<PAGE> 1
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, 1999
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)
<TABLE>
<S> <C>
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)
</TABLE>
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 August 31, 1999 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 $20,927,795 (4,783,496
shares of Common Stock at a closing price on the NASDAQ National Market of
$4.375 on such date). Outstanding as of August 31, 1999 were 8,882,818 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 18, 1999 are incorporated by reference in Part
III.
-1-
<PAGE> 2
ACE*COMM CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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 22
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K 22
</TABLE>
-2-
<PAGE> 3
PART I
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
"Selected Financial Data", "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Additional Factors Affecting Future
Operating Results" and "--Year 2000".
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, Next Generation
Networks (NGN), and large enterprises operating internal networks. The Company's
product based solutions perform billing data collection and mediation, wholesale
billing, subscriber billing and customer care, network surveillance, alarm
processing and network traffic and business 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 and Convergent Mediation
The Company offers several products and solutions for the collection,
mediation and analysis and presentation of call data derived from networks
ranging from voice circuit switched networks, through data networks based on
X.25, frame relay, and Asynchronous Transfer Mode (ATM), to traditional switched
networks and the NGNs based on the Internet Protocol (IP). This collection of
capabilities is referred to as Convergent Mediation.
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 other network elements and electronically transmits
the data to a central location. The data is processed for such purposes as
billing, business analysis, 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. A recent version of DCMS is called the Network Element Data Server
("NEDS") which provides the data on a real-time basis. The DCMS*PLUS(R) version
of DCMS is based on a low-cost technology platform and is targeted at carriers
in emerging economy countries. The new DCMS*POWER, based on PowerPC technology,
is used for IP collection and mediation as well as for other high-speed
protocols, 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 IP, 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 mediation platform. 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 billing, customer care or network management systems.
As more IP, ATM and frame relay network elements are incorporated into carrier
and enterprise networks, it will become increasingly important for network
operators 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 and mediation of call detail
records transmitted by multiple DCMS units and similar equipment of other
-3-
<PAGE> 4
vendors. UPS-32 collects call data from dispersed network element sites,
processes and formats the data on a customer-defined schedule, and distributes
the data to the customer's billing and/or operations center. The CANS(R),
Central Access Network Server version of UPS-32 collects, mediates, and
distributes network data in real time. The real-time collection and mediation of
network data by NEDS and CANS is increasingly important in NGNs.
CDReZ is a new software package that assists telecommunications service
providers in managing their billing network data flow. It supports customer
service and provides data used in customer relationship management (CRM). CDReZ
is a fully data independent, flexible, user-defined tool used to pre-process
billing data before distributing the data to downstream OSS.
Provisioning Gateway (APG) is a service activation gateway that can be used
by any Billing, Customer Care or Service Management system to activate and
manage subscribers and the services they use on multi-service networks. APG can
support multiple service providers sharing the same multi-service network.
Network interfaces can be adapted or created for any type of network element.
The addition of the APG, a message-oriented mediation solution, to both file and
real-time flow based mediation solutions adds another dimension of convergence
to our mediation product offerings.
TREX*COMM(R) - TREX*COMM is a software based solution designed for local
exchange carriers who use carrier network facilities 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 protocols, customers can access 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, TREX*COMM makes
network information available to CENTREX subscribers to enable them to manage
and control their telecommunications costs.
Data Warehousing and Business Support Systems
N*VISION(TM) - N*VISION, the successor to the Company's RTMS(R), Real Time
Management System, was originally developed for use by international and long
distance carriers. N*VISION monitors network data in real-time and provides,
from a single database, information for subscriber and wholesale billing,
carrier settlements, fraud detection, subscriber management and network
management. The heart of N*VISION is a very large and flexible 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 network
elements. N*VISION processing software presents the data for analysis within
seconds of call completion through the use of a user-friendly Graphical User
Interface. N*Vision is increasingly used to collect, mediate, store, and process
data from NGNs utilizing ATM and IP technology.
Surveillance, Alarm and Traffic Reporting
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 many other network components of the billing system
to assure that no billing data is lost or duplicated. In addition, ANMS serves
as a user interface and collects system logs from the network elements.
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.
-4-
<PAGE> 5
Enterprise Network Management
NetPlus(R) Voice and Data Network Management System - NetPlus is a family
of network management solutions consisting of five systems designed to automate
network operations and management functions for circuit-switched and IP-based
networks. These systems employ a network 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 systems
are intended to manage private voice and data networks for 1,000 to 50,000
users. These systems 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, convergent (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
network architecture and common database that permit them to operate
independently or as an integrated product. Support is offered for both
circuit-switched and IP-based network topologies. The product is continually
enhanced, through tailoring to specific customer needs. NetPlus PRO*VISION is
licensed for operation by network service providers and is operated in
ACE*COMM's data processing center to provide service bureau and outsource
services.
SERVICES
The Company is increasingly asked to provide services to customers which
might involve the development of new products from funded customer research, or
adapt existing ACE*COMM products to the customer's specialized needs. In these
instances, the products of the Company may serve as a total or partial basis for
the customer requirements. Apart from custom product development, the Company
provides consulting, systems integration, facilities management, outsourcing,
service bureau, and a variety of on-going support services such as training and
installation. These service offerings allow a customer to choose the level of
technical and development involvement they want to take on internally, as
compared to the level that they want to outsource to ACE*COMM. It also allows
the customer to have an ongoing source of knowledge for future support and
developmental needs.
QUALITY
The Company maintains an ISO 9000 standard Quality Management Program to
monitor the quality of its offerings 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.
SALES AND MARKETING
The Company sells product based solutions 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
-5-
<PAGE> 6
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
To develop, market and distribute its product solutions 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 product and solutions for use by them
or their customers. The Company sells its products, systems and services through
direct sales and through the Company's strategic alliance partners. In 1999,
sales to strategic alliance partners comprised approximately 36% of revenue.
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 product based
solutions.
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.
- - GENERAL DYNAMICS GOVERNMENT SYSTEMS CORPORATION WORLDWIDE TELECOMMUNICATION
("GENERAL DYNAMICS GOVERNMENT SYSTEMS") - provides telephone systems at
military facilities throughout the world. The Company, as a subcontractor
to General Dynamics Government Systems for network management products,
installs and supports NetPlus products at multiple military facilities.
- - 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.
-6-
<PAGE> 7
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 under
warranty for a period ranging from one to 24 months. This can include 24 hour,
seven days per week support, replacement parts, software upgrades, and Year 2000
enhancements, when and if required. 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 generally within the
next year. Backlog at June 30, 1999, 1998 and 1997 was approximately $7.3
million, $11.2 million and $7.0 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 and 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 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 Telesciences, Inc. ("TLSI"), Comptel and
CGI, Inc. ("CGI") that can supply individual billing data collection components
and (iii) vendors that supply product components, including Ericcson-Hewlett-
Packard
-7-
<PAGE> 8
Telecommunications ("EHPT"), 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 & Company ("Stonehouse")
and Metasolv, (iii) vendors that supply product components such as EHPT 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, 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, EHPT, 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
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 1999, 1998 and 1997, independent research and development
expenses were $1.6 million, $2.4 million and $1.5 million, respectively.
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
-8-
<PAGE> 9
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, 1999, the Company employed a total of 178 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 five office locations: Gaithersburg, Maryland;
Frederick, 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:
<TABLE>
<CAPTION>
CURRENT
LOCATION SQUARE FOOTAGE LEASE EXPIRATION ANNUAL RENT
- -------- -------------- ---------------- -------------------------------
<S> <C> <C> <C>
Gaithersburg, Maryland 38,427 November 30, 2003 $653,000 (subject to annual
increases of approximately
$21,000 and allocated
operating costs each year)
</TABLE>
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 1999.
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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
George T. Jimenez 63 Chief Executive Officer and Chairman of the Board
Gino O. Picasso 43 President and Chief Operating Officer
S. Joseph Dorr 52 Executive Vice President of Business Development
Dr. Thomas V. Russotto 54 Executive Vice President of Technology and Chief Technology Officer
James K. Eckler 52 Executive Vice President of Finance and Administration
Loretta L. Rivers 42 Corporate Secretary
</TABLE>
-9-
<PAGE> 10
George T. Jimenez is the Chief Executive Officer of the Company and has
served as Treasurer and a Director of the Company since its inception in 1983.
From 1983 to September 1999, Mr. Jimenez also served as the President of the
Company.
Gino O. Picasso joined the Company in September 1999 as President and Chief
Operating Officer. Prior to joining the Company and since 1994, Mr. Picasso
served as President of GE Capital Spacenet Service, Inc., a wholly owned
subsidiary of General Electric Company.
S. Joseph Dorr has been a Vice President of the Company since 1983 and is
currently the Executive Vice President of Business Development. From 1983 to
1989, he also 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 a Vice President of the Company since 1985
and is currently the Executive Vice President of Technology and Chief Technology
Officer. From 1988 to 1998, Dr. Russotto directed the Carrier Networks Division
and from 1983 to 1985 he served as Director of Product Development at the
Company.
James K. Eckler joined the Company in October of 1998, and was named the
Executive Vice President of Finance and Administration in January 1999. Prior to
joining the Company, Mr. Eckler served as Interim CFO of a privately held
telecommunications systems integration firm, IMCI Technologies (March 1998 to
September 1998). Prior to that, Mr. Eckler was President of Eckler & Company, a
privately held management consulting firm specializing in electronic commerce,
payment systems, and logistics for global logistics companies (August 1996 to
March 1998). From the fall of 1994 to August 1996 he served as Vice President of
Corporate Development for TNT Logistics, a wholly-owned subsidiary of TNT Ltd.
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 18, 1999.
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.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------- --------------------------------------------
HIGH LOW HIGH LOW
------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
1st Quarter $ 6.13 $ 1.38 $ 23.88 $ 13.38
2nd Quarter 6.94 0.81 24.63 11.00
3rd Quarter 8.38 1.81 14.38 5.88
4th Quarter 4.94 2.19 8.88 5.06
</TABLE>
COMMON STOCKHOLDERS
As of August 31, 1999, there were 8,882,818 shares outstanding and held by
75 shareholders of record.
-10-
<PAGE> 11
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 future payment of cash dividends, if any, is also
within the discretion of the Board of Directors and will 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.
PRIVATE PLACEMENTS
On March 31, 1999 the Company sold an aggregate of 4,296 shares of Common Stock
to non-affiliates pursuant to the Company's Employee Stock Purchase Plan, for an
aggregate of $11,411. The Company relied on Section 4 (2) of the Securities Act
of 1933 (the "Act") as an exemption from registration under the Act. The Company
expects to register under the Act the balance of the shares issuable under the
plan.
-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, 1999 and as of June 30,
1999, 1998, 1997, 1996, and 1995 are derived from the audited financial
statements of the Company.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $ 29,657 $ 22,465 $ 33,684 $ 19,983 $ 12,415
Cost of revenue 13,765 13,325 17,627 10,836 6,579
------------- ------------- ------------- ------------- -------------
Gross profit 15,892 9,140 16,057 9,147 5,836
Selling, general and administrative 13,046 14,574 11,254 6,751 6,049
Research and development 1,562 2,358 1,472 957 1,045
Provision for doubtful accounts 812 2,455 - - -
------------- ------------- ------------- ------------- -------------
Income (loss) from operations 472 (10,247) 3,331 1,439 (1,258)
Interest income (185) (247) (347) - -
Interest expense 39 117 156 379 335
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes 618 (10,117) 3,522 1,060 (1,593)
Income taxes - (898) 898 - -
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 618 $ (9,219) $ 2,624 $ 1,060 $ (1,593)
============= ============= ============= ============= =============
Net income (loss) per share:
Basic $ 0.07 $ (1.06) $ 0.35 $ 0.26 $ (0.53)
============= ============= ============= ============= =============
Diluted $ 0.07 $ (1.06) $ 0.32 $ 0.18 $ (0.53)
============= ============= ============= ============= =============
Number of shares used in computing
net income (loss) per share
Basic 8,838 8,708 7,460 3,472 3,279
============= ============= ============= ============= =============
Diluted 8,931 8,708 8,152 5,829 3,279
============= ============= ============= ============= =============
<CAPTION>
JUNE 30,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 3,424 $ 2,956 $ 7,920 $ 369 $ 190
Working capital (deficit) 7,959 5,978 17,864 1,897 (1,374)
Total assets 18,699 24,593 33,518 14,298 8,293
Total liabilities 5,220 11,808 11,809 12,187 7,414
Mandatorily redeemable preferred stock - - - 2,262 2,122
Stockholders' equity (deficit) 13,479 12,785 21,709 (150) (1,242)
</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 table presents certain unaudited statement of operations data
for each quarter of 1999 and 1998. 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
-----------------------------------------------------------------
1999
-----------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1999 1999
-------------- -------------- --------------- ---------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $ 6,723 $ 7,528 $ 7,254 $ 8,152
Cost of revenue 3,083 4,276 3,082 3,324
-------------- -------------- --------------- ---------------
Gross profit 3,640 3,252 4,172 4,828
Selling, general and
administrative 3,175 2,591 3,481 3,799
Research and development 360 225 429 548
Provision for doubtful accounts 55 394 305 58
-------------- -------------- --------------- ---------------
Income (loss) from operations 50 42 (43) 423
Interest income (64) (50) (39) (35)
Interest expense 25 14 3 -
-------------- -------------- --------------- ---------------
Income (loss) before income taxes 89 78 (7) 458
Income taxes - - - -
-------------- -------------- --------------- ---------------
Net income (loss) $ 89 $ 78 $ (7) $ 458
============== ============== =============== ===============
Net income (loss) per share:
Basic $ 0.01 $ 0.01 $ (0.00) $ 0.05
============== ============== =============== ===============
Diluted $ 0.01 $ 0.01 $ (0.00) $ 0.05
============== ============== =============== ===============
<CAPTION>
FISCAL THREE MONTHS ENDED
-----------------------------------------------------------------
1998
-----------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1998 1998
--------------- --------------- -------------- --------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue $ 8,735 $ 5,491 $ 4,560 $ 3,679
Cost of revenue 3,684 4,598 2,380 2,663
--------------- --------------- -------------- --------------
Gross profit 5,051 893 2,180 1,016
Selling, general and
administrative 3,343 3,623 4,437 3,171
Research and development 449 503 804 602
Provision for doubtful accounts - 340 1,000 1,115
--------------- --------------- -------------- --------------
Income (loss) from operations 1,259 (3,573) (4,061) (3,872)
Interest income (86) (67) (56) (38)
Interest expense 34 30 27 26
--------------- --------------- -------------- --------------
Income (loss) before income taxes 1,311 (3,536) (4,032) (3,860)
Income taxes 512 (1,335) 823 (898)
--------------- --------------- -------------- --------------
Net income (loss) $ 799 $ (2,201) $ (4,855) $ (2,962)
=============== =============== ============== ==============
Net income (loss) per share:
Basic $ 0.09 $ (0.25) $ (0.55) $ (0.34)
=============== =============== ============== ==============
Diluted $ 0.09 $ (0.25) $ (0.55) $ (0.34)
=============== =============== ============== ==============
</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. In addition, in fiscal 2000, management
believes that its
-13-
<PAGE> 14
customers' capital spending decisions will be affected by the diversion of
resources to Year 2000 issues and to related changes in their internal
operations.
