<PAGE> 1
As filed with the Securities and Exchange Commission on May 2, 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 March 31, 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)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
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, 2000 9,162,649
-1-
<PAGE> 2
ACE*COMM CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information
Item 1. Financial Statements
<S> <C>
Balance Sheets as of March 31, 2000
(Unaudited) and June 30, 1999 3
Statements of Operations (Unaudited) for the three and
nine months ended March 31, 2000 and 1999 4
Statements of Stockholders' Equity for the
nine months ended March 31, 2000 (Unaudited)
and year ended June 30, 1999 5
Statements of Cash Flows (Unaudited) for the
nine months ended March 31, 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)
<TABLE>
<CAPTION>
MARCH 31,
2000 JUNE 30,
(UNAUDITED) 1999
----------------- ----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,164 $ 3,424
Accounts receivable, net 10,037 6,547
Inventories, net 1,945 2,152
Note receivable 0 516
Prepaid expenses and other assets 663 466
----------------- ----------------
Total current assets 16,809 13,105
Property and equipment, net 3,418 3,779
Capitalized software development costs, net 941 1,747
Other assets 298 68
----------------- ----------------
Total assets $ 21,466 $ 18,699
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings $ 274 $ 47
Accounts payable 804 1,517
Accrued expenses 593 797
Accrued compensation 1,662 1,621
Accrued contract costs 84 718
Deferred revenue 1,088 446
----------------- ----------------
Total current liabilities 4,505 5,146
Noncurrent borrowings 395 74
----------------- ----------------
Total liabilities 4,900 5,220
----------------- ----------------
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,
9,162,649 and 8,877,628 shares issued and outstanding 92 89
Additional paid-in capital 21,061 19,897
Accumulated deficit (4,587) (6,507)
----------------- ----------------
Total stockholders' equity 16,566 13,479
----------------- ----------------
Total liabilities and stockholders' equity $ 21,466 $ 18,699
================= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 4
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,
------------------------------------ ----------------------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenue $ 8,073 $ 7,254 $ 24,228 $ 21,505
Cost of revenue 3,168 3,082 10,349 10,441
----------------- ----------------- ---------------- ---------------
Gross profit 4,905 4,172 13,879 11,064
Selling, general and administrative expense 3,685 3,481 10,842 9,247
Research and development expense 601 429 1,310 1,014
Provision for doubtful accounts (67) 305 (235) 754
----------------- ----------------- ---------------- ---------------
Income from operations 686 (43) 1,962 49
Interest income (45) (39) (89) (153)
Interest expense 36 3 60 42
----------------- ----------------- ---------------- ---------------
Income before income taxes 695 (7) 1,991 160
Income tax provision (10) - 71 -
----------------- ----------------- ---------------- ---------------
Net income $ 705 $ (7) $ 1,920 $ 160
================= ================= ================ ===============
Basic net income per share $ 0.08 $ 0.00 $ 0.21 $ 0.02
================= ================= ================ ===============
Diluted net income per share $ 0.07 $ 0.00 $ 0.20 $ 0.02
================= ================= ================ ===============
Shares used in computing net income per share:
Basic 9,125 8,872 9,001 8,859
================= ================= ================ ===============
Diluted 10,087 8,872 9,612 8,996
================= ================= ================ ===============
</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
--------------------------
ADDITIONAL
PAR PAID-IN (ACCUMULATED
SHARES VALUE CAPITAL DEFICIT) TOTAL
------------ ------------ -------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 8,807 $ 88 $ 19,822 $ (7,125) $ 12,785
Exercise of common stock options 66 1 64 - 65
Employee Stock Purchase Plan 4 - 11 - 11
Net income for the year ended June 30, 1999 - - - 618 618
------------ ------------ -------------- ----------------- ------------
Balance, June 30, 1999 8,877 $ 89 $ 19,897 $ (6,507) $ 13,479
------------ ------------ -------------- ----------------- ------------
Exercise of common stock options 272 3 1,125 - 1,128
Employee Stock Purchase Plan 14 - 39 - 39
