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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-21059
ACE*COMM CORPORATION
(Exact name of registrant as specified in its charter)
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Maryland 52-1283030
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer I.D. No.)
704 Quince Orchard Road
Gaithersburg, Maryland 20878 20878
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (301) 721-3000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
$.01 par value
(Title of class)
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 requirement for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of September 15, 2000 the aggregate market value of the voting stock
held by non-affiliates of the registrant (i.e. persons who are not directors,
officers or affiliated therewith) was approximately $45,475,060 (5,234,238
shares of Common Stock at a closing price on the NASDAQ National Market of
$8.688 on such date). Outstanding as of September 15, 2000 were 9,187,410 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its annual
meeting to be held on November, 14, 2000 are incorporated by reference in Part
III.
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ACE*COMM CORPORATION
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. BUSINESS 3
Item 2. PROPERTIES 9
Item 3. LEGAL PROCEEDINGS 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 11
Item 6. SELECTED FINANCIAL DATA 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 20
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 20
Item 11. EXECUTIVE COMPENSATION 20
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 20
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 20
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K 21
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PART I
ITEM 1. BUSINESS
This Report contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
investors should specifically consider the various factors identified in this
Report which could cause actual results to differ materially from those
indicated by such forward-looking statements, including the matters set forth in
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Additional Factors Affecting Future
Operating Results".
GENERAL BUSINESS DEVELOPMENT
ACE*COMM Corporation (the "Company"), incorporated in Maryland in 1983,
sells product-based Operations Support System ("OSS") and Business Support
System ("BSS") solutions worldwide for telecommunications and Internet service
providers, including Next Generation Network ("NGN") operators, and enterprise
network operators. The Company provides technology, hardware and software
products, and related services for voice, conventional data networks and
Internet protocol ("IP") based networks. The Company specializes in solutions
that enable the capture, management, enhancement, warehousing, and distribution
of network data used to support the business operations of service providers.
These OSS and BSS solutions are provided by the Company to a broad range of
customers, delivering both public and private communications services, and
include wireless carriers, incumbent and competitive local exchange carriers,
national and international long distance carriers, Internet service providers
and enterprises. The Company's fiscal year ends on June 30. Unless otherwise
noted, all references to years in this document are assumed to be fiscal.
SOLUTIONS, PRODUCTS AND SERVICES
SOLUTIONS FOR TELECOMMUNICATIONS AND INTERNET SERVICE PROVIDERS
The Company offers product-based solutions to telecommunications service
providers for the collection, management, and distribution of call and
transaction data. The Company's Convergent Mediation(TM) solutions enable
customers to collect call data from a wide range of sources, including
Next-Generation Networks carrying voice and data, wireless and radio networks,
and conventional voice networks. Convergent Mediation(TM) hardware and software
solutions enable service providers to process call data in support of critical
operations and business functions, such as billing, network management, traffic
analysis, marketing, rating/costing, and fraud detection.
The Company's Convergent Mediation(TM) solutions enable customers to capture
data directly from voice and data switches and other network elements. Once
captured, the data can be consolidated, validated, formatted, correlated,
summarized, augmented, and stored in a centralized data warehouse. Customers can
use various Company software applications to verify, analyze, and manage the
data, and generate subscriber usage information. The data can also be
distributed to other OSS and BSS applications; which may be provided by the
Company, the service provider, or third parties; that can include billing,
customer relationship management (CRM), provisioning, and fraud detection.
The Company's core telecommunications service provider infrastructure solution,
N*VISION(TM) allows service providers to process, manage and analyze usage
information generated from multiple sources, such as gateways, land lines,
mobile or other types of voice switches, intelligent network (IN) nodes, data
network switches, and routers. N*VISION(TM) develops, stores, and monitors
network data in real time, and its data warehouse gives customers the ability to
gain nearly instant access to key business information including traffic
statistics, usage patterns, and information relating to transaction costs which
is used in settlements between carriers and wholesale billing, and provides
derivative information and displays that assist in managing network operations.
The Company's telecommunications service provider solutions provide the
following range of capabilities:
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Data Capture - software and hardware solutions that capture and secure call
data.
Data Collection - software products that manage the collection process for large
networks, including the polling and verification of records sent directly from
network elements or hardware data capture units that may be provided by the
Company or other vendors.
Data Management - software products that manage, reformat, prepare, and send
collected and processed data to OSS and BSS functions for such purposes as
billing, CRM, and fraud detection.
Data Warehousing - a software product set that stores records for OSS and BSS
operations and decision making. This product is a repository for real-time,
batch and historical data, storing call data in complete and summarized formats,
statistics, customer-provided pilot tables, etc. The data warehouse application
set also include an environment and software tools to view, manage, augment,
reprocess, and generate reports on large volumes of call records.
Rating/Costing - a software application that allows customers to measure both
individual and summarized call records for billing and settlements. It supports
multiple rating dimensions as well as multiple rate plans. Rates can be changed
in real time or on a scheduled basis.
Data Presentation - a software application that normalizes, formats, correlates,
summarizes, and/or augments call records for numerous downstream applications
such as billing and fraud systems.
Data Distribution - software products that, using compatible protocols,
distribute normalized, formatted, correlated, summarized, and/or augmented call
records to numerous downstream applications such as billing and fraud systems.
SOLUTIONS FOR ENTERPRISE NETWORK TELEMANAGMENT
The Company offers solutions to enterprises for the automation of network
operations and management functions. The Company's NetPlus(R) Enterprise
Operations Support System is the core capability of this solution set and is
deployed on multi-vendor/multi-protocol voice, data, and video networks.
NetPlus(R) is scaleable, to accommodate numerous network sizes and locations.
NetPlus(R) enables enterprises to improve service and control costs by managing
various aspects of the network, including alarm and fault resolution, cabling
and facilities management, convergent billing, chargeback billing, cost control
and recovery. NetPlus(R) also provides the capability to automate maintenance by
providing work orders, trouble tickets, inventory, and switching equipment
configuration management. Following are the primary functions provided by
NetPlus(R):
Fault Management - a software product that allows network managers on a
real-time basis to detect faults and to determine their origins and perform
fault correction.
Configuration Management - a software product that delivers comprehensive
subscriber, connectivity, and equipment administration functions. These modules
track, maintain, and report on the entire network structure.
Accounting Management - system functions that collect, store, process, rate and
verify billing and accounting data.
Performance Management - system functions that aggregate and analyze network
performance, call data, and configuration data to provide managers with an
overall performance model of their network and operations.
Security Management - a multi-level, layered system that covers systems ranging
from the operating system and database to forms and commands within forms.
Directory Management - an application that handles listing in organizational or
alphabetical formats, which allow for personnel, departmental, and classified
directory listings.
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Product Backplane(TM) - an application services layer, software infrastructure
common to all NetPlus(R) applications, that is based on an Oracle(R) database,
client/server distributed processing, Web-based User Interface (WUI), and
Graphical User Interface (GUI) presentation, which operates for a single module
or multiple functional system and allows users to implement only the modules
they need.
Network Management Applications - infrastructure software that provides
high-performance, low-cost, small footprint applications for managing network
elements performance.
SERVICES
Most of the Company's services are delivered in conjunction with Company
solutions and products. The Company is increasingly asked to adapt existing
products to customers' specialized needs. Apart from custom product development,
the Company provides technical Customer Support, consulting, systems
integration, outsourcing, service bureau, and a variety of on-going support and
maintenance services related to Company products such as training and
installation.
QUALITY
The Company maintains an ISO 9001 standard Quality Management Program to
monitor the quality of its offerings and has an internal Quality Management
Committee to set quality objectives for the Company and a Quality Assurance
Department to implement and monitor compliance with the applicable procedures.
SALES AND MARKETING
The Company sells product-based solutions through direct sales and
through the strategic alliance partners. See "Strategic Alliances and Other
Customers." At present, the Company is increasing its sales efforts through the
application of new sales and marketing strategies. During fiscal year 2000, the
Company hired additional experienced, direct sales representatives and broadened
its strategic alliances by adding certain non-exclusive third party
relationships to existing distribution channels and alliances with carriers,
communications equipment manufacturers, computer equipment manufacturers,
software developers and telecom consultants. Additionally, the Company has
recently restructured its marketing function and is hiring experienced personnel
in the areas of market research, marketing communications, product management,
and marketing strategy in order to increase its scope and capabilities in this
area.
The sales process for new contracts generally requires a significant
investment of time and money and takes from several months to several years.
This process involves senior executives, sales representatives and support
personnel and typically requires presentations, demonstrations, field trials,
and lengthy negotiations. The Company spends significant time consulting with
strategic partners and end users to adapt its products to meet end user
requirements. Through ongoing sales, maintenance, training and systems analysis,
the Company maintains contact with its partners and end users to determine their
evolving requirements for updates and enhancements. Through these processes, the
Company gains valuable industry expertise, as well as the ability to identify
emerging industry applications and new sales opportunities.
STRATEGIC ALLIANCES
To assist in developing, marketing, and distributing its product
solutions effectively and as part of the Company's marketing efforts, the
Company has established strategic alliances with several large organizations:
telecommunication and Internet equipment manufacturers, computer equipment
manufacturers, telecom systems
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integrators and other organizations (the "strategic alliance partners" or
"partners"). Each alliance is designed to do one or more of the following:
develop products designed to meet the needs of the partner or its customers,
establish a joint marketing relationship to include Company products in systems
sold by the partner, create a reseller channel for the Company's products, or
jointly provide customer support to end users. These strategic alliances enable
the Company to leverage relationships within the industry to enhance its market
development.
