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DC01/0058526v2
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, 1997
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)
Maryland 52-1283030
(State or other jurisdiction of (I.R.S. Employer I.D.
incorporation or organization) No.)
704 Quince Orchard Road
Gaithersburg, Maryland 20878 20878
(Address of principal executive offices) (Zip Code)
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.
As of September 26, 1997, 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 $96,621,981
[ ] million (4,656,481([ ] shares of Common Stock at a
closing price on the NASDAQ National Market of $20.75[ ] on such
date). Outstanding as of September 26, 1997 were 8,641,505 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its annual
meeting to be held on November 19, 1997 are incorporated by reference in
Part III.
Exhibit Index located at page [ ].
ACE*COMM CORPORATION
TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS 3
Item 2. PROPERTIES 14
Item 3. LEGAL PROCEEDINGS 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 14
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 15
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED
STOCKHOLDER MATTERS 16
Item 6. SELECTED FINANCIAL DATA 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
19
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 47
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
48
Item 11. EXECUTIVE COMPENSATION 48
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 48
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
48
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 49
PART I
ITEM 1. BUSINESS
Background and Overview
ACE*COMM is a Maryland corporation incorporated in 1983.
The Company develops, markets and services Operations Support
System ("OSS") hardware and software solutions for networks
deployed by telecommunications service providers, such as post,
telephone and telegraph companies ("PTTs"), incumbent or
competitive local exchange carriers, national or international
long distance carriers and other public or private carriers. The
Company also sells solutions for service and network management
to large enterprises operating internal data and voice networks.
The Company's products perform such functions as billing data
collection, billing, network surveillance, alarm processing and
network traffic management for some of the largest carriers and
enterprises in the world.
The Company develops close, long-term relationships with
many of its customers, from the early stage of project
development through product installation and upgrading, to
implement solutions that can operate on a stand-alone basis and
be tailored to a customer's specific network. The Company has
developed, and continuously refines, its base of hardware and
software products, which can be tailored to meet the current and
evolving requirements of its customers. The Company works
closely with customers after initial implementation, to enable
customers to include new features, expand into additional markets
or operate with new network technologies and protocols. In
addition, the Company provides ongoing support, maintenance and
training related to the customer's system.
Strategy
The Company's objective is to be the market leader in the
markets in which it participates by providing advanced technology
products to a range of customers, including existing carriers,
new and emerging carriers, and large enterprises both directly
and through its strategic alliances. Using its technological
leadership the Company creates products that perform real-time
data collection, subscriber data warehousing and network data
management in support of communications networks. Maintaining
high quality is an additional important feature of the strategy,
including the registration of its processes and procedures under
the international quality standard ISO 9001.
Markets
In the past the Company's products have been sold primarily
in two markets, the carrier network market and the enterprise
network market. Carriers comprise companies such as the regional
Bell operating companies ("RBOCs"), PTTs, large independent phone
companies and large wireless companies. Enterprise network
customers comprise such companies as the Fortune 1000 businesses,
government agencies, colleges, armed forces installations, and
large medical complexes.
Over the past year new markets have developed for the
Company's products in the area of new and emerging carriers.
These markets include new wireless carriers, long distance
carriers, and competitive local exchange carriers (CLECs). Based
on the Company's knowledge and experience gained from
successfully marketing its products to the existing carrier
network and enterprise network markets, it is enhancing some of
its products and developing new products to compete in the new
and emerging carrier market.
Products, Services and Distribution
Traditional Carrier Network Products
The Company's traditional carrier network products have been
installed in over 800 end user sites in 37 countries. The
Company's traditional carrier network product customers accounted
for approximately 65.3% of the Company's total revenue in fiscal
1997. The Company's traditional carrier network product
customers in fiscal 1997 which contributed 10% or more of the
Company's revenue from such customers were Telefonos de Mexico,
S.A. de C.V. ("TELMEX") and Samsung Electronics, which
contributed 26.1% and 15.8%, respectively, of revenue from such
customers and 17.1% and 10.3%, respectively, of total Company
revenue.
The Company's traditional carrier network products consist
of software and hardware which is connected to existing network
infrastructures. These products meet the requirements of the
existing voice and data wireline businesses and the growing
markets of cable television, the Internet and wireless
businesses. The automation of data collection and distribution
from remote switches enables carriers to operate larger,
increasingly complex systems with more customer features, more
reliably, more cost effectively and with fewer personnel. The
Company's traditional carrier network products are designed to
facilitate more accurate and more frequent billing, thereby
reducing billing lag time and accounts receivable. They also
support carriers' ability to track calling patterns, manage
fraud, perform fault management, improve network performance, and
verify that calls are not needlessly routed through inefficient
or expensive paths. These products enable a carrier to increase
the size of its system and provide its end users with better
service, in remote and international locations. Following are
descriptions of the Company's principal traditional carrier
network products:
Data Collection
DCMS - DCMS, Distributed Call Measurement SystemO, is a hardware
and software based microprocessor controlled product which
collects call record data from telephone switches and
electronically transmits them to a central location, where
the data can be processed for such purposes as billing,
traffic analysis and fraud management. The DCMS eliminates
magnetic tape storage units and manual data collection,
reduces processing costs, and increases the accuracy of
billing data which, in turn, increases revenue. The most
recent version of DCMS, NEDSO, Network Element Data Server,
can provide the data on a real-time basis. The Company also
offers the DCMS*PLUSO, a version of DCMS which is based on a
new technology platform and is targeted at carriers in third
world and
Billing Reports and Access to Customer Data
emerging countries. These products can be adapted to support
virtually all wireline and wireless telephone switches.
UPS-32 - UPS-32, Universal Polling System-32O, is a mini-
computer, server or PC-based product, programmed to control the
collection and transmission of call detail records transmitted by
multiple DCMS units and similar equipment of other vendors. UPS-
32 collects call data from dispersed switch sites, processes and
formats the data on a customer-defined schedule, and distributes
the data to the customer's billing center. The most recent
version of UPS-32, CANSO, Central Access Network Server, collects
and distributes data in real-time.
TREX*COMMO - TREX*COMM is a software-based product designed
for local exchange carriers who use network switches to provide
customer premises voice and data communication services for
business customers, under a service concept called CENTREX.
TREX*COMM automates the transfer of CENTREX call usage data from
remote switch sites to customers' equipment and sorts records by
customer codes, group codes, or other identifying data fields.
Using standard modem protocols, customers can dial the TREX*COMM
system to retrieve their data. Running on UNIX platforms and used
in conjunction with a data collection product, such as the DCMS,
TREX*COMM makes network information available to CENTREX
subscribers to enable them to manage and control data.
Surveillance and Alarm (traffic reporting)
UTS-32 - UTS-32, Universal Traffic System-32O, uses
information gathered by DCMS products or other providers' data
collection products to provide reports on system traffic and
usage on a periodic basis. UTS-32 produces hourly group traffic
reports, multi-day study reports, multi-day load balancing
reports, multi-day group traffic analyses, weekly historical
usage reports, yearly trunk forecasting reports, and other
engineering information used to monitor and maximize the
efficiency of the system and enable the carrier to minimize down-
time.
N*VISIONO - N*VISION, a successor to the Company's RTMS,
Real Time Management System, a system originally developed for
Teleglobe, monitors network data in real-time and provides, from
a single data base, information for billing, fraud detection,
subscriber management and network management. The heart of
N*VISION is a 600 gigabyte data warehouse. N*VISION uses NEDS to
capture call records in real-time from remote switches. N*VISION
processing software presents the data for analysis within seconds
of call completion.
ANMS - ANMS, AMAT Network Management SystemO, monitors the
elements of a billing network. ANMS is a mini-computer based
product that collects and reports on alarms sent by DCMSs, UPS-
32s and other network elements in the billing system to assure
that no billing data is lost. In addition, ANMS serves as a user
interface and collects system logs from the network elements. The
Company presently is adding standard network management protocols
to ANMS.
Enterprise Network Management Products
The Company's enterprise network management products have
been installed in over 120 end user sites in 10 countries. Such
products accounted for approximately 24.4% of the Company's total
revenue in fiscal 1997. The Company's enterprise network
management product customers in fiscal 1997 which contributed 10%
or more of the Company's revenue from such customers were ANSTEC
and GTE Government Systems, which contributed 28.2% and 18.7%,
respectively, of revenue from such customers and 6.9% and 4.6%,
respectively, of total Company revenue.
The Company's enterprise network management products meet
the requirements of network managers of large, growing and
increasingly complex integrated voice and data networks. These
products are designed to enable the managers to operate their
networks more effectively, to more accurately control costs, to
minimize network down time, and to implement other network
management features as their requirements grow and change.
Following are descriptions of the Company's principal enterprise
network management products.
NetPlus Voice and Data Network Management System- The
NetPlus family of network management products consists of five
systems designed to automate network operations and management
functions. These systems employ a client server architecture and
common database that permit them to operate either independently
or as an integrated whole. NetPlus products are scaleable,
providing flexibility to accommodate a broad range of network
sizes and multiple locations. The Company typically provides
NetPlus products as fully integrated hardware and software
configurations. These products are intended to manage private
voice and data networks for 1,000 to 50,000 users. These
products allow a network to automate tasks such as alarm
processing, connectivity tracking, automatic cable and channel
assignment, creation of subscriber and circuit records, inventory
control, traffic surveillance and management, work order and
trouble ticket processing, directory assistance and subscriber
billing.
WinSNMP - A set of SNMP utilities developed by the Company
that are sold to telecom equipment manufacturers. This product
is a highly integrated SNMP applications set that enables end-
users on Microsoft Windows platforms to execute SNMP operations
against their network devices, servers and managed desktops. The
set includes end-user kits for users, experts and the enterprise.
New and Emerging Carrier Products
The Company's new and emerging carrier network products have
been installed in over seven new and emerging carriers in the
U.S. in fiscal 1997. These customers accounted in the aggregate
for approximately 10.3% of the Company's total revenue in fiscal
1997.