The Company's sales cycle, from initial contact to contract execution,
order and delivery, also varies substantially from customer to customer and from
project to project. The purchase of the Company's product based solutions
generally involves a significant commitment of customer capital and management
time. The sales cycle associated with the purchases of the Company's product
based solutions 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 delivery cycle varies depending
on the extent to which the order requires tailoring to a customer's requirements
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 continue 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 product based solutions and services 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, network
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 product based solutions and services to new
and emerging carriers and to enterprise customers, including agencies of the
U.S. Government.
The Company's product based solutions and services are typically sold
pursuant to contracts having an aggregate value of several hundred thousand to
several million dollars. Contracts for the Company's data collection, network
surveillance, alarm and traffic reporting solutions 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 solutions 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 hardware sales, services, and software
license fees. Revenue from hardware sales is recognized upon delivery. Revenue
from services consists of consulting, service bureau processing, system design
and analysis, customization and installation, training, support and maintenance
fees. Revenue from service bureau processing and consulting are recognized as
services are performed. Revenue from support and maintenance services are
recognized ratably over the term of the related agreement, generally one year.
The Company's software licenses to end users generally provide for an
initial license fee to use the software 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 at the
time of delivery, provided that the Company has no remaining service
obligations, collectibility is considered probable and the fees are fixed and
-14-
<PAGE> 15
determinable. 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. Where there are service obligations (such as, system design and
analysis, customization, installation and training) that are essential to the
functionality of the software delivered, revenue from software license fees and
services are recorded using the percentage-of-completion method, whereby revenue
is recognized based on the estimated stage of completion of individual contracts
determined on a cost or level of efforts basis.
The Company sells its systems 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 generally within the
next year. Backlog at June 30, 1999, 1998 and 1997 was approximately $7.3
million, $11.2 million and $7.0 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 1999 consisted of GTE, Samsung Electronics, and Winstar.
These customers represented approximately, 12.1%, 11.5%, and 10%, respectively,
of total revenue for the year ended June 30, 1999.
Substantially all of the Company's revenue is derived from
dollar-denominated sales. In 1999, 59% of total revenue was generated from
domestic sales. Although the Company had significant sales in Asia (27% of total
revenue in 1999) and in Canada and Mexico (6% of total revenue in 1999), 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 more favorable cash collections due to
aggressive collection efforts in 1999 compared to 1998. For 1999, days sales
outstanding [365/(annual sales/average of net accounts receivable at year end)]
was 102 days compared to 212 days in 1998 (representing a 52% decrease) and 134
days in 1997.
The Company's cost of revenue consists of the cost of product engineering
and production, cost of customer support personnel, the costs of materials
purchased by the Company for incorporation into its products, amortization of
capitalized software development costs, warranty costs, inventory obsolescence,
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, benefits, travel expenses, and general
office administrative expenses (rent and occupancy, telephone and other office
supply costs) of the Company. It also includes promotional costs, recruitment
expenses, professional fees, outside services, and depreciation and
amortization.
Research and development expenses consist of personnel costs related to the
design and development of the Company's product. 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 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.
Certain prior year information has been reclassified to conform with
current year presentation.
-15-
<PAGE> 16
YEARS ENDED JUNE 30, 1999 AND 1998
Revenues. Total revenue increased 32% from $22.5 million in 1998 to $29.7
million in 1999. The increase of $7.2 million was principally due to an increase
in new and follow-on sales of products and services to U.S. new and emerging
carrier customers. Additionally, the Company experienced greater sales of
hardware and services relative to software sales.
Revenue from sales to new and emerging carrier products and services
increased 116% or $7.0 million in 1999, an amount nearly equal to the total
increase in revenue, and represented 44% of total revenue compared to 27% of
total revenue in 1998. This increase is primarily a result of new and follow-on
sales of services. Revenues from enterprise network products and services
increased 46% or $2.3 million in 1999 and represented 24% of total revenue
compared to 22% of total revenue in 1998. This increase reflects stronger demand
from the U.S. government, resulting in part from the reinstatement of U.S. Air
Force orders which had been suspended in 1998. Revenue from traditional carrier
network products and services decreased 18% or $2.1 million in 1999 and
represented 32% of total revenue compared to 51% of total revenue in 1998.
During 1999, the Company experienced a continuation of a trend for
customers, especially new and emerging carrier customers, to seek a higher level
of involvement by ACE*COMM in their business operations, including more systems
integration work, than previously experienced.
Gross Margins for 1999, were 54% compared to 41% for 1998. The improvement
in the gross margin is primarily due to a change in the mix of revenue as
services increased in significance relative to lower margin hardware product
sales.
Selling General and Administrative (SG & A) expenses for 1999 were $13.0
million compared to $14.6 million in 1998 (which represented 44% and 65% of
revenue in 1999 and 1998, respectively). The decrease in SG & A is primarily
attributable to a decrease in employment costs resulting from staff reductions
and other cost containment initiatives implemented throughout the year. The
decrease was partially offset by an increase in professional service fees.
Research and Development expenses for 1999 were $1.6 million (5% of
revenue) compared to $2.4 million (10% of revenue) in 1998. The decrease of $0.8
million is primarily attributable to a high level of R & D personnel working on
revenue producing projects and a greater quantity of customer funded research
and development projects.
Provision for Doubtful Accounts. The Company increased its allowance for
doubtful accounts receivable by $0.8 million, wrote off $2.8 million in
uncollectible accounts and reported recoveries of $0.4 million in fiscal 1999.
In fiscal 1998, the allowance for doubtful accounts was increased by $2.5
million and there were no write-offs or recoveries.
YEARS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenue decreased 33% in fiscal 1998 to $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. Second, 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. Air Force. Revenue from new
-16-
<PAGE> 17
and emerging carriers 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.
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.
Selling General and Administrative (SG & A) expenses for 1998 were $14.6
million compared to $11.3 million in 1997 (representing 65% 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.
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 (10% 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.
Provision for Doubtful Accounts. The Company increased its allowance for
doubtful accounts receivable in 1998 by $2.5 million, considering the increased
aging of accounts and the Company's evaluation of the collectibility of its
accounts receivable.
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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had $3.4 million of cash and cash
equivalents, compared to $3.0 million at June 30, 1998. Operating activities
provided the Company with $2.7 million for the year ended June 30, 1999. Net
income, non-cash depreciation and amortization, a decrease in accounts
receivables and inventories, offset by a decrease in accrued expenses and
deferred revenue, were the primary drivers of cash provided by operations.
During the same period the Company used $1.2 million for purchases of property
and equipment and investments in capitalized software. For the year ended June
30, 1999, the Company paid $1.0 million in debt and capital lease obligations
which were partially offset by proceeds from the exercise of common stock
options and employee stock purchases of $0.1 million.
Accounts receivables, net of allowances for doubtful accounts, declined to
$6.5 million at June 30, 1999 from $10.0 million at June 30, 1998. Accounts
receivables include billed accounts receivables, unbilled accounts receivables
and an allowance for doubtful accounts. Billed accounts receivables declined to
$4.4 million at June 30, 1999 from $8.8 million at June 30, 1998 reflecting
aggressive collections and charge-offs of uncollectible accounts. Unbilled
accounts receivables decreased to $3.1 million at June 30, 1999 from $3.6
million at June 30, 1998. These receivables primarily represent contractual
payment terms which may not be billed for up to twelve months. During 1999, the
Company increased its allowance for doubtful accounts receivable by $0.8
million, wrote off $2.8 million in uncollectible accounts and reported
recoveries of $0.4 million. The Company believes the allowance for doubtful
accounts is adequate.
Gross inventories decreased to $2.4 million at June 30, 1999 from $3.6
million at June 30, 1998. The decrease of $1.2 million was primarily due to
several large shipments made during fiscal 1999, some of which were on hand at
June 30, 1998. In addition the Company wrote-off $0.2 million in obsolete
inventory during 1999.
-17-
<PAGE> 18
Accrued liabilities decreased to $3.1 million at June 30, 1999 from $6.5
million at June 30, 1998. The decrease of $3.4 million was primarily due to a
decrease of $2.9 million in accrued contract costs in 1999. The decrease in
accrued contract costs was principally due to commission payments made to a
strategic alliance partner doing business in Asia.
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 principal balance was $1.1 million, and
all principal and interest payments had been made in accordance with the payment
schedule outlined in the note agreement.
In June 1999, the principal amount of the note was amended to $0.6 million,
consisting of the original principal balance of $1.6 million, increased by
additional amounts due and payable of $0.2 million, and decreased by principal
payments received of $1.2 million. The term of the note was extended to December
1999. At June 30, 1999, the outstanding principal balance was $0.5 million, and
all principal and interest payments had been made in accordance with the payment
schedule outlined in the amended note agreement.
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. 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. In addition, the Company had term loans outstanding from
Crestar in the aggregate principal amount of $888,000 at June 30, 1998.
During the second quarter of fiscal 1999, the Crestar line of credit was
cancelled and replaced with a Accounts Receivable Purchase Agreement
("Agreement") with Silicon Valley Bank ("SVB"). The Agreement enables the
Company to borrow up to $4.0 million through SVB's discretionary purchases of
accounts receivable. SVB will pay up to 80% of the face amount of each
receivable, with the balance of such face amount (less certain finance and
administrative charges) payable to the Company following collection of the
receivable. The receivables purchased by SVB must be collected within 90 days
unless otherwise agreed by SVB and the Company, must not be in dispute, and must
conform to other eligibility requirements. The purchases are with full recourse
against the Company, which has agreed to repurchase any non-conforming
receivable subject to SVB's ability to allow the substitution of conforming for
non-conforming receivables. The Company's obligations under the Agreement are
secured by a security interest in all of the Company's assets. Advances made to
the Company are repayable in full upon demand in the event of default under the
Agreement, including a breach in any material respect of any representation or
warranty as to the receivables purchased or the Company's insolvency. The
finance charges and administrative fees under this Agreement are based on an
amount equal to SVB's prime rate plus 4% per annum, of the average daily
outstanding account balance and .625% of the face amount of each purchased
receivable, respectively. Outstanding borrowings as of the date of this filing
are $ 1.0 million
In August 1999, the Company and SVB modified the Agreement to reduce the
rate of interest charged from prime plus 4% per annum to prime.
Under the terms of its office lease, the Company maintains a letter of
credit under its line of credit with SVB, 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 $400,000 decreasing annually through 2003 to $100,000. As of the date of this
filing, the Company was not subject to any draw against this letter of credit by
the landlord.
During 1999, the Company paid down debt balances and its capital lease
obligations by $1.0 million. At June 30, 1999, the balance of current and
non-current borrowings represents amounts due under a capital lease.
In September 1999, the Company entered into a one-year loan and security
agreement with SVB. The agreement provides for advances of up to $1,250,000 in
the aggregate to finance equipment purchases. The minimum
-18-
<PAGE> 19
amount of each advance is $50,000 and a maximum of ten equipment advances may be
made over the term of the agreement. Each advance is repayable over 36 months
and is secured by each item of equipment, or personal property financed by the
advance. The Company is required under this agreement to maintain certain
financial covenants. The agreement also contains other customary conditions and
events of default, the failure to comply with, or occurrence of, would prevent
any further borrowings and would generally require the immediate repayment of
any outstanding borrowings under the agreement. Interest on each equipment
advance is determined by the Bank and is equal to the sum of a comparable term
to the U.S. Treasury note, plus 350 basis points. Outstanding advances as of the
date of this filing aggregated approximately $ 441,000.
The Company believes that existing cash balances, cash flows from
operations and available sources of financing will be sufficient to support the
Company's working capital requirements for at least the next twelve months.
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, in
addition to those set forth in "Selected Quarterly Financial Data", and
"--Year 2000", 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 the continued demand by such customer
for its products and services. In addition, in fiscal 2000, management believes
that its customers' capital spending decisions will be affected by the
diversion of resources to Year 2000 issues and to related changes in their
internal operations. 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.
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, or that it will successfully develop other sales
and marketing strategies.
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.
-19-
<PAGE> 20
Trade receivables subject the Company to the potential for credit risk with
customers in the telecommunication services industry and government sector.
Approximately 49% of the Company's gross trade receivables balances was
represented by five customers at June 30, 1999. To reduce credit risk, the
Company conducts ongoing evaluations of its customers and requires letters of
credit or other pre-payment arrangements, as appropriate. The Company maintains
accounts receivable allowances to provide for potential credit losses. However
there can be no assurances that one or more customers will not be unable or
unwilling to pay its or their obligations to the Company and in such event the
Company's cash flows and financial results would be adversely affected.
