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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
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 12, 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of August 21, 2002, the aggregate market value of the Common Stock
held by non-affiliates of the registrant [(i.e. persons who are not directors,
officers or affiliated therewith)] was approximately $4,800,000 ([7,330,664]
shares of Common Stock at a closing price on the Nasdaq National Market of $0.65
on such date). Outstanding as of August 21, 2002 were 9,338,803 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, 13, 2002 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 11
Item 3. LEGAL PROCEEDINGS 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 13
Item 6. SELECTED FINANCIAL DATA 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 23
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 24
Item 11. EXECUTIVE COMPENSATION 24
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 24
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 24
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K 24
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PART I
ITEM 1. BUSINESS
This Report contains certain statements of a forward-looking nature relating to
future events or the future financial performance of the Company. Investors are
cautioned that such statements are only predictions and that actual events or
results may differ materially. In evaluating such statements, investors should
specifically consider the various factors identified in this Report which could
cause actual results to differ materially from those indicated by such
forward-looking statements, including the matters set forth in "Business -
Backlog", "Business - Proprietary Rights and Licenses", "Selected Financial
Data", and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Additional Factors Affecting Future Operating Results".
Investors should not place undue reliance on these forward-looking statements.
These forward-looking statements speak only as of the date in which they are
made, and the Company undertakes no obligation to update any forward-looking
statements.
The Company's fiscal year ends on June 30. Unless otherwise noted, all
references to years in this document are assumed to be fiscal years.
GENERAL
ACE*COMM Corporation, incorporated in Maryland in 1983, and its subsidiary
ACE*COMM Canada, incorporated in Quebec in 1996 (hereinafter referred to
collectively as the "Company"), delivers enterprise telemanagement and
Convergent Mediation(TM) solutions to wired and wireless voice, data, and
Internet communications providers. The Company's solutions consist of hardware,
software and related services, that enable the capture, security, validation,
correlation, augmentation, and warehousing of data from network elements and the
distribution of data in appropriate formats to OSS ("Operations Support
Systems") and BSS ("Business Support Systems") operations. The Company's
solutions derive information from the mass of data that is generated by a
customer's network. This information can be used to reduce costs, accelerate
time-to-market for new products and services, generate new sources of revenue,
and push forward with next-generation initiatives. The consolidated financial
statements include the accounts of the Company and its subsidiary, ACE*COMM
Canada. All significant inter-company balances and transactions have been
eliminated in consolidation.
SOLUTIONS FOR TELECOMMUNICATIONS AND INTERNET SERVICE PROVIDERS
The Company's Convergent Mediation(TM) solutions bring together wired and
wireless, voice, data, and Internet communications technologies from across all
conventional and next-generation network elements to provide a consistent view
of data and near real-time processing and reporting, in a flexible and scalable
distributed architecture. Convergent Mediation(TM) solutions are designed to
solve a customer's data needs while protecting their investment in their
existing OSS/BSS infrastructure.
The Company's Convergent Mediation(TM) solutions provide the following range of
capabilities:
CAPTURE AND COLLECTION
Capture and Collection refer to the processes involved in the securing of
network usage data. The mandate for these processes is to gather and secure all
of the data once and once only--to ensure there are no duplicates or gaps. This
includes associated audits to ensure that data exchange is performed correctly,
and to generate alarms when an error is detected. Typically, the term "capture"
is used where the data extraction interface requires a co-located adjunct to the
network element. "Collection" generally refers to the process of centralizing
data from several sites. Data is gathered directly from multiple network
elements and from other data capture adjunct processors.
MANAGE
Data management refers to the different data processing capabilities of the
mediation system. For example, data is validated for syntactical and semantic
errors. Duplicate data is weeded out, gaps in the data sequence are identified,
and alarms are generated. Different record formats can be normalized into a
common format to ensure that downstream processing modules have only a single
record format to deal with. Records can be augmented with customer, service,
cost, and other billing information. Fragmented records can be reassembled to
provide a single view of the call session. Also, error correction and
reprocessing can be applied to data that failed any of the processing stems from
a previous run.
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PRICE/COST
Pricing and costing identifies and monitors inbound and outbound data flows in
real-time from a financial perspective. This enables the measurement of
individual records and summarized usage records, support for multiple rating
dimension and flexible plans for inter-carrier invoice reconciliation and
pre-billing processing, rate changes on a scheduled basis or in real-time for
rapid response, and the management of termination costs.
PRESENT
Presentation functions reformat and summarize network usage records for numerous
downstream applications such as billing and fraud systems. The presentation
layer may perform the transformation on a per-record basis (one output record
per input record) or on a summary-basis in which many detail records are
aggregated into one record. A single source of data is used for all business
operations, which ends duplication, discrepancies, and the need for data
reconciliation, and provides the ability to plan and make decisions based on
solid business analysis.
WAREHOUSE
Specialized network-usage data warehousing adds value to data by correlating,
aggregating, and augmenting it to an individual customer's specifications. It
can turn large volumes of network data into the knowledge required to maintain a
competitive advantage, quickly detect and correct traffic flow problems, profile
customer usage and gain knowledge for effective marketing, filter out unbillable
data, and reprocess erroneous data until it is resolved.
CALEA SOLUTION
This solution is a comprehensive voice/data monitoring system that collects and
analyzes suspicious and high-risk information enabling law enforcement groups,
security agencies, and IT managers to make decisions and take action in
security-threatening environments.
SOLUTIONS FOR ENTERPRISES
The Company offers solutions to enterprises, which include government agencies,
military organizations, educational institutions and "Fortune 1000" size
organizations, for the automation of network operations and management
functions. The Company's NetPlus(R) Enterprise Operations Support System (EOSS)
is the core capability of this solution set and is deployed on
multi-vendor/multi-protocol voice, data, and video networks. NetPlus(R) is
scalable, to accommodate numerous network sizes and locations. NetPlus(R)
enables enterprises to improve service and control costs by managing various
aspects of the network, including alarm and fault resolution, cabling and
facilities management, convergent billing, charge back billing, cost control and
recovery. NetPlus(R) also provides the capability to automate maintenance by
providing work orders, trouble tickets, inventory, and switching equipment
configuration management.
The Company's Enterprise Network Telemanagement solutions provide the following
range of capabilities:
FAULT MANAGEMENT
A software product that allows network managers on a near real-time basis to
detect faults and to determine their origins and to perform fault correction.
CONFIGURATION MANAGEMENT
A software product that delivers subscriber, connectivity, and equipment
administration functions. These modules track, maintain, and report on the
entire network structure.
ACCOUNTING MANAGEMENT
System functions that collect, store, process, rate and verify billing and
accounting data.
PERFORMANCE MANAGEMENT
System functions that aggregate and analyze network performance call data, and
configuration data to provide managers with an overall performance model of
their network and operations.
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SECURITY MANAGEMENT
A multi-level, layered system that covers security functions ranging from the
operating system and database, to forms and commands within forms.
NETPLUS(R) EOSS INTERNET CONTENT MANAGER
A new set of features for the surveillance and monitoring of Internet events,
traffic, and data. It provides enterprise telephony and IT managers with
security-monitoring and productivity-tracking capabilities for network
knowledgeextraction and surveillance.
DIRECTORY MANAGEMENT
An application that handles personnel, departmental and classified directory
listings in organizational or alphabetical formats.
NETPLUS(R) CALL INTERCEPT MANAGER (CIM)
A high performance surveillance system that is fully compliant with legal
interception standards, ensuring accurate and responsible surveillance and risk
management. The CIM can collect both Interception Related Information (IRI) and
Call Content (CC) in real-time.
PRODUCT BACKPLANE(TM)
An application services layer, software infrastructure common to all NetPlus(R)
applications, that is based on an Oracle(R) database, client/server distributed
processing, Web-based User Interface (WUI), and Graphical User Interface (GUI)
presentation, which operates for a single module or multiple functional system
and allows users to implement only the modules they need.
NETWORK MANAGEMENT APPLICATIONS
Infrastructure software that provides high-performance, low-cost,
small-footprint applications for managing network element performance.
PROFESSIONAL SERVICES AND SUPPORT
The Company's services are generally delivered in conjunction with the Company's
solutions. The Company's professional service team assists customers in
implementing its solutions, educates users, and provides maintenance and
technical support. Implementation services include identification of technical
requirements, solution design, product testing, and installation and
integration. The Company's systems integration partners often provide additional
expertise on international contracts and orders. The Company provides
comprehensive educational courses to its customers, alliance partners, and
employees so they can acquire the knowledge and skills necessary to deploy, use
and maintain the Company's solutions. The Company also offers train-the-trainer
programs that enable its customers to conduct their own internal end-user
training. The Company's maintenance and technical support services include help
desk support, problem resolution, software maintenance and scheduled software
upgrades. The Company provides technical support for its products from its
Gaithersburg headquarters and utilizes the Web, telephone, electronic mail and,
if necessary, on-site assistance to respond to and resolve customers' technical
questions. International customers are supported either directly by the Company
or by third-party vendors trained by the Company.
The Company believes that a high level of customer support is critical to the
Company's continuing success in developing relationships with end users and its
strategic partners (See "Business-Strategic Alliances and Partners").
QUALITY
The Company maintains an ISO 9001 standard Quality Management Program to monitor
the quality of its offerings and has an internal Quality Management Committee to
set quality objectives for the Company and a Quality Assurance Department to
implement and monitor compliance with the applicable procedures.
-5-
SALES AND MARKETING
The Company markets and sells product-based solutions directly through its sales
force. The Company concentrates its sales efforts on a range of service
providers, from small start-ups to large established communication providers
that offer voice and data services, including Internet-based services. The
Company complements its direct sales with indirect sales through its strategic
alliances with OSS/BSS operators, original equipment manufacturers ("OEM") and
resellers. These alliance partners give the Company's direct sales force a
global reach and provide significant leads and referrals. The Company also
believes that these relationships lend credibility and help to gain additional
market acceptance for its product-based solutions.
The Company sells substantially all of its product-based solutions worldwide
from its headquarters in Gaithersburg, Maryland. In 2002, the Company continued
to expand its sales and marketing efforts outside North America through a
combination of direct sales in selected markets, continued partnerships with
systems integrators, and the extension of its relationships with existing
customers. These efforts resulted in greater Middle Eastern and Asian sales in
fiscal year 2002.
The Company derives a majority of its revenues from products delivered or
services performed within the United States. Products delivered or services
performed outside of the United States represented approximately 45%, 39% and
29% of total revenues in fiscal years 2002, 2001, and 2000, respectively. See
Note 13 of the Notes to Financial Statements for a summary of the Company's
revenue by geographic area.
Revenue for a given period typically reflects products delivered or services
performed during the period with respect to relatively large financial
commitments from a small number of customers. During 2002, the Company had 20
customers each generating $250,000 or more in revenues during the period ("Major
Customers") and together represented approximately 86% of total revenues.
Siemens AG, the Company's largest customer in fiscal year 2002, represented
approximately 17% of total revenues and TRW contributed approximately 11% of
total revenues. During 2001, the Company had 23 Major Customers representing 93%
of total revenues. Siemens AG represented approximately 23% of revenues and
Winstar contributed 14% of total revenues earned during 2001. During 2000, the
Company had 27 Major Customers representing 90% of total revenues. The average
revenues earned per Major Customer were $0.8 million in 2002, $1.0 million in
2001 and $1.1 million in 2000.
