It's a familiar script in the new Washington economy.
A small, high-tech company with rising sales and profits and prospects galore has a story to tell and a willing audience on Wall Street. The company decides to go public, seeking the capital it needs for a rapid expansion into new markets and new products. Company insiders stand to make millions converting their years of "sweat equity" into something tangible: cold cash.
And so the story would go for AceComm Corp., a Gaithersburg telecommunications equipment firm that took the path traveled by many of its fellow high-tech companies in suburban Maryland and Northern Virginia when it went public in the summer of 1996.
At first, AceComm stuck to the story line. Revenue continued to rise as the company tapped new markets, with sales increasing 69 percent and earnings more than doubling to $2.6 million in 1997. Founder and chief executive George T. Jimenez saw the value of his holdings rise to $57 million from about $17 million.
But then AceComm got caught in a whirlwind not entirely of its own making, as its reliance on Asian customers backfired amid the financial crisis that began bedeviling the Far East in the summer of 1997. Instead of another local high-tech wonder tale, AceComm became an anecdote in the downside-of-globalization story. In the year ended June 30, 1998, revenue fell by a third, profits turned to losses to the tune of more than $9 million, and its stock fell to less than a $1 last fall from more than $20 a share during the post-IPO glory days.
The suddenness of the downturn caught Jimenez by surprise. When the Asian financial temblor first shook these shores in the autumn of 1997, he found himself calmly answering questions about the company's reliance on Asia for 50 percent of its business. As he told an ABC News TV crew sent out to gather comment for a segment on the crisis hosted by Peter Jennings, Asia's effect on his company would be minimal.
"At that time we were saying it looked to us like we might have had a sniffle, but we won't catch the flu," Jimenez said. "It turned out we caught pneumonia."
How that happened constitutes a lesson in just how dramatically the fortunes of a small company can change. It's also an example of how quickly a company can fall out of favor with the financial community when the yellow brick road turns out to be full of potholes. And it's a warning to American companies that seek their gold in capricious foreign markets.
"For a small company, they were thrown a curveball they couldn't have seen coming," said Michael Neiberg, a Hambrecht & Quist analyst who has followed the company over time but no longer officially watches it. "They were small and they were growing quickly, and then they stopped growing."
AceComm came of age in the newly deregulated world of telecommunications that followed the 1984 breakup of Ma Bell. As many of the former phone monopoly's business units were spun off, so emerged viable opportunities for other small companies to provide critical services for the new phone companies then springing up. AceComm, in particular, found success providing computer equipment and software that allows telecommunications companies, Internet service providers and cellular phone providers to track voice and data traffic on their networks. The information is used for billing, network management and security.
At a time when traditional phone companies were ditching their mainframe-based, central office equipment, companies like AceComm were seen by investors as ways to cash in on the growth in new telecommunications technologies expected in a deregulated environment.
"Their whole story was they sold a critical piece of the networking puzzle," said Steven Levy, a Lehman Brothers telecommunications analyst who was instrumental in helping AceComm go public when he worked at Oppenheimer & Co. "It was a real hot topic at the time."
Over time, the market changed and AceComm with it. Following a pattern first seen in the United States, the state-owned monopoly telephone companies in foreign countries soon began switching to privately held corporations. AceComm rode this trend in the early 1990s, its revenue rising 38 percent from 1994 to 1996, its last year as a private company, largely because of lucrative contracts with Mexican phone giant Telmex and Canada's Teleglobe. Together, those two customers accounted for nearly 40 percent of AceComm's 1996 revenues of $19.9 million. Profits fared even better, rising 64 percent to slightly more than $1 million in the same time frame.
It may seem quaint now, what with profitless Internet start-ups in a frenzy to go public, but in 1996 when AceComm was seeking public financing, companies were supposed to be profitable before tapping the equity markets. Thus, AceComm's track record was the kind to draw the notice of investment bankers.
"It was a very difficult time to go public because of the time of year and overall malaise in the market," Levy said. "But back in those days, that was a very successful IPO."