The Company derived approximately $12.1 million, or 41% of its total
revenues, from customers outside of the United States in 1999. 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 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 develops and markets hardware and software products which (i)
collect call record data for use in customer billing, customer care, network
surveillance, alarm processing and network management and (ii) automate certain
of such network operation and management functions. The Company's products are
incorporated in systems used by post, telephone and telegraph companies,
telephone and wireless carriers, and large enterprises. The Company's products
must be able to process date-dependent data correctly. The Year 2000 problem
refers to the limitations in the programming code of certain existing software
programs which limit the ability of such programs to accurately produce or
process date-sensitive information for the year 2000 and beyond. In the case of
the Company's products, unless the relevant software programs are modified prior
to December 31, 1999, the supply by an end-user's system of inaccurate
date-sensitive data (such as call records) or inaccuracies in the Company's
software (including third party operating system software) could cause the
Company's products to provide erroneous or inaccurate output data to its
customers for billing, network management, etc. Certain of the Company's
installed products are the subject of warranties or of maintenance contracts
under which the Company agrees to modify products to accurately process
date-sensitive information, including dates at and beyond January 1, 2000.
The Company has completed testing of its current products (including
component parts supplied by third parties) for Year 2000 compliance, using the
definition of Year 2000 conformity requirements developed by the British
Standards Institute. The Company has notified customers that older products may
require modification to become Year 2000 compliant and is offering maintenance
contracts to provide such modifications for a fee. Customers who have elected
not to purchase an extended maintenance contract and want the Company's product
to be Year 2000 compliant must procure the Year 2000 upgrade for a fee. Most,
but not all, customers have entered into such maintenance or upgrade contracts.
The Company plans to complete upgrading all customers who are currently under
customer support contracts by September 30, 1999.
The Company has completed an assessment of the risks and costs associated
with the Year 2000 issue on internal hardware and software. The Company is in
the process of implementing systems changes and expects this process to be
completed for all critical systems by September 30, 1999. The Company is in the
process of obtaining an assessment of its non-information technology systems
(e.g. elevators, HVAC contained in facilities that the company leases from
others).
-20-
<PAGE> 21
The cost of addressing the Company's Year 2000 issues has not been fully
quantified. The Company expenses such costs as incurred. 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.
The Company's business, financial condition and results of operations could
be materially adversely affected by the Year 2000 problem if it or third parties
fail to successfully address this issue. In particular, if customers fail to
modify their systems such as to supply accurate data, their systems could be
significantly disrupted and claims against the Company could result. In
addition, if customers fail to purchase Year 2000 upgrades or maintenance
contracts, or if the Company's upgrades or modifications are inadequate, the
Company may experience significant liability, which could have a material
adverse effect on the Company. These and other Year 2000 related problems which
may be encountered by the Company's strategic partners and customers could have
a material adverse effect on the Company, through the impact of litigation or
the loss of business. In addition, in the event that the Company's internal
systems are not compliant, the Company could experience considerable delays in
customer service, sales and collections and in compiling sales and financial
information and performing other administrative functions. The Company may have
to expend more resources than is currently anticipated to resolve Year 2000
issues and such expenditures could have a material adverse effect on the
Company's results of operations and financial condition.
The Company has developed a contingency plan to address the situation that
may result if the Company or third parties are unable to achieve Year 2000
compliance for its critical operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements, together with the independent
accountants' reports thereon, appear at pages F-1 through F-20 of
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported
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 1999 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 1999 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 1999 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
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference to
Proxy Statement for the 1999 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.
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:
Page
Report of Independent Auditors ................................ F-2
Report of Independent Accountants ................................ F-3
Balance Sheets as of June 30, 1999 and 1998......................... F-4
Statements of Operations for the years ended June 30, 1999, 1998
and 1997................................................ F-5
Statements of Stockholders' Equity for the years
ended June 30, 1999, 1998 and 1997...................... F-6
Statements of Cash Flows for the years
ended June 30, 1999, 1998 and 1997...................... F-7
Notes to Financial Statements....................................... F-8
(a)(2) FINANCIAL STATEMENT SCHEDULES
Except for the schedule listed below, all other schedules are
omitted because they are not applicable or the required information
is shown in the financial statements or notes thereto.
Schedule II - Valuation and Qualifying Accounts X-1
(a)(3) EXHIBITS
3.2 (A) Articles of Amendment and Restatement dated
November 18, 1991.
3.3 (A) Articles of Amendment dated August 6, 1996.
3.5 (A) Form of Articles of Amendment and Restatement of
the Company.
3.6 (A) By-laws of the Company as amended to date.
4.1 (A) Form of Specimen of Common Stock Certificate.
10.1 (A) Supplier Agreement dated December 16, 1992 between
the Registrant and AT&T World Services, Inc.
10.2 (A) Marketing Agreement dated June 18, 1990 between
the Registrant and AT&T World
-22-
<PAGE> 23
Services, Inc .
10.3 (A) Subcontract Agreement dated February 24, 1994
between Registrant and AT&T Corporation,
Government Integrated Solutions .
10.4 (A) Authorized Distributor Agreement dated July 23,
1991 between the Registrant and AmerInd, Inc .
10.5 (A) Supply Contract dated August 17, 1994 between the
Registrant and Teleglobe Canada, Inc .
10.6 (A) License Agreement dated August 1, 1995 between the
Registrant and Teleglobe Canada, Inc .
10.7 (A) Subcontract No. 95-1350-01 dated November 8, 1995
between the Registrant and ANSTEC, Inc .
10.8 (A) Agreement of Subcontract dated April 24, 1994
between the Registrant and the Communications
Systems Division of GTE Government Systems
Corporation
10.9 (A) 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.
10.12 (B)* Form of Term Loan Note entered into Between the
Company and two Officers in Fiscal 1997
10.13 (B)* Form of Non-Qualified Stock Option Grant Agreement
(certain executive officers - fiscal 1997)
10.14 (B)* Form of Non-Qualified Stock Option Grant Agreement
(certain executive officers - fiscal 1997)
10.15 (B)* Executive Bonus Plan
10.16 (B) Lease Between Principal Mutual Life Insurance
Company and the Company as Tenant dated August 6,
1996
10.22 (C)* Amended and Restated Omnibus Stock Plan
10.23 (C)* Amended and Restated Omnibus Stock Plan for
Directors
10.24 (D)* Employment Agreement dated as of October 1, 1998
between the Company and T. Russotto
10.25 (D)* Non-Qualified Stock Option Grant Agreement dated
March 23, 1999 between the Company and T.
Russotto.
10.26 (D)* Incentive Stock Option Grant Agreement dated
March 4, 1999 between the Company and J. Eckler.
23 (D) Consent of Ernst & Young LLP
23.1 (D) Consent of PricewaterhouseCoopers LLP
27. (D) Financial Data Schedule
27.1 (D) Amended Financial Data Schedule for the quarters
ending September 30, December 31, and March 31,
1999
27.2 (D) Amended Financial Data Schedule - Fiscal Year 1998
--------------------------------------------------------------------
(A) Incorporated by reference to the identically
numbered exhibit filed as an exhibit to the
Company's Registration Statement on Form S-1, File
No. 333-25439
(B) Incorporated by reference to the identically
numbered exhibit filed as an exhibit to the
Company's Form 10-K, filed October 1, 1997.
(C) Incorporated by reference to the Company's Proxy
Statement, dated October 21, 1997.
(D) Filed herewith * Management contract or
compensatory plan or amendment required to be
filed as an exhibit.
(b) REPORTS ON FORM 8-K and 8-K/A
A Report on Form 8-K was filed on May 6, 1999, and amended on May 13,1999,
with respect to Item 9. Changes in Registrant's Certifying Accountant.
-23-
<PAGE> 24
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 28, 1999
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>
/s/George T. Jimenez Chief Executive Officer September 28, 1999
- -------------------- and Chairman of the Board
(George T. Jimenez)
/s/James K. Eckler Executive Vice President of Finance and September 28, 1999
- ------------------ Administration
(James K. Eckler) (Principal Financial Officer)
(Principal Accounting Officer)
/s/Paul G. Casner, Jr. Director September 28, 1999
- ----------------------
(Paul G. Casner, Jr.)
/s/Gilbert A. Wetzel Director September 28, 1999
- --------------------
(Gilbert A. Wetzel)
/s/William R. Newlin Director September 28, 1999
- --------------------
(William R. Newlin)
/s/Harry M. Linowes Director September 28, 1999
- -------------------
(Harry M. Linowes)
</TABLE>
-24-
<PAGE> 25
ACE*COMM CORPORATION
INDEX TO FINANCIAL STATEMENTS
The following Financial Statements of the Registrant are filed as part of
this report:
Page
Report of Independent Auditors...........................................F-2
Report of Independent Accountants........................................F-3
Balance Sheets as of June 30, 1999 and 1998..............................F-4
Statements of Operations for the years ended June 30,
1999, 1998 and 1997..........................................F-5
Statements of Stockholders' Equity for the years
ended June 30, 1999, 1998 and 1997...........................F-6
Statements of Cash Flows for the years ended June 30,
1999, 1998 and 1997..........................................F-7
Notes to Financial Statements............................................F-8
F-1
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of ACE*COMM Corporation
We have audited the accompanying balance sheet of ACE*COMM Corporation as of
June 30, 1999, and the related statement of operations, stockholders' equity,
and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ACE*COMM Corporation at June
30, 1999, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
Washington, D.C.
August 25, 1999
F-2
<PAGE> 27
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 the results of its operations and its cash
flows for each of the two 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-3
<PAGE> 28
ACE*COMM CORPORATION
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,424 $ 2,956
Accounts receivable, net 6,547 9,985
Inventories, net 2,152 3,232
Notes receivable 516 825
Prepaid expenses and other 466 666
-------------------- --------------------
Total current assets 13,105 17,664
Property and equipment, net 3,779 4,069
Capitalized software development costs, net 1,747 2,461
Notes receivable - 310
Other assets 68 89
==================== ====================
Total assets $ 18,699 $ 24,593
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings $ 47 $ 1,030
Accounts payable 1,517 2,010
Accrued expenses 797 739
Accrued compensation 1,621 2,161
Accrued contract costs 718 3,577
Deferred revenue 446 2,169
-------------------- --------------------
Total current liabilities 5,146 11,686
Noncurrent borrowings 74 122
-------------------- --------------------
Total liabilities 5,220 11,808
-------------------- --------------------
Commitments and contingencies ( Note 14 )
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,
8,877,628 and 8,807,049 shares issued and outstanding 89 88
Additional paid-in capital 19,897 19,822
Accumulated deficit (6,507) (7,125)
-------------------- --------------------
Total stockholders' equity 13,479 12,785
-------------------- --------------------
Total liabilities and stockholders' equity $ 18,699 $ 24,593
==================== ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 29
ACE*COMM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------------------
1999 1998 1997
------------------- ----------------- --------------------
<S> <C> <C> <C>
Revenue $ 29,657 $ 22,465 $ 33,684
Cost of revenue 13,765 13,325 17,627
------------------- ----------------- --------------------
Gross profit 15,892 9,140 16,057
Selling, general and administrative expense 13,046 14,574 11,254
Research and development expense 1,562 2,358 1,472
Provision for doubtful accounts 812 2,455 -
------------------- ----------------- --------------------
Income (loss) from operations 472 (10,247) 3,331
Interest income (185) (247) (347)
Interest expense 39 117 156
------------------- ----------------- --------------------
Income (loss) before income taxes 618 (10,117) 3,522
Income tax (benefit) provision - (898) 898
------------------- ----------------- --------------------
Net income (loss) $ 618 $ (9,219) $ 2,624
=================== ================= ====================
Basic net income (loss) per share $ 0.07 $ (1.06) $ 0.35
=================== ================= ====================
Diluted net income (loss) per share $ 0.07 $ (1.06) $ 0.32
=================== ================= ====================
Shares used in computing net income (loss) per share:
Basic 8,838 8,708 7,460
=================== ================= ====================
Diluted 8,931 8,708 8,152
=================== ================= ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 30
ACE*COMM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------------------------- ----------------------------------------
CLASS B
SHARES PAR VALUE SHARES PAR VALUE
------------------ ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1996 1 $ 1 3,590 $ 36
Accretion of preferred stock dividends - - - -
Conversion of preferred stock, Class C - - 1,531 15
Redemption of preferred stock, Class B (1) (1) - -
Issuance of common stock pursuant to
initial public offering - - 2,645 26
Exercise of common stock options - - 838 8
Repurchase and retirement
of common stock - - (54) -
Net income for the year ended June 30, 1997 - - - -
------------------ ----------------- ----------------- -------------------
Balance, June 30, 1997 - $ - 8,550 $ 85
Exercise of common stock options - - 258 3
Repurchase and retirement
of common stock - - (1) -
Net loss for the year ended June 30, 1998 - - - -
------------------ ----------------- ----------------- -------------------
Balance, June 30, 1998 - $ - 8,807 $ 88
Exercise of common stock options - - 66 1
Employee stock purchase plan - - 4 -
Net income for the year ended June 30, 1999 - - - -
------------------ ----------------- ----------------- -----------------
Balance, June 30, 1999 - $ - 8,877 $ 89
================== ================= ================= ===================
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT)
PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
----------------- --------------------- ----------------
<S> <C> <C> <C>
Balance, June 30, 1996 $ 343 $ (530) $ (150)
Accretion of preferred stock dividends (17) - (17)
Conversion of preferred stock, Class C 2,264 - 2,279
Redemption of preferred stock, Class B (307) - (308)
Issuance of common stock pursuant to
initial public offering 16,083 - 16,109
Exercise of common stock options 2,060 - 2,068
Repurchase and retirement
of common stock (896) - (896)
Net income for the year ended June 30, 1997 - 2,624 2,624
----------------- --------------------- ----------------
Balance, June 30, 1997 $ 19,530 $ 2,094 $ 21,709
Exercise of common stock options 313 - 316
Repurchase and retirement
of common stock (21) - (21)
Net loss for the year ended June 30, 1998 - (9,219) (9,219)
----------------- --------------------- ----------------
Balance, June 30, 1998 $ 19,822 $ (7,125) $ 12,785
Exercise of common stock options 64 - 65
Employee stock purchase plan 11 - 11
Net income for the year ended June 30, 1999 - 618 618
--------------- ----------------------- ----------------
Balance, June 30, 1999 $ 19,897 $ (6,507) $ 13,479
================= ===================== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 31
ACE*COMM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 618 $ (9,219) $ 2,624
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating
activities:
Depreciation and amortization 2,243 1,563 1,135
Provision for doubtful accounts 812 2,455 -
Changes in operating assets and liabilities:
Accounts receivable 2,626 3,680 (7,476)
Inventories, net 1,080 (418) (978)
Notes receivable 619 (1,135) -
Prepaid expenses and other assets 221 362 (367)
Accounts payable (493) (725) (387)
Accrued liabilities (3,341) 351 4,078
Deferred income taxes - (898) 898
Deferred revenue (1,723) 1,659 (1,380)
------------ ------------- ------------
Net cash provided by (used for) operating activities 2,662 (2,325) (1,853)
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (624) (1,203) (2,390)
Additions to capitalized software development costs (615) (1,343) (1,371)
------------ ------------- ------------
Net cash used for investing activities (1,239) (2,546) (3,761)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in line of credit (100) 100 (4,446)
Other borrowings - - 1,000
Payments on debt (883) (450) (341)
Principal payments under capital lease obligation (48) (38) (21)
Net proceeds from common stock issued - - 16,109
Exercise of common stock options 65 316 2,068
Employee stock purchase plan 11 - -
Repurchase and retirement of common stock - (21) (896)
Redemption of class B preferred shares - - (308)
------------ ------------- ------------
Net cash (used for) provided by financing activities (955) (93) 13,165
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents 468 (4,964) 7,551
Cash and cash equivalents at beginning of year 2,956 7,920 369
============ ============= ============
Cash and cash equivalents at end of year $ 3,424 $ 2,956 $ 7,920
============ ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for :
Interest $ 39 $ 114 $ 164
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES:
Accretion of preferred stock dividends $ - $ - $ 17
Purchase of equipment under capital lease $ - $ - $ 222
Conversion of Class C preferred stock $ - $ - $ 2,279
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 32
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
ACE*COMM Corporation (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 hardware sales, services, and software license
fees. Revenue from hardware sales is recognized upon delivery. Revenue from
services consists of consulting, service bureau processing, system design and
analysis, customization and installation, training, support and maintenance
fees. Revenue from service bureau processing and consulting are recognized as
services are performed. Revenue from support and maintenance services are
recognized ratably over the term of the related agreement, generally one year.