A strategic alliance typically involves a formal agreement between the
Company and the strategic alliance partner, pursuant to which the parties agree
to develop and sell products to the partner for use by the partner, or by its
customers who are in such cases the end users of the Company's products. Each
agreement specifies the terms of the alliance, which may include off the shelf
products and/or parameters for product development and product specifications,
product pricing, the terms of intellectual property ownership, and the
responsibilities of each partner for system integration, proposal drafting,
sales and marketing. Once the products are developed, the strategic alliance
partner will issue specific orders to the Company from time to time to purchase
products, subject to the terms of the overall agreement. The products are
generally purchased and paid for by the partner for resale to its customers
directly or as part of a larger system installation. Sales to a strategic
alliance partner may vary from period to period, depending on the timing of
orders, which in turn may depend on a number of factors, including the
completion of the Company's product development, the partner's marketing and
sales efforts to its customers, the timing of orders from the partner's
customers, and various internal financial, strategic and other factors specific
to a partner or any of its customers. Accordingly, sales to a partner in one
period are not necessarily predictive of sales to the partner in future periods.
The following is a list of the Company's current significant
strategic alliances:
- CISCO SYSTEMS, INC. ("CISCO") - the Company provides mediation and data
warehousing capabilities to Cisco customers as part of Cisco's end-to-end
solutions.
- GENERAL DYNAMICS GOVERNMENT SYSTEMS CORPORATION WORLDWIDE TELECOMMUNICATION
("GENERAL DYNAMICS GOVERNMENT SYSTEMS") - provides telephone systems at
military facilities throughout the world. The Company, as a subcontractor to
General Dynamics Government Systems for network management products, installs
and supports NetPlus(R) products at multiple military facilities.
- KEANE FEDERAL SYSTEMS, INC. ("KEANE") - the Company provides subcontract
services to Keane primarily for delivery of its NetPlus(R) software products
and related services to United States Government installations throughout the
world.
- MARCONI, PLC ("MARCONI") - the Company provides Convergent Mediation(TM)
solutions that work in conjunction with Marconi's ServiceOn Management(R)
suite of products.
- MOTOROLA, INC. - the Company provides a customized version of its Convergent
Mediation(TM) solution for integration into Motorola's Mobile Data Gateway
switch and to work in conjunction with their iDEN technologies. Motorola's
iDEN software and hardware products provide telephone companies with the
capability to offer integrated wireless communications services.
- SIEMENS AG - the Company sells its Enterprise Networks Operations Support
products outside of the United States through Siemens AG, who serves as a
prime contractor.
- TRW, INC. - the Company provides subcontract services to TRW for the delivery
of its Convergent Mediation(TM) solution for the real-time usage management,
data warehousing and data analysis requirements of British
Telecommunications' Airwave service.
CUSTOMER SUPPORT
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The Company believes that a high level of customer support is critical
to the Company's continuing success in developing relationships with its
strategic partners and end users. The Company offers technical customer support
24 hours per day, seven days per week. Support is provided via telephone, remote
login, e-mail and, if necessary, on-site assistance. In addition, the Company
has established a Web site on the Internet to keep customers informed of product
developments. International customers are supported directly by the Company or
by local representatives that have been trained by the Company. These
representatives do not represent the Company exclusively. The Company also
conducts training classes for its strategic partners and other customers.
The Company typically provides new customers with Customer Support under
warranty for a period ranging from one to 24 months. This can include 24 hour,
seven days per week support, replacement parts, software upgrades, when and if
required. The Company also offers various levels of continuing Customer Support
after the initial warranty period expires through Technical Support Agreements.
In addition, the Company provides customers with support on a time and materials
basis.
BACKLOG
The Company defines backlog as signed contracts or purchase orders for
delivery of hardware and software products and services generally within the
next year. Backlog at June 30, 2000, 1999 and 1998 was approximately $8.9
million, $7.3 million and $11.2 million, respectively. Backlog, as defined, does
not include contracts for hardware and software products which require the
further issuance of purchase orders.
The Company's contracts are large and technically complicated and
require a significant commitment of management and financial resources from the
Company's customers. The development of a contract is typically a lengthy
process because it must address a customer's specific technical requirements and
often requires internal approvals that require substantial lead-time.
Accordingly, the Company may experience significant variations in revenue from
quarter to quarter, reflecting delays in contract signing or contract order
deliveries. In addition, contracts that involve software deliveries may involve
tailoring of the product to specific customer requirements, which can delay
final delivery of the order. No assurance can be given that current backlog will
necessarily lead to revenue in any specific future period.
COMPETITION
Competition in the markets for the Company's products is driven by
rapidly changing enabling and core network and communications technologies,
evolving industry standards, frequent new product introductions and
enhancements, and rapid changes in customer requirements. To maintain and
improve its competitive position, the Company must continue to develop and
introduce value-added, timely and cost-effective new products, features and
services that keep pace with technological developments and emerging industry
standards, and address the increasingly sophisticated needs of its customers.
The Company expects the continued growth of the telecommunications and
Internet service provider market and the enterprise network market to encourage
new entrants and competitors to enter these markets in the future. The Company
believes that the principal competitive factors in these markets include
specialized project management capabilities and technical expertise, compliance
with industry quality standards and protocols, customer support, product
features such as adaptability, scalability and flexibility, the ability to
integrate with other products, functionality and ease-of-use, product
reputation, responsiveness to customer needs, and timeliness of implementation.
To remain competitive, the Company will be required to respond promptly and
effectively to the challenges of next generation technological changes within
the industry, as well as to its competitors' innovations.
In the telecommunications and Internet service provider market, the
Company's current and prospective competitors include: (i) large carriers which
internally develop full system products for themselves, tailored to their
particular specifications, (ii) next generation service provider companies, such
as Comptel plc., Narus, Inc., and Xacct Technologies 1997 Ltd., that can supply,
data collection, mediation components, and data storage capabilities, (iii)
vendors that supply more inclusive products, such as Veramark Technologies,
Inc., and CGI, Inc. (iv) telecom equipment manufacturers that provide network
products such as Lucent Technologies, Inc., and Ericsson, (v)
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companies that provide OSS software applications for carriers, such as
Stonehouse Technologies, Inc., and MetaSolv Software, Inc., (vi) companies that
supply product components such as Ericcson-Hewlett-Packard Telecommunications
(EHPT) and Fujitsu, (vii) companies that provide billing and customer care
applications, such as Amdocs Limited and Portal Software, Inc., and (viii)
companies that develop custom solutions, such as EDS Inc. and Computer Sciences
Corp.
In the enterprise network market, the Company's current and prospective
competitors include (i) companies that provide products for telephony networks,
such as Switchview Inc., Telco Research Corporation and Veramark Technologies,
Inc., and (ii) companies that provide products for data networks, such as Remedy
Corp. and Computer Associates International, Inc.
The Company believes that its ability to compete in its markets depends
in part on a number of competitive factors outside its control, including the
ability of others to develop technology that is competitive with the Company's
products, the price at which competitors offer comparable products and services,
the extent of competitors' responsiveness to customer needs, and the ability of
the Company's competitors to hire, retain and motivate key personnel.
The Company competes with a number of companies that have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition. As a result, the Company's competitors may be able to
adapt more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sale of their
products than can the Company. There can be no assurance that the Company's
current or potential competitors will not develop products comparable or
superior to those developed by the Company, or adapt more quickly than the
Company to new technologies, evolving industry trends or changing customer
requirements.
RESEARCH AND PRODUCT DEVELOPMENT
The Company's research and development efforts are focused on developing
new products to meet the growing needs of customers and on improving existing
products by incorporating new features and technologies. The Company believes
that the timely development of new products and enhancements is essential to
maintaining its competitive position in the marketplace. In its research and
development efforts the Company works closely with customers, end users and
leading technology vendors, in tailoring new features which are subsequently
incorporated into future versions of products available to all customers. The
Company continually reviews opportunities to license technologies from third
parties when appropriate based on timing and cost considerations.
During the years 2000, 1999 and 1998, research and development expenses
were $1.7 million, $1.6 million and $2.4 million, respectively.
PROPRIETARY RIGHTS AND LICENSES
The Company does not currently hold any patents and relies on a
combination of copyright, trademark, contract and trade secret laws and
statutory and/or common law to maintain its proprietary rights to its products.
The Company believes that, because of, among other things, the rapid pace of
technological change in the telecommunication and software industries, patent
protection for its products is a less significant factor in the Company's
success than the knowledge, ability and experience of the Company's employees,
the frequency of product enhancements and the timeliness and quality of support
services provided by the Company.
The Company generally enters into confidentiality agreements with its
employees, consultants, customers and potential customers and limits access to,
and distribution of, its proprietary information. Use of the Company's software
products is usually restricted to specified locations and is subject to terms
and conditions prohibiting unauthorized reproduction or transfer of the software
products. The Company also seeks to protect its software, including the source
code, as a trade secret and as copyrighted work.
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EMPLOYEES
At June 30, 2000, the Company employed a total of 208 employees. None of
the Company's employees are represented by a labor union. The Company has
experienced no work stoppages and believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company leases space at four office locations: Gaithersburg,
Maryland; Frederick, Maryland, Montreal, Canada; and Flemington, New Jersey. The
Company believes that its facilities are adequate for its current needs and that
suitable additional space will be available as required. The Gaithersburg
offices are the Company's corporate headquarters and are used for product
assembly, software and engineering development, professional services and
support. The following sets forth information concerning the Company's
significant facilities:
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SQUARE CURRENT
LOCATION FOOTAGE LEASE EXPIRATION ANNUAL RENT
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Gaithersburg, Maryland 38,427 November 30, 2003 $693,000 (subject
to annual
increases of
approximately
$21,000 and
allocated
operating costs
each year)
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
current executive officers of the Registrant.
