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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
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 incorporation or organization) (I.R.S. Employer I.D. No.)
704 Quince Orchard Road
Gaithersburg, Maryland 20878 20878
(Address of principal executive offices) (Zip Code)
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 22, 1998 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 $7,134,310
million (3,567,155 shares of Common Stock at a closing price on the NASDAQ
National Market of $2 on such date). Outstanding as of September 22, 1998 were
8,854,939 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its annual
meeting to be held on November 17, 1998 are incorporated by reference in Part
III.
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ACE*COMM CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. BUSINESS 3
Item 2. PROPERTIES 9
Item 3. LEGAL PROCEEDINGS 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 9
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 10
Item 6. SELECTED FINANCIAL DATA 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 21
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 21
Item 11. EXECUTIVE COMPENSATION 21
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 21
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 21
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K 22
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ITEM 1. BUSINESS
This report contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such
statements, investors should specifically consider the various factors
identified in this Report which could cause actual results to differ materially
from those indicated by such forward-looking statements, including the matters
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Additional Factors Affecting Future Operating Results."
GENERAL BUSINESS DEVELOPMENT
ACE*COMM(R), incorporated in Maryland in 1983, develops, markets and
services Operations Support System ("OSS") hardware and software solutions for
data and voice networks operated by post, telephone and telegraph companies
("PTTs"), incumbent and competitive local exchange carriers ("CLEC"), national
and international long distance carriers, wireless carriers and large
enterprises operating internal networks. The Company's products perform
billing data collection, billing, customer care, network surveillance, alarm
processing and network traffic management functions. The Company's fiscal year
ends on June 30. Unless otherwise noted, all references to years in this
document are assumed to be fiscal.
PRODUCTS, SERVICES AND DISTRIBUTION
Data Collection
DCMS(R) - DCMS, Distributed Call Measurement System, 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, increases the accuracy of
billing data and in turn, increases revenue. The most recent version of DCMS
is called Network Element Data Server ("NEDS") which can provide the data on a
real-time basis. The Company also offers the DCMS*PLUS(R), a version of DCMS
which is based on a new technology platform and is targeted at carriers in
emerging economy countries. These products can be adapted to support virtually
all wireline and wireless telephone switches.
N*USAGE - N*USAGE is a software product data collection platform that
enables service providers who operate data networks, including X.25, frame
relay and Asynchronous Transfer Mode ("ATM") to collect billing data and charge
their customers on a usage-sensitive basis. N*USAGE includes a data collection
front-end and a core processing engine which also acts as a mediator. The
front-end captures the data and secures it on disk, verifies it then converts
it to a normalized format. The core processing engine then aggregates the
billing and statistical data, augments any external information and correlates
and reformats the final data before distributing it to the end-user billing and
customer care or network management system. 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.
UPS-32(R) - UPS-32, Universal Polling System-32, is a software
product, designed 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, CANS(R),
Central Access Network Server, collects and distributes data in real-time.
TREX*COMM(R) - TREX*COMM is a software 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 collects CENTREX call usage data from remote switch
sites and transfers it to the customers' data collection equipment. Records
can then be sorted 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,
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TREX*COMM makes network information available to CENTREX subscribers to enable
them to manage and control data.
Surveillance, Alarm and Traffic Reporting
UTS-32(R) - UTS-32, Universal Traffic System-32 is a software product
designed to use 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*VISION(TM) - N*VISION, a successor to the Company's RTMS(R), Real
Time Management System, a system originally developed for use by long distance
carriers, monitors network data in real-time and provides, from a single
database, information for billing, fraud detection, subscriber management and
network management. The heart of N*VISION is a 600 gigabyte data warehouse.
N*VISION operates directly connected to network elements or employs the
Company's NEDS units 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(R) - ANMS, AMAT Network Management System, monitors the elements
of a billing network. ANMS is a software product that collects and reports on
alarms sent by DCMSs, UPS-32s and other network components of 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.
Enterprise Network Management
NetPlus(R) 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.
Billing and Customer Care
NetPlus PRO*VISION - NetPlus PRO*VISION is an integrated suite of
software applications that addresses the billing, customer care and OSS
requirements of new and emerging carriers. NetPlus PRO*VISION is an advanced,
multi-service (voice, data, cable, long distance, etc.) management offering
that performs automated, integrated customer management, operations support and
network maintenance functions. NetPlus PRO*VISION consists of three major
subsystems, employing a client server architecture and common database that
permit them to operate independently or as an integrated product. The product
is continually enhanced, through tailoring to specific customer needs.
The Company's products have been installed in over 1,900 end user
sites in 55 countries. None of the Company's customers in 1998 contributed 10%
or more of the Company's revenue.
The Company maintains an ISO 9000 standard 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 12 years as a result of undetected errors.
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SALES AND MARKETING
The Company sells products through direct sales and through the
Company's strategic alliance partners. See "Strategic Alliances and Other
Customers." 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 significant time consulting with
strategic partners and end users to adapt its products to meet end user
requirements. Through ongoing sales, maintenance, training and systems
analysis, the Company maintains contact with its partners and end users to
determine their evolving requirements for updates and enhancements. Through
these processes, the Company gains valuable industry expertise, as well as the
ability to identify emerging industry applications and new sales opportunities.
STRATEGIC ALLIANCES AND OTHER CUSTOMERS
To develop, market and distribute its products effectively, the
Company has established strategic alliances with several large organizations:
Telecom equipment manufacturers, computer equipment manufacturers, telecom
systems integrators and other organizations (the "strategic alliance partners"
or "partners") to which the Company sells products for use by them or their
customers. The Company sells products through direct sales and through the
Company's strategic alliance partners. In 1998, sales to strategic alliance
partners and through the direct sales force comprised approximately 40% and 60%
of revenue, respectively. 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 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.
The following is a list of the Company's more significant strategic
alliances:
- - ANSTEC, INC. - teamed with the Company and was selected, through a
competitive procurement process, to install the Company's NetPlus products
at multiple U.S. Air Force bases and other U.S. government installations
throughout the world.
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- - AT&T CORPORATION, FEDERAL SYSTEMS DIVISION - provides telephone systems for
the Executive Branch of the U.S. Government.
- - 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.
- - CGH SYSTEMS, INC. - signed a Marketing Agreement to sell the Company's data
collection products into the Chinese market.
- - 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.
- - FORE SYSTEMS, INC. - formed an alliance with the Company to develop the
ForeView(R) Accountant, a new network module that will generate billing
information from FORE Systems' line of ATM (Asynchronous Transfer Mode)
switches.
- - 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 multiple military facilities.
- - 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.
- - 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.
- - LUCENT TECHNOLOGIES, INC. (FORMERLY AT&T NETWORK SYSTEMS) - developed an
OEM version of the DCMS to be used in combination with Lucent's BILLDATS(R)
(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.
- - POLARIS COMMUNICATIONS SERVICES, INC. - partner with the Company to supply
integration and application products/services to automate Regional Bell
Operating Company's ("RBOC's") CENTREX station message accounting services.
- - PRC - system integration contractor to the U.S. Army in Europe that
subcontracts to the Company for maintenance and technical services.
- - 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.
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- - 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.
CUSTOMER SUPPORT
The Company believes that a high level of customer support is critical
to the Company's continuing success in developing relationships with its
strategic partners and end users. The Company offers technical customer
support 24 hours per day, seven days per week. Support is provided via
telephone, remote login, e-mail and, if necessary, on-site assistance. In
addition, the Company has established a World Wide Web site on the Internet to
keep customers informed of product developments. International customers are
supported directly by the Company or by local representatives that have been
trained by the Company. These representatives do not represent the Company
exclusively. The Company also conducts training classes for its strategic
partners and other customers.
The Company typically provides new customers with Customer Support for
a period of up to 24 months. This includes 24 hour, seven days per week
support, replacement parts, software upgrades, and Year 2000 enhancements,
when and if available. The Company also offers various levels of continuing
Customer Support after the initial warranty period expires through Technical
Support Agreements. In addition, the Company provides customers with support
on a time and materials basis.
BACKLOG
The Company defines backlog as signed contracts or purchase orders for
delivery of hardware and software products and services within the next year.
Backlog at June 30, 1998, 1997 and 1996 was approximately $11.2 million, $7.0
million and $10.4 million, respectively. Backlog, as defined, does not include
contracts for hardware and software products which require the further issuance
of purchase orders.
The Company's contracts are large and technically complicated and
require a significant commitment of management and financial resources from the
Company's customers. The development of a contract is typically a lengthy
process because it must address a customer's specific technical requirements
and often requires internal approvals that require substantial lead-time.
Accordingly, the Company may experience significant variations in revenue from
quarter to quarter, reflecting delays in contract signing or contract order
deliveries. In addition, contracts that involve software deliveries may
involve tailoring of the product to specific customer requirements, which can
delay final delivery of the order. No assurance can be given that current
backlog will necessarily lead to revenue in any specific future period.
COMPETITION
Competition in the 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
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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 and CGI, Inc.
("CGI") 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 and 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 & Company ("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 customers and on improving existing
products by incorporating new features and technologies. The Company believes
that the timely development of new products and enhancements is essential to
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, in tailoring new features which are subsequently
incorporated into future versions of products available to all customers. The
Company continually reviews opportunities to license technologies from third
parties when appropriate based on timing and cost considerations.