The sales process for new contracts or orders 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 and to determine their evolving requirements for updates and
enhancements.
STRATEGIC ALLIANCES AND PARTNERSHIPS
To assist in developing, marketing, and distributing its product-based solutions
effectively and as part of the Company's marketing efforts, the Company has
established strategic alliances with several large organizations:
telecommunication and Internet equipment manufacturers, computer equipment
manufacturers, telecom systems integrators and other organizations ("strategic
alliance partners" or "partners"). Each alliance is designed to accomplish 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
the Company's products in systems sold by the partner, create a reseller channel
for the Company's products, or jointly provide customer support to end users.
These strategic alliances enable the Company to leverage relationships within
the industry to enhance its market development.
Each alliance typically involves a formal agreement between the Company and a
strategic alliance partner, pursuant to which the parties agree that the Company
will develop and sell products to the partner for use by the partner, or by its
customers who are in such cases the end users of the Company's products. Each
agreement specifies the terms of the alliance, which may include off the shelf
products and/or parameters for product development and product specifications,
product pricing, the terms of intellectual property ownership, and the
responsibilities of each partner for system integration, proposal drafting,
sales and marketing. Once the products are developed, the strategic alliance
partner will issue specific orders to the Company from time to time to purchase
products, subject to the terms of the
-6-
overall agreement. The products are generally purchased and paid for by the
partner for resale to its customers directly or as part of a larger system
installation. Sales to a strategic alliance partner may vary from period to
period, depending on the timing of orders, which in turn may depend on a number
of factors, including the completion of the Company's product development, the
partner's marketing and sales efforts to its customers, the timing of orders
from the partner's customers, and various internal financial, strategic and
other factors specific to a partner or any of its customers. Accordingly, sales
to a partner in one period are not necessarily predictive of sales to the
partner in future periods.
The Company classifies its alliances into the following categories: OSS/BSS, OEM
and reseller. The following is a list of the Company's current significant
strategic alliances:
OSS/BSS
Alliances in this category encompass complementary software application vendors
with whom the Company has a joint marketing relationship to provide the vendor's
customers with end-to-end solutions for operations support functions.
Comgates Ltd. - The Company's Convergent Mediation(TM) solutions provide the
COMGATES Softswitch with the ability to generate billing information from the
transactions that its softswitch technology processes.
Ubiquity Software Corporation ("Ubiquity") - The Company's alliance with
Ubiquity addresses customer demands for Session Initiation Protocol (SIP)
solutions that allow end-users to conduct communications sessions over IP
networks. The companies' joint offering is intended to allow customers to
quickly deploy Ubiquity's Helmsman(R) Application Services Platform without any
disruption to their existing OSS/BSS infrastructure.
Dynamicsoft, Inc. - The Company's Convergent Mediation(TM) solutions interface
with the Dynamicsoft Session Management Suite proxy server to collect important
usage information, providing mediation and data warehousing capabilities to
wireline and wireless carriers.
Convergys Corporation ("Convergys") (formerly Geneva Technology) - The Company's
Convergent Mediation(TM) solutions provide important usage information to
Convergys' carrier grade billing. Convergys billing products are designed to
handle the volumes of data that are typical of companies such as national PTTs
that support many millions of customers.
OEM
Alliances in this category encompass original equipment manufacturers that embed
the Company's technologies into their solutions for end-users.
Compagnie Financiere Alcatel ("Alcatel") - The Company's Convergent
Mediation(TM) solutions collect usage information from specific Alcatel switches
providing the mission important billing information carriers need.
Cisco Systems, Inc. ("Cisco") - The Company is a Cisco New World Ecosystem
alliance partner focusing on mediation and data warehousing solutions for
convergent networks.
Marconi Corporation, PLC ("Marconi")- The Company provides Convergent
MediationTM solutions that work in conjunction with Marconi's ServiceOn
Management(R) suite of products.
Motorola, Inc. - The Company provides Convergent Mediation(TM) solutions,
integrated into the Mobile Data Gateway switch, that collect and format call
detail records for electronic transmission to a billing center.
Zoom Networks Inc. ("Zoom") - The Company provides Convergent Mediation(TM)
solutions for bundling into comprehensive offerings for Zoom's customers, who
are primarily in the Chinese wireless and next-generation networks market
sectors.
-7-
RESELLERS
Alliances in this category encompass leading hardware and software vendors or
integrators who are resellers for the Company's products.
TRW, Inc. - The Company provides subcontract services for its Convergent
Mediation(TM) platform to TRW Inc. for the real-time usage data management,
warehousing and analysis requirements of a digital radio service in the United
Kingdom.
General Dynamics Corporation ("GD")- As a GD's subcontractor for network
management products, the Company installs and supports NetPlus(R) at multiple
military facilities.
Keane, Inc. - The Company's primary involvement with Keane Inc. is the delivery
of NetPlus(R)and related services to United States Government installations
around the world.
Siemens AG - The Company sells its Enterprise Telemanagement Operations Support
and Convergent Mediation(TM) solutions outside the United States through Siemens
AG, who serves as a prime contractor.
MOSECO Jordan - The Company's alliance agreement with MOSECO Jordan covers sales
and support activities to address the operations support systems requirements of
the Middle Eastern region's communications service providers.
Unisys Corporation ("Unisys") - The Company has an arrangement with Unisys to
collectively design and deploy NetPlus(R) as part of an overall Unisys offering
to state government customers.
-8-
BACKLOG
The Company defines backlog as signed contracts or purchase orders for delivery
of its product-based solutions generally within the next year. Backlog at June
30, 2002, 2001, and 2000 was approximately $4.9 million, $5.7 million, and $8.9
million, respectively. The Company has experienced fluctuations in its backlog
at various times. It anticipates that $3.9 million of the backlog at June 30,
2002, will be recovered during fiscal 2003. Although the company believes that
its entire backlog consists of firm orders, the Company's backlog as of any
particular date may not be indicative of actual revenue for any future period
because of the possibility of customer changes in delivery schedules and delays
inherent in the delivery of complex systems. Backlog, as defined, does not
include contracts for solutions that 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 its 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 involve substantial lead-time. Accordingly, the Company may
experience significant variations in revenue from quarter to quarter, as a
result of delays in contract signing or contract order deliveries. In addition,
contracts that involve software deliveries may involve customization of the
product to specific customer requirements, which can delay final delivery of the
order. No assurance can be given that current backlog will necessarily lead to
revenue in any specific future period.
COMPETITION
Competition in the markets for the Company's product-based solutions is driven
by rapidly changing, enabling and core network and communications technologies,
evolving industry standards, frequent new product introductions and
enhancements, and rapid changes in customer requirements. To maintain and
improve its competitive position, the Company must continue to develop and
introduce value-added, timely and cost-effective new products, features and
services that keep pace with technological developments and emerging industry
standards, and address the increasingly sophisticated needs of our customers.
The Company expects continued intense competition in the telecommunications,
Internet service provider and enterprise network markets.
The Company believes that the principal competitive factors in these markets
include: product performance that meets customer expectations, specialized
project management capabilities, in-house technical expertise, compliance with
industry quality standards and protocols, in-house customer support, product
features that include adaptability, scalability and flexibility, the ability to
integrate with other products, adjustable functionality and ease-of-use, product
reputation, responsiveness to customer needs, and timeliness of implementation.
To remain competitive, the Company will be required to respond promptly and
effectively to the challenges of next generation technological changes within
the industry, as well as to our competitors' innovations.
In the telecommunications and Internet service provider markets, the Company's
current and prospective competitors include: (i) large service providers who
develop full-system products internally, tailored to their particular
specifications, (ii) other companies, such as Comptel Corporation, Narus, Inc.,
and Xacct Technologies, that can provide data collection, mediation components,
and data storage capabilities, (iii) vendors that supply more inclusive
products, such as Intec., and EDB4tel (iv) telecommunications equipment
manufacturers that provide network products, such as Lucent Technologies, Inc.,
and Ericsson, (v) companies that provide OSS software applications for carriers,
such as MetaSolv Software, Inc., (vi) companies that supply product components,
such as Ericcson-Hewlett-Packard and Fujitsu, (vii) companies that provide
billing and customer care applications, such as Amdocs Limited and Portal
Software, Inc., and (viii) companies that develop custom solutions, such as EDS
Inc. and Computer Sciences Corp.
In the enterprise network market, our current and prospective competitors
include (i) companies that provide products for telephony networks, such as MDR
Switchview Global Networks Inc., Peregrine Systems, Inc., Stonehouse
Technologies, Inc., and Veramark Technologies, Inc., and (ii) companies that
provide products for data networks, such as Remedy Corp. and Computer Associates
International, Inc.
The Company believes that its ability to compete in its markets depends in part
on a number of competitive factors outside its control, including the ability of
others to develop technology that is competitive with the Company's products,
the price at which competitors offer comparable products and services, the
extent of competitors' responsiveness to customer needs, and the ability of our
competitors to hire, retain and motivate key personnel.
-9-
The Company competes with a number of companies that have substantially greater
financial, technical, sales and marketing capabilities in addition to 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 the Company. There can be no assurance
that our 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 its customers and on improving existing
products by incorporating new features and technologies. The Company believes
that the timely development of new products and enhancements is essential to
maintaining its competitive position in the marketplace. In its research and
development efforts the Company works closely with customers, end users and
leading technology vendors, in tailoring new features that 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.
Research and development expenses were $0.8 million, $1.7 million and $2.3
million in 2002, 2001, and 2000, respectively. As a percent of revenues,
research and development expenses were approximately 4% in 2002 and
approximately 7% in 2001 and 2000.
PROPRIETARY RIGHTS AND LICENSES
The Company currently holds a patent on it's N*Usage technology and also 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 other
products. The Company believes that, patent protection is effective for some
product technologies, but because of the rapid pace of technological change in
the telecommunication and software industries, patent protection for other
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.
The Company cannot guarantee that the steps taken to protect its proprietary
rights will be adequate to deter misappropriation of its intellectual property,
and the Company may not be able to detect unauthorized use and take appropriate
steps to enforce its intellectual property rights. If third parties infringe or
misappropriate the Company's copyrights, trademarks, trade secrets or other
proprietary information, the Company could be seriously harmed. In addition,
although the Company believes that its proprietary rights do not infringe on the
intellectual property rights of others, other parties may assert infringement
claims against the Company or claim that it has violated their intellectual
property rights. Claims against the Company, either successful or unsuccessful,
could result in significant legal and other costs and may be a distraction to
management. The Company has primarily focused on intellectual property
protection within the United States but has expanded that scope to selected
international markets. Protection of intellectual property outside the United
Sates will sometimes require additional filings with local patent, trademark, or
copyright offices, as well as the implementation of contractual or license terms
different from those used in the United States. Protection of intellectual
property in many foreign countries is weaker and less reliable than in the
United States. If our business expands into foreign countries, costs and risks
associated with protecting our intellectual property abroad will increase.
