<PAGE> 1
As filed with the Securities and Exchange Commission on February 11, 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 December 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 DECEMBER 31, 1999 9,092,456
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ACE*COMM CORPORATION
INDEX
Part I - Financial Information
Item 1. Financial Statements
<TABLE>
<S> <C>
Balance Sheets as of December 31, 1999
(Unaudited) and June 30, 1999 3
Statements of Operations (Unaudited) for the three and
six months ended December 31, 1999 and 1998 4
Statements of Stockholders' Equity for the
six months ended December 31, 1999 (Unaudited)
and year ended June 30, 1999 5
Statements of Cash Flows (Unaudited) for the
six months ended December 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 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
</TABLE>
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<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACE*COMM CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1999 JUNE 30,
(UNAUDITED) 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,820 $ 3,424
Accounts receivable, net 9,137 6,547
Inventories, net 1,834 2,152
Note receivable 0 516
Prepaid expenses and other 390 466
-------------- --------------
Total current assets 15,181 13,105
Property and equipment, net 3,478 3,779
Capitalized software development costs, net 1,182 1,747
Other assets 347 68
-------------- --------------
Total assets $ 20,188 $ 18,699
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings $ 376 $ 47
Accounts payable 395 1,517
Accrued expenses 756 797
Accrued compensation 2,095 1,621
Accrued contract costs 95 718
Deferred revenue 665 446
-------------- --------------
Total current liabilities 4,382 5,146
Noncurrent borrowings 339 74
-------------- --------------
Total liabilities 4,721 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, 9,092,456 and 8,877,628 shares
issued and outstanding 91 89
Additional paid-in capital 20,669 19,897
Accumulated deficit (5,293) (6,507)
-------------- --------------
Total stockholders' equity 15,467 13,479
-------------- --------------
Total liabilities and stockholders' equity $ 20,188 $ 18,699
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ACE*COMM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ----------------------------
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 7,975 $ 7,528 $ 16,154 $ 14,250
Cost of revenue 3,336 4,276 7,181 7,359
-------------- ------------- ------------- -------------
Gross profit 4,639 3,252 8,973 6,891
Selling, general and administrative
expense 3,726 2,591 7,157 5,766
Research and development expense 380 225 709 585
Provision for doubtful accounts (193) 394 (168) 449
-------------- ------------- ------------- -------------
Income from operations 726 42 1,275 91
Interest income (20) (50) (44) (114)
Interest expense 21 14 24 38
-------------- ------------- ------------- -------------
Income before income taxes 725 78 1,295 167
Income tax provision 53 - 81 -
-------------- ------------- ------------- -------------
Net income $ 672 $ 78 $ 1,214 $ 167
============== ============= ============= =============
Basic net income per share $ 0.07 $ 0.01 $ 0.14 $ 0.02
============== ============= ============= =============
Diluted net income per share $ 0.07 $ 0.01 $ 0.13 $ 0.02
============== ============= ============= =============
Shares used in computing net income
per share:
Basic 8,991 8,869 8,940 8,853
============== ============= ============= =============
Diluted 9,629 8,903 9,374 8,898
============== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
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ACE*COMM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
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 206 2 747 - 749
Employee Stock Purchase Plan 9 - 25 - 25
Net income for the period ended
December 31, 1999 - - - 1,214 1,214
---------- --------- ----------- -------------- ----------
Balance, December 31, 1999 9,092 $ 91 $ 20,669 $ (5,293) $ 15,467
========== ========= =========== ============== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE> 6
ACE*COMM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
DECEMBER 31,
----------------------------------
1999 1998
(UNAUDITED) (UNAUDITED)
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,214 $ 167
Adjustments to reconcile net income to net cash (used
for) provided by operating activities:
Depreciation and amortization 1,064 920
Provision for doubtful accounts (168) 449
Changes in operating assets and liabilities:
Accounts receivable (2,422) 1,655
Inventories, net 318 876
Notes receivable 516 400
Prepaid expenses and other assets (203) (46)
Accounts payable (1,122) (603)
Accrued liabilities (190) (1,176)
Deferred revenue 219 (937)
------- -------
Net cash (used for ) provided by operating activities (774) 1,705
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (198) (136)
Additions to capitalized software development costs - (549)
------- -------
Net cash used for investing activities (198) (685)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 1,750 0
Payments on debt (1,129) (986)
Principal payments under capital lease obligation (27) (24)
Exercise of common stock options 749 39
Employee stock purchase plan 25 0
------- -------
Net cash provided by (used in) financing activities 1,368 (971)