During the years 1998, 1997 and 1996, independent research and
development expenses were $2.4 million, $1.5 million and $1.0 million,
respectively.
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PROPRIETARY RIGHTS AND LICENSES
The Company does not currently hold any patents and relies on a
combination of copyright, trademark, contract and trade secret laws and
statutory and/or common law to maintain its proprietary rights to its products.
The Company believes that, because of, among other things, the rapid pace of
technological change in the telecommunication and software industries, patent
protection for its products is a less significant factor in the Company's
success than the knowledge, ability and experience of the Company's employees,
the frequency of product enhancements and the timeliness and quality of support
services provided by the Company.
The Company generally enters into confidentiality agreements with its
employees, consultants, customers and potential customers and limits access to,
and distribution of, its proprietary information. Use of the Company's
software products is usually restricted to specified locations and is subject
to terms and conditions prohibiting unauthorized reproduction or transfer of
the software products. The Company also seeks to protect its software,
including the source code, as a trade secret and as copyrighted work.
EMPLOYEES
At June 30, 1998, the Company employed a total of 175 employees. None
of the Company's employees are represented by a labor union. The Company has
experienced no work stoppages and believes that its employee relations are
good.
ITEM 2. PROPERTIES
The Company leases space at four office locations: Gaithersburg,
Maryland; 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, professional services and
support. The following sets forth information concerning the Company's
Gaithersburg facilities:
SQUARE CURRENT
------ -------
LOCATION FOOTAGE LEASE EXPIRATION ANNUAL RENT
-------- ------- ---------------- -----------
Gaithersburg, Maryland 37,874 November 30, 2003 $653,000 (subject to
annual increases of
approximately
$19,000 and allocated
operating costs 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 1998.
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.
NAME AGE POSITION
---- --- --------
George T. Jimenez 62 President, Chief Executive Officer and Chairman of the
Board
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S. Joseph Dorr 51 Vice President - Sales
Dr. Thomas V. Russotto 53 Vice President - Operations
Loretta L. Rivers 41 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 - Sales since March 1998 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 and from 1983
to 1989 was Director of the Network Management Division.
Dr. Thomas V. Russotto has been Vice President - Operations since
March 1998. From 1988 to 1998, Dr. Russotto directed the Carrier Networks
Division and has been a Vice President of the Company since 1985. From 1983 to
1985, he served as Director of Product Development at the 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 17,
1998.
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.
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------
1998 1997
-------------------------------------- -----------------------------------
HIGH LOW HIGH LOW
-------------- ----------------- -------------- ---------------
1st Quarter (for 1997, since August 13) $ 23.88 $ 13.38 $ 13.88 $ 7.00
2nd Quarter 24.63 11.00 16.00 9.75
3rd Quarter 14.38 5.88 18.00 7.88
4th Quarter 8.88 5.06 23.13 7.63
COMMON STOCKHOLDERS
As of September 22, 1998, there were 8,854,939 shares held by 64
shareholders of record.
DIVIDENDS
The Company has never declared or paid cash dividends on the Common
Stock. The Company currently intends to retain earnings, if any, to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. The 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
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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, 1998:
Construction of plant, building and facilities -
Purchase and installation of machinery and equipment $ 2,390,229
Purchase of real estate -
Acquisition of other business(es) -
Repayment of indebtedness 4,446,563
Working capital 9,152,817
Other purposes:
Redemption of Preferred Stock 308,000
Directors & Officers Insurance 155,750
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each of the Company's
years in the five-year period ended June 30, 1998 and as of June 30, 1998,
1997, 1996, 1995 and 1994 are derived from the audited financial statements of
the Company.
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- ------- ------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue $ 22,465 $33,684 $19,983 $12,415 $14,523
Costs and operating Expenses:
Cost of products, software licenses
and services 13,325 17,627 10,836 6,579 7,675
--------- ------- ------- --------- ---------
Gross profit 9,140 16,057 9,147 5,836 6,848
Selling, general and administrative 17,029 11,254 6,751 6,049 5,473
Research and development 2,358 1,472 957 1,045 573
--------- ------- ------- --------- ---------
(Loss) income from operations (10,247) 3,331 1,439 (1,258) 802
Interest (income) expense, net (130) (191) 379 335 156
--------- ------- ------- --------- ---------
(Loss) income before income taxes (10,117) 3,522 1,060 (1,593) 646
Income taxes (898) 898 - - -
--------- ------- ------- --------- ---------
Net (loss) income $ (9,219) $ 2,624 $ 1,060 $(1,593) $ 646
========= ======= ======= ========= =========
Net (loss) income per share:
Basic $ (1.06) 0.35 $ 0.26 $ (0.53) $ 0.16
========= ======= ======= ========= =========
Diluted $ (1.06) 0.32 $ 0.18 $ (0.53) $ 0.11
========= ======= ======= ========= =========
Number of shares used in computing
net (loss) income per share
Basic 8,708 7,460 3,472 3,279 3,261
========= ======= ======= ======== =========
Diluted 8,708 8,152 5,829 3,279 5,777
========= ======= ======= ======== =========
JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- ------- ---------- -------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,956 $ 7,920 $ 369 $ 190 $ 147
Working capital (deficit) 5,978 17,864 1,897 (1,374) 590
Total assets 24,593 33,518 14,298 8,293 7,407
Total liabilities 11,808 11,809 12,187 7,414 4,943
Mandatorily redeemable preferred stock - - 2,262 2,122 1,982
Stockholders' equity (deficit) 12,785 21,709 (150) (1,242) 483
The Company paid no dividend on its capital stock during any of the periods
reported above.
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SELECTED QUARTERLY INFORMATION
The following tables present certain unaudited statement of operations
data for each quarter of 1998 and 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.
FISCAL THREE MONTHS ENDED
----------------------------------------------------------------------------------------
1998 1997
-------------------------------------------- ------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1998 1998 1996 1996 1997 1997
--------- ---------- ---------- --------- --------- -------- ---------- ---------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenue $8,735 $ 5,491 $ 4,560 $ 3,679 $6,264 $7,258 $8,209 $11,953
Costs and operating expenses:
Costs of products, software
licenses and services 3,684 4,598 2,380 2,663 3,138 3,481 3,951 7,057
--------- ---------- ---------- -------- --------- -------- ----------- ---------
Gross Profit 5,051 893 2,180 1,016 3,126 3,777 4,258 4,896
Selling, general and
Administrative 3,343 3,963 5,437 4,286 2,135 2,511 2,806 3,802
Research and development 449 503 804 602 398 468 300 306
--------- ---------- ---------- -------- --------- -------- ----------- ---------
Income from operations 1,259 (3,573) (4,061) (3,872) 593 798 1,152 788
Interest expense (income),
net (52) (37) (29) (12) 53 (92) (85) (67)
--------- ---------- ---------- -------- --------- -------- ----------- ---------
Income (loss) before income 1,311 (3,536) (4,032) (3,860) 540 890 1,237 855
taxes
Income taxes 512 (1,335) 823 (898) - 266 470 162
--------- ---------- ---------- -------- --------- -------- ----------- ---------
Net income (loss) $ 799 $(2,201) $(4,855) $(2,962) $ 540 $ 624 $ 767 $ 693
========= ========== ========== ======== ========= ======== =========== =========
Net (loss) income per share:
Basic $ 0.09 $ (0.25) $ (0.55) $ (0.34) $ 0.09 $ 0.08 $ 0.10 $ 0.08
========= ========== ========== ======== ========= ======== =========== =========
Diluted $ 0.09 $ (0.25) $ (0.55) $ (0.34) $ 0.07 $ 0.07 $ 0.09 $ 0.08
========= ========== ========== ======== ========= ======== =========== =========
The Company's quarterly operating results have in the past and will in
the future vary significantly as a result of the timing of contract execution,
orders for products, and completion and delivery of significant product orders.
Large orders typically are preceded by long sales cycles and, accordingly, the
timing of such an order has been and will continue to be difficult to predict.
Certain orders are for products that require additional tailoring to customer
requirements and, accordingly, vary in timing of delivery. The failure to
obtain, or delays in the delivery of, one or more large orders, for any reason,
could have a material adverse effect on the Company's results of operations and
financial condition. The Company's results also vary based on the type and
quantity of products shipped, the timing of product shipments, the relative
revenue mix in a given period and the resulting margins. The variations may be
material.
The timing of large orders depends on a variety of factors affecting
the capital spending decisions of the Company's customers, which in turn, can
affect the Company's quarterly operating results. These factors include
changes in governmental regulation, changes in the customers' competitive
environment, pricing policies by the Company or its competitors, personnel
changes, demand for the Company's products, the number, timing and significance
of new product and product enhancement announcements by the Company and its
competitors, the ability 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.
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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 purchases 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 product delivery cycle varies from product to product depending on the
extent to which it requires tailoring to a customer's requirement and the
extent to which such requirements are fixed in advance or developed over time.
The Company's expense levels are based, in part, on its expectations
as to future revenue levels. If revenue levels are below expectations,
operating results will be materially adversely affected.