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NAME AGE POSITION
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George T. Jimenez 64 Chairman of the Board and Chief Executive Officer
Gino O. Picasso 44 President and Chief Operating Officer
S. Joseph Dorr 53 Executive Vice President of Business Development
Dr. Thomas V. Russotto 55 Executive Vice President and Chief Technology Officer
James K. Eckler 53 Executive Vice President of Finance and Administration
</TABLE>
George T. Jimenez is the Chief Executive Officer of the Company and has
served as Treasurer and a Director of the Company since its inception in 1983.
From 1983 to September 1999, Mr. Jimenez also served as the President of the
Company.
Gino O. Picasso joined the Company in September 1999 as President and
Chief Operating Officer. Prior to joining the Company and since 1994, Mr.
Picasso served as President of GE Capital Spacenet Service, Inc., a wholly owned
subsidiary of General Electric Company.
S. Joseph Dorr has been a Vice President of the Company since 1983 and
is currently the Executive Vice President of Business Development. From 1983 to
1989, he also served as Corporate Secretary of the Company. From 1980 to 1983,
he served as Director of the Commercial Systems Division of the Company's
predecessor and from 1983 to 1989 was Director of the Network Management
Division.
Dr. Thomas V. Russotto has been a Vice President of the Company since
1985 and is currently an Executive Vice President and Chief Technology Officer.
In 1998, he served as Vice President of Operations of the Company. From 1988 to
1998, Dr. Russotto directed the Carrier Networks Division and from 1983 to 1985
he served as Director of Product Development at the Company.
James K. Eckler joined the Company in October of 1998, and was named the
Executive Vice President of Finance and Administration in January 1999. Prior to
joining the Company, Mr. Eckler served as Interim CFO of a privately held
telecommunications systems integration firm, IMCI Technologies (March 1998 to
September 1998). Prior to that, Mr. Eckler was President of Eckler & Company, a
privately held management consulting firm specializing in electronic commerce,
payment systems, and logistics for global logistics companies (August 1996 to
March 1998). From the fall of 1994 to August 1996 he served as Vice President of
Corporate Development for TNT Logistics, a wholly-owned subsidiary of TNT Ltd.
The term of each executive officer will expire at the next annual
meeting of the Board of Directors, which is scheduled to be held November 14,
2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS
COMMON STOCK PRICES
The following table sets forth for the periods indicated the highest and
lowest bid prices for the shares of common stock reported on the Nasdaq National
Market.
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YEAR ENDED JUNE 30,
--------------------------------------------------------
2000 1999
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HIGH LOW HIGH LOW
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1st Quarter $ 5.88 $ 3.19 $ 6.06 $ 1.38
2nd Quarter 11.88 3.50 6.94 0.75
3rd Quarter 18.56 6.75 8.31 1.81
4th Quarter 10.63 3.00 4.75 2.13
</TABLE>
COMMON STOCKHOLDERS
As of September 15, 2000, there were 9,187,410 shares outstanding and
held by 58 shareholders of record.
DIVIDENDS
The Company has never declared or paid cash dividends on the Common
Stock. The Company currently intends to retain earnings, if any, to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. The future payment of cash dividends, if
any, is within the discretion of the Board of Directors and will depend on the
future earnings, capital requirements, financial condition and future prospects
of the Company and such other factors, as the Board of Directors may deem
relevant.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each of the Company's
fiscal years in the five-year period ended June 30, 2000 and as of June 30,
2000, 1999, 1998, 1997, and 1996 are derived from the audited financial
statements of the Company.
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YEAR ENDED JUNE 30,
---------------------------------------------------------------
2000 1999 1998 1997 1996
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(IN THOUSANDS EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Revenue $ 33,766 $ 29,657 $ 22,465 $ 33,684 $ 19,983
Cost of revenue 15,346 13,765 13,325 17,627 10,836
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Gross profit 18,420 15,892 9,140 16,057 9,147
Selling, general and administrative 14,730 13,046 14,574 11,254 6,751
Research and development 1,724 1,562 2,358 1,472 957
Provision for doubtful accounts (200) 812 2,455 - -
----------- ----------- ----------- ----------- -----------
Income (loss) from operations 2,166 472 (10,247) 3,331 1,439
Interest income (143) (185) (247) (347) -
Interest expense 90 39 117 156 379
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 2,219 618 (10,117) 3,522 1,060
Income taxes 21 - (898) 898 -
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 2,198 $ 618 $ (9,219) $ 2,624 $ 1,060
=========== =========== =========== =========== ===========
Net income (loss) per share:
Basic $ 0.24 $ 0.07 $ (1.06) $ 0.35 $ 0.26
=========== =========== =========== =========== ===========
Diluted $ 0.23 $ 0.07 $ (1.06) $ 0.32 $ 0.18
=========== =========== =========== =========== ===========
Number of shares used in computing
net income (loss) per share
Basic 8,994 8,838 8,708 7,460 3,472
=========== =========== =========== =========== ===========
Diluted 9,587 8,931 8,708 8,152 5,829
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 4,386 $ 3,424 $ 2,956 $ 7,920 $ 369
Working capital 13,184 7,959 5,978 17,864 1,897
Total assets 22,785 18,699 24,593 33,518 14,298
Total liabilities 5,866 5,220 11,808 11,809 12,187
Mandatorily redeemable preferred stock - - - - 2,262
Stockholders' equity (deficit) 16,919 13,479 12,785 21,709 (150)
</TABLE>
-12-
<PAGE> 13
SELECTED QUARTERLY INFORMATION
The following table presents certain unaudited statement of operations
data for each quarter of 2000 and 1999. These data have been derived from the
Company's unaudited financial statements and have been prepared on the same
basis as the Company's audited financial statements, which appear in this Annual
Report on Form 10-K. In the opinion of the Company's management, these data
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such data. Such quarterly results are not
necessarily indicative of future results of operations. This information is
qualified by reference to, and should be read in conjunction with, the Company's
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.
<TABLE>
<CAPTION>
FISCAL THREE MONTHS ENDED
----------------------------------------------------------------------------------
2000 1999
--------------------------------------- ---------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1999 1999 2000 2000 1998 1998 1999 1999
--------- --------- -------- -------- -------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue $ 8,179 $ 7,975 $ 8,073 $ 9,539 $ 6,723 $ 7,528 $ 7,254 $ 8,152
Cost of revenue 3,889 3,381 3,213 4,863 3,083 4,276 3,082 3,324
--------- --------- -------- -------- -------- --------- --------- ---------
Gross profit 4,290 4,594 4,860 4,676 3,640 3,252 4,172 4,828
Selling, general and
administrative 3,386 3,681 3,640 4,023 3,175 2,591 3,481 3,799
Research and development 329 380 601 414 360 225 429 548
Provision for doubtful
accounts 25 (193) (67) 35 55 394 305 58
--------- --------- -------- -------- -------- --------- --------- ---------
Income (loss) from 550 726 686 204 50 42 (43) 423
operations
Interest income (24) (20) (45) (54) (64) (50) (39) (35)
Interest expense 4 21 36 29 25 14 3 -
--------- --------- -------- -------- -------- --------- --------- ---------
Income (loss) before
income taxes 570 725 695 229 89 78 (7) 458
Income taxes 28 53 (10) (50) - - - -
--------- --------- -------- -------- -------- --------- --------- ---------
Net income (loss) $ 542 $ 672 $ 705 $ 279 $ 89 $ 78 $ (7) $ 458
========= ========= ======== ======== ======== ========= ========= =========
Net income (loss) per share:
Basic $ 0.06 $ 0.07 $ 0.08 $ 0.03 $ 0.01 $ 0.01 $ (0.00) $ 0.05
========= ========= ======== ======== ======== ========= ========= =========
Diluted $ 0.06 $ 0.07 $ 0.07 $ 0.03 $ 0.01 $ 0.01 $ (0.00) $ 0.05
========= ========= ======== ======== ======== ========= ========= =========
</TABLE>
The Company's quarterly operating results have in the past and will in
the future vary significantly as a result of the timing of contract execution,
orders for products, and completion and delivery of significant product orders.
Large orders typically are preceded by long sales cycles and, accordingly, the
timing of such an order has been and will continue to be difficult to predict.
Certain orders are for products that require additional tailoring to customer
requirements and, accordingly, vary in timing of delivery. The failure to
obtain, or delays in the delivery of, one or more large orders, for any reason,
could have a material adverse effect on the Company's results of operations and
financial condition. The Company's results also vary based on the type and
quantity of products shipped, the timing of product shipments, the relative
revenue mix in a given period and the resulting margins. The variations may be
material.
The timing of large orders depends on a variety of factors affecting the
capital spending decisions of the Company's customers, which in turn, can affect
the Company's quarterly operating results. These factors include changes in
governmental regulation, changes in the customers' competitive environment,
pricing policies by the Company or its competitors, personnel changes, demand
for the Company's products, the number, timing and significance of new product
and product enhancement announcements by the Company and its competitors, the
ability
-13-
<PAGE> 14
of the Company to develop, introduce and market new and enhanced versions of its
products on a timely basis, and the mix of direct and indirect sales and general
economic factors.
The Company's sales cycle, from initial contact to contract execution,
order and delivery, also varies substantially from customer to customer and from
project to project. The purchase of the Company's product based solutions
generally involves a significant commitment of customer capital and management
time. The sales cycle associated with the purchases of the Company's product
based solutions is subject to a number of additional significant risks,
including customers' budgetary constraints and internal acceptance reviews, over
which the Company has little or no control. The delivery cycle varies depending
on the extent to which the order requires tailoring to a customer's requirements
and the extent to which such requirements are fixed in advance or developed over
time.
The Company's expense levels are based, in part, on its expectations as
to future revenue levels. If revenue levels are below expectations, operating
results will be materially adversely affected.