------- -------
Net increase (decrease) in cash and cash equivalents 396 49
Cash and cash equivalents, beginning of period 3,424 2,956
------- -------
Cash and cash equivalents, end of period $ 3,820 $ 3,005
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 24 $ 45
Income taxes $ 34 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE> 7
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
ACE*COMM in accordance with generally accepted accounting principles for interim
financial statements and pursuant to the rules of the Securities and Exchange
Commission for Form 10-Q. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete financial
statements have been omitted. It is the opinion of management that all
adjustments considered necessary for a fair presentation have been included, and
that all such adjustments are of a normal and recurring nature. Operating
results for the periods presented are not necessarily indicative of the results
that may be expected for any future periods. For further information, refer to
the audited financial statements and footnotes included in the Company's Annual
Report on Form 10-K for the year ended June 30, 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>
DECEMBER 31, JUNE 30,
1999 1999
---------------- ----------------
<S> <C> <C>
Billed $ 7,394 $ 4,355
Unbilled 2,502 3,059
Allowance for doubtful accounts (759) (867)
---------------- ----------------
$ 9,137 $ 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 decreased its
provision for doubtful accounts by $168,000, credited recoveries of $123,000 to
the allowance and wrote-off $63,000 in uncollected accounts for the six months
ended December 31, 1999. The Company increased its provision for doubtful
accounts by $449,000, credited recoveries of $252,000 to the allowance and
wrote-off $1,837,000 in uncollectible accounts for the six months ended December
31, 1998.
NOTE 3 - STOCKHOLDERS' EQUITY
During the second quarter of fiscal year 2000, the Company issued 3,826 shares
of common stock under the Employee Stock Purchase Plan and 178,071 shares of
common stock through the exercise of stock options issued under the Omnibus
Stock Plan. For the six month period ended December 31, 1999, the Company issued
9,016 shares of common stock under the Employee Stock Purchase Plan and 205,812
shares of common stock through the exercise of stock options issued under the
Omnibus Stock Plan.
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NOTE 4 - INCOME TAXES
The Company's effective tax rate is less than the normal tax rate because of the
availability of net operating losses carried forward from prior years.
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<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
Company expects such sales to continue as a significant percentage of its
revenue for at least the next several years. The balance of the Company's
revenue is derived from the sale of product-based solutions and services to new
and emerging carriers and to enterprise customers, including agencies of the
U.S. Government.
This Report contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
investors should specifically consider the various factors contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999
which could cause actual results to differ materially from those indicated by
such forward-looking statements, and the matters set forth in "Additional
Factors Affecting Future Operating Results" and in "Year 2000" 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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
- ------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Revenue 41.8% 56.8% 44.5% 51.6%
------------- ----------- ------------- ------------
Gross Profit 58.2% 43.2% 55.5% 48.4%
Selling, general and administrative
expenses 46.7% 34.4% 44.3% 40.5%
Research and development expenses 4.8% 3.0% 4.3% 4.1%
Provision for doubtful accounts -2.4% 5.2% -1.0% 3.2%
------------- ----------- ------------- ------------
Income from operations 9.1% 0.6% 7.9% 0.6%
======================================================================================================
</TABLE>
Revenues for the three month period ended December 31, 1999 ("second
quarter of fiscal year 2000") were $8.0 million compared to $7.5 million for the
comparable three month period in fiscal year 1999. Revenues were higher in the
second quarter of fiscal year 2000 primarily as a result of increased direct
sales (rather than through strategic alliance partners) to North American
customers in recent periods, which the Company believes has enabled it to secure
more recurring sales to customers.
Revenue from sales to emerging carriers increased 45% to $4.4 million in
the second quarter of fiscal year 2000 from $3.0 million in the second quarter
of fiscal year 1999. This category of revenue constituted 54% of total revenue
in the second quarter of fiscal year 2000 compared to 40% of total revenue in
the second quarter of fiscal year 1999. This increase is primarily a result of
substantial increases in sales of the Company's billing solution services and
software and related service revenue. Revenue from sales to the Company's
Enterprise customers increased 42% to $1.3 million in the second quarter of
fiscal year 2000 from $0.9 million in the second quarter of fiscal year 1999.
