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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 0-13898
VERAMARK TECHNOLOGIES, INC.
(Exact Name of Registrant as specified in its Charter)
DELAWARE 16-1192368
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
3750 MONROE AVENUE, PITTSFORD, NY 14534
(Address of principal executive offices)
(716) 381-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act
NONE N/A
(Title of Each Class) (Name of each exchange
on which registered)
COMMON STOCK, $.10 PAR VALUE
(Securities registered pursuant to Section 12 (g) of the Act)
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.
_____
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 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 requirements for the past 90 days.
YES X NO
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of January 31, 2000 was $78,314,418.
The number of shares of Common Stock, $.10 par value, outstanding on
January 31, 2000 was 8,063,448.
DOCUMENTS INCORPORATED BY REFERENCE
PART I - None
PART II - None
PART III - Item 10 Pages 2 - 5 and page 17 of the Company's
Proxy Statement for the Annual Meeting of
Shareholders to be held May 18, 2000.
Under "Election of Directors" and
"Compliance With Section 16 (a)."
Item 11 Pages 11 - 12 of the Company's Proxy
Statement for the Annual Meeting of
Shareholders to be held May 18, 2000.
under "Executive Compensation."
Item 12 The tables contained on Pages 13 - 14 and the
information under "Election of Directors" on
Pages 2 - 5 of the Company's Proxy Statement
for the Annual Meeting of Shareholders to be
held May 18, 2000.
PART I
ITEM 1 BUSINESS
Veramark Technologies was incorporated (as MOSCOM Corporation) in New
York in January 1983 and reincorporated in Delaware in 1984. The Company's
name was changed to Veramark Technologies, Inc. on June 15, 1998.
Veramark Technologies, Inc. produces telecommunications and network
management systems for users of private branch exchange (PBX) based voice
networks and data networks, including the Internet. Veramark also produces
billing and customer care systems for providers of wireless and wireline
network services in the global market. Veramark's products consist primarily
of software running under Microsoft Windows 98, Windows 2000 and Windows NT
Systems.
Veramark's historical core business has been based on sales of
telemanagement systems and software packages including telephone call
accounting and fraud detection products. Veramark is one of the world's
leading producers of call accounting systems and has sold more than 85,000 of
these, and related products, to customers in more than 80 countries.
Veramark's call accounting systems are sold through leading manufacturers and
resellers of telephone systems including SBC/Ameritech, Lucent Technologies,
Philips and Siemens.
Veramark's VeraBill software is a network billing and customer care
system used by small to mid-range telephone and wireless network operators to
manage customer accounts, generate bills, track payments and support customer
service operations. Veramark has targeted start-up service providers and more
established telephone companies deploying new network services as potential
purchasers of VeraBill systems. VeraBill system size capability currently
ranges from 2,000 to 400,000 subscriber access lines. Growth has resulted
from the deregulation and liberalization of monopoly telephone markets
throughout the world. Growth in this market has also been stimulated by the
introduction of many new wireless network services including digital cellular
and personal communications service (PCS) now being deployed widely around the
world. The VeraBill product is marketed worldwide directly by Veramark and
through wireline and wireless network equipment manufacturers and system
integrators.
In 2000, Veramark will begin marketing the VeraWeb series of network
resource management software products. These products allow businesses to
easily track, manage and allocate costs for use of the Internet and other
network resources. VeraWeb's easy and flexible reports help businesses
maximize the productivity of both their networks and their employees.
On January 7, 2000, Veramark merged with The Angeles Group, which is now
operated as a Division of Veramark. The Angeles Group produces comprehensive
telemanagement systems for large enterprises. The Angeles Group product, The
Quantum Series, includes integrated modules for call accounting, directory,
bill reconciliation, cable management, inventory and PBX fraud alerts. The
Angeles Group Division has 42 employees.
Veramark's products are designed for the global market. During the past
year, 20% of Veramark's revenues were derived outside the United States, from
customers in more than 80 countries.
Veramark's headquarters, operations, engineering and support staff is
located in a 65,000 square foot leased facility located in Pittsford, New
York. Approximately 40 field sales and support personnel are located in
cities with high concentrations of Veramark's products. The Angeles Group
Division is located in a 9,453 square foot facility in Westlake Village,
California.
TELEMANAGEMENT SYSTEMS
Veramark is among the world's leading producers of telemanagement
products, which are used by organizations to optimize the usage of their
telecommunications services and equipment, and to control telephone expenses.
Telemanagement products include call accounting systems, telephone fraud
detection products and facilities management systems.
CALL ACCOUNTING
Veramark's initial telemanagement product lines were CALL ACCOUNTING
SYSTEMS which connect to a business telephone system (or PBX) to collect,
store, and process information on every outside telephone call made.
Call accounting systems give businesses easy access to complete
information on telephone usage including the dialed number, calling extension,
call duration, time of day, destination, trunk line and cost of each call.
All of Veramark's call accounting products provide this fundamental
information, in graphical summary and detailed report formats, without
monitoring actual phone conversations.
The primary appeal of call accounting systems is that they save money on
telephone and network equipment bills. Telephone bills, which typically
represent the third largest business expense after payroll and facilities, can
be reduced by 10% - 30% through heightened awareness and management. As a
result, the cost of a call accounting system can generally be recovered in
less than one year through direct expense reduction.
Call accounting systems are purchased and used for many other valuable
reasons as well, including:
- Traffic analysis to determine an optimal number of trunks and best
long distance carrier configurations.
- Allocating telephone expense to specific cost centers or clients
based on actual use.
- Producing revenues by reselling phone services to clients or hotel
guests.
- Detecting fraudulent use of the phone system by hackers and
unauthorized use of company phones for personal calls or 900 numbers.
- Evaluating employee productivity.
Veramark's premier call accounting product, since its release in 1999, is
the Emerald XP software. Emerald XP comes in affordable model sizes ranging
from 25 to 20,000 telephone extensions. The Emerald XP system is able to
collect and process data from up to 100 different remote telephone switches
(PBX's) from one central location. Veramark's economical Pollable Storage
Unit (PSU) collects data from the remote PBX's and stores it until polled by a
central Emerald XP system. Private label versions of Emerald XP are sold by
Lucent Technologies and Philips. Emerald XP is designed to be an international
product. It supports worldwide call rating, all world currencies, date
schemes and privacy practices.
Veramark also produces call accounting software products based on the
UNIX operating system. These products are marketed very successfully by
Lucent Technologies as an integrated solution with Lucent Technologies'
smaller telephone systems and application processors.
PBX FRAUD DETECTION SYSTEMS address a problem that is estimated to exceed
$1 billion annually - the theft of telephone service through PBX "hacking."
PBX owners use call accounting systems to spot potential fraud and take
corrective measures to minimize the loss. Veramark offers an optional
HackerTracker module with the Emerald XP system to automate the detection of
fraud 24 hours per day and instantly send out alarms by printed report, audio
signal, pager or fax to initiate preventive measures.
The market for telemanagement products is a highly fragmented one
supplied primarily by small firms selling directly to end-users. What sets
Veramark apart and enables Veramark to maintain a leading worldwide market
share is our distribution relationships with some of the largest sales and
support organizations in the industry. The strength, breadth and quality of
Veramark's distribution network for telemanagement products is unsurpassed,
including Lucent Technologies, SBC/Ameritech, and Sprint in the United States,
and Siemens, Philips, and Lucent Technologies in international markets.
A typical range of end user prices for Veramark's call accounting and
fraud detection systems is from $2,000 to $40,000 per system.
DEFINITY NETWORK TELECOMMUNICATIONS SOFTWARE
Definity Network Telecommunications software ("DNT") is a client/server
based enterprise management system that automates cost control and service
operations in large corporate voice and multimedia network environments.
Formerly called TMS for Windows, DNT goes beyond call accounting with fully
integrated modules for service and maintenance management, network equipment
tracking, as well as local and long distance call management. DNT runs on
highly scalable single or multi-processor Windows NT computer platforms, the
de facto standard for client/server computing in information technology
departments throughout the world.
Veramark sells DNT through Lucent Technologies, which markets DNT as a
Lucent product with the Lucent Definity Enterprise Communications server.
Target customers for DNT are mid to large size enterprises from all
industries and include multi-national corporations, government agencies, and
medical and educational institutions. Typical users will have 2,000 to 50,000
telephone extensions in multiple facilities. End user prices will typically
range from $45,000 to $235,000 per system.