Based upon all of the foregoing, the Company believes that quarterly
revenue and operating results are likely to vary significantly in the future
and that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Further, it is likely that in some future quarter the Company's
revenue or operating results will be below the expectation of public market
analysts and investors. In such event, the price of the Common Stock could be
materially adversely affected.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company sells 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 significant revenue from
sales of its data collection, surveillance, alarm and traffic reporting
products to traditional carriers. The Company expects such sales to continue
as a significant percentage of its revenue for at least the next several years.
The balance of the Company's revenue is derived from the sale of 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 data collection, surveillance, alarm and traffic
reporting products typically require the delivery of products, including
hardware and licensed software, along with installation, training and post
contract support services. Contracts for billing and customer care and
enterprise network management products typically require the Company to
license, in perpetuity, software applications and provide for 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, significant
uncertainties regarding acceptance have expired and 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 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. None of the Company's customers in 1998 contributed 10% or
more of the Company's revenue. For contracts involving significant production,
modification or customization of hardware and software, revenue is recognized
using the percentage-of-completion method, based on the relationship of costs
incurred to estimated total costs of the project, which fairly reflects contract
performance milestones.
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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 defines backlog as signed contracts or purchase orders for
delivery of hardware and software products and services within the next year.
Backlog at June 30, 1998, 1997 and 1996 was approximately $11.2 million, $7.0
million and $10.4 million, respectively. Backlog, as defined, does not include
contracts for hardware and software products which require the further issuance
of purchase orders.
The Company's revenue is typically concentrated among certain
customers, the largest of which in 1998 consisted of Logix, Samsung
Electronics, TELMEX, and Winstar. These customers represented approximately
8%, 8%, 7%, and 6% respectively of total revenue for the year ended June 30,
1998. Sales to three customers in Asia representing a single end user
comprised approximately 9% of total revenue for the year ended June 30, 1998.
Substantially all of the Company's revenue is derived from
dollar-denominated sales and in 1998 55% of total revenue was generated from
domestic sales. Although the Company had significant sales in Asia (23% of
total revenue in 1998) and in Canada and Mexico (11% of total revenue in 1998),
the Company does not have significant foreign operations. The Company's
customers are usually contractually obligated to pay for product in U.S.
dollars. All products are shipped from the United States pursuant to terms of
orders issued by customers.
The Company has experienced less favorable cash collection cycles in
both its international sales and its domestic sales in 1998 compared to 1997.
For 1998, days sales outstanding [365/(annual sales/average of year end
accounts receivable)] for sales to U.S. customers was 176 compared to 161 in
1997 (representing a 9% increase). Days sales outstanding for sales to foreign
customers was 182 in 1998 compared to 114 in 1997 (representing a 60%
increase), primarily due to delayed collections associated with the economic
crisis in Korea and the Asia Pacific region.
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 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 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 costs 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 commissions, rent, reserves against
doubtful accounts receivable, insurance, depreciation. 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
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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.
YEARS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenue decreased 33% from $22.5 million compared to $33.7
million for 1997. The decrease of $11.2 million was caused by several factors.
First, the economic crisis in Korea and the Asia Pacific region significantly
reduced the amount of orders for the Company's DCMS hardware products compared
to the prior year. Secondly, the orders expected in 1998 from the Company's
continuing work as one of the subcontractors to the U.S. Air Force, were
indefinitely delayed in mid-1998. Finally, certain anticipated orders were not
placed until late in the fourth quarter of 1998 and had not been completed by
the end of the year.
Revenue from traditional carrier network products decreased as a percentage of
total revenue from 65% of total revenue in 1997 to 51% of total revenue in 1998
primarily as a result of the decrease in sales to Korea. Revenue from
enterprise network products decreased from 25% of total revenue in 1997 to 22%
of total revenue in 1998 primarily as a result of the decreased sales caused
from the delay in orders from the U.S. Airforce. Revenue from new and emerging
carriers such as Logix, Winstar Telecommunications, and Nextel increased from
10% of revenue in 1997 to 27% of revenue in 1998 primarily as a result of
increased sales of the new NetPlus PRO*VISION product. The Company believes
revenues from sales of its Netplus PRO*VISION products to new and emerging
carriers in North America will continue to increase in the future.
Gross Margins for 1998 were 41% compared to 48% for 1997. The decrease in the
gross margins was caused by the effect of certain fixed costs on lower volume
of revenue, particularly with regard to sales of DCMS hardware products, the
mix of products and services and the addition of approximately $334,000 of
additional reserves for inventory obsolescence. The Company expects gross
margins to improve as sales of the NetPlus PRO*VISION product increase, due to
higher gross margins for this product.
Selling General and Administrative expenses for 1998 were $17 million compared
to $11 million in 1997 (which represented 76% and 33% of revenue for 1998 and
1997 respectively) . A primary cause of the increase was due to the increased
personnel, fringe benefits and facilities costs associated with expansion of
the Company's marketing, sales and administrative functions in anticipation of
receiving significant orders from Korea and the Asia Pacific region before the
economic crisis impacted the Company's business. Additionally, the Company
increased its reserves for doubtful accounts receivables in 1998 by $2.5
million, considering the increased aging of accounts and the Company's
evaluation of the collectibility of its accounts receivable.
In April 1998, the Company completed a general reduction in staffing which
included administrative personnel. As a result of these staff reductions and
ordinary turnover, the Company expects selling, general and administrative
expenses to be lower as a percentage of revenue in 1999.
Research and Development expenses for 1998 were $2.4 million (11% of revenue)
compared to $1.5 million (4% of revenue) in 1997. The increase of $0.9
million was primarily due to the development of the Company's NetPlus
PRO*VISION product line for the new and emerging carrier market. 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.
Benefit for Income Taxes. The Company recognized a $898,000 benefit from
income taxes in 1998 compared to a $898,000 provision for income taxes in
1997. The benefit was recognized as a result of the utilization of the
Company's net operating losses which eliminated its deferred income tax
liability.
YEARS ENDED JUNE 30, 1997 AND 1996
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Revenue. Total revenue increased 69% from $20.0 million in 1996 to $33.7
million in 1997. The increase in revenue was attributable to increased sales
volume of the Company's products and software licenses. Revenue from
traditional carrier network products increased 64%, representing 65% of total
revenues, which growth resulted from increases in sales to foreign strategic
alliance partners that included the Korea Consortium and International
Computers Limited. Revenue from enterprise network products increased 29%,
representing 24% 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% of 1997 revenues up from 1% in 1996.
Cost of Products, Software Licenses and Services. Cost of products, software
licenses and services increased 63% to $17.6 million in 1997 from $10.8 million
in 1996 and decreased as a percentage of revenue to 52% from 54%, 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 48% and 46% for years 1997 and 1996, respectively. The
improvement in gross margin was primarily the result of an increase in software
license revenue as a percentage of total revenues in 1997.
Selling, General and Administrative. Selling, general and administrative
expenses increased 67% to $11.0 million in 1997 from $6.8 million in 1996.
These expenses represented 33% and 34% of total revenue in 1997 and 1996,
respectively. The increased expenses were 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 increased rent incurred in conjunction with the
Company's relocation to a larger facility.
Research and Development. Research and development expense increased 54% to
$1.5 million in 1997 from approximately $1.0 million in 1996. The increase was
attributable to the addition of software development engineers and technical
consultants required to support the Company's product development activities.
As a percentage of revenue, research and development expense decreased to 4% in
1997 from 5% in 1996.
Provision for Income Taxes. The Company recorded a tax provision of
approximately $898,000 in 1997, representing an effective tax rate of 26%.
This rate was lower than the expected statutory income tax rate primarily due
to a decrease in the valuation allowance and utilization of foreign tax
credits. This provision represents an increase of approximately $898,000 over
1996 when no provision was recorded, the result of the provision being offset
by a similar decrease in the valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company had $2.9 million of cash and cash equivalents,
compared to $7.9 million at June 30, 1997. During 1998, the Company used $2.3
million in operations, $1.2 million for investment in property and equipment,
and $1.3 million for investment in capitalized software. The use of cash for
operations was primarily due to the funding of operating losses. Cash and cash
equivalents available in future periods may be significantly lower than that
available at year end, depending on the results of collections of accounts
receivable and of payments received in connection with contracts.
Accounts receivables, net of allowances for doubtful accounts, declined to
$10.0 million at June 30, 1998 from $16.1 million at June 30, 1997. Accounts
receivables include billed accounts receivables, unbilled accounts receivables
and an allowance for doubtful accounts. Billed accounts receivables declined
to $8.8 million at June 30, 1998 from $13.0 million at June 30, 1997 reflecting
a decline in revenue in 1998 as well as more active management of the
outstanding receivables. Billed accounts receivable at June 30, 1998 also
reflects the conversion of a $1.6 million account receivable which was
outstanding at June 30, 1997 into a secured note receivable. At June 30, 1998
the Company had collected approximately $0.5 million leaving a balance on the
note of $1.1 million, which, under the terms of the note is to be paid in full
by September 1999. Billed accounts receivables, before allowance for doubtful
accounts, at June 30, 1998 included $5.2 million over 90 days. Unbilled
accounts receivables rose slightly to $3.6 million at June 30, 1998 from $3.1
million at June 30, 1997. These receivables primarily represent contractual
payment terms which may not be billed for up to twelve months. During 1998,
the Company increased its allowance for doubtful accounts receivable by
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$2.5 million considering the increased aging of accounts and the Company's
evaluation of the collectibility of its accounts receivables. The Company
believes these reserves are adequate.
