<PAGE> 1
As filed with the Securities and Exchange Commission on February 22, 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 December 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 0-21059
ACE*COMM CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND 52-1283030
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
704 QUINCE ORCHARD ROAD, GAITHERSBURG, MD 20878
(Address of principal executive offices) (Zip Code)
301-721-3000
(Registrant's telephone number, including area code)
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 FEBRUARY 17, 1999 8,873,332
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<PAGE> 2
ACE*COMM CORPORATION
INDEX
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Balance Sheets as of December 31, 1998
(Unaudited) and June 30, 1998 3
Statements of Operations (Unaudited) for the
Three and Six Months Ended December 31, 1998 and 1997 4
Statements of Stockholders' Equity (Unaudited) for the
Six Months Ended December 31, 1998 and 1997 5
Statements of Cash Flows (Unaudited) for the
Six Months Ended December 31, 1998 and 1997 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 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
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<PAGE> 3
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ACE*COMM CORPORATION
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------- ----------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,005 $ 2,956
Accounts and note receivable, net 8,616 10,810
Inventories, net 2,356 3,232
Prepaid expenses and other 729 666
-------- --------
Total current assets 14,706 17,664
Property and equipment, net 3,786 4,069
Capitalized software development costs, net 2,509 2,461
Note receivable - 310
Other assets 72 89
-------- --------
Total assets $ 21,073 $ 24,593
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings $ 44 $ 1,030
Accounts payable 1,407 2,010
Accrued expenses 556 739
Accrued compensation 1,467 2,161
Accrued contract costs 3,278 3,577
Deferred revenue 1,232 2,169
-------- --------
Total current liabilities 7,984 11,686
Noncurrent borrowings 98 122
-------- --------
Total liabilities 8,082 11,808
-------- --------
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,
8,869,025 and 8,807,049 shares issued and outstanding 89 88
Additional paid-in capital 19,860 19,822
(Accumulated deficit) retained earnings (6,958) (7,125)
-------- --------
Total stockholders' equity 12,991 12,785
-------- --------
Total liabilities and stockholders' equity $ 21,073 $ 24,593
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
ACE*COMM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue $ 7,528 $ 5,491 $ 14,250 $ 14,226
Cost of revenue 4,276 4,598 7,359 8,282
-------- -------- -------- --------
Gross profit 3,252 893 6,891 5,944
Selling, general and administrative expense 2,985 3,963 6,215 7,306
Research and development expense 225 503 585 951
-------- -------- -------- --------
Income (loss) from operations 42 (3,573) 91 (2,313)
Interest income 50 67 114 153
Interest expense 14 30 38 64
-------- -------- -------- --------
Income (loss) before income taxes 78 (3,536) 167 (2,224)
Income tax provision (benefit) - (1,335) - (823)
-------- -------- -------- --------
Net income (loss) $ 78 $ (2,201) $ 167 $ (1,401)
======== ======== ======== ========
Basic net income (loss) per share $ 0.01 $ (0.25) $ 0.02 $ (0.16)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.01 $ (0.25) $ 0.02 $ (0.16)
======== ======== ======== ========
Shares used in computing net income (loss) per share:
Basic 8,869 8,654 8,853 8,623
======== ======== ======== ========
Diluted 8,903 8,654 8,898 8,623
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE> 5
ACE*COMM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------- ----------------------------------
CLASS B
SHARES PAR VALUE SHARES PAR VALUE
-------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 - $ - 8,551 $ 85
Exercise of common stock options - - 257 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 - - 62 1
Repurchase and retirement of
common stock - - - -
Net income for the period
ended December 31, 1998 - - - -
-------------- ------------- --------------- ---------------
Balance, December 31, 1998 - $ - 8,869 $ 89
============== ============= =============== ===============
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT)
PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
----------------- ---------------------- ---------------
<S> <C> <C> <C>
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 38 - 39
Repurchase and retirement of
common stock - - -
Net income for the period
ended December 31, 1998 - 167 167
----------------- ---------------------- ---------------
Balance, December 31, 1998 $ 19,860 $ (6,958) $ 12,991
================= ====================== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