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EMPLOYEES
At June 30, 2002, the Company employed 113 full- and part-time 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 two principal office locations: Gaithersburg,
Maryland and Montreal, Canada. The Company believes that its facilities are
adequate for its current needs and that suitable additional space will be
available as required. The Gaithersburg office is the Company's corporate
headquarters and is used for product assembly, software and engineering
development, professional services and support, sales, and administration. The
following sets forth information concerning the Company's significant
facilities:
SQUARE CURRENT
LOCATION FOOTAGE LEASE EXPIRATION ANNUAL RENT
-------- ------- ---------------- -----------
Gaithersburg, Maryland 38,427 November 30, 2003 $783,000 (subject to
annual increases of
approximately
$21,000 and allocated
operating costs each
year)
Montreal, Quebec, Canada 3,415 June 30, 2006 $65,000
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
No matter was submitted to a vote of its security holders during the fourth
quarter of 2002.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the current
executive officers of the Company.
NAME AGE CURRENT POSITION
---- --- ----------------
George T. Jimenez 66 Chairman of the Board, Chief Executive Officer, President
and Treasurer
Joseph A. Chisholm 61 Chief Operating Officer
Steven R. Delmar 46 Chief Financial Officer
Martin Demers 39 Chief Marketing Officer
Loretta L. Rivers 45 Corporate Secretary and Director of Human Resources
George T. Jimenez is the Chief Executive Officer of the Company and has served
as Treasurer and a Director of the Company since its inception in 1983. From
1983 to September 1999, Mr. Jimenez also serves as the President of the Company.
Joseph A. Chisholm joined the Company in February 2001 as Vice President of
Engineering, and was named Chief Operating Officer in August 2001. Mr. Chisholm
served as Vice President of Engineering and Operations for GE Capital Spacenet
Services from 1994 until his retirement in 1998.
Steven R. Delmar joined the Company as a consultant in July 2001 and was
appointed the Chief Financial Officer as of October 1, 2001. Prior to joining
the Company, Mr. Delmar held various executive positions with Microlog
Corporation, a communications software company, including fifteen years as
Executive Vice President and Chief Financial Officer. He was most recently
Co-President and a Director of Microlog.
Martin Demers has been the Chief Marketing Officer of the Company since November
2000 and has held various senior positions, including Division Vice President,
Division Director, and Product Manager, since joining the Company in 1996. Mr.
Demers was named Chief Marketing Officer in November 2000. Prior to joining
ACE*COMM, Mr. Demers managed the development of Teleglobe's data management
infrastructure to support its international expansion.
Loretta L. Rivers has been Corporate Secretary since 1989 and was also named
Director of Human Resources in January 2001. Ms. Rivers 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 for November 13, 2002.
-12-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS
COMMON STOCK PRICES
The Company's common stock is traded on The Nasdaq National Market under the
symbol ACEC. The following table sets forth for the periods indicated the
highest and lowest bid prices at the 4:00 close for the shares of common stock
reported on the Nasdaq National Market.
YEAR ENDED JUNE 30,
-----------------------------------------------
2002 2001
--------------------- ---------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
1st Quarter $ 1.65 $ 1.12 $ 9.81 $ 5.41
2nd Quarter 1.49 1.05 6.88 2.25
3rd Quarter 1.50 1.12 2.94 1.06
4th Quarter 1.41 0.95 1.90 1.03
COMMON STOCKHOLDERS
As of August 21, 2002, there were 9,338,803 common shares outstanding and held
by 111 shareholders of record.
DIVIDENDS
The Company has never declared or paid cash dividends on the Common Stock. The
Company currently intends to retain earnings, if any, to finance the growth and
development of its business and does not anticipate paying cash dividends in the
foreseeable future. The future payment of cash dividends, if any, is within the
discretion of the Board of Directors and will depend on the future earnings,
capital requirements, financial condition and future prospects of the Company
and such other factors, as the Board of Directors may deem relevant. Under the
term of its line of credit, the Company cannot pay or declare dividend without
the approval of its bank.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each of the Company's fiscal
years in the five-year period ended June 30, 2002 and as of June 30, 2002, 2001,
2000, 1999, and 1998 are derived from the audited financial statements of the
Company.
YEAR ENDED JUNE 30,
------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue $ 18,094 $ 24,179 $ 33,766 $ 29,657 $ 22,465
Gross profit 8,982 10,844 19,413 15,892 9,140
Net (loss) income $ (3,988) $ (6,927) $ 2,198 $ 618 $ (9,219)
Net (loss) income per share:
Basic $ (0.43) $ (0.75) $ 0.24 $ 0.07 $ (1.06)
======== ======== ======== ======== ========
Diluted $ (0.43) $ (0.75) $ 0.23 $ 0.07 $ (1.06)
======== ======== ======== ======== ========
-13-
JUNE 30,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 3,530 $ 5,770 $ 4,386 $ 3,424 $ 2,956
Working capital 4,702 7,879 13,335 7,959 5,978
Total assets 10,402 14,943 22,785 18,699 24,593
Long-term liabilities 44 323 597 74 122
Total liabilities 4,071 4,686 5,866 5,220 11,808
Stockholders' equity 6,331 10,257 16,919 13,479 12,785
SELECTED QUARTERLY FINANCIAL DATA
The following table presents certain unaudited statement of operations data for
each quarter of 2002 and 2001. This data has been derived from the Company's
unaudited financial statements and has 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, this data includes 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
------------------------------------------------------------------------------------
2002 2001
----------------------------------------- ----------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
2001 2001 2002 2002 2000 2000 2001 2001
------- ------- ------- ------- ------- ------- ------ -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Revenue $ 4,396 $ 4,601 $ 5,025 $ 4,072 $ 9,005 $ 5,275 $ 5,519 $ 4,380
Gross profit 2,020 2,324 2,557 2,080 4,397 2,206 2,656 1,585
Net income (loss) (1,438) (958) (633) (959) 169 (2,759) (1,807) (2,530)
Net income (loss) per share:
Basic $ (0.15) $ (0.10) $ (0.07) $ (0.10) $ 0.02 $ (0.30) $ (0.20) $ (0.27)
======= ======= ======= ======= ======= ======= ======= =======
Diluted $ (0.15) $ (0.10) $ (0.07) $ (0.10) $ 0.02 $ (0.30) $ (0.20) $ (0.27)
======= ======= ======= ======= ======= ======= ======= =======
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,
receipt of purchase orders, and performance of the work or completion of
delivery. Large contracts or orders are typically preceded by long sales cycles
and, accordingly, the timing of such a contract or order has been and will
continue to be difficult to predict. Certain contracts or orders require
additional tailoring to customer requirements and, accordingly, vary in timing
of delivery. The failure to obtain or delays in the completion of one or more
large contracts or orders, for any reason, could have a material adverse effect
on the Company's results of operations and financial condition. The variations
may be material.
The timing of large contracts or 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, changes in industry-specific economic conditions, pricing policies
by the Company or its competitors, personnel changes, demand for the Company's
-14-
solutions, the number, timing and significance of new technologies developed by
either the Company or its competitors, the ability of the Company to develop,
introduce and market new and enhanced versions of its product-based solutions on
a timely basis, and the mix of direct and indirect sales and general economic
factors.
The Company's sales cycle, from initial contact to contract execution, order and
delivery, also varies substantially from customer-to-customer and from
project-to-project. The purchase of the Company's product-based solutions
generally involves a significant commitment of customer capital and management
time. The sales cycle associated with the purchases of the Company's
product-based solutions is subject to a number of additional significant risks,
including customers' budgetary constraints and internal acceptance reviews, over
which the Company has little or no control. The delivery cycle varies depending
on the extent to which the contract or order requires tailoring to a customer's
requirements and the extent to which such requirements are fixed in advance or
developed over time.
The Company's revenues in any quarter are substantially dependent on orders
booked, products delivered, and services performed. Because the Company's
operating expenses are based, in part, on anticipated revenue levels and because
a high percentage of the Company's expenses are relatively fixed, a delay in the
recognition of revenue from even a limited number of contracts, or the absence
of anticipated orders, or a delay in adjusting operating expenses to lower
actual or anticipated revenues could cause significant variation in operating
results from quarter-to-quarter and could cause net income to fall significantly
short of anticipated levels.
Based upon all of the foregoing, the Company believes that quarterly revenue and
operating results are likely to continue to vary significantly in the future and
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Further, it is likely that in some future quarter the Company's
revenue or operating results will be below the expectation of public market
analysts and investors. In such event, the price of the Common Stock could be
materially adversely affected.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 "Business -
Backlog", "Business - Proprietary Rights and Licenses", and "Selected Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Additional Factors Affecting Future Operating Results."
Investors should not place undue reliance on these forward-looking statements.
These forward-looking statements speak only as of the date in which they are
made, and the Company undertakes no obligation to update any forward-looking
statements.
OVERVIEW
The Company enters into formal arrangements that provide for single or multiple
deliverables of hardware, software and related services. These arrangements are
formalized by either a simple purchase order or by more complex contracts such
as development, reseller or master agreements. These arrangements are typically
U.S. dollar denominated and typically have an aggregate value of several
thousand to several million dollars and vary in length from 30 days to several
years (e.g., master agreements). Agreements spanning several years are typically
implemented in smaller statements of work or orders that are typically
deliverable within three to twelve months.
The Company derives revenues primarily from the sale of its product-based
solutions, where a combination of hardware, proprietary software and related
services are offered to customers. When an agreement provides for significant
modification or customization of software, or when the Company's system
integration and product development are essential to the functionality of the
software, revenues related to the software licenses and services are aggregated
and the combined revenues are recognized on a percentage-of-completion basis.
Revenue recognized using the percentage-of-completion method is based on the
estimated stage of completion of individual contracts determined on a cost or
level
-15-
of efforts basis. Any hardware or post-contract customer support provided for
under the terms of the agreement is unbundled. Hardware revenue is recognized
upon delivery (i.e., transfer of title) and post-contract customer support is
recognized ratably over the term of the arrangement.
Most of the Company's professional services are delivered in conjunction with
the Company's solutions and are essential to the functionality of other elements
of the arrangement. However, the Company occasionally sells unbundled services;
and, in these instances, the Company generally recognizes revenue as the
services are performed.
In limited instances, the Company enters into a multiple element arrangement
that does not involve significant modification or customization of the related
software. In these limited instances, the Company allocates revenue to each
element of the arrangement based on objective evidence of the element's fair
value based on internal price listings developed by the Company. Revenue is
recognized upon delivery (i.e. transfer of title) when a signed agreement
exists, the fee is fixed and determinable, and collection of the resulting
receivable is probable.
Revenue for a given period typically reflects products delivered or services
performed during the period with respect to relatively large financial
commitments from a small number of customers. During 2002, the Company had 20
customers each generating $250,000 or more in revenues during the period ("Major
Customers") and together represented approximately 86% of total revenues.
Siemens AG, the Company's largest customer in fiscal year 2002, represented
approximately 17% of total revenues and TRW contributed approximately 11% of
total revenues. During 2001, the Company had 23 Major Customers representing 93%
of total revenues. Siemens AG represented approximately 23% of revenues and
Winstar contributed 14% of total revenues earned during 2001. During 2000, the
Company had 27 Major Customers representing 90% of total revenues. The average
revenues earned per Major Customer were $0.8 million in 2002, $1 million in 2001
and $1.1 million in 2000.