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 at the
time of delivery, provided that the Company has no remaining service
obligations, collectibility is considered probable and the fees are fixed and
determinable. 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. Where there are service obligations (such as system design and
analysis, customization, installation and training) that are essential to the
functionality of the software delivered, revenue from software license fees and
services are recorded using the percentage-of-completion method, whereby revenue
is recognized based on the estimated stage of completion of individual contracts
determined on a cost or level of efforts basis.
In 1999, the Company adopted Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2"), as amended. SOP 97-2 provides guidance in recognizing
revenue on software transactions and did not significantly affect existing
revenue recognition policies.
Payments received for revenues not yet recognized are reflected as deferred
revenue in the accompanying balance sheets. Revenue recognized prior to the
scheduled billing date of an item is reflected as unbilled accounts receivable.
F-8
<PAGE> 33
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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
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 assets as
follows: equipment and vehicles - 7 years; computer equipment -3 to 7 years.
Leasehold improvements are amortized on a straight-line method over the shorter
of the improvements' estimated useful lives or related remaining lease terms.
Maintenance and repair costs are charged to current earnings. 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, not exceeding 3 years. 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
Basic earnings per share excludes dilution and is computed by dividing net
income (loss) by the weighted average of common shares outstanding for the
period. Diluted earnings per share 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.
F-9
<PAGE> 34
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
<S> <C> <C>
Billed $ 4,355 $ 8,829
Unbilled 3,059 3,621
Allowance for doubtful accounts (867) (2,465)
---------------------------- ----------------------------
$ 6,547 $ 9,985
============================ ============================
</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. In fiscal 1999, $2,410,000
in accounts receivable were written off, net of recoveries. There were no
write-offs of accounts receivable in 1998 and 1997.
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 principal balance was $1.1 million, and
all principal and interest payments had been made in accordance with the payment
schedule outlined in the note agreement.
In June 1999, the principal amount of the note was amended to $0.6 million,
consisting of the original principal balance of $1.6 million, increased by
additional amounts due and payable of $0.2 million, and decreased by principal
payments received of $1.2 million. The term of the note was extended to December
1999. At June 30, 1999, the outstanding principal balance was $0.5 million, and
all principal and interest payments had been made in accordance with the payment
schedule outlined in the amended note agreement.
F-10
<PAGE> 35
NOTE 4 - INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
<S> <C> <C>
Inventories $ 2,404 $ 3,581
Allowance for obsolescence (252) (349)
---------------------------- ----------------------------
$ 2,152 $ 3,232
============================ ============================
</TABLE>
In fiscal 1999, $220,000 in obsolete inventories were written off. There were no
write-offs of inventories in fiscal years 1998 and 1997.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
<S> <C> <C>
Computer equipment $ 5,172 $ 4,454
Office equipment 1,055 1,153
Vehicles - 42
Leasehold improvements 205 205
---------------------------- ----------------------------
6,432 5,854
Less accumulated depreciation and amortization (2,653) (1,785)
---------------------------- ----------------------------
$ 3,779 $ 4,069
============================ ============================
</TABLE>
Depreciation expense of property and equipment amounted to $914,000, $604,000
and $448,000 in 1999, 1998 and 1997, respectively. At June 30, 1999 and 1998,
office equipment includes a capitalized lease in the amount of $222,000 and
accumulated depreciation of $ 57,000 and $35,000, respectively.
NOTE 6 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------
1999 1998
------------------------- -------------------------
<S> <C> <C>
Capitalized software development costs $ 7,897 $ 7,282
Less accumulated amortization (6,150) (4,821)
------------------------- -------------------------
$ 1,747 $ 2,461
========================= =========================
</TABLE>
Amortization expense of capitalized software amounted to $1,329,000, $959,000
and $687,000 in 1999, 1998 and 1997, respectively.
F-11
<PAGE> 36
NOTE 7 - BORROWINGS
The Company's borrowings consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------
1999 1998
------------------------- -------------------------
<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
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
Capital lease obligation for the use of an office
telephone system, principal plus interest (10.03%),
due in monthly installments through November 2001. 121 164
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 121 1,152
Less current portion (47) (1,030)
------------------------- -------------------------
Noncurrent portion $ 74 $ 122
========================= =========================
</TABLE>
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. 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 had term loans outstanding from
Crestar in the aggregate principal amount of $888,000 at June 30, 1998. The
Company was in default of the line of credit at June 30, 1998. However, the
Company arranged alternative financing to support working capital needs during
the period of default.
During the second quarter of fiscal 1999, the Crestar line of credit was
canceled and replaced with a Accounts Receivable Purchase Agreement
("Agreement") with Silicon Valley Bank ("SVB"). The Agreement enables the
Company to borrow up to $4.0 million through SVB's discretionary purchases of
accounts receivable. SVB will pay up to 80% of the face amount of each
receivable, with the balance of such face amount (less certain finance and
administrative charges) payable to the Company following collection of the
receivable. The receivables purchased by SVB must be collected within 90 days
unless otherwise agreed by SVB and the Company, must not be in dispute, and must
conform to other eligibility requirements. The purchases are with full recourse
against the Company, which has agreed to repurchase any non-conforming
receivable subject to SVB's ability to allow the substitution of conforming for
non-conforming receivables. The Company's obligations under the Agreement are
secured by a security interest in all of the Company's assets. Advances made to
the Company are repayable in full upon demand in the event of default under the
Agreement, including a breach in any material respect of any
F-12
<PAGE> 37
NOTE 7 - BORROWINGS, CONTINUED
representation or warranty as to the receivables purchased or the Company's
insolvency. The finance charges and administrative fees under this Agreement are
based on an amount equal to SVB's prime rate plus 4% per annum, of the average
daily outstanding account balance and .625% of the face amount of each purchased
receivable, respectively. As of June 30, 1999, there were no outstanding
borrowings.
In August 1999, the Company and SVB modified the Agreement to reduce the rate of
interest charged from prime plus 4% per annum to prime.
NOTE 8 - RETIREMENT PLAN
The Company has a 401(k) plan, under which to be eligible, employees must have
completed six months of service, be at least 21 years of age and be credited
with 1,000 hours of service. The Company may make contributions to the plan at
its discretion. Contributions expensed by the Company during 1999, 1998, and
1997 were approximately $110,000, $0, and $103,000, respectively.
NOTE 9 - INCOME TAXES
Deferred tax assets (liabilities) are related to the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------
1999 1998
----------------------- ----------------------
<S> <C> <C>
Tax assets:
Inventories $ 336 $ 460
Accrued expenses 645 808
Net operating loss carryforwards 3,097 6,806
Tax credit carryforwards 519 572
Other - 115
----------------------- ----------------------
Gross deferred tax assets 4,597 8,761
----------------------- ----------------------
Tax liabilities:
Income on contracts (1,161) (1,846)
Software costs (663) (871)
Depreciation (420) (456)
----------------------- ----------------------
Gross deferred tax liabilities (2,244) (3,173)
----------------------- ----------------------
Net deferred tax asset 2,353 5,588
Valuation allowance (2,353) (5,588)
----------------------- ----------------------
Net deferred tax $ - $ -
======================= ======================
</TABLE>
F-13
<PAGE> 38
NOTE 9 - INCOME TAXES, CONTINUED
The components of the (benefit) provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
<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. Any income tax benefit resulting from
the utilization of operating losses resulting from the exercise of options will
be reflected in additional paid-in-capital (versus through the tax provision)
when actually realized for tax purposes.
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.
At June 30, 1999, the Company has available general business credit
carryforwards of approximately $250,000, 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 $8.0 million that expire in
years 2007 through 2019. Included in net operating loss carryforwards at June
30, 1999 are $4.7 million for tax deductions related to non-qualified stock
options. 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.
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 income
(loss) before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- --------------------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate $ 210 $ (1,963) $ 1,287
State income taxes net of Federal benefit 30 (229) 178
Nondeductible expenses 47 79 70
Foreign tax credit 53 - (259)
Other - 390 (101)
Change in valuation allowance (340) 825 (277)
--------------------- --------------------- --------------------
Actual (benefit) provision $ - $ (898) $ 898
===================== ===================== ====================
</TABLE>
F-14
<PAGE> 39
NOTE 10 - STOCKHOLDERS' EQUITY
Employee Stock Purchase Plan
In 1999, the Company adopted an Employee Stock Purchase Plan (the "Plan") to
provide a method whereby all employees have an opportunity to acquire a
proprietary interest in the Company through the purchase of shares of common
stock. The Plan is implemented through common stock offerings in consecutive
offering periods, each constituting a calendar quarter. The first offering
period commenced on January 1, 1999. The option price of the common stock,
purchased with payroll deductions made during an offering period, is the lower
of 85% of the closing price of the common stock on the first eligible trading
day of an offering period or 85% of the closing price of the common stock on the
last eligible day of an offering period. The maximum number of shares of common
stock which may be issued under the Plan is 240,000 shares. During 1999, the
Company issued 4,296 shares of common stock under the Plan.
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 or unrestricted stock, stock appreciation rights and phantom stock
options. The Company may grant options under the Omnibus Plan until September
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 1999, 1998, and 1997 are further subject to accelerated
vesting 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. As of June 30, 1999,
1998 and 1997, there were outstanding phantom stock options totaling 10,082,
8,082, and 3,082, respectively, and no restricted stock or stock appreciation
rights had been granted. Compensation cost associated with the 1999, 1998, and
1997 phantom stock option grants was immaterial.
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. During fiscal year 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.
F-15
<PAGE> 40
NOTE 10 - STOCKHOLDERS' EQUITY, CONTINUED
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 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 generally
expire five years from date of grant.
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, 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
Granted 795,259 3.47 15,000 4.39
Exercised (66,283) 0.97 - -
Expired (393,687) 8.07 - -
----------------- ------------------- ------------------- -------------------
Outstanding Options at June 30, 1999 1,446,071 $ 5.12 46,500 $ 8.19
================= =================== =================== ===================
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 exercisable at June 30, 1999 576,579 $ 6.35 25,500 $ 8.24
================= =================== =================== ===================
Options available for granting 347,609 90,500
================= ===================
</TABLE>
F-16
<PAGE> 41
10 - STOCKHOLDERS' EQUITY, CONTINUED
The following table summarizes information about stock options outstanding at
June 30, 1999:
<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, 1999 Life (yrs) Exercise Price at June 30, 1999 Exercise Price
- -------------------------- ------------------------ ------------ ------------------------ --------------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.41 to $ 1.78 38,874 0.6 $ 0.77 38,874 $ 0.77
$ 1.78 to $ 3.55 437,575 9.6 $ 2.29 - -
$ 3.55 to $ 5.33 295,413 8.7 $ 4.87 86,428 $ 5.00
$ 5.33 to $ 7.10 624,262 6.2 $ 6.59 439,658 $ 6.68
$ 7.10 to $ 8.88 3,000 4.6 $ 7.94 - -
$10.65 to $12.43 79,263 7.8 $ 11.88 28,935 $ 11.88
$14.20 to $15.98 5,184 2.6 $ 14.75 5,184 $ 14.75
$15.98 to $17.75 9,000 3.4 $ 17.50 3,000 $ 17.50
------------------------ -----------------
1,492,571 602,079
======================== =================
</TABLE>
FINANCIAL ACCOUNTING STANDARDS NO. 123
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 1999, 1998 and 1997.