Based upon all of the foregoing, the Company believes that quarterly
revenue and operating results are likely to continue to vary significantly in
the future and that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. Further, it is likely that in some future quarter the
Company's revenue or operating results will be below the expectation of public
market analysts and investors. In such event, the price of the Common Stock
could be materially adversely affected.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
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
its 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 derives revenues from software license fees, services, and
hardware sales. The Company's software licenses to end-users generally provide
for an initial license fee to use the product in perpetuity. Under certain
contracts, the Company licenses its software to resellers for subsequent
modification and resale. Revenue for software licenses is generally recognized
at the time of delivery, provided that the Company has no remaining service
obligations, collectibilty is considered probable and the fees are fixed and
determinable.
In connection with the licensing of its software, the Company is
frequently engaged to provide custom product development and implementation
services. In situations where such services include significant modification or
customization of the software or are otherwise essential to the functionality of
the software, revenues relating to the software license and services are
aggregated and the combined revenues are recognized using the
percentage-of-completion method. Revenue earned using the
percentage-of-completion method is based on the estimated stage of completion of
individual contracts determined on a cost or level of efforts basis.
-14-
<PAGE> 15
Revenue from renewed post contract customer support and maintenance
agreements is recognized ratably over the appropriate term, generally one year.
Revenue related to professional services is recognized as services are performed
or on the basis of percentage-of-completion. Revenue from hardware sales is
recognized upon delivery.
The Company's product mix has changed over the past several years with a
greater emphasis on software based solutions and related services. Sales of
software and services typically generate a higher gross margin than sales of
hardware.
The Company defines backlog as signed contracts or purchase orders for
delivery of hardware and software products and services generally within the
next year. Backlog at June 30, 2000, 1999 and 1998 was approximately $8.9
million, $7.3 million and $11.2 million, respectively. Backlog, as defined, does
not include contracts for hardware and software products that require the
further issuance of purchase orders.
The Company's revenue is typically concentrated among certain customers.
One customer, Winstar, comprised approximately 11% of total revenues in 2000.
Substantially all of the Company's revenue is derived from
dollar-denominated sales. In 2000, 71% of total revenue was generated from sales
in the United States. The Company also derived approximately 15% of its sales in
Canada and Mexico. The Company's customers are usually contractually obligated
to pay for product in U.S. dollars. The Company has operations in Canada but
otherwise does not have significant foreign operations. All products are shipped
from the United States or Canada pursuant to terms of orders issued by
customers.
The Company has experienced more favorable cash collections due to
improved credit practices in 2000 and 1999 compared to 1998. For 2000, days
sales outstanding [365/(annual sales/average of net accounts receivable at year
end)] was 99 days compared to 102 days in 1999 and 212 days in 1998.
The Company's cost of revenue consists of the cost of product
engineering and production, cost of customer support personnel, the costs of
materials purchased by the Company for incorporation into its products,
amortization of capitalized software development costs, warranty costs, and
inventory obsolescence. The expenses for services provided by certain alliance
partners in connection with the installation and integration of the Company's
products can also be included.
Selling, general and administrative expenses consist of costs to support
the Company's sales and administrative functions. Included within these costs
are salaries, bonuses, sales commissions, benefits, travel expenses, and general
office administrative expenses (rent and occupancy, telephone and other office
supply costs) of the Company. It also includes promotional costs, recruitment
expenses, professional fees, outside services, and depreciation and
amortization.
Research and development expenses consist of personnel costs related to
the design and development of the Company's products. These costs are expensed
as incurred. However, computer software development costs incurred after the
technological feasibility of a product is established and until the product is
available for release to customers may be capitalized. Capitalized software and
purchased technology costs are amortized on a product by product basis based on
the greater of the ratio of current sales to estimated total future sales or a
straight-line basis over the remaining estimated economic life of the product
(no greater than three years) including the current year. In fiscal year 2000,
the Company did not capitalize new software or purchased technology costs.
YEARS ENDED JUNE 30, 2000 AND 1999
Revenues. Total revenue increased 14%, or $4.1 million, from $29.7
million in 1999 to $33.8 million in 2000. The increase of $4.1 million was
principally due to an increase in sales of the Company's software based
solutions. Revenue from software solutions increased $3.4 million, or 43% to
$11.3 million in 2000, from $7.9 million in 1999. Services revenue increased
$1.4 million, or 12% to $12.8 million in 2000, from $11.4 million in 1999. These
increases were offset by a decrease in hardware sales of approximately $0.7
million, from $10.4 million in 1999 to $9.7 million in 2000.
-15-
<PAGE> 16
The increase in software sales is primarily due to an increase in sales
of the Company's Convergent Mediation(TM) data warehousing and business support
solution software to Next-Generation Network operators. The increase in service
revenue is primarily a result of increases in consulting and customization
related to software and development agreements, which was partially offset by a
decrease in other services to a single customer in 2000.
Revenue from sales to Next-Generation Network operators increased 46%,
or $5.8 million, from $12.6 million in 1999 to $18.4 million in 2000, and
represented 54% of total revenue in 2000 compared to 44% of total revenue in
1999. The increase in sales to Next-Generation Network operators is primarily
due to an increase in sales of the Company's Convergent Mediation(TM) data
warehousing and business support solution software and services. Revenues from
sales to enterprises decreased 11% to $6.4 million in 2000 and represented 19%
of total revenue compared to 24% of total revenue in 1999. The decrease in sales
to enterprises is primarily due to a decrease in sales through alliance
partners. Revenue from sales to traditional carriers decreased 8% to $9.0
million in 2000 and represented 27% of total revenue compared to 32% of total
revenue in 1999. The decrease in sales to traditional carriers is primarily due
to a decrease in proprietary hardware sales, which was partially offset by an
increase in software sales.
Gross Margins for 2000, were 55% compared to 54% for 1999. The modest
improvement in the gross margin is primarily due to a change in the mix of
revenue as software solutions and services increased relative to lower margin
hardware product sales. Sales of software and services typically generate a
higher gross margin than sales of hardware.
Selling, General and Administrative (SG & A) expenses for 2000 were
$14.7 million compared to $13.0 million in 1999, which represented 44% of
revenue in 2000 and 1999. The increase in SG & A is primarily due to higher
staffing levels, higher compensation and associated benefits, and recruiting
costs. Higher staffing levels resulted from the need to support new business
developments. These increases were partially offset by lower professional fees.
Research and Development expenses for 2000 were $1.7 million compared to
$1.6 million in 1999. The modest increase of $0.1 million is primarily due to
the Company's continued commitment to a high-level research and development
strategy. The Company initiated projects with new customers and strategic
partners to develop next generation technologies for telecommunications service
providers.
Provision for Doubtful Accounts. The Company recognized a net recovery
of $200,000, compared to a net expense of $812,000 in 1999. The net credit in
the provision for doubtful accounts is principally due to the successful
collection of accounts previously reserved or written off.
YEARS ENDED JUNE 30, 1999 AND 1998
Revenues. Total revenue increased 32% from $22.5 million in 1998 to
$29.7 million in 1999. The increase of $7.2 million was principally due to an
increase in new and follow-on sales of products and services to U.S.
Next-Generation Network operators. Additionally, the Company experienced greater
sales of hardware and services relative to software sales.
Revenue from sales to Next-Generation Network operators increased 116%
or $7.0 million in 1999, an amount nearly equal to the total increase in
revenue, and represented 44% of total revenue compared to 27% of total revenue
in 1998. This increase is primarily a result of new and follow-on sales of
services. Revenues from sales to enterprises increased 46% or $2.3 million in
1999 and represented 24% of total revenue compared to 22% of total revenue in
1998. This increase reflects stronger demand from the U.S. government, resulting
in part from the reinstatement of U.S. Air Force orders, which had been
suspended in 1998. Revenue from sales to traditional carriers decreased 18% or
$2.1 million in 1999 and represented 32% of total revenue compared to 51% of
total revenue in 1998.
-16-
<PAGE> 17
During 1999, the Company experienced a continuation of a trend for
customers, especially Next-Generation Network operators, to seek a higher level
of involvement by the Company in their business operations, including more
systems integration work, than previously experienced.
Gross Margins for 1999, were 54% compared to 41% for 1998. The
improvement in the gross margin is primarily due to a change in the mix of
revenue as services increased in significance relative to lower margin hardware
product sales.
Selling, General and Administrative (SG & A) expenses for 1999 were
$13.0 million compared to $14.6 million in 1998 (which represented 44% and 65%
of revenue in 1999 and 1998, respectively). The decrease in SG & A is primarily
attributable to a decrease in employment costs resulting from staff reductions
and other cost containment initiatives implemented throughout the year. The
decrease was partially offset by an increase in professional service fees.
Research and Development expenses for 1999 were $1.6 million (5% of
revenue) compared to $2.4 million (10% of revenue) in 1998. The decrease of $0.8
million is primarily attributable to a high level of R & D personnel working on
revenue producing projects and a greater quantity of customer funded research
and development projects.
Provision for Doubtful Accounts. The Company increased its allowance for
doubtful accounts receivable by $0.8 million, wrote off $2.8 million in
uncollectible accounts and reported recoveries of $0.4 million in fiscal 1999.
In fiscal 1998, the allowance for doubtful accounts was increased by $2.5
million and there were no write-offs or recoveries.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had $4.4 million of cash and cash
equivalents, compared to $3.4 million at June 30, 1999. Operating activities of
the Company used $0.4 million for the year ended June 30, 2000 primarily as a
result of an increase in accounts receivable. The change of cash flow from
accounts receivable is primarily a result of the year end accounts receivable
balance representing the completion of a significant amount of work on contracts
near the end of the fiscal year, with significant billings in the fourth quarter
of 2000. During the same period in 1999, operating activities provided the
Company with $2.7 million. Net income, non-cash depreciation and amortization, a
decrease in accounts receivables and inventories, offset by a decrease in
accrued expenses and deferred revenue, were the primary drivers of cash provided
by operations in 1999.