Net income for the period ended March 31, 2000 - - - 1,920 1,920
------------ ------------ -------------- ----------------- ------------
Balance, March 31, 2000 9,163 $ 92 $ 21,061 $ (4,587) $ 16,566
============ ============ ============== ================= ============
</TABLE>
The accompanying notes are an integral part of these financial statements
-5-
<PAGE> 6
ACE*COMM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
MARCH 31,
-----------------------------------------
2000 1999
(UNAUDITED) (UNAUDITED)
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,920 $ 160
Adjustments to reconcile net income to net cash (used for) provided
by operating activities:
Depreciation and amortization 1,570 1,607
Provision for doubtful accounts (235) 754
Changes in operating assets and liabilities:
Accounts receivable (3,255) 2,155
Inventories, net 207 1,142
Notes receivable 516 600
Prepaid expenses and other assets (427) 152
Accounts payable (713) (881)
Accrued liabilities (797) (2,475)
Deferred revenue 642 (993)
---------------- -----------------
Net cash (used for ) provided by operating activities (572) 2,221
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (403) (473)
Additions to capitalized software development costs - (616)
---------------- -----------------
Net cash used for investing activities (403) (1,089)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 1,944 -
Payments on debt (1,369) (985)
Principal payments under capital lease obligation (27) (35)
Exercise of common stock options 1,128 66
Employee stock purchase plan 39 -
---------------- -----------------
Net cash provided by (used in) financing activities 1,715 (954)
---------------- -----------------
Net increase in cash and cash equivalents 740 178
Cash and cash equivalents, beginning of period 3,424 2,956
---------------- -----------------
Cash and cash equivalents, end of period $ 4,164 $ 3,134
================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 60 $ 42
Income taxes $ 86 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<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, 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year information has been reclassified to conform to
current year presentation.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
-------------------- --------------------
<S> <C> <C>
Billed $ 4,622 $ 4,355
Unbilled 5,910 3,059
Allowance for doubtful accounts (495) (867)
-------------------- --------------------
$ 10,037 $ 6,547
==================== ====================
</TABLE>
Unbilled receivables include costs and estimated profit on contracts in progress
which have been recognized as revenue but not yet billed to customers under the
provisions of specific contracts. Substantially all unbilled receivables are
expected to be billed and collected within one year. The Company reduced its
provision for doubtful accounts by $235,000, credited recoveries of $147,000 to
the allowance and wrote-off $284,000 in uncollected accounts for the nine months
ended March, 31, 2000. The Company increased its provision for doubtful accounts
by $754,000, credited recoveries of $268,000 to the allowance and wrote-off
$2,496,000 in uncollectible accounts for the nine months ended March, 31, 1999.
NOTE 3 - STOCKHOLDERS' EQUITY
During the third quarter of fiscal year 2000, the Company issued 4,374 shares of
common stock under the Employee Stock Purchase Plan and 65,819 shares of common
stock through the exercise of stock options issued under the Omnibus Stock Plan.
For the nine month period ended March 31, 2000, the Company issued 13,390 shares
of common stock under the Employee Stock Purchase Plan and 271,631 shares of
common stock through the exercise of stock options issued under the Omnibus
Stock Plan.
7
<PAGE> 8
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.
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 carriers,
service providers and enterprises, both through direct channels and through
strategic alliance partners, for delivery to end users in the United States and
worldwide. Since June 1994, the Company, consistent with its strategic
emphasis, has derived significant revenue from sales of its data capture,
mediation, network monitoring and data distribution products to traditional
carriers. The balance of the Company's revenue is derived from the sale of
product-based solutions and services to new and emerging carriers and to
enterprise customers, including agencies of the U.S. Government.