THE QUANTUM SERIES
The Quantum Series, marketed by Veramark's Angeles Group Division, is the
Company's most comprehensive telemanagement software product. It consists of
full integrated modules that can also be separated as stand-alone products for
call accounting, cable management, work orders, phone bill management, least
distance jumper routing, inventory management directory, and toll fraud.
The target for Quantum is Fortune 1000 companies and comparably sized
organizations in health care, utilities, financial services and government
sectors. Quantum is sold through a direct sales force and through
SBC/Ameritech. Typical sales prices range from $75,000 to $600,000.
CENTRAL OFFICE TELEMANAGEMENT
Veramark's INFO/MDR products capture, at the central office, vital
information in the form of Message Detail Records on every call handled by
that particular central office switch. These raw detail records are then
processed into meaningful formats and distributed to a central telephone
company billing processor or to business subscribers.
Telephone companies use INFO/MDR to enhance the appeal of Centrex and
Virtual Private Network service. With Centrex service, business customers
utilize the telephone company's central office switch to route calls to
individual extensions rather than a PBX. INFO/MDR gives telephone companies
the ability to provide complete, timely and accurate call detail information
to customers, economically and efficiently. Telephone companies are also
using INFO/MDR to provide message accounting for virtual private networks,
another rapidly growing segment of the telecommunications market. Virtual
private networks utilize customized software design to provide private network
functionality over the common carrier public network.
Telephone companies with multiple INFO/MDR systems installed include
AT&T, Alltel, Bell Atlantic, Century Telephone, Citizens Utilities, Cable &
Wireless, SBC/Ameritech and Sprint. End user prices for INFO/MDR range from
$26,000 to $80,000 per system
BILLING PRODUCTS AND SERVICES
Deregulation and the introduction of new wireless services are the most
significant forces affecting the telecommunications industry worldwide. One
result is to significantly expand demand for products designed for new
entrants to the industry. Another is to drastically change the requirements
of established service providers suddenly facing a dramatically new
environment. Veramark's VeraBill family of software products is designed for
this new telecommunications world. VeraBill is a comprehensive network and
operations support system for telecommunications, paging and Internet service
providers. Based on highly scalable Windows NT client/server architecture,
VeraBill can be configured to support operators with as few as 2,000 or as
many as 400,000 subscriber access lines. VeraBill supports wireline as well
as cellular, PCS, and other wireless services. VeraBill is an operations
support system for managing billing, receivables, service and work orders,
plus network and customer premises equipment. These functions are fully
integrated with a common database but modular in design to enable customers to
select the functionality required. VeraBill's client server architecture
allows users to easily add subscriber capacity as demanded. This is a
particularly attractive feature for emerging service providers with rapid
expansion plans. Since VeraBill is based on Microsoft's pervasive Windows
operating system, operator training is very straightforward. Computer
hardware costs are significantly lower than with traditional billing systems.
VeraBill is capable of rating and billing telecommunications services
worldwide. Billing formats and schemes can be adjusted quickly by the network
operators to accommodate new marketing plans or to meet competitive offerings.
Event message rating is highly flexible and supports rating schemes based on
dialed number, rating bands or meter pulse algorithms. VeraBill is also
designed to manage multiple dialing plans simultaneously and provide tariff
options specific for individual telephone numbers. This flexibility affords
service providers limitless tools for creating competitive marketing
promotions.
The market for VeraBill is worldwide -- wherever new service providers
are entering the market or existing providers find their billing and customers
care systems inadequate to meet changing market conditions. Demand for
billing systems is growing rapidly as a result of monopoly markets being
opened to competition and by the introduction of new wireless technologies.
To reach this expansive market Veramark is forming distribution and marketing
relationships with the leading global providers of switches and support
systems sold to landline and wireless telecommunications companies. VeraBill
is currently marketed worldwide by leading switch manufacturers including
Alcatel and Nokia Telecommunications.
End user prices for VeraBill systems range from $150,000 to over $1
million per system.
MARKETING AND SALES
Veramark's marketing and sales personnel are located at its headquarters
in Pittsford, New York, and in 30 locations throughout the United States.
Veramark's marketing and distribution strategy is founded on building
mutually beneficial relationships with companies with large, established
distribution networks for telecommunications and computer products. The
nature of the relationships varies depending on the product and market. For
some, Veramark develops and manufactures customized products under a private
label while others purchase and resell Veramark's standard products. The
Angeles Group Division sells the Quantum Series through a direct sales force
as well as through SBC/Ameritech.
Veramark's marketing strategy is focused upon telephone switch
manufacturers and sellers and providers of telephone services. A partial
listing of companies using or selling Veramark products follows:
TELECOMMUNICATIONS EQUIPMENT MANUFACTURERS
Alcatel
Lucent Technologies
Nokia Telecommunications
Philips
Siemens
TELEPHONE SERVICE PROVIDERS
SBC/Ameritech
AT&T
Cable & Wireless
Sprint
Sales to Lucent Technologies accounted for 67% of Veramark's 1999
revenue.
NEW PRODUCT DEVELOPMENT
Veramark is currently pursuing several opportunities to expand its
telemanagement and billing product lines and to offer products for related
markets.
Software development costs meeting recoverability tests are capitalized
under Statement of Financial Accounting Standard No. 86 effective January 1,
1986. The cost of software capitalized is amortized on a product-by-product
basis over its estimated economic life, or the ratio of current revenues to
current and anticipated revenues from such software, whichever provides the
greater amortization. The Company periodically records adjustments to write
down certain capitalized costs to their net realizable value.
BACKLOG
At December 31, 1999 Veramark had a backlog of $1,470,124. Backlog as of
December 31, 1998 was $2,194,031. Backlog is not deemed to be a material
indicator of 2000 revenues.
The Company's policy is to recognize orders only upon receipt of firm
purchase orders.
COMPETITION
The telecommunications management industry is highly competitive and
highly fragmented. The number of domestic suppliers of telemanagement systems
for business users is estimated to exceed 100 companies. The vast majority of
those are regional firms with limited product lines and limited sales and
development resources. Several competitors are established companies that are
able to compete with Veramark on a national basis.
There are fewer competitors in the market for billing systems for
telephone service providers. Competition in this market is expected to
increase as the market matures. In addition, several existing competitors are
substantially larger than Veramark and devote significantly more resources to
this market on a worldwide basis.
Some competing firms have greater name recognition and more financial,
marketing and technological resources than Veramark. Competition in the
industry is based on price, product performance, depth of product line and
customer service. Veramark believes its products are priced competitively
based upon their performance and functionality. However, Veramark does not
strive to be consistently the lowest priced supplier in its markets.
In common with other information industries, the markets into which the
Company sells have recently been characterized by rapid shift toward the
software component of product content and away from the hardware element.
Historically, prices for application software have declined rapidly in the
face of competition. Increased competition for the Company's software
products could adversely affect the Company's sales volume and profits.
MANUFACTURING
Veramark assembles its products from components purchased from a large
variety of suppliers both domestic and international. Wherever feasible, the
Company secures multiple sources, but in some cases it is not possible.
Veramark offers warranty coverage on all products for 90 days or one year
on parts and 90 days on labor. Repair services are offered at the Pittsford,
New York facility and by some of the Company's larger customers.
EMPLOYEES
As of December 31, 1999, Veramark employed 222 full-time personnel.
Veramark's employees are not represented by any labor unions.
ITEM 2 FACILITIES
The Company's principal administrative office and manufacturing facility
is located in a one-story building in Pittsford, New York. Veramark presently
leases approximately 65,000 square feet of the building of which approximately
5,000 square feet is devoted to manufacturing. The term of the lease expires
on October 31, 2002.
The Angeles Group Division occupies 9,453 square feet of a building in
Westlake Village, California, pursuant to a lease that expires on February 28,
2004.
ITEM 3 LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company or to
which the Company is a party or of which any of its property is the subject.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Veramark Technologies, Inc. Common Stock, $.10 par value, is traded on
the NASDAQ National Market System (symbol: VERA). The following quotations
are furnished by NASDAQ for the periods indicated. The quotations reflect
inter-dealer quotations that do not include retail markups, markdowns or
commissions and may not represent actual transactions.