ACE*COMM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
DECEMBER 31,
1998 1997
------------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 167 $(1,401)
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization 920 852
Provision for doubtful accounts 449 340
Provision for inventory obsolescence - 334
Changes in operating assets and liabilities:
Accounts and note receivable, net 2,055 (355)
Inventories, net 876 (263)
Other assets (46) (411)
Accounts payable (603) (1,230)
Accrued expenses (482) (216)
Accrued compensation (694) (123)
Deferred income taxes - (863)
Deferred revenue (937) 126
------- -------
Net cash provided by (used for) operating activities 1,705 (3,210)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (136) (1,166)
Additions to capitalized software development costs (549) (655)
------- -------
Net cash used for investing activities (685) (1,821)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (989) (256)
Principal payments under capital lease obligation (21) (19)
Exercise of common stock options 39 241
Repurchase and retirement of common stock - (21)
------- -------
Net cash used for financing activities (971) (55)
------- -------
Net increase (decrease) in cash and cash equivalents 49 (5,086)
Cash and cash equivalents at beginning of period 2,956 7,920
======= =======
Cash and cash equivalents at end of period $ 3,005 $ 2,834
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for :
Interest $ 45 $ 64
Income taxes $ - $ 39
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE> 7
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, 1998.
The Company recently reported in a Report on Form 8-K dated January
26, 1999, as amended on Form 8-K/A, the resignation of independent accountants.
The Company has not yet selected a successor firm.
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 AND NOTES RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
---------------------------- ----------------------------
<S> <C> <C>
Billed $ 7,539 $ 8,829
Unbilled 1,671 3,621
Allowance for doubtful accounts (1,329) (2,465)
---------------------------- ----------------------------
$ 7,881 $ 9,985
============================ ============================
</TABLE>
Unbilled receivables include items 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 made a provision for doubtful
accounts of $0.4 million and $0.4 million for the six months ended December 31,
1998 and 1997, respectively, and $2.5 million for the year end June 30, 1998.
The Company made approximately $1.6 million (net) in charge-offs during the six
months ended December 31, 1998.
Note Receivable:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
---------------------------- ----------------------------
<S> <C> <C>
Note receivable $ 735 $ 1,135
Less: current portion (735) (825)
---------------------------- ----------------------------
Noncurrent portion $ - $ 310
============================ ============================
</TABLE>
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<PAGE> 8
NOTE 3 - EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following is a reconciliation of the numerators and denominators
of basic net (loss) income per common share ("basic EPS") and diluted net (loss)
income per common share ("diluted EPS"):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income available to common $ 78 $(2,201) $ 167 $(1,401)
------- ------- ------- -------
Shares (denominator):
Weighted average common shares 8,869 8,654 8,853 8,623
======= ======= ======= =======
Basic EPS $ 0.01 $ (0.25) $ 0.02 $ (0.16)
======= ======= ======= =======
DILUTED EPS:
Net income available to common $ 78 $(2,201) $ 167 $(1,401)
------- ------- ------- -------
Shares (denominator):
Weighted average common shares 8,869 8,654 8,853 8,623
Stock options 34 - 45 -
------- ------- ------- -------
Total weighted shares and equivalents 8,903 8,654 8,898 8,623
======= ======= ======= =======
Diluted EPS $ 0.01 $ (0.25) $ 0.02 $ (0.16)
======= ======= ======= =======
</TABLE>
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Company sells products to telecommunications carriers and
enterprises, both through direct channels and through strategic alliance
partners, for delivery to end users in the United States and internationally.
Since June 1994 the Company, consistent with its strategic emphasis, has
derived significant revenue from sales of its data collection, surveillance,
alarm, and traffic reporting products to traditional carriers. The balance of
the Company's revenue is derived from the sales of products and software
licenses 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 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
"Additional Factors Affecting Future Operating Results," and in "Selected
Financial Data--Selected Quarterly Information" contained in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1998.