Enterprise revenue constituted 17% of total revenue in the second quarter of
fiscal year 2000 compared to 12% of total revenue in the second quarter of
fiscal year 1999. The overall increase in sales for the second quarter is
largely a result of the Company resuming its work with the U.S. Air Force that
had been suspended during the second quarter of fiscal year 1999. Revenue from
sales to traditional carriers decreased 35% to $2.3 million in the second
quarter of fiscal year 2000 from $3.6 million in the
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<PAGE> 10
second quarter of fiscal year 1999. This category of revenue constituted 29% of
total revenue in the second quarter of fiscal year 2000 compared to 48% of total
revenue in the second quarter of fiscal year 1999. Revenues were higher in
fiscal year 1999 due to the presence of a large contract for hardware with an
international customer in fiscal year 1999. The decreased sales in fiscal year
2000 were partially offset by an increase in sales of convergent mediation
products.
Revenue for the six month period ended December 31, 1999 were $16.2
million compared to $14.3 million for the six month period ended December 31,
1998. Revenues were higher in fiscal year 2000 primarily due to a substantial
increase in sales of software solutions and service revenue.
Revenue from sales to emerging carriers increased 41% to $7.6 million in
the first six months of fiscal year 2000 from $5.4 million in the first six
months of fiscal year 1999. This category of revenue constituted 47% of total
revenue in the first six months of fiscal year 2000 compared to 38% of total
revenue in the first six 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 six months of fiscal year 2000 compared to the first six months of fiscal
year 1999. This category of revenue constituted 22% of total revenue in the
first six months of fiscal year 2000 compared to 24% of total revenue in the
first six months of fiscal year 1999. Revenue from sales to traditional carriers
decreased 5% to $5.1 million in the first six months of fiscal year 2000 from
$5.4 million in the first six months of fiscal year 1999. This category of
revenue constituted 32% of total revenue in the first six months of fiscal year
2000 compared to 36% of total revenue in the first six months of fiscal year
1999. In fiscal year 2000 a significant percentage of revenues resulted from
sales to one customer in Canada.
Gross profit margins for the second quarter of fiscal year 2000 were 58%
compared to 43% for the comparable three month period in fiscal year 1999. Gross
profit margins for the first six months of fiscal year 2000 were 56% compared to
48% for the comparable six month period in fiscal year 1999. The increases in
the current three and six month periods reflect a sales mix involving a greater
percentage of software and services.
Selling, general and administrative ("SG&A") expenses for the second
quarter of fiscal year 2000 were $3.7 million compared to $2.6 million for the
comparable period in the prior fiscal year which represents 47% and 34% of
revenue, respectively. Additionally SG&A expenses for the first six months of
fiscal year 2000 were $7.2 million compared to $5.8 million for the comparable
period in the prior fiscal year which represents 44% and 41% of revenue,
respectively. The increases in the current three and six month periods are a
result of changes in estimates related to employee labor and benefits in fiscal
year 1999 and employment taxes related to employee stock option exercises in
fiscal year 2000.
The provision for doubtful accounts declined to $(193,000) in the second
quarter of fiscal year 2000 from $394,000 in the comparable period in fiscal
year 1999. The provision for doubtful accounts declined to $(168,000) for the
first six months of fiscal year 2000 from $449,000 for the comparable six month
period in fiscal year 1999. The net credit is principally due to improved credit
management practices and the successful resolution of a major outstanding
receivable.
Research and development ("R&D") expenses for the second quarter of
fiscal year 2000 were $0.4 million compared to $0.2 million for the comparable
three month period in fiscal year 1999 which represents 5% and 3% of revenue,
respectively. Additionally, R&D expenses for the first six months of fiscal year
2000 were $0.7 million compared to $0.6 million for the comparable period in the
prior fiscal year which represents 4% and 4% of revenue, respectively. The
increase in expenses is primarily attributable to the Company's increased
commitment to convergent mediation.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 the Company had $3.8 million in cash compared with
$3.4 million in cash at December 31, 1998. Operating activities of the Company
used $0.8 million for the six months ended December 31, 1999 primarily as a
result of increased receivables and major decreases in accounts payable. During
the same period of the prior fiscal year, the Company generated $1.7 million of
operating cash flow from decreases in accounts receivable and inventory. The
change of cash flow from accounts receivable is explained by the December 31,
1998 balance being low due to aggressive collection procedures, as compared to
the Company's processing of several customers' significant invoices in December
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1999. Accounts payable decreased for the six months ended December 31, 1999 due
to the Company improving the average days from invoice to payment.
During the six months ended December 31, 1999, the Company increased
investments in property and equipment by $0.2 million due to the purchase of
computer equipment. In the same period of the prior fiscal year, the Company had
investments of $0.1 million in property and equipment and $0.5 million in
capitalized software.