In addition to marketing the products developed for the
traditional carriers, the Company is developing new products for
this market. The Company has enhanced its NetPlus product to
provide an integrated suite of applications for new and emerging
carriers. This new market segment requires
modular, scalable applications that can be implemented in a
few months. The Company's products provide most of the features
necessary for billing, customer care and OSSs. In addition to
the NetPlus products the Company has developed the following
products for the new and emerging carrier markets:
PRO*VISION - PRO*VISION is an integrated suite of
applications that addresses the billing, customer care and OSS
requirements of new and emerging carriers. Its flow-through
subscriber service creation design permits carriers to meet the
multi-service based operational support and network management
requirements mandated in the market. This product is a multi-
service (voice, data, cable, long distance, etc.) management
offering that performs advanced, integrated customer management,
operations support and network maintenance to automate the
carrier-wide functions of a multi-service carrier. The product
consists of three major subsystems which employ a client server
architecture and common database that permit them to operate
independently or as an integrated product.
The Company employs a documented Quality Management Program
to monitor the quality of its products and detect errors 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.
The Company has experienced no product returns in the past
11 years as a result of undetected errors. Where undetected
errors occur, the Company may incur additional costs and delays
in order to remedy the errors.
Sales and Marketing
The Company sells products through direct sales and through
the Company's strategic alliance partners. See "Strategic
Alliances and Other Customers." In fiscal 1997, sales to
strategic alliance partners and through the direct sales force
comprised approximately 57.2% and 42.8% of revenue, respectively.
At present, the Company is increasing its sales efforts through
more aggressive sales and marketing strategies. The Company is
hiring additional experienced, direct sales representatives and
increasing the number of strategic alliances by adding non-
exclusive third party distribution channels and alliances with
new carriers, communications equipment manufacturers, computer
equipment manufacturers, software developers and telecom
consultants, to market the Company's products.
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 a significant
amount of 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.
Customer Support
The Company believes that a high level of engineering and
development services and customer support is critical to the
Company's continuing success in developing relationships with its
strategic partners and end users. To augment its sales efforts,
the Company offers product-related engineering and development
services, requirements analysis, project management, system
design, tailoring and installation, training, ongoing support and
upgrades. 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 World Wide Web site on
the Internet which keeps 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.
Strategic Alliances and Other Customers
In order to develop, market and distribute its products
effectively, the Company has established strategic alliances with
several large organizations: telecom equipment manufacturers,
computer equipment manufacturers, and telecom systems integrators
(the "strategic alliance partners" or "partners") to which the
Company sells products for use by them or their customers. The
Company's strategic alliances apply to its traditional carrier
network products, new and emerging carriers, and its enterprise
network management products. 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, and create a reseller channel for the
Company's products.
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
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
purchased and paid for by the partner either for its own use or
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 most significant
strategic alliances in fiscal 1997:
Traditional Carrier Network Products
AT&T World Services, Inc. ("AT&T World Services") - selected the
DCMS and UPS-32 as operating components of its billing analysis
systems for international toll gateways, to be sold to customers
worldwide. These systems are used to collect data for traffic
analysis and billing.
Cincinnati Bell Information Systems, Inc. ("CBIS") - CBIS is the
largest cellular billing service provider in the world. The
Company and CBIS developed a customized version of the DCMS which
contains information management software designed to meet the
needs of cellular service providers.
Guangzhou Riccson Computing Co. Ltd. - is installing the
Company's DCMS products as part of its own billing system, in the
People's Republic of China.
IBM - is marketing the Company's NEDS and CANS products as part
of its own billing system.
International Computers Limited - is installing the Company's
NEDS and CANS products along with its own billing system for
Vodafone Limited in the United Kingdom and the national cellular
carrier in Indonesia.
Lucent Technologies, Inc. (formerly AT&T Network Systems) -
developed an OEM version of the DCMS to be used in combination
with Lucent's BILLDATS (corresponding to the Company's UPS-
32/CANS product) collection software with the Company. Lucent has
deployed BILLDATS systems incorporating the Company's products in
various domestic and international teleprocessing projects.
Newbridge Networks and Siemens - contracted with the Company to
develop usage sensitive billing software for Frame Relay and ATM
products which will be offered as part of their network and
service management products.
Samsung Electronics Company, Limited, LG Information and
Communications, Limited and ILGIN Corporation - formed a
consortium ("Korean Consortium") to provide a billing data
collection system for Korea Telecom, the national carrier for the
Republic of South Korea. The consortium has purchased significant
quantities of the Company's products for installation in the
Korea Telecom network.
Stratus - sells the Company's N*VISION, UPS-32, and CANS products
with its computer platforms.
Tandem - is marketing the Company's UPS-32 and CANS products as
components of its hardware products.
Teleglobe Canada, Inc. - Teleglobe is the government chartered
international long distance provider for Canada. Teleglobe has
developed with the Company a data collection network, data
warehouse and operator display system to capture and monitor
international traffic and usage data and provide information for
fraud detection and other OSS functions on a real-time basis.
The result of
this cooperative development project was the Company's N*VISION
product, which is being marketed to other carriers worldwide.
Enterprise Network Management Products
ANSTEC, Inc. - teamed with the Company and was selected, through
a competitive procurement process, to install the Company's
NetPlus products at 107 U.S. Air Force bases and 50 other U.S.
government installations throughout the world.
Amerind, Inc. - installed a version of the Company's NetPlus
products as a part of the U.S. Army's automated directory
attendance system at installations throughout the United States.
AT&T Corporation, Federal Systems Division - provides telephone
systems for the Executive Branch of the U.S. Government.
GTE Government Systems - provides telephone systems at military
facilities throughout the world. The Company, as a subcontractor
to GTE Government Systems for network management products,
installs and supports NetPlus products at 40 of these military
facilities.
ISI Infortext - worked with the Company to develop a Windows NT
Version of NetPlus and is selling the Company's NetPlus products
in the U.S. to enterprise customers.
Tubedale Communications Ltd. - integrates the Company's NetPlus
products into its Telemasys system to be marketed in Europe,
Africa and the Middle East.
New and Emerging Carrier Products
Eagle Telecommunications Management Inc. - sells the Company's
PRO*VISION products as part of its central office switch
products, internationally to new and emerging carriers.
GeoPhone LLC - sells the Company's NetPlus products as part of
its satellite communications products internationally.
Stratus - sells the Company's PRO*VISION product as part of its
client server system.
The following is a list of some of the Company's other most
significant customers in fiscal 1997 that have installed the
Company's products within their organizations:
ALLTEL - is using the Company's UPS-32 product to provide
billing data collection services to its customers.
Citizens Utilities - purchased DCMS systems for installation
in its telephone operating units.
GTE Telops (a division of GTE Telephone Company) - purchased
DCMS systems for installation on certain switch types
throughout its network.
Telefonos de Mexico, S.A. de C.V. - TELMEX, the national and
local long distance carrier of Mexico, selected the Company to
upgrade data collection throughout its switch network system.
WinStar Telecommunications- using the Company's PRO*VISION
billing application for call record collection and mediation
to support its retail billing application.
As more ATM and Frame Relay switches are incorporated into
carrier and enterprise networks, it will become increasingly
important for network managers to be able to bill customers based
on actual usage. Pursuant to an agreement with Newbridge, the
Company has developed a billing component for advanced data
switches, which provides access providers with flexible options
for billing users of data network services. The Company received
an up-front payment for the development work and will receive on-
going fees with respect to sales of the software by Newbridge to
its customers. For fiscal 1997, revenues from this agreement have
not been material. The Company anticipates similar opportunities
to develop other network edge technologies for equipment and
service providers in the growing market for data services.
The Company plans to continue to develop and expand its
strategic alliances with established, well-recognized industry
leaders, as it believes that these alliances enable the Company
to increase sales most cost-effectively and successfully position
it to increase market penetration of its products.
Backlog
The Company tracks two types of backlog: "order backlog,"
which represents signed purchase orders, and "contract backlog,"
which represents signed project contracts that become order
backlog upon the signing of specific purchase orders. Order
backlog was approximately as follows: $3.6 million, $10.4 million
and $7.0 million at June 30, 1995, 1996 and 1997, respectively.
Contract backlog was approximately: $1.0 million, $37.2 million
and $45.8 million at June 30, 1995, 1996 and 1997, respectively.
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 typically is 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. No assurance
can be given that current backlog will necessarily lead to
revenue in any future period.
Competition
Competition in the market for the Company's products is
driven by rapidly changing 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, on a timely
and cost-effective basis, new products and product features 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 traditional
carrier market, new emerging carrier market, and the large
enterprise network management market to encourage new competitors
to enter the 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, scaleability and flexibility, ability to integrate
with other products, functionality and ease of use, product
reputation, responsiveness to customer needs, and timeliness of
implementation. In the future, the Company will be required to
respond promptly and effectively to the challenges of
technological change and its competitors' innovations.
In the traditional carrier network products 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)
companies, such as Axiom, Inc., Comptel, CGI, Inc. ("CGI"), and
IDT - Alston that can supply individual billing data collection
components, and (iii) vendors that supply product components,
including Hewlett-Packard Company ("HP"), IBM Corporation
("IBM"), Moscom Corporation ("Moscom"), Objective System
Integrators, Inc. ("OSI") and CGI.
In the new and emerging carrier market, the Company's
current and prospective competitors include (i) telecom equipment
manufacturers that provide network products such as Lucent and
Ericsson, (ii) companies that provide software applications for
carriers, such as Stonehouse & Company ("Stonehouse"), Metasolv,
(iii) vendors that supply product components such as HP and IBM,
(iv) companies that provide billing and customer care
applications such as Kenan Systems, Scopus, and Clarify, and (v)
companies that develop custom solutions like AMS, Perot Systems
and CSC.
In the enterprise network management products market, the
Company's current and prospective competitors include
(i) companies that provide products for telephony networks, such
as Telco Research Corporation, Complimentary Solutions, Inc.,
Stonehouse, Switchview, Inc., Moscom and OSI and (ii) companies
that provide products for data networks, such as Remedy
Corporation, Net Manage, Inc., Computer Associates International,
Inc., FTP Software, Inc., Castle Rock Computing, HP, IBM and Sun
Microsystems, 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
traditional carriers, new emerging carriers, and enterprises 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 its 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, often in cooperative
product development and enhancement initiatives. The Company
continually reviews opportunities to license technologies from
third parties when appropriate based on timing and cost
considerations. The Company believes that this approach
facilitates and accelerates the development of new and enhanced
products.
The Company's efforts are influenced significantly by
industry developments and by customer and end user requirements.
New features may be tailored initially for delivery to a single
customer and subsequently incorporated into future versions of
the product which are available to all customers.