Emboldened by its successes in Mexico and Canada, AceComm began straying farther from home in its search for new business. The emerging markets of Asia beckoned.
Among the company's coups was an $18 million contract won in early 1996 -- almost equal to the small company's annual sales at the time -- to provide equipment to the state-owned telephone company in South Korea. It seemed a ratification of AceComm's foray into the Southeast Asian market, for which it had spent heavily to develop sales and marketing support. Another win was its selection as a subcontractor on an International Business Machines Corp. deal in Indonesia.
"Emerging markets we saw as a big play for us," Jimenez said. "And of course, the biggest emerging market was Southeast Asia. We invested heavily in sales and marketing in Southeast Asia from 1993 and 1994 right up till 1997."
It was a decision that would come back to haunt the company -- and with a speed that astonished Jimenez, 63, a veteran small-businessman who was no stranger to the vicissitudes of the marketplace. An engineer, Jimenez has spent most of his career working in and around computers and telecommunications equipment. After a spell running a military systems engineering and software division of a larger company, Jimenez and a partner bought American Computer & Electronics in the late 1970s, then sold it in 1983, when he founded AceComm.
"The beginning of calendar '98 it collapsed," he said. "We went from doing $9 to $10 million quarters to $4.5 million quarters in sales. Southeast Asia went from $4.5 million a quarter to zero."
The first response, after bewilderment and shock, was denial.
"At the time we were looking at it and saying, `These economies can't be all that bad. It can't last that long.' "
Events quickly proved him wrong. First, the South Koreans stopped their big order dead in its tracks. Then, an Indonesian subcontract to IBM was canceled at the last minute. And, adding insult to injury, the Air Force delayed a contract potentially worth more than $20 million because of Year 2000 computer bug worries.
"It was almost like you were taking a cannonball in the chest every day," Jimenez said.
It wasn't only customers who began to distance themselves from the company.
Crestar Bank found it had no use for the company, effectively withdrawing its $3.5 million line of credit because the AceComm's cash flow had fallen below agreed-upon limits.
"We basically had a meeting, they came in one day and said, `The bank no longer wants you as a customer,' " Jimenez said. "These were the same people a year before, we had like $15 million in their bank and they had been offering us $10 million to do acquisitions."
Jeffrey Patch, a Crestar account manager, said he could not comment on dealings with clients, past or present.
Along with Crestar, AceComm lost the attention of its auditors, PricewaterhouseCoopers. To this day, Jimenez says he doesn't know why, though he suspects Pricewaterhouse had come to view AceComm as no longer "a going concern." Through a spokesman, the head of the Pricewaterhouse regional office declined to comment about the dispute.
Then the securities analysts joined the exodus. After all, there isn't a whole lot of interest among the established brokerage houses for stocks selling in the single digits. And there aren't many deals to be had raising capital for a company whose sales are declining and whose profits have disappeared.
"When companies aren't growing, they probably don't need financing," one analyst said bluntly, speaking on condition of anonymity.
Paul Mejean, managing director of Soundview Technology Group and one of the leaders in the investment community who helped take AceComm public as head of the technology practice at Furman, Selz, gave another reason for the sudden lack of interest.
"If I follow a tiny, tiny micro-cap company, my boss is going to ask me, `Why are you following that company?' " said Mejean, who also explained that his firm was acquired and that Soundview does not specialize in the kind of telecommunications firms in AceComm's market.
"We probably had about six firms that were making a market in the stock," Jimenez said. "That went down to one."
Lacking analyst coverage, AceComm's stock languished, leaving the company vulnerable to the inevitable short-sellers who take positions that enable them to profit only when a stock loses value.
Meanwhile, the company's financial condition worsened as 1998 rolled on. Overhead that rose during the expansion into Asia soon became a crippling burden. Spending on salaries and general expenses had consumed a third of the company's revenues in 1997, but as those revenues shrank, the proportion grew, reaching 76 cents out of every dollar of revenue in 1998.