To finance operating and investment activities for the six months ended
December 31, 1999, the Company received advances of $1.4 million under its
Accounts Receivable Purchase Agreement and Equipment Financing Agreement with
Silicon Valley Bank. The Company also financed a $0.4 million multi-year
directors and officers liability insurance policy through Transamerica Insurance
Finance Corporation. The financed amount is payable through March 2000 and bears
interest at 6.98% per annum The Company also received $0.8 million from employee
stock option exercises and employee stock purchases. These increases were offset
by debt payments of $1.1 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 $9.1 million at December 31, 1999 from $6.5 million at
June 30, 1999. The level of accounts receivable at December 31, 1999 reflects
the processing of several customers' significant invoices in December 1999.
Unbilled accounts receivable decreased from June 30, 1999. At December 31, 1999
the unbilled accounts receivable balance was $2.5 million compared to $3.0
million at June 30, 1999. The billed accounts receivable was $7.4 million at
December 31, 1999 compared with $4.4 million at June 30, 1999. For the six month
period ended December 31, 1999, the Company decreased its provision for doubtful
accounts by $168,000, credited recoveries of $125,000 to the allowance and
wrote-off $65,000 in uncollected accounts. The decrease in the allowance is
primarily due to the collection of a customer's accounts receivable balance that
had been reserved for in prior periods.
The Company has an Accounts Receivable Purchase Agreement (the
"Agreement") with Silicon Valley Bank (the "Bank"), enabling the Company to
borrow up to $4 million through the Bank's discretionary purchases of accounts
receivable. The Bank pays up to 80% of the face amount of each receivable, with
the balance of such face amount (less a finance charge equal to the Bank's prime
rate, a fee of 0.625% of the face amount and certain costs and expenses of the
Bank in administering the facility) payable to the Company following collection
of the receivable. The receivables purchased by the Bank must be collected
within 90 days unless otherwise agreed by the Bank and the Company, must not be
in dispute, and must conform to other eligibility requirements. The purchases
are with full recourse against the Company, which has agreed to repurchase any
non-conforming receivable subject to the Bank's ability to allow the
substitution of conforming for non-conforming receivables. The Company's
obligations under the Agreement are secured by a security interest in all of the
Company's assets. Advances made to the Company are repayable in full upon demand
in the event of default under the Agreement, including a breach in any material
respect of any representation or warranty as to the receivables purchased or the
Company's insolvency. As of the date of this filing, $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 plus 350 basis points, requires a commitment fee (and the
reimbursement of bank expenses for certain costs of making and administering
this facility) and a final payment equal to 6.5% of the value of the initial
amount of each advance at the end of the financing period for that advance. The
loan is subject to certain financial covenants and reporting requirements as a
condition of the Equipment Agreement. Outstanding advances as of the date of
this filing aggregated approximately $406,000.
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 the date of this filing, the Company was not subject to any draw
against this letter of credit by the landlord.
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<PAGE> 12
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, in
addition to those set forth in "-Year 2000", which could affect ACE*COMM's
future operating results. These factors are intended to serve as a cautionary
statement to statements that may be made, either verbally or in writing,
including those in any other forward-looking statements made by or on behalf of
the Company.
To date, a significant portion of the Company's revenue has been derived
from substantial orders placed by large organizations. The Company expects that
in the future it will continue to be dependent upon a limited number of
customers in any given period for a significant portion of its revenue. The
Company's future success may depend upon the continued demand by such customer
for its products and services. 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 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 53% of the Company's gross trade
receivables balances at December 31, 1999. To reduce credit risk, the Company
conducts ongoing evaluations of its customers and requires letters of credit or
other pre-payment arrangements, as appropriate. The Company maintains accounts
receivable allowances to provide for potential credit losses. However, there can
be no assurances that one or more customers will not be unable or unwilling to
pay its or their obligations to the Company and in such event the Company's cash
flows and financial results would be adversely affected.
The Company derived approximately $5.7 million, or 35% of its total
revenues, from customers outside of the United States in the first six 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
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<PAGE> 13
world. These revenues may be adversely affected by changing economic conditions
in foreign countries, which, in turn, could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's ability to successfully develop new, and enhance existing,
products, to service its customers, and to remain competitive depends in large
part on its ability to attract and retain highly qualified technical, sales and
marketing and management personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to continue to
attract and retain such personnel.
YEAR 2000
The Company develops and markets hardware and software products which
(i) collect call record data for use in customer billing, customer care, network
surveillance, alarm processing and network management and (ii) automate certain
of such network operation and management functions. The Company's products are
incorporated in systems used by public carriers, service providers and large
enterprises. The Company's products must be able to process date-dependent data
correctly. The Year 2000 problem refers to the limitations in the programming
code of certain existing legacy software programs which limit the ability of
such programs to accurately interpret some date-sensitive information for the
year 2000 and beyond. In the case of the Company's products, 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 agreed to modify products to accurately
process date-sensitive information, including dates at and beyond January 1,
2000.
