<PAGE> 1
As filed with the Securities and Exchange Commission on May 17, 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 March 31, 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 MARCH 31, 1999 8,873,332
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ACE*COMM CORPORATION
INDEX
Part I - Financial Information
Item 1. Financial Statements
Balance Sheets as of March 31, 1999
(Unaudited) and June 30, 1998 3
Statements of Operations (Unaudited) for the
three and nine months ended March 31, 1999 and 1998 4
Statements of Stockholders' Equity (Deficit) for the
nine months ended March 31, 1999 (Unaudited)
and year ended June 30, 1998 5
Statements of Cash Flows (Unaudited) for the
nine months ended March 31, 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 5. Other Information 13
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 EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
----------------- ----------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,134 $ 2,956
Accounts receivable, net 7,076 9,985
Inventories, net 2,090 3,232
Note receivable 535 825
Prepaid expenses and other 526 666
----------------- ----------------
Total current assets 13,361 17,664
Property and equipment, net 3,875 4,069
Capitalized software development costs, net 2,142 2,461
Note receivable - 310
Other assets 72 89
----------------- ----------------
Total assets $ 19,450 $ 24,593
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings $ 45 $ 1,030
Accounts payable 1,129 2,010
Accrued expenses 585 739
Accrued compensation 1,740 2,161
Accrued contract costs 1,677 3,577
Deferred revenue 1,176 2,169
----------------- ----------------
Total current liabilities 6,352 11,686
Noncurrent borrowings 87 122
----------------- ----------------
Total liabilities 6,439 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,
8,873,332 and 8,807,049 shares issued and outstanding 89 88
Additional paid-in capital 19,887 19,822
Accumulated deficit (6,965) (7,125)
----------------- ----------------
Total stockholders' equity 13,011 12,785
----------------- ----------------
Total liabilities and stockholders' equity $ 19,450 $ 24,593
================= ================
</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 FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------------ ----------------------------------
1999 1998 1999 1998
----------------- ----------------- ---------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue $ 7,254 $ 4,560 $ 21,505 $ 18,787
Cost of revenue 3,082 2,380 10,441 10,662
----------------- ----------------- ---------------- ---------------
Gross profit 4,172 2,180 11,064 8,125
Selling, general and administrative expense 3,786 5,437 10,001 12,744
Research and development expense 429 804 1,014 1,755
----------------- ----------------- ---------------- ---------------
(Loss) income from operations (43) (4,061) 49 (6,374)
Interest income (39) (56) (153) (209)
Interest expense 3 27 42 91
----------------- ----------------- ---------------- ---------------
(Loss) income before income taxes (7) (4,032) 160 (6,256)
Income tax provision - 823 - -
----------------- ----------------- ---------------- ---------------
Net (loss) income $ (7) $ (4,855) $ 160 $ (6,256)
================= ================= ================ ===============
Basic net income (loss) per share $ 0.00 $ (0.55) $ 0.02 $ (0.72)
================= ================= ================ ===============
Diluted net income (loss) per share $ 0.00 $ (0.55) $ 0.02 $ (0.72)
================= ================= ================ ===============
Shares used in computing net income (loss)
per share:
Basic 8,872 8,783 8,859 8,675
================= ================= ================ ===============
Diluted 8,872 8,783 8,996 8,675
================= ================= ================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
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ACE*COMM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------ ------------------------- (ACCUMULATED
CLASS B ADDITIONAL DEFICIT)
PAID-IN RETAINED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL EARNINGS TOTAL
----------- ----------- ----------- ------------ -------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 - $ - 8,550 $ 85 $ 19,530 $ 2,094 $ 21,709
Exercise of common stock
options - - 258 3 313 - 316
Repurchase and retirement of
common stock - - (1) - (21) - (21)
Net loss for the year ended
June 30, 1998 - - - - - (9,219) (9,219)
----------- ----------- ----------- ------------ -------------- ----------------- ------------
Balance, June 30, 1998 - - 8,807 88 19,822 (7,125) 12,785
----------- ----------- ----------- ------------ -------------- ----------------- ------------
Exercise of common stock
options - - 66 1 65 - 66
Net income for the period
ended March 31, 1999 - - - - - 160 160
----------- ----------- ----------- ------------ -------------- ----------------- ------------
Balance, March 31, 1999 - $ - 8,873 $ 89 $ 19,887 $ (6,965) $ 13,011
=========== =========== =========== ============ ============== ================= ============
</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 NINE MONTHS ENDED