During the fiscal years 1995, 1996 and 1997, product
research and development expenses were $1.0 million,
$1.0 million and $1.5 million, respectively.
Proprietary Rights and Licenses
The Company does not currently hold any patents and relies
on a combination of statutory and/or common law, copyright,
trademark, contract and trade secret laws 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 a
copyrighted work.
Employees
At June 30, 1997, the Company employed a total of 195
employees, including 40 involved in manufacturing and quality
assurance, 54 in research and development, 27 in sales and
marketing, 28 in professional services and 46 in administration
and finance. None of the Company's employees is 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; Montreal, Canada; Flemington, New Jersey;
and Orlando, Florida. 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 and support. The
following sets forth information concerning the Company's
Gaithersburg facilities:
Location Squar Lease Annual Rent
e Expiration
Foota
ge
Gaithersburg, 37,87 November 30, $615,000
Maryland 4 2003 (subject to
annual
increases of
approximatel
y $20,000
each year)
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal
proceedings.
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 fiscal 1997.
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 as of June
30, 1997.
Name Ag Position
e
George T. Jimenez 61 President, Chief Executive Officer
and Chairman of the Board
S. Joseph Dorr 50 Vice President - Network
Management Division
Dr. Thomas V. Russotto 52 Vice President - Carrier Networks
Division
Jeffrey S. Simpson 42 Vice President - Finance
James M. Moore 55 Vice President - Marketing
Loretta L. Rivers 40 Secretary
George T. Jimenez is the Chief Executive Officer of the
Company and has served as President, Treasurer and a Director of
the Company since its inception in 1983. From 1980 to 1983,
Mr. Jimenez served as the President of the Company's predecessor.
S. Joseph Dorr has been Vice President - Network Management
Division since 1988 and a Vice President of the Company since
1983. From 1983 to 1989, he 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.
Dr. Thomas V. Russotto has been Vice President - Carrier
Networks Division since 1988 and a Vice President of the Company
since 1985. From 1983 to 1985, he served as Director of Product
Development at the Company.
Jeffrey S. Simpson has been Vice President - Finance of the
Company since July 1996 and a financial consultant to the Company
since March 1996. From 1988 to January 1996, Mr. Simpson served
in various positions with The Compucare Company, a software
development company, including Director of Finance from March
1990 to May 1993, Chief Financial Officer from May 1993 to August
1995 and Vice President, Finance, from September 1995 to January
1996. From 1985 to 1988, Mr. Simpson served as a Manager of
Financial Planning and Analysis with U.S. Sprint.
James M. Moore has been Vice President - Marketing of the
Company since May 1996. From March 1994 to May 1996, Mr. Moore
served as Vice President, Business Market of NYNEX, a
telecommunications company, and from May 1992 to March 1994 he
served as Managing Director, Business Market of NYNEX. From
March 1989 to May 1992, Mr. Moore served as Managing Director,
Marketing of New England Telephone Company.
Loretta L. Rivers has been Corporate Secretary and
Administrative Supervisor of the Company since 1989 and has
served in various capacities with the Company since its inception
in 1983.
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 19, 1997.
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.
Price Range of Shares
High Low
Year Ended June 30, 1997:
1st Quarter (since August 13) 13.88 7.00
2nd Quarter 16.00 9.75
3rd Quarter 18.00 8.25
4th Quarter 23.13 7.63
Common Stockholders
As of September 26, 1997, 8,641,505 shares were held of
record by 43 shareholders.
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 terms of the Company's bank credit facilities
prohibit the payment of cash dividends. The future payment of
cash dividends, if any, is also 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.
Use of Proceeds from Initial Public Offering
The Company filed a registration statement on Form S-1,
Registration No. 333-06731, which became effective August 12,
1996 (the "Offering") registering 2,500,000 shares of Common
Stock, $.01 par value per share ("shares"). The Company
previously reported Use of Proceeds from the Offering on Forms
SR. As a result of a change in the applicable disclosure rules,
the Company is hereby updating the disclosure previously made on
such Forms. Item 11 of the Form SR filed for the period ended
May 10, 1997 hereby is amended and restated as follows as of June
30, 1997:
Construction of plant,
building and facilities $ 0
Purchase and installation
of machinery and equipment 2,390,229
Purchase of real estate 0
Acquisition of other
business(es) 0
Repayment of indebtedness
4,446,563
Working capital
4,457,464
Temporary investment:
US Treasury Money Fund 4,695,353
Other purposes:
Redemption of Preferred Stock 308,000
Directors & Officers Insurance 155,750
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,
1997 and as of June 30, 1997, 1996, 1995, 1994, and 1993 are
derived from the audited financial statements of the Company.
Fiscal Year Ended June 30,
1993 1994 1995 1996 1997
(in thousands, except per share data)
Statement of
Operations Data
Revenue-products,
software licenses $ $ $ $19,9 $
and services 11,137 14,523 12,415 83 33,684
Costs and Operating
expenses:
Cost of products,
software
licenses 5,870 7,675 6,579 10,83 17,627
and services 4,065 5,473 6,049 6 10,992
Selling, general 6,751
and 780 573 1,045 1,472
administrative 957
Research and
development
Income (loss) from
operations 422 802 (1,258 1,439 3,593
)
Interest expense
(income), net 53 156 335 379 (191)
Income (loss) before
income
taxes and 369 646 (1,593 1,060 3,784
extraordinary )
item
Income taxes 151 - - - 1,160
Income (loss) before
extraordinary item 218 646 (1,593 1,060 2,624
)
Extraordinary item -
tax benefit of net
operating loss 151 - - - -
carryforwards
Net income (loss) $ $ $(1,59 $1,06 $
369 646 3) 0 2,624
Pro forma net income
per share $ $ 0.32
0.18
Number of shares
used in computing
pro forma net income 5,894 8,152
per share
June 30,
1993 1994 1995 1996 1997
(in thousands)
Balance Sheet Data:
Cash and cash $ 62 $ $ 190 $ $
equivalents 147 369 7,920
Working capital 519 590 (1,374 1,897 17,835
(deficit) )
Total assets 6,582 7,407 8,293 14,29 33,518
8
Total liabilities 4,763 4,943 7,414 12,18 11,809
7
Mandatorily
redeemable preferred 1,842 1,982 2,122 2,262 -
stock
Stockholders'
(deficit) equity (23) 483 (1,242 (150) 21,709
)
The Company paid no dividend on its capital stock during any
of the periods reported above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company sells products to carriers and enterprises, both
through direct channels and through strategic alliance partners,
for delivery to end users in the United States and
internationally. Since June 1994, the Company, consistent with
its strategic emphasis, has derived most of its revenue from
sales of its carrier network products to traditional carriers.
The Company expects such sales to increase as a percentage of its
revenue for at least the next several years. The balance of the
Company's revenue is derived from the sale of products and
software licenses to new and emerging carriers and to enterprise
customers, including agencies of the U.S. Government.
The Company's products typically are sold pursuant to
contracts having an aggregate value of several hundred thousand
to several million dollars. Contracts for the Company's
traditional carrier network products typically require the
delivery of products, including hardware and licensed software,
along with installation, training and post contract support
services. Contracts for new and emerging carriers and enterprise
networks typically require the Company to license, in perpetuity,
software applications and provide hardware and services that
include installation, training and post contract support.
Software, hardware and services sold pursuant to new and emerging
carrier and enterprise network contracts are separately priced.
At the expiration of the post contract support period, customers
are offered the opportunity to purchase additional support
services.
The Company derives revenues from software license fees,
hardware sales, and product related services. Revenue from
hardware sales is recognized upon delivery while revenue from
product related services is recognized as the services are
rendered. 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 the
source code of its software to resellers for subsequent
modification and resale. Revenue from software licenses is
recognized after the software has been delivered, all significant
uncertainties regarding acceptance have expired and all
significant obligations have been fulfilled. Costs relating to
insignificant obligations are accrued. Revenue from contracts
with payment terms in excess of one year is recognized to the
extent of payments that are probable and due within one year.
Revenue related to obligations to provide post contract customer
support without charge is unbundled from the license and
recognized ratably over the term of the agreement. Revenue from
maintenance services is recognized ratably over the term of the
related agreement. For contracts involving significant
production, modification or customization of hardware and
software, revenue is recognized using the percentage of
completion method, based on performance milestones specified in
the contract, which fairly reflect progress toward contract
completion.
The Company sells its products either as components in the
products or systems developed and marketed by its strategic
partners or directly to end users. The Company typically
experiences higher margins in connection with its direct sales
contracts, offset in part by relatively higher sales and
marketing expenses.
The Company tracks two types of backlog: "order backlog,"
which represents signed purchase orders, and "contract backlog",
which represents signed project contracts that become order
backlog upon the signing of specific purchase orders. Order
backlog was $7.0 million at June 30, 1997, compared to $10.4
million at June 30, 1996.
The Company's revenue typically is concentrated among
certain customers, the largest of which in fiscal 1997 consisted
of TELMEX, Samsung Electronics, LG Information & Communications,
Ltd. and ANSTEC, Inc. These customers represented approximately
17.1%, 10.3%, 7.4% and 6.9%, respectively, of total revenue for
the year ended June 30, 1997.
Substantially all of the Company's revenue is derived from
dollar-denominated sales and, although the Company in its most
recent fiscal year had significant sales to Mexico and the
Republic of South Korea, the Company does not have significant
foreign operations. Prior to fiscal 1997, the Company's sales
had been principally to its strategic alliance partners in the
United States or to end users in foreign countries. During
fiscal 1997, the Company also sold its products and software
licenses to foreign strategic partners, the sales to which
represent 32.4% of annual revenues. The Company's customers
continue to pay for products in U.S. dollars. All products are
shipped from the United States pursuant to terms of orders issued
by customers.
The Company has experienced more favorable cash collection
cycles for its international sales than its domestic sales. For
fiscal 1997, the accounts receivable turnover rates (annual
sales/average of year end accounts receivable) were 2.27 for
sales to U.S. customers and 3.19 for sales to foreign customers,
and the accounts receivable turnover rates in days were 161 for
U.S. sales and 114 for sales to foreign customers. Though the
Company has not historically experienced the greater risk that is
generally associated with cash cycles for sales to international
customers, the Company believes that past experience is not
necessarily indicative of future results and that as its sales
directly to foreign customers increase it may experience greater
delays in collections.