RESULTS OF OPERATIONS
Revenues for the three-month period ended December 31, 1998
("second quarter") were $7.5 million compared to $5.5 million for the
comparable three-month period in fiscal 1998. Revenues were higher in the
current quarter compared to the second quarter in fiscal 1998, primarily as a
result of sales of the Company's new and follow-on sales of products and
services to U.S. new and emerging carrier customers.
Revenue from traditional carrier network products increased
slightly from $3.4 million to $3.6 million from the second quarter of fiscal
1998 to the second quarter of fiscal 1999, respectively. However, such revenues
decreased from 61% of total revenue in the second quarter of fiscal 1998 to 48%
of total revenue in the second quarter of fiscal 1999, reflecting substantially
higher total revenue for the second quarter of fiscal 1999 versus the second
quarter of fiscal 1998. Revenue from new and emerging carrier products during
the second quarter increased to 40% of revenue compared to 17% of revenue for
the comparable three-month period in fiscal 1998, primarily as a result of new
sales of the Company's N*VISION product and follow-on sales of other products
and services to existing U.S. new and emerging carrier customers. This
represents an increase from approximately $0.9 million in the second fiscal
quarter of 1998 to over $3.0 million for the second fiscal quarter of fiscal
1999. Revenues from enterprise network products decreased from 22% of total
revenue in the second quarter of fiscal 1998 to 12% of revenue in the second
quarter of fiscal 1999, or $1.2 million to $0.9 million, respectively,
reflecting lower sales of the Company's NetPlus(R) product.
Revenues for the six-month period ended December 31, 1998 were
$14.3 million compared to $14.2 million for the six-month period in fiscal 1998.
Athough revenues remained relatively constant period to period, the Company
experienced a change in mix for its sales, with software, integration, services
and consulting increasing in importance as a percentage of total sales in
fiscal 1999, compared to fiscal 1998.
Revenue from traditional carrier network products decreased from
$8.3 million to $5.3 million from the first six months of fiscal 1998 to the
first six months of fiscal 1999, respectively, representing a decrease from 58%
of total revenue in the first six months of fiscal 1998 to 37% of total revenue
in the first six months of fiscal 1999. Revenue from new and emerging carrier
products during the first six months increased to 38% of revenue compared to
22% of revenue for the comparable six-month period in fiscal 1998, primarily as
a result of new sales of the Company's N*VISION product and follow-on sales of
other products and services to existing U.S. new and emerging carrier
customers. This represents an increase from approximately $3.2 million in the
first six months of 1998 to over $5.5 million for the first six months of
fiscal 1999. Revenues from enterprise network products increased from 20% of
total revenue in the first six months of fiscal 1998 to 24% of revenue in the
first six months of fiscal 1999, or $2.8 million to $3.5 million, respectively.
Gross margins for the second quarter and first six months of fiscal
1999 were 43% and 48%, respectively, compared to 16% and 42% for the comparable
three- and six-month periods of fiscal 1998. The increase in gross profit
margins was due primarily to higher margins associated with significant
software-based revenues and the higher revenues for the quarter offsetting the
existing fixed costs of manufacturing facilities for its DCMS product line.
Selling, general and administrative (SG&A) expenses for the second
quarter were $3.0 million compared to $4.0 million for the same period in the
prior year (which represents 40% and 72% of revenue respectively). The SG&A
expenses include a provision for doubtful accounts, totaling $0.4 million in
the second fiscal quarter of 1999 and $0.3 million in the second fiscal quarter
of 1998. SG&A expenses for the first six months of fiscal 1999 were $6.2
million compared to $7.3 million for the same period in the prior year (which
represents 44% and 51% of revenue respectively). The SG&A expenses include a
provision for doubtful accounts, totaling $0.4 million in the first six months
of fiscal 1999 and $0.3 million in the first six months of fiscal 1998. The
decrease in SG&A expenses for both the three- and six-month periods of fiscal
1999 compared to fiscal 1998 is primarily attributable to an overall decrease
in employment costs resulting from headcount reduction and other cost
initiatives which commenced in 1998.