Gross inventories increased from $2.8 million at June 30, 1997 to $3.6 million
at June 30, 1998. The increase of $0.8 million was primarily due to the
purchase of hardware for a significant order which was received, but not
completed as of June 30, 1998. In addition the Company increased reserves for
inventory obsolescence from $15,000 at June 30, 1997 to $349,000 at June 30,
1998. This increase recognizes the obsolescence resulting from the rapidly
changing technology of the industry that the Company operates in and the value
of older inventory, which the Company maintains for support of long-term
maintenance contracts.
In April 1998, the Company obtained from Crestar Bank of Maryland ("Crestar") a
revolving credit facility ("line of credit") providing for borrowings of up to
$3.5 million which expires December 31, 1998. Borrowings under the line of
credit are subject to approval by the bank and the bank has the right to refuse
borrowing requests at any time. Interest on outstanding balances under the line
of credit is payable monthly at the LIBOR rate plus 2 1/2%. The line of credit
is secured by the general assets of the Company, requires compliance with
certain financial covenants, including positive net income and minimum tangible
net worth and, in the event of default, permits Crestar to accelerate any
outstanding obligations under the line of credit or under any other loans
outstanding from Crestar. At September 25, 1998, the Company's only borrowings
under the line of credit were letters of credit in the aggregate amount of
$767,000 (see below). In addition, the Company has term loans outstanding from
Crestar in the aggregate principal amount of $888,000 at June 30, 1998 (see
below). The Company also maintains its cash at accounts with Crestar. Crestar
recently notified the Company that it was in default of the line of credit as a
result of the Company's failure to comply with certain financial covenants. The
Company is in the process of seeking alternative financing. In the meantime,
Crestar has stated in writing, without waiving any of its rights, that it is not
taking action to enforce its rights and remedies under the line of credit
agreement. However, if the borrowings outstanding under the line of credit (i.e.
the letters of credit and term loans) are repaid in full on or before November
2, 1998, Crestar has agreed to waive its right to collect approximately $35,000
in termination fees. All amounts due under Crestar borrowings are classified as
current liabilities in the financial statements.
The Company currently is actively seeking alternative financing to replace its
line of credit. George T. Jimenez, the Chief Executive Officer of the Company
and a significant stockholder, has agreed that in the event that alternative
financing can not be obtained in a timely manner and that, at any time during
the next 12 months the Company's working capital becomes inadequate to support
the business at its then current level, he will make available through a loan
guarantee or a loan, for working capital in the principal amount of up to $3.5
million (less any amounts raised by the Company after September 28, 1998 from
financing activities or through the sale or pledge of assets). Such loan, if
any would bear interest at prime plus 2%, would be repayable out of the first
alternate funding available to the Company or upon a change of control, if any,
and would be collateralized by the assets of the Company.
In addition, Mr. Jimenez has agreed to provide an unconditional guarantee,
fully secured by cash or marketable securities, of the Company's reimbursement
obligation for any amounts paid by Crestar in connection with a $450,000 letter
of credit issued in connection with the Company's lease of its headquarters
building (see below). The Company has agreed to reimburse Mr. Jimenez for any
amounts that he is required to pay under such guarantee.
The Company believes that existing cash balances, cash flows from operations
and alternate sources of financing (including the financing referred to above
from Mr. Jimenez) will be sufficient to support the Company's working capital
requirements for at least the next twelve months. The Company's ability to
generate sufficient cash flows for working capital is dependent on the
Company's ability to increase sales and to receive from customers in a timely
fashion adequate payments in connection with its contracts. There is no
assurance that such sales or payment levels will be achieved. If cash flows
from operations are insufficient to satisfy the Company's working capital
requirements, the Company will be required to reduce expenses, raise additional
funds through debt or equity financings or sales of assets and/or consider
strategic alternatives. There can be no assurance that reductions in expenses
would be achievable in a timely manner or, if achieved, that they would not
have a material adverse effect on the Company's ability to generate revenues at
the levels achieved to date. Further, there is no assurance that adequate
additional funds will be available, in a timely manner or on terms favorable to
the Company.
During 1998, the Company paid down debt balances (including its capital lease
obligations) by $488,000. The long-term debt includes two term loans for
capital equipment and a capital lease obligation with monthly repayment terms,
which are due in varying monthly installment through June 2000 and June 2001.
At June 30, 1998, the balance of term loans and the capital lease obligation
was $1 million compared to $1.5 million at June 30, 1997. With the exception
of
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a capital lease for an office telephone system, all of the Company's term loans
are with Crestar. At June 30, 1998, the amount owed to Crestar for the term
loans was $888,000. These loans bear interest at the bank's prime rate and at
1% over the bank's prime rate, and are secured by accounts receivable,
inventory, specific equipment and by the Company's general assets. At June
30, 1998, the amount owed on the capital lease was $164,000 and is due in
monthly installments of principal plus interest (10.03%) through November
2001. As of September 28, 1998, the Company had made all required payments
under the terms of its loans and capital lease agreement.
Under the terms of its office lease, the Company maintains a letter of credit
under its line of credit with Crestar, which names the landlord as the sole
beneficiary and which may be drawn on by the landlord in the event of a
monetary default by the Company. The letter of credit required under the lease
for 1999 is $450,000 decreasing annually through 2003 to $100,000.
The Company maintains other letters of credit under its line of credit with
Crestar which at September 14, 1998 totaled $327,000. These letters of credit
represent performance guarantees under the terms of contracts the Company has
entered into with several of its customers and expire through October 31, 1998.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In October 1998, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which provides guidance in recognizing revenue on contracts with multiple
elements including software licenses and services and superseded the previous
authoritative literature (SOP 91-1). SOP 97-2 is effective for the Company for
transactions entered into after June 30, 1998. In February 1998, the AICPA
proposed deferring, for one year, the implementation date for certain
provisions of SOP 97-2. This standard is expected to result in more
conservative revenue recognition on software transactions than was allowed
under previous guidance.
In June 1997, the FASB issued SFAS No. 131 entitled "Disclosures about Segments
of an Enterprise and Related Information" which will become effective for the
Company's 1999 financial statements and will apply to quarterly reporting
beginning in the first quarter of 1999. This Statement may change the way
public companies, having segments, report information about their business in
annual financial statements and may require them to report selected segment
information in their quarterly reports issued to stockholders. It also
requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenues,
and its major customers. The Company is currently evaluating reporting and
disclosure requirements under this standard.
In June 1997, the FASB issued SFAS No. 130 entitled "Reporting Comprehensive
Income", which will become effective for the Company's 1999 year and will apply
to quarterly reporting beginning in the first quarter of 1999. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and it
components. All items that are required to be recognized under accounting
standards as components of comprehensive income must be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company's principal component of comprehensive income is net
income. This standard is not expected to materially affect the Company's
reporting and disclosure requirements.
ADDITIONAL 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
-19-
20
the continued demand by such customers for its products and services. The
Company's results of operations and financial condition could be materially
adversely affected by the failure of anticipated orders to materialize and by
deferrals or cancellation of orders.
Sales to traditional carriers have provided and are expected to
continue to provide substantial 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's growth has placed significant demands on the Company's
administrative, operational and financial personnel and systems. Additional
expansion by the Company may further strain the Company's management, financial
and other resources. There can be no assurance that the Company's systems,
procedures, controls and existing space will be adequate to support continued
growth of the Company's operations. If the Company is unable to respond to and
manage changing business conditions, the quality of its products and services
and its results of operations could be materially adversely affected.
The new and emerging carrier market in the United States and overseas
represents a source of growing demand for the Company's products, software
licenses and services. In that this market segment is relatively new and in
that many of these organizations are in the early stages of their development,
financial resources may be limited and may adversely affect their ability to
pay for the Company's products, software licenses and services.
The Company derived approximately $10.2 million, or 45% of its total
revenues, from customers outside of the United States in 1998. The Company
anticipates that a significant amount of future revenues will be derived from
sales to end users in Asia, Europe and other areas of the world. These
revenues may be adversely affected by the changing economic conditions in
foreign countries, which, in turn, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's ability to successfully develop new, and enhance
existing, products, to service its customers, and to remain competitive depends
in large part on its ability to attract and retain highly qualified technical,
sales and marketing and management personnel. Competition for such personnel
is intense, and there can be no assurance that the Company will be able to
continue to attract and retain such personnel.
YEAR 2000
The Company has not completed a thorough assessment of the risks and costs
associated with the Year 2000 issue on internal hardware, software and
non-information technology systems nor has the Company addressed Year 2000
compliance of suppliers providing material incorporated into the Company's
products.
Management believes that risks associated with Year 2000 issues and related
contingency plan arrangements will be resolved such that Year 2000 issues are
adequately mitigated and ongoing operations are not disrupted.
The Company is establishing a program wherein systems will be assessed as to
Year 2000 compliance. This assessment will include internal infrastructure,
supplier readiness and product evaluation including information technology and
non-information technology systems and applications. This assessment will
include identifying areas of non-compliance, plans to address known exposures,
implementation of any system changes, validation of Year 2000 compliance and
contingencies to mitigate unknown risk. The Company has targeted Year 2000
exposures to be
-20-
21
identified and addressed no later than June 1999. Attention and priority will
be placed on those systems considered critical to the ongoing operations,
requiring integration with other compliant systems and with longer lead-time
anticipated to remediate.