For the purposes of the pro forma amounts shown below, 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>
1999 1998 1997
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Expected life (years) 3-8 3-8 3-8
Risk-free interest rate 5-6 % 5-6 % 6 %
Expected volatility 123 % 81 % 77 %
Dividend yield 0 % 0 % 0 %
</TABLE>
The weighted average fair value of stock options granted under the stock option
plans during 1999, 1998 and 1997 was $2.91, $5.48 and $5.83 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:
F-17
<PAGE> 42
10 - STOCKHOLDERS' EQUITY, CONTINUED
<TABLE>
<CAPTION>
(amounts in thousands except per share amounts) 1999 1998 1997
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Pro-forma amounts
Net (loss) income $ (1,010) $ (9,893) $ 1,212
======================= ======================= =======================
Basic (loss) income per share $ (0.11) $ (1.14) $ 0.16
======================= ======================= =======================
Diluted (loss) income per share $ (0.11) $ (1.14) $ 0.15
======================= ======================= =======================
</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.
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. 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 was as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance, June 30, 1996 2,262
Accretion of dividends 17
Conversion upon initial public offering (2,279)
----------------------------
Balance, June 30, 1997 $ -
============================
</TABLE>
F-18
<PAGE> 43
NOTE 12 - EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following is a reconciliation of the numerators and denominators of basic
net income (loss) per common share ("Basic EPS") and diluted net income (loss)
per common share ("Diluted EPS"):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
BASIC EPS:
Income (numerator):
Net income (loss) $ 618 $ (9,219) $ 2,624
Less: preferred stock dividends - - (17)
------------------ ------------------ ------------------
Net income (loss) available to common stockholders $ 618 $ (9,219) $ 2,607
================== ================== ==================
Shares (denominator):
Weighted average common shares 8,838 8,708 7,460
================== ================== ==================
Basic EPS $ 0.07 $ (1.06) $ 0.35
================== ================== ==================
DILUTED EPS:
Income (numerator):
Net income (loss) $ 618 $ (9,219) $ 2,624
Less: Preferred stock dividends - (17)
Effect of dilutive securities:
Convertible preferred stock - 17
------------------ ------------------ ------------------
Net income (loss) available to common stockholders $ 618 $ (9,219) $ 2,624
================== ================== ==================
Shares (denominator):
Weighted average common shares 8,838 8,708 7,460
Stock options 93 - 486
Convertible preferred stock - 206
------------------ ------------------ ------------------
Total weighted shares and equivalents 8,931 8,708 8,152
================== ================== ==================
Diluted EPS $ 0.07 $ (1.06) $ 0.32
================== ================== ==================
</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.
F-19
<PAGE> 44
NOTE 14 - COMMITMENTS AND CONTINGENCIES
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).
During the second quarter of fiscal 1999, the Company replaced its letter of
credit arrangement with Crestar with a new $400,000 standby letter of credit
arrangement with Silicon Valley Bank. The letter of credit is secured by
restricted cash equivalents maintained at SVB; the requirement decreases
annually through 2003 to $100,000.
At June 30, 1998, the Company had letter of credit arrangements with Crestar
totaling $293,000 which guaranteed the Company's performance under certain
contracts (see Note 7). The letter of credit arrangement expired in the second
quarter of fiscal 1999.
The Company leases 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. Additionally, the Company leases
equipment under operating leases which, in the aggregate, are not significant.
The Company is committed for the payment of minimum rentals under operating
lease agreements through the year 2004 in the following amounts (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
------------------------------------- -----------------------------
<S> <C>
2000 $ 810
2001 803
2002 790
2003 736
2004 310
-----------------------------
$ 3,449
=============================
</TABLE>
The total rental expense under operating leases was $868,000, $813,000 and
$728,000 for the years ended June 30, 1999, 1998 and 1997, 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 following is a breakdown of the Company's revenue by geographic
area (in thousands):
<TABLE>
<CAPTION>
----------------------- ----------------------- -----------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
U.S. $ 17,519 $ 12,314 $ 12,770
Canada and Mexico 1,670 2,557 7,746
Asia 7,971 5,178 11,186
Europe 999 858 1,203
South America 222 815 699
Africa and Middle East 1,276 743 80
----------------------- ----------------------- -----------------------
Total Revenue $ 29,657 $ 22,465 $ 33,684
======================= ======================= =======================
</TABLE>
SALES TO MAJOR CUSTOMERS
Sales to three customers representing a single end-user in Asia comprised
approximately 14%, 9% and 21% of total revenue for 1999, 1998 and 1997,
respectively. Sales to an end user in Mexico comprised
F-20
<PAGE> 45
approximately 7% and 17% of the Company's revenues in 1998 and 1997,
respectively. Two other customers each accounted for approximately 12% and 10%
of total revenue in fiscal year 1999.
NOTE 16 - CONCENTRATIONS OF CREDIT RISK
Trade receivables subject the Company to the potential for credit risk with
customers in the telecommunication services industry and government sector.
Approximately 49% of the Company's gross trade receivables balances was
represented by five customers at June 30, 1999. To reduce credit risk, the
Company conducts ongoing evaluations of its customers and requires letters of
credit or other pre-payment arrangements, as appropriate. The Company maintains
accounts receivable allowances to provide for potential credit losses.
F-21
<PAGE> 46
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO RECOVERIES OF BALANCE AT
BEGINNING COSTS AND PRIOR END OF
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS WRITE-OFFS PERIOD
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1999:
Allowance for doubtful accounts $ 2,465,000 $ 812,000 $ 392,000 $ 2,802,000 $ 867,000
Reserve for obsolete inventory 349,163 (97,353) - - 251,810
Year ended June 30, 1998:
Allowance for doubtful accounts 10,000 2,455,000 - - 2,465,000
Reserve for obsolete inventory 15,000 334,163 - - 349,163
Year ended June 30, 1997:
Allowance for doubtful accounts 10,000 - - - 10,000
Reserve for obsolete inventory 15,000 - - - 15,000
</TABLE>
S-1
<PAGE> 47
INDEX TO EXHIBITS
<TABLE>
<S> <C>
10.24 (D)* Employment Agreement dated as of October 1, 1998 between the Company and T. Russotto
10.25 (D)* Non-Qualified Stock Option Grant Agreement dated March 23, 1999 between the Company and T. Russotto.
10.26 (D)* Incentive Stock Option Grant Agreement dated March 4, 1999 between the Company and J. Eckler.
23 (D) Consent of Ernst & Young LLP
23.1 (D) Consent of PricewaterhouseCoopers LLP
27. (D) Financial Data Schedule
27.1 (D) Amended Financial Data Schedule for the quarters ending September 30, December 31, and March 31, 1999
27.2 (D) Amended Financial Data Schedule - Fiscal Year 1998
---------------------------------------------------------------------------------------------------------------------
(D) Filed herewith
* Management contract or compensatory plan or amendment required to be filed as an exhibit.
</TABLE>
X-1
<PAGE> 1
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of the 1st day of October, 1998, between
ACE*COMM Corporation (the "Company") and Thomas Russotto (the "Executive").
WHEREAS, the Board of Directors of the Company has determined that it is in
the best interests of the Company and its shareholders to assure the Executive's
commitment to the Company throughout its recovery period, and, further, to
assure that the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a corporate
reorganization or Change of Control (as defined below) of the Company, and
WHEREAS, the Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by the recovery period or by a pending or threatened corporate
reorganization or Change of Control and, therefore, it is in the best interests
of the Company and its shareholders to provide the Executive with compensation
and benefits arrangements upon termination which ensure that the compensation
and benefits expectations of the Executive will be satisfied and are competitive
with those of other corporations.
NOW, THEREFORE, in order to accomplish these objectives, and in
consideration of the promises and mutual agreements herein contained, the
Company and Executive hereby agree as follows:
1. EMPLOYMENT, DUTIES.
Subject to the provisions set forth elsewhere in this Agreement, the
Company hereby employs the Executive as its Executive Vice President and Chief
Technology Officer (or such other title as is appropriate from time to time as
is determined by the Chief Executive Officer), with such responsibilities and
authority as shall be assigned to him from time to time by the Board of
Directors or the Chief Executive Officer of the Company, provided that after a
Change of Control, the Executive's position, authority, duties and
responsibilities shall not be substantially diminished from those held,
exercised and assigned during the 120-day period immediately preceding the
Change of Control.
Initially, the Executive's duties shall include:
Duties as directed by the Chief Executive Officer from time to time,
including those set forth on Exhibit A.
The Executive's principal place of employment shall be at the Company's
main headquarters, in Gaithersburg, Maryland, subject to such travel as may be
required by his employment.
The Executive hereby agrees to remain in the employ of the Company subject
to the terms and conditions of this Agreement, for the Term of this Agreement
(defined below) and to perform his duties faithfully, loyally and to report to,
and follow the directions of, the Chief Executive Officer. During the Term, and
excluding any periods of vacation and sick leave to which the Executive is
entitled, the Executive agrees to devote his full business time and best efforts
to the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder, to use his
best efforts to perform faithfully and efficiently such responsibilities. During
the Term it shall not be a violation of this Agreement for the Executive to (A)
serve on corporate, civic or charitable boards or committees, (B) deliver
lectures, fulfill speaking engagements or teach at educational institutions and
(C) manage personal investments, so long as such activities do not materially
interfere with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement.
<PAGE> 2
The Executive represents and warrants that there are no agreements or
arrangements, whether written or oral, in effect which would prevent him from
rendering exclusive services to the Company during the term hereof, and that he
has not made and will not make any commitment, agreement or arrangement, or do
any act, in conflict with this Agreement and that entering into this Agreement
will not be in violation of any other agreement.
2. TERM.
The term of the Executive's employment under this Agreement shall commence
on October 1, 1998 (the "Effective Date") and shall end on the third anniversary
of the Effective Date, unless sooner terminated, as provided herein, or renewed
by mutual agreement of the parties (the "Term").
3. COMPENSATION.
As compensation for all services to be rendered pursuant to this Agreement,
the Company shall pay the Executive, during the Term, the following:
"Base Salary" payable bi-weekly, less such amounts as shall be required to
be withheld by applicable laws and regulations. The "Base Salary" shall be
$185,000 per year, subject to consideration by the Compensation Committee
of the Board of Directors as of October 1 of each year for increases as
appropriate.
"Bonus" In addition to his Base Salary, the Executive shall be eligible to
receive with respect to each fiscal year (beginning with respect to the
1999 fiscal year), payable on October 1, 1999, 2000 and 2001, respectively,
for the prior fiscal year pursuant to a plan established for, and applied
consistently to, all executives, a bonus of (1) up to $100,000 payable in
cash or shares of Common Stock of the Company of equivalent value and (2)
an option for up to 22,000 shares of Common Stock. Such Bonus shall be
payable, based on the Company's financial performance and personal
objectives as determined by the Chief Executive Officer and the Board of
Directors.
Following a Change of Control, the Executive shall be eligible, for each fiscal
year ending during the balance of the Term, an annual bonus (the "Annual Bonus")
in cash and options at least equal to the average of the bonuses offered to the
Executive under the Company's annual bonus plan for the preceding three full
fiscal years prior to the Change of Control (the "Average Annual Bonus"). Each
such Annual Bonus shall be paid no later than the end of the third month of the
fiscal year next following the fiscal year for which the Annual Bonus is
awarded, unless the Executive shall elect to defer the receipt of such Annual
Bonus.
4. OPTION GRANTS.
The Executive will be granted an option (the "Option") in substantially the
form attached hereto. To the extent that the terms of the Option evidenced in
the Option Agreement and in the Amended and Restated Omnibus Stock Plan (the
"Plan") are in any way inconsistent with the terms of this Agreement, the terms
of the Option as set forth in the Option Agreement and Plan shall supersede any
terms set forth herein with respect thereto.
5. PERQUISITES.
During the Term the Executive shall be eligible to participate in benefit
plans generally available to all employees.
In addition, the Executive shall receive the following:
- Company-paid term life insurance providing death benefits equal to two
times Base Salary
- Short-term and long-term disability insurance on substantially the terms
set forth in the policies provided through the Company to the Executive as
of the date hereof
<PAGE> 3
- Health insurance on substantially the terms set forth in the policy
currently provided through the Company to the Executive as of the date
hereof
- Participation in the Company's 401(k) Plan and Employee Stock Purchase Plan
on the terms set forth in such plans
- Education and training and professional organization membership support (2
weeks per year)
- Use of a Company car with a retail value of approximately $45,000 First
Class air travel on US flights or international flights of more than 12
hours and Business Class on shorter international flights
- Accrued annual leave up to 30 days upon termination by the Company other
than for Cause
- 10 holidays per current Company policy
After a Change of Control, the Executive shall be eligible to participate
in benefit plans at least as favorable to the Executive as were available to the
Executive at the Company within the 120 days prior to the Change of Control. In
addition, specifically, if, as a result of a Change of Control, the Executive is
asked to relocate his employment to a location more than 40 miles away from the
Executive's residence, the Executive shall be entitled to receive relocation
benefits of up to $90,000, subject to presentation of reasonable documentation.
6. TERMINATION AND COMPENSATION THEREFOR PRIOR TO A CHANGE OF CONTROL.
6.1 DEATH: If the Executive dies during the Term and prior to a Change of
Control, this Agreement shall terminate automatically as of the date of death of
the Executive. In the event of such termination, all compensation and other
benefits payable or provided hereunder shall cease as of the date of termination
(except to the extent that death benefits are then payable), and Base Salary and
all accrued benefits (if any) then payable to the Executive pursuant to the
terms of any plans or arrangements referred to in Sections 3 or 5, shall be paid
to the Executive (or to his heirs, legatees and/or personal representatives)
through the date of termination. No Bonus shall be payable with respect to the
year in which the Executive dies. Any bonus, the payment of which was deferred
pursuant to the terms of the Executive Bonus Plan, will be paid in full. The
Option will remain exercisable for up to one year from the date of death in
accordance with the terms of the Option Agreement with respect to Option Shares
that have vested as of the date of death. Unvested Option Shares will be deemed
cancelled upon the date of death.