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<PAGE> 10
Research and development (R&D) expenses for the second quarter were
$0.2 million compared to $0.5 million for the comparable three-month period in
fiscal 1998. This represents approximately 3% of revenue for the second quarter
and 9% for the comparable period last year. The decrease in expenses is
primarily attributable to a high level of R&D personnel working on revenue
projects and a greater quantity of funded research and development projects.
R&D expenses for the first six months of fiscal 1999 were $0.6
million compared to $1.0 million for the comparable six-month period in fiscal
1998, representing approximately 4% and 7% of revenue respectively. The decrease
in expenses is primarily attributable to a decrease in Company-sponsored R&D.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998 the Company had $3.0 million in cash compared
with $3.0 million in cash at June 30, 1998. Operating activities provided the
Company with $1.7 million for the six-months ended December 31, 1998, primarily
by reducing receivables and inventory. During the same period the Company used
$0.7 million for investments in capitalized software and purchases of property
and equipment, and $1.0 million for payments on bank debt and capital lease
obligations. During the comparable period of fiscal 1998, the Company operating
activities used $3.2 million. In addition, the Company invested $1.8 million in
capitalized software and purchases of property and equipment. The Company made
a $0.3 million payment on debt which was largely offset by the exercise of
options ($0.2 million). Cash decreased by about $5.1 million during the fiscal
1998 period.
Accounts receivable, (unbilled and billed), net of reserves for
doubtful accounts, declined to $7.9 million at December 31, 1998 from $9.1
million at September 30, 1998, and from $10.0 million at June 30, 1998. The
level of accounts receivable at December 31, 1998 reflects aggressive
collections and charge-offs and a $0.4 million increase in the provision for
doubtful accounts over the six-month period. Unbilled accounts receivable have
decreased substantially from June 30, 1998. As of December 31, 1998 the
unbilled was $1.7 million, compared to $2.7 as of September 30, 1998, and $3.6
million as of June 30, 1998. The billed accounts receivable was $7.5 million as
of December 31, 1998, compared with $7.3 million as of September 30, 1998, and
$8.8 million at June 30, 1998. The increase in billed accounts receivable from
September 30, 1998 is primarily the result of billing unbilled accounts, and
the additional revenue in the fiscal 1999 second quarter that has turned into
receivables. Billed accounts receivable over 90 days has decreased to $3.2
million as of December 31, 1998, compared to $3.6 million as of September 30,
1998, and $5.2 million as of June 30, 1998. For the six month period ending
December 31, 1998, the Company has charged off about $1.6 million in
receivables (net of recoveries). As of December 31, 1998, the Company
maintained a $1.3 million reserves for doubtful accounts, down from the $2.5
million at June 30, 1998 reflecting the steady decline of accounts receivables
(especially items over 90 days).
The Company has entered into 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 will pay 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 from time to time plus 4% per annum, 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
December 31, 1998 and the date of this filing, there were no outstanding
borrowings.
The Bank has issued on behalf of the Company to the Company's
landlord, a letter of credit in the amount of $0.4 million to secure the
Company's obligations under the terms of its office lease. The Company also has
two work guarantee letters of credit outstanding, one in the amount of $0.4
million expires March 31, 1999, and second in the amount of $25,000, expires
October 31, 1999. The Bank may secure (at its option) these letters of credit
with cash, CD's, or accounts receivable at its discretion. As of December 31,
1998, the letters of credit were not secured. The letters of credit are
currently fully secured by 30 day CD's.
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<PAGE> 11
The Company believes that existing cash balances, cash flows from
operations, the availability of credit under its credit facility with Silicon
Valley 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. The Company's ability to generate sufficient cash flows for working
capital is dependent on the Company's ability to increase sales and to receive
from customers, in a timely fashion, adequate payments in connection with its
contracts. There is no assurance that such sales or payment levels will be
achieved. If cash flows from operations and advances available under its credit
facility are insufficient to satisfy the Company's working capital requirements,
the Company will be required to reduce expenses, raise additional funds through
debt or equity financing or sales of assets and/or consider strategic
alternatives. There can be no assurance that reductions in expenses would be
achievable in a timely manner or, if achieved, that they would not have a
material adverse effect on the Company's ability to generate revenues at the
levels achieved to date. Further, there is no assurance that adequate additional
funds will be available, in a timely manner or on terms favorable to the
Company.
