<PAGE> 1
As filed with the Securities and Exchange Commission on November 15, 1999
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 0-21059
ACE*COMM CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 52-1283030
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
704 QUINCE ORCHARD ROAD, GAITHERSBURG, MD 20878
(Address of principal executive offices) (Zip Code)
301-721-3000
(Registrant's telephone number, including
area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF SEPTEMBER 30, 1999 8,910,559
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ACE*COMM CORPORATION
INDEX
Part I - Financial Information
Item 1. Financial Statements
Balance Sheets as of September 30, 1999
(Unaudited) and June 30, 1999 3
Statements of Operations (Unaudited) for the
three months ended September 30, 1999 and 1998 4
Statements of Stockholders' Equity for the
three months ended September 30, 1999 (Unaudited)
and year ended June 30, 1999 5
Statements of Cash Flows (Unaudited) for the
three months ended September 30, 1999 and 1998 6
Notes to Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACE*COMM CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- --------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,622 $ 3,424
Accounts receivable, net 8,677 6,547
Inventories, net 1,793 2,152
Note receivable 266 516
Prepaid expenses and other 621 466
-------- --------
Total current assets 14,979 13,105
Property and equipment, net 3,660 3,779
Capitalized software development costs, net 1,430 1,747
Other assets 67 68
-------- --------
Total assets $ 20,136 $ 18,699
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings $ 1,204 $ 47
Accounts payable 1,081 1,517
Accrued expenses 786 797
Accrued compensation 1,910 1,621
Accrued contract costs 442 718
Deferred revenue 288 446
-------- --------
Total current liabilities 5,711 5,146
Noncurrent borrowings 368 74
-------- --------
Total liabilities 6,079 5,220
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, 0 shares issued and outstanding
Common stock, $.01 par value, 45,000,000 shares
authorized, 8,910,559 and 8,877,628 shares issued
and outstanding 89 89
Additional paid-in capital 19,933 19,897
Accumulated deficit (5,965) (6,507)
-------- --------
Total stockholders' equity 14,057 13,479
-------- --------
Total liabilities and stockholders' equity $ 20,136 $ 18,699
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ACE*COMM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue $ 8,179 $ 6,723
Cost of revenue 3,844 3,083
------- -------
Gross profit 4,335 3,640
Selling, general and administrative expense 3,530 3,175
Research and development expense 258 360
Provision for doubtful accounts 25 55
------- -------
Income from operations 522 50
Interest income (24) (64)
Interest expense 4 25
------- -------
Net income $ 542 $ 89
======= =======
Basic net income per share $ 0.06 $ 0.01
======= =======
Diluted net income per share $ 0.06 $ 0.01
======= =======
Shares used in computing net income per share:
Basic 8,890 8,836
======= =======
Diluted 9,120 8,893
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
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ACE*COMM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK (ACCUMULATED
ADDITIONAL DEFICIT)
PAR PAID IN RETAINED
SHARES VALUE CAPITAL EARNINGS TOTAL
------- ------- --------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 8,807 $ 88 $19,822 $(7,125) $12,785
Exercise of common stock options 66 1 64 -- 65
Employee Stock Purchase Plan 4 -- 11 -- 11
Net income for the year ended June 30, 1999 -- -- -- 618 618
------- ------- ------- ------- -------
Balance June 30, 1999 8,877 $ 89 $19,897 $(6,507) $13,479
------- ------- ------- ------- -------
Exercise of common stock options 28 -- 23 -- 23
Employee Stock Purchase Plan 5 -- 13 -- 13
Net income for the period ended September 30, 1999 -- -- -- 542 542
------- ------- ------- ------- -------
Balance September 30, 1999 8,910 $ 89 $19,933 $(5,965) $14,057
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
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ACE*COMM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 542 $ 89
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
Depreciation and amortization 564 476
Provision for doubtful accounts 25 55
Changes in operating assets and liabilities:
Accounts receivable (2,155) 995
Inventories, net 359 982
Notes receivable 250 --
Prepaid expenses and other assets (154) 43
Accounts payable (436) (727)
Accrued liabilities 2 (587)
Deferred revenue (158) (973)
------- -------
Net cash (used for ) provided by operating activities (1,161) 353
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (128) (90)
Additions to capitalized software development costs -- (278)
------- -------
Net cash used for investing activities (128) (368)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 1,451 --
Payments on debt -- (223)
Principal payments under capital lease obligation -- (10)
Net proceeds from common stock issued 23 38
Employee stock purchase plan 13 --
------- -------
Net cash provided by (used in) financing activities 1,487 (195)
------- -------
Net increase (decrease) in cash and cash equivalents 198 (210)
Cash and cash equivalents, beginning of year 3,424 2,956
======= =======
Cash and cash equivalents, end of quarter $ 3,622 $ 2,746
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
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ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
ACE*COMM in accordance with generally accepted accounting principles for interim
financial statements and pursuant to the rules of the Securities and Exchange
Commission for Form 10-Q. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete financial
statements have been omitted. It is the opinion of management that all
adjustments considered necessary for a fair presentation have been included, and
that all such adjustments are of a normal and recurring nature. Operating
results for the periods presented are not necessarily indicative of the results
that may be expected for any future periods. For further information, refer to
the audited financial statements and footnotes included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1999.