The cost of addressing the Company's Year 2000 issues has not been quantified,
as assessment of Year 2000 compliance has not been completed. However,
management is not aware of any Year 2000 compliance exposures which would
preclude ongoing operations during the next twelve months or which would result
in material short-term cash requirements. There can be no assurance that there
will not be a delay in, or increased costs associated with, the programs
indicated in this section. Since the assessment is ongoing, the potential
impact of these complications on the Company's financial condition and results
of operations cannot be determined at this time. If computer systems used by
the Company or its suppliers, the integrity of products provided to the
Company, or the software applications used in systems manufactured and sold by
the Company, fail or experience significant difficulties related to the Year
2000, the Company's operations and financial results could be materially
affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements, together with the
independent accountants' report thereon, appear at pages F-1
through F-18 of this Form 10-K.
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 1998 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by
reference to Proxy Statement for the 1998 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this
report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by
reference to Proxy Statement for the 1998 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this
report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by
reference to Proxy Statement for the 1998 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A not later
than 120 days after the end of the year covered by this
report.
-21-
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) INDEX TO FINANCIAL STATEMENTS
The following Financial Statements of the Registrant are filed as part
of this report:
Page
----
Report of Independent Accountants......................................................................... F-2
Balance Sheets as of June 30, 1998 and 1997............................................................... F-3
Statements of Operations for the years ended June 30, 1998, 1997
and 1996......................................................................................... F-4
Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1998, 1997 and 1996............................................................... F-5
Statements of Cash Flows for the years
ended June 30, 1998, 1997 and 1996............................................................... F-6
Notes to Financial Statements............................................................................. F-7
(a)(2) 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.
(a)(3) INDEX TO EHIBITS
See attached Index to Exhibits on page X-1 of this form 10-K.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the fourth quarter of
1998.
-22-
23
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 29, 1998
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. Jimenez President, Chief Executive Officer September 29, 1998
-------------------- and Chairman of the Board
(George T. Jimenez) (Principal Executive Officer and
Principal Financial Officer)
/s/Leslie Oleynik Controller September 29, 1998
----------------- (Principal Accounting Officer)
(Leslie Oleynik)
/s/Gilbert A. Wetzel Director September 29, 1998
--------------------
(Gilbert A. Wetzel)
/s/Paul G. Casner, Jr. Director September 29, 1998
----------------------
(Paul G. Casner, Jr.)
/s/Gary P. Golding Director September 29, 1998
------------------
(Gary P. Golding)
-23-
24
ACE*COMM CORPORATION
INDEX TO FINANCIAL STATEMENTS
The following Financial Statements of the Registrant are
filed as part of this report:
Page
----
Report of Independent Accountants............................................F-2
Balance Sheets as of June 30, 1998 and 1997.................................F-3
Statements of Operations for the years ended June 30,
1998, 1997 and 1996..............................................F-4
Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1998, 1997 and 1996...............................F-5
Statements of Cash Flows for the years ended June 30,
1998, 1997 and 1996..............................................F-6
Notes to Financial Statements................................................F-7
F-1
25
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, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our 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.
PricewaterhouseCoopers LLP
Washington, D.C.
September 29, 1998
F-2
26
ACE*COMM CORPORATION
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30,
-----------------------------------------------
1998 1997
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,956 $ 7,920
Accounts receivable, net 9,985 16,120
Inventories, net 3,232 2,814
Notes receivable 825 -
Prepaid expenses and other 666 1,011
-------------------- --------------------
Total current assets 17,664 27,865
Property and equipment, net 4,069 3,470
Capitalized software development costs, net 2,461 2,077
Notes receivable 310 -
Other assets 89 106
-------------------- --------------------
Total assets $ 24,593 $ 33,518
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings $ 1,030 $ 527
Accounts payable 2,010 2,735
Accrued expenses 739 446
Accrued compensation 2,161 2,129
Accrued contract costs 3,577 3,551
Deferred income taxes - 103
Deferred revenue 2,169 510
-------------------- --------------------
Total current liabilities 11,686 10,001
Noncurrent borrowings 122 1,013
Deferred income taxes - 795
-------------------- --------------------
Total liabilities 11,808 11,809
-------------------- --------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, 0
shares issued and outstanding - -
Common stock, $.01 par value, 45,000,000 shares authorized,
8,807,049 and 8,550,582 shares issued and outstanding 88 85
Additional paid-in capital 19,822 19,530
(Accumulated deficit) retained earnings (7,125) 2,094
-------------------- --------------------
Total stockholders' equity 12,785 21,709
-------------------- --------------------
Total liabilities and stockholders' equity $ 24,593 $ 33,518
==================== ====================
The accompanying notes are an integral part of these financial statements.
F-3
27
ACE*COMM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30,
-------------------------------------------------------------
1998 1997 1996
---------------- ----------------- -----------------
Revenue - products, software licenses and services $ 22,465 $33,684 $19,983
Cost of products, software licenses and services 13,325 17,627 10,836
-------- ------- -------
Gross profit 9,140 16,057 9,147
Selling, general and administrative expense 17,029 11,254 6,751
Research and development expense 2,358 1,472 957
-------- ------- -------
(Loss) income from operations (10,247) 3,331 1,439
Interest income (247) (347) -
Interest expense 117 156 379
-------- ------- -------
(Loss) income before income taxes (10,117) 3,522 1,060
Income tax (benefit) provision (898) 898 -
-------- ------- -------
Net (loss) income $ (9,219) $ 2,624 $ 1,060
======== ======= =======
Basic net (loss) income per share $ (1.06) $ 0.35 $ 0.26
======== ======= =======
Diluted net (loss) income per share $ (1.06) $ 0.32 $ 0.18
======== ======= =======
Shares used in computing net (loss) income per share:
Basic 8,708 7,460 3,472
======== ======= =======
Diluted 8,708 8,152 5,829
======== ======= =======
The accompanying notes are an integral part of these financial statements.
F-4
28
ACE*COMM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
PREFERRED STOCK COMMON STOCK
------------------------ ----------------------- ADDITIONAL
CLASS B PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
--------- ----------- --------- ------------ -------------
Balance, June 30, 1995 1 $ 1 3,297 $ 33 $ 320
Accretion of preferred stock dividends - - - - (140)
Exercise of common stock options - - 293 3 163
Payment of stock subscriptions receivable - - - - -
Net income for the year ended June 30, 1996 - - - - -
--------- ----------- --------- ------------ -------------
Balance, June 30, 1996 1 1 3,590 36 343
Accretion of preferred stock dividends - - - - (17)
Conversion of preferred stock, Class C - - 1,531 15 2,264
Redemption of preferred stock, Class B (1) (1) - - (307)
Issuance of common stock pursuant to
initial public offering - - 2,645 26 16,083
Exercise of common stock options - - 838 8 2,060
Repurchase and retirement
of common stock - - (54) - (896)
Net income for the year ended June 30, 1997 - - - - -
--------- ----------- --------- ------------ -------------
Balance, June 30, 1997 - - 8,550 85 19,530
Exercise of common stock options - - 258 3 313
Repurchase and retirement
of common stock - - (1) - (21)
Net loss for the year ended June 30, 1998 - - - - -
--------- ----------- --------- ------------ -------------
Balance, June 30, 1998 - $ - 8,807 $ 88 $ 19,822
========= =========== ========= ============ =============
(ACCUMULATED
STOCK DEFICIT)
SUBSCRIPTIONS RETAINED
RECEIVABLE EARNINGS TOTAL
------------- ----------------- ---------------
Balance, June 30, 1995 $ (6) $ (1,590) $ (1,242)
Accretion of preferred stock dividends - - (140)
Exercise of common stock options (117) - 49
Payment of stock subscriptions receivable 123 - 123
Net income for the year ended June 30, 1996 - 1,060 1,060
------------- ----------------- ---------------
Balance, June 30, 1996 - (530) (150)
Accretion of preferred stock dividends - - (17)
Conversion of preferred stock, Class C - - 2,279
Redemption of preferred stock, Class B - - (308)
Issuance of common stock pursuant to
initial public offering - - 16,109
Exercise of common stock options - - 2,068
Repurchase and retirement
of common stock - - (896)
Net income for the year ended June 30, 1997 - 2,624 2,624
------------- ----------------- ---------------
Balance, June 30, 1997 - 2,094 21,709
Exercise of common stock options - - 316
Repurchase and retirement
of common stock - - (21)
Net loss for the year ended June 30, 1998 - (9,219) (9,219)
------------- ----------------- ---------------
Balance, June 30, 1998 $ - $ (7,125) $ 12,785
============= ================= ===============
The accompanying notes are an integral part of these financial statements.