During fiscal 2001 and 2002, the Company experienced significant net losses from
operations, primarily due to lower demand from its North American
telecommunications customers. Management expects this lower demand to continue
in the foreseeable future. To offset the effects of the current lower North
American demand, the Company continues to target sales efforts in what it
believes to be a growing market for its Convergent Mediation(TM) solutions
outside of North America.
The Company is focused on streamlining the organization to meet its objectives,
conserve cash and control expenses. In January 2002, the Company reduced staff
by approximately 10% of the Company's then 135 full-time employees. This
reduction was designed to reduce costs without materially impacting the
Company's ability to maintain its historical levels of customer involvement and
technological innovation.
The Company plans to continue pursuing new business opportunities in
partnerships and alliances with other companies, although there can be no
assurances as to the timing or effectiveness of any partnering arrangements.
These arrangements could include: technology and marketing alliances driven by
product development requirements and sales opportunities, as well as other
business combinations that would strengthen the Company's product offerings and
market potential.
-16-
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants include a discussion of
its critical accounting policies. The Company's significant accounting policies
are more fully described in Note 2 to the Company's consolidated financial
statements. However, certain of our accounting policies are particularly
important to the portrayal of our financial position and results of operations
and require the application of significant judgment by our management. The
following is a brief discussion of the Company's critical accounting policies:
REVENUE RECOGNITION
The Company derives revenues primarily from product-based solutions, where a
combination of hardware, proprietary software, and services are offered to
customers. These product-based solutions are typically formalized in a multiple
element arrangement involving significant modification or customization of the
underlying software and implementation services. The Company's software licenses
to end-users generally provide for an initial license fee to use the product in
perpetuity. Under certain contracts, the Company licenses its software to
resellers for subsequent modification and resale. In situations when the
Company's product-based solutions involve significant modification or
customization of software, or when the Company's systems integration and product
development are essential to the functionality of the software, revenues
relating to the software licenses and services are aggregated and the combined
revenues are recognized on a percentage-of-completion basis. The hardware
revenue on these contracts is recognized upon transfer of title. Revenue
recognized using the percentage-of-completion method is based on the estimated
stage of completion of individual contracts determined on a cost or level of
efforts basis.
In limited instances, the Company enters into a multiple element arrangement
that does not involve significant modification or customization of the related
software. In these limited instances, the Company recognizes revenue in
accordance with AICPA Statement of Position 97-2, "Software Revenue
Recognition," and allocates revenue to each element of the arrangement based on
objective evidence of the element's fair value based on internal price listings
developed by the Company. Revenue is recognized upon delivery (i.e., transfer of
title), when a signed agreement exists, the fee is fixed and determinable, and
collection of the resulting receivable is probable.
Our revenue recognition policy takes into consideration the creditworthiness of
the customer in determining the probability of collection as a criterion for
revenue recognition. The determination of creditworthiness requires the exercise
of judgment, which affects our revenue recognition. If a customer is deemed to
be not creditworthy, all revenue under arrangements with that customer is
recognized only upon receipt of cash. The creditworthiness of customers is
re-assessed on a regular basis and revenue is deferred until cash is received.
ALLOWANCE FOR BAD DEBTS
The allowance for doubtful accounts is established through a charge to general
and administrative expenses. This allowance is for estimated losses resulting
from the inability of our customers to make required payments. It is an estimate
and is regularly evaluated by us for adequacy by taking into consideration
factors such as past experience, credit quality of the customer, age of the
receivable balance, individually and in aggregate, and current economic
conditions that may affect a customer's ability to pay. The use of different
estimates or assumptions could produce different allowance balances. Our
customer base is highly concentrated in the telecommunications and Internet
service provider industries. Several of the leading companies in these
industries have filed for bankruptcy. If collection is not probable at the time
the transaction is consummated, we do not recognize revenue until cash
collection. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
-17-
RESULTS OF OPERATIONS
The following sets forth selected consolidated data as a percentage of revenue
for each of the following years ended June 30:
YEARS ENDED JUNE 30,
2002 2001 2000
--------------------------------------
Revenue 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of revenue 50.4 % 55.1 % 42.5 %
Selling, general and administrative 63.7 % 63.5 % 45.0 %
Research and development 4.3 % 6.8 % 6.7 %
Provision for doubtful accounts 3.8 % 3.4 % (0.6)%
--------------------------------------
Income (Loss) from operations (22.2)% (28.8)% 6.4 %
Net interest income 0.2 % 0.1 % 0.2 %
--------------------------------------
Income (Loss) before income taxes (22.0)% (28.7)% 6.6 %
Provision (Benefit) for income taxes 0.0 % 0.0 % 0.1 %
--------------------------------------
Net Income (Loss) (22.0) % (28.7)% 6.5 %
======================================
REVENUES
Total revenues in 2002 were $18.1 million compared to $24.2 million in 2001 and
$33.8 million in 2000. Total revenues decreased $6.1 million or 25% in 2002 and
$9.6 million or 28% in 2001, in each case as compared to the prior year.
Revenue growth depends, in part, on the overall demand for the Company's
product-based solutions. Because the Company's sales are primarily to
telecommunication and Internet service providers and enterprises, its ability to
generate revenue also depends on specific conditions affecting those providers
and on general economic conditions. The decrease in revenues in 2002, over the
prior corresponding period, reflects the continuing weak general economic
conditions and, more specifically, weak economic conditions in the domestic
telecommunication and Internet service provider markets. Customers in this
market often rely on the capital markets to meet their ongoing cash flow
requirements and to support their growth. During 2002, customers in this market
encountered further reduced demand for their products and difficulty in
accessing capital markets, resulting in the continuing reduction of demand for
the Company's products. In addition, several of the Company's North American
customers filed for bankruptcy during 2002. Consequently, revenues from sales to
telecommunication and Internet service providers decreased 34% to $9.7 million
in 2002, as compared to the prior year, and represented approximately 53% of
total revenues.
Revenues from sales to enterprises decreased 12% to $8.4 million in 2002, as
compared to the prior year, and represented approximately 47% of total revenues.
During 2001, the Company received a single large order of approximately $5.0
million that it was not able to completely replace in 2002. The decline in sales
to enterprises reflects the same weak economic conditions and the Company has
experienced increased competition from telecommunication equipment manufacturers
who are seeking to diversify sales from the telecommunications and internet
service provider markets to the overall enterprise market.
In 2001, next generation service providers in the telecommunication and Internet
market began experiencing reduced demand for their products and difficulty in
accessing capital markets and, as a result, the Company experienced decreased
demand for Convergent Mediation(TM) product-based solutions. Revenues from sales
to telecommunication and Internet service providers decreased 46% to $14.7
million in 2001, as compared to the prior year, and represented approximately
61% of total revenue. Conversely, revenues from sales to enterprises increased
49% to $9.5 million in 2001, as compared to the prior year, and represented 39%
of total revenues. A single customer in 2001 contributed significantly to the
increase in sales to enterprises.
-18-
COST OF REVENUES
The Company's cost of revenue consists primarily of direct labor costs, direct
material costs, and allocable indirect costs and to a lesser extent, amortized
capitalized software development costs, and inventory obsolescence costs. The
expenses for services provided by certain alliance partners in connection with
the installation and integration of the Company's products may also be included.
Cost of revenues were $9.1 million in 2002, $13.3 million in 2001 and $14.4
million in 2000, representing 50%, 55% and 43% of total revenues in each year,
respectively. Cost of revenues decreased $4.2 million or 32% in 2002, as
compared to the prior year, reflecting a decrease in labor and labor related
costs, as the Company further decreased staffing levels in response to the
continuing decline in demand for the Company's products within the
telecommunications sector. Cost of revenues decreased in 2001 reflecting a
reduction in labor and labor related costs in response to unfavorable economic
conditions and decline in demand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist of costs to support the
Company's sales and administrative functions. Sales expenses consist primarily
of salary, commission, travel, trade show, bid and proposal, and other related
selling and marketing expenses required to sell our product-based solutions to
target markets. General and administrative expenses consist of unallocated costs
related to information systems infrastructure, facilities, finance and
accounting, legal, human resources and corporate management.
Selling, general and administrative expenses were $11.5 million in 2002, $15.3
million in 2001, and $15.2 million in 2000, representing 64%, 63% and 45% of
total revenues in each year, respectively. Selling, general and administrative
expenses decreased $3.8 million or 25% in 2002, as compared to the prior year.
The decrease is primarily the result of a continuing effort to reduce expenses,
which includes Company and employee initiated reductions in personnel. Selling,
general and administrative expenses increased $0.2 million or 1% in 2001, as
compared to the prior year, and reflect an increase in sales related expenses as
the Company modified its sales structure to obtain new customers and support
existing customers.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of personnel costs and the associated
infrastructure costs required to support the design and development of the
Company's product-based solutions.
Research and development expenses were $0.8 million in 2002 compared to $1.7
million in 2001 and $2.3 million in 2000. Research and development expenses
decreased $0.9 million or 53% in 2002 and $0.6 million or 27% in 2001, as
compared to each prior corresponding period. Research and development expenses
represented 4% of revenues in 2002 and 7% of revenues in 2001 and 2000. The
decrease in research and development in 2001 and 2002, over the prior
corresponding periods, reflects a decrease in resources applied to research and
development. The Company was selective in approving new projects and in some
instances discontinued projects that were not related to the development of
Convergent Mediation TM solutions. During 2000, research and development costs
were higher, compared to the prior corresponding periods, due to an increase in
resources applied to develop next generation technologies, especially Convergent
Mediation TM solutions and a decrease in capitalized software development costs.
The Company did not capitalize software development costs in 2002, 2001 or in
2000 because the Company's product development methodology generally establishes
technological feasibility near the end of the development process.
PROVISION FOR DOUBTFUL ACCOUNTS
The Company recognized a net provision for doubtful accounts of $0.7 million in
2002, compared to a net provision for doubtful accounts of $0.8 million in 2001
and a net recovery of $0.2 million in 2000, representing a decrease of $0.1
million in 2002 and an increase of $1.0 million in 2001, in each case as
compared to the corresponding period of the prior year.
-19-
Beginning in 2001 and continuing through 2002, some of the Company's
telecommunication and Internet service provider customers who elected to
reorganize under Chapter 11 of the bankruptcy code, were unable to obtain
adequate financing, or were affected by unfavorable economic conditions in their
respective markets. The impact of these economic conditions on our customers,
and in particular the bankruptcy filing by Winstar, adversely affected the
Company's ability to collect outstanding accounts receivables, resulting in
increased bad debts in 2002 and 2001.The Company believes that it will not
continue to encounter these difficulties with its current customers. However,
existing or future customers' ability to pay the Company may be adversely
impacted by the continuing unfavorable economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company's primary source of liquidity were cash and cash
equivalents of $3.5 million and a $3.5 million working capital line of credit.
Cash and cash equivalents were $3.5 million at June 30, 2002, $5.8 million at
June 30, 2001 and $4.4 million on June 30, 2000. The cash and cash equivalents
balance decreased by $2.3 million or 39% in 2002 and increased by $1.4 million
or 32% in 2001, as compared to their prior corresponding periods. Cash and cash
equivalents were 34% of total assets at June 30, 2002 compared to 39% at June
30, 2001.
Working capital was $4.7 million at June 30, 2002, $7.9 million at June 30, 2001
and $13.3 million at June 30, 2000. Working capital decreased $3.2 million or
41% in 2002 and decreased $5.4 million or 41% in 2001, in each case as compared
to the prior year's corresponding period. The decreases in working capital in
2002 and 2001 were primarily the result of operating losses, net of depreciation
and amortization in excess of purchased assets.