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.
RECLASSIFICATIONS
Certain prior year information has been reclassified to conform to
current year presentation.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30,
1999 1999
------------ --------
<S> <C> <C>
Billed $ 6,900 $ 4,355
Unbilled 2,756 3,059
Allowance for doubtful accounts (979) (867)
------- -------
$ 8,677 $ 6,547
======= =======
</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. The
Company increased its allowance for doubtful accounts by $25,000 and credited
recoveries of $87,000 to the allowance for the three months ended September 30,
1999. The Company increased its allowance for doubtful accounts by $55,000 and
wrote-off $1.7 million in uncollectible accounts for the three months ended
September 30, 1998.
NOTE 3 - STOCKHOLDERS' EQUITY
During the first quarter of fiscal 2000, the Company issued 5,190 shares of
common stock under the Employee Stock Purchase Plan and 27,741 shares of common
stock through the exercise of stock options issued under the Omnibus Stock Plan.
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NOTE 4 - INCOME TAXES
The Company's effective tax rate is less than the normal tax rate because of the
availability of net operating losses to be carried forward from prior years.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
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.
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 contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999
which could cause actual results to differ materially from those indicated by
such forward-looking statements, including the matters set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Additional Factors Affecting Future Operating Results" and in
"- Year 2000" as well as matters presented in this Report.
RESULTS OF OPERATIONS
Revenues for the three-month period ended September 30, 1999 ("first
quarter of fiscal year 2000") were $8.2 million compared to $6.7 million for the
comparable three-month period in fiscal year 1999. Revenues were higher in the
first quarter of fiscal year 2000 primarily as a result of an increase in new
and follow-on sales of products and services to new, emerging, and traditional
carrier customers offset by a reduction in sales from the Company's Enterprise
(U.S. government) customers.
Revenue from sales to new and emerging carriers increased 33% to $3.2
million in the first quarter of fiscal year 2000 from $2.4 million in the first
quarter of fiscal year 1999. This category of revenue constituted 40% of total
revenue in the first quarter of fiscal year 2000 compared to 35% of total
revenue in the first quarter of fiscal year 1999. This increase is primarily a
result of new and follow-on sales of software and services. Revenue from sales
to traditional carriers increased 56% to $2.8 million in the first quarter of
fiscal year 2000 from $1.8 million in the first quarter of fiscal year 1999.
This category of revenue constituted 34% of total revenue in the first quarter
of fiscal year 2000 compared to 26% of total revenue in the first quarter of
fiscal year 1999. This increase is primarily a result of new sales of the
Company's products and solutions to current and new customers. Revenue from
sales to the Company's Enterprise customers decreased 15% to $2.2 million in the
first quarter of fiscal year 2000 from $2.6 million in the first quarter of
fiscal year 1999. This category of revenue constituted 27% of total revenue in
the first quarter of fiscal year 2000 compared to 38% of total revenue in the
first quarter of fiscal year 1999. This decrease reflects weaker demand from the
government sector.