This Report contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
investors should specifically consider the various factors contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999
which could cause actual results to differ materially from those indicated by
such forward-looking statements, and the matters set forth in "Additional
Factors Affecting Future Operating Results" presented in this Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items on the Company's statement of operations as a percentage of revenue:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
- ----------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Revenue 39.2% 42.5% 42.7% 48.6%
---------------- --------------- ----------------- ---------------
Gross Profit 60.8% 57.5% 57.3% 51.4%
Selling, general and administrative expenses 45.6% 48.0% 44.7% 43.0%
Research and development expenses 7.4% 5.9% 5.5% 4.7%
Provision for doubtful accounts -0.8% 4.2% -1.0% 3.5%
---------------- --------------- ----------------- ---------------
Income from operations 8.6% -0.6% 8.1% 0.2%
============================================================================================================================
</TABLE>
Revenues for the three month period ended March 31, 2000 ("third
quarter of fiscal year 2000") were $8.1 million compared to $7.3 million for the
comparable three month period in fiscal year 1999. Revenues were higher in the
third quarter of fiscal year 2000 as a result of increased sales of software and
services of approximately $1.6 million, offset by a decrease in hardware sales
of approximately $0.8 million. The software and service revenue generates a
higher gross margin than hardware sales.
Revenue from sales to emerging carriers increased 28% to $4.2 million
in the third quarter of fiscal year 2000 from $3.2 million in the third quarter
of fiscal year 1999. This category of revenue constituted 52% of total revenue
in the third quarter of fiscal year 2000 compared to 45% of total revenue in the
third quarter of fiscal year 1999. This increase is primarily a result of
substantial increases in sales of the Company's billing solution services and
mediation software . Revenue from sales to the Company's Enterprise customers
increased 28% to $2.3 million in the third quarter of fiscal year 2000 from $1.8
million in the third quarter of fiscal year 1999. Enterprise revenue constituted
28% of total revenue in the third quarter of fiscal year 2000 compared to 25% of
total revenue in the third quarter of fiscal year 1999. The overall increase in
sales for the third quarter is a result of the Company resuming its work with
the U.S. Air Force that had been suspended for most of fiscal year 1999
including part of the third quarter. Revenue from sales to traditional carriers
decreased 27% to $1.6 million in the third quarter of fiscal year 2000 from $2.2
million in the third quarter of fiscal year
9
<PAGE> 10
1999. This category of revenue constituted 20% of total revenue in the third
quarter of fiscal year 2000 compared to 31% of total revenue in the third
quarter of fiscal year 1999. Revenues were higher in fiscal year 1999 because
the Company was performing on a large contract for hardware with an
international customer. The decreased sales in fiscal year 2000 were partially
offset by a license upgrade sale.
Revenue for the nine month period ended March 31, 2000 was $24.2
million compared to $21.5 million for the nine month period ended March 31,
1999. Revenues were higher in fiscal year 2000 primarily due to a substantial
increase in sales of software solutions and services.
Revenue from sales to emerging carriers increased 37% to $11.8 million
in the first nine months of fiscal year 2000 from $8.6 million in the first nine
months of fiscal year 1999. This category of revenue constituted 49% of total
revenue in the first nine months of fiscal year 2000 compared to 40% of total
revenue in the first nine months of fiscal year 1999. This increase is primarily
a result of substantial increases in the Company's convergent mediation, data
warehousing and billing solution services and software revenue. Revenue from
sales to the Company's Enterprise customers remained relatively constant in the
first nine months of fiscal year 2000 compared to the first nine months of
fiscal year 1999. This category of revenue constituted 24% of total revenue in
the first nine months for both fiscal year 2000 and fiscal year 1999. Revenue
from sales to traditional carriers decreased 13% to $6.6 million in the first
nine months of fiscal year 2000 from $7.6 million in the first nine months of
fiscal year 1999. This category of revenue constituted 27% of total revenue in
the first nine months of fiscal year 2000 compared to 35% of total revenue in
the first nine months of fiscal year 1999. In fiscal year 1999, a significant
percentage of revenues were from a large contract for hardware with an
international customer.
Gross profit margins for the third quarter of fiscal year 2000 were
60.8% compared to 57.5% for the comparable three month period in fiscal year
1999. Gross profit margins for the first nine months of fiscal year 2000 were
57.3% compared to 51.4% for the comparable nine month period in fiscal year
1999. The increases in the current three and nine month periods reflect a sales
mix involving a greater percentage of software and services to new and existing
customers which carry higher gross margins.