COMMON STOCK PRICE RANGE
Quarters Ended
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
1999 $8.75-5.75 $7.75-5.88 $11.88-7.50 $14.75-11.00
1998 $7.00-5.56 $7.25-5.25 $ 8.44-3.88 $ 6.88- 3.00
As of December 31, 1999, there were 597 holders of record of the
Company's common Stock and approximately 3,200 additional beneficial holders.
The Company paid dividends of $.02 per share during the months of January
and July of each year from 1990 through 1995. The Company paid a dividend of
$.02 per share in January 1996. No dividends were paid in 1997, 1998 or 1999
and no dividend is planned for 2000.
ITEM 6 SELECTED FINANCIAL DATA (Restated under Statement of Financial
Accounting Standards No. 128)
Year Ended December 31,
1999 1998 1997 1996 1995
Net Sales $24,192,363 $17,119,540 $12,408,269 $13,380,862 $17,570,381
Net Income (Loss) $2,694,452 $1,019,427 $(5,030,507) $(5,936,096) $881,950
Net Income (Loss) per
Diluted Share $.32 $.13 $(.69) $(.86) $.13
Total Assets $19,455,262 $15,182,501 $11,909,527 $13,604,623 $18,014,394
Long Term Obligations $3,043,771 $2,882,847 $1,983,348 $1,320,682 $1,126,786
Weighted Average Diluted
Shares Outstanding 8,439,812 7,911,759 7,331,360 6,866,154 6,909,874
Cash Dividends paid per
share $.00 $.00 $.00 $.02 $.04
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements, which involve risks
and uncertainties including, but not limited to, economic, competitive,
governmental and technological factors, affecting the Company's operations,
markets, products, services and prices, as well as other factors discussed in
the Company's filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
Sales of $24,192,363 for the year ended December 31, 1999 established a
Company record for annual sales achievement and represents an increase of 41%
from the $17,119,540 of sales achieved for the year ended December 31, 1998.
The Company's fourth quarter 1999 sales of $6,979,460, set a new quarterly
sales record, and was the eleventh consecutive quarterly sales increase.
The Company's record sales were attained as a result of gains in all
major product categories for 1999 as compared to 1998. Sales of the Company's
core telemanagement products and services, which accounted for approximately
74% of total 1999 revenues, increased 24% from 1998 results. Telemanagement
products are used by organizations to optimize the usage of telecommunications
services and equipment, and to control telephone expenses. The Company's
telemanagement products are sold through leading manufacturers and resellers
of telephone systems, including Lucent Technologies, SBC/Ameritech, Philips
and Siemens.
Sales of VeraBill, the Company's billing and customer care offering,
increased 144% from 1998 levels and accounted for 15% of the Company's total
1999 sales, versus 9% of the Company's 1998 sales. VeraBill is sold through
distributors including Alcatel, and Ericsson Telecom, as well as on a direct
sale basis. For 1999, approximately 48% of VeraBill revenues were generated
from distributor relationships.
Sales of INFO/MDR, the Company's central office telemanagement product,
increased by 43% from 1998 levels, accounting for 6% of 1999 total sales.
Telephone companies use INFO/MDR to enhance the appeal of centrex and virtual
private network services.
Sales of DNT (formerly called TMS for Windows), the Company's
client/server enterprise product, increased by 63% from 1998 sales and
accounted for 4% of the Company's total sales for 1999. During
the fourth quarter of 1999, the Company completed a new release of DNT, which
significantly enhances the product's reliability and functionality. As a
result of this new release, the Company expects sales of DNT to increase
significantly again in 2000.
For the year ended December 31, 1999, shipment of product accounted for
68% of total sales, with the remaining 32% of sales being derived from
services such as maintenance and support, training, and installation services.
During 1998 product sales accounted for 71% of sales, and services accounted
for 29% of the total. Overall product sales for 1999 increased 35% from 1998
levels and 1999 service revenues increased 58% over 1998.
In 1999, the Company generated a gross margin of $20,564,598 or 85% of
sales versus a gross margin of $14,018,204 or 82% of sales for the year ended
December 31, 1998. The higher margins reflect a combination of lower direct
product costs associated with the increasing content of software based
applications in the Company's product mix, and a reduction in the amortization
of previously capitalized development costs as a percentage of total sales.
For the year ended December 31, 1999, the Company incurred $4,612,302 of
engineering and development expenses, net of costs capitalized. This
represented a 74% increase from the net engineering and development costs
incurred for the year ended December 31, 1998. Gross expenditures for
research and development, before the effects of capitalization, were
$5,006,209 for 1999, an increase 28% from the 1998 expense level of
$3,925,530.
The following table depicts the overall financial impact of engineering
and development efforts on the Company's results, for 1999 and 1998, by
highlighting gross expenditures, amounts capitalized, net engineering and
development expense, and the amount of previously capitalized expenditures
charged to cost of sales:
1999 1998
GROSS EXPENDITURES FOR ENGINEERING AND
Software Development $5,006,209 $3,925,530
LESS: COSTS CAPITALIZED 393,907 1,269,019
---------- ----------
NET EXPENDITURES FOR ENGINEERING AND
Software Development 4,612,302 2,656,511
PLUS: AMOUNTS AMORTIZED AND CHARGED
to Cost of Sales 1,095,642 983,945
---------- ----------
TOTAL EXPENSE RECOGNIZED $5,707,944 $3,640,456
========== ==========
During 1999 the Company's development efforts resulted in a number of
notable accomplishments including:
1. New releases of VeraBill and DNT, both of which contained upgrades in
features and functionality, allowing the Company to expand the addressable
markets available.
2. A significant upgrade to Emerald, the Company's flagship telemanagement
product, designed, not only to broaden the appeal of this product to
existing channels, but also to open new potential areas of distribution.
Private label versions of Emerald XP are now being sold by Lucent
Technologies and Philips. Emerald XP is also designed to be an
international product, supporting worldwide call rating, all world
currencies, date schemes and privacy practices.
3. Development of the Company's new Internet accounting product (VeraWeb) and
the integration of that product into a number of the Company's existing
call management offerings. These network products will allow businesses to
easily track, manage and allocate costs for use of the Internet and other
network resources.
Selling, general and administrative expenses of $13,355,516 for the year
ended December 31, 1999 were 27% higher than the expenses incurred for the
year ended December 31, 1998 of $10,506,360. The higher expenses are
attributable to an increase in employment level from 166 employees at December
31, 1998 to 222 employees at December 31, 1999. The chart below breaks down
the increased employment by function:
1999 1998
Manufacturing/Materials 15 12
Engineering/ Development 65 49
Marketing/Project Management 25 15
Support/Service/Implementation 68 46
Sales 31 29
Administration 18 15
--- ---
222 166
=== ===
The increased staffing in the support, service, and implementation area
is deemed necessary, to not only enhance the prospects of future sales growth
and opportunity, especially in support of the Company's network products, DNT
and VeraBill, but to provide the proper level of service and trained personnel
in anticipation of the Company's first quarter 2000 launch of its Internet
accounting product offerings.
The Company also invested heavily during 1999 to augment its product and
project management functions. This investment has strengthened the Company's
abilities to gather competitive market data, and more efficiently manage
product releases.
For the year ended December 31, 1999, the Company realized a 164%
increase in net income to $2,694,452 representing 11.1% of sales, from
$1,019,427 or 6.0% of sales for the twelve months ended December 31, 1998.
Earnings per share for the year ended December 31, 1999 were $0.32 per
diluted share versus $0.13 per diluted share earned for 1998, an increase of
146%.
As shown in the chart below, EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization) rose significantly as well, increasing from
$2,204,760 for 1998 to $4,339,648 for the twelve months ended December 31,
1999, an increase of 97%.
1999 1998
Net Income $2,694,452 $1,019,427
Net Interest Income (192,672) (179,094)
Income Taxes 95,000 15,000
Depreciation and Amortization 1,742,868 1,349,243
---------- ----------
$4,339,648 $2,204,576
========== ==========
EBITDA as a % of Sales 17.9% 12.9%
===== =====
EBITDA is not intended to represent cash flows for the period, nor has it
been presented as an alternative to either operating income, as determined
by generally accepted accounting principles (GAAP), nor as an indicator of
operating performance or cash flows from operating, investing and financial
activities, as determined by GAAP, and thus is susceptible to varying
calculations. EBITDA as presented may not be comparable to other similarly
titled measures of other companies.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
Sales for the year ended December 31, 1998 were $17,119,540, representing
an increase of 38% from the sales of $12,408,269 realized for the year ended
December 31, 1997. The Company's net income of $1,019,427 or $0.13 per share
for the year ended December 31, 1998 compared to a net loss for the year ended
December 31, 1997 of $5,030,507, or $0.69 per share. Since a major
restructuring undertaken during 1997, the Company has achieved six consecutive
quarters of increasing sales and profitability.