As a result of the size of most of its contracts and orders,
the significant length of sales cycles and the complexities which
arise from time to time in completing any given contract or
order, the Company typically experiences fluctuations in
quarterly and year-to-year results. Marketing in foreign
countries, particularly in Asia and other emerging markets,
frequently requires extensive field testing and may result in
delays in the timing and closing of sales by the Company's
strategic alliance partners, which in turn may delay orders of
the Company's products. The Company has experienced significant
delays in timing of revenue related to sales to end users in
overseas markets.
During fiscal 1997, the Company reclassified expenses for
services provided by certain strategic alliance partners in
connection with the installation and integration of the Company's
products. As a result, certain fiscal 1996 amounts have been
reclassified from selling, general and administrative expense to
cost of products, software licenses and services, to conform with
fiscal 1997 financial statement presentation.
The Company's cost of products, software licenses and
services consists of the cost of product engineering and
production, cost of customer support personnel, license fees paid
to third-party software vendors, amortization of capitalized
software development costs, the cost of hardware purchased by the
Company for incorporation into its products and expenses for
services provided by certain alliance partners in connection with
the installation and integration of the Company's products.
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 commission, rent, insurance, depreciation and non-product
amortization expenses. Also included are costs associated with
the Company's participation in trade shows and industry
conferences, and related travel and other promotional costs.
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 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 (no greater than
three years) including the current year.
Results Of Operations
The following table sets forth, for the periods indicated,
certain items on the Company's statement of operations as a
percentage of revenue:
Fiscal Year Ended June
30,
1995 1996 1997
Revenue- products, software 100% 100% 100%
licenses and services
Costs and operating expenses:
Cost of products, software
licenses 53.0 54.2 52.3
and services__..
Selling, general and 48.7 33.8 32.6
administrative
Research and development 8.4 4.8 4.4
__________
(Loss) income from operations (10.1) 7.2% 10.7%
___ %
Years Ended June 30, 1996 and 1997
Revenue. Total revenue increased 68.6% from $20.0
million in fiscal 1996 to $33.7 million in fiscal 1997. The
increase in revenue is attributable to increased sales volume of
the Company's products and software licenses. Revenue from
traditional carrier network products increased 63.8%,
representing 65.3% of total revenues, which growth resulted from
increases in sales to foreign strategic alliance partners that
include the Korea Consortium and International Computers Limited.
Revenue from enterprise network products increased 28.8%,
representing 24.4% of total revenues , which growth resulted
primarily from increases in sales of software licenses to ISI
Infortext, Tubedale Communications and International Logistics
Systems, Inc. Revenue from new and emerging carriers, such as
WinStar Telecommunications and SpectraNet International,
represents 10.3% of fiscal 1997 revenues, up from 0.9% in fiscal
1996.
Cost of Products, Software Licenses and Services. Cost of
products, software licenses and services increased 62.7% from
$10.8 million in fiscal
1996 to $17.6 million in fiscal 1997 and decreased as a
percentage of revenue from 54.2% to 52.3%, respectively. The
increase in costs is attributable to increased hardware cost and
increased labor expense associated with the increased annual
sales volume and to increased expenses for services provided by
certain alliance partners. Gross margins were 45.8% and 47.7%
for fiscal years 1996 and 1997, respectively. The improvement in
gross margin was primarily the result of an increase in software
license revenue as a percentage of total revenues in fiscal 1997.
Selling, General and Administrative. Selling, general and
administrative expenses increased 62.8% from $6.8 million in
fiscal 1996 to $11.0 million in fiscal 1997. These expenses
represented 33.8% and 32.6% of total revenue in fiscal 1996 and
fiscal 1997, respectively. The increased expenses are
attributable to costs associated with increased infrastructure
required to support the Company's growth, costs associated with
increased sales and marketing efforts that include the cost of an
expanded sales force, and to increased rent incurred in
conjunction with the Company's relocation to a larger facility.
The Company anticipates that the continued expansion of its sales
efforts, both domestically and internationally, will increase its
sales and marketing expense and may have an adverse effect on the
Company's earnings.
Research and Development. Research and development expense
increased 53.8% from approximately $1.0 million in fiscal 1996
to $1.5 million in fiscal 1997. The increase is attributable to
the addition of software development engineers and technical
consultants required to support the Company's continued product
development activities. As a percentage of revenue, research and
development expense decreased from 4.8% in fiscal 1996 to 4.4% in
fiscal 1997. The Company plans to spend significant resources on
research and development in future periods in order to enhance
its technology, which may have an adverse effect on the Company's
earnings.
Provision for Income Taxes. The Company recorded a tax
provision of approximately $1.2 million in fiscal 1997,
representing an effective tax rate of 30.6%. This rate was lower
than the expected statutory income tax rate primarily due to a
decrease in the valuation allowance. This provision represents
an increase of approximately $1.2 million over fiscal 1996 when
no provision was recorded, the result of the provision being
offset by a similar decrease in the valuation allowance.
Years Ended June 30, 1995 and 1996
Revenue. Revenue increased 61.0%, from $12.4 million in
fiscal 1995 to $20.0 million in fiscal 1996. The increase is
attributable to increased sales volume of the Company's
traditional carrier network products to Teleglobe and TELMEX and
delivery of enterprise network products to the U.S. Government
pursuant to the Company's contract with ANSTEC.
Cost of Products, Software Licenses and Services. Cost of
products, software licenses and services increased 64.7% from
$6.6 million in fiscal 1995 to $10.8 million is fiscal 1996.
The increase is attributable to increased purchases of hardware
related to DCMS units for the TELMEX contract which were
subsequently incorporated into shipped products. Gross margins
were 47.0% and 45.8% for fiscal 1995 and 1996, respectively.
The decline in gross margins was caused primarily by costs for
services provided by certain alliance parties for which no
similar expenses existed in fiscal 1995.
Selling, General and Administrative. Selling, general and
administrative expenses increased 11.6% from $6.0 million in
fiscal 1995 to $6.8 million in fiscal 1996. These expenses
represented 48.7% and 33.8% of total revenue in fiscal 1995 and
fiscal 1996, respectively. The increase in these expenses is
attributed to costs associated with the Company's continued
expansion of marketing programs. The Company expects these
expenses to increase in future periods as a result of its efforts
to position itself to penetrate international markets for
traditional carrier network products, its plans to expand sales
of enterprise network products in the United States and the
hiring of additional management personnel.
Research and Development. Research and development expense
decreased 8.4% from approximately $1.01 million in fiscal 1995 to
approximately $1.0 million in fiscal 1996, primarily as a result
of completion of work on software development related to the
technology platform for the Teleglobe contract. As a percentage
of revenue. Research and development expense decreased from 8.4%
in fiscal 1995 to 4.8% in fiscal 1996 primarily as a result of
the increase in period to period revenues. The Company plans to
spend significant resources on research and development in future
periods in order to enhance its technology.
Provision for Income Taxes. No income tax benefit or
provision was recorded for the fiscal years ended June 30, 1995
and 1996, respectively, since any benefit or provision was offset
by a similar increase or decrease in the valuation allowance. As
of June 30, 1995 and 1996, a valuation allowance was recorded for
the full value of the net deferred tax assets, as the Company's
results can vary based upon type, timing and quantity of product
shipped and, consequently, it was management's judgment that it
was more likely than not that the net deferred tax asset would
not be realized.
Selected Quarterly Information
The following tables present certain unaudited statement of
operations data for each quarter of fiscal 1996 and fiscal 1997.
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.
Fis
cal
Thr
ee
Mon
ths
End
ed
F F
i i
s s
c c
a a
l l
1 1
9 9
9 9
6 7
Sept. Dec. March June Sept. Dec. March June
30, 31, 31 30, 30, 31, 31, 30,
1995 1995 1996 1996 1996 1997
1996 1997
(in
thous
ands)
Statement of
Operations Data:
Revenue-
products, $3,43 $4,772 $4,9 $6,872 $6,2 $7,2 $8,2 $11,
software licenses 3 06 64 57 09 953
and services
Costs and
operating
expenses:
Cost of
products, 1,736 2,738 2,53 3,95
software 3 3,829 3,13 3,48 1 7,05
licenses and 8 0 7
services
Selling,
general and 1,362 1,608 1,43 2,80
administrative 9 2,342 2,13 2,51 6 3,54
5 1 0
Research and 132 235 264 326 398 468 300 306
development
Income from 203 191 670 375 593 798 1,15 1,05
operations 2 0
Interest expense 104 97 84 94 53 (92) (85) (67)
(income), net
Income before 99 94 586 281 540 890 1,23 1,11
income taxes 7 7
Income taxes - - - - - 266 470 424
Net income $99 $94 $586 $281 $540 $624 $767 $693
As a Percentage
of Revenues:
Revenue-
products, 100% 100% 100% 100% 100% 100% 100% 100%
software licenses
and services
Costs and
operating
expenses:
Cost of
products, 51 57 52 50 48 48 59
software 56
licenses and
services
Selling,
general and 39 34 29 34 35 34 30
administrative 34
Research and 4 5 5 5 6 6 4 2
development
Income from 6 4 14 5 10 11 14 9
operations
Interest expense 3 2 2 1 1 (1) (1) -
(income), net
Income before 3 2 12 4 9 12 15 9
income taxes
Income taxes - - - - - 3 6 3
Net income 3% 2% 12% 4% 9% 9% 9% 6%
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 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. The failure to obtain 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 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, orders for products and delivery of product, also
varies substantially from customer to customer and from project
to project. The purchase of traditional carrier network
products, new and emerging carrier network products and
enterprise network management products generally involves a
significant commitment of customer capital and management time.
The sales cycle associated with the purchase of the Company's
products 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 Company's expense levels are based, in party, on its
expectations as to future revenue levels. If revenue levels are
below expectations, operating results are likely to be materially
adversely affected.
Based upon all of the foregoing, the Company believes that
quarterly revenue and operating results are likely 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 expectations of
public market analysts and investors. In such event, the price
of the Common Stock could be materially adversely affected.
Liquidity and Capital Resources
Cash and cash equivalents increased $7.6 million from
$369,000 at June 30, 1996 to $7.9 million at June 30, 1997. The
increase in cash is attributable to funds generated from the
Company's initial public offering of common stock, which raised
net proceeds of $16 million. Cash and cash equivalents increased
$179,000 from $190,000 at June 30, 1995 to $369,000 at June 30,
1996. This increase is due primarily to a combination of cash
provided by operations and financing activities offset, in part,
by investment in property and capitalized software development
costs. The increase in cash and cash equivalents of $147,000
during the year ended June 30, 1995 is primarily attributable to
increased borrowings.