Selling, general and administrative ("SG&A") expenses for the third
quarter of fiscal year 2000 were $3.7 million compared to $3.5 million for the
comparable period in the prior fiscal year which represents 45.6% and 48.0% of
revenue, respectively. Additionally SG&A expenses for the first nine months of
fiscal year 2000 were $10.8 million compared to $9.2 million for the comparable
period in the prior fiscal year which represents 44.7% and 43.0% of revenue,
respectively. The increases in the current three and nine month periods are a
result of higher staffing levels and associated benefits, along with wage
increases.
The provision for doubtful accounts declined to $67,000 in the third
quarter of fiscal year 2000 from $305,000 in the comparable period in fiscal
year 1999. The Company reduced the provision for doubtful accounts by $235,000
for the first nine months of fiscal year 2000 from $754,000 for the comparable
nine month period in fiscal year 1999. The net credit is principally due to
improved credit management practices and the successful settlement of two
previously reserved outstanding receivables.
Research and development ("R&D") expenses for the third quarter of
fiscal year 2000 were $0.6 million compared to $0.4 million for the comparable
three month period in fiscal year 1999 which represents 7.4% and 5.9% of
revenue, respectively. Additionally, R&D expenses for the first nine months of
fiscal year 2000 were $1.3 million compared to $1.0 million for the comparable
period in the prior fiscal year which represents 5.5% and 4.7% of revenue,
respectively. The increase in R&D expenses is primarily attributable to the
Company's increased commitment to a high-level research and development
strategy. A portion of the increase is attributable to the Company initiating
projects with new customers and strategic partners to develop next generation
technologies.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000 the Company had $4.2 million in cash compared with
$3.1 million in cash at March 31, 1999. Operating activities of the Company used
$0.6 million for the nine months ended March 31, 2000 primarily as a result of
increased receivables and decreases in accounts payable and accrued liabilities.
During the same period of the prior fiscal year, the Company generated $2.2
million of operating cash flow from decreases in accounts receivable and
inventory and major decreases in accrued contract costs. The change of cash flow
from accounts receivable is a result of the March 31, 2000 accounts receivable
balance representing the completion of a significant amount of work on other
contracts near the end of March 2000 which was billed in April 2000. The lower
March 31, 1999 balance is the result of aggressive collection procedures.
Accounts payable decreased for the nine months ended March 31, 2000 and March
31, 1999 due to the Company improving the average days from invoice to payment.
Accrued liabilities decreased for the nine months ended March 31, 2000 as a
result of accrued contract payments of $634,000. Similarly, in the same period
of the prior fiscal year, accrued liabilities decreased significantly as a
result of accrued contract payments of $1.9 million.
During the nine months ended March 31, 2000, the Company increased
investments in property and equipment by $0.4 million due to the purchase of
computer equipment. In the same period of the prior fiscal year, the Company had
investments of $0.5 million in property and equipment and $0.6 million in
capitalized software.
To finance operating and investment activities for the nine months
ended March 31, 2000, the Company received advances of $1.6 million under its
Accounts Receivable Purchase Agreement and Equipment Financing Agreement with
Silicon Valley Bank. The Company also financed a $0.3 million multi-year
directors and officers liability insurance policy through Transamerica Insurance
Finance Corporation. The financed amount is payable through April 2000 and bears
interest at 6.98% per annum. The Company also received $1.1 million from
employee stock option exercises and employee stock purchases. These increases
were offset by debt payments of $1.4 million. During the same period of the
prior fiscal year, the Company paid down debt of $1.0 million.
Accounts receivable (billed and unbilled), net of allowance for
doubtful accounts, increased to $10.0 million at March 31, 2000 from $6.5
million at June 30, 1999. The level of accounts receivable at March 31, 2000
reflects an increase in unbilled accounts receivables to $5.9 million at March
31, 2000 from $3.1 million at June 30, 1999. This increase is due to the
issuance of a large software license and the completion of a significant amount
of work on other contracts near the end of March 2000 which was billed in April
2000. The billed accounts receivable remained relatively unchanged with a $4.6
million balance at March 31, 2000 compared with $4.4 million at June 30, 1999.
For the nine month period ended March 31, 2000, the Company reduced its
provision for doubtful accounts by $235,000, credited recoveries of $147,000 to
the allowance and wrote-off $284,000 in uncollected accounts. The decrease in
the allowance is primarily due to the successful settlement of two previously
reserved outstanding receivables.