The increase in 1998 sales resulted from a combination of significant
growth in the Company's traditional call accounting markets and contributions
from the Company's newer network product offerings, VeraBill and TMS.
For the year ended December 31, 1998 sales of core call accounting
products and services increased by 28% over the level realized during 1997,
representing 87% of Company sales for 1998 versus 94% of Company sales during
1997. Subsequent to December 31 1998, the Company announced that it has begun
shipping CAS NT, a new enterprise call accounting system to Lucent
Technologies, the Company's largest distributor. CAS NT is a 32 bit call
accounting application specifically designed to run on computers utilizing the
Microsoft Windows NT operating system and contains new features and
functionality that exceed the capabilities and range of Veramark's previous
call accounting systems.
Sales of VeraBill, the Company's billing and customer care product more
than doubled over 1997 sales, and accounted for 9% of total 1998 revenues.
VeraBill is a comprehensive system for wireline, wireless, and other network
providers, with up to 400,000 subscriber access lines. Through the end of
1998 twenty-two VeraBill systems are installed, providing billing and customer
care services for carriers on five continents. VeraBill is currently marketed
by a number of the world's leading wireline and wireless switch vendors
including Alcatel, Nokia, and Lucent Technologies.
Sales of TMS, the Company's mid to high-end telemanagement product, while
below Company expectations for 1998, accounted for 4% of the Company's total
sales. Customer interest and quote activity however, remains high and the
Company expects sales of TMS to increase significantly in 1999.
For the year ended December 31, 1998, 28% of Company sales were derived
from previously deferred billings for a variety of services, including
training, installation, and custom rate updates. This compared with 20% of
sales for the year ended December 31, 1997. During 1998, approximately 7% of
Company sales were from previously deferred billings for services, which have
not been, and are not expected to be, utilized by customers, based on
historical experience.
The gross margin earned on sales for the year ended December 31, 1998 was
82% compared to the 72% margin earned on sales for the year ended December
31, 1997. The increased gross margin reflects significantly lower direct
product and associated overhead cost as the product mix continues to shift to
software based products and away from older hardware based product offerings.
In addition, the amortization expense charged to cost of sales related to
previously capitalized development costs continues to decline as a percentage
of the total Company sales.
Net engineering and software development expenses of $2,656,511 for the
year ended December 31, 1998 were 24% higher than the net engineering and
software development expenses of $2,148,107 incurred for the year ended
December 31, 1997. The table presented below summarizes the impact on the
Company's operations of it's engineering and development efforts for the years
ended December 31, 1998 and 1997, by detailing engineering and development
expenses on both a gross and net of capitalization basis, and adding back
charges to cost of sales resulting from the amortization of previously
capitalized development costs.
1998 1997
GROSS EXPENDITURES FOR ENGINEERING AND
Software Development $3,925,530 $3,471,953
LESS: COST CAPITALIZED 1,269,019 1,323,846
---------- ----------
NET EXPENDITURES FOR ENGINEERING AND
Software Development 2,656,511 2,148,107
PLUS: AMOUNTS AMORTIZED AND CHARGED
to Cost of Sales 983,945 1,360,676
---------- ----------
TOTAL EXPENSE RECOGNIZED $3,640,456 $3,508,783
========== ==========
Engineering and development efforts for 1998 focused on new releases and
enhancements to the Company's network products, VeraBill and TMS.
Selling, general and administrative expenses increased from $9,343,880
for the year ended December 31, 1997 to $10,506,360 for the year ended
December 31, 1998, an increase of 12%.
The increased expense level is attributable to a number of factors
including:
1. An increase of just over $1 million dollars in the Company's support and
customer service costs. This includes significant investments in staffing,
training of existing and new staff members, and upgrades in the tools and
processes required to provide more efficient and effective service to
customers. The Company believes this investment is necessary to properly
support not only customers needs but those of marketing partners as well,
particularly for the new network product offerings, to enhance the
prospects of future sales growth and profitability.
2. An increase of approximately $400,000 in the marketing and project
management functions designed to increase both internal product marketing
and scheduling capability, and to strengthen resources committed to
external competitive market analysis.
3. The continuation of a major effort begun in late 1997 and carrying
throughout 1998 to upgrade and fully integrate the Company's internal
management information systems. The goal of this program was to replace a
large number of standalone departmental systems that had been developed
over the years with a single integrated system allowing all functional
areas of the Company to communicate more effectively and share common data
bases.
Net interest income earned on the short term investment of excess cash
balances increased from $97,912 during 1997 to $179,094 for the year ended
December 31, 1998 due to higher average cash balances available for
investment as a result of 1998's positive cash flows.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash position (cash plus short-term investments) at
December 31, 1999 was $7,442,991, representing a 46% increase from the cash
position of $5,089,903 at December 31, 1998. For the year ended December 31,
1999, the Company generated approximately $3,800,000 of positive cash flow
from operations, and approximately $892,000 from the exercise of stock options
and warrants.
Accounts receivable of $3,238,121 at December 31, 1999 were 42% higher
than the December 31, 1998 accounts receivable of $2,273,705. The increased
accounts receivable are directly attributable to the higher sales volumes
realized throughout 1999 as compared to 1998. The Company has seen no changes
in payment trends from major customers and has lowered the provision for
doubtful accounts from $110,000 at December 31, 1998 to $95,000 at December
31, 1999.
Inventories at December 31, 1999 were $557,123, a total relatively
unchanged from the $579,968 of inventory on hand December 31, 1998. Only a
small percentage of the Company's current product offerings contain a hardware
element and, as a result, it is not expected that inventories would increase
significantly at any point in the foreseeable future.
Prepaid expenses at December 31, 1999 were $159,912, consisting primarily
of expenses associated with the Company's acquisition of The Angeles Group,
which closed on January 7, 2000. Those charges will be expensed in the first
quarter of 2000.
During 1999 the Company continued to invest significant amounts of
capital in upgrading its facilities, computer and network capabilities, and
customer support and service tools. For the year ended December 31, 1999
capital spending totaled $2,117,451. This follows on top of $785,633 of
capital spending for the year ended December 31, 1998. During 1999 the
Company disposed of approximately $900,000 of fully depreciated equipment,
principally computers, replaced by newer and more powerful systems. The net
value of property and equipment after depreciation was $2,901,948 at December
31, 1999, an increase of 106% from the net value of property and equipment at
December 31, 1998.
Software development costs previously capitalized and carried as an asset
on the balance sheet at December 31, 1999 were $2,691,807, versus $3,393,542
at December 31, 1998, a reduction of 21%. During the first quarter of 1999
the Company capitalized $393,907 of development expenses associated with the
latest release of its VeraBill product, and for the year ended December 31,
1999, amortized $1,095,642 of previously capitalized development charges. The
Company capitalized no development charges in the second, third, or fourth
quarters of 1999.
Total assets of December 31, 1999 were $19,455,262, representing an
increase of 28% from the total assets of $15,182,501 at December 31, 1998.
Accounts payable of $803,519 at December 31, 1999 were up 8% over the
December 31, 1998 level of $740,576. Accruals for accrued compensation and
related taxes increased from a balance of $891,186 at December 31, 1998 to
$1,897,192 at December 31, 1999. This increase reflects a combination of the
Company's significant increase in employment (166 full-time employees at
December 31, 1998 to 222 employees at December 31, 1999), and increases in
accruals for commissions, profit sharing, and bonus achievements, based on
meeting certain revenue and profitability objectives for the year ended
December 31, 1999.