The Company's Chief Executive Officer has agreed in the event
financing can not be obtained in a timely manner and that, at any time until
September 28, 1999, the Company's working capital becomes inadequate to support
the business at its then current level, he will make available working capital,
through a loan guarantee or a loan, in the principal amount of up to $3.5
million (less any amounts raised after September 28, 1998 from financing
activities or through the sale or pledge of assets including borrowings under
the Agreement with Silicon Vally Bank). Such loan, if any, would bear interest
at prime plus 2%, would be repayable out of the first funding available to the
Company or upon a change of control, if any, and would be collateralized by
assets of the Company.
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 "Liquidity and Capital Resources" 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 customers for its products and services. The Company's results of
operations and financial condition could be materially adversely affected by the
failure of anticipated orders to materialize and by deferrals or cancellation of
orders.
Sales to traditional carriers have provided and are expected to
continue to provide substantial revenue. The Company's business is dependent
upon the continued growth of the telecommunications industry, in the United
States and internationally, on the continued convergence of the Company's
network technology to receive widespread market acceptance of voice and data
networks and on the evolution and widespread adoption of emerging network
technologies. Any decline in the growth of the industry, the failure of these
markets to converge or the failure of these network technologies to evolve or
achieve widespread market acceptance could have a material adverse effect on the
Company.
A key element of the Company's business strategy is to develop
strategic alliances with leading companies that provide telecommunications
services or that manufacture and market network equipment in order to expand the
Company's distribution channels and enter new markets. There can be no assurance
that the Company will be able to continue to increase the number of, or to
expand, these types of relationships, in order to market its products
effectively, particularly internationally.
The Company's growth has placed significant demands on the
Company's administrative, operational and financial personnel and systems.
Additional expansion by the Company will 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 operation. If the Company is unable to
respond to and manage the demands placed on its personnel, systems, and
operations, the quality of its products and services and its results of
operations could be materially adversely impacted.
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<PAGE> 12
The new and emerging carrier market in the United States and
overseas represents a source of growing demand for the Company's products,
software licenses and services. In that this market segment is relatively new
and in that many of these organizations are in the early stages of their
development, financial resources may be limited and may adversely affect their
ability to pay for the Company's products, software licenses and services.
The Company derived approximately $5.4 million, or 38% of its total
revenues, from customers outside of the United States during the first six
months of 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 the changing economic
conditions in foreign countries, which, in turn, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's ability to successfully develop new, and enhance
existing, products, to service its customers, and to remain competitive depends
in large part on its ability to attract and retain highly qualified technical,
sales and marketing and management personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to continue
to attract and retain such personnel.
YEAR 2000
The Company 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 with dates around January 1, 2000.
The Company is in the process of completing an assessment 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 assessment and any required
modifications are being performed by in-house personnel. Based on such testing,
the Company believes that products delivered after October 1998 are Year 2000
compliant. 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 product to be Y2K
compliant must procure the Year 2000 upgrade for a fee. Most, but not all,
customers have entered into such contracts.
The Company is in the process of completing a thorough assessment of
the risks and costs associated with the Year 2000 issue on internal hardware and
software. The Company has established a program wherein systems will be assessed
as to Year 2000 compliance. This assessment includes identifying areas of
non-compliance, plans to address known exposures, implementation of any systems
changes, validation of Year 2000 compliance and contingencies to mitigate
unknown risk. The Company has targeted Year 2000 exposures to be identified and
addressed no later than June, 1999. Attention and priority is focused on those
systems considered critical to the ongoing operations, requiring integration
with other compliant systems and with longer lead-time anticipated to remediate.
The Company has not completed an assessment of its non-information technology
systems (e.g. elevators, HVAC).