Gross profit margins for the first quarter of fiscal year 2000 were
53%, compared to 54% for the comparable three-month period in fiscal 1999. The
change in gross profit margin is due to the change in the mix of revenue and due
to amortization of capitalized software.
Selling, general and administrative ("SG&A") expenses for the first
quarter of fiscal year 2000 were $3.5 million compared to $3.2 million for the
same period in the prior fiscal year (which represents 43% and 47% of revenue,
respectively). The increase in the SG&A expense was related to an overall
increase in employment related costs offset by cost containment initiatives.
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The provision for doubtful accounts declined to $25,000 in the first
quarter of fiscal year 2000, from $55,000 in the same period in fiscal year
1999. The Company increased its allowance for doubtful accounts by $25,000 and
credited recoveries of $87,000 to the allowance for the three months ended
September 30, 1999. The Company increased its allowance for doubtful accounts
by $55,000 and wrote-off $1.7 million in uncollected accounts for the three
months ended September 30, 1998.
Research and development ("R&D") expenses for the first quarter of
fiscal year 2000 were $0.3 million compared to $0.4 million for the comparable
three-month period in fiscal year 1999 (representing 3% and 5% of revenue,
respectively). The decrease in expenses is primarily attributable to a high
level of R&D personnel working on revenue projects and a greater quantity of
customer funded research and development projects.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999 the Company had $3.6 million in cash compared
with $3.4 million in cash at June 30, 1999. Operating activities of the Company
used $1.2 million for the three-months ended September 30, 1999, primarily as a
result of increased receivables and lower accounts payable. During the same
period the Company used $0.1 million for purchases of property and equipment.
To finance operating and investment activities, the Company received advances
under its Accounts Receivable Purchase Agreement and Equipment Financing
Agreement with Silicon Valley Bank. During the comparable period of fiscal year
1999, operating activities provided the Company with $0.4 million in cash. The
Company also invested $0.4 million in capitalized software and purchases of
property and equipment. The Company made a $0.2 million payment on debt which
was partially offset by the exercise of stock options. Cash consequently
decreased $0.2 million during this comparable period of 1999.
Accounts receivable (billed and unbilled), net of allowance for
doubtful accounts, increased to $8.7 million at September 30, 1999 from
$6.5 million at June 30, 1999. The level of accounts receivable at September 30,
1999 reflects the impact of increasing sales over the past few quarters and
aggressive collections and charge-off as well as a $ 25,000 increase in the
provision for doubtful accounts over the three-month period. Unbilled accounts
receivable have decreased from June 30, 1999. As of September 30, 1999, the
unbilled accounts receivable balance was $2.8 million compared with $3.0 million
as of June 30, 1999. The billed accounts receivable was $6.9 million as of
September 30, 1999, compared with $4.4 million at June 30, 1999. As of September
30, 1999, the Company maintained a $1.0 million allowance for doubtful accounts,
up from the $0.9 million at June 30, 1999. The Company believes the allowance
for doubtful accounts is adequate.
The Company has an Accounts Receivable Purchase Agreement (the
"Agreement") with Silicon Valley Bank (the "Bank"), enabling the Company to
borrow up to $4 million through the Bank's discretionary purchases of accounts
receivable. The Bank pays up to 80% of the face amount of each receivable, with
the balance of such face amount (less a finance charge equal to the Bank's prime
rate, a fee of 0.625% of the face amount and certain costs and expenses of the
Bank in administering the facility) payable to the Company following collection
of the receivable. The receivables purchased by the Bank must be collected
within 90 days unless otherwise agreed by the Bank 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 the Bank'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. As of the date of this filing, $221,000 borrowing under
this Agreement.
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<PAGE> 11
The Company also has an Equipment Financing Agreement (the "Equipment
Agreement"), with the Bank enabling the Company to borrow up to $1.25 million
through the Bank's financing of recently acquired Company equipment and fixed
assets. The Bank finances up to 100% of the original stated cost of the
equipment. The Equipment agreement provides for the Company to obtain advances
for amounts exceeding $50,000 per advance, and to repay advances (plus interest)
over a 36 month period. The Equipment Agreement bears interest at the 36 month
treasury rate plus 350 basis points, requires a commitment fee (and the
reimbursement of bank expenses for certain costs of making and administering
this facility) and a final payment equal to 6.5% of the value of the initial
amount of each advance at the end of the financing period for that advance. The
loan is subject to certain financial covenants, and reporting requirements, as a
condition of the Equipment Agreement. Outstanding advances as of the date of
this filing aggregated approximately $417,000.
