<PAGE> 1
As filed with the Securities and Exchange Commission on November 14, 2000
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, 2000.
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 [ ]
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF SEPTEMBER 30, 2000 9,210,710
</TABLE>
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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 September 30, 2000
(Unaudited) and June 30, 2000 3
Statements of Operations (Unaudited) for the
three months ended September 30, 2000 and 1999 4
Statements of Stockholders' Equity for the
three months ended September 30, 2000 (Unaudited)
and year ended June 30, 2000 5
Statements of Cash Flows (Unaudited) for the
three months ended September 30, 2000 and 1999 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
</TABLE>
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<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACE*COMM CORPORATION
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
-------------- -------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,983 $ 4,386
Accounts receivable, net 10,083 11,818
Inventories, net 1,862 1,869
Prepaid expenses and other 857 531
-------------- -------------
Total current assets 17,785 18,604
Property and equipment, net 3,067 3,190
Capitalized software development costs, net 541 738
Other assets 208 253
-------------- -------------
Total assets $ 21,601 $ 22,785
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings $ 312 $ 280
Accounts payable 424 1,538
Accrued expenses 403 565
Accrued compensation 2,079 2,267
Deferred revenue 695 770
-------------- -------------
Total current liabilities 3,913 5,420
Noncurrent borrowings 438 446
-------------- -------------
Total liabilities 4,351 5,866
-------------- -------------
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, 9,210,710 and 9,180,638 shares issued
and outstanding 92 92
Additional paid-in capital 21,298 21,136
Accumulated deficit (4,140) (4,309)
-------------- -------------
Total stockholders' equity 17,250 16,919
-------------- -------------
Total liabilities and stockholders' equity $ 21,601 $ 22,785
============== =============
</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 SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2000 1999
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue $ 9,005 $ 8,179
Cost of revenue 4,608 3,889
------------- -------------
Gross profit 4,397 4,290
Selling, general and administrative expense 3,797 3,386
Research and development expense 361 329
Provision for doubtful accounts 95 25
------------- -------------
Income from operations 144 550
Interest income (66) (24)
Interest expense 32 4
------------- -------------
Income before income taxes 178 570
Income tax provision 9 28
------------- -------------
Net income $ 169 $ 542
============= =============
Basic net income per share $ 0.02 $ 0.06
============= =============
Diluted net income per share $ 0.02 $ 0.06
============= =============
Shares used in computing net income per share:
Basic 9,188 8,890
============= =============
Diluted 9,795 9,120
============= =============
</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
(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, 1999 8,877 $ 89 $ 19,897 $ (6,507) $ 13,479
Exercise of common stock options 288 3 1,185 - 1,188
Employee Stock Purchase Plan 16 - 54 - 54
Net income for the year ended June 30, 1999 - - - 2,198 2,198
---------- ---------- ----------- -------------- ----------
Balance June 30, 2000 9,181 $ 92 $ 21,136 $ (4,309) $16,919
Exercise of common stock options 26 - 144 - 144
Employee Stock Purchase Plan 4 - 18 - 18
Net income for the period
ended September 30, 2000 - - - 169 169
---------- ---------- ----------- -------------- ----------
Balance September 30, 2000 9,211 $ 92 $ 21,298 $ (4,140) $ 17,250
========== ========== =========== ============== ==========
</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 THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2000 1999
------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 169 $ 542
Adjustments to reconcile net income to net cash provided
by/(used for) operating activities:
Depreciation and amortization 480 564
Provision for doubtful accounts 95 25
Changes in operating assets and liabilities:
Accounts receivable 1,640 (2,155)
Inventories, net 7 359
Notes receivable - 250
Prepaid expenses and other assets (281) (154)
Accounts payable (1,114) (436)
Accrued liabilities (350) 2
Deferred revenue (75) (158)
------------- --------------
Net cash provided by (used for ) operating activities 571 (1,161)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (160) (128)
------------- --------------
Net cash used for investing activities (160) (128)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 91 1,451
Payments on debt (53) -
Principal payments under capital lease obligation (14) -
Net proceeds from common stock issued - 23
Exercise of common stock options 144 -
Employee stock purchase plan 18 13
------------- --------------
Net cash provided by financing activities 186 1,487
------------- --------------
Net increase in cash and cash equivalents 597 198
Cash and cash equivalents, beginning of period 4,386 3,424
------------- --------------
Cash and cash equivalents, end of period $ 4,983 $ 3,622
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 22 $ -
Income taxes $ 4 $ -
</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 Corporation (the "Company") in accordance with generally accepted
accounting principles for interim financial statements and pursuant to the rules
of the Securities and Exchange Commission for Quarterly Reports on 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, 2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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,
2000 2000
---------------- ----------------
<S> <C> <C>
Billed $ 5,845 $ 8,823
Unbilled 4,786 3,464
Allowance for doubtful accounts (548) (469)
---------------- ----------------
$ 10,083 $ 11,818
================ ================
</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 $95,000 and wrote off $16,000 in
uncollectable accounts for the three months ended September 30, 2000. 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.