The Company's operating activities used $1.7 million in cash during 2002,
generated $1.8 million in cash during 2001, and used cash of $0.4 million in
2000. The changes between years in cash flows from operating activities are
principally due to changes in net income (loss) after adjustments for non-cash
charges such as depreciation and changes in working capital amounts. Changes in
accounts receivable balances are typically the most significant component of
working capital and fluctuate relative to the timing and volume of the Company's
revenues.
Net cash used for investing activities was $0.3 million, $0.5 million, and $0.5
million in 2002, 2001, and 2000, respectively, representing capital purchases of
computer equipment.
The Company's financing activities used cash of $0.2 million in 2002, and
generated cash of $0.06 million in 2001 and $1.8 million in 2000. The Company
incurred negative cash flows from financing activities in 2002 primarily as a
result of a decrease in common stock option exercises and employee stock
purchases, as compared to positive cash flows from financing activities in 2001
and 2000. Common stock option exercises were more significant in 2000,
reflecting an increase in the Company's stock market price. Additionally,
borrowings and other financial obligations resulted in a net cash outflow of
$0.3 million in 2002, $0.2 million in 2001 and $1.5 million in 2000.
The Company has incurred significant net losses from operations during fiscal
2001 and 2002, primarily due to decreased demand for its products from the North
American telecommunications market. As a result of declining revenues, the
Company has initiated numerous cost reduction measures which have significantly
lowered operating expenses. Additionally, the Company has developed contingency
plans to reduce expenses further, should revenues decline below projected
levels.
The following table summarizes our contractual obligations and commitments as
of June 30, 2002 and the effect such commitments could have on our liquidity and
cash flows in future periods.
----------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATION PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
----------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years After 5
year years
----------------------------------------------------------------------------------------------
Operating Leases $1,312 $870 $424 $18 $0
----------------------------------------------------------------------------------------------
-20-
The Company has commercial commitments of a $3.5 million accounts receivable
backed line of credit that expires July 1, 2003. No amounts were outstanding as
of June 30, 2002. The Company also has issued standby letters of credit for
security deposits for office space and to guarantee service contracts and is
summarized in the following table. The standby letters of credit have a one-year
term and renew annually.
---------------------------------------------------------------------------------------------------
OTHER COMMERCIAL COMMITMENTS AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
---------------------------------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years Over 5
Amounts year years
Committed
---------------------------------------------------------------------------------------------------
Standby Letters of Credit $225,000 $225,000 $ -- $ -- $ --
---------------------------------------------------------------------------------------------------
LINES OF CREDIT
The Company entered into a new Loan and Security Agreement (the "Agreement" or
"new Agreement") with Silicon Valley Bank (the "Bank"), effective July 2, 2002.
This new Agreement replaces the previous accounts receivable purchase agreement
with the Bank. Under this new Agreement, the Company may borrow up to $3.5
million through the Bank's approved borrowing base of eligible accounts
receivable. The $3.5 million line has sublimits of $350,000 for Letters of
Credit issuance and $1.25 million for Export Import Bank usage. The Bank will
pay an advance rate of 80% of the eligible accounts receivable under the master
line, and an advance rate of 90% of the eligible foreign accounts receivable
under the Export Import Bank sublimit line. The costs of this Agreement include
an interest rate equal to the Bank's prime rate plus 200 basis points per annum
(with a minimum rate of 4.75% per annum) charged on the average daily balance of
advances outstanding, payable monthly and calculated on a 360-day year basis.
There are also certain costs and expenses of the Bank in administering the line.
Additionally, the Company paid non-refundable fees of $31,250 to the Bank upon
execution of the new Agreement. The receivables which comprise the borrowing
base must not be more than 90 days aged, must not be in dispute, and must
conform to other eligibility requirements. The Company's obligations under the
Agreement are secured by a security interest in all of the Company's assets and
intellectual property. Advances made to the Company are payable in full upon
demand in the event of default under the agreement. As of June 30, 2002, there
were no outstanding borrowings under this Agreement. Based on eligible accounts
receivable as of June 30, 2002, the Company could have borrowed $0.45 million
under the line of credit.
The Company has amounts outstanding on an Equipment Financing Agreement (the
"Equipment Agreement") with the Bank, which enabled the Company to borrow
against recently acquired Company equipment and fixed assets through January 31,
2001, [the date the agreement expired]. The Equipment Agreement bears interest
at the 36-month treasury rate plus 350 basis points as of the borrowing date,
requires a commitment fee (and the reimbursement of bank expenses for certain
costs of making and administering this facility) and a final payment equal to
6.5% of the value of the initial amount of each advance at the end of the
financing period for that advance. Financial covenants under the Equipment
Agreement require the Company to maintain certain liquidity ratios, which the
Company was in compliance with at June 30, 2002. Outstanding advances as of June
30, 2002, aggregated approximately $220,000 and are due through periods ending
September 2003.
Under the terms of its corporate headquarter's office lease, the Company
maintains a letter of credit under its line of credit with the Bank, which names
the landlord as the sole beneficiary and which may be drawn on by the landlord
in the event of a monetary default by the Company under the lease. The letter of
credit required under the lease for fiscal year 2002 is $200,000, decreasing in
fiscal year 2003 to $100,000. As of the date of this filing, the Company was not
subject to any draw against this letter of credit by the landlord. The Company
also maintains other customer related letters of credit issued by the Bank to
support specific terms and conditions of customer orders. The aggregate of these
customer related letters of credit total approximately $25,000 at June 30, 2002.
The Company maintains minimum cash balances to secure its obligations under
these letters of credit.
The Company has no significant commitments for capital expenditures at June 30,
2002. The Company believes that existing cash balances, cash flow from
operations, the availability of credit under its credit facilities with the Bank
and other potential sources of financing will support the Company's working
capital requirements for the next twelve months.
-21-
ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS
This annual report on Form 10-K and the other documents we file with the SEC
contain forward looking statements that are based on current expectations,
estimates, forecasts and projections about the industries to which we supply
solutions and in which we operate, our beliefs and our management's assumptions.
In addition, other written or oral statements that constitute forward-looking
statements may be made by or on behalf of us. Words such as `expects,'
`anticipates,' `targets,' `goals,' `projects,' `intends,' `believes,' `seeks,'
`estimates,' variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecast in such forward-looking
statements. Except as required under the federal securities laws and the rules
and regulations of the SEC, we do not have the intention or obligation to update
publicly any forward-looking statements after the distribution of this Report on
Form 10-K, whether as a result of new information, future events, changes in
assumptions, or otherwise.
The following items are representative of the risks, uncertainties and
assumptions that could affect the outcome of the forward-looking statements
Reliance on Significant Customers and Large Orders. To date, a significant
portion of our revenue has come from large financial commitments from a small
number of customers. We expect to continue to depend on a limited number of
customers in any given period for a significant portion of our revenue, and in
turn, to be dependent on their continuing success and positive financial results
and condition. If we fail to continue to receive orders from such customers for
our solutions, or if any one or more of these customers suffers a downturn, our
results will suffer.
Economic Conditions. If the current uncertainty and negativity in the economic
climate in the U.S. and the rest of the world continue, our customers -- and our
business and financial results -- will continue to be adversely affected.
Telecommunications Industry Conditions. Our business and financial results are
highly dependent on the telecom industry and the capital spending of our
customers. Recent trends, all of which is likely to have a continuing adverse
effect on us, indicate that capital spending by telecom companies has decreased
and may continue to decrease in the near future as a result of the general
decline in economic conditions in local and international markets, by intense
competition in the development of new technology, and by the increasing
reluctance of large telecom carriers to make significant capital expenditures,
due, in part to increasing competition from smaller, rapidly developing
alternative carriers, decreasing prices for telecom services and equipment, and
regulatory rate structures that have become less dependent on the level of
carriers' capital expenditures.
Market Consolidation. The North American communications industry has experienced
significant consolidation. In the future, there may be fewer potential customers
requiring operations support systems and related services, increasing the level
of competition in the industry. In addition, larger, consolidated communication
companies have strengthened their purchasing power, which could create pressure
on the prices charged and the margins realized. These companies are also
striving to streamline their operations by combining different communications
systems and the related operations support systems into one system, reducing the
number of vendors needed. The Company may lose customers as a result of industry
consolidation, which may have a material adverse effect on the Company's
business, financial condition and results of operations.
Strategic Alliances. Our results could suffer further if we are unable to
continue to develop or to be successful in developing strategic alliances with
leading companies that provide telecommunications services or that manufacture
and market network equipment, in order to expand our distribution channels and
provide additional exposure for our product offerings.
Credit Risk. Our results could be adversely affected by non-payment or
slow-payment of trade receivables from customers in the telecommunication
services industry and government sector, or in the early stages of their
development and whose financial resources may be limited.
International Sales. To the extent that a substantial portion of our revenues
are derived from international sales and are therefore subject to the related
risks, including the general economic conditions in each country, the overlap of
different
-22-
tax structures, the difficulty in managing resources in various countries,
changes in regulatory requirements, compliance with a variety of foreign laws
and regulations, and longer payment cycles, our results may be adversely
affected.
Hiring and Retention of Employees. Our business and results may be adversely
affected if we are unable to successfully develop new, and enhance existing,
products, to service our customers, and to attract and retain highly qualified
technical, sales and marketing and management personnel.
Accurate Estimates of Resources Necessary to Complete Fixed-Price Contracts. Our
sales are typically formalized in multiple element arrangements involving
significant customization of the underlying software and services. Our failure
to accurately estimate the resources required for a project or a failure to
complete contractual obligations in a manner consistent with the project plan
may result in lower than expected project margins or project losses, which would
negatively impact operating results. On occasion, we have and may be required in
the future to commit unanticipated additional resources to complete projects.
Additionally, we may fix the price of an arrangement before the final
requirements are finalized. As a result, project losses may occur that would
have a negative impact on operating results.
Revenue Forecasting. We may not be able to accurately forecast the timing of our
revenue recognition due to the difficulty of anticipating compliance with the
accounting requirements for revenue recognition and to the fact that we
historically have generated a disproportionate amount of our operating revenues
toward the end of each quarter. Our operating results historically have varied
from fiscal period to fiscal period. Accordingly, our financial results in any
particular fiscal period are not necessarily indicative of results for future
periods.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements, together with the independent
accountants' reports thereon, appear at pages F-1 through F-19 of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-23-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information concerning Directors of the Company required by Item 10
is incorporated by reference to the Company's Proxy Statement for the
2002 Annual Meeting of Stockholders, to be filed pursuant to
Regulations 14A not later than 120 days after the end of the year
covered by this report, and will be contained therein under the heading
"Election of Directors."
EXECUTIVE OFFICERS
The information concerning executive officers of the Company required
by Item 10 is set forth in Item 1 hereof under the heading "Executive
Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference to
the Company's Proxy Statement for the 2002 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
the Company's Proxy Statement for the 2002 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
the Company's Proxy Statement for the 2002 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.