The Company invested in property and equipment of $0.5 million in 2000
consisting primarily of computer equipment purchases. In the same period of the
prior fiscal year, the Company made investments of $0.6 million in property and
equipment and $0.6 million in capitalized software.
To finance operating and investment activities for 2000, the Company
received advances of $1.7 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 Company
received $1.2 million from employee stock option exercises and employee stock
purchases. These increases were offset by debt payments of $1.5 million. During
1999, the Company paid down debt of $1.0 million.
Accounts receivable, net of allowances for doubtful accounts, increased
to $11.8 million at June 30, 2000 from $6.5 million at June 30, 1999. Accounts
receivable include billed accounts, unbilled accounts and an allowance for
doubtful accounts. Billed accounts receivable increased to $8.8 million at June
30, 2000 from $4.4 million at June 30, 1999. The increase is primarily
attributable to the completion of a significant amount of work on contracts,
which were billed in the fourth quarter of 2000. Unbilled accounts receivable
increased to $3.5 million at June 30, 2000 from $3.1 million at June 30, 1999.
These receivables represent contractual payment terms, which may not be billed
for up to twelve months. During 2000, the Company reduced its allowance for
doubtful accounts by $.4 million. The decrease in the allowance is principally
due to successful collection of accounts previously reserved or written off.
-17-
<PAGE> 18
Gross inventories decreased to $2.1 million at June 30, 2000 from $2.4
million at June 30, 1999. The decrease of $0.3 million was primarily due to
several large shipments made in June 2000. In addition, the Company wrote off
$0.3 million in obsolete inventory in 2000, compared to a write off of $0.2
million in 1999.
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, and 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. At June 30, 2000, there were no outstanding borrowings
under this agreement.
In September 1999, the Company obtained 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. At June 30, 2000,
outstanding borrowings aggregated approximately $638,000.
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. 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 $79,000 at June 30, 2000.
During the third quarter of fiscal 2000, the Company obtained 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 June 30, 2000, there were no
borrowings under this agreement
The Company believes that existing cash balances, cash flows from
operations and the availability of credit under its credit facilities 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.
-18-
<PAGE> 19
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, in addition to those set forth in "Selected Quarterly Financial Data",
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.
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 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 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 46% of the Company's gross trade
receivable balances at June 30, 2000. To reduce credit risk, the Company
conducts ongoing evaluations of its customers and monitors their payment
patterns. The Company maintains accounts receivable allowances to provide for
potential credit 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 $9.8 million, or 29% of its total
revenues, from customers outside of the United States in 2000. The Company
anticipates that a significant amount of future revenues may be derived from
sales
-19-
<PAGE> 20
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.
-20-
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements, together with the
independent accountants' reports thereon, appear at pages F-1
through F-19 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None for fiscal year ended June 30, 2000. Previously reported
with respect to fiscal year ended June 30, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated by
reference to Proxy Statement for the 2000 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by
reference to Proxy Statement for the 2000 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by
reference to Proxy Statement for the 2000 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by
reference to Proxy Statement for the 2000 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this report.
-21-
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) INDEX TO FINANCIAL STATEMENTS
The following Financial Statements of the Registrant are filed as part
of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors......................................................... F-2
Report of Independent Accountants...................................................... F-3
Balance Sheets as of June 30, 2000 and 1999............................................ F-4
Statements of Operations for the years ended June 30, 2000, 1999
and 1998....................................................................... F-5
Statements of Stockholders' Equity for the years
ended June 30, 2000, 1999 and 1998............................................. F-6
Statements of Cash Flows for the years
ended June 30, 2000, 1999 and 1998............................................. F-7
Notes to Financial Statements.......................................................... F-8
</TABLE>
<TABLE>
<CAPTION>
(a)(2) FINANCIAL STATEMENT SCHEDULES
Except for the schedule listed below, all other schedules are omitted because they are not applicable
or the required information is shown in the financial statements or notes thereto.
<S> <C>
Schedule II - Valuation and Qualifying Accounts S-1
(a)(3) EXHIBITS
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
3.2 (A) Articles of Amendment and Restatement dated November 18, 1991.
3.3 (A) Articles of Amendment dated August 6, 1996.
3.5 (A) Form of Articles of Amendment and Restatement of the Company.
3.6 (A) By-laws of the Company as amended to date.
4.1 (A) Form of Specimen of Common Stock Certificate.
10.13 *(B) Form of Non-Qualified Stock Option Grant Agreement (certain executive officers -
fiscal 1997)
10.14 *(B) Form of Non-Qualified Stock Option Grant Agreement (certain executive officers -
fiscal 1997)
10.15 *(B) Executive Bonus Plan
10.16 (B) Lease Between Principal Mutual Life Insurance Company and the Company as Tenant
dated August 6, 1996
10.22 *(C) Amended and Restated Omnibus Stock Plan
10.23 *(C) Amended and Restated Omnibus Stock Plan for Directors
10.24 *(D) Employment Agreement dated as of October 1, 1998 between the Company and T.
</TABLE>
-22-
<PAGE> 23
<TABLE>
<S> <C>
Russotto
10.25 *(D) Non-Qualified Stock Option Grant Agreement dated March 23, 1999
between the Company and T. Russotto.
10.26 *(D) Incentive Stock Option Grant Agreement dated March 4, 1999 between
the Company and J. Eckler.
10.27 *(E) Employment Agreement dated as of October 7, 1999 between the Company
and J. Eckler
10.28 *(F) Amended and Restated Omnibus Stock Plan
10.29 *(H) Amended and Restated Omnibus Stock Plan for Directors
10.30 *(G) Amendment to Employment Agreement dated as of March 31, 2000 between
the Company and J. Eckler
10.31 *(H) Employment Agreement dated as of September 14, 1999 between the
Company and G. Picasso
10.32 *(H) Non-Qualified Stock Option Grant Agreement dated September 20, 1999
between the Company and G. Picasso
10.33 *(H) Employment Agreement dated as of October 1, 1999 between the Company
and S. Joseph Dorr
10.34 *(H) Non-Qualified Stock Option Grant Agreement dated August 24, 1999
between the Company and S. Joseph Dorr
23 (H) Consent of Ernst & Young LLP, independent auditors
23.1 (H) Consent of PricewaterhouseCoopers LLP, independent accountants
27. (H) Financial Data Schedule
--------------- ----- -----------------------------------------------------------------------
(A) Incorporated by reference to the identically
numbered exhibit filed as an exhibit to the
Company's Registration Statement on Form S-1, File
No. 333-25439
(B) Incorporated by reference to the identically
numbered exhibit filed as an exhibit to the
Company's Form 10-K, filed October 1, 1997.
(C) Incorporated by reference to the Company's Proxy
Statement, dated October 21, 1999.
(D) Incorporated by reference to the identically
numbered exhibit filed as an exhibit to the
Company's Form 10-K, filed September 28, 1999.
(E) Incorporated by reference to the identically
numbered exhibit filed as an exhibit to the
Company's Form 10-Q, filed November 15, 1999
(F) Incorporated by reference to the Company's Proxy
Statement, dated October 18, 1999.
(G) Incorporated by reference to exhibit 10.3 filed as
an exhibit to the Company's Form 10-Q, filed May
2, 2000.
(H) Filed herewith
* Management contract or compensatory plan or
amendment required to be filed as an exhibit.
</TABLE>
(b) REPORTS ON FORM 8-K and 8-K/A
None.
-23-
<PAGE> 24
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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
By: /s/George T. Jimenez
--------------------------------
George T. Jimenez
Chief Executive Officer
Date: September 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/George T. Jimenez Chief Executive Officer September 28, 2000
-------------------- and Chairman of the Board
(George T. Jimenez)
/s/James K. Eckler Executive Vice President of Finance and September 28, 2000
------------------ Administration
(James K. Eckler) (Principal Financial Officer)
/s/Kelly J. Tura Controller September 28, 2000
---------------- (Principal Accounting Officer)
(Kelly J. Tura)
/s/Paul G. Casner, Jr. Director September 28, 2000
----------------------
(Paul G. Casner, Jr.)
/s/Gilbert A. Wetzel Director September 28, 2000
--------------------
(Gilbert A. Wetzel)
/s/William R. Newlin Director September 28, 2000
-------------------
(William R. Newlin)
/s/Harry M. Linowes Director September 28, 2000
-------------------
(Harry M. Linowes)
</TABLE>
-24-
<PAGE> 25
ACE*COMM CORPORATION
INDEX TO FINANCIAL STATEMENTS
The following Financial Statements of the Registrant are filed as part
of this report:
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors.....................................................F-2
Report of Independent Accountants..................................................F-3
Balance Sheets as of June 30, 2000 and 1999........................................F-4
Statements of Operations for the years ended June 30,
2000, 1999 and 1998........................................................F-5
Statements of Stockholders' Equity for the years
ended June 30, 2000, 1999 and 1998.........................................F-6
Statements of Cash Flows for the years ended June 30,
2000, 1999 and 1998........................................................F-7
Notes to Financial Statements......................................................F-8
</TABLE>
F-1
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of ACE*COMM Corporation
We have audited the accompanying balance sheets of ACE*COMM Corporation as of
June 30, 2000 and 1999, and the related statements of operations, stockholders'
equity, and cash flows for the years then ended. Our audits also included the
financial statement schedule listed in the index at Item 14(a), These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform our
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ACE*COMM Corporation at June
30, 2000 and 1999, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
McLean, VA.