6.2 DISABILITY: If the Company determines in good faith that the Disability
of the Executive has occurred during the Term (pursuant to the definition of
Disability set forth below), it may give to the Executive written notice of its
intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the 30th
day after the date of such notice (the "Disability Effective Date"), provided
that, within the 30 days after such receipt, the Executive shall not have
returned to full-time performance of the Executive's duties. For purposes of
this Agreement, "Disability" shall mean the Executive' incapacity due to mental
or physical illness which is determined to be total and permanent by a physician
selected by the Company or its insurers and reasonably acceptable to the
Executive or the Executive's legal representative. In the event of such
termination, all compensation and other benefits payable or provided hereunder
shall cease as of the effective date of termination (except to the extent that
disability benefits are then payable), and Base Salary and all accrued benefits
(if any) then payable to the Executive pursuant to the terms of any plans or
arrangements referred to in Sections 3 or 5, shall be paid to the Executive (or
to his guardian or personal representatives) through the date of termination. No
Bonus shall be payable with respect to the year in which the Executive is
determined by the Board of Directors to have become disabled. The Option will
remain exercisable for up to 90 days from the effective date of termination in
accordance with the terms of the Option Agreement, with respect to Option Shares
that have vested as of the effective date of termination. Unvested Option Shares
will be deemed cancelled upon the effective date of termination.
<PAGE> 4
6.3 TERMINATION AT ELECTION OF THE COMPANY:
(a) FOR CAUSE: Notwithstanding any other provision of this Agreement, the
Company may terminate the Executive's employment hereunder at any time prior to
a Change of Control, effective after sufficient notice of such termination and
failure to cure, upon the occurrence of any of the following: (i) the
Executive's engaging in conduct that constitutes gross neglect or willful
misconduct in carrying out his duties under this Agreement; (ii) the Executive's
engaging in any acts or omissions involving dishonesty or that demonstrate a
lack of integrity; (iii) the Executive's making knowing material
misrepresentations to the Company that injure the business and affairs of the
Company, monetarily or otherwise; (iv) the Executive's committing a material
breach of any of his obligations under this Agreement. Such termination will be
deemed for "Cause."
In the event of termination of the Executive's employment for Cause, all
compensation and other benefits payable or provided hereunder shall cease as of
the date of termination and Base Salary and all accrued benefits (if any) then
payable to the Executive pursuant to the terms of any plans or arrangements
referred to in Sections 3 or 5, shall be paid to the Executive through the date
of termination. No Bonus shall be payable with respect to the year in which the
Executive is terminated for Cause. Any bonus, the payment of which was deferred
pursuant to the terms of the Executive Bonus Plan, will be paid in full. Upon
termination of the Executive for Cause, the Option shall terminate immediately
and no longer be exercisable.
(b) OTHER THAN FOR CAUSE: In addition to the Company's right to terminate
the Executive's employment pursuant to Sections 6.3(a), prior to a Change of
Control the Company may, for any reason or for no reason, terminate the
Executive's employment upon written notice to the Executive effective upon the
date of the notice. In the event of such termination, all compensation and other
benefits payable or provided hereunder shall cease as of the date of termination
and Base Salary and all accrued benefits (if any) then payable to the Executive
pursuant to the terms of any plans or arrangements referred to in Sections 3 or
5, shall be paid to the Executive through the date of termination. No Bonus
shall be payable with respect to the year in which the Executive is terminated
other than for Cause. Any bonus, the payment of which was deferred pursuant to
the terms of the Executive Bonus Plan, will be paid in full. As additional
compensation for such termination, the Company shall pay the Executive upon such
termination a lump sum equal to one year's Base Salary as is in effect as of
immediately prior to such termination.
If the termination occurs before October 1, 1999, 100,000 of the Option
Shares shall vest and become exercisable as of the date of termination; if the
termination occurs on or after October 1, 1999 but before October 1, 2000,
50,000 of the Option Shares shall vest and become exercisable as of the date of
termination. The Option will remain exercisable for up to 90 days from the
effective date of termination in accordance with the terms of the Option
Agreement with respect to Option Shares that have vested as of the effective
date of termination. Unvested Option Shares will be deemed cancelled upon the
effective date of termination.
6.4 TERMINATION BY THE EXECUTIVE: Notwithstanding any other provision of
this Agreement, prior to a Change of Control the Executive may terminate his
employment upon written notice of termination delivered to the Board of
Directors, effective upon the date of receipt of such notice by the Board. In
the event of such termination, all compensation and other benefits payable or
provided hereunder shall cease as of the date of termination, all accrued
benefits (if any) then payable to the Executive pursuant to the terms of any
plans or arrangements referred to in Sections 3 or 5, shall be paid to the
Executive through the date of termination and Base Salary shall be paid to the
Executive through a date that is 60 days from the date of termination. No Bonus
shall be payable with respect to the year in which such termination is
effective. Any bonus, the payment of which was deferred pursuant to the terms of
the Executive Bonus Plan, will be paid in full. Upon termination by the
Executive, the unvested portion of the Option shall terminate immediately and no
longer be exercisable; the vested portion of the Option shall remain exercisable
for 90 days and thereafter shall terminate.
<PAGE> 5
7. Termination and Compensation therefor following a Change of Control.
7.1 DEFINITION OF CHANGE OF CONTROL: For the purpose of this Agreement, a
"Change of Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 51% or
more of either (i) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (ii) the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that for purposes of this
subsection (a), the following acquisitions shall not constitute a Change of
Control: (i) any acquisition directly from the Company, (ii) any
acquisition by the Company, (iii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company or (iv) any acquisition by any
corporation pursuant to a transaction which complies with clauses (A) and
(B) of subsection (c) of this Section 7.1; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board; or
(c) Consummation of a reorganization, merger or consolidation
involving the Company or any subsidiary of the Company or sale or other
disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, either (A)(i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately
prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to
such Business Combination of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be or (ii) at least
a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination and (B) no
Person (excluding any corporation resulting from such Business Combination
or any employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 35% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership
existed prior to the Business Combination.
7.1 DEATH: If the Executive dies during the Term after a Change of Control,
this Agreement shall terminate automatically as of the date of death of the
Executive. In the event of such termination, all
<PAGE> 6
compensation and other benefits payable or provided hereunder shall cease as of
the date of termination (except to the extent that death benefits are then
payable), and Base Salary and all accrued benefits (if any) then payable to the
Executive pursuant to the terms of any plans or arrangements referred to in
Sections 3 or 5, shall be paid to the Executive (or to his heirs, legatees
and/or personal representatives) through the date of termination. No Bonus shall
be payable with respect to the year in which the Executive dies. The Option will
remain exercisable for up to one year from the date of death in accordance with
the terms of the Option Agreement with respect to Option Shares that have vested
as of the date of death. Unvested Option Shares will be deemed cancelled upon
the date of death.
With respect to the provision of plans or arrangements pursuant to Sections
3 or 5, these shall include, without limitation, and the Executive's estate
and/or beneficiaries shall be entitled to receive, benefits at least equal to
the benefits that would have been provided by the Company to the estate and
beneficiaries of the Executive under such plans, programs, practices and
policies relating to death benefits, if any, as in effect with respect to such
Executive and his beneficiaries at any time during the 120-day period
immediately preceding the Change of Control.
7.2 DISABILITY: If during the Term and after a Change of Control the
Company determines in good faith that the Disability of the Executive has
occurred during the Term (pursuant to the definition of Disability set forth in
Section 6.2), it may give to the Executive written notice of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after the date of
such notice (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. In the event of such termination, all
compensation and other benefits payable or provided hereunder shall cease as of
the effective date of termination (except to the extent that disability benefits
are then payable), and Base Salary and all accrued benefits (if any) then
payable to the Executive pursuant to the terms of any plans or arrangements
referred to in Sections 3 or 5, shall be paid to the Executive (or to his
guardian or personal representatives) through the date of termination. No Bonus
shall be payable with respect to the year in which the Executive is determined
by the Board of Directors to have become disabled. The Option will remain
exercisable for up to 90 days from the effective date of termination in
accordance with the terms of the Option Agreement, with respect to Option Shares
that have vested as of the effective date of termination. Unvested Option Shares
will be deemed cancelled upon the effective date of termination.
7.3 TERMINATION AT ELECTION OF THE COMPANY:
(a) FOR CAUSE: Notwithstanding any other provision of this Agreement, the
Company may terminate the Executive's employment hereunder at any time after a
Change of Control upon the occurrence of any of the following: (i) the willful
and continued failure of the Executive to perform substantially the Executive's
duties with the Company or one of its affiliates (other than any such failure
resulting from incapacity due to physical or mental illness), after a written
demand for substantial performance is delivered to the Executive by the Board or
the Chief Executive Officer of the Company which identifies the manner in which
the Board or Chief Executive officer believes that the Executive has not
substantially performed the Executive's duties, or (ii) the willful engaging by
the Executive in illegal conduct or gross misconduct which is materially and
demonstrably injurious to the Company. Following a Change of Control, only such
termination will be deemed for Cause.
The cessation of employment of the Executive shall not be deemed to be for
Cause following a Change of Control unless and until there shall have been
delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the Board at a meeting of the
Board called and held for such purpose (after reasonable notice is provided to
the Executive and the Executive is given an opportunity, together with counsel,
to be heard before the Board), finding that, in the good faith opinion of the
Board, the Executive is guilty of the conduct described in subparagraph (i) or
(ii) above, and specifying the particulars thereof in detail.
<PAGE> 7
In the event of such termination of the Executive's employment, all
compensation and other benefits payable or provided hereunder shall cease
as of the date of termination and Base Salary and all accrued benefits (if
any) then payable to the Executive pursuant to the terms of any plans or
arrangements referred to in Sections 3 or 5, shall be paid to the Executive
through the date of termination. No Bonus shall be payable with respect to
the year in which the Executive is so terminated for Cause. Upon
termination of the Executive for Cause, the Option shall terminate
immediately and no longer be exercisable.
(b) OTHER THAN FOR CAUSE: In addition to the Company's right to terminate
the Executive's employment pursuant to Sections 7.3(a), following a Change of
Control the Company may, for any reason or for no reason, terminate the
Executive's employment upon written notice to the Executive. In the event of
such termination, all compensation and other benefits payable or provided
hereunder shall cease as of the date of termination and Base Salary and all
accrued benefits (if any) then payable to the Executive pursuant to the terms of
any plans or arrangements referred to in Sections 3 or 5, shall be paid to the
Executive through the date of termination. No Bonus shall be payable with
respect to the year in which the Executive is terminated other than for Cause.
As additional compensation for such termination, the Company shall pay the
Executive upon such termination a lump sum equal to one year's Base Salary as is
in effect as of immediately prior to such termination. In addition, any Option
Shares that are unvested as of the date of termination shall immediately vest
and become exercisable as of the effective date of termination. The Option shall
be exercisable with respect to such accelerated shares and any other Option
Shares previously vested as of the effective date of termination and shall
remain exercisable for 90 days from the effective date of termination. In
addition, the Company shall transfer to the Executive title to the Company car
Executive is using as of such date. Finally, with respect to stock options that
are held by the Executive other than the Option, options with respect to
unearned and unvested shares shall be cancelled immediately; options with
respect to shares that have been earned but are not vested (i.e. exercisable)
shall be deemed vested and shall be exercisable as of the date of termination;
and all options that are vested (i.e. exercisable) as of the date of termination
shall remain exercisable for 90 days from the date of termination.
7.4 Termination by the Executive:
(a) FOR GOOD REASON: The Executive may terminate his employment for Good
Reason at any time following a Change of Control. For purposes of this
Agreement, "Good Reason" shall mean:
(i) a substantial diminishment in the position, authority, duties and
responsibility of the Executive, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by
the Executive;
(ii) any failure by the Company to comply with any of the provisions
of Sections 3 and 5 of this Agreement, other than a failure not occurring
in bad faith and which is remedied by the Company promptly after receipt of
written notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at a location
that is more than 40 miles away from his residence as of immediately prior
to the Change of Control;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section 10.6
of this Agreement.
In the event of such termination, all compensation and other benefits
payable or provided hereunder shall cease as of the date of termination and Base
Salary and all accrued benefits (if any) then
<PAGE> 8
payable to the Executive pursuant to the terms of any plans or arrangements
referred to in Sections 3 or 5, shall be paid to the Executive through the date
of termination. No Bonus shall be payable with respect to the year in which the
Executive is terminated other than for Cause. As additional compensation for
such termination, the Company shall pay the Executive upon such termination a
lump sum equal to one year's Base Salary as is in effect as of immediately prior
to such termination. In addition, any Option Shares that are unvested as of the
date of termination shall immediately vest and become exercisable as of the
effective date of termination. The Option shall be exercisable with respect to
such accelerated shares and any other Option Shares previously vested as of the
effective date of termination and shall remain exercisable for 90 days from the
effective date of termination. In addition, the Company shall transfer to the
Executive title to the Company car Executive is using as of such date. Finally,
with respect to stock options that are held by the Executive other than the
Option, options with respect to unearned and unvested shares shall be cancelled
immediately; options with respect to shares that have been earned but are not
vested (i.e. exercisable) shall be deemed vested and shall be exercisable as of
the date of termination; and all options that are vested (i.e. exercisable) as
of the date of termination shall remain exercisable for 90 days from the date of
termination.
Any termination by the Executive for Good Reason, shall be communicated by
notice of termination to the Company indicating the specific termination
provision in this Agreement relied upon, and, to the extent applicable,
reasonable detail as to the facts and circumstances claimed to provide a basis
for termination under the provision so indicated and specifying the termination
date (which date shall be not more than thirty days after the giving of such
notice).
(b) OTHER THAN FOR GOOD REASON . Notwithstanding any other provision of
this Agreement, the Executive may terminate his employment effective as of the
date of his written notice of termination delivered to the Board of Directors.
In the event of such termination, all compensation and other benefits payable or
provided hereunder shall cease as of the date of termination and Base Salary and
all accrued benefits (if any) then payable to the Executive pursuant to the
terms of any plans or arrangements referred to in Sections 3 or 5, shall be paid
to the Executive through the date of termination. No Bonus shall be payable with
respect to the year in which the Executive effects such termination. Upon such
termination by the Executive, the Option shall terminate immediately and shall
no longer be exercisable.