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 Auditors............................................F-2
Balance Sheets as of June 30, 2002 and 2001...............................F-3
Statements of Operations for the years ended June 30,
2002, 2001 and 2000..............................................F-4
-24-
Statements of Stockholders' Equity for the years
ended June 30, 2002, 2001 and 2000..............................F-5
Statements of Cash Flows for the years ended June 30,
2002, 2001 and 2000.............................................F-6
Notes to Financial Statements............................................F-7
(a)(2) FINANCIAL STATEMENT SCHEDULES
Except for the schedule listed below, all other schedules are omitted
because they are not applicable or the required information is shown in
the financial statements or notes thereto.
Schedule II - Valuation and Qualifying Accounts S-1
(a)(3) EXHIBITS
3.5 (A) Articles of Amendment and Restatement dated August 19, 1996.
3.6 (A) By-laws of the Company as amended to date.
4.1 (A) Form of Specimen of Common Stock Certificate.
10.13 (B)* Form of Non-Qualified Stock Option Grant Agreement (certain executive officers -
fiscal 1997)
10.14 (B)* Form of Non-Qualified Stock Option Grant Agreement (certain executive officers -
fiscal 1997)
10.16 (B) Lease Between Principal Mutual Life Insurance Company and the Company as Tenant
dated August 6, 1996
10.22 (C)* Amended and Restated Omnibus Stock Plan
10.23 (C)* Amended and Restated Omnibus Stock Plan for Directors
10.24 (D)* Employment Agreement dated as of October 1, 1998 between the Company and T. Russotto
10.25 (D)* Non-Qualified Stock Option Grant Agreement dated March 23, 1999 between the Company
and T. Russotto.
10.26 (D)* Incentive Stock Option Grant Agreement dated March 4, 1999 between the Company and
J. Eckler.
10.27 (E)* Employment Agreement dated as of October 7, 1999 between the Company and J. Eckler
10.28 (F)* Amended and Restated Omnibus Stock Plan
10.29 (H)* Amended and Restated Omnibus Stock Plan for Directors
10.30 (G)* Amendment to Employment Agreement dated as of March 31, 2000 between the Company and
J. Eckler
10.33 (H)* Employment Agreement dated as of October 1, 1999 between the Company and S. Joseph
Dorr
10.34 (H)* Non-Qualified Stock Option Grant Agreement dated August 24, 1999 between the Company
and S. Joseph Dorr
10.35 (I)* 2000 Stock Option Plan for Directors
23 (J) Consent of Ernst & Young LLP, independent auditors
99.1 (J) Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------------------------------------------
(A) Incorporated by reference to the identically numbered exhibit filed as an
exhibit to the Company's Registration Statement on Form S-1, File No. 333-25439
(B) Incorporated by reference to the identically numbered exhibit filed as an
exhibit to the Company's Form 10-K, filed October 1, 1997.
-25-
(C) Incorporated by reference to the Company's Proxy Statement, dated October 21, 1997.
(D) Incorporated by reference to the identically numbered exhibit filed as an exhibit to
the Company's Form 10-K, filed September 28, 1999.
(E) Incorporated by reference to the identically numbered exhibit filed as an
exhibit to the Company's Form 10-Q, filed November 15, 1999
(F) Incorporated by reference to the Company's Proxy Statement, dated October 18, 1999.
(G) Incorporated by reference to exhibit 10.3 filed as an exhibit to the Company's Form
10-Q, filed May 2, 2000.
(H) Incorporated by reference to the identically numbered exhibit filed as an
exhibit to the Company's Form 10-K, filed September 28, 2000.
(I) Incorporated by reference to the Company's Proxy Statement, dated October 17, 2000.
(J) Filed herewith
--------
* Identifies exhibit that consists of or includes a management contract
or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
None
-26-
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: August 29, 2002
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 Chief Executive Officer August 29, 2002
-------------------------- and Chairman of the Board
(George T. Jimenez) (Principal Executive Officer)
/s/Steven R. Delmar Chief Financial Officer August 29, 2002
-------------------------- (Principal Financial and Accounting Officer)
(Steven R. Delmar)
/s/Paul G. Casner, Jr. Director August 29, 2002
--------------------------
(Paul G. Casner, Jr.)
/s/Gilbert A. Wetzel Director August 29, 2002
--------------------------
(Gilbert A. Wetzel)
/s/Harry M. Linowes Director August 29, 2002
--------------------------
(Harry M. Linowes)
-27-
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 Auditors............................................F-2
Balance Sheets as of June 30, 2002 and 2001...............................F-3
Statements of Operations for the years ended June 30,
2002, 2001 and 2000..............................................F-4
Statements of Stockholders' Equity for the years
ended June 30, 2002, 2001 and 2000...............................F-5
Statements of Cash Flows for the years ended June 30,
2002, 2001 and 2000..............................................F-6
Notes to Financial Statements.............................................F-7
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of ACE*COMM Corporation
We have audited the accompanying balance sheets of ACE*COMM Corporation as of
June 30, 2002 and 2001, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2002. Our audits also included the financial statement schedule listed in the
index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform our
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ACE*COMM Corporation at June
30, 2002 and 2001, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
McLean, VA
August 12, 2002
F-2
ACE*COMM CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30,
----------------------------
2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 3,530 $ 5,770
Accounts receivable, net 3,866 4,603
Inventories, net 1,122 1,360
Prepaid expenses and other 211 509
-------- --------
Total current assets 8,729 12,242
Property and equipment, net 1,659 2,489
Capitalized software development costs, net -- 184
Other assets 14 28
-------- --------
Total assets $ 10,402 $ 14,943
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings $ 209 $ 299
Accounts payable 663 239
Accrued expenses 582 623
Accrued compensation 1,340 1,701
Deferred revenue 1,233 1,501
-------- --------
Total current liabilities 4,027 4,363
Borrowings 11 221
Other liabilities 33 102
-------- --------
Total liabilities 4,071 4,686
-------- --------
Commitments and contingencies (Note 12 )
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.01 par value, 45,000,000 shares authorized,
9,328,044 and 9,264,112 shares issued and outstanding 93 93
Additional paid-in capital 21,462 21,400
Accumulated deficit (15,224) (11,236)
-------- --------
Total stockholders' equity 6,331 10,257
-------- --------
Total liabilities and stockholders' equity $ 10,402 $ 14,943
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30,
----------------------------------------------
2002 2001 2000
-------- -------- --------
Revenue $ 18,094 $ 24,179 $ 33,766
Cost of revenue 9,112 13,335 14,353
-------- -------- --------
Gross profit 8,982 10,844 19,413
Selling, general and administrative expense 11,530 15,345 15,184
Research and development expense 780 1,650 2,263
Provision for doubtful accounts 701 812 (200)
-------- -------- --------
(Loss) income from operations (4,029) (6,963) 2,166
Interest income (91) (232) (143)
Interest expense 50 196 90
-------- -------- --------
(Loss) income before income tax provision (3,988) (6,927) 2,219
Income tax provision -- -- 21
-------- -------- --------
Net (loss) income $ (3,988) $ (6,927) $ 2,198
======== ======== ========
Basic net (loss) income per share $ (0.43) $ (0.75) $ 0.24
======== ======== ========
Diluted net (loss) income per share $ (0.43) $ (0.75) $ 0.23
======== ======== ========
Shares used in computing net (loss) income per share:
Basic 9,308 9,230 8,994
-------- -------- --------
Diluted 9,308 9,230 9,587
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
F-4
ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
------ --------- ---------- ----------- -----
Balance, June 30, 1999 8,877 $ 89 $ 19,897 $ (6,507) 13,479
Exercise of common stock options 288 3 1,185 -- 1,188
Employee stock purchase plan 16 -- 54 -- 54
Net income for the year ended June 30, 2000 -- -- -- 2,198 2,198
----- -------- -------- -------- --------
Balance, June 30, 2000 9,181 92 21,136 (4,309) 16,919
Exercise of common stock options 36 -- 158 -- 158
Employee stock purchase plan 47 1 106 -- 107
Net loss for the year ended June 30, 2001 -- -- -- (6,927) (6,927)
----- -------- -------- -------- --------
Balance, June 30, 2001 9,264 93 21,400 (11,236) 10,257
Employee stock purchase plan 68 1 65 -- 66
Stock repurchases (4) (1) (3) -- (4)
Net loss for the year ended June 30, 2002 -- -- -- (3,988) (3,988)
----- -------- -------- -------- --------
Balance, June 30, 2002 9,328 $ 93 $ 21,462 $(15,224) $ 6,331
===== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
-----------------------------------------
2002 2001 2000
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(3,988) $(6,927) $ 2,198
Adjustments to reconcile net (loss) income to net cash (used for)
provided by operating activities:
Depreciation and amortization 1,248 1,752 2,128
Provision for doubtful accounts 701 812 (200)
Loss of disposal of property and equipment 34 12 --
Changes in operating assets and liabilities:
Accounts receivable 36 6,403 (5,071)
Inventories, net 238 509 283
Notes receivable -- -- 516
Prepaid expenses and other assets 312 240 (250)
Accounts payable 424 (1,299) 21
Accrued liabilities (402) (357) (304)
Deferred revenue (268) 731 324
Noncurrent portion of deferred rent liability (69) (49) --
------- ------- -------
Net cash (used for) provided by operating activities (1,734) 1,827 (355)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (268) (502) (530)
------- ------- -------
Net cash used for investing activities (268) (502) (530)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings -- 91 2,142
Payments on debt (272) (236) (1,481)
Principal payments under capital lease obligation (28) (61) (56)
Proceeds from exercise of common stock options -- 158 1,188
Repurchase of common stock (4) -- --
Proceeds from employee stock purchase plan 66 107 54
------- ------- -------
Net cash (used for) provided by financing activities (238) 59 1,847
------- ------- -------
Net (decrease) increase in cash and cash equivalents (2,240) 1,384 962
Cash and cash equivalents at beginning of year 5,770 4,386 3,424
------- ------- -------
Cash and cash equivalents at end of year $ 3,530 $ 5,770 $ 4,386
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 50 $ 195 $ 90
Income taxes $ -- $ 9 $ 95
The accompanying notes are an integral part of these financial statements.
F-6
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
ACE*COMM Corporation (the "Company"), incorporated in Maryland in 1983, delivers
enterprise telemanagement applications and advanced Convergent Mediation(TM)
solutions to wired and wireless voice, data, and Internet communications
providers. The Company's technology enables the capture, security, validation,
correlation, augmentation, and warehousing of data from network elements and
distributes it in appropriate formats to OSS ("Operations Support Systems") and
BSS ("Business Support Systems") operations. The Company's product-based
solutions are tailored to each customer's needs, providing the capabilities to
extract knowledge from their networks--knowledge they use to reduce costs,
accelerate time-to-market for new products and services, generate new sources of
revenue, and push forward with next-generation initiatives.