August 16, 2000
F-2
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ACE*COMM Corporation
In our opinion, the accompanying statements of operations, stockholders'
equity and cash flows for the year ended June 30, 1998 present fairly, in all
material respects, the results of operations and cash flows of ACE*COMM
Corporation for the year ended June 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
financial statements of ACE*COMM Corporation for any period subsequent to June
30, 1998.
PricewaterhouseCoopers LLP
Washington, D.C.
September 29, 1998
F-3
<PAGE> 28
ACE*COMM CORPORATION
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
2000 1999
----------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,386 $ 3,424
Accounts receivable, net 11,818 6,547
Inventories, net 1,869 2,152
Notes receivable - 516
Prepaid expenses and other 531 466
----------- ------------
Total current assets 18,604 13,105
Property and equipment, net 3,190 3,779
Capitalized software development costs, net 738 1,747
Other assets 253 68
----------- ------------
Total assets $ 22,785 $ 18,699
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings $ 280 $ 47
Accounts payable 1,538 1,517
Accrued expenses 506 797
Accrued compensation 2,267 1,621
Accrued contract costs 59 718
Deferred revenue 770 446
----------- ------------
Total current liabilities 5,420 5,146
Noncurrent borrowings 446 74
----------- ------------
Total liabilities 5,866 5,220
----------- ------------
Commitments and contingencies ( Note 12 )
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued and outstanding - -
Common stock, $.01 par value, 45,000,000 shares
authorized, 9,180,638 and 8,877,628 shares
issued and outstanding 92 89
Additional paid-in capital 21,136 19,897
Accumulated deficit (4,309) (6,507)
----------- ------------
Total stockholders' equity 16,919 13,479
----------- ------------
Total liabilities and stockholders' equity $ 22,785 $ 18,699
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 29
ACE*COMM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------
2000 1999 1998
---------- ---------- -----------
<S> <C> <C> <C>
Revenue $ 33,766 $ 29,657 $ 22,465
Cost of revenue 15,346 13,765 13,325
---------- ---------- -----------
Gross profit 18,420 15,892 9,140
Selling, general and administrative expense 14,730 13,046 14,574
Research and development expense 1,724 1,562 2,358
Provision for doubtful accounts (200) 812 2,455
---------- ---------- -----------
Income (loss) from operations 2,166 472 (10,247)
Interest income (143) (185) (247)
Interest expense 90 39 117
---------- ---------- -----------
Income (loss) before income taxes 2,219 618 (10,117)
Income tax provision (benefit) 21 - (898)
---------- ---------- -----------
Net income (loss) $ 2,198 $ 618 $ (9,219)
========== ========== ===========
Basic net income (loss) per share $ 0.24 $ 0.07 $ (1.06)
========== ========== ===========
Diluted net income (loss) per share $ 0.23 $ 0.07 $ (1.06)
========== ========== ===========
Shares used in computing net income (loss) per share:
Basic 8,994 8,838 8,708
========== ========== ===========
Diluted 9,587 8,931 8,708
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 30
ACE*COMM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ (ACCUMULATED
ADDITIONAL DEFICIT)
PAID-IN RETAINED
SHARES PAR VALUE CAPITAL EARNINGS TOTAL
----------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 8,550 $ 85 $ 19,530 $ 2,094 $ 21,709
Exercise of common stock options 258 3 313 - 316
Repurchase and retirement
of common stock (1) - (21) - (21)
Net loss for the year ended June 30, - - - (9,219) (9,219)
1998
----------- ----------- ----------- ------------- ----------
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 288 3 1,185 1,188
Employee stock purchase plan 16 54 54
Net income for the year ended June 30,
2000 2,198 2,198
----------- ----------- ----------- ------------- ----------
Balance, June 30, 2000 9,181 $ 92 $ 21,136 $ (4,309) $ 16,919
=========== =========== =========== ============= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 31
ACE*COMM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
2000 1999 1998
----------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,198 $ 618 $ (9,219)
Adjustments to reconcile net income (loss) to net cash
(used for) provided by operating activities:
Depreciation and amortization 2,128 2,243 1,563
Provision for doubtful accounts (200) 812 2,455
Changes in operating assets and liabilities:
Accounts receivable (5,071) 2,626 3,680
Inventories, net 283 1,080 (418)
Notes receivable 516 619 (1,135)
Prepaid expenses and other assets (250) 221 362
Accounts payable 21 (493) (725)
Accrued liabilities (304) (3,341) 351
Deferred income taxes - - (898)
Deferred revenue 324 (1,723) 1,659
----------- --------- ----------
Net cash (used for) provided by operating activities (355) 2,662 (2,325)
----------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (530) (624) (1,203)
Additions to capitalized software development costs - (615) (1,343)
----------- --------- ----------
Net cash used for investing activities (530) (1,239) (2,546)
----------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in line of credit - (100) 100
Other borrowings from Bank 2,142 - -
Payments on debt (1,481) (883) (450)
Principal payments under capital lease obligation (56) (48) (38)
Exercise of common stock options 1,188 65 316
Employee stock purchase plan 54 11 -
Repurchase and retirement of common stock - - (21)
----------- --------- ----------
Net cash provided by (used for) financing activities 1,847 (955) (93)
----------- --------- ----------
Net increase (decrease) in cash and cash equivalents 962 468 (4,964)
Cash and cash equivalents at beginning of year 3,424 2,956 7,920
----------- --------- ----------
Cash and cash equivalents at end of year $ 4,386 $ 3,424 $ 2,956
=========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for :
Interest $ 90 $ 39 $ 114
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 32
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
ACE*COMM Corporation (the "Company"), incorporated in Maryland in 1983, delivers
product based solutions for Telecommunications and Internet service providers
worldwide. The Company develops technology and provides related services for
voice, conventional data networks and Internet protocol (IP) based networks. The
Company specializes in products and services that enable the capture,
management, enhancement and distribution of network data used to support the
business operations of service providers. These Operations Support System (OSS)
solutions are provided by the Company to a broad range of customers, delivering
both public and private communications services, and include wireless carriers,
incumbent and competitive local exchange carriers, national and international
long distance carriers, Internet services providers and enterprises.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Significant estimates inherent
in the preparation of the accompanying financial statements include:
management's forecasts of contract costs and progress towards completion, which
are used to determine revenue recognition under the percentage-of-completion
method, estimates of allowances for doubtful accounts receivable and inventory
obsolescence, tax valuation allowances, and estimates of the net realizable
value of capitalized software development costs.
REVENUE RECOGNITION
The Company derives revenues from software license fees, services, and hardware
sales. The Company's software licenses to end-users generally provide for an
initial license fee to use the product in perpetuity. Under certain contracts,
the Company licenses its software to resellers for subsequent modification and
resale. Revenue for software licenses is generally recognized at the time of
delivery, provided that the Company has no remaining service obligations,
collectiblity is considered probable and the fees are fixed and determinable.
In connection with the licensing of its software, the Company is frequently
engaged to provide custom product development and implementation services. In
situations where such services include significant modification or customization
of the software or are otherwise essential to the functionality of the software,
revenues relating to the software license and services are aggregated and the
combined revenues are recognized using the percentage-of-completion method.
Revenue earned using the percentage-of-completion method is based on the
estimated stage of completion of individual contracts determined on a cost or
level of efforts basis.
Revenue from support and maintenance services is recognized ratably over the
term of the related agreement, generally one year. Revenue related to
professional services is recognized as services are performed. Revenue from
hardware sales is recognized upon delivery.
In 1999, the Company adopted Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2"), as amended. SOP 97-2 provides guidance in recognizing
revenue on software transactions and did not significantly affect existing
revenue recognition policies.
F-8
<PAGE> 33
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Payments received for revenues not yet recognized are reflected as deferred
revenue in the accompanying balance sheets. Revenue recognized prior to the
scheduled billing date of an item is reflected as unbilled accounts receivable.
CASH EQUIVALENTS
The Company considers all investments with an original maturity of three months
or less on their acquisition date to be cash equivalents.
INVENTORIES
Inventories, which consist principally of purchased materials to be used in the
production of finished goods, are stated at the lower of cost, determined on the
first-in, first-out (FIFO) method, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets as
follows: equipment and vehicles - 7 years; computer equipment - 3 to 7 years.
Leasehold improvements are amortized on a straight-line method over the shorter
of the improvements' estimated useful lives or related remaining lease terms.
Maintenance and repair costs are charged to current earnings. Long-lived assets
held and used by the Company are reviewed for impairment whenever changes in
circumstances indicate the carrying value of an asset may not be recoverable.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company owns certain proprietary rights to computer software systems that
the Company has either developed or purchased and licensed to customers.
Purchased computer software and the related copyrights are capitalized at their
costs.
Research and development costs are expensed as incurred. However, computer
software development costs incurred after technological feasibility of a product
is established through the time when the product is available for release to
customers are capitalized. Capitalized software and purchased technology costs
are amortized on a product by product basis based on the greater of the ratio of
current sales to estimated total future sales or a straight-line basis over the
remaining estimated economic life of the product, not exceeding 3 years. The
Company periodically evaluates its capitalized software costs for recoverability
against anticipated future revenues, and writes down or writes off capitalized
software costs if recoverability is in question.
EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing net
income (loss) by the weighted average of common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Deferred income tax assets and
liabilities are determined based upon differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. A valuation allowance reduces deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
F-9
<PAGE> 34
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and accrued expenses approximate fair value because of the short
maturity of these items.
The carrying amounts of debt issued pursuant to the Company's bank credit
agreements approximate fair value because the interest rates on these
instruments change with market interest rates.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Billed $ 8,823 $ 4,355
Unbilled 3,464 3,059
Allowance for doubtful accounts (469) (867)
---------------- ----------------
$ 11,818 $ 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 $200,000, credited recoveries of $152,000 to
the allowance and wrote-off $350,000 in uncollected accounts for the year ended
June 30, 2000. The Company increased its provision for doubtful accounts by
$812,000, credited recoveries of $392,000 to the allowance and wrote-off
$2,802,000 for the year ended June 30, 1999. In fiscal 1998, the Company
increased its provision for doubtful accounts by $2,455,000 and there were no
write-offs or recoveries.