Net cash (used for) provided by operating activities for the
year ended June 30, 1997, 1996, and 1995 was ($1.9 million), $0.7
million, and ($1.2 million), respectively. The increase in net
cash used for operating activities from fiscal 1996 to fiscal
1997 primarily reflects a significant increase in accounts
receivable and inventories of $7.5 million and $1.0 million,
respectively, which reflect the increase in the Company's sales
volume, and a decrease in deferred revenues of $1.4 million,
partially offset by net income of $2.6 million and increases in
accrued expenses and deferred income taxes of $2.8 million and
$1.2 million, respectively. The increase in net cash provided by
operating activities from fiscal year 1995 to 1996 is due
primarily to the Company's return to profitability with net
income of $1.0 million in fiscal 1996, as compared to a net loss
of $1.6 million in fiscal 1995, and an increase in accounts
payable, accrued expenses and deferred revenue of $1.9 million,
$0.7 million and $0.9 million, respectively, offset in part by an
increase in accounts receivable and inventories of $3.9 million
and $0.9 million, respectively.
Net cash used for investing activities of $3.8 million,
$1.3 million and $1.0 million in fiscal 1997, 1996 and 1995,
respectively, reflect purchases of property and equipment and the
capitalization of software development costs. Purchases of
property and equipment, consisting primarily of computers and
office equipment, were $2.4 million, $0.4 million and $0.5
million in fiscal 1997, 1996, and 1995, respectively.
Capitalized software development costs were $1.4 million, $0.9
million, and $0.5 million in fiscal 1997, 1996, 1995,
respectively. The Company expects it will continue to make
investments in both capitalized software development and in fixed
assets for infrastructure to support anticipated business growth.
Net cash provided by financing activities for the fiscal
year ended June 30, 1997, was $13.2 million. During fiscal 1997,
the Company received net proceeds of $16 million from the initial
public offering of its common stock.
In addition, the Company received proceeds of $2.1 million from
the exercise of common stock options. The Company used these
proceeds to reduce bank and other debt obligations by $4.8
million, to pay the withholding tax obligations of $0.9 million
associated with the exercise of employee stock options which were
paid for by the employees with the surrender of previously owned
shares and to redeem $0.3 million in outstanding preferred stock.
During the fourth quarter, the Company entered into an agreement
with its bank to finance $1,000,000 in capital equipment
purchases. Also during fiscal 1997, the Company entered into a
capital lease obligation for an office telephone system. At June
30, 1997, capitalized lease obligations were $0.2 million. Net
cash provided by financing activities for fiscal 1996 of $0.8
million is primarily attributable to an increase in borrowings
of $1.4 million, offset by debt payments of approximately $0.7
million. Net cash provided by financing activities for fiscal
1995 also reflects increased borrowings of $2.6 million offset,
in part, by $0.4 in debt repayments.
With the exception of the capital lease referred to above,
all of the Company's borrowings are from Crestar Bank of
Maryland. The Company has two lines of credit with Crestar
totaling $3.5 million under which no amounts were outstanding at
June 30, 1997. These lines of credit, in the principal amount of
$2.5 million and a $1.0 million, respectively, each expires on
November 30, 1997. Borrowings under these facilities bear
interest payable monthly, at 0.5% over the bank's prime rate and
are secured by accounts receivable, inventory and specific
equipment. In addition, the Company has two term note facilities
pursuant to which the Company has made borrowings in the
aggregate principal amount as of June 30, 1997 of approximately
$0.3 million and $1.0 million, respectively, which are due in
varying monthly installments through June 2000 and June 2001,
respectively, bear interest at 1.0% over the bank's prime rate
and at the bank's prime rate, respectively, and are secured by
accounts receivable, inventory and specific equipment and by the
Company's general assets, respectively. These loan arrangements
require the Company to comply with certain financial covenants.
The Company believes that existing cash balances, cash flows
from operations and available bank lines, when renewed as
anticipated, will be sufficient to support the Company's working
capital requirement for at least the next 12 months. Thereafter,
if cash generated from operations is insufficient to satisfy the
Company's working capital requirements, the Company may be
required to raise additional funds. No assurance can be given
that additional financing will be available or that, if
available, such financing will be obtainable on terms favorable
to the Company or its stockholders. In the event that adequate
funds are not available, the Company's business may be adversely
affected.
Factors Affecting Future Operating Results
ACE*COMM provides products to a technology driven industry
sector. Therefore, ACE*COMM's success is dependent in part upon
factors beyond its control. This report contains forward-looking
statements relating to the prospective operating results of the
Company. The following are factors which could affect ACE*COMM's
future operating results. These factors are intended to serve as
a cautionary statement to statements that may be made, either
verbally or in writing, including those in any other forward-
looking statements made by or on behalf of, the Company:
To date, a significant portion of the Company's revenue has
been derived from substantial orders placed by large
organizations. The Company expects that in the future it will
continue to be dependent upon a limited number of
customers in any given period for a significant portion of its
revenue. The Company's future success may depend upon the
continued demand by such customer for its products and services.
The Company's results of operations and financial condition could
be materially adversely affected by the failure of anticipated
orders to materialize and by deferrals or cancellation of orders.
Sales to traditional carriers have provided and are expected
to continue to provide a majority of revenue. The Company's
business is dependent upon the continued growth of the
telecommunications industry, in the United States and
internationally, on the continued convergence of voice and data
networks and on the evolution and widespread adoption of emerging
network technologies. Any decline in the growth of the industry,
the failure of these markets to converge or the failure of these
network technologies to evolve or achieve widespread market
acceptance could have a material adverse effect on the Company.
A key element of the Company's business strategy is to
develop strategic alliances with leading companies that provide
telecommunications services or that manufacture and market
network equipment in order to expand the Company's distribution
channels and enter new markets. There can be no assurance that
the Company will be able to continue to increase the number of,
or to expand, these types of relationships, in order to market
its products effectively, particularly internationally.
The Company has expanded its operations rapidly, which 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 expansion of the
Company's operations. If the Company is unable to respond to and
manage changing business conditions, the quality of its products
and services and its results of operations could be materially
adversely affected.
The new and emerging carrier market in the United States and
overseas represents a source of growing demand for the Company's
products, software licenses and services. In that this market
segment is relatively new and in that many of these organizations
are in the early stages of their development, financial resources
may be limited and may adversely affect their ability to pay for
the Company's products, software licenses and services.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). This statement establishes
standards for computing and presenting earnings per share ("EPS")
and making them comparable to international standards. It
replaces the presentation of primary EPS with a presentation of
basic EPS, and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with
complex capital structures. Basic EPS excludes dilution and is
computed by dividing income available to common shareholders by
the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity. SFAS 128 requires restatement of all prior period
earnings per share data
presented, and is effective for financial statements issued for
periods ending after December 15, 1997, including interim
periods. Earlier application is not permitted.
The Company will adopt this statement during the second
quarter of fiscal 1998, as required. Accordingly, all prior
period EPS data will be restated. To illustrate the effect of
adoption, the Company has elected to disclose pro forma basic and
diluted EPS amounts computed using SFAS 128, as permitted by the
standard. The pro forma basic and diluted EPS for each of the
two years in the period ended June 30, 1997 are set forth below:
Fiscal Year Ended
June 30,
1996
1997
Pro forma basic earnings $0.34 $0.20
per share
Pro forma diluted $0.32 $0.18
earnings per share
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Financial Statements:
Page
Report of Independent Accountants _________________________
30
Balance Sheets at June 30, 1997 and 1996_______________________
31
Statements of Operations for the years ended June 30, 1997, 1996
and 1995_..____________..___________________
32
Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1997, 1996 and 1995________.._____________
33
Statements of Cash Flows for the years ended June 30, 1997, 1996
and 1995_..____...___
34
Notes to the Financial Statements__________________...._______..
36
Financial Statement Schedules:
All Schedules are omitted because they are not applicable or the
required information is shown in the financial statements or
notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ACE*COMM Corporation
In our opinion, the financial statements listed in the
accompanying index present fairly, in all material respects, the
financial position of ACE*COMM Corporation at June 30, 1997 and
1996, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1997, 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 audits. We conducted our
audits 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 audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Washington, D.C.
September 29, 1997
ACE*COMM CORPORATION - BALANCE SHEETS
June 30,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 7,919,631$ 369,206
Accounts receivable, less allowance for doubtful
accounts of $10,000 16,119,862 8,643,871
Inventories 2,814,221
1,836,317
Prepaid expenses and other 1,011,193 283,813
Total current assets 27,864,90711,133,207
Property and equipment, net 3,469,997 1,305,844
Capitalized software development costs, net 2,076,665 1,393,067
Other assets
106,258 466,268
Total assets $33,517,827 $14,298,386
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings $ 527,
359 $ 2,097,178
Accounts payable 2,734,791 3,122,212
Accrued contract costs 3,550,589 386,543
Accrued expenses 183,969 527,991
Accrued compensation 2,128,759 1,133,072
Officer loan -
78,572
Deferred income taxes 395,173 -
Deferred revenue 509,700 1,890,103
Total current liabilities10,030,340
9,235,671
Noncurrent borrowings 1,013,214 2,951,541
Deferred income taxes 765,000 -
Total liabilities11,808,554
12,187,212
Mandatorily redeemable Class C Preferred Stock, $5.14 par
value, 340,211 shares authorized, issued and outstanding -
2,261,627
Commitments and contingencies
Stockholders' equity (deficit):
Class B Preferred Stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding - 1,000
Common stock, $.01 par value, 45,000,000 shares authorized,
8,550,582 and 3,590,451 shares issued and outstanding 85,506
35,905
Additional paid-in capital 19,530,035 343,124
Retained earnings (accumulated deficit) 2,093,732 (530,482)
Total stockholders' equity (deficit)21,709,273 (150,4
53)
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity $33,517,827 $
14,298,386
The accompanying notes are an integral part of these financial s
tatements.