The Company has incurred significant net losses from operations during fiscal
years 2001 and 2002, primarily due to decreased demand for its products from the
North American telecommunications market. As a result of declining revenues, the
Company has initiated numerous cost reduction measures which have significantly
lowered operating expenses. Additionally, the Company has developed contingency
plans to reduce expenses further, should revenues decline below projected
levels.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates. Significant estimates inherent
in the preparation of the accompanying financial statements include:
management's forecasts of contract costs and progress toward 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 primarily from product-based solutions, where a
combination of hardware, proprietary software, and services are offered to
customers. These product-based solutions are typically formalized in a multiple
element arrangement involving significant modification or customization of the
underlying software and implementation services. The Company's software licenses
to end-users generally provide for an initial license fee to use the product in
perpetuity. Under certain contracts, the Company licenses its software to
resellers for subsequent modification and resale. In situations when the
Company's product-based solutions involve significant modification or
customization of software, or when the Company's systems integration and product
development are essential to the functionality of the software, revenues
relating to the software licenses and services are aggregated and the combined
revenues are recognized on a percentage-of-completion basis. The hardware
revenue on these contracts is recognized upon transfer of title. Revenue
recognized using the percentage-of-completion method is based on the estimated
stage of completion of individual contracts determined on a cost or level of
efforts basis.
In limited instances, the Company enters into a multiple element arrangement
that does not involve significant modification or customization of the related
software. In these limited instances, the Company recognizes revenue in
accordance with AICPA Statement of Position 97-2, "Software Revenue
Recognition," and allocates revenue to each element of the arrangement based on
objective evidence of the element's fair value based on internal price listings
developed by the Company. Revenue is recognized upon delivery (i.e., transfer of
title), when a signed agreement exists, the fee is fixed and determinable, and
collection of the resulting receivable is probable.
F-7
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
While the Company occasionally sells unbundled services, most of the Company's
services are delivered in conjunction with the Company's product-based
solutions. Revenue from technical customer support and maintenance services is
recognized ratably over the term of the related agreement, generally one year.
Revenue from consulting services is recognized on a time and material basis, as
the services are performed. Revenue from outsourcing or service bureau services
is recognized on a per-unit-of-volume basis as the services are performed.
Revenue related to obligations to provide post contract customer support is
unbundled from the license and recognized ratably over the term of the
agreement.
Payments received for revenues not yet recognized are reflected as deferred
revenue in the accompanying balance sheets. Revenue recognized prior to the
scheduled billing date of an item is reflected as unbilled accounts receivable.
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of three months
or less to be cash equivalents.
INVENTORIES
Inventories consist principally of purchased materials to be used in the
production of finished goods and are stated at the lower of cost, determined on
the first-in, first-out (FIFO) method, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets as
follows: equipment and vehicles - 7 years; computer equipment -3 to 7 years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the improvements' estimated useful lives or related remaining lease terms.
Maintenance and repair costs are charged to current earnings. Long-lived assets
held and used by the Company are reviewed for impairment whenever changes in
circumstances indicate the carrying value of an asset may not be recoverable.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company owns certain proprietary rights to computer software systems that
the Company has either developed or purchased and licensed to customers.
Purchased computer software and the related copyrights are capitalized at their
costs.
Research and development costs are expensed as incurred. However, the Company
capitalizes 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. Capitalized software and purchased
technology costs are amortized on a product by product basis based on the
greater of the ratio of current sales to estimated total future sales or a
straight-line basis over the remaining estimated economic life of the product,
not exceeding 3 years. The Company periodically evaluates its capitalized
software costs for recoverability against anticipated future revenues, and
writes down or writes off capitalized software costs if recoverability is in
question.
F-8
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing net
(loss) income by the weighted average common shares outstanding for the period.
Diluted earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Deferred income tax assets and
liabilities are determined based upon differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. A valuation allowance reduces deferred tax assets when it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.
RECLASSIFICATIONS
Certain prior year information has been reclassified to conform to the current
year's presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and accrued expenses approximate fair value because of the short
maturity of these items.
The carrying amounts of debt issued pursuant to the Company's bank credit
agreements approximate fair value because the interest rates on these
instruments change with market interest rates.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following (in thousands):
JUNE 30,
------------------------
2002 2001
------- -------
Billed $ 1,908 $ 3,670
Unbilled 2,563 1,430
Allowance for doubtful accounts (605) (497)
------- -------
$ 3,866 $ 4,603
======= =======
Unbilled receivables include costs and estimated profit on contracts in progress
that have been recognized as revenue but not yet billed to customers under the
provisions of specific contracts. Substantially all unbilled receivables are
expected to be billed and collected within one year. The Company recorded a
provision for doubtful accounts of $701,000 and wrote-off $593,000 in
uncollected accounts during the year ended June 30, 2002. During the year ended
June 30, 2001, the Company recorded a provision for doubtful accounts of
$812,000, credited the allowance for recoveries of $13,000, and wrote-off
$797,000 in uncollected accounts receivables. During the year ended June 30,
2000, the Company reduced its provision for doubtful accounts by $200,000,
credited the allowance for recoveries of $152,000, and wrote-off $350,000 in
uncollected accounts receivables.
F-9
NOTE 4 - INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30,
------------------------
2002 2001
------- -------
Inventories $ 1,316 $ 1,564
Allowance for obsolescence (194) (204)
------- -------
$ 1,122 $ 1,360
======= =======
Inventory write-offs during the years ended June 30, 2002, 2001 and 2000 were
$170,000, $438,000 and $304,000 respectively.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
JUNE 30,
------------------------
2002 2001
------- -------
Lab test equipment $ 137 $ --
Computer equipment 6,157 6,090
Office equipment 866 866
Leasehold improvements 464 462
------- -------
7,624 7,418
Less accumulated depreciation and amortization (5,965) (4,929)
------- -------
$ 1,659 $ 2,489
======= =======
Depreciation expense of property and equipment amounted to $1,064,000,
$1,191,000 and $1,119,000 during the years ended June 30, 2002, 2001 and 2000,
respectively. As of June 30, 2002 and 2001, leasehold improvements include a
capitalized lease in the amount of $246,000 and accumulated depreciation of
$246,000 and $223,000 respectively.
NOTE 6 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of the following (in thousands):
JUNE 30,
------------------------
2002 2001
------- -------
Capitalized software development costs
$ 7,897 $ 7,897
Less accumulated amortization (7,897) (7,713)
------- -------
$ -- $ 184
======= =======
Amortization expense of capitalized software amounted to $184,000, $554,000 and
$1,009,000 during the years ended June 30, 2002, 2001 and 2000, respectively.
F-10
NOTE 7 - BORROWINGS
The Company's borrowings consist of the following (in thousands):
JUNE 30,
-------------------
2002 2001
----- -----
Capital lease obligation for the use of an office telephone
system, principal plus interest (from 10.03% to 13.75%),
due in monthly installments through November 2001 $ -- $ 28
Advances from equipment financing agreement with Silicon
Valley Bank, principal plus interest (from 9.28% to
9.98%) due in monthly installments through September 2003
220 492
----- -----
Total borrowings 220 520
Less current portion (209) (299)
----- -----
Noncurrent portion $ 11 $ 221
===== =====
Annual maturities of noncurrent borrowings are $11,000 during the year ended
June 30, 2004.
LINES OF CREDIT
The Company secured a new Loan and Security Agreement (the "Agreement" or "new
Agreement") with Silicon Valley Bank (the "Bank") effective on July 2, 2002
replacing a previous accounts receivable purchase agreement with the Bank. Per
the Agreement, the Company may borrow up to $3.5 million through the Bank's
approved borrowing base of eligible accounts receivables. The $3.5 million line
has sublimits of $350 thousand for Letters of Credit and $1.25 million for
Export Import Bank usage. The Bank will pay an advance rate of 80% of the
eligible accounts receivables under the master line, and an advance rate of 90%
of the eligible foreign accounts receivables under the Export Import Bank
Sublimit line. The costs of this Agreement include an interest rate equal to the
Bank's prime rate plus 200 basis points per annum (with a minimum rate of 4.75%
per annum) charged on the average daily balance of advances outstanding, payable
monthly and calculated on a 360-day year basis; additionally the Company is
required to pay certain costs and expenses of the Bank in administering the
line. The Agreement has a maturity date of July 1, 2003, at which time all
obligations are due and payable in full. The Agreement has a $5.0 million
minimum tangible net worth covenant which must be complied with on a monthly
basis. The Company's obligations under the Agreement are secured by a security
interest in all of the Company's assets and intellectual property. Advances made
to the Company are payable in full upon demand in the event of default under the
agreement. As of June 30, 2002, there were no outstanding borrowings under this
Agreement. Based on eligible accounts receivable as of June 30, 2002, the
Company could have borrowed $0.45 million under the line of credit.
The Company has amounts outstanding on an Equipment Financing Agreement (the
"Equipment Agreement") with the Bank, which enabled the Company to borrow
against recently acquired Company equipment and fixed assets through January 31,
2001, the date the agreement expired. The Equipment Agreement bears interest at
the 36-month treasury rate plus 350 basis points as of the borrowing date,
requires a commitment fee (and the reimbursement of bank expenses for certain
costs of making and administering this facility) and a final payment equal to
6.5% of the value of the initial amount of each advance at the end of the
financing period for that advance. Financial covenants under the Equipment
Agreement require the Company to maintain certain liquidity ratios, which the
Company was in compliance with at June 30, 2002. Outstanding advances as of June
30, 2002, aggregated approximately $220,000 and are due through periods ended
September 2003.
F-11
NOTE 8 - RETIREMENT PLAN
The Company has a 401(k) plan available to employees the first full month after
commencement of their employment, provided they are at least 21 years of age.
The Company may make contributions to the plan at its discretion. Contributions
expensed by the Company during the years ended June 30, 2002, 2001, and 2000,
were approximately ($25,000), $141,000 and $111,000 respectively.
NOTE 9 - INCOME TAXES
The primary components of the Company's net deferred tax assets and liabilities
are as follows (in thousands):
JUNE 30,
----------------------------------
2002 2001
-------- --------
Tax assets:
Allowance for doubtful accounts $ 230 $ 189
Inventories 381 245
Accrued expenses 217 476
Net operating loss carryforwards 9,900 9,055
Tax credit carryforwards 256 256
Other 11 13
-------- --------
Gross deferred tax assets 10,995 10,234
-------- --------
Tax liabilities:
Income on contracts (998) (544)
Software costs -- (70)
Depreciation (106) (248)
Other (10) --
-------- --------
Gross deferred tax liabilities (1,114) (862)
-------- --------
Net deferred tax asset 9,881 9,372
Valuation allowance (9,881) (9,372)
-------- --------
Net deferred tax $ -- $ --
======== ========
At June 30, 2002, the Company had net operating loss carryforwards available to
offset future taxable income of approximately $26.1 million, which expire from
2006 through 2022. As of June 30, 2002, the Company also had a general business
credit carryforward of approximately $256,000 available to reduce future tax
liabilities through 2006. These tax credits do not expire.
Realization of the net deferred tax asset is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Based on
historical net operating losses and no assurance that the Company will generate
any earnings or any specific level of earnings in future years, the Company
established a valuation allowance on the net deferred assets at June 30, 2002
and 2001. Approximately $5.2 million of the valuation allowance as of both June
30, 2002 and 2001, resulted from the tax benefit of non-qualified stock options
that is included within the deferred tax benefit related to net operating loss
carryforwards. When the related valuation allowance is released, the tax benefit
will be credited directly to equity.
F-12
NOTE 9 - INCOME TAXES, Continued
The provision for income taxes for 2000 related to current state income taxes.
In 2001 and 2000, the Company paid income taxes of $9,000 and $95,000
respectively. There were no income taxes paid during 2002.