8. CERTAIN COVENANTS OF THE EXECUTIVE.
8.1 At all times during the Term, and following termination of this
Agreement for any reason, the Executive shall keep secret and retain in
strictest confidence, and shall not use for the benefit of himself or others
except in connection with the business and affairs of the Company, all
confidential matters relating to the business of the Company or matters relating
to this Agreement, learned by the Executive heretofore or hereafter, and shall
not disclose them to anyone outside of the Company, except (i) as required in
the course of performing his duties hereunder, (ii) with the Company's express
written consent, or (iii) to the extent that the confidential matter (a) is in
the public domain or is generally known in the industry through no unlawful act
of the Executive or (b) must be disclosed by the Executive pursuant to law.
8.2 All memoranda, notes, lists, records and other documents or papers
made or compiled by or on behalf of the Executive, or made available to the
Executive in connection with his employment are and shall be the property of the
Company and shall be delivered to the Company promptly upon termination of the
Executive's employment with the Company or at any other time upon request.
Executive will be provided reasonable access to such information for his own
legal defense.
8.3 The Executive agrees that, for a period of one year from the date
of termination of his employment under 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 in any business that is in competition with the
Business of the Company. "Business" shall mean the business of providing
Operations Support System hardware and/or software for data and voice networks
operated by telecommunications providers and large enterprises, including for
<PAGE> 9
billing data collection, billing, customer care, network surveillance, alarm
processing and network traffic management. "Business" does not include any
information technology that is provided to an entity that is not in the
telecommunications Operations Support Systems market. Specifically, by way of
example, "Business" would not include technology used for educational,
government, military, retail, wholesale, banking or other markets that is not
for the purpose of telecommunications for these markets. Further, it would not
include technology for the telecommunications industry that has not been part of
the Company's activities in the last three years nor for the term of this
Agreement such as LANs, circuit switching, packet switching, cryptology, dense
wavelength division multiplexing, or the like. Provided that the foregoing shall
not prohibit the Executive from owning beneficially less than 5% of the
outstanding stock of any class of stock of a corporation the securities of which
are regularly traded or quoted on a national securities exchange. Specifically,
but without limiting the generality of the foregoing, the Executive 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 or services;
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, 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 Company to anyone not
connected with the Company;
"Indirect" competition shall include any competition undertaken through an
entity owned in whole or in part by the Executive or any of his agents or
affiliates.
This Section 8.3 shall not be enforceable in the event that the Company
owes under the terms of this Agreement (e.g. in the event of termination by the
Company without Cause), and fails to pay, to the Executive amounts due the
Executive under the terms of this Agreement.
8.4 If the Executive breaches, or threatens to breach, any of the
provisions of Section 8 (the "Restrictive Covenants"), the Company shall have,
in addition to its right immediately to terminate this Agreement for Cause, the
right and remedy (which right and remedy shall be independent of others and
severally enforceable, and which shall be in addition to, and not in lieu of,
any other rights and remedies available to the Company under law or in equity)
to seek an injunction or other equitable relief to prevent any such breach or
continuing breach, including having the Restrictive Covenants specifically
enforced by any court having equity jurisdiction, it being acknowledged and
agreed that any such breach or threatened breach will cause irreparable injury
to the Company and that money damages will not provide adequate remedy to the
Company.
8.5 SEVERABILITY OF COVENANTS: The Executive acknowledges and agrees that
the Restrictive Covenants are reasonable and valid in all respects. If any court
determines that any of the Restrictive Covenants or any part thereof, is invalid
or unenforceable, the remainder of the Restrictive Covenants shall not thereby
be affected and shall be given full effect, without regard to the invalid
portions. The parties agree 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 possible under applicable law, the
benefits intended by this Agreement. The validity, legality or enforceability of
this Agreement shall not be affected by any such modification.
8.6 ENFORCEABILITY IN JURISDICTIONS: The parties intend to and hereby
confer jurisdiction to enforce the Restrictive Covenants upon the courts of
Maryland.
<PAGE> 10
9. [INTENTIONALLY DELETED]
10. OTHER PROVISIONS.
10.1 NOTICES: Any notice or other communication required or which may be
given hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage paid, and shall be deemed given when so
delivered personally, telegraphed, telexed, sent by facsimile transmission or,
if mailed, four days after the date of mailing, as follows:
(i) if to the Company, to:
ACE*COMM Corporation
704 Quince Orchard Road
Gaithersburg, Maryland 20878
Attention: George Jimenez, Chairman of the Board
(ii) if to the Executive, to:
(intentionally omitted)
Any party may notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
10.2 ENTIRE AGREEMENT: This Agreement contains the entire agreement between
the parties with respect to the subject matter hereof and supersedes all prior
agreements and understandings, written or oral, with respect thereto.
10.3 PERSONNEL POLICY MANUAL: All terms and conditions applicable to all
employees of the Company contained in the ACE*COMM Employee Handbook as the same
shall be in force from time to time, shall apply to the employment of the
Executive except to the extent that they conflict with the specific terms and
conditions of this Agreement, in which event the terms and conditions of this
Agreement shall prevail.
10.4 WAIVERS AND AMENDMENTS: This Agreement may be amended, modified,
superseded, canceled, renewed or extended, and the terms and conditions hereof
may be waived, only by a written instrument signed by the Executive and the
Chairman of the Board of the Company (each, in such capacity, a party) or, in
the case of a waiver, by the party waiving compliance. No delay on the part of
any party in exercising any right, power or privilege hereunder, nor any single
or partial exercise of any right, power or privilege hereunder, preclude any
other further exercise thereof or the exercise of any other right, power or
privilege hereunder.
10.5 GOVERNING LAW; NO OTHER AGREEMENTS: This Agreement has been negotiated
and is to be performed in the State of Maryland, and shall be governed and
construed in accordance with the laws of the State of Maryland applicable to
agreements made and to be performed entirely within such State. This Agreement
supersedes, as of its effective date, any other oral or written agreement
between the parties with respect to the subject matter hereof.
10.6 SUCCESSORS.
<PAGE> 11
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as defined in this Agreement and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
10.7 COUNTERPARTS: This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
10.8 TAXES: The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
IN WITNESS WHEREOF, the parties have executed or caused to be executed this
Agreement on the date first above written.
ACE*COMM Corporation
By:
--------------------------------------
George Jimenez
Chairman of the Board
--------------------------------------
Thomas Russotto
<PAGE> 1
EXHIBIT 10.25
ACE*COMM CORPORATION
AMENDED AND RESTATED OMNIBUS STOCK PLAN
NON-QUALIFIED STOCK OPTION GRANT AGREEMENT
This Grant Agreement (the "Agreement") is entered into effective as of
March 23, 1999 (the "Grant Date"), by and between ACE*COMM Corporation, a
Maryland corporation (the "Company"), and Thomas V. Russotto ("Grantee").
ARTICLE 1
GRANT OF OPTION
SECTION 1.1 GRANT OF OPTION. Subject to the terms and conditions prescribed
in the Agreement and pursuant to the provisions of the Amended and Restated
Omnibus Stock Plan (the "Plan"), the Company hereby grants to Grantee as of the
Grant Date a Non-Qualified Stock Option (the "Option") to purchase all or any
part of 150,000 shares of voting common stock of the Company (the "Stock") at an
exercise price of $2.00 per share (the "Exercise Price").
SECTION 1.2 TERM OF OPTION. Unless the Option granted pursuant to Section
1.1 hereof terminates earlier pursuant to other provisions of the Agreement, the
Option shall expire at 5:00 p.m. Eastern Time on the day following the tenth
(10th) anniversary of its Grant Date.
ARTICLE 2
VESTING
SECTION 2.1 VESTING. Unless the Option has earlier terminated pursuant to
the provisions of the Agreement, Grantee shall become vested in the Option in
accordance with the schedule below, provided, however, that Grantee shall have
been in the continuous, full-time employ of the Corporation from the Grant Date
through the applicable date below:
<TABLE>
<CAPTION>
Percentage of
Date Option Vested
---- -------------
<S> <C>
July 22, 1999 50,000 shares
July 22, 2000 50,000 shares
July 22, 2001 50,000 shares
</TABLE>
<PAGE> 2
ARTICLE 3
EXERCISE OF OPTION
SECTION 3.1 EXERCISABILITY OF OPTION. The Option shall be exercisable with
respect to any vested shares. Except as otherwise provided herein, no portion of
the Option shall be exercisable by Grantee prior to the time such portion of the
Option has vested. Vested Option Shares that have become exercisable shall
remain exercisable throughout the term of this Option, except as otherwise set
forth in this Agreement, including Article 4.
SECTION 3.2 ACCELERATION OF EXERCISABILITY. Unless the Option has earlier
terminated pursuant to the provisions of the Agreement, the exercisability of
the Option granted to Grantee hereunder shall be accelerated so that the Vested
Option Shares shall become exercisable earlier in whole or in part upon the
terms and conditions set forth in the Employment Agreement dated as of October
1, 1998 between the Company and Mr. Russotto (the "Employment Agreement").
SECTION 3.3 MANNER OF EXERCISE. The exercisable portion of the Option
shares may be exercised, in whole or in part, by delivering written notice to
the Compensation Committee of the Board of Directors in accordance with Section
5.8 hereof in such form as the Committee may require from time to time;
provided, however, that the Option may not be exercised at any one time as to
fewer than one hundred (100) shares (or such number of shares as to which the
Option is then exercisable if such number of shares then exercisable is less
than one hundred (100)). Such notice shall specify the number of shares of Stock
subject to the Option as to which the Option is being exercised, and shall be
accompanied by full payment of the Exercise Price of the shares of Stock as to
which the Option is being exercised and any applicable withholding taxes which
may be due. Payment of the Exercise Price and any withholding tax obligations
shall be made in cash (or cash equivalents acceptable to the Committee in the
Committee's discretion). In the Committee's sole and absolute discretion, the
Committee may authorize payment of the Exercise Price and any withholding tax
obligations to be made, in whole or in part, by such other means as the
Committee may prescribe. The Option may be exercised only in multiples of whole
shares and no partial shares shall be issued.
The Committee, subject to such limitations as it may determine, may
authorize payment of the Exercise Price and any withholding tax obligations in
whole or in part, by delivery of a properly executed exercise notice, together
with irrevocable instructions: (i) to a brokerage firm approved by the Company
to deliver promptly to the Company the aggregate amount of sale or loan proceeds
to pay the exercise price and any withholding tax obligations that may arise in
connection with the exercise, and (ii) to the Company to deliver the
certificates for such purchased shares directly to such brokerage firm.
SECTION 3.4 ISSUANCE OF SHARES AND PAYMENT OF CASH UPON EXERCISE. Upon
exercise of the Option, in whole or in part, in accordance with the terms of the
Agreement and upon payment of the Exercise Price and any withholding tax
obligations for the shares of Stock as to which the Option is exercised, the
Company shall issue to Grantee or Grantee's permitted transferee, as the case
may be, the number of shares of Stock so paid for, in the form of fully paid and
nonassessable Stock.
ARTICLE 4
TERMINATION OF OPTION
Unless the Option has earlier terminated pursuant to the provisions of the
Agreement, the Option granted to Grantee shall terminate in its entirety upon
the events and on the terms and conditions set forth in the Employment
Agreement, but in any event not later than on the tenth anniversary of the Grant
Date.
<PAGE> 3
ARTICLE 5
MISCELLANEOUS
SECTION 5.1 NON-GUARANTEE OF EMPLOYMENT OR OTHER RELATIONSHIP. Nothing in
the Plan or the Agreement shall be construed as a contract of employment or for
services between the Company (or an affiliate) and Grantee, or as a contractual
right of Grantee to continued employment or affiliation with the Company or an
affiliate, or as a limitation of the right of the Company or an affiliate to
terminate its relationship with Grantee at any time.
SECTION 5.2 NO RIGHTS OF STOCKHOLDER. Grantee shall not have any of the
rights of a stockholder with respect to the shares of Stock that may be issued
upon the exercise of the Option until such shares of Stock have been issued to
him upon the due exercise of the Option.
SECTION 5.3 WITHHOLDING OF TAXES. The Company or any affiliate shall have
the right to deduct from any compensation or any other payment of any kind
(including withholding the issuance of shares of Stock) due Grantee the amount
of any federal, state or local taxes required by law to be withheld as the
result of the exercise of the Option; provided, however, that the value of the
shares of Stock withheld may not exceed the statutory minimum withholding amount
required by law. In lieu of such deduction, the Committee may require Grantee to
make a cash payment to the Company or an affiliate equal to the amount required
to be withheld. If Grantee does not make such payment when requested, the
Company may refuse to issue any Stock certificate under the Plan until
arrangements satisfactory to the Committee for such payment have been made.
SECTION 5.4 NONTRANSFERABILITY OF OPTION. Except as expressly authorized by
the Committee in writing, the Option shall be nontransferable otherwise than by
will or the laws of descent and distribution, and during the lifetime of
Grantee, the Option may be exercised only by Grantee or, during the period
Grantee is under a legal disability, by Grantee's guardian or legal
representative.
SECTION 5.5 AGREEMENT SUBJECT TO CHARTER, BY-LAWS AND GOVERNING LAWS. This
Agreement is subject to the Charter and By-Laws of the Company, and any
applicable Federal or state laws, rules or regulations, including without
limitation, the laws, rules, and regulations of the State of Maryland, other
than the conflict of laws principles thereof.
SECTION 5.6 GENDER. As used herein the masculine shall include the feminine
as the circumstances may require.
SECTION 5.7 HEADINGS. The headings in the Agreement are for reference
purposes only and shall not affect the meaning or interpretation of the
Agreement.
SECTION 5.8 NOTICES. All notices and other communications made or given
pursuant to the Agreement shall be in writing and shall be sufficiently made or
given if hand delivered or mailed by certified mail, addressed to Grantee at the
address contained in the records of the Company, or addressed to the Committee,
care of the Company for the attention of its Secretary at its principal office
or, if the receiving party consents in advance, transmitted and received via
telecopy or via such other electronic transmission mechanism as may be available
to the parties.