F-5
29
ACE*COMM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
-----------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (9,219) $ 2,624 $ 1,060
Adjustments to reconcile net (loss) income to net cash
(used for) provided by operating activities:
Depreciation and amortization 1,563 1,135 822
Changes in operating assets and liabilities:
Accounts receivable, net 6,135 (7,476) (3,941)
Notes receivable (1,135) - -
Inventories, net (418) (978) (872)
Other assets 362 (367) (490)
Accounts payable (725) (387) 1,876
Accrued expenses 319 3,082 623
Accrued compensation 32 996 702
Deferred income taxes (898) 898 -
Deferred revenue 1,659 (1,380) 893
----------------- ----------------- -----------------
Net cash (used for) provided by operating activities (2,325) (1,853) 673
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,203) (2,390) (417)
Additions to capitalized software development costs (1,343) (1,371) (927)
----------------- ----------------- -----------------
Net cash used for investing activities (2,546) (3,761) (1,344)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in line of credit 100 (4,446) 1,175
Other borrowings - 1,000 186
Payments on debt (450) (341) (683)
Principal payments under capital lease obligation (38) (21) -
Net proceeds from common stock issued - 16,109 -
Exercise of common stock options 316 2,068 49
Payment of stock subscriptions receivable - - 123
Repurchase and retirement of common stock (21) (896) -
Redemption of class B preferred shares (308) -
----------------- ----------------- -----------------
Net cash (used for) provided by financing activities (93) 13,165 850
----------------- ----------------- -----------------
Net (decrease) increase in cash and cash equivalents (4,964) 7,551 179
Cash and cash equivalents at beginning of year 7,920 369 190
================= ================= =================
Cash and cash equivalents at end of year $ 2,956 $ 7,920 $ 369
================= ================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 114 $ 164 $ 375
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES:
Accretion of preferred stock dividends $ - $ 17 $ 140
Purchase of equipment under capital lease $ - $ 222 $ -
Conversion of Class C preferred stock $ - $ 2,279 $ -
Exercise of common stock options $ - $ - $ 2
Notes received for exercise of common stock options $ - $ - $ 117
The accompanying notes are an integral part of these financial statements.
F-6
30
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
ACE*COMM Corporation ("ACE*COMM" or the "Company") develops, sells and services
Operations Support Systems ("OSS") hardware and software products for data and
voice networks. The Company's customers include telecommunications service
providers 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.
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. Significant estimates inherent in the
preparation of the accompanying financial statements include: management's
forecasts of contract costs and progress towards completion which are used to
determine revenue recognition under the percentage-of-completion method,
estimates of allowances for doubtful accounts receivable and inventory
obsolescence, tax valuation allowances, and estimates of the net realizable
value of capitalized software development costs.
REVENUE RECOGNITION
The Company derives revenues from software license fees, 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, significant
uncertainties regarding acceptance have expired and 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 the relationship of costs
incurred to the estimated total costs of the project, which fairly reflects
contract performance milestones.
In October 1998, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which provides guidance in recognizing revenue on contracts with multiple
elements including software licenses and services and superseded the previous
authoritative literature (SOP 91-1). SOP 97-2 is effective for the Company for
transactions entered into after June 30, 1998. In February 1998, the AICPA
proposed deferring, for one year, the implementation date for certain
provisions of SOP 97-2. This standard is expected to result in more
conservative revenue recognition on software transactions than was allowed
under previous guidance.
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
F-7
31
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 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. Long-lived assets held and used by the
Company are reviewed for impairment whenever changes in circumstances indicate
the carrying value of an asset may not be recoverable.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company owns certain proprietary rights to computer software systems that
the Company has either developed or purchased and licensed to customers.
Purchased computer software and the related copyrights are capitalized at their
costs.
Research and development costs are expensed as incurred. However, computer
software development costs incurred after technological feasibility of a
product is established through the time when the product is available for
release to customers are capitalized. Capitalized software and purchased
technology costs are amortized on a product by product basis based on the
greater of the ratio of current sales to estimated total future sales or a
straight-line basis over the remaining estimated economic life of the product
(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.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The
Company adopted this statement during the second quarter of 1998, as required.
Accordingly, prior period earnings per share data have been restated to conform
with SFAS 128.
Basic earnings per share excludes dilution and is computed by dividing net
(loss) income by the weighted average 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.
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.
RECLASSIFICATION
Certain prior year information has been reclassified to conform with current
year presentation.
F-8
32
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
Accounts receivable consist of the following (in thousands):
JUNE 30,
---------------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Billed $ 8,829 $ 12,990
Unbilled 3,621 3,140
Allowance for doubtful accounts (2,465) (10)
---------------------------- ----------------------------
$ 9,985 $ 16,120
============================ ============================
Unbilled receivables include costs and estimated profit on contracts in
progress which have been recognized as revenue but not yet billed to customers
under the provisions of specific contracts. Substantially all unbilled
receivables are expected to be billed and collected within one year. There were
no write-offs of accounts receivable in 1998, 1997 and 1996.
NOTES RECEIVABLE
In March 1998, the Company converted a $1.6 million account receivable,
outstanding from a prime contractor, to a secured interest-bearing promissory
note, payable over a term of 18 months. Principal and interest payments on the
note are due monthly through September 1999 at an interest rate of prime plus
1%. At June 30, 1998, the outstanding principle balance was $1.1 million, and
all principle and interest payments had been made in accordance with the
payment schedule outlined in the note agreement.
NOTE 4 - INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30,
---------------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Inventories $ 3,581 $ 2,829
Allowance for obsolescence (349) (15)
---------------------------- ----------------------------
$ 3,232 $ 2,814
============================ ============================
Inventories consist principally of purchased materials to be used in the
production of finished goods. There were no write-offs of inventories in 1998,
1997 and 1996.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
JUNE 30,
---------------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Computer equipment $ 4,454 $ 3,594
Office equipment 1,153 908
Vehicles 42 42
Leasehold improvements 205 107
---------------------------- ----------------------------
5,854 4,651
Less accumulated depreciation and amortization (1,785) (1,181)
---------------------------- ----------------------------
$ 4,069 $ 3,470
============================ ============================
Depreciation expense of property and equipment amounted to $604,000, $448,000
and $280,000 in 1998,
F-9
33
1997 and 1996, respectively. At June 30, 1998 and 1997, office equipment
includes a capitalized lease in the amount of $222,000 and accumulated
depreciation of $35,000 and $13,000, respectively.
NOTE 6 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of the following (in thousands):
JUNE 30,
---------------------------------------------------------
1998 1997
------------------------- -------------------------
Capitalized software development costs $ 7,282 $ 5,939
Less accumulated amortization (4,821) (3,862)
------------------------- -------------------------
$ 2,461 $ 2,077
========================= =========================
Amortization expense of capitalized software amounted to $959,000, $687,000 and
$542,000 in 1998, 1997 and 1996, respectively.
NOTE 7 - BORROWINGS
The Company's borrowings consist of the following: (in thousands)
JUNE 30,
---------------------------------------------------------
1998 1997
------------------------- -------------------------
Installment note with Crestar Bank, due in monthly
installments through July 1, 2001, bearing
interest at the bank's prime rate (8.5% at June 30, 1998),
collateralized by general assets of the Company $ 771 $ 1,000
Installment notes with Crestar Bank, due in
monthly installments through June 2000, bearing interest
at the bank's prime rate (8.5% at June 30, 1998) plus
1%, collateralized by accounts receivable, inventory
and specific equipment. 117 339
Capital lease obligation for the use of an office telephone
system, principal plus interest (10.03%), due in monthly
installments through November 2001. 164 201
Line of credit with Crestar Bank, credit limit up to
$3.5 million due December 31, 1998, bearing interest at
LIBOR (5.66% at June 30, 1998) plus 2.5%, collateralized
by general assets of the Company. 100 -
------------------------- -------------------------
Total borrowings 1,152 1,540
Less current portion (1,030) (527)
------------------------- -------------------------
Noncurrent portion $ 122 $ 1,013
========================= =========================
Annual maturities of noncurrent borrowings
are as follows (in thousands):
2000 $ 47
2001 51
2002 24
-------------------------
Total $ 122
=========================
F-10
34
LINE OF CREDIT
In April 1998, the Company obtained from Crestar Bank of Maryland ("Crestar") a
revolving credit facility ("line of credit") providing for borrowings of up to
$3.5 million which expires December 31, 1998. Borrowings under the line of
credit are subject to approval by the bank and the bank has the right to refuse
borrowing requests at any time. Interest on outstanding balances under the line
of credit is payable monthly at the LIBOR rate plus 2 1/2%. The line of credit
is secured by the general assets of the Company, requires compliance with
certain financial covenants, including positive net income and minimum tangible
net worth and, in the event of default, permits Crestar to accelerate any
outstanding obligations under the line of credit or under any other loans
outstanding from Crestar. At June 30, 1998 the balance of borrowings under the
line of credit included a $100,000 draw on the line of credit, which was
subsequently paid in August of 1998, and letters of credit in the aggregate
amount of $743,000 (see Note 14). In addition, the Company has term loans
outstanding from Crestar in the aggregate principal amount of $888,000 at June
30, 1998. The Company also maintains its cash accounts with Crestar. Crestar
recently notified the Company that it was in default of the line of credit as a
result of the Company's failure to comply with certain financial covenants. The
Company is in the process of seeking alternative financing. In the meantime,
Crestar has stated in writing, without waiving any of its rights, that it is not
taking action to enforce its rights and remedies under the line of credit
agreement. However, if the borrowings outstanding under the line of credit (i.e.
the letters of credit and term loans) are repaid in full on or before November
2, 1998, Crestar has agreed to waive its right to collect approximately $35,000
in termination fees. All amounts due under Crestar borrowings are classified as
current liabilities in the financial statements.