Deferred Revenue at December 31, 1999 was $2,146,997, as compared to
$2,061,475 at December 31, 1998. Deferred revenues represent the value of
unrecognized revenues related to a variety of services for which the Company
has billed customers but has not yet performed the associated service. These
services typically include training, installation, customer rate updates, and
maintenance and support, some of which may not be ultimately utilized by
customers. For the year ended December 31, 1999 30% of the Company's sales
were generated from previously deferred billings. This compares with 28% of
Company sales for the year ended December 31, 1998. During 1999 approximately
8% of sales were realized from previously deferred billings for services,
which have not been, and are not expected to be, utilized by customers, based
on historical experience. This compares with 7% of sales for 1998.
Other accrued liabilities at December 31, 1999 total $245,954 consisting
primarily of accruals for income taxes, legal and accounting charges, and
potential warranty costs. This compares with total accrued liabilities of
$672,063 at December 31, 1998.
Total shareholders equity increased from $7,767,704 at December 31, 1998
to $11,317,829 at December 31, 1999, an increase of 46%. The increase is
attributable to the years net income of $2,694,452 and net proceeds received
from the exercise of stock options and warrants of $891,767. During the first
and second quarters of 1999, the Company repurchased 27,925 shares of its
common stock on the open market at prices ranging from $5.94 to $6.25.
The Company maintains a private equity line of credit agreement with a
single institutional investor. Under the equity line, the Company has the
right to sell to the investor shares of the Company's common stock at a price
equal to 88% of the average bid price of the stock for the subsequent ten
trading days. During the term of the agreement the Company may sell up to $6
million to this investor with no more than $500,000 in any single month. This
agreement expires August 30, 2000. There were no transactions under this
agreement during 1999.
The Company maintains an agreement with a major commercial bank for a
secured demand line of credit arrangement in the amount of $3,000,000. In
August of 1999, the Company entered into an agreement with the same bank for a
$7,000,000 three-year acquisition revolving credit facility. This is in
addition to the $3,000,000 demand line of credit agreement referenced above.
There have been no borrowings against either agreement as of December 31,
1999.
In light of its current cash position, profitable operations, and the
credit arrangements referred to above, the Company believes that it has
sufficient resources to meet its financial needs and support anticipated
growth over the next twelve months.
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REQUIRED TO BE INCLUDED HEREIN AS FOLLOWS:
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 19
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated balance sheets 20 - 21
Consolidated statements of operations 22
Consolidated statements of stockholders' equity 23
Consolidated statements of cash flows 24
Notes to consolidated financial statements 25 - 35
SUPPLEMENTAL AUDITED FINANCIAL STATEMENTS:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 36
Consolidated balance sheets 37 - 38
Consolidated statements of operations 39
Consolidated statements of stockholder's equity 40
Consolidated statements of cash flows 41
Notes to consolidated financial statements 42 - 54
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Veramark Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Veramark
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1999. The consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 Veramark Technologies, Inc. as
of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999,
in conformity with accounting principles generally accepted in the United
States.
Arthur Andersen LLP
Rochester, New York,
February 4, 2000
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $ 2,305,723 $ 371,209
Investments 5,137,268 4,718,694
Accounts receivable, trade (net of allowance
for doubtful accounts of $95,000 and $110,000) 3,238,121 2,273,705
Inventories 557,123 579,968
Prepaid expenses and other current assets 159,912 155,831
----------- -----------
Total current assets 11,398,147 8,099,407
----------- -----------
PROPERTY AND EQUIPMENT:
Cost 7,073,087 5,864,469
Less accumulated depreciation 4,171,139 4,455,539
----------- -----------
Property and equipment, net 2,901,948 1,408,930
----------- -----------
Software development costs (net of accumulated
amortization of $1,531,720 and $1,322,254) 2,691,807 3,393,542
Pension assets 1,977,710 1,873,721
Deposits and other assets 485,650 406,901
----------- -----------
Total other assets 5,155,167 5,674,164
----------- -----------
TOTAL ASSETS $19,455,262 $15,182,501
=========== ===========
The accompanying notes to the consolidated financial statements are
an integral part of these balance sheets.
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
CURRENT LIABILITIES:
Accounts payable $ 803,519 $ 740,576
Accrued compensation and related taxes 1,897,192 891,186
Deferred revenue 2,146,997 2,061,475
Restructuring accrual -0- 166,650
Other accrued liabilities 245,954 672,063
----------- -----------
Total current liabilities 5,093,662 4,531,950
PENSION OBLIGATION 3,043,771 2,882,847
----------- -----------
Total liabilities 8,137,433 7,414,797
----------- -----------
COMMITMENTS (Note 9)
STOCKHOLDERS' EQUITY:
Common Stock, par value, $.10; shares
authorized, 40,000,000; issued 7,782,823
shares and 7,607,709 shares 778,282 760,771
Additional paid-in capital 19,965,283 18,954,579
Accumulated deficit (9,039,979) (11,734,431)
Treasury Stock (80,225 and 52,300 shares at
cost) (385,757) (213,215)
----------- -----------
Total stockholders' equity 11,317,829 7,767,704
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,455,262 $15,182,501
=========== ===========
The accompanying notes to the consolidated financial
statements are an integral part of these balance sheets.
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
NET SALES $24,192,363 $17,119,540 $12,408,269
----------- ----------- -----------
COSTS AND OPERATING EXPENSES:
Cost of sales 3,627,765 3,101,336 3,431,342
Engineering and software development 4,612,302 2,656,511 2,148,107
Selling, general and administrative 13,355,516 10,506,360 9,343,880
Other expenses - - 2,613,359
----------- ----------- -----------
Total costs and operating expenses 21,595,583 16,264,207 17,536,688
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 2,596,780 855,333 (5,128,419)
INTEREST INCOME 192,672 179,094 97,912
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 2,789,452 1,034,427 (5,030,507)
INCOME TAX PROVISION 95,000 15,000 -
----------- ----------- -----------
NET INCOME (LOSS) $ 2,694,452 $ 1,019,427 $(5,030,507)
=========== =========== ===========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE
Basic $ .35 $ .13 $ (.69)
=========== =========== ===========
Diluted $ .32 $ .13 $ (.69)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC) 7,612,333 7,565,796 7,331,360
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
(DILUTED) 8,439,812 7,911,759 7,331,360
=========== =========== ===========
The accompanying notes to the consolidated financial
statements are an integral part of these statements.