ACE*COMM CORPORATION
STATEMENTS OF OPERATIONS
Years ended June 30,
1997 1996 1995
Revenues - Products, software licenses
and services $33,683,793$19,983,182$12,415,
331
Costs and operating expenses:
Cost of products, software licenses and services17,626,48610,8
36,490 6,579,504
Selling, general and administrative10,992,3566,750,5336,048,700
Research and development 1,471,731 956,950 1,04
4,968
Total costs and operating expenses30,090,57318,543,973 13,67
3,172
Income (loss) from operations 3,593,2201,439,209(1,257,841)
Interest income 347,207 - -
Interest expense (156,040) (379,553) (334,
805)
Income (loss) before income taxes 3,784,3871,059,656(1,592,646)
Income taxes 1,160,173 -
- -
Net income (loss) $ 2,624,214 $ 1,059,656$(1,592,
646)
Pro forma net income per share $ 0.32$ 0.18
Shares used in computing pro forma net
income per share 8,152,1665,893,818
The accompanying notes are an integral part of these financial
statements.
ACE*COMM CORPORATION
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Retained
Preferred Stock Common Stock Additional Stock Earnings
Class B Paid-inSubscriptions(Accumulat
ed
Shares Par Value SharesPar ValueCapital Receivable Deficit) Total
Balance, June 30, 19941,000 $1,0003,261,245$32,612$ 446,789 $
- - $ 2,508$ 482,909
Accretion of preferred stock dividends - - - - (139,894) - -
(139,894)
Exercise of common stock options- - 36,000 360 12,980 (5,900) - 7,440
Net loss for the year
ended June 30, 1995 - - - - - - (1,592,646)
(1,592,646)
Balance, June 30, 19951,000 1,0003,297,245 32,972 319,875 (5,900) (1,590,138)(1,242,191)
Accretion of preferred stock dividends - - - - (139,894) - -
(139,894)
Exercise of common stock options- - 293,206 2,933 163,143 (117,232) - 48,844
Payment of stock subscriptions receivable- - - - - 123,132-
123,132
Net income for the year
ended June 30, 1996 - - - - - - 1,059,656
1,059,656
Balance, June 30, 19961,000 1,0003,590,451 35,905 343,124 - (530,482) (150,453)
Accretion of preferred stock dividends - - - - (17,487) - -
(17,487)
Conversion of preferred stock, Class C - - 1,530,950 15,310 2,263,804 - -
2,279,114
Redemption of preferred stock, Class B(1,000)(1,000) - - (307,000) - -
(308,000)
Issuance of common stock pursuant to
initial public offering- - 2,645,000 26,45016,083,653 - - 16,110,103
Exercise of common stock options- - 838,460 8,3852,060,162 - - 2,068,547
Repurchase and retirement of common stock- - (54,279) (544) (896,221) - -
(896,765)
Net income for the year
ended June 30, 1997 - - - - - - 2,62
4,214 2,624,214
Balance, June 30, 1997 - $ - 8,550,582$85,506$19,530,035$ - $ 2,093,732$21,709,273
The accompanying notes are an integral part of these financial statements.
ACE*COMM CORPORATION
STATEMENTS OF CASH FLOWS
Years ended June 30,
1997 1996 1995
Cash flows from operating activities:
Net income (loss) $
2,624,214$ 1,059,656 $(1,592,646)
Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating activities:
Depreciation 448,228 279,773 243,245
Amortization of capitalized software 687,180 542,240 418,373
Changes in operating assets and liabilities
Accounts receivable (7,475,991)(3,941,131)(338,
074)
Inventories (977,904)(871,816)(165,704)
Other assets (367,370)(490,446)(6,108)
Accounts payable (387,421)1,876,455(169,129)
Accrued expenses 2,820,024 623,629 190,254
Accrued compensation 995,687 702,476(51,324)
Deferred income taxes 1,160,173 - -
Deferred revenue (1,380,403) 893,026 311
,777
Net cash (used for) provided by operating
activities (1,853,583) 673
,862 (1,159,336)
Cash flows from investing activities:
Purchases of property and equipment (2,390,229)(416,969)(522,076)
Additions to capitalized software development costs(1,370,778)
(927,397) (473,158)
Net cash used for investing activities(3,761,007)(1,344,366)
(995,234)
Cash flows from financing activities:
Net (decrease) increase in line of credit(4,446,563)1,174,8131,
465,000
Other borrowings 1,000,000 185,5391,144,376
Payments on debt (341,729)(682,521)(419,653)
Principal payments under capital lease obligation(20,578)-
- -
Net proceeds from common stock issued16,110,103 - -
Exercise of common stock options 2,068,547 48,844 7,440
Payment of stock subscriptions receivable -
123,132 -
Repurchase and retirement of common stock(896,765)- -
Redemption of preferred stock (308,000) -
- -
Net cash provided by financing activities13,165,015 849,8072,
197,163
Net increase in cash and cash equivalents7,550,425179,30342,593
Cash and cash equivalents at beginning of year 369,206 189
,903 147,310
Cash and cash equivalents at end of year$ 7,919,631$ 369,206$
189,903
Supplemental disclosures of cash flow information:
Cash paid during the year for interest$ 163,527$ 375,052$
329,048
Supplemental schedule of non cash financing activities:
Accretion of preferred stock dividends$ 17,487$ 139,894$
139,894
Purchase of equipment under capital lease$ 222,152
Conversion of Class C preferred stock$ 2,279,114
Exercise of common stock options $ 1,575$
90
Notes received for exercise of common stock options $ 117,232
$ 5,900
The accompanying notes are an integral part of these financial
statements.
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Organization
ACE*COMM Corporation ("ACE*COMM" or the "Company") develops,
markets and services operations support systems ("OSS") products
for networks deployed by telecommunications service providers,
such as telephone companies, other public carriers and large
enterprises operating data and voice networks using intranets and
the Internet. The Company's products perform such functions as
billing data collection, network surveillance, alarm processing
and network management for some of the largest carriers and
enterprises in the world.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements. Actual results could differ from
those estimates.
Revenue recognition
The Company derives revenues from software license fees, hardware
sales, and product related services. Revenue from hardware sales
is recognized upon delivery while revenue from product related
services is recognized as the services are rendered. 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 the source code of its
software to resellers for subsequent modification and resale.
Revenue from software licenses is recognized after the software
has been delivered, all significant uncertainties regarding
acceptance have expired and all significant obligations have been
fulfilled. Costs relating to insignificant obligations are
accrued. Revenue from contracts with payment terms in excess of
one year is recognized to the extent of payments that are
probable and due within one year. Revenue related to obligations
to provide post contract customer support without charge is
unbundled from the license and recognized ratably over the term
of the agreement. Revenue from maintenance services is
recognized ratably over the term of the related agreement. For
contracts involving significant production, modification or
customization of hardware and software, revenue is recognized
using the percentage of completion method, based on performance
milestones specified in the contract, which fairly reflect
progress toward contract completion.
Significant customers
The Company extends credit to its customers in the normal course
of business. During fiscal 1997, two customers in the
telecommunication industry represented approximately 27% of
revenues. During fiscal 1996 and fiscal 1995, three customers in
the same industry represented approximately 51% and 59% of
revenues, respectively. Sales to end users and strategic
alliance partners in Canada comprised approximately 4%, 11% and
16% of total revenues for fiscal 1997, 1996 and 1995,
respectively. Sales to end users in Mexico comprised 19% and 29%
of the Company's revenues for fiscal 1997 and 1996, respectively.
Sales to strategic alliance partners in Korea comprised 24% of
the Company's revenues for fiscal 1997.
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 related equipment, fixtures and vehicles of
seven years. Leasehold improvements are amortized on a straight-
line method over the shorter of the improvements' estimated
useful lives or related remaining lease terms.
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 (no greater than three years), including the
current year. 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.
Pro forma net income per share
Historical net income per share is not considered relevant as it
would differ materially from pro forma net income per share given
the change in the capital structure of the Company. Except as
noted below, pro forma net income per share is computed using the
weighted average number of shares of Common Stock, assuming
conversion of Class C Preferred Stock, and dilutive Common Stock
equivalent shares from Common Stock options. Common Stock
equivalent shares are calculated using the treasury stock method.
Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, Common Stock and Common Stock equivalent shares
issued by the Company at prices below the public offering price
during the twelve month period prior to the offering date (using
the treasury stock method and an offering price of $7 per share)
have been included in the calculation as if they were outstanding
for all periods regardless of whether they are dilutive.
Income taxes
Deferred income taxes are recognized for the expected future tax
consequences of temporary differences by applying enacted
statutory tax rates to differences between the financial
statement carrying amounts and the tax basis of existing assets
and liabilities.
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.
The Company believes that it is not practical to estimate a fair
market value different from the Class C Preferred Stock carrying
value of $2,261,627 at June 30, 1996 as the security has numerous
unique features including voting, redemption and conversion
rights and is not traded on an open market.
Reclassification
Certain 1996 amounts have been reclassified to conform with 1997
financial statement presentation.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable net of allowance for doubtful accounts of
$10,000 consist of the following:
June 30,
1997 1996
Billed $12,980,371 $7,270,545
Unbilled 3,139,491 1,373,326
$16,119,862 $8,643,871
Unbilled receivables include costs and estimated earnings on
contracts in progress and software license fees 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.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30,
1997 1996
Computer equipment $ 3,593,665 $1,931,382
Furniture and fixtures 907,930 279,841
Vehicles 42,384 42,384
Leasehold improvements 106,761 19,654
4,650,740 2,273,261
Less accumulated depreciation and amortization(1,180,743) (9
67,417)
$ 3,469,997 $1,305,844
Depreciation expense of property and equipment amounted to
$448,228, $279,773 and $243,245 in 1997, 1996 and 1995,
respectively. At June 30, 1997, furniture and fixtures and
accumulated depreciation include a capitalized lease in the
amount of $222,000 and $13,000, respectively.
NOTE 5 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS
June 30,
1997 1996
Capitalized software development costs$ 5,938,595 $ 4,567,817
Less accumulated amortization (3,861,930) (3,174
,750)
$ 2,076,665 $ 1,393,067
Amortization expense of capitalized software $687,180
$542,240
amounted to and $418,373 in 1997, 1996 and 1995,
respectively.
NOTE 6 - BORROWINGS
The Company's borrowings consist of the following:
June 30,
1997 1996
Installment note payable, due in
monthly installments
of $20,833 through July 1, 2001,
bearing interest at $1,000,000$ -
the bank's prime rate (8.5% at June
30, 1997),
collateralized by general assets of
the Company.