MARCH 31,
1999 1998
---------------- -----------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 160 $ (6,256)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,607 1,316
Provision for doubtful accounts 754 1,340
Provision for inventory obsolescence - 334
Changes in operating assets and liabilities:
Accounts receivable 2,155 2,079
Inventories 1,142 71
Note receivable 600 (1,585)
Prepaid expenses and other assets 152 (368)
Accounts payable (881) (1,622)
Accrued expenses and contract costs (2,054) 459
Accrued compensation (421) 469
Deferred income taxes - (55)
Deferred revenue (993) 253
---------------- -----------------
Net cash provided by (used for) operating activities 2,221 (3,565)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (473) (1,369)
Additions to capitalized software development costs (616) (897)
---------------- -----------------
Net cash used for investing activities (1,089) (2,266)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (985) (373)
Principal payments under capital lease obligation (35) (28)
Exercise of common stock options 66 314
Repurchase and retirement of common stock - (21)
---------------- -----------------
Net cash used for financing activities (954) (108)
---------------- -----------------
Net increase (decrease) in cash and cash equivalents 178 (5,939)
Cash and cash equivalents at beginning of period 2,956 7,920
================ =================
Cash and cash equivalents at end of period $ 3,134 $ 1,981
================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 42 $ 91
Income taxes $ - $ 39
</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, 1998.
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>
MARCH 31, JUNE 30,
1999 1998
-------------------- --------------------
<S> <C> <C>
Billed $ 5,869 $ 8,829
Unbilled 2,197 3,621
Allowance for doubtful accounts (990) (2,465)
-------------------- --------------------
$ 7,076 $ 9,985
==================== ====================
</TABLE>
Unbilled receivables include amounts 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 $0.8 million and $1.3 million for the nine months ended March 31,
1999 and 1998, respectively, and $2.5 million for the year ended June 30, 1998.
The Company made approximately $2.2 million in charge-offs (net of recoveries)
during the nine months ending March 31, 1999.
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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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
BASIC EPS:
Income (numerator)
Net (loss) income
stockholders (numerator): $ (7) $ (4,855) $ 160 $ (6,256)
---------------- ---------------- ---------------- ----------------
Shares (denominator):
Weighted average common shares 8,872 8,783 8,859 8,675
================ ================ ================ ================
Basic EPS $ 0.00 $ (0.55) $ 0.02 $ (0.72)
================ ================ ================ ================
DILUTED EPS:
Net (loss) income (numerator): $ (7) $ (4,855) $ 160 $ (6,256)
---------------- ---------------- ---------------- ----------------
Shares (denominator):
Weighted average common shares 8,872 8,783 8,859 8,675
Diluted effect of stock options - - 137 -
================ ================ ================ ================
Total weighted shares and equivalents 8,872 8,783 8,996 8,675
================ ================ ================ ================
Diluted EPS $ 0.00 $ (0.55) $ 0.02 $ (0.72)
================ ================ ================ ================
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Company sells products and services 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 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 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 March 31, 1999 ("third
quarter") were $7.3 million compared to $4.6 million for the comparable
three-month period in fiscal 1998. Revenues were higher in the current quarter
primarily as a result of new and follow-on sales of products and services to
U.S. new and emerging carrier customers and stronger growth from the sale of
products and services to Enterprise (primarily government) clients.
Revenue from traditional carrier network products increased 17% from
$1.9 million to $2.3 million from the third quarter of fiscal 1998 to the third
quarter of fiscal 1999,respectively. However, such revenue decreased from 41%
of total revenue in the third quarter of fiscal 1998 to 31% of total revenue in
the third quarter of 1999. Revenue from new and emerging carriers products and
services during the third quarter increased to 44% of revenue compared to 38% of
revenue in the comparable three-month period in fiscal 1998, primarily as a
result of sales to existing U.S. new and emerging carrier customers. This
represents an increase from $1.7 million in the third quarter of fiscal 1998 to
over $3.2 million in the third quarter of fiscal 1999. Revenues from enterprise
network products increased from 22% of total revenue in the third quarter of
1998, to 25% of revenue in third quarter of fiscal 1999, or $1.0 million to $1.8
million, reflecting stronger demand from the government sector.