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
COMMON STOCK
ADDITIONAL CUMULATIVE TOTAL
PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) ADJUSTMENT EQUITY
BALANCE - December 31, 1996 6,934,872 $693,487 $15,785,850 $(7,723,351) $(56,396) $ 8,699,590
Sale of Stock 501,934 50,193 2,429,824 - - 2,480,017
Exercise of stock options and
warrants 126,750 12,675 571,729 - - 584,404
Stock Retirements (13,853) (1,385) (86,363) - - (87,748)
Foreign currency translation
adjustment - - - - 56,396 56,396
Net loss - - - (5,030,507) - (5,030,507)
--------- -------- ----------- ------------ --------- -----------
BALANCE - December 31, 1997 7,549,703 $754,970 $18,701,040 $(12,753,858) $ - $ 6,702,152
Sale of Stock 24,700 2,470 140,914 - - 143,384
Exercise of stock options and
warrants 26,044 2,605 79,951 - - 82,556
Stock Purchase Plan 9,981 998 49,905 - - 50,903
Stock Retirements (2,719) (272) (17,231) - - (17,503)
Treasury Stock (52,300) - (213,215) - - (213,215)
Net Income - - - 1,019,427 - 1,019,427
--------- -------- ----------- ------------ --------- -----------
BALANCE - December 31, 1998 7,555,409 $760,771 $18,741,364 $(11,734,431) $ - $ 7,767,704
Exercise of stock options and
warrants 151,898 15,189 888,247 - - 903,436
Stock Purchase Plan 24,099 2,410 134,038 - - 136,448
Stock Retirements (883) (88) (11,581) - - (11,669)
Treasury Stock (27,925) - (172,542) - - (172,542)
Net Income - - - 2,694,452 - 2,694,452
--------- -------- ----------- ------------ --------- -----------
BALANCE - December 31, 1999 7,702,598 $778,282 $19,579,526 $(9,039,979) $ - $11,317,829
========= ======== =========== =========== ========= ===========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
OPERATING ACTIVITIES:
Net income (loss) $2,694,452 $1,019,427 $(5,030,507)
---------- ---------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,742,868 1,349,243 1,738,518
Provision for bad debts (18,000) 28,973 135,369
Provision for inventory obsolescence 73,101 274,996 166,334
Loss on disposal of fixed assets 4,497 2,719 301,919
Changes in assets and liabilities:
Accounts receivable (946,416) (578,631) 1,617,968
Inventories (50,256) 309,833 556,677
Prepaid expenses and other current assets (4,081) (125,249) 39,137
License fees and purchased software - (30,405) (1,858)
Deposits and other assets (210,028) (822,623) 89,421
Accounts payable 62,943 (5,653) (424,279)
Accrued compensation and related taxes 1,006,006 542,584 (612,553)
Restructuring accrual (166,650) (79,816) 246,466
Deferred Revenue 85,522 357,672 494,733
OTHER ACCRUED LIABILITIES (426,109) 493,136 (8,295)
---------- ---------- -----------
Net adjustments 1,153,397 1,716,779 4,339,557
---------- ---------- -----------
Net cash provided by (used in) operating
activities 3,847,849 2,736,206 (690,950)
---------- ---------- -----------
INVESTING ACTIVITY:
Investments (418,574) (2,362,913) (2,105,601)
Additions to property and equipment (2,117,451) (785,633) (437,533)
Software development costs (393,907) (1,269,019) (1,323,846)
---------- ---------- -----------
Net cash used in investing activities (2,929,932) (4,417,565) (3,866,980)
---------- ---------- -----------
FINANCING ACTIVITIES:
Increase in pension obligation 160,924 899,499 662,666
Proceeds from sale of stock - 143,384 2,480,017
Exercise of stock options and warrants 891,767 65,053 496,656
Employee stock purchase plan 136,448 50,903 -
Treasury stock purchases (172,542) (213,215) -
---------- ---------- -----------
Net cash provided by financing activities 1,016,597 945,624 3,639,339
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,934,514 (735,735) (918,591)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
371,209 1,106,944 2,025,535
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,305,723 $ 371,209 $ 1,106,944
========== ========== ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS include the accounts
of Veramark Technologies, Inc. (the Company) and its wholly-owned
subsidiaries, Votan Corporation, MOSCOM Limited and Global Billing
Services Limited (companies incorporated in England) and MOSCOM GmbH (a
company incorporated in Germany). During 1997 the Company closed these
subsidiaries as discussed in Note 11. All significant inter-company
accounts and transactions have been eliminated. The Company designs
and manufactures telecommunication management systems and telephone
company billing systems for users and providers of telecommunication
services in the global market.
ESTIMATES - The preparation of consolidated financial statements, in
conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets
and liabilities, at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The consolidated financial statements include management's best
estimates of the net realizable value of software development costs.
Accordingly, the Company periodically records adjustments to write down
the carrying value of software development costs to their net
realizable value. The amounts the Company will ultimately realize
could differ materially from the carrying value of the software
development costs. (see Note 11).
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards (SFAS) No. 107 "Disclosures about Fair Value of Financial
Instruments," requires disclosures of the fair value of certain
financial instruments. The carrying amount of cash and cash
equivalents, investments, accounts receivable and accounts payable
reflect fair value due to their short-term nature.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less to be
cash equivalents.
INVESTMENTS - The Company carries its investments in accordance with
SFAS No. 115, "Investments in Certain Debt and Equity Securities." As
of December 31, 1999, and 1998, the Company has deemed its portfolio to
consist of available for sale securities. At December 31, 1999 and
1998 the carrying value of investments approximated market.
Investments at December 31, 1999 and 1998 consisted of the following:
1999 1998
Commercial Paper $ - $2,289,479
Certificates of Deposit 483,541 914,015
US Government Securities 662,267 473,621
Bond Funds 3,991,460 1,201,665
Money Market Funds 1,979,695 155,257
---------- ----------
$7,116,963 $5,034,037
========== ==========
The contractual maturities of the Company's investments as of December 31,
1999 are as follows:
Due within one year $3,155,602
Due within one to two years 1,807,885
Due within two to three years 995,255
Due within three to four years 1,100,506
Due within four to six years 57,715
----------
$7,116,963
==========
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentration of credit risk consist principally
of investments and accounts receivable. The Company places its
investments ($7,116,963 and $5,034,037 as of December 31, 1999 and
1998, respectively) with quality financial institutions and, by policy,
limits the amount of credit exposure to any one financial institution.
The Company's customers are not concentrated in any specific geographic
region, but are concentrated in the telecommunications industry. As of
December 31, 1999 and 1998, one customer in this industry accounted
for approximately $1,100,834 and $996,209 respectively, of the total
accounts receivable balance. The Company performs ongoing credit
evaluations of its customers' financial conditions but does not require
collateral to support customer receivables. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends and other
information.
INVENTORIES are stated at the lower of cost (first-in, first-out) or
market. The Company evaluates the net realizable value of inventory on
hand considering deterioration, obsolescence, replacement costs and
other pertinent factors, and records adjustments as necessary.
PROPERTY AND EQUIPMENT is recorded at cost and depreciated on a
straight-line basis using the following useful lives:
Computer hardware and software 3-5 years
Machinery and equipment 4-7 years
Furniture and fixtures 5-10 years
Leasehold improvements Term of lease
All maintenance and repair costs are charged to operations as incurred.
LONG-LIVED ASSETS AND INTANGIBLES - In January 1996, the Company
adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable on
an undiscounted cash flow basis. The statement also requires that
long-lived assets and certain identifiable intangibles to be disposed
of be reported at the lower of carrying amount or fair values less cost
to sell. The adoption of SFAS No. 121 did not have a material effect
on the financial statements. In 1997 the Company wrote off certain
amounts of capitalized software as discussed in Note 11. The Company
did not record any impairments in 1998 or 1999.
SOFTWARE DEVELOPMENT COSTS meeting recoverability tests are
capitalized, and amortized on a product-by-product basis over their
economic life, ranging from three to five years, or the ratio of
current revenues to current and anticipated revenues from such
software, whichever provides the greater amortization.
REVENUE RECOGNITION - The Company recognizes revenue from product sales
upon shipment to the customer. Revenues from maintenance and extended
warranty agreements are recognized ratably over the term of the
agreements. The Company recognizes revenue from previously deferred
billings for services, which have not been, and are not expected to be
utilized by customers, based on historical experience. The Company also
enters into license agreements for certain of its software products.
These revenues are recognized in accordance with the provisions of
Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as
amended by SOP 98-4.
INCOME TAXES are provided on the income earned in the financial
statements. Deferred income taxes are provided to reflect the impact
of "temporary differences" between the amounts of assets and
liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. Tax credits are recognized as a
reduction to income taxes in the year the credits are earned.
NET INCOME (OR LOSS) PER COMMON SHARE is computed in accordance with
the provisions of SFAS No. 128, "Earnings Per Share." Basic EPS is
computed by dividing reported earnings available to common stockholders
by weighted average shares outstanding. No dilution for common share
equivalents is included. Diluted EPS is computed on a similar basis to
the previously calculated fully diluted EPS. The Company was required
to adopt SFAS No. 128 retroactively for periods ending after December
15, 1997. Included in diluted earnings per share in 1998 and 1999 are
345,963 and 827,479, respectively, which represents the dilutive effect
of stock options and warrants in 1997 as the effect would be anti-
dilutive.
RECLASSIFICATIONS - Certain prior year balances have been reclassified
to conform with current year presentation.
STOCK-BASED COMPENSATION - In October 1995, SFAS No. 123. "Accounting
for Stock-Based Compensation" was issued which sets forth a fair value
method of recognizing stock-based compensation expense. The Company
continues to measure compensation for such plans using the intrinsic
value based method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees,"
and will disclose the additional information relative to issued stock
options and pro forma net income and earnings per share, as if the
options granted were expensed at their estimated fair value at the time
of grant.
2. INVENTORIES
The major classifications of inventories as of December 31, 1999 and 1998
are:
1999 1998
Purchased parts and components $423,460 $340,350
Work in process 94,991 116,228
Finished goods 38,672 123,390
-------- --------
$557,123 $579,968
======== ========
3. PROPERTY AND EQUIPMENT
The major classifications of property and equipment as of December
31, 1999 and 1998 are:
1999 1998
Machinery and equipment $1,241,036 $1,377,179
Computer hardware and software 3,378,477 3,075,398
Furniture and fixtures 1,085,362 1,064,117
Leasehold improvements 1,368,212 347,775
---------- ----------
$7,073,087 $5,864,469
========== ==========
Depreciation expense was approximately $618,000, $334,000 and
$311,000 for the years ended December 31, 1999, 1998 and
1997, respectively. During 1999 the Company wrote off
fully depreciated assets totaling approximately $908,000.