The differences between the tax provision calculated at the statutory federal
income tax rate and the actual tax provision recorded for each year are as
follows (in thousands):
YEARS ENDED JUNE 30,
-----------------------------------------------
2002 2001 2000
------- ------- -------
Income tax (benefit) provision at statutory rate $(1,247) $(2,355) $ 849
State income taxes net of Federal benefit (228) (266) 89
Nondeductible expenses 33 71 62
Foreign taxes -- -- 53
Other -- -- --
Change in valuation allowance 1,442 2,550 (1,032)
------- ------- -------
Actual (benefit) provision $ -- $ -- $ 21
------- ------- -------
NOTE 10 - STOCKHOLDERS' EQUITY
Employee Stock Purchase Plan
In 1999, the Company adopted an Employee Stock Purchase Plan (the "Plan") to
provide a method whereby all employees have an opportunity to acquire a
proprietary interest in the Company through the purchase of shares of common
stock. The Plan is implemented through common stock offerings in consecutive
offering periods, each constituting a calendar quarter. The option price of the
common stock, purchased with payroll deductions made during an offering period,
is the lower of 85% of the closing price of the common stock on the first
eligible trading day of an offering period or 85% of the closing price of the
common stock on the last eligible trading day of an offering period. The maximum
number of shares of common stock, which may be issued under the Plan, is 240,000
shares. The Company issued 67,932, 47,924, and 15,936 shares of common stock
under the plan in 2002, 2001, and 2000, respectively.
Stock Options
AMENDED AND RESTATED OMNIBUS STOCK PLAN ("OMNIBUS PLAN")
In connection with the Shareholder-approved Omnibus Plan, the Company may grant
nonqualified and incentive stock options to officers and employees. The exercise
price of each option granted under the Omnibus Plan is determined by the
Compensation Committee, and is limited to a minimum of the fair market value of
the Company's Common Stock on the date of grant. The Omnibus Plan also provides
for the issuance of restricted or unrestricted stock, stock appreciation rights
and phantom stock options. The Company may grant options under the Omnibus Plan
until September 2009.
The terms of option grants and issuances of restricted stock, stock appreciation
rights and phantom stock options, including vesting and exerciseability, are
determined by the Compensation Committee of the Board of Directors. 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 2002 and 2000 are further subject
F-13
NOTE 10 - STOCKHOLDER'S EQUITY, Continued
to accelerated vesting based on achievement of certain pre-determined
performance goals. During the year ended June 30, 2001, the Company did not
grant any performance-based options. Vested options and phantom stock options
become exercisable immediately upon vesting or within three years from the date
of grant. As of June 30, 2002, 2001 and 2000, there were outstanding phantom
stock options totaling 27,800, 7,882, and 7,082, respectively, and no restricted
stock or stock appreciation rights had been granted. Compensation cost
associated with the 2002, 2001, and 2000 phantom stock options was immaterial.
AMENDED AND RESTATED STOCK OPTION PLAN FOR DIRECTORS ("DIRECTORS' PLAN")
The Shareholder-approved Directors' Plan provides for the Company 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.
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. Options granted to Directors starting
November 2000, vest 3,000 shares each year (4,000 shares in the case of the
Chairman of the Audit Committee) from the date of grant. Options become
exercisable immediately upon vesting. Options granted under the Directors' Plan
generally expire five years from date of grant.
Stock Repurchases
During 2002, the Company authorized the repurchase of 4,000 shares of common
stock at an average per share price of $1.11.
F-14
NOTE 10 - STOCKHOLDERS' EQUITY, Continued
Information relating to all the plans is summarized as follows:
OMNIBUS PLAN DIRECTORS' PLAN
------------------------------- -----------------------------
WEIGHTED WEIGHTED
NUMBER AVG. SHARE NUMBER OF AVG. SHARE
OF SHARES PRICE SHARES PRICE
--------- -------- ------- --------
Outstanding Options at June 30, 1999 1,446,071 $ 5.12 46,500 $ 8.19
Granted 765,685 4.49 52,000 9.75
Exercised (287,074) 4.14 -- --
Expired (171,218) 4.93 -- --
--------- -------- ------- --------
Outstanding Options at June 30, 2000 1,753,464 5.02 98,500 9.01
Granted 457,488 3.48 21,000 3.84
Exercised (26,550) 5.42 (9,000) 1.55
Expired (483,310) 4.36 -- --
--------- -------- ------- --------
Outstanding Options at June 30, 2001 1,701,092 4.79 110,500 8.19
Granted 707,169 1.33 9,000 1.22
Exercised -- -- -- --
Expired (864,682) 4.78 (35,500) 8.18
--------- -------- ------- --------
Outstanding Options at June 30, 2002 1,543,579 3.21 84,000 7.46
========= ======== ======= ========
Options exercisable at June 30, 2000 522,814 $ 6.40 37,500 $ 8.20
========= ======== ======= ========
Options exercisable at June 30, 2001 694,151 $ 5.49 51,836 $ 9.19
========= ======== ======= ========
Options exercisable at June 30, 2002 627,297 $ 4.06 50,001 $ 9.08
========= ======== ======= ========
Options available for granting 936,477 170,000
========= =======
The following table summarizes information about stock options outstanding at
June 30, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------ ---------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at June 30, 2002 Life (yrs) Exercise Price at June 30, 2002 Exercise Price
- --------------- ---------------- ----------- -------------- ---------------- --------------
$0.00 - $1.78 628,109 9.3 $ 1.33 92,350 $ 1.32
$1.79 - $3.55 375,885 6.2 2.29 252,140 2.43
$3.56 - $5.33 257,257 5.9 4.24 102,881 4.52
$5.34 - $7.10 259,503 6.5 6.51 171,350 6.50
$7.11 - $17.75 106,825 4.5 10.41 58,577 11.71
--------- -------
1,627,579 677,298
========= =======
F-15
NOTE 10 - STOCKHOLDERS' EQUITY, CONTINUED
FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company measures compensation expense for its stock option plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. The Company recorded no compensation
cost associated with stock options in 2002, 2001 and 2000.
For the purposes of the pro forma amounts shown below, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes model.
The weighted-average assumptions included in the Company's fair value
calculations are as follows:
2002 2001 2000
---- ---- ----
Expected life (years) 3-8 3-8 3-8
Risk-free interest rate 5-6 % 5-6 % 5-6 %
Expected volatility 106 % 123 % 149 %
Dividend yield 0 % 0 % 0 %
The weighted average fair value of stock options granted under the stock option
plans during the years ended June 30, 2002, 2001 and 2000 was $0.73, $2.23 and
$4.68 respectively. If the Company determined compensation costs for these plans
based on the fair value of stock options in accordance with Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), the Company's net loss and
loss per share would have been:
(Amounts in thousands except per share amounts)
2002 2001 2000
--------- --------- --------
Pro-forma amounts
Net loss $ 5,477 $ 8,832 $ 235
========= ========= ========
Basic loss per share $ 0.59 $ 0.96 $ 0.03
========= ========= ========
Diluted loss per share $ 0.59 $ 0.96 $ 0.03
========= ========= ========
F-16
NOTE 11 - 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,
---------------------------------------------
2002 2001 2000
------- ------- -------
Basic EPS:
(Loss) income (numerator):
Net (loss) income available to common shareholders $(3,988) $(6,927) $ 2,198
======= ======= =======
Shares (denominator):
Weighted average common shares 9,308 9,230 8,994
======= ======= =======
Basic EPS $ (0.43) $ (0.75) $ 0.24
======= ======= =======
Diluted EPS:
(Loss) income (numerator):
Net (loss) income available to common stockholders $(3,988) $(6,927) $ 2,198
======= ======= =======
Shares (denominator):
Weighted average common shares 9,308 9,230 8,994
Stock options* -- -- 593
------- ------- -------
Total weighted shares and equivalents 9,308 9,230 9,587
======= ======= =======
Diluted EPS $ (0.43) $ (0.75) $ 0.23
======= ======= =======
- ------------------
* Due to the loss incurred during the years ended June 30, 2002
and 2001 zero incremental shares related to stock options are
included in the calculation of Diluted EPS because the effect
would be antidilutive.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company has a $200,000 letter of credit arrangement with the Bank, which
guarantees the Company's performance to its landlord. The letter of credit is
secured by restricted cash equivalents maintained at the Bank; the requirement
decreases in 2003 to $100,000.
The Company leases office space under non-cancelable operating leases. Lease
terms range from two to seven years and include renewal options for additional
periods. Management expects that in the normal course of business, leases will
be renewed or replaced by other leases. Additionally, the Company leases
equipment under operating leases that, in the aggregate, are not significant.
The Company is committed for the payment of minimum rentals under operating
lease agreements through the year 2007 in the following amounts (in thousands):
YEAR ENDING JUNE 30, AMOUNT
-------------------- ---------
2003 $ 870
2004 369
2005 35
2006 20
2007 18
---------
$ 1,312
=========
F-17
NOTE 12 - COMMITMENTS AND CONTINGENCIES, Continued
The total rental expense under operating leases was $941,000, $1,058,000 and
$956,000 for the years ended June 30, 2002, 2001 and 2000, respectively.
NOTE 13 - BUSINESS AND CREDIT CONCENTRATIONS
The Company sells its products worldwide from its headquarters in Gaithersburg,
Maryland. The following is a breakdown of the Company's revenue by geographic
area (in thousands):
------- ------- -------
2002 2001 2000
------- ------- -------
U.S. $ 9,933 $14,792 $24,016
Canada and Mexico 1,594 1,199 5,089
Asia 1,563 587 2,063
Europe: Germany 3,001 5,545 373
Europe: Other 416 656 314
South America 64 249 618
Africa and Middle East 1,523 1,151 1,293
------- ------- -------
Total revenue $18,094 $24,179 $33,766
======= ======= =======
During the year ended June 30, 2002, one customer comprised 17% of total
revenue. Another customer comprised 11%, 6%, and 5%, respectively, of the
Company's total revenues during the years ended June 30, 2002, 2001, and 2000.
Total revenues earned outside of the US represents 45% of total revenue earned
for the year.
In addition, five customers represented approximately 60% of the Company's gross
trade receivable balances as of June 30, 2002. A single customer accounted for
27% of the accounts receivable balance at June 30, 2002. To reduce credit risk,
the Company conducts ongoing evaluations of its customers and requires letters
of credit or other pre-payment arrangements. The Company maintains accounts
receivable allowances to provide for potential credit losses.
F-18
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO RECOVERIES BALANCE AT
BEGINNING COSTS AND OF PRIOR END OF
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS WRITE-OFFS PERIOD
Year ended June 30, 2002:
Allowance for doubtful accounts $ 497,000 $ 701,000 $ -- $ 593,000 $ 605,000
Reserve for obsolete inventory $ 204,183 $ 160,000 $ -- $ 170,029 $ 194,154
Year ended June 30, 2001:
Allowance for doubtful accounts $ 469,000 $ 812,000 $ 13,000 $ 797,000 $ 497,000
Reserve for obsolete inventory $ 187,354 $ 455,000 $ -- $ 438,171 $ 204,183
Year ended June 30, 2000:
Allowance for doubtful accounts $ 867,000 $(200,000) $ 152,000 $ 350,000 $ 469,000
Reserve for obsolete inventory $ 251,810 $ 239,983 $ -- $ 304,439 $ 187,354