Revenues for the nine-month period ended March 31, 1999 were $21.5
million compared to $18.8 million for the comparable nine-month period in fiscal
1998. This growth in sales came about while the company experienced a change in
sales mix. Software, integration, consulting and outsourcing services increased
in importance as a percentage of total sales in fiscal 1999, compared to fiscal
1998.
Revenue from traditional carrier network products decreased from $10.1
million to $7.5 million from the first nine months of fiscal 1998 to the first
nine months of fiscal 1999, representing a decrease from 54% of total revenue in
the first nine-months of fiscal 1998 to 35% of total revenue in the first
nine-months of fiscal 1999. Revenue from new and emerging carrier products and
services during the first nine-months increased to 40% of total revenue compared
to 26% of revenue for the comparable nine-month period in fiscal 1998, primarily
as a result of new sales of the Company's N*VISION product and follow-on sales
of products, software, services, and consulting to the existing U.S. new and
emerging carrier customers. This represents an increase from $4.9 million in the
first nine-months of fiscal 1998 compared to almost $8.7 million for the first
nine-months of fiscal 1999. Revenues from enterprise network products increased
from 20% of total revenue for the first nine-months of fiscal 1998 to 25% of
revenue for the first nine-months of fiscal 1999, or $3.8 million to $5.3
million, respectively, reflecting stronger demand from the government sector.
Gross margins for the third quarter and the first nine-months of fiscal
1999 were 58% and 51%, respectively, compared to 48% and 43% for the third
quarter and the first nine-months of 1998. The improvement in gross margin is
due
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to a change in the mix of revenue, with less hardware and more software and
services sales, compared to the similar period in fiscal 1998.
Selling, general and administrative (SG&A) expenses for the third
quarter were $3.8 million compared to $5.4 million for the same period in the
prior year (which represents 52% and 119% of revenue respectively). The SG&A
expenses include a provision for doubtful accounts, totaling $0.3 million in the
third quarter of fiscal 1999, and $0.8 million for the nine-month period of
fiscal 1999. SG&A expenses for the first nine-months of fiscal 1999 were $10.0
million compared to $12.7 million for the same period in the prior year (which
represents 47% and 68% of revenues respectively). The decrease in SG&A expenses
for both the three- and nine-month periods in fiscal 1999 compared to fiscal
1998 is primarily attributable to a decrease in the provision for doubtful
accounts and an overall decrease in employment costs resulting from staff
reduction and other cost initiatives which commenced in 1998. This decrease was
partially offset legal, accounting and financial consulting fees of
approximately $400,000 in the third quarter of fiscal year 1999. For the same
period in fiscal 1998, the Company incurred approximately $146,000 in legal,
accounting and financial consulting fees.
Research and development (R&D) expenses for the third quarter were $0.4
million compared to $0.8 million for the comparable three-month period in fiscal
1998 (which represents 6% and 18% of revenue respectively). R&D expenses for
the first nine months of fiscal 1999 were $1.0 million compared to $1.8
million for the comparable nine-month period in fiscal 1998(which represents 5%
and 9% 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 March 31, 1999 the Company had $3.1 million in cash compared with
$3.0 million in cash at June 30, 1998. Operating activities provided the Company
with $2.2 million for the nine-months ended March 31, 1999, primarily by
reducing receivables and inventory. During the same period the Company used $1.0
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 $3.6 million in cash. In fiscal 1998, the Company invested $2.3
million in capitalized software and purchases of property and equipment. The
Company made a $0.4 million payment on debt which was largely offset by the
exercise of stock options ($0.3 million). Cash decreased by about $5.9 million
during the fiscal 1998 period.