4. ENGINEERING AND SOFTWARE DEVELOPMENT EXPENDITURES
Engineering and software development expenditures incurred
during the years ended December 31, 1999, 1998 and 1997
were recorded as follows:
1999 1998 1997
Engineering and software development
expense included in the consolidated
statements of operations $ 4,612,302 $ 2,656,511 $ 2,148,107
Amounts capitalized and included in
the consolidated balance sheets 393,907 1,269,019 1,323,846
------------ ------------ ------------
Total expenditures for engineering
and software development $ 5,006,209 $ 3,925,530 $ 3,471,953
============ ============ ============
Additionally, the Company recorded amortization of capitalized software
development costs of approximately $1,096,000, $984,000, and $1,361,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
Such amortization is included in cost of sales in the consolidated
statements of operations.
5. BENEFIT PLANS
The Company sponsors an employee incentive savings
plan under section 401(k) for all eligible employees.
The Company's contributions to the plan are
discretionary and totaled $100,000 in 1999 and $50,000
in 1998. There were no contributions in 1997.
The Company also sponsors an unfunded Supplemental
Executive Retirement Program, which is a nonqualified
plan that provides certain key employees defined
pension benefits. Periodic pension expense for the
years ended December 31, 1999, 1998 and 1997 consists
of the following:
1999 1998 1997
Service cost $307,637 $279,957 $123,231
Interest cost 173,356 120,933 92,448
Net amortization and deferral 86,883 49,444 36,965
-------- -------- --------
Pension expense $567,876 $450,334 $252,644
======== ======== ========
A reconciliation of the pension plan's funded status
with amounts recognized in the Company's balance
sheets follows:
1999 1998
Actuarial present value of accumulated
benefit obligation $ 3,043,771 $ 2,882,847
============ ============
Actuarial present value of projected benefit
Obligation $ 3,043,771 $ 2,882,847
Plan assets - -
------------ ------------
Projected benefit obligation in excess of
plan assets 3,043,771 2,882,847
Prior service cost not yet recognized in
net periodic pension cost (1,000,538) (1,087,422)
Additional minimum liability 1,000,538 1,087,422
------------ ------------
Accrued pension expense $ 3,043,771 $ 2,882,847
============ ============
Included in the pension asset caption in the consolidated balance sheets
as of December 31, 1999 and 1998 is an intangible asset of $1,000,538
and $1,087,422, respectively, related to the minimum liability adjustment
for the unfunded accumulated benefit obligation.
The discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit
obligation were 7% and 3% respectively.
The Company maintains life insurance covering the lives of certain key
employees covered under its Supplemental Executive Retirement Program
with the Company named as beneficiary. The Company intends to use
death benefits as well as loans against the accumulating cash surrender
value of the policies to fund the pension obligation.
6. STOCKHOLDERS' EQUITY
During 1997, the Company entered into a private equity line of credit
agreement with a single institutional investor. Under the equity
line for a period of two years, the Company has the right to sell
to the investor shares of the Company's common stock at a price equal
to 88% of the average bid price of the stock for the subsequent ten
trading days. During the two year period the Company may sell up to $6
million of common stock to the investor with no more than $500,000 in any
single month. There were no shares of common stock sold to this investor
during 1999. During 1998, the Company sold 24,700 shares of common
stock to this investor realizing net proceeds of $143,384. During 1997,
the Company sold 501,934 shares of common stock to this investor realizing
net proceeds of $2,480,017. During 1998 the expiration date of this
agreement was extended from June 2, 1998 to August 30, 2000.
The Company has reserved 650,000 shares of its common stock for issuance
under its 1993 Stock Option Plan, the successor plan to the 1983 Stock
Option Plan. The Company's Board of Directors approved a 1998 Stock
Option Plan on December 15, 1997 covering up to 2,500,000 shares of
common stock and on that date granted options to purchase 755,000
shares, subject to shareholder approval, which was obtained in
May, 1998. Both plans provide for options which may be issued as
nonqualified or qualified incentive stock options. All options granted
are exercisable in increments of 20 - 25% per year beginning one year from
the date of grant. All options granted to employees have a ten year term.
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25. Accordingly, compensation expense has been recognized
only to the extent the exercise price was below the fair market value at the
time of the grant. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates for awards consistent with the method of SFAS No. 123, the Company's
net income (loss) per share would have been reduced to the pro forma
amounts indicated below:
1999 1998 1997
Net income (loss) As reported $2,694,452 $1,019,427 $(5,030,507)
Pro forma $2,151,546 $389,569 $(5,438,726)
Net income (loss) per common share As reported
Basic $.35 $.13 $(.69)
Diluted $.32 $.13 $(.69)
Pro forma
Basic $.28 $.05 $(.74)
Diluted $.25 $.05 $(.74)
Compensation expense recognized in the statement of operations for
the year ended December 31, 1999, 1998 and 1997 was approximately
$355,638, $215,991 and $-0- respectively, for options issued at an
exercised price below fair market values at the time of the grant.
The SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, so the resulting pro
forma compensation cost may not be representative of that to be
expected in future years.
For purposes of the disclosure above, the fair value of each option
grant is estimated on the date of the grant using the Black-
Scholes option-pricing model with the following weighed-average
assumptions used for grants in 1999, 1998, and 1997.
1999 1998 1997
Dividend yield .00% .00% .00%
Expected volatility 64.47% 59.00% 58.86%
Risk-free interest rate 4.58% 5.61% 6.79%
Expected life 7 years 7 years 7 years
A summary of stock option and warrant transactions for the years
ended December 31, 1999, 1998 and 1997 is shown below:
1999 1998 1997
OPTIONS SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
AVERAGE AVERAGE AVERAGE
PRICE PRICE PRICE
Shares under option, beginning
of year 1,715,475 $4.16 655,746 $2.40 231,489 $5.53
Options granted 536,537 6.55 1,163,720 5.15 797,246 3.00
Options exercised (47,517) 3.14 (22,450) 2.31 (68,128) 3.64
Options terminated (22,975) 5.43 (81,541) 4.61 (304,861) 6.06
--------- ----- --------- ----- -------- -----
Shares under option, end of year 2,181,520 4.76 1,715,475 4.16 655,746 2.40
========= ===== ========= ===== ======= =====
Shares exercisable 656,556 $4.15 379,146 $4.11 46,292 $3.01
========= ===== ========= ===== ======= =====
Weighted average fair value of
options granted $4.35 $3.33 $3.53
========= ========= =======
WARRANTS
Warrants outstanding, beginning
of year 185,822 $7.20 194,770 $7.12 92,799 $6.21
Warrants granted 5,289 6.38 - - 165,412 6.49
Warrants exercised (104,381) 6.92 (3,594) 4.87 (58,622) 4.69
Warrants expired (8,685) 5.76 (5,354) 5.37 (4,819) 6.80
--------- ----- ------- ----- ------- -----
Warrants outstanding, end of year 78,045 $7.68 185,822 $7.20 194,770 $7.12
========= ======= =======
7. SALES INFORMATION
Sales to one customer were approximately $16,287,000 or 67% of the Company's
total sales in 1999. Sales to this same customer were approximately
$11,763,000 or 69% of the Company's total sales in 1998 and approximately
$6,748,000 or 54% of the Company's total sales in 1997.
Export sales to unaffiliated customers, primarily in Europe and South
America were approximately $4,922,000, $2,893,000, and $3,138,000 in
1999, 1998 and 1997, respectively.
In accordance with SFAS No. 131 related to segment reporting, the Company
has determined that it operates in one segment.