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<PAGE> 8
NOTE 3 - STOCKHOLDERS' EQUITY
During the first quarter of fiscal 2001, the Company issued 4,022 shares of
common stock under the Employee Stock Purchase Plan and 26,050 shares of common
stock through the exercise of stock options issued under the Omnibus Stock Plan.
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 carried forward from prior years and used
to offset taxes that otherwise would be payable.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The Company sells product based solutions and services to
telecommunications and Internet service providers, including traditional
telephony carriers, Next-Generation Network operators, and enterprise network
operators, both through direct channels and through strategic alliance partners,
for delivery to end users in the United States and internationally. These
product based solutions and services are typically sold pursuant to contracts
having an aggregate value of several hundred thousand to several million
dollars.
The Company has historically derived significant revenue from sales of
its data collection and mediation products to traditional carriers, with the
balance of the Company's revenues derived from the sale of product based
solutions and services to enterprises and Next-Generation Network operators.
During the past several years, the Company has experienced substantial growth in
sales of its Convergent Mediation(TM) products to Next-Generation Network
operators. These customers are often experiencing rapid growth and are choosing
the Company's product based solutions and services to meet their requirements
for voice, data, wireless, and Internet networks. The Company plans to focus on
developing and selling Convergent Mediation(TM) products to Next-Generation
Network operators in the telecommunications and Internet networks market.
The Company also plans to aggressively pursue new business arrangements
with other companies, although there can be no assurances as to the timing or
effectiveness of any such arrangements. These arrangements could include: 'hands
on' technology and marketing alliances driven by product development and sales
opportunities, as well as other business combinations that would strengthen the
Company's product offerings and market potential.
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, 2000,
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," as well as
matters presented in this Report.
RESULTS OF OPERATIONS
Revenues increased 10%, or $0.8 million, to $9.0 million for the
three-month period ended September 30, 2000 ("first quarter of fiscal year
2001") from $8.2 million for the three-month period ended September 30, 1999
("first quarter of fiscal year 2000"). Revenues were higher in the first quarter
of fiscal year 2001 primarily as a result of an increase in sales of
non-proprietary hardware. The increase in non-proprietary hardware sales were
partially offset by a decrease in sales of the Company's proprietary hardware
while sales of the Company's software based solutions and services remained
relatively stable. Sales of non-proprietary hardware increased $1.7 million or
292% in the first quarter of fiscal year 2001 and represented approximately 25%
of total revenues. Sales of proprietary hardware decreased $0.8 million or 45%
in the first quarter of fiscal year 2001 and represented approximately 11% of
revenue. The increase in non-proprietary hardware is primarily due to a new
order for the Company's NetPlus(R) Enterprise Operations Support System from one
of the Company's alliance partners.
Revenue from sales to the Company's Enterprise customers increased 49%,
or $1.1 million, to $3.3 million in the first quarter of fiscal year 2001 from
$2.2 million in the first quarter of fiscal year 2000, and represented
approximately 37% and 27% of total revenue in the first quarter of fiscal year
2001 and 2000, respectively. The increase in sales to the Company's Enterprise
Customers is primarily due to a new order for the Company's NetPlus(R)
Enterprise Operations Support System, as previously noted. Revenue from sales to
the Company's Traditional Carrier customers decreased 48% to $1.4 million in the
first quarter of fiscal year 2001 from $2.7 million in the first quarter of
fiscal year 2000, and represented approximately 16% and 33% of total revenue in
the first quarter of fiscal year 2001 and 2000, respectively. The decrease in
revenues from sales to the Company's Traditional Carrier customers is primarily
due to the discontinuation of one and completion of several contract(s), which
was partially offset by revenue earned on a new order received in the fourth
quarter of fiscal year 2000. Revenues from sales to the Next-Generation Network
operators increased 32%, or $1.1 million, to $4.3 million in the first quarter
of fiscal year 2001 from $3.2 million in the first quarter of fiscal year 2000.