The Company has an Accounts Receivable Purchase Agreement (the
"Agreement") with Silicon Valley Bank (the "Bank"), enabling the Company to
borrow up to $4 million through the Bank's discretionary purchases of accounts
receivable. The Bank pays up to 80% of the face amount of each receivable, with
the balance of such face amount (less a finance charge equal to the Bank's prime
rate, a fee of 0.625% of the face amount and certain costs and expenses of the
Bank in administering the facility) payable to the Company following collection
of the receivable. The receivables purchased by the Bank must be collected
within 90 days unless otherwise agreed by the Bank, and the Company must not be
in dispute and must conform to other eligibility requirements. The purchases are
with full recourse against the Company, which has agreed to repurchase any
non-conforming receivable subject to the Bank's ability to allow the
substitution of conforming for non-conforming receivables. The Company's
obligations under the Agreement are secured by a security interest in all of the
Company's assets. Advances made to the Company are repayable in full upon demand
in the event of default under the Agreement, including a breach in any material
respect of any representation or warranty as to the receivables purchased or the
Company's insolvency. As of March 31, 2000, $0 borrowing was made 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
11
<PAGE> 12
plus 350 basis points, requires a commitment fee (and the reimbursement of bank
expenses for certain costs of making and administering this facility) and a
final payment equal to 6.5% of the value of the initial amount of each advance
at the end of the financing period for that advance. The loan is subject to
certain financial covenants and reporting requirements as a condition of the
Equipment Agreement. Outstanding advances as of March 31, 2000 aggregated
approximately $518,000.
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 2000 is $350,000 decreasing annually through fiscal year 2003 to
$100,000. As of March 31, 2000, the Company was not subject to any draw against
this letter of credit by the landlord.
Additionally, the Company has an Export-Import Bank Loan and Security
Agreement ("Exim Agreement")of up to $1 million with the Bank. This 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
receivables and related inventory. The Bank will issue standby letters of credit
up to 90% of each eligible foreign accounts receivable plus 50% of the eligible
export-related inventory. Interest is paid monthly in arrears at the Bank's
prime rate plus 1/2 % per annum. A loan fee of 1 1/2% plus Bank fees and charges
in connection with the loan are due the Bank. This Exim Agreement is subject to
certain financial covenants. As of March 31, 2000, there have been $0 borrowings
under this line.
The Company believes that existing cash balances, cash flow from
operations, the availability of credit under its credit facility with the Bank
and other potential sources of financing will be sufficient to support the
Company's working capital requirements for at least the next twelve months.
ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS
ACE*COMM provides product based solutions 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
could affect ACE*COMM's future operating results. These factors are intended to
serve as a cautionary statement to statements that may be made, either verbally
or in writing, including those in any other forward-looking statements made by
or on behalf of the Company.
To date, a significant portion of the Company's revenue has been
derived from substantial orders placed by large organizations. The Company
expects that in the future it will continue to be dependent upon a limited
number of customers in any given period for a significant portion of its
revenue. The Company's future success may depend upon the continued demand by
such customer for its products and services. The Company's results of operations
and financial condition could be materially adversely affected by the failure of
anticipated orders to materialize and by deferrals or cancellation of orders.
The Company's business is dependent upon the continued growth of the
telecommunications industry, in the United States and internationally, on the
continued convergence of voice and data networks and on the evolution and
widespread adoption of emerging network technologies. Any decline in the growth
of the industry, the failure of these markets to converge or the failure of
these network technologies to evolve or achieve widespread market acceptance
could have a material adverse effect on the Company.
A key element of the Company's business strategy is to develop
strategic alliances with leading companies that provide telecommunications
services or that manufacture and market network equipment in order to expand the
Company's distribution channels and enter new markets. There can be no assurance
that the Company will be able to continue to increase the number of, or to
expand, these types of relationships, in order to market its products
effectively, particularly internationally, or that it will successfully develop
other sales and marketing strategies.