NOTE 4 - INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Inventories $ 2,056 $ 2,404
Allowance for obsolescence (187) (252)
---------------- ----------------
$ 1,869 $ 2,152
================ ================
</TABLE>
Inventory write-offs in fiscal years 2000, 1999 and 1998 were $304,000, $220,000
and $0, respectively.
F-10
<PAGE> 35
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Computer equipment $ 5,660 $ 5,172
Office equipment 840 833
Leasehold improvements 462 427
---------------- ----------------
6,962 6,432
Less accumulated depreciation and amortization (3,772) (2,653)
---------------- ----------------
$ 3,190 $ 3,779
================ ================
</TABLE>
Depreciation expense of property and equipment amounted to $1,119,000, $914,000
and $604,000 in 2000, 1999 and 1998, respectively. At June 30, 2000 and 1999,
leasehold improvements includes a capitalized lease in the amount of $246,000
and accumulated depreciation of $ 169,000 and $57,000, respectively.
NOTE 6 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Capitalized software development costs $ 7,897 $ 7,897
Less accumulated amortization (7,159) (6,150)
--------------- ---------------
$ 738 $ 1,747
=============== ===============
</TABLE>
Amortization expense of capitalized software amounted to $1,009,000, $1,329,000
and $959,000 in 2000, 1999 and 1998, respectively.
NOTE 7 - BORROWINGS
The Company's borrowings consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Capital lease obligation for the use of an office
telephone system, principal plus interest (from
10.03% to 13.75%), due in monthly installments
through November 2001. 88 121
Advances from equipment financing agreement with
Silicon Valley Bank, principal plus interest (from
9.28 to 9.98%) due in monthly installments through
June 2003. 638 -
--------------- ---------------
Total borrowings 726 121
Less current portion (280) (47)
--------------- ---------------
Noncurrent portion $ 446 $ 74
=============== ===============
</TABLE>
Annual maturities of noncurrent borrowings are $270,000 in 2002 and $176,000 in
2003.
F-11
<PAGE> 36
NOTE 7 - BORROWINGS, CONTINUED
LINES OF CREDIT
During the second quarter of fiscal 1999, the Company obtained an Accounts
Receivable Purchase Agreement ("Agreement") from Silicon Valley Bank ("the
Bank"). The Agreement enables the Company to borrow up to $4.0 million through
the Bank's discretionary purchases of accounts receivable. The Bank will pay up
to 80% of the face amount of each receivable, with the balance of such face
amount (less 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 substantially 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 .625% of the face amount of each purchased receivable, respectively.
In August 1999, the Company and the Bank modified the Agreement to reduce the
rate of interest charged from prime plus 4% per annum to prime. At June 30,
2000, there were no borrowings made under this amended agreement.
During the first quarter of fiscal 2000, the Company obtained 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 June 30, 2000 aggregated approximately $638,000.
During the third quarter of fiscal 2000, the Company obtained 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 June 30, 2000, there were no
borrowings under this agreement.
F-12
<PAGE> 37
NOTE 8 - RETIREMENT PLAN
The Company has a 401(k) plan, under which to be eligible, employees must have
completed six months of service, be at least 21 years of age and be credited
with 1,000 hours of service. The Company may make contributions to the plan at
its discretion. Contributions expensed by the Company during 2000, 1999, and
1998 were approximately $111,000, $110,000 and $0, respectively.
NOTE 9 - INCOME TAXES
The primary components of the Company's net deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Tax assets:
Allowance for doubtful accounts $ 178 $ 329
Inventories 237 365
Accrued expenses 501 483
Net operating loss carryforwards 7,513 7,895
Tax credit carryforwards 266 266
Other 33 83
------------- -------------
Gross deferred tax assets 8,728 9,421
------------- -------------
Tax liabilities:
Income on contracts (1,315) (1,161)
Software costs (280) (663)
Depreciation (347) (401)
------------- -------------
Gross deferred tax
liabilities (1,942) (2,225)
------------- -------------
Net deferred tax asset 6,786 7,196
Valuation allowance (6,786) (7,196)
------------- -------------
Net deferred tax $ - $ -
============= =============
</TABLE>
At June 30, 2000, the Company had net operating loss carryforwards available to
offset future taxable income of approximately $19.8 million, which expire from
2007 through 2020. At June 30, 2000, the Company also had general business
credit carryforward of approximately $250,000 available to reduce future tax
liabilities. These credits expire beginning in the year 2007. In addition, the
Company also had alternative minimum tax credits of approximately $14,000
available to offset future tax liabilities. These tax credits do not expire.
Realization of the net deferred tax asset is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Based on
historical net operating losses and no assurance that the Company will generate
any earnings or any specific level of earnings in future years, the Company
established a valuation allowance on the net deferred assets at June 30, 2000
and 1999. Approximately $5.2 and $4.7 million of the valuation allowance in 2000
and 1999, respectively, resulted from the tax benefit of non-qualified stock
options that have not been recognized for tax purposes. When the valuation
allowance is released, the tax benefit will be credited directly to equity.
F-13
<PAGE> 38
NOTE 9 - INCOME TAXES, CONTINUED
Significant components of the provision (benefit) for income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------
2000 1999 1998
------------- ------------- --------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State 21 - -
------------- ------------- --------------
Total current 21 - -
------------- ------------- --------------
Deferred
Federal - - (745)
State - - (153)
------------- ------------- --------------
Total deferred - - (898)
------------- ------------- --------------
Total $ 21 $ - $ (898)
============= ============= ==============
</TABLE>
In 2000, 1999, and 1998, the Company paid income taxes of $95,000, $0, and
$1,000, respectively.
The differences between the tax provision calculated at the statutory federal
income tax rate and the actual tax provision recorded for each year are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------
2000 1999 1998
------------- ------------- --------------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory
rate $ 849 $ 210 $ (1,963)
State income taxes net of Federal benefit 89 30 (229)
Nondeductible expenses 62 47 79
Foreign taxes 53 53 -
Other - - 390
Change in valuation allowance (1,032) (340) 825
------------- ------------- --------------
Actual (benefit) provision $ 21 $ - $ (898)
============= ============= ==============
</TABLE>
NOTE 10 - STOCKHOLDERS' EQUITY
Employee Stock Purchase Plan
In 1999, the Company adopted an Employee Stock Purchase Plan (the "Plan") to
provide a method whereby all employees have an opportunity to acquire a
proprietary interest in the Company through the purchase of shares of common
stock. The Plan is implemented through common stock offerings in consecutive
offering periods, each constituting a calendar quarter. The first offering
period commenced on January 1, 1999. The option price of the common stock,
purchased with payroll deductions made during an offering period, is the lower
of 85% of the closing price of the common stock on the first eligible trading
day of an offering period or 85% of the closing price of the common stock on the
last eligible day of an offering period. The maximum number of shares of common
stock, which may be issued under the Plan, is 240,000 shares. The Company issued
15,936 and 4,296 shares of common stock under the plan in 2000 and 1999,
respectively.
F-14
<PAGE> 39
NOTE 10 - STOCKHOLDERS' EQUITY, CONTINUED
Stock Options
AMENDED AND RESTATED OMNIBUS STOCK PLAN ("OMNIBUS PLAN")
In connection with the Shareholder approved Omnibus Plan, the Company has
reserved 4,200,000 shares of Common Stock to grant nonqualified and incentive
stock options to officers and employees. The exercise price of each option
granted under the Omnibus Plan is determined by the Compensation Committee, and
is limited to a minimum of the fair market value of the Company's Common Stock
on the date of grant. The Omnibus Plan also provides for the issuance of
restricted or unrestricted stock, stock appreciation rights and phantom stock
options. The Company may grant options under the Omnibus Plan until September
2009.
The terms of option grants and issuances of restricted stock, stock appreciation
rights and phantom stock options, including vesting and exerciseability, are
determined by the Compensation Committee. Options and phantom stock options
granted to date vest either immediately or over a period of one to eight years
from the date of grant, subject to accelerated vesting in certain events such as
a change of control, and expire upon the earlier of the employee's termination
or five or ten years from the date of grant. Certain options and phantom stock
options granted in 2000, 1999 and 1998 are further subject to accelerated
vesting based on achievement of certain pre-determined performance goals. Vested
options and phantom stock options become exercisable immediately upon vesting or
within three years from the date of grant. As of June 30, 2000, 1999 and 1998,
there were outstanding phantom stock options totaling 7,082, 10,082, and 8,082,
respectively, and no restricted stock or stock appreciation rights had been
granted. Compensation cost associated with the 2000, 1999, and 1998 phantom
stock option grants was immaterial.
In July 1998, the Company re-priced 122,984 options and phantom stock options
with original exercise and base unit prices of $12.00 to the $5.00 fair market
value on the date of re-pricing. During fiscal year 1998, the Company re-priced
80,000 options with an original exercise price of $17.75 to the $6.38 fair
market value on the date of re-pricing. No other terms of the options were
modified.
AMENDED AND RESTATED STOCK OPTION PLAN FOR DIRECTORS ("DIRECTORS' PLAN")
In connection with the Shareholder approved Directors' Plan, the Company has
reserved 200,000 shares of Common Stock to grant nonqualified stock options to
non-employee members of the Company's Board of Directors. The exercise price of
each option granted under the Directors' Plan is limited to a minimum of the
fair market value of the Company's Common Stock on the date of grant. The
Company may grant options under the Directors' Plan until July 2000.