And the company's well of cash began to evaporate. From $7.9 million at the end of the fiscal year in mid-June 1997, it dropped to $2.9 million a year later. Much of the missing $5 million went to cover the operating losses.
"It was really a difficult time. We were bleeding cash," Jimenez said. "It got to the point where when you looked down the pike, we were going to run out."
The troubles did not go unnoticed by rank-and-file employees, partly because Jimenez had always made it a policy to share company information with workers.
"I'd been around there a long time," said Loretta Rivers, the corporate secretary, who started out at the front desk of AceComm's predecessor company 22 years ago. "We'd had highs and lows before. For me, it was just another low."
But Rivers said this time the lows were well known outside AceComm's Gaithersburg building.
"I said at the time of the IPO and shortly thereafter -- and I will maintain this forever -- you have no idea what's going to happen to you when a company goes public," Rivers said.
"We went from being a private company, where our business was our business, and you go to where your business is everybody's business and you're not prepared for that," she said. "Investors were calling and saying, `Hey, what's happened to my stock?' "
Engineer Danny Nguyen, a seven-year veteran, had been laid off before at another job, and so he naturally worried when things went awry. But he remained, even as the company was forced to shed about 40 of its 220 employees.
"I still believe in the company," Nguyen said. "We do the right business, but it may take us some time."
Today, Jimenez displays little sign of the inner turmoil that accompanied the past two years. A runner who is proud to tell of his success at making the entry cut for this November's New York Marathon (his second New York, and third marathon overall), Jimenez said he drew some solace from the training regimen for long-distance running.
"There are dark days and light days," he said. "You can imagine, spending some time out on the road every once in a while did me some good."
To stanch the company's cash drain and minimize its losses, Jimenez took other actions besides cutting workers. He sliced his own salary down to almost zero and asked other managers to accept reductions in pay. Bonuses were abandoned. And before he arranged a new $4 million line of credit with Silicon Valley Bank, which has been eagerly expanding its business locally by lending to high-tech firms, Jimenez agreed to loan his company as much as $3.5 million of his own money or guarantee loans of a similar amount if AceComm ran out of cash.
"Under George Jimenez's leadership, the company was able to cut its costs, redirect its marketing and work itself through the process," said William Newlin, a Pittsburgh lawyer who sits on AceComm's board and oversees the interest of a private venture fund that invested in the company.
Newlin said Jimenez's willingness to risk his own money at the company during its hard times was critical to the board's support for Jimenez's rescue plan.
"No question, when you have an executive that believes strongly enough in the company to `invest' his own resources, it certainly bolsters your own sense of security," Newlin said.
Jimenez receives high praise from Newlin, former analysts and employees for the way in which he has reversed the losses at AceComm by marketing products to a new group of customers, primarily the "competitive local exchange carriers" who have emerged since Congress rewrote the nation's telecommunications laws in 1996.
"George handled it beautifully," Soundview's Mejean said. "He's a very experienced and seasoned businessman."
The moves are paying off, with new contracts to supply equipment to companies such as MediaOne Group Inc., WinStar Communications Inc. and Unisys Corp. Meanwhile, there are other signs the tide may have turned in AceComm's favor.
In January, Korea Telecom resumed its purchase of AceComm equipment.
In late April, the company announced financial results for its third quarter, breaking even on estimated sales of $7.3 million. Cash on hand, meanwhile, increased to $3.1 million, and the company recorded $8 million of new orders.
In May, Ernst & Young agreed to be AceComm's new auditors.
In June, the Air Force began began doing business with AceComm again, placing a $2 million order.
"The stock has not come back," Jimenez candidly acknowledges. It has been trading at about $4 a share lately and closed at $3.81 1/4 Friday, down 6 1/4 cents a share on the Nasdaq Stock Market. "But the story is as attractive as it was back then. One piece of the market went south. That piece will come back."
A Look at ...
Business: Telecommunications equipment firm
Chairman, chief executive: George T. Jimenez
Ticker symbol: ACEC on the NASDAQ
Web address: www.acecomm.com
Source: Company reports, Bloomberg News