The Company has completed testing of its current products (including
component parts supplied by third parties) for Year 2000 compliance, using the
definition of Year 2000 conformity requirements developed by the British
Standards Institute. The Company has notified customers that older products may
require modification to become Year 2000 compliant and is offering maintenance
contracts to provide such modifications for a fee. Customers who have elected
not to purchase an extended maintenance contract and want the Company's product
to be Year 2000 compliant procured the Year 2000 upgrade for a fee. Most, but
not all, customers have entered into such maintenance or upgrade contracts. The
Company has completed upgrading all customers who are currently under customer
support contracts.
The Company has completed an assessment of the risks associated with the
Year 2000 issue on internal hardware and software. The Company has received
verification that the non-information technology systems (e.g. elevators, HVAC
contained in facilities that the company leases from others) are Year 2000
compliant.
Based on the Company's work to date and its continuing operation on and
after January 1, 2000, the Company believes that it was successful in ensuring
the Year 2000 compliance of all systems and that future costs relating to the
Year 2000 issue will not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
The cost of addressing the Company's Year 2000 issues has not been fully
quantified. Management is not aware of any Year 2000 compliance exposures which
would preclude ongoing operations during the next twelve months or which would
result in material short-term cash requirements.
13
<PAGE> 14
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 18, 1999, the Registrant held its 1999 Annual Meeting of
Stockholders (the "1999 Annual Meeting"). At the 1999 Annual Meeting, the
following directors were elected as Class I and Class III directors,
respectively, the first to serve until the 2000 and the following two to serve
until the 2002 Annual Meeting of Stockholders, respectively, or until their
successor is duly elected and qualifies:
<TABLE>
<S> <C> <C>
Harry M. Linowes Votes For: 8,350,893 Votes Withheld: 229,200
George T. Jimenez Votes For: 8,351,093 Votes Withheld: 229,000
William R. Newlin Votes For: 8,350,793 Votes Withheld: 229,300
</TABLE>
In addition to the Class I and Class III directors enumerated above, as
of the close of the 1999 Annual Meeting, the Company's Board of Directors
consisted of Gilbert A. Wetzel, a Class I director whose term expires at the
2000 Annual Meeting of Stockholders and Paul G. Casner, Jr., a Class II director
whose term expires at the 2001 Annual Meeting of Stockholders.
At the 1999 Annual Meeting, the stockholders also took the following
actions:
(i) to approve the proposal to amend the Amended and Restated
Omnibus Stock Plan,
Votes For: 5,001,333
Votes Against: 355,975
Abstain: 7,945
Not Voted: 3,545,306
(ii) to approve the proposal to amend the Amended and Restated
Stock Option Plan for Directors,
Votes For: 8,460,013
Votes Against: 104,085
Abstain: 15,795
Not Voted: 330,666
(iii) to approve the proposal to ratify the selection of Ernst &
Young LLP as the Company's independent auditors for the
fiscal year ending June 30, 2000.
Votes For: 8,566,134
Votes Against: 10,789
Abstain: 2,370
Not Voted: 330,666
14
<PAGE> 15
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
10.1 (A) Amended and Restated Omnibus Stock Plan
10.2 (A) Amended and Restated Stock Option Plan for Directors
27 Financial Data Schedule
- --------------------------------------------------------------------------------------------------------------
(A) Incorporated by reference to the Company's Proxy Statement, dated October 4, 1999
</TABLE>
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACE*COMM CORPORATION
DATE February 11, 2000 By
-------------------
George T. Jimenez
Chief Executive Officer
-------------------
James K. Eckler
Executive Vice President -
Finance and Administration
(Principal Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
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> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,820
<SECURITIES> 0
<RECEIVABLES> 9,896
<ALLOWANCES> 759
<INVENTORY> 1,834
<CURRENT-ASSETS> 15,181
<PP&E> 6,630
<DEPRECIATION> 3,152
<TOTAL-ASSETS> 20,188
<CURRENT-LIABILITIES> 4,382
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 15,376
<TOTAL-LIABILITY-AND-EQUITY> 20,188
<SALES> 16,154
<TOTAL-REVENUES> 16,154
<CGS> 7,181
<TOTAL-COSTS> 7,181
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (168)
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 1,295
<INCOME-TAX> 81
<INCOME-CONTINUING> 1,214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,214
<EPS-BASIC> .14
<EPS-DILUTED> .13
</TABLE>