The Company currently is actively seeking alternative financing to replace its
line of credit. George T. Jimenez, the Chief Executive Officer of the Company
and a significant stockholder, has agreed that in the event that alternative
financing can not be obtained in a timely manner and that, at any time during
the next 12 months the Company's working capital becomes inadequate to support
the business at its current level, he will make available, through a loan
guarantee or loan, working capital in the principal amount of up to $3.5
million (less any amounts raised by the Company after September 28, 1998 from
financing activities or through the sale or pledge of assets). Such loan, if
any would bear interest at prime plus 2%, would be repayable out of the first
alternate funding available to the Company or upon a change of control, if any,
and would be collateralized by the assets of the Company.
In addition, Mr. Jimenez has agreed to provide an unconditional guarantee,
fully secured by cash or marketable securities, of the Company's reimbursement
obligation for any amounts paid by Crestar in connection with a $450,000 letter
of credit issued in connection with the Company's lease of its headquarters
building (see Note 14). The Company has agreed to reimburse Mr. Jimenez for any
amounts that he is required to pay under such guarantee.
The Company believes that existing cash balances, cash flows from operations
and alternate sources of financing (including the financing referred to above
from Mr. Jimenez) will be sufficient to support the Company's working capital
requirements for at least the next twelve months. The Company's ability to
generate sufficient cash flows for working capital is dependent on the
Company's ability to increase sales and to receive from customers in a timely
fashion adequate payments in connection with its contracts. There is no
assurance that such sales or payment levels will be achieved. If cash flows
from operations are insufficient to satisfy the Company's working capital
requirements, the Company will be required to reduce expenses, raise additional
funds through debt or equity financings or sales of assets and/or consider
strategic alternatives. There can be no assurance that reductions in expenses
would be achievable in a timely manner or, if achieved, that they would not
have a material adverse effect on the Company's ability to generate revenues at
the levels achieved to date. Further, there is no assurance that adequate
additional funds will be available, in a timely manner or on terms favorable to
the Company.
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. No contributions were due or made by the Company
in 1998. During 1997 and 1996, Company contributions were approximately
$103,000 and $97,000, respectively.
F-11
35
NOTE 9 - INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
JUNE 30,
---------------------------------------------------------
1998 1997 1996
---------------- ------------------- ----------------
Tax assets:
Costs capitalized to inventory $ 460 $ 245 $ 253
Accruals deducted for tax 808 172 88
Net operating loss carryforwards 6,806 4,190 940
Tax credit carryforwards 572 575 292
Copyrights and patents 18 21 21
Other 97 - 4
---------------- ------------------- ----------------
Gross deferred tax assets 8,761 5,203 1,598
---------------- ------------------- ----------------
Tax liabilities:
Income on contracts (1,846) (1,224) (476)
Software costs deducted for tax (871) (810) (616)
Depreciation (456) (258) (229)
---------------- ------------------- ----------------
Gross deferred tax liabilities (3,173) (2,292) (1,321)
---------------- ------------------- ----------------
Net deferred tax asset 5,588 2,911 277
Valuation allowance (5,588) (3,809) (277)
---------------- ------------------- ----------------
Net deferred tax liability $ - $ (898) $ -
================ =================== ================
Current deferred tax liability $ - $ (103) $ -
Noncurrent deferred tax liability - (795) -
---------------- ------------------- ----------------
Net deferred tax liability $ - $ (898) $ -
================ =================== ================
The components of the (benefit) provision for income taxes are as follows (in
thousands):
YEARS ENDED JUNE 30,
--------------------------------------------------------
1998 1997 1996
---------------- ------------------ ---------------
Current:
Federal $ - $ - $ -
State - - -
---------------- ------------------ ---------------
Total current - - -
---------------- ------------------ ---------------
Deferred
Federal (745) 745 -
State (153) 153 -
---------------- ------------------ ---------------
Total deferred (898) 898 -
---------------- ------------------ ---------------
Total $ (898) $ 898 $ -
================ ================== ===============
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 1998, there was a net increase in
the valuation allowance of $1.8 million. This increase primarily relates to
additional income tax net operating losses generated from the current year
operating loss as well as from the deduction created by the exercise of
non-qualified stock options. Any income tax benefit resulting from the
utilization of operating losses will be recognized as a benefit against future
taxable income. Benefit resulting from the exercise of options will be
reflected in additional paid-in-capital (versus through the tax
F-12
36
provision) when actually realized for tax purposes. Net operating loss deferred
tax assets generated from operating losses and deductions from option exercises
amounted to approximately $2.0 million and $4.8 million, respectively at June
30, 1998 ($381,000 and $3.8 million, respectively at June 30, 1997).
In 1998, the income tax benefit was comprised of a $898,000 benefit resulting
from the reversal of deferred tax liabilities based on the ability of the
Company to utilize current year losses to reduce future payment of such taxes.
The benefit was net of an increase in the valuation allowance of $825,000. In
1997, the provision for income taxes was comprised of $898,000 including a
reduction in the valuation allowance of $277,000. In 1996, the provision for
income taxes was comprised of a Federal and state provision of $458,000 which
was offset by a reduction in the valuation allowance of the same amount.
At June 30, 1998, 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. The Company also has net operating loss
carryforwards for tax purposes of approximately $17.5 million that expire in
years 2007 through 2013. Ownership changes as defined by the Internal Revenue
Code, may limit the amount of net operating loss carryforwards that can be
utilized annually to offset future taxable income or liability.
The total income tax (benefit) provision for each year varied from the amount
computed by applying the statutory U.S. Federal income tax rates to net (loss)
income before income taxes as follows (in thousands):
YEARS ENDED JUNE 30,
----------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
Income tax (benefit) provision at statutory rate $ (1,963) $ 1,287 $ 360
State income taxes net of Federal benefit (229) 178 49
Nondeductible expenses 79 70 24
Foreign tax credit - (259) -
Other 390 (101) 25
Change in valuation allowance 825 (277) (458)
------------------ ----------------- -----------------
Actual (benefit) provision $ (898) $ 898 $ -
================== ================= =================
NOTE 10 - STOCKHOLDERS' EQUITY
STOCK OPTIONS
OMNIBUS STOCK PLAN ("OMNIBUS PLAN")
In connection with the Shareholder approved Omnibus Plan, the Company has
reserved 3,200,000 shares of Common Stock to grant nonqualified and incentive
stock options to officers and employees. The exercise price of each option
granted under the Omnibus Plan is determined by the Compensation Committee, and
is limited to a minimum of the fair market value of the Company's Common Stock
on the date of grant. The Omnibus Plan also provides for the issuance of
restricted stock, stock appreciation rights and phantom stock options. The
Company may grant options under the Omnibus Plan until September 18, 2007.
The terms of option grants and issuances of restricted stock, stock appreciation
rights and phantom stock options, including vesting and exerciseability, are
determined by the Compensation Committee. Options and phantom stock options
granted to date vest either immediately or over a period of one to eight years
from the date of grant, subject to accelerated vesting in certain events such as
a change of control, and expire upon the earlier of the employee's termination
or five or ten years from the date of grant. Certain options and phantom stock
options granted in 1997 and 1998 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 and phantom stock options
become exercisable immediately upon vesting or within three years from the date
of grant. In connection with grants through June 30 1998, the Company had
772,621, 770,510, and 543,744 options and phantom stock options outstanding
subject to performance-based accelerated vesting arrangements at June 30, 1998,
1997 and 1996, respectively. As of June 30, 1998, 1997 and 1996, there were
outstanding phantom stock options totaling 8,082,
F-13
37
3,082 and 0, respectively, and no restricted stock or stock appreciation
rights had been granted. Compensation cost associated with the 1998 and 1997
phantom stock option grants was immaterial.
During 1998, the Company re-priced 80,000 options with an original exercise
price of $17.75 to the $6.38 fair market value on the date of re-pricing. No
other terms of the options were modified. There were no modifications of
option terms in 1997 or 1996.
In July 1998, the Company re-priced 122,984 options and phantom stock options
with original exercise and base unit prices of $12.00 to the $5.00 fair market
value on the date of re-pricing. No other terms of the options or phantom
stock options were modified.
STOCK OPTION PLAN FOR DIRECTORS ("DIRECTORS' PLAN")
In connection with the Shareholder approved Directors' Plan, the Company has
reserved 200,000 shares of Common Stock to grant nonqualified stock options to
non-employee members of the Company's Board of Directors. The exercise price of
each option granted under the Directors' Plan is limited to a minimum of the
fair market value of the Company's Common Stock on the date of grant. The
Company may grant options under the Directors' Plan until July 1, 2000.
Options granted to directors through June 30, 1997 vest 4,500 shares each year
from the date of grant. Options granted subsequent to June 30, 1997 vest 3,000
shares each year from the date of grant. Vested options become exercisable
immediately upon vesting. Options granted under the Directors' Plan expire the
earlier of five years from date of grant, six months after death, resignation,
or removal without cause, or immediately upon removal for cause.