Accounts receivable (billed and unbilled), net of allowance for
doubtful accounts, declined to $7.1 million at March 31, 1999 from $10.0 million
at June 30, 1998. The level of accounts receivable at March 31, 1999 reflects
aggressive collections and charge-offs and a $0.8 million increase in the
provision for doubtful accounts over the nine-month period. Unbilled accounts
receivable have decreased substantially from June 30, 1998. As of March 31, 1999
the unbilled accounts receivable balance was $2.2 million compared with $3.6
million as of June 30, 1998. The billed accounts receivable was $5.9 million as
of March 31, 1999 compared with $8.8 million at June 30, 1998. Billed accounts
receivable over 90 days decreased to $2.4 million as of March 31, 1999, compared
to $5.0 million as of June 30, 1998. For the nine month period ended March 31,
1999, the Company charged off about $2.2 million in receivables (net of
recoveries). As of March 31, 1999, the Company maintained a $1.0 million
allowance for doubtful accounts, down from the $2.5 million at June 30, 1998
reflecting an increase in write-offs and a steady decline in accounts
receivables over 90 days past due.
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
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<PAGE> 11
material respect of any representation or warranty as to the receivables
purchased or the Company's insolvency. As of March 31, 1999 and the date of this
filing, there were no outstanding borrowings under this Agreement.
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
a work guarantee letter of credit in the amount of $25,000 which 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 March 31, 1999, these
letters of credit were fully secured by 30 day CD's.
The Company believes that existing cash balances, cash flow 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.
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
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<PAGE> 12
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.
The new and emerging carrier market in the United States and overseas
represents a source of growing demand for the Company's products 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 and services.
The Company derived approximately $8.6 million, or 40% of its total
revenues, from customers outside of the United States during the first nine
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 and services for 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 at and beyond January 1, 2000.
The Company has completed 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 Company is in the process of testing of its
current products and expects this process to be completed on or before June 30,
1999. 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 contracts.
The Company has completed an assessment of the risks and costs
associated with the Year 2000 issue on internal hardware and software. The
Company is in the process of implementing systems changes and expects this
process to be completed on or before June 30, 1999. The Company has not
completed an assessment of its non-information technology systems (e.g.
elevators, HVAC all contained in facilities that the company leases from
others).
The cost of addressing the Company's Year 2000 issues has not been
fully quantified and the company expenses such costs as incurred. However,
management is not aware of any Year 2000 compliance exposures which would
preclude ongoing operations during the next twelve months or which would result
in material short-term cash requirements.
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<PAGE> 13
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 not developed a comprehensive 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. The Company plans
to develop and execute a contingency plan that narrows the focus on specific
areas of significant concern and concentrate resources to address them. Specific
contingency plans and resources for permitting the necessary flexibility of
response are expected to be identified and put into place commencing in
mid-1999.
PART II: OTHER INFORMATION
ITEM 5. OTHER INFORMATION
As previously reported, Ernst & Young L.L.P. had been engaged,
through counsel to the Company, to perform a review of certain accounting
matters relating to the first and second quarters and to actions being taken to
address the issued raised in the draft management letter provided by the
Company's former independent accountants and described in the Company's
previously filed report on Form 8-K. The Audit Committee of the Board of
Directors had requested the review to ensure that these issues were adequately
addressed by management. Ernst & Young L.L.P. has now completed its review and,
based on a consideration of various factors, including the results of that
review and presentations by management of the Company, the Board of Directors
believes that management has adequately addressed these issues.
The Company recently reported in a Report on Form 8-K dated May 6,
1999, as amended on Form 8-K/A, the appointment of Ernst & Young L.L.P. as
their new independent accountants for fiscal year 1999.
-13-
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
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 22,
1999, pursuant to a Report on Form 8K/A with respect to Item 5. Changes in
Registrant's Certifying Accountant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACE*COMM CORPORATION
DATE May 17, 1999 By /s/
-------------------
George T. Jimenez
President and Chief Executive Officer
/s/
-------------------
James K. Eckler
Executive Vice President - Finance and
Administration
(Principal Financial Officer)
-14-
<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-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,134
<SECURITIES> 0
<RECEIVABLES> 8,601
<ALLOWANCES> 990
<INVENTORY> 2,090
<CURRENT-ASSETS> 13,361
<PP&E> 6,282
<DEPRECIATION> 2,407
<TOTAL-ASSETS> 19,450
<CURRENT-LIABILITIES> 6,352
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 12,922
<TOTAL-LIABILITY-AND-EQUITY> 19,450
<SALES> 7,254
<TOTAL-REVENUES> 7,254
<CGS> 3,082
<TOTAL-COSTS> 3,082
<OTHER-EXPENSES> 3,461
<LOSS-PROVISION> 754
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (7)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