-9-
<PAGE> 10
Revenue from sales to Next-Generation Network operators represented
approximately 47% and 40% of total revenue in the first quarter of fiscal year
2001 and 2000, respectively. The increase in sales to Next-Generation Network
operators is primarily due to continued sales of the Company's Convergent
Mediation(TM) data warehousing and business support solution software and the
supporting non-proprietary hardware.
Gross profit margins for the first quarter of fiscal year 2001 were 49%
of total revenues, compared to 53% of total revenues for the comparable
three-month period in fiscal 2000. The change in gross profit margin is
primarily due to a change in the mix of revenue as sales of lower margin
non-proprietary hardware increased relative to higher margin software and
proprietary hardware. Additionally, the Company revised its burden estimate
resulting in a more precise allocation of employee related benefit and facility
costs and an increase in cost of sales.
Selling, general and administrative expenses for the first quarter of
fiscal year 2001 were $3.8 million compared to $3.4 million for the same period
in the prior fiscal year, which represented 42% and 41% of revenue,
respectively. The increase in sales, general and administrative expenses are a
result of an increase in employment-related costs, which were partially offset
by an increase in burden costs allocated to cost of sales.
The provision for doubtful accounts increased to $95,000 in the first
quarter of fiscal year 2001, from $25,000 in the same period in fiscal year
2000. The provision for doubtful accounts was lower in the first quarter of
fiscal year 2000 as a result of recoveries received in that quarter. The Company
did not experience similar recoveries in the first quarter of fiscal year 2001.
Research and development expenses for the first quarter of fiscal year
2001 were $0.4 million compared to $0.3 million for the comparable three-month
period in fiscal year 2000. Research and development expenses were 4% of
revenue in the first quarter of fiscal year 2001 and 2000. The increase of
$0.1 million in research and development expenses is primarily due to the
Company's continued efforts to develop next generation technologies, especially
Convergent Mediation(TM) products and services.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 the Company had $5.0 million in cash compared with
$4.4 million in cash at June 30, 2000. Operating activities of the Company
provided $0.6 million for the three-months ended September 30, 2000, primarily
as a result of a decrease in accounts receivable, partially offset by a decrease
in accounts payable. The change in cash flow from accounts receivable is
primarily a result of significant cash receipts from the Company's customers
during the first quarter of fiscal year 2001, which were used to reduce amounts
due to the Company's vendors. During the same period in fiscal year 2000, the
Company used $1.2 million in operating activities primarily as a result of
increased accounts receivable and decreased accounts payable. The Company
invested $0.2 million in the first quarter of fiscal year 2001 and $0.1 million
in the first quarter of fiscal year 2000 in property and equipment consisting
primarily of computer equipment. During the first quarter of fiscal year 2001,
the Company received $0.2 million from employee stock option exercises and
employee stock purchases. The Company also received $.09 million in advances and
made principal payments of $.05 million under its Equipment Financing Agreement
with Silicon Valley Bank. During the comparable period of fiscal year 2000, the
Company received advances of $1.5 million under its Accounts Receivable Purchase
Agreement and Equipment Financing Agreements with Silicon Valley Bank.
Accounts receivable, net of allowance for doubtful accounts, decreased
to $10.1 million at September 30, 2000 from $11.8 million at June 30, 2000.
Accounts receivable include billed accounts, unbilled accounts and an allowance
for doubtful accounts. Billed accounts receivable decreased to $5.8 million at
September 30, 2000 from $8.8 million at June 30, 2000. The decrease in accounts
receivable is primarily a result of significant cash receipts from the Company's
customers during the first quarter of fiscal year 2001. Unbilled accounts
receivable increased $1.3 million to $4.8 million at September 30, 2000 from
$3.5 million at June 30, 2000. These receivables result from contractual payment
terms, which may not be billed for up to twelve months. During the first quarter
of fiscal year 2001, the Company modestly increased its allowance for doubtful
accounts by $79,000.
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
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<PAGE> 11
certain finance and administrative charges) 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. The finance charges and administrative fees under this
Agreement are based on an amount equal to the Bank's prime rate plus 4% per
annum, of the average daily outstanding account balance and 0.625% of the face
amount of each purchased receivable, respectively. At September 30, 2000, there
were no outstanding borrowings under this Agreement.