Installment notes, due in varying
monthly installments
through June 2000, bearing interest
at the bank's prime 338,998 550,073
rate (8.5% at June 30, 1997) plus
1%, collateralized
by accounts receivable, inventory
and specific equipment.
Capital lease obligation for the use
of an office
telephone system, principal plus 201,575 -
interest (10.03%),
due in monthly installments of
$4,723 through
November 2001.
Bank line of credit, credit limit up
to $2,500,000,
due November 30, 1997, bearing
interest at the - 1,775,000
bank's prime rate (8.25% at June 30,
1996)
plus 0.5%, collateralized by accounts
receivable,
inventory and specific equipment.
Bank line of credit, credit limit up
to $1,000,000,
due August 31, 1996, bearing interest
at the bank's - 1,000
prime rate (8.25% at June 30, 1996) ,000
plus
1.25%, collateralized by inventory
and accounts
receivable.
Bank line of credit, credit limit up
to $1,000,000
due November 30, 1997, bearing
interest at the - 921,563
bank's prime rate (8.25% at June 30,
1996)
plus 0.5%, collateralized by accounts
receivable,
inventory and specific equipment.
June 30,
1997 1996
Bank line of credit, credit limit up
to $750,000
due August 20, 1996, bearing interest
at the bank's $ - $ 75
prime rate (8.25% at June 30, 1996) 0,000
plus 0.5%,
collateralized by accounts
receivable, inventory
and specific equipment.
Unsecured note payable for the
purchase of technology
and product rights, principal due in -
quarterly installments of $10,417 52,083
plus interest at 8% through April
1997.
Total borrowings 1,540,57 1,540,5735,048,719
Less current portion (527,359)(2,097,1
78)
Noncurrent portion $1,013,214$2,951,541
Annual maturities of noncurrent borrowings are as follows:
1999 $ 366,663
2000 319,374
2001 304,146
2002 23,031
Total $1,013,214
On June 30, 1997, the Company entered into a new installment note
arrangement with its bank. At June 30, 1997, the Company has
borrowed $1,000,000 under this arrangement which is due in
monthly installments of $20,833 through July 1, 2001. The loan
bears interest at the bank's prime rate, is secured by the
general assets of the Company and contains certain financial
covenants.
At June 30, 1997, the Company has two separate lines of credit
for $2,500,000 and $1,000,000, with its bank which are due
November 30, 1997. The lines bear interest at 0.5% over the
bank's prime rate. These credit facilities are secured by
accounts receivable, inventory and specific equipment and contain
certain financial covenants.
On November 27, 1996, the Company entered into a five-year
noncancelable lease agreement for equipment which has been
accounted for as a capital lease.
NOTE 7 - TRANSACTIONS WITH RELATED PARTIES
In connection with the purchase of certain assets by the Company
at its inception, the Company's president loaned $150,000 to the
Company to assist in financing the acquisition. The outstanding
loan balance totaled $0 and $78,572 at June 30, 1997 and 1996,
respectively.
NOTE 8 - RETIREMENT PLAN
The Company has a 401(k) plan, under which to be eligible,
employees must have completed six months of service and be at
least 21 years of age and be credited with 1,000 hours of
service. Contributions made by the Company during 1997, 1996 and
1995 were approximately $103,000, $97,000 and $0, respectively.
NOTE 9 - INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:
June 30,
1997 1996 1995
Tax assets:
Costs capitalized to inventory$ 244,892$ 252,705$
134,572
Accruals not deducted for tax172,058 88,356 55,368
Net operating loss carryforwards4,189,835939,9171,203,675
Tax credit carryforwards 316,126 291,738 251,283
Copyright and patents 21,286 21,323 23,857
Other - 4,017 3,963
Gross deferred tax assets4,944,1971,598,056 1,672,718
Tax liabilities:
Income on contracts (1,224,401) (475,918) (333,297)
Software costs deducted for tax(809,898)(616,076)(393,137)
Depreciation (257,983) (229,312) (163,829)
Other (3,261) - (3,900)
Gross deferred tax liabilities(2,295,543)(1,321,306)
(894,163)
Net deferred tax asset 2,648,654 276,750 778,555
Valuation allowance (3,808,827) (276,750) (778,555)
Net deferred tax liability$(1,160,173)$ - $ -
Current deferred tax liability$ (395,173)$ -
$ -
Noncurrent deferred tax liability (765,000) -
- -
Net deferred tax liability $(1,160,173) $ -
$ -
The components of the provision for income taxes are as follows:
Years ended June 30,
1997 1996 1995
Current:
Federal $ - $ - $ -
State - - -
Total current - - -
Deferred:
Federal 1,011,851 - -
State 148,322 - -
Total deferred 1,160,173 - -
Total $1,160,173$ -
$ -
The Company records a valuation allowance for deferred tax assets
when it is management's judgment that it is more likely than not
that all or a portion of a deferred tax asset will not be
realized. In 1997, the provision for income taxes included a net
increase in the valuation allowance of $3,532,077. This increase
primarily relates to additional income tax net operating losses
generated from the deduction created by the exercise of non-
qualified stock options. This income tax benefit will be
reflected in additional paid-in capital when actually realized
for tax purposes. In 1996, the provision for income taxes was
comprised of a Federal and state provision of $457,000, which was
offset by a reduction in the valuation allowance of the same
amount. In addition, the Company recorded a foreign tax credit
of $44,000 which increased the valuation allowance. The change
during 1995 in the valuation allowance was largely attributable
to the increase in net operating losses.
At June 30, 1997, the Company has available research credit
carryforwards of approximately $252,000, which are available to
offset future income tax and expire in years through 2007. In
addition, the Company has available a foreign tax credit of
$61,000 that expires in 2001. The Company also has net operating
loss carryforwards for income tax purposes of approximately
$9,766,000 million which expire in years through 2010. Ownership
changes, as defined in the Internal Revenue Code, may limit the
amount of net operating loss carryforwards that can be utilized
annually to offset future taxable income or tax liability.
The total income tax provision (benefit) for each year varied
from the amount computed by applying the statutory U.S. Federal
income tax rates to income before income taxes as follows:
Years Ended June 30,
1997 1996 1995
Income tax provision/(benefit) at statutory rate$1,286,692 $
360,283 $(541,500)
State income taxes net of Federal benefit 178,245 48,956
(79,632)
Nondeductible expenses 69,629 23,503 30,555
Other (97,643) 24,574
12,433
Change in valuation allowance (276,750)(457,316) 578,144
Actual provision $1,160,173$ - $ -
NOTE 10 - MANDATORILY REDEEMABLE PREFERRED STOCK
On October 31, 1991, in connection with an investment agreement,
the Company sold 340,211 shares of Class C Preferred Stock at
$5.14 per share. The Class C Preferred stock consists of two
series. Series 1 stock (211,727 shares) provides voting rights
equal to the same number of shares of Common Stock and Series 2
stock (128,484 shares) provides no voting rights but, if elected
by a majority of the holders of the Class C Preferred Stock, will
become voting shares on a one-to-one basis.
Each share of Class C Preferred Stock may be converted into
Common Stock at any time by the holder. Additionally, the shares
will be converted automatically upon an underwritten, public
offering of the Common Stock. The number of shares of Common
Stock into which the Class C Preferred Stock can be converted is
determined by a conversion price, as defined under the agreement.
At June 30, 1996, the conversion price is $1.14 per share and if
converted, the shares would be exchanged on a 4.5 to 1 basis. No
dividends are payable with respect to any converted shares. The
Company has reserved 1,530,950 shares of Common Stock for the
purpose of conversion.
Any shares not converted by designated dates will be redeemed by
the Company as follows: one third of the shares on September 15,
1995, one-half of the remaining shares on September 15, 1996, and
all the remaining shares on September 15, 1997. The redemption
price is equal to $5.14 per share plus accrued dividends. In the
case of redemption, the holders are entitled to receive accrued
dividends, at a semi-annual rate of four percent, from November
1, 1992. The Company also has the right to force redemption, if
certain triggering events occur, at a price of $5.14 per share
plus accrued dividends from November 1, 1992, calculated at an
annual rate of twelve percent.
Activity with respect to Class C Preferred Stock is as follows:
Balance, June 30, 1994 $ 1,981,839
Accretion of dividends 139,894
Balance, June 30, 1995 2,121,733
Accretion of dividends 139,894
Balance, June 30, 1996 2,261,627
Accretion of dividends 17,487
Conversion upon initial public offering(2,279,114)
Balance, June 30, 1997 $ -
NOTE 11 - STOCKHOLDERS' EQUITY
Preferred Stock
In July 1996, the Board authorized 5,000,000 shares of
undesignated Preferred Stock. At June 30, 1997, no shares were
issued or outstanding.
Stock Options
Prior to the establishment of the Company's formal option plan,
the Company granted options to various employees for performance
and hiring incentives. Under this plan, 909,000 options were
granted and 886,500 were exercised or expired prior to 1994 with
an option price of $.17 - $.62. During 1995, the remaining
22,400 shares were exercised at a price of $.17. The Company no
longer issues options under this plan.
The Company has reserved 2,200,000 shares of Common Stock in
connection with a Board of Directors approved plan to grant
nonqualified stock options to officers and key employees and
200,000 shares of Common Stock in connection with a plan to grant
nonqualified stock options to the Company's nonemployee
directors. The exercise price on all options granted is
equivalent to the fair market value of the Company's Common Stock
on the date of grant. The terms of options, including vesting
and exerciseability are determined by the Compensation Committee
of the Board of Directors. All 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 10 years from the date of grant.
Certain options granted in 1997 are further subject to
accelerated vesting within one year from the date of grant based
on achievement of certain pre-determined performance goals.
Vested options become exerciseable immediately upon vesting or
within three years from the date of grant. The Company had
260,231 options outstanding subject to performance-based
accelerated vesting arrangements at June 30, 1997. Options for
directors vest 4,500 shares each year from the date of grant and
expire the earlier of 5 years from date of grant, after
resignation or immediately upon removal for cause. The Company
had exercisable options of 593,697, 938,711 and 1,187,407 as of
June 30, 1997, 1996 and 1995, respectively. The stock option
plan also provides for the issuance of restricted stock, stock
appreciation rights and phantom stock options. As of June 30,
1997, 1996 and 1995, no restricted stock, stock appreciation
rights or phantom stock options had been granted. As of June 30,
1997, options available for granting were 266,656.