Information relating to all the plans is summarized as follows:
OMNIBUS PLAN DIRECTORS' PLAN
----------------- ------------------ --------------------------------------------
WEIGHTED AVG WEIGHTED AVG
NUMBER OF SHARES SHARE PRICE NUMBER OF SHARES SHARE PRICE
----------------- ------------------ ------------------- -------------------
Outstanding Options at June 30, 1995 1,137,907 $ 0.54 63,000 $ 0.51
Granted 164,503 4.20 9,000 7.00
Exercised (266,206) 0.63 (27,000) 0.50
Expired (2,993) 0.82 (4,500) 0.62
----------------- ------------------ ------------------- -------------------
Outstanding Options at June 30, 1996 1,033,211 1.40 40,500 1.92
Granted 744,677 8.86 13,500 7.00
Exercised (806,960) 2.55 (31,500) 0.50
Expired (5,250) 12.00 - -
----------------- ------------------ ------------------- -------------------
Outstanding Options at June 30, 1997 965,678 6.13 22,500 7.00
Granted 689,883 7.67 9,000 17.50
Exercised (257,871) 1.22 - -
Expired (286,908) 10.48 - -
----------------- ------------------ ------------------- -------------------
Outstanding Options at June 30, 1998 1,110,782 $ 7.10 31,500 $ 10.00
================= ================== =================== ===================
Options exercisable at June 30, 1996 907,211 $ 0.62 31,500 $ 0.50
================= ================== =================== ===================
Options exercisable at June 30, 1997 584,697 $ 3.41 9,000 $ 7.00
================= ================== =================== ===================
Options exercisable at June 30, 1998 444,354 $ 6.18 18,000 $ 7.00
================= ================== =================== ===================
Options available for granting 749,181 - 105,500 -
================= ================== =================== ===================
FINANCIAL ACCOUNTING STANDARDS NO. 123
F-14
38
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 Company recorded no compensation cost
associated with stock options in 1998, 1997 and 1996.
The following table summarizes information about stock options outstanding at
June 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at June 30, 1998 Life (yrs) Exercise Price at June 30, 1998 Exercise Price
- ------------------ ------------------ ------------ -------------- ---------------- ----------------
$ 0.41 to $ 1.78 100,850 1.8 $ 0.69 100,850 $ 0.68
$ 5.33 to $ 7.10 811,109 7.7 $ 6.56 300,610 $ 6.86
$10.65 to $12.43 216,139 8.7 $ 11.95 55,710 $ 11.96
$14.20 to $15.98 5,184 3.6 $ 14.75 5,184 $ 14.74
$15.98 to $17.75 9,000 4.4 $ 17.50 0 $ 0.00
------------------ ----------------
1,142,282 462,354
================== ================
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:
1998 1997 1996
----------------------- ----------------------- -----------------------
Expected life (years) 3-8 3-8 3
Risk-free interest rate 5-6 % 6 % 5-6 %
Expected volatility 81 % 77 % 0 %
Dividend yield 0 % 0 % 0 %
The weighted average fair value of stock options granted under the stock option
plans during 1998, 1997 and 1996 was $5.48, $5.83 and $0.73 respectively. If
the Company determined compensation costs for these plans in accordance with
SFAS 123, the Company's net (loss) income and earnings per share would have
been:
(amounts in thousands except
per share amounts) 1998 1997 1996
----------------------- ----------------------- -----------------------
Pro-forma amounts
Net (loss) income $ (9,893) $ 1,212 $ 1,004
======================= ======================= =======================
Basic (loss) income per share $ (1.14) $ 0.16 $ 0.25
======================= ======================= =======================
Diluted (loss) income per share $ (1.14) $ 0.15 $ 0.17
======================= ======================= =======================
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.
F-15
39
NOTE 11 - 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 consisted of two series. Series 1 stock (211,727 shares)
provided voting rights equal to the same number of shares of Common Stock and
Series 2 stock (128,484 shares) provided no voting rights but, if elected by a
majority of the holders of the Class C Preferred Stock, would become voting
shares on a one-to-one basis. Each share of Class C Preferred Stock could be
converted into Common Stock at any time by the holder.
Any shares not converted by designated dates were redeemable 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 was equal to $5.14 per share plus
accrued dividends. In the case of redemption, the holders were entitled to
receive accrued dividends, at a semi-annual rate of four percent, from November
1, 1992. The Company also had 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.
In connection with the Company's initial public offering in August 1996, and
pursuant to the terms of the investment agreement, the shares were converted
into 1,530,950 shares of the Company's common stock.
Activity with respect to Class C Preferred Stock is as follows (in thousands):
Balance, June 30, 1995 $ 2,122
Accretion of dividends 140
-----------------------------
Balance, June 30, 1996 2,262
Accretion of dividends 17
Conversion upon initial public offering (2,279)
-----------------------------
$
Balance, June 30, 1997 -
=============================
NOTE 12 - EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following is a reconciliation of the numerators and denominators of basic
net (loss) income per common share ("basic EPS") and diluted net (loss) income
per common share ("Diluted EPS"):
YEARS ENDED JUNE 30,
-----------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
BASIC EPS:
Income (Numerator):
Net (loss) income $ (9,219) $ 2,624 $ 1,060
Less: Preferred stock dividends - (17) (140)
------------------ ------------------ ------------------
Net (loss) income available to common stockholders $ (9,219) $ 2,607 $ 920
================== ================== ==================
Shares (Denominator):
Weighted average common shares 8,708 7,460 3,472
================== ================== ==================
Basic EPS $ (1.06) $ 0.35 $ 0.26
================== ================== ==================
DILUTED EPS:
Income (Numerator):
F-16
40
Net (loss) income $ (9,219) $ 2,624 $ 1,060
Less: Preferred stock dividends - (17) (140)
Effect of dilutive securities:
Convertible preferred stock - 17 140
------------------ ------------------ ------------------
Net (loss) income available to common stockholders $ (9,219) $ 2,624 $ 1,060
================== ================== ==================
Shares (Denominator):
Weighted average common shares 8,708 7,460 3,472
Stock options - 486 826
Convertible preferred stock - 206 1,531
================== ================== ==================
Total weighted shares and equivalents 8,708 8,152 5,829
================== ================== ==================
Diluted EPS $ (1.06) $ 0.32 $ 0.18
================== ================== ==================
Options to purchase 288,455 shares of Common Stock were outstanding during
1998, but were not included in the computation of diluted EPS because the
effect would have been anti-dilutive.
NOTE 13 - 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 approximately $16.1 million.
The Mandatorily Redeemable Class C Preferred Stock was automatically converted
into 1,530,950 shares of the Company's 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 14 - COMMITMENTS AND 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, 1998 the Company had a $450,000 letter of credit arrangement with
Crestar which guarantees the Company's performance to its landlord (see Note
7). The letter of credit requirement decreases annually through 2003 to
$100,000.
Additionally, at June 30, 1998, the Company had letter of credit arrangements
with Crestar totaling $293,000 which guarantee the Company's performance under
contracts (see Note 7). Subsequent to June 30, 1998, the Company entered letter
of credit arrangements totaling $34,000 with Crestar, which guarantee the
Company's performance under contracts (see Note 7). These letter of credit
arrangements expire through October 1998.
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 the
year 2004 in the following amounts (in thousands):
F-17
41
YEAR ENDING JUNE 30, AMOUNT
- ------------------------------------------------------- -----------------------------
1999 $ 772
2000 736
2001 693
2002 714
2003 736
Thereafter 310
-----------------------------
$ 3,961
=============================
The total rental expense under operating leases was $813,000, $728,000 and
$330,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
NOTE 15 - EXPORT SALES AND SALES TO MAJOR CUSTOMERS
EXPORT SALES
The Company sells its products worldwide from its headquarters in Gaithersburg,
Maryland. The Company has no foreign operations. The following is a breakdown
of the Company's revenue by geographic area (in thousands):
YEARS ENDED JUNE 30,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
U.S. $ 12,314 $ 12,770 $ 9,393
Canada and Mexico 2,557 7,746 7,993
Asia 5,178 11,186 1,998
Europe 858 1,203 599
South America 815 699 --
Africa and Middle East 743 80 --
-------------------- -------------------- --------------------
Total Revenue $ 22,465 $ 33,684 $ 19,983
==================== ==================== ====================
SALES TO MAJOR CUSTOMERS
During 1998, there was no single customer or group of customers under common
control that represented 10% or more of total revenue. Sales to three customers
representing a single end-user in Asia comprised approximately 9%, 21% and 0%
of total revenue for 1998, 1997 and 1996, respectively. Sales to an end user in
Mexico comprised approximately 7%, 17% and 29% of the Company's revenues in
1998, 1997 and 1996, respectively.
F-18
42
INDEX TO 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.
*** Amended and Restated Omnibus Stock Plan.
*** Amended and Restated Stock Option Plan for Directors
(as amended as of 1997)
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
10.17**** Collateral Assignment, Patent Mortgage and Security
Agreement between the Company and Crestar
Bank dated April 23,1998
10.18**** Loan and Security Agreement between the Company and Crestar
Bank dated April 23, 1998
10.19**** Revolving Note between the Company and Crestar Bank dated
April 23, 1998
23 **** Consent of Independent Accountants
27.1 **** Financial Data Schedule
99.1 **** Separation Agreement and General release
- ---------------------------
* Incorporated by reference to identically numbered exhibit filed as an
exhibit to the Registrant's Registration Statement on Form S-1 No.
333-06731
** Incorporated by reference to identically numbered exhibit filed as an
exhibit on Form 10-K filed September 30, 1997
*** Incorporated by reference in the Company's Proxy Statement filed on
October 21, 1997
**** Filed herewith.
X-1