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 at September 30, 2000
aggregated approximately $676,000.
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 fiscal year 2001 is $300,000 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 also maintains other customer
related Letters of Credit issued by Silicon Valley Bank to support specific
terms and conditions of customer orders. The aggregate of these letters of
credit total approximately $216,000 at September 30, 2000.
The Company has an Export-Import Bank Loan and Security Agreement
("Ex-Im Agreement") with the Bank that provides for up to $1 million in
borrowings through December 2000. The Ex-Im Agreement enables the Company to
support working capital requirements and allows for the issuance of foreign bid
and performance standby letters of credit against foreign accounts receivable
and related inventory. Under the terms of the Ex-Im Agreement, the Bank may
issue advances against a borrowing base of 90% of eligible foreign accounts
receivable and 50% of eligible export related inventory. Letters of credit may
be issued against 50% of the borrowing base. Interest on outstanding borrowings
accrues at the bank's prime rate of interest plus 1/2% per annum. Upon issuance
of each standby letter of credit, the Company pays a credit fee of 1.5% per
annum of the face amount of the standby letter of credit. The Company's
obligations under the Ex-Im Agreement are secured by a security interest in
substantially all of the Company's assets. The Company's ability to borrow under
the Ex-Im Agreement is subject to maintenance of certain financial ratios and
reporting requirements. At September 30, 2000, there were no outstanding
borrowings under this Agreement.
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
The Company provides product-based solutions to a technology driven
industry sector. Therefore, the Company's success is dependent in part upon
factors beyond its control. This report contains forward-looking statements
relating to the prospective operating results of the Company. The following are
factors, which could affect the Company'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.
-11-
<PAGE> 12
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.
The Company's quarterly revenues are largely dependent on contracts
executed during the quarter. Revenues for a given period typically involve large
financial commitments from a relatively small number of customers, and the
Company often receives a large portion of it contracts in the last month of any
given quarter. Accordingly, delays in the completion of sales near the end of a
quarter could negatively impact revenues in that quarter.
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. Two customers, Siemens AG and Winstar, comprised approximately 28% and
11%, respectively, of total revenues in the first quarter of fiscal year 2001.
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 provide additional exposure for the company's product
offerings. There can be no assurance that the Company will be able to continue
to increase the number of, or to expand, these types of relationships, in order
to market its products effectively, particularly internationally, or that it
will successfully develop other sales and marketing strategies.
The Company's growth has placed significant demands on the Company's
administrative, operational and financial personnel and systems. Additional
expansion by the Company may further strain the Company's management, financial
and other resources. There can be no assurance that the Company's systems,
procedures, controls and existing space will be adequate to support continued
growth of the Company's operations. If the Company is unable to respond to and
manage changing business conditions, the quality of its products and services
and its results of operations could be materially adversely affected.
The Next-Generation Network 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 often in the early stages of their development,
their financial resources may be limited and may adversely affect their ability
to pay for the Company's products, software licenses and services.
Next-Generation Network operators often rely extensively on the capital markets
to meet their ongoing cash flow requirements, and there is no certainty that the
markets will always provide them with adequate liquidity to pay their vendors,
including the Company, on a timely basis.
Trade receivables subject the Company to the potential for credit risk
with customers in the telecommunication services industry and government sector.
Five customers represented approximately 42% of the Company's gross trade
receivable balances at September 30, 2000. To reduce credit risk, the Company
conducts ongoing evaluations of its customers, monitors their payment patterns,
and in certain circumstances manages credit risk through letters of credit. The
Company maintains accounts receivable allowances to provide for potential credit
-12-
<PAGE> 13
losses. However there can be no assurances that all customers will be able or
willing to pay their obligations to the Company and in the event that one or
more customers becomes unable or unwilling, the Company's cash flows and
financial results could be adversely affected.
The Company derived approximately $3.5 million, or 38% of its total
revenues, from customers outside of the United States in the first quarter of
fiscal year 2001. The Company anticipates that a significant amount of future
revenues may 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.
-13-
<PAGE> 14
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
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.
<TABLE>
<S> <C>
ACE*COMM CORPORATION
DATE November 14, 2000 By
-------------------
George T. Jimenez
Chief Executive Officer
-------------------
James K. Eckler
Executive Vice President - Finance and Administration
(Principal Financial Officer)
</TABLE>
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