The cost of addressing the Company's Year 2000 issues has not been
fully quantified, as assessment of Year 2000 compliance has not been completed.
However, management is not aware of any Year 2000 compliance exposures which
would preclude ongoing operations during the next twelve months or which would
result in material short-term cash
-12-
<PAGE> 13
requirements. There can be no assurance that there will not be a delay in, or
increased costs associated with, the potential impact of these complications on
the Company's financial condition and results of operations.
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 Y2K upgrades or mainstream
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.
-13-
<PAGE> 14
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 17, 1998, the Registrant held its 1998 Annual Meeting of
Stockholders (the "1998 Annual Meeting"). At the 1998 Annual Meeting, the
following directors were elected as a Class II and Class III director,
respectively, to serve until the 2001 and 1999 Annual Meeting of Stockholders,
respectively, until their successor is duly elected and qualifies:
Paul G. Casner, Jr. Votes For: 6,960,496 Votes Withheld: 55,215
William R. Newlin Votes For: 6,960,496 Votes Withheld: 55,215
In addition to the Class II and Class III directors enumerated
above, as of the close of the 1998 Annual Meeting, the Company's Board of
Directors consisted of Gilbert A. Wetzel, a Class I director whose term expires
at the 2000 Annual Meeting of Stockholders and George T. Jimenez, a Class III
director whose term expires at the 1999 Annual Meeting of Stockholders.
At the 1998 Annual Meeting, the stockholders also took the following
actions:
(i) to approve the proposal to adopt the ACE*COMM
Qualified Employee Stock Purchase Plan.
Votes For: 6,929,934
Votes Against: 76,877
Abstain: 8,900
(ii) to approve the proposal to ratify the
appointment of PricewaterhouseCoopers LLP as
the Company's independent auditors for the
fiscal year ending June 30, 1999.
Votes For: 6,899,306
Votes Against: 112,700
Abstain: 3,705
ITEM 5. OTHER INFORMATION
In connection with the previously reported resignation of its
independent accountants the Company reported that it had engaged a "big five"
accounting firm to assist the Company by reviewing its accounting policies and
practices and their application in the financial statements for the quarter
ended December 31, 1998. The accounting firm, Ernst & Young LLP ("E&Y"),
thereafter recommended, and the Company concurred, that the scope of the
Company's review of certain accounting matters be more comprehensive and
extended. The Audit Committee of the Board of Directors has requested this more
comprehensive review of the financial statements for the Company's first and
second fiscal quarters to be able to report back to the Board on the accuracy
and reliability of the Company's financial statement reporting and disclosure
processes, and respond to actions being taken to address the issues raised in
the draft management letter provided by its former independent accountants and
described in the Company's previously filed Report on Form 8-K. This review,
which is being done through counsel to the Company, will replace the
agreed-upon procedures engagement which had been previously reported.
-14-
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K and 8-K/A
A Report on Form 8-K was filed on January 26, 1999 and amended on February 2,
1999, pursuant to a Report on Form 8K/A with respect to Item 5 changes in
Registrant's Certifying Accountant.
-15-
<PAGE> 16
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 February 22, 1999 By /s/
--------------------
George T. Jimenez
President and Chief Executive Officer
/s/
--------------------
James K. Eckler
Executive Vice President - Finance
and Administration
(Principal Accounting Officer)
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 3,005
<SECURITIES> 0
<RECEIVABLES> 7,881
<ALLOWANCES> 1,329
<INVENTORY> 2,356
<CURRENT-ASSETS> 14,706
<PP&E> 3,786
<DEPRECIATION> 920
<TOTAL-ASSETS> 21,073
<CURRENT-LIABILITIES> 7,984
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 12,902
<TOTAL-LIABILITY-AND-EQUITY> 21,073
<SALES> 7,528
<TOTAL-REVENUES> 7,528
<CGS> 4,276
<TOTAL-COSTS> 4,276
<OTHER-EXPENSES> 3,210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 78
<INCOME-TAX> 0
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