The Company's growth has placed significant demands on the Company's
administrative, operational and financial personnel and systems. Additional
expansion by the Company may further strain the Company's management, financial
and other resources. There can be no assurance that the Company's systems,
procedures, controls and existing space will be adequate to support continued
growth of the Company's operations. If the Company is unable to respond to
12
<PAGE> 13
and manage changing business conditions, the quality of its products and
services and its results of operations could be materially adversely affected.
The new and emerging carrier market in the United States and overseas
represents a source of growing demand for the Company's products, software
licenses and services. In that this market segment is relatively new and in that
many of these organizations are in the early stages of their development,
financial resources may be limited and may adversely affect their ability to pay
for the Company's products, software licenses and services.
Trade receivables subject the Company to the potential for credit risk
with customers in the telecommunication services industry and government sector.
Five customers represented approximately 47% of the Company's gross trade
receivables balances at March 31, 2000. To reduce credit risk, the Company
conducts ongoing evaluations of its customers and requires letters of credit or
other pre-payment arrangements, as appropriate. The Company maintains accounts
receivable allowances to provide for potential credit losses. However, there can
be no assurances that one or more customers will not be unable or unwilling to
pay its or their obligations to the Company and in such event the Company's cash
flows and financial results would be adversely affected.
The Company derived approximately $7.5 million, or 30.8% of its total
revenues, from customers outside of the United States in the first nine months
of fiscal year 2000. The Company anticipates that a significant amount of future
revenues will be derived from sales to end users in Canada, Asia, Europe,
Africa, the Middle East 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
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<S> <C> <C>
10.1 (A) Amended and Restated Omnibus Stock Plan
10.2 (A) Amended and Restated Stock Option Plan for Directors
10.3 Amendment to Employment Agreement dated as of March 31, 2000 between the Company and
J. Eckler
27 Financial Data Schedule
---------------------------------------------------------------------------------------------------------------------
(A) Incorporated by reference to the Company's Proxy Statement, dated October 4, 1999
(b) Reports on Form 8-K
None
</TABLE>
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 2, 2000 By:
-------------------
George T. Jimenez
Chief Executive Officer
-------------------
James K. Eckler
Executive Vice President - Finance and
Administration
(Principal Financial Officer)
14
<PAGE> 1
EXHIBIT 10.3
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT is dated as of March 31, 2000
and is to amend an Employment Agreement dated as of October 7, 1999 between
ACE*COMM Corporation and James Eckler.
WHEREAS the parties intend to amend Mr. Eckler's Employment Agreement
to cause the acceleration of vesting of certain options to purchase Common Stock
of the Company under certain circumstances.
NOW THEREFORE, the parties agree as follows:
The following sentence in Sections 7.3(B) and 7.4(A):
In addition, if the effective date of termination is before
March 3, 2000, 29,500 of the Option Shares shall be
accelerated to become exercisable as of the effective date of
termination.
shall be amended to read as follows:
In addition, if the effective date of termination is before
October 7, 2000, 59,000 of the Option Shares (and if the
effective date of termination is on or after October 7, 2000,
29,500 of the Option Shares) shall be accelerated to become
exercisable as of the effective date of termination.
IN WITNESS WHEREOF, the parties have executed or caused to be executed
this Amendment on the date first above written.
ACE*COMM Corporation
By:
------------------------------
George Jimenez
Chairman of the Board
-----------------------------------
James Eckler
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 2000 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> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 4,164
<SECURITIES> 0
<RECEIVABLES> 10,532
<ALLOWANCES> 495
<INVENTORY> 1,945
<CURRENT-ASSETS> 16,809
<PP&E> 6,835
<DEPRECIATION> 3,417
<TOTAL-ASSETS> 21,466
<CURRENT-LIABILITIES> 4,505
<BONDS> 0
0
0
<COMMON> 92
<OTHER-SE> 16,566
<TOTAL-LIABILITY-AND-EQUITY> 21,466
<SALES> 24,228
<TOTAL-REVENUES> 24,228
<CGS> 10,349
<TOTAL-COSTS> 10,349
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (235)
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> 1,991
<INCOME-TAX> 71
<INCOME-CONTINUING> 1,920
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,920
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.20
</TABLE>