Options granted to directors through June 30, 1997 vest 4,500 shares each year
from the date of grant. Options granted subsequent to June 30, 1997 vest 3,000
shares each year from the date of grant. Vested options become exercisable
immediately upon vesting. Options granted under the Directors' Plan generally
expire five years from date of grant.
F-15
<PAGE> 40
NOTE 10 - STOCKHOLDERS' EQUITY, CONTINUED
Information relating to all the plans is summarized as follows:
<TABLE>
<CAPTION>
OMNIBUS PLAN DIRECTORS' PLAN
-------------------------- ------------------------
WEIGHTED WEIGHTED
NUMBER AVG. SHARE NUMBER OF AVG. SHARE
OF SHARES PRICE SHARES PRICE
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding Options at June 30,
1997 965,678 $ 6.13 22,500 $ 7.00
Granted 689,883 7.67 9,000 17.50
Exercised (257,871) 1.22 - -
Expired (286,908) 10.48 - -
---------- ----------- ----------- -----------
Outstanding Options at June 30,
1998 1,110,782 7.10 31,500 10.00
Granted 795,259 3.47 15,000 4.39
Exercised (66,283) 0.97 - -
Expired (393,687) 8.07 - -
---------- ----------- ----------- -----------
Outstanding Options at June 30,
1999 1,446,071 5.12 46,500 8.19
Granted 765,685 4.49 52,000 9.75
Exercised (287,074) 4.14 - -
Expired (171,218) 4.93 - -
---------- ----------- ----------- -----------
Outstanding Options at June 30,
2000 1,753,464 $ 5.02 98,500 $ 9.01
========== =========== =========== ===========
Options exercisable at June 30,
1998 444,354 $ 6.18 18,000 $ 7.00
=========== ========== =========== ===========
Options exercisable at June 30,
1999 576,579 $ 6.35 25,500 $ 8.24
========= =========== =========== ===========
Options exercisable at June 30,
2000 522,814 $ 6.40 37,500 $ 8.20
========= =========== =========== ===========
Options available for granting 753,142 38,500
========= ===========
</TABLE>
The following table summarizes information about stock options outstanding at
June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- ------------------------------
Weighted-
Number Average Weighted- Number
Outstanding Remaining Average Exercisable Weighted-
Range of at June 30, Contractual Exercise at June 30, Average
Exercise Prices 2000 Life (yrs) Price 2000 Exercise Price
----------------- -------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 0.41 to $ 1.78 1,800 0.7 $ 0.64 1,800 $ 0.64
$ 1.79 to $ 3.55 336,361 8.3 $ 2.35 91,776 $ 2.42
$ 3.56 to $ 5.33 764,062 8.9 $ 4.15 74,695 $ 4.93
$ 5.34 to $ 7.10 591,294 5.7 $ 6.67 319,215 $ 6.77
$ 7.11 to $17.75 158,447 5.7 $ 11.31 72,828 $ 12.38
-------------- --------------
1,851,964 560,314
============== ==============
</TABLE>
F-16
<PAGE> 41
10 - STOCKHOLDERS' EQUITY, CONTINUED
FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company measures compensation expense for its stock option plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. The Company recorded no compensation
cost associated with stock options in 2000, 1999 and 1998.
For the purposes of the pro forma amounts shown below, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes model.
The weighted-average assumptions included in the Company's fair value
calculations are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Expected life (years) 3-8 3-8 3-8
Risk-free interest rate 5-6 % 5-6 % 5-6 %
Expected volatility 149 % 123 % 81 %
Dividend yield 0 % 0 % 0 %
</TABLE>
The weighted average fair value of stock options granted under the stock option
plans during 2000, 1999 and 1998 was $4.68, $2.91 and $5.48 respectively. If the
Company determined compensation costs for these plans based on the fair value of
stock options in accordance with Statement of Financial Accounting Standards No.
123 ("SFAS 123"), the Company's net income (loss) and earnings per share would
have been:
<TABLE>
<CAPTION>
(amounts in thousands except per
share amounts) 2000 1999 1998
-------------- ------------- -------------
<S> <C> <C> <C>
Pro-forma amounts
Net (loss) $ (235) $ (1,010) $ (9,893)
============== ============= =============
Basic (loss) per share $ (.03) $ (0.11) $ (1.14)
============== ============= =============
Diluted (loss) per share $ (.03) $ (0.11) $ (1.14)
============== ============= =============
</TABLE>
The SFAS 123 fair value method of accounting does not apply to options granted
prior to January 1, 1995 and, accordingly, the resulting pro forma compensation
cost may not be representative of that to be expected in the future.
F-17
<PAGE> 42
NOTE 11 - EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following is a reconciliation of the numerators and denominators of basic
net income (loss) per common share ("Basic EPS") and diluted net income (loss)
per common share ("Diluted EPS"):
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------
2000 1999 1998
---------- ----------- -----------
<S> <C> <C> <C>
BASIC EPS:
Income (numerator):
Net income (loss) available to common
shareholders $ 2,198 $ 618 $ (9,219)
========== =========== ===========
Shares (denominator):
Weighted average common shares 8,994 8,838 8,708
========== =========== ===========
Basic EPS $ 0.24 $ 0.07 $ (1.06)
========== =========== ===========
DILUTED EPS:
Income (numerator):
Net income (loss) available to common
stockholders $ 2,198 $ 618 $ (9,219)
========== =========== ===========
Shares (denominator):
Weighted average common shares 8,994 8,838 8,708
Stock options 593 93 -
---------- ----------- -----------
Total weighted shares and equivalents 9,587 8,931 8,708
========== =========== ===========
Diluted EPS $ 0.23 $ 0.07 $ (1.06)
========== =========== ===========
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company has a $350,000 letter of credit arrangement with the Bank which
guarantees the Company's performance to its landlord. The letter of credit is
secured by restricted cash equivalents maintained at the Bank; the requirement
decreases annually through 2003 to $100,000.
The Company leases office space under non-cancelable operating leases. Lease
terms range from two to seven years and include renewal options for additional
periods. Management expects that in the normal course of business, leases will
be renewed or replaced by other leases. Additionally, the Company leases
equipment under operating leases which, in the aggregate, are not significant.
F-18
<PAGE> 43
NOTE 12 - COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company is committed for the payment of minimum rentals under operating
lease agreements through the year 2005 in the following amounts (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
----------------------- -------------
<S> <C>
2001 $ 937
2002 925
2003 777
2004 317
2005 -
---------
$ 2,956
=========
</TABLE>
The total rental expense under operating leases was $956,000, $868,000 and
$813,000 for the years ended June 30, 2000, 1999 and 1998, respectively.
NOTE 13 - BUSINESS AND CREDIT CONCENTRATIONS
The Company sells its products worldwide from its headquarters in Gaithersburg,
Maryland. The following is a breakdown of the Company's revenue by geographic
area (in thousands):
<TABLE>
<CAPTION>
------------- ------------- -------------
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
U.S. $ 24,016 $ 17,519 $ 12,314
Canada and Mexico 5,089 1,670 2,557
Asia 2,063 7,971 5,178
Europe 687 999 858
South America 618 222 815
Africa and Middle East 1,293 1,276 743
------------- ------------- -------------
Total Revenue $ 33,766 $ 29,657 $ 22,465
============= ============= =============
</TABLE>
During the years ended June 30, 2000 and 1999, 11% and 10%, respectively, of the
Company's total revenues was attributed to one customer. Sales to three
customers representing a single end-user in Asia comprised approximately 14% and
9% of total revenue for 1999 and 1998, respectively. One other customer
accounted for approximately 12% of total revenue in fiscal year 1999. Sales to
an end-user in Mexico comprised approximately 7% of the Company's revenues in
1998.
In addition, five customers represented approximately 46% of the Company's gross
trade receivable balances at June 30, 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.
F-19
<PAGE> 44
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO RECOVERIES
BEGINNING COSTS AND OF PRIOR BALANCE AT
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS WRITE-OFFS END OF
PERIOD
<S> <C> <C> <C> <C> <C>
Year ended June 30, 2000:
Allowance for doubtful accounts $ 867,000 $ (200,000) $ 152,000 $ 350,000 $ 469,000
Reserve for obsolete inventory $ 251,810 $ 239,983 $ - $ 304,439 $ 187,354
Year ended June 30, 1999:
Allowance for doubtful accounts $ 2,465,000 $ 812,000 $ 392,000 $2,802,000 $ 867,000
Reserve for obsolete inventory $ 349,163 $ 122,647 $ - $ 220,000 $ 251,810
Year ended June 30, 1998:
Allowance for doubtful accounts $ 10,000 $ 2,455,000 $ - $ - $ 2,465,000
Reserve for obsolete inventory $ 15,000 $ 334,163 $ - $ - $ 349,163
</TABLE>
S-1
<PAGE> 45
INDEX TO EXHIBITS
<TABLE>
<S> <C>
10.29 *(H) Amended and Restated Omnibus Stock Plan for Directors
10.31 *(H) Employment Agreement dated as of September 14, 1999 between the Company and
G. Picasso
10.32 *(H) Non-Qualified Stock Option Grant Agreement dated September 20, 1999 between the
Company and G. Picasso
10.33 *(H) Employment Agreement dated as of October 1, 1999 between the Company and S.
Joseph Dorr
10.34 *(H) Non-Qualified Stock Option Grant Agreement dated August 24, 1999 between the
Company and S. Joseph Dorr
23 (H) Consent of Ernst & Young LLP, independent auditors
23.1 (H) Consent of PricewaterhouseCoopers LLP, independent accountants
27. (H) Financial Data Schedule
(H) Filed herewith
* Management contract or compensatory plan or amendment required to be filed as an
exhibit.
</TABLE>
X-1