Under the terms of its office lease, the Company maintains a letter of
credit under its line of credit with the Bank, 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.
The Company believes that existing cash balances, cash flow from
operations, the availability of credit under its credit facility with the Bank
and other potential 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 "-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.
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<PAGE> 12
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.
Trade receivables subject the Company to the potential for credit risk
with customers in the telecommunication services industry and government sector.
Approximately 43% of the Company's gross trade receivables balances was
represented by five customers at September 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 $3.2 million, or 40% of its total
revenues, from customers outside of the United States in the first three months
of fiscal year 2000. 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 public carriers, service providers 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 legacy software programs which limit the ability of
such programs to accurately interpret some 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 with dates at and beyond January
1, 2000.
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<PAGE> 13
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 has completed upgrading all customers who are currently under
customer support contracts with the exception of four customers. These customer
sites are scheduled to receive the Year 2000 upgrade by November 30, 1999. The
aforementioned customers represent less than 5% of the total Company's customer
population.
The Company has completed an assessment of the risks 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 October 31, 1999. The Company has received
verification that the non-information technology systems (e.g. elevators, HVAC
contained in facilities that the company leases from others) are Year 2000
compliant.
The cost of addressing the Company's Year 2000 issues has not been
fully quantified. 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.
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<PAGE> 14
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
10.27 Employment Agreement dated as of October 7, 1999 between the
Company and J. Eckler.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACE*COMM CORPORATION
DATE November 15, 1999 By /s/_____________________________________
George T. Jimenez
Chief Executive Officer
/s/_____________________________________
James K. Eckler
Executive Vice President - Finance and
Administration (Principal Financial
Officer)
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<PAGE> 1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of the 7th day of October, 1999, between
ACE*COMM Corporation (the "Company") and James Eckler (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 retain the
services of the Executive and to assure his 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, Mr. Eckler has worked for the Company since September 14, 1998
as a consultant, and as an employee effective as of October 19, 1998, and the
Board believes that it is in the best interests of the Company to retain Mr.
Eckler, 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 confirms its employment of the Executive as its Executive Vice
President, Finance and Administration) (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.
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The Executive's duties shall include:
Duties as directed by the Chief Executive Officer from time to time,
including:
1. Shareholder Relations - Assist the CEO in developing a Company strategy
and in disseminating the strategy. Be responsible for compiling and
presenting the operating results to the investment community. Assist
the CEO in managing the Company Shareholder Relations Program.
2. Finance - Be responsible for managing the Company's finances. Develop
and implement a financing plan, maintain relationships with creditors
and manage the Company's finance function.
3. MIS - Manage the Company's accounting and management information
reporting systems (MIS), develop improvement plans, and provide MIS
solutions.
4. Control - Be responsible for Company internal financial controls and
external reporting systems and requirements, including SEC reporting.
5. Legal - Oversee Company contracting function and process and serve as a
member of Company's Committee.
6. M&A - Develop a plan for external growth and assist the CEO in the
management of a corporate development program.
7. Service Operations - Develop a new services business plan for the
Company for Board approval and lead the effort to implement such a
plan.
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. Beginning
as of the date of this Agreement, and for the balance of the Term (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 interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
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 commenced on October 19, 1998
and shall end on October 19, 2001, unless sooner terminated, as provided herein,
or renewed by mutual agreement of the parties (the "Term").
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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
a minimum of $150,000 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
2000 fiscal year), payable on October 1 of the following year, a bonus of
(1) up to $75,000 payable in cash or shares of Common Stock of the Company
of equivalent value and (2) an option for up to 20,000 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 paid to the Executive under the Company's annual bonus plan for the
preceding three full fiscal years prior to the Change of Control (or such fewer
number of years that he Executive was employed by the Company, annualized in the
event that the Executive was not employed by the Company for the whole of such
fiscal year) (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.
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4. OPTION GRANTS.
