted "EPS on the face of the income statement for all entities
with complex capital structures. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average number
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 or resulted in the issuance of
common stock that then share in the earnings of the entity. SFAS 128 requires
restatement of all prior period earning per share data presented, and is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Earlier application is not permitted.
The Company adopted this statement during the second quarter of 1998, as
required. Accordingly, all prior period EPS data have been restated.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and No.
131, "Disclosures about Segments of an Enterprise and Related Information."
These statements become effective for the Company's 1998 financial statements.
The Company is evaluating these statements to determine the impact on its
reporting and disclosure requirements.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," which provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions and becomes effective
for the Company's fiscal 1999 financial statements. In March 1998, the AICPA
adopted SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2"
which defers by one year the implementation date for a provision of SOP 97-2.
The Company is evaluating the impact of both SOP 97-2 and SOP 98-4 and will
fully adopt required provisions of both pronouncements beginning with fiscal
year 1999.
YEAR 2000 COMPLIANCE
The Company is currently evaluating the impact of "Year 2000" compliance on its
internal business systems and applications as well as the impact on the
Company's products.
12
<PAGE>
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
11.1 Statement of Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACE*COMM CORPORATION
DATE May 11, 1998 By /s/ George T. Jimenez
-----------------
George T. Jimenez
President and Chief Executive Officer
/s/ Joseph F. Greeves
-----------------
Joseph F. Greeves
Vice President and Chief Financial Officer
14
<PAGE>
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic income per share:
Net (loss) income ........................................... $(4,855) $ 767 $(6,256) $ 1,931
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding:
Common stock ................................................ 8,783 8,068 8,675 7,416
------- ------- ------- -------
------- ------- ------- -------
Basic (loss) income per share (pro forma for the nine
months ended March 31, 1997) ................................. $ (0.55) $ 0.10 $ (0.72) $ 0.26
------- ------- ------- -------
------- ------- ------- -------
Diluted income per share:
Net (loss) income ........................................... $(4,855) $ 767 $(6,256) $ 1,931
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding:
Common stock ................................................ 8,783 8,068 8,675 7,416
Common stock options, as if converted, only if dilutive...... -- 944 -- 837
------- ------- ------- -------
Weighted average common shares and equivalents ................... 8,783 9,012 8,675 8,253
------- ------- ------- -------
------- ------- ------- -------
Diluted (loss) income per share (pro forma for the nine
months ended March 31, 1997) ................................. $ (0.55) $ 0.09 $ (0.72) $ 0.23
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
March 31, 1998 Financial Statements included in the Company's Form 10-Q
and is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,981
<SECURITIES> 0
<RECEIVABLES> 14,051
<ALLOWANCES> 1,350
<INVENTORY> 2,409
<CURRENT-ASSETS> 19,546
<PP&E> 5,898
<DEPRECIATION> 1,647
<TOTAL-ASSETS> 26,658
<CURRENT-LIABILITIES> 9,411
<BONDS> 0
0
0
<COMMON> 88
<OTHER-SE> 15,658
<TOTAL-LIABILITY-AND-EQUITY> 26,658
<SALES> 18,787
<TOTAL-REVENUES> 18,787
<CGS> 10,662
<TOTAL-COSTS> 10,662
<OTHER-EXPENSES> 14,499
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> (6,256)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,256)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,256)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