<PAGE> 4
SECTION 5.9 ENTIRE AGREEMENT; MODIFICATION. The Agreement contains the
entire agreement between the parties with respect to the subject matter
contained herein and may not be modified, except as provided in the Plan or in a
written document signed by each of the parties hereto.
SECTION 5.10 CONFORMITY WITH PLAN. This Agreement is intended to conform in
all respects with, and is subject to all applicable provisions of, the Plan,
which is incorporated herein by reference. Unless stated otherwise herein,
capitalized terms in this Agreement shall have the same meaning as defined in
the Plan. Inconsistencies between this Agreement and the Plan shall be resolved
in accordance with the terms of the Plan. In the event of any ambiguity in the
Agreement or any matters as to which the Agreement is silent, the Plan shall
govern, as interpreted by the Committee in good faith.
IN WITNESS WHEREOF, the parties have executed the Agreement as of the date
first above written.
ATTEST: ACE*COMM CORPORATION
By:
- ----------------------------- ------------------------------
George T. Jimenez
WITNESS: GRANTEE
- ------------------------------ ---------------------------------
Thomas V. Russotto
<PAGE> 1
EXHIBIT 10.26
ACE*COMM CORPORATION
AMENDED AND RESTATED OMNIBUS STOCK PLAN
INCENTIVE STOCK OPTION GRANT AGREEMENT
This Incentive Stock Option Grant Agreement (the "Agreement") is entered
into effective as of March 4, 1999 (the "Grant Date"), by and between ACE*COMM
Corporation, a Maryland corporation (the "Company"), and James K. Eckler
("Grantee").
ARTICLE 1
GRANT OF OPTION
Section 1.1 Grant of Option. Subject to the terms and conditions prescribed
in the Agreement and pursuant to the provisions of the Amended and Restated
Omnibus Stock Plan (the "Plan"), the Company hereby grants to Grantee as of the
Grant Date an Incentive Stock Option (the "Option") to purchase all or any part
of 88,500 shares of voting common stock of the Company (the "Stock") at an
exercise price of $3.125 per share (the "Exercise Price").
Section 1.2 Term of Option. Unless the Option granted pursuant to Section
1.1 hereof terminates earlier pursuant to other provisions of the Agreement, the
Option shall expire at 5:00 p.m. Eastern Time on the day prior to the tenth
(10th) anniversary of its Grant Date.
ARTICLE 2
VESTING
Section 2.1 Vesting. Unless the Option has earlier terminated pursuant to
the provisions of the Agreement, Grantee shall become vested in the Option in
accordance with the schedule below, provided, however, that Grantee shall have
been in the continuous, full-time employ of the Corporation from the Grant Date
through the applicable date below:
FRACTION OF
DATE OPTION VESTED
March 4, 2006 One-Third
March 4, 2007 One-Third
March 4, 2008 One-Third
Section 2.2 Acceleration. In the event Grantee enters into an agreement or
other written understanding regarding his employment with the Company, vesting
shall be accelerated to the extent, if any, provided in such employment
agreement or other written understanding.
<PAGE> 2
ARTICLE 3
EXERCISE OF OPTION
Section 3.1 Exercisability of Option. The Option shall be exercisable with
respect to any vested shares. Except as otherwise provided herein, no portion of
the Option shall be exercisable by Grantee prior to the time such portion of the
Option has vested. Vested Option Shares that have become exercisable shall
remain exercisable throughout the term of this Option, except as otherwise set
forth in this Agreement, including Article 4.
Section 3.2 Manner of Exercise. The exercisable portion of the Option
shares may be exercised, in whole or in part, by delivering written notice to
the Compensation Committee of the Board of Directors in accordance with Section
5.8 hereof in such form as the Committee may require from time to time;
provided, however, that the Option may not be exercised at any one time as to
fewer than one hundred (100) shares (or such number of shares as to which the
Option is then exercisable if such number of shares then exercisable is less
than one hundred (100)). Such notice shall specify the number of shares of Stock
subject to the Option as to which the Option is being exercised, and shall be
accompanied by full payment of the Exercise Price of the shares of Stock as to
which the Option is being exercised and any applicable withholding taxes which
may be due. Payment of the Exercise Price and any withholding tax obligations
shall be made in cash (or cash equivalents acceptable to the Committee in the
Committee's discretion). In the Committee's sole and absolute discretion, the
Committee may authorize payment of the Exercise Price and any withholding tax
obligations to be made, in whole or in part, by such other means as the
Committee may prescribe. The Option may be exercised only in multiples of whole
shares and no partial shares shall be issued.
The Committee, subject to such limitations as it may determine, may
authorize payment of the Exercise Price and any withholding tax obligations in
whole or in part, by delivery of a properly executed exercise notice, together
with irrevocable instructions: (i) to a brokerage firm approved by the Company
to deliver promptly to the Company the aggregate amount of sale or loan proceeds
to pay the exercise price and any withholding tax obligations that may arise in
connection with the exercise, and (ii) to the Company to deliver the
certificates for such purchased shares directly to such brokerage firm.
Section 3.3 Issuance of Shares and Payment of Cash upon Exercise. Upon
exercise of the Option, in whole or in part, in accordance with the terms of the
Agreement and upon payment of the Exercise Price and any withholding tax
obligations for the shares of Stock as to which the Option is exercised, the
Company shall issue to Grantee or Grantee's permitted transferee, as the case
may be, the number of shares of Stock so paid for, in the form of fully paid and
nonassessable Stock.
<PAGE> 3
ARTICLE 4
TERMINATION OF OPTION
Unless the Option has earlier terminated pursuant to the provisions of the
Agreement, the Option granted to Grantee shall terminate in its entirety upon
the termination of Grantee's employment with the Company, but in any event not
later than on the day prior to the tenth anniversary of the Grant Date.
ARTICLE 5
MISCELLANEOUS
Section 5.1 Non-Guarantee of Employment or Other Relationship. Nothing in
the Plan or the Agreement shall be construed as a contract of employment or for
services between the Company (or an affiliate) and Grantee, or as a contractual
right of Grantee to continued employment or affiliation with the Company or an
affiliate, or as a limitation of the right of the Company or an affiliate to
terminate its relationship with Grantee at any time.
Section 5.2 No Rights of Stockholder. Grantee shall not have any of the
rights of a stockholder with respect to the shares of Stock that may be issued
upon the exercise of the Option until such shares of Stock have been issued to
him upon the due exercise of the Option.
Section 5.3 Withholding of Taxes. The Company or any affiliate shall have
the right to deduct from any compensation or any other payment of any kind
(including withholding the issuance of shares of Stock) due Grantee the amount
of any federal, state or local taxes required by law to be withheld as the
result of the exercise of the Option; provided, however, that the value of the
shares of Stock withheld may not exceed the statutory minimum withholding amount
required by law. In lieu of such deduction, the Committee may require Grantee to
make a cash payment to the Company or an affiliate equal to the amount required
to be withheld. If Grantee does not make such payment when requested, the
Company may refuse to issue any Stock certificate under the Plan until
arrangements satisfactory to the Committee for such payment have been made.
Section 5.4 Nontransferability of Option. Except as expressly authorized by
the Committee in writing, the Option shall be nontransferable otherwise than by
will or the laws of descent and distribution, and during the lifetime of
Grantee, the Option may be exercised only by Grantee or, during the period
Grantee is under a legal disability, by Grantee's guardian or legal
representative.
Section 5.5 Agreement Subject to Charter, By-Laws and Governing Laws. This
Agreement is subject to the Charter and By-Laws of the Company, and any
applicable Federal or state laws, rules or regulations, including without
limitation, the laws, rules, and regulations of the State of Maryland, other
than the conflict of laws principles thereof.
Section 5.6 Gender. As used herein the masculine shall include the feminine
as the circumstances may require.
Section 5.7 Headings. The headings in the Agreement are for reference
purposes only and shall not affect the meaning or interpretation of the
Agreement.
Section 5.8 Notices. All notices and other communications made or given
pursuant to the Agreement shall be in writing and shall be sufficiently made or
given if hand delivered or mailed by certified mail, addressed to Grantee at the
address contained in the records of the Company, or addressed to the Committee,
care of the Company for the attention of its Secretary at its principal office
or, if the receiving party consents in advance, transmitted and received via
telecopy or via such other electronic transmission mechanism as may be available
to the parties.
Section 5.9 Entire Agreement; Modification. The Agreement contains the
entire agreement
<PAGE> 4
between the parties with respect to the subject matter contained herein and may
not be modified, except as provided in the Plan or in a written document signed
by each of the parties hereto.
Section 5.10 Conformity with Plan. This Agreement is intended to conform in
all respects with, and is subject to all applicable provisions of, the Plan,
which is incorporated herein by reference. Unless stated otherwise herein,
capitalized terms in this Agreement shall have the same meaning as defined in
the Plan. Inconsistencies between this Agreement and the Plan shall be resolved
in accordance with the terms of the Plan. In the event of any ambiguity in the
Agreement or any matters as to which the Agreement is silent, the Plan shall
govern, as interpreted by the Committee in good faith.
IN WITNESS WHEREOF, the parties have executed the Agreement as of the date
first above written.
ATTEST: ACE*COMM CORPORATION
By:
- ----------------------------- --------------------------------
WITNESS: GRANTEE
- ----------------------------- --------------------------------
James K. Eckler
<PAGE> 1
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 333-12107 and No. 333-15237) pertaining to the Company's Amended
and Restated Omnibus Stock Plan and the Amended and Restated Stock Option Plan
for Directors of our report dated August 25, 1999, with respect to the financial
statements and schedule of ACE*COMM Corporation included in the Annual Report
(Form 10-K) for the year ended June 30, 1999.
Ernst & Young LLP
Washington, D.C.
September 22, 1999
<PAGE> 1
EXHIBIT 23.1
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, which appears in ACE*COMM Corporation's Annual Report on
Form 10-K for the year ended June 30, 1999.
PricewaterhouseCoopers LLP
Washington, D.C.
September 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1999 FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-K AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,424
<SECURITIES> 0
<RECEIVABLES> 7,900
<ALLOWANCES> 837
<INVENTORY> 2,152
<CURRENT-ASSETS> 13,105
<PP&E> 6,432
<DEPRECIATION> 2,653
<TOTAL-ASSETS> 18,699
<CURRENT-LIABILITIES> 5,146
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 13,390
<TOTAL-LIABILITY-AND-EQUITY> 18,699
<SALES> 29,657
<TOTAL-REVENUES> 29,657
<CGS> 13,765
<TOTAL-COSTS> 13,765
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 812
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> 618
<INCOME-TAX> 0
<INCOME-CONTINUING> 618
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 618
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS AMENDED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JUNE 30, 1999 FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999 JUN-30-1999
<PERIOD-START> JUL-01-1998 JUL-01-1998 JUL-01-1998
<PERIOD-END> SEP-30-1998 DEC-31-1998 MAR-31-1999
<CASH> 2,746 3,005 3,134
<SECURITIES> 0 0 0
<RECEIVABLES> 10,910 9,945 8,601
<ALLOWANCES> 840 1,329 990
<INVENTORY> 2,250 2,356 2,090
<CURRENT-ASSETS> 15,693 14,706 13,361
<PP&E> 5,944 5,949 6,282
<DEPRECIATION> 1,995 2,163 2,407
<TOTAL-ASSETS> 22,200 21,073 19,450
<CURRENT-LIABILITIES> 9,177 7,984 6,352
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 89 89 89
<OTHER-SE> 12,823 12,902 12,922
<TOTAL-LIABILITY-AND-EQUITY> 22,200 21,073 19,450
<SALES> 6,723 14,251 21,505
<TOTAL-REVENUES> 6,723 14,251 21,505
<CGS> 3,083 7,359 10,441
<TOTAL-COSTS> 3,083 7,359 10,441
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 55 449 754
<INTEREST-EXPENSE> 25 39 42
<INCOME-PRETAX> 89 167 160
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 89 167 160
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 89 167 160
<EPS-BASIC> 0.01 0.02 0.02
<EPS-DILUTED> 0.01 0.02 0.02
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS AMENDED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JUNE 30, 1998 FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1998 JUN-30-1998 JUN-30-1998
<PERIOD-START> JUL-01-1997 JUL-01-1997 JUL-01-1997 JUL-01-1997
<PERIOD-END> SEP-30-1997 DEC-31-1997 MAR-31-1998 JUN-30-1998
<CASH> 5,293 2,834 1,981 2,956
<SECURITIES> 0 0 0 0
<RECEIVABLES> 16,393 16,485 14,051 13,275
<ALLOWANCES> 10 350 1,350 2,465
<INVENTORY> 2,647 2,743 2,409 3,232
<CURRENT-ASSETS> 25,805 23,159 19,546 17,664
<PP&E> 5,279 4,260 5,897 5,854
<DEPRECIATION> 1,339 1,541 1,646 1,785
<TOTAL-ASSETS> 32,101 29,756 26,658 24,593
<CURRENT-LIABILITIES> 7,319 8,107 9,411 11,686
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 86 87 88 88
<OTHER-SE> 22,507 20,441 15,658 12,697
<TOTAL-LIABILITY-AND-EQUITY> 32,101 29,756 26,658 24,593
<SALES> 8,735 14,226 18,786 22,465
<TOTAL-REVENUES> 8,735 14,226 18,786 22,465
<CGS> 3,684 8,282 10,662 13,325
<TOTAL-COSTS> 3,684 8,282 10,662 13,325
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 340 1,340 2,455
<INTEREST-EXPENSE> 34 64 91 117
<INCOME-PRETAX> 1,311 (2,225) (6,257) (10,117)
<INCOME-TAX> 512 (823) 0 (898)
<INCOME-CONTINUING> 799 (1,402) (6,257) (9,219)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 799 (1,402) (6,257) (9,219)
<EPS-BASIC> 0.09 0.16 0.72 1.06
<EPS-DILUTED> 0.09 0.16 0.72 1.06
</TABLE>