The parties have agreed to amend the Executive's Amended and Restated
Incentive Stock Option Agreement dated as of August 13,1999 (the "Option"). The
terms and conditions of the Option are set forth in the Amended and Restated
Option Agreement ("Amended Option Agreement") attached hereto as Attachment A.
To the extent that the terms of the Option evidenced in the Amended Option
Agreement and in the Amended and Restated Omnibus Stock Plan are in any way
inconsistent with the terms of this Agreement, the terms of the Option as set
forth in the Amended Option Agreement and Plan shall supersede any terms set
forth herein with respect thereto.
Perquisites:
During the Term the Executive shall be eligible to participate in
executive benefit plans generally available to all executives, shall be entitled
to use a Company-owned or leased car for business use (subject to a maximum
expense to the Company of $550 per month), subject to reimbursing the Company
for any personal use and shall be eligible for reimbursement for business
expenses in accordance with 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.
The Company agrees to use reasonable efforts to maintain liability
insurance for present and former directors and officers during the Term and for
up to one year thereafter on substantially the terms of the policy currently
maintained by the Company, provided that the premium cost of such insurance to
the Company does not increase substantially over the cost paid for the Company's
current policy - including any subsequent adjustments related to extraordinary
events affecting the current policy (which was entered into in August 1999).
The Company agrees to relocate the Executive, at his discretion, once
during the term of this Agreement, from his present address to a location within
approximately 10 miles of Company headquarters. Reimbursement for relocation
will be in accordance with the Attached Relocation Policy (or a similar plan
agreed to by the Company), with the following modification:
- THE $20,000 CEILING ON THE MAXIMUM REIMBURSEMENT FOR ALL COSTS OF CLOSING
(#6 OF POLICY), MAINTENANCE (#7 OF POLICY) AND ACQUIRING A HOME AT A NEW
LOCATION (#8 OF POLICY) IS RAISED TO $40,000
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 1.5 hours
away from the Executive's then residence (as determined by Yahoo Maps), the
Executive shall be entitled to receive relocation benefits that are at least as
favorable to the Executive as would have been available to the Executive at the
Company within the 120 days prior to the Change of Control (up to $90,000).
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. The Option will remain exercisable for up to
one year from the date of death in
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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 during the Term and prior to a Change of Control the
Executive becomes physically, mentally or emotionally disabled, whether totally
or partially, as determined by the Board of Directors of the Company in good
faith, such as to be unable to perform his services hereunder for a period of
one month or shorter periods aggregating one month , the Company may at any time
after the last day of the month of disability or on the last day of the shorter
periods aggregating one month of disability, terminate the Executive's
employment hereunder effective on the 30th day after the date of such written
notice. 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 such date of termination. No Bonus shall be payable
with respect to the year in which the termination for disability becomes
effective. 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.
6.3 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 upon the date of notice of such termination,
upon the occurrence of any of the following, which shall be determined in the
sole discretion of the Board of Directors of the Company: (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, that have a demonstrably adverse effect on the Company; (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. Upon termination of the Executive for Cause,
the unvested portion of the Option shall terminate immediately and no longer be
exercisable.
(B) OTHER THAN FOR CAUSE, IN ANTICIPATION OF A CHANGE OF CONTROL: In
addition to the Company's right to terminate the Executive's employment pursuant
to Section 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 that such
termination occurs in anticipation of a Change of Control and at the direction
of the acquiror (without participation by the Executive), 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 in anticipation of a Change of Control. 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, if the
effective date of termination is before March 3, 2000, the vesting of 29,500of
the Option Shares shall be accelerated to become exercisable as of the effective
date of termination and the Option shall be exercisable with
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respect to such shares and to 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.
(C) OTHER THAN FOR CAUSE AND NOT IN ANTICIPATION OF A CHANGE OF
CONTROL: In addition to the Company's right to terminate the Executive's
employment pursuant to Sections 6.3(a) and (b), 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. 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. 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 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 such termination is effective. Upon termination by
the Executive, the Option shall terminate immediately and no longer be
exercisable, except that the vested portion of the Option, if any, shall remain
exercisable for 90 days from the date of termination.
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
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(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 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.
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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
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" after a Change of Control 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.