Information relating to all the plans is summarized as follows:
Shares Price
Options outstanding, June 30, 1994 1,144,693$ 17 - .83
Granted 107,199 .64 - .83
Exercised (36,000) .17 -
.83
Expired (14,985) .41 - .83
Options outstanding, June 30, 1995 1,200,907 .41 - .83
Granted 173,503 .64 - 7.00
Exercised (293,206) .30 -
.83
Expired (7,493) .62 - .83
Options outstanding, June 30, 1996 1,073,711 .41 - 7.00
Granted 758,177 7.00 - 14.75
Exercised (838,460) .30 -
14.75
Expired (5,250) 12.00
Options outstanding, June 30, 1997 988,178$ .30 - 14.75
Financial Accounting Standards No. 123
Effective June 30, 1997, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"). In accordance with the
standard, the Company has elected to continue to measure
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 following table summarizes information about stock options
outstanding at June 30, 1997.
Options Outstanding
Options Exercisable
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of OutstandingContractual Average Exercisable Average
Exercise Pricesat 6/30/97 Life Exercise Priceat 6/3
0/97Exercise Price
$.30 to .83 330,236 1.6 years$.53
330,236 $.53 $7.00397,777
4.1 $7.00 258,277 $7.00
$11.88 to 14.75260,165 9.6 $12.00
5,184 $14.75
988,178 593,697
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:
1997 1996
Expected life (years) 3-8 3
Risk-free interest rate 6% 5-6%
Volatility 77% 0%
Dividend yield 0% 0%
The weighted average fair value of stock options granted under
the employee stock option plans during 1997 and 1996 was
$1,248,250 and $34,422, respectively. Had the Company determined
compensation costs for these plans in accordance with SFAS 123,
the Company's net income would have been $1,211,596 (or $0.15 per
share) in 1997 and $1,004,136 (or $0.17 per share) in 1996. The
SFAS 123 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.
NOTE 12 - INITIAL PUBLIC OFFERING
On August 13, 1996, in connection with the Company's initial
public offering, 2,875,000 shares of Common Stock, 2,645,000 of
which were offered by the Company, were sold at $7.00 per share.
The net proceeds raised by the Company totaled $16,110,103.
The Mandatorily Redeemable Class C Preferred Stock was
automatically converted on a one to one basis into Common Stock
upon the completion of the Company's initial public offering. No
dividends were payable with respect to the converted shares.
On August 28, 1996, the Company redeemed the Class B Preferred
Stock for $308,000 in accordance with its terms that required
redemption upon transfer of substantially all assets or of
majority control of the Company.
NOTE 13 - CONTINGENCIES
As collateral for performance on a long-term contract and to a
ceding insurer, the Company entered into a bond on November 28,
1995 under which the Company is contingently liable in the amount
of $1,175,000. This bond is in force until November 28, 1998.
At June 30, 1997, the Company had a $500,000 letter of credit
arrangement with a financial institution, which guarantees the
Company's performance to its landlord.
NOTE 14 - EFFECT OF NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128"). This statement establishes standards
for computing and presenting earnings per share, simplifying
previous standards for computing earnings per share ("EPS") and
making them comparable to international standards. It replaces
the presentation of primary EPS with a presentation of basic EPS,
and requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex
capital structures. Basic EPS excludes dilution and is computed
by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity. SFAS 128 requires restatement of all prior period
earnings per share data presented, and is effective for financial
statements issued for periods ending after December 15, 1997,
including interim periods. Earlier application is not permitted.
The Company will adopt this statement during the second quarter
of 1998, as required. Accordingly, all prior period EPS data will
be restated. To illustrate the effect of adoption, the Company
has elected to disclose pro forma basic and diluted EPS amounts
computed using SFAS 128, as permitted by the standard. The pro
forma basic and diluted EPS for each of the two years in the
period ended June 30, 1997 are set forth below:
Year Ended June 30,
1997 1996
Pro forma basic earnings per share $0.34 $0.20
Pro forma diluted earnings per share$0.32 $0.18
NOTE 15 - COMMITMENTS
The Company leases certain 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.
The Company is committed for the payment of minimum rentals under
operating lease agreements through fiscal year 2004 in the
following amounts:
Year ending June 30, Amount
1998 $ 731,000
1999 745,000
2000 732,000
2001 693,000
2002 714,000
Thereafter 1,046,000
$4,661,000
The total rental expense under operating leases was $727,965,
$330,499 and $259,466 for the years ended June 30, 1997, 1996 and
1995, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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 1997 Annual Meeting
of Stockholders, to be filed pursuant to Regulation 14A not
later than 120 days after the end of the fiscal 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 1997 Annual Meeting
of Stockholders, to be filed pursuant to Regulation 14A not
later than 120 days after the end of the fiscal 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 1997 Annual Meeting
of Stockholders, to be filed pursuant to Regulation 14A not
later than 120 days after the end of the fiscal 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 1997 Annual Meeting
of Stockholders, to be filed pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered
by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, and REPORTS
on FORM 8-K
(a) The information called for by Item 14 is included under
Part III, Item 8 hereof.
The following documents are filed as part of this
report:
Exhibits
3.2* Articles of Amendment and Restatement dated November 18,
1991.
3.3* Articles of Amendment dated August 6, 1996.
3.5* Form of Articles of Amendment and Restatement of the
Company.
3.6* By-laws of the Company as amended to date.
4.1* Form of Specimen of Common Stock Certificate.
10.1* Supplier Agreement dated December 16, 1992 between the
Registrant and AT&T World Services, Inc.
10.2* Marketing Agreement dated June 18, 1990 between the
Registrant and AT&T World Services, Inc.
10.3* Subcontract Agreement dated February 24, 1994 between
Registrant and AT&T Corporation, Government Integrated
Solutions.
10.4 Authorized Distributor Agreement dated July 23, 1991
between the Registrant and AmerInd, Inc.
10.5* Supply Contract dated August 17, 1994 between the
Registrant and Teleglobe Canada, Inc.
10.6* License Agreement dated August 1, 1995 between the
Registrant and Teleglobe Canada, Inc.
10.7* Subcontract No. 95-1350-01 dated November 8, 1995 between
the Registrant and ANSTEC, Inc.
10.8* Agreement of Subcontract dated April 24, 1994 between the
Registrant and the Communications Systems Division of GTE
Government Systems Corporation.
10.9* Agreement to Purchase Hardware, Render Services and
License and Sublicense the Use of Software dated
October 11, 1995 between the Registrant and Telefonos de
Mexico, S.A. de C.V.
10.11* Amended and Restated Omnibus Stock Plan.
10.12 Form of Term Loan Note entered into Between the Company
and two Officers in Fiscal 1997
10.13 Form of Non-Qualified Stock Option Grant Agreement
(certain executive officers - fiscal 1997)
10.14 Form of Non-Qualified Stock Option Grant Agreement
(certain executive officers - fiscal 1997)
10.15 Executive Bonus Plan
10.16 Lease Between Principal Mutual Life Insurance Company and
the Company as Tenant dated August 6, 1996
11.1 Computation of Pro Forma Net Income Per Share
24 Consent of Price Waterhouse LLP
27 Financial Data Schedule
* Incorporated by reference to the identically numbered
exhibit filed as an exhibit to the Registrant's Registration
Statement on Form S-1 No. 333-06731.
(b) No reports on Form 8-K have been filed during the fourth
quarter of fiscal 1997.
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 30, 1997
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:
Name Title Date
/s/ George T. President, Chief ExecutiveSeptember 30, 1997
Jimenez Officer
(George T. Jimenez) and Chairman of the Board
(Principal Executive Officer)
/s/ Jeffrey S. Vice President - Finance September 30, 1997
Simpson (Principal Financial Officer
(Jeffrey S. and
Simpson) Principal Accounting Officer)
/s/ Gilbert A. Director September 30, 1997
Wetzel
(Gilbert A. Wetzel)
/s/ Paul G. Casner, Director September 30, 1997
Jr.
(Paul G. Casner,
Jr.)
/s/ Gary P. Golding Director September 30, 1997
(Gary P. Golding)
EXHIBIT INDEX
3.2* Articles of Amendment and Restatement dated November 18,
1991.
3.3* Articles of Amendment dated August 6, 1996.
3.5* Form of Articles of Amendment and Restatement of the
Company.
3.6* By-laws of the Company as amended to date.
4.1* Form of Specimen of Common Stock Certificate.
10.1* Supplier Agreement dated December 16, 1992 between the
Registrant and AT&T World Services, Inc.
10.2* Marketing Agreement dated June 18, 1990 between the
Registrant and AT&T World Services, Inc.
10.3* Subcontract Agreement dated February 24, 1994 between
Registrant and AT&T Corporation, Government Integrated
Solutions.
10.4 Authorized Distributor Agreement dated July 23, 1991
between the Registrant and AmerInd, Inc.
10.5* Supply Contract dated August 17, 1994 between the
Registrant and Teleglobe Canada, Inc.
10.6* License Agreement dated August 1, 1995 between the
Registrant and Teleglobe Canada, Inc.
10.7* Subcontract No. 95-1350-01 dated November 8, 1995 between
the Registrant and ANSTEC, Inc.
10.8* Agreement of Subcontract dated April 24, 1994 between the
Registrant and the Communications Systems Division of GTE
Government Systems Corporation.
10.9* Agreement to Purchase Hardware, Render Services and
License and Sublicense the Use of Software dated
October 11, 1995 between the Registrant and Telefonos de
Mexico, S.A. de C.V.
10.11* Amended and Restated Omnibus Stock Plan.
10.12 Form of Term Loan Note entered into Between the Company
and two Officers in Fiscal 1997
10.13 Form of Non-Qualified Stock Option Grant Agreement
(certain executive officers - fiscal 1997)
10.14 Form of Non-Qualified Stock Option Grant Agreement
(certain executive officers - fiscal 1997)
10.15 Executive Bonus Plan
10.16 Lease Between Principal Mutual Life Insurance Company and
the Company as Tenant dated August 6, 1996
11.1 Computation of Pro Forma Net Income Per Share
24 Consent of Price Waterhouse LLP
27 Financial Data Schedule
___________
* Incorporated by reference to the identically numbered
exhibit filed as an exhibit to the Registrant's Registration
Statement on Form S-1 No. 333-06731.