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.
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
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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, if the effective date of termination is before March 3, 2000,
29,500 of the Option Shares shall be accelerated to 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.
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 90 miles away from the Company's main
headquarters as of immediately prior to the Change of Control, or the
Company's requiring him to relocate outside of the United States or the
Company's requiring the Executive to relocate more than once after a
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 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,
if the effective date of termination is before March 3, 2000, 29,500 of the
Option Shares shall be accelerated to 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.
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).
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(B) OTHER THAN FOR GOOD REASON . Nothwithstanding 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
("Documents") 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, provided that such Documents are in the
possession of the Executive or his agent(s), shall be delivered to the Company
promptly upon termination of the Executive's employment with the Company or at
any other time upon request.
8.3 The Executive agrees that, for a period beginning on the date of
this agreement and ending one year from the date of termination of this
Agreement, as a result of termination of employment or expiration of the Term,
he will not, engage in any activity that is in competition with the Business of
the Company. Business" shall mean the business of providing Operations Support
System hardware, services and/or software for data and/or voice networks
operated by telecommunications and internet providers and large enterprises,
including for 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
also for the purpose of telecommunications in these markets. Further, it would
not include technology for telecommunications that has not been part of the
Company's activities in the last three years, from the date hereof, nor for the
term of this Agreement 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) Solicit business or in any other way interfere with or disrupt the
Company's business relationships with any persons in the Business;
b) Solicit, hire, contract with or enter into any business dealings
with, entice or aid or cooperate with others in soliciting or enticing any
employees of the Company to leave the Company and join any other company in the
Business;
c) Divulge any confidential information regarding the Company to anyone
not connected with the Company;
-24-
<PAGE> 11
"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.
For a period beginning on the date of this agreement and ending one
year from the date of termination of this Agreement, as a result of termination
of employment or expiration of the Term, the Executive shall not directly or
indirectly, (a) hire, solicit or encourage any employee of the Company to leave
such employment, or (b) hire any such employee who has left such employment
within one year of the termination of such employment.
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 the lump sum due that
is equal to one year's Base Salary as is in effect as of immediately prior to
such termination
8.4 Subject to the last paragraph of Section 8.3, 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.
9. INDEMNIFICATION. The Company hereby agrees to indemnify and hold
harmless the Executive, to the fullest extent permitted by law, from and against
any and all losses, claims, damages and costs incurred in connection with any
lawsuit or investigation or inquiry brought against the Company and resulting
from any acts occurring prior to September 14, 1998, when the Executive became a
consultant for the Company.
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
-25-
<PAGE> 12
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.
(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.
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<PAGE> 13
(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
________________________________________
James Eckler
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<PAGE> 14
ATTACHMENT A
ACE*COMM CORPORATION
AMENDED AND RESTATED OMNIBUS STOCK PLAN
AMENDED AND RESTATED INCENTIVE STOCK OPTION GRANT AGREEMENT
This Amended and Restated Incentive Stock Option Grant Agreement (the
"Agreement") is entered into effective as of October 7, 1999, by and between
ACE*COMM Corporation, a Maryland corporation (the "Company"), and James K.
Eckler ("Grantee"), accelerates the vesting schedule of the Incentive Stock
Option Grant Agreement dated as of August 13, 1999, but is otherwise identical
to that Grant Agreement, which it supersedes.
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 March 4, 1999 (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
August 13, 1999 One-Third
October 7, 2000 One-Third
October 7, 2001 One-Third
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<PAGE> 15
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.
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<PAGE> 16
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 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
-30-
<PAGE> 17
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
-31-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,622
<SECURITIES> 0
<RECEIVABLES> 9,922
<ALLOWANCES> 979
<INVENTORY> 1,793
<CURRENT-ASSETS> 14,979
<PP&E> 6,559
<DEPRECIATION> 2,899
<TOTAL-ASSETS> 20,136
<CURRENT-LIABILITIES> 5,711
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 13,968
<TOTAL-LIABILITY-AND-EQUITY> 20,136
<SALES> 8,179
<TOTAL-REVENUES> 8,179
<CGS> 3,844
<TOTAL-COSTS> 3,844
<OTHER-EXPENSES> 0
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