8. INCOME TAXES
The components of the income (loss) before income taxes for the years
ended December 31, 1999, 1998 and 1997 is presented below:
1999 1998 1997
Domestic (loss) income $2,789,452 $1,034,427 $(4,214,949)
Foreign loss - - (815,558)
---------- ---------- -----------
$2,789,452 $1,034,427 $(5,030,507)
========== ========== ===========
The income tax provision (benefit) includes the following:
1999 1998 1997
Current income tax payable
(refundable):
Federal $ 80,908 $12,775 -
State 14,092 2,225 2,225
Foreign - - -
-------- ------- -----
$ 95,000 $15,000 2,225
-------- ------- -----
Deferred income tax:
Federal 510,123 236,281 (1,483,659)
State 48,660 93,738 (97,872)
Foreign - - -
-------- ------- -----------
Increase (decrease) in valuation
allowance (558,783) (330,019) 1,579,306
- - (2,225)
-------- -------- -----------
$ 95,000 $ 15,000 $ -
======== ======== ===========
The income tax (benefit) provision differs from those computed using the
statutory federal tax rate of 34%, due to the following:
1999 1998 1997
Tax at statutory federal rate $948,414 $351,705 $(1,710,372)
US Tax effect of foreign losses (312,024) - 302,572
State taxes, net of federal tax benefit 1,650 63,336 (115,471)
Utilization of tax credits - (31,977) -
(Decrease) increase in valuation (558,783) (354,118) 1,528,621
allowance
Other 15,743 (13,946) (5,350)
-------- -------- ----------
$ 95,000 $ 15,000 $ -
======== ======== ==========
The deferred income tax asset (liability) recorded in the
consolidated balance sheets results from differences between
financial statement and tax reporting of income and
deductions. A summary of the composition of the deferred income
tax asset (liability) follows:
1999 1998
DOMESTIC DOMESTIC
General business credits $1,055,314 $ 944,253
Net operating losses 1,305,396 2,537,748
Deferred compensation 956,317 694,091
Alternative minimum tax credits 329,273 256,755
Inventory 165,173 157,079
Accounts receivable 35,457 40,805
Capitalized software (1,004,616) (1,258,848)
Fixed assets (65,687) (54,634)
Restructuring 205,314 204,071
Other 46,264 65,668
---------- ----------
3,028,205 3,586,988
Valuation allowance (3,028,205) (3,586,988)
---------- ----------
Deferred asset (liability) $ - $ -
========== ==========
The Company has $3,613,311 of federal net operating loss
carryforwards available as of December 31, 1999, of that
total, $782,000 is limited to a utilization of approximately
$100,000 annually. The carryforwards expire in varying
amounts in 1999 through 2012. The valuation allowance has
decreased by $558,783 during the year ended December 31,
1999.
As of December 31, 1999, the Company had approximately
$909,000 of net operating loss carryforwards available to
offset future earnings of MOSCOM Limited, and
approximately $1,594,000 of net operating loss carryforwards to
offset future earnings of MOSCOM GmbH. These subsidiaries
were closed in 1997.
The Company's tax credit carryforwards as of December
31, 1999 are as follows:
DESCRIPTION AMOUNT EXPIRATION DATES
General business credits $990,052 1999 - 2019
New York State investment tax credits $ 65,262 2001 - 2014
Alternative minimum tax credits $329,273 No expiration date
Cash paid (received) for income taxes during the years ended December 31,
1999, 1998 and 1997 totaled $11,705, $(87,018), and $-0-, respectively.
9. COMMITMENTS
OPERATING LEASE OBLIGATIONS - The Company leases current manufacturing
and office facilities and certain equipment under operating leases, which
expire at various dates through 2001. The facility leases provide for
extension privileges. Rent expense under all operating leases (exclusive
of real estate taxes and other expenses payable under the leases) was $258,000,
$405,000, and $707,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Minimum lease payments as of December 31, 1999 under operating leases are as
follows:
YEAR ENDING DECEMBER 31,
2000 $ 416,416
2001 335,172
---------
Total minimum lease payments $ 751,588
=========
Legal Matters - The Company is subject to litigation from time to
time in the ordinary course of business. Although the amount of
any liability with respect to such litigation cannot be determined, in
the opinion of management, such liability will not have a material
adverse effect on the Company's financial condition or results of
operations.
10. LINES OF CREDIT
The Company maintains a secured line of credit agreement with a
major commercial bank for up to $3,000,000, all of which is
available as of December 31, 1999. The Company also maintains a
separate $7,000,000 three year acquisition revolving credit
agreement with the same bank. There have been no borrowings
against either agreement as of December 31, 1999.
11. OTHER EXPENSES
THE COMPANY RECORDED A 1997 CHARGE AGAINST EARNINGS OF $2,613,359
CONSISTING OF THE FOLLOWING:
Restructuring Charges $ 854,444
Accelerated Retirement Benefits 509,576
Other Non-Recurring Charges 1,249,339
----------
$2,613,359
==========
The restructuring charges were attributable to the closing of the
Company's European subsidiaries and its Votan subsidiary located in California,
all of which had been operating unprofitably. These closings were part
of a restructuring plan developed by the Company's management and approved
by its Board of Directors during May 1997. The plan allowed the Company to
focus its attentions and resources on its core businesses and profitable
markets, while at the same time significantly reducing operating
expenses. The charge of $854,444 consists of lease termination charges,
currency translation losses, the disposal of certain fixed assets, and
severance and accrued compensation payments to effected employees. In
total, employment was reduced by 28 employees as a result of the
restructuring of these subsidiaries. This restructuring met the criteria set
forth in Emerging Issues Task Force Issue ("EITF") 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit and Activity (Including Certain Costs Incurred in a Restructuring)."
The charge of $509,576 for accelerated retirement benefits relate to the
retirement of the Company's former President and CEO, Albert J.
Montevecchio, who submitted a proposal for his retirement to the Board of
Directors on May 21. This charge represents an acceleration of charges
that normally would have been accrued by the Company over the next four years
had Mr. Montevecchio remained with the Company to age 65 as assumed by his
employment agreement with the Company.
The other non-recurring charges of $1,249,339 consist of a variety of
items including $276,712 of costs incurred in connection with the
withdrawn Votan initial public offering, the write-off accounts
receivable of $492,500, the write-off of capitalized software associated with
the Votan voice technologies of $470,876 and miscellaneous expenses of
$9,251. During the third quarter of 1999, the Company recovered $166,650
previously charged against income in connection with the termination of a
facilities lease held by a former subsidiary. This recovery completes the
accounting for the restructuring recorded in 1997.
12. STOCKHOLDERS' RIGHTS PLAN
In December 1997, the Company adopted a stockholder rights plan. The plan is
intended to protect shareholders from unfair or coercive takeover practices.
In accordance with the plan, the Board of Directors declared a dividend
distribution of one common stock purchase right for each share of common
stock payable January 9, 1998 to holders of record of common stock
issued and outstanding at the close of business on that date. Upon the
occurrence of certain trigger events that may be related to an unfriendly
attempt to purchase a controlling interest in the Company, the Board of
Directors may permit each rights holder to purchase from the Company shares of
common stock for one-half market value. The rights will not be detachable or
exercisable until certain events occur. The Board of Directors may elect to
terminate the rights at any time.
13. SUBSEQUENT ACQUISITION
On January 7, 2000, the Company acquired all of the outstanding shares
of The Angeles Group in a stock for stock merger accounted for as a pooling
of interests. In connection with the merger, the Company issued 360,850
shares of common stock with an aggregate value of $4,059,562. In
connection with the acquisition, the Company paid the debt of The Angeles
Group of $1.1 million and transaction costs of approximately $600,000.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Veramark Technologies, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Veramark Technologies, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related supplemental consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. The supplemental
consolidated financial statements give retroactive effect to the merger of
Veramark Technologies, Inc. and The Angeles Group, Inc. on January 7, 2000,
which has been accounted for using the pooling-of-interests method as
described in the notes to the supplemental consolidated financial statements.
These supplemental consolidated financial statements are the responsibility
of the Company's management. Our responsiblity is to express an opinion
on these supplemental consolidated financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. 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 supplemental consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Veramark Technologies, Inc. as
of December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1999, after giving effect to the merger of Veramark
Technologies, Inc. and The Angeles Group, Inc., as described in the
notes to the supplemental consolidated financial statements, in
conformity with accounting principles generally accepted in the
United States.
Arthur Andersen LLP
Rochester, New York
February 4, 2000
VERAMARK TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $ 2,894,500 $ 1,497,125
Investments 5,137,268 4,718,694
Accounts receivable, trade (net of allowance
for doubtful accounts of $260,000
and $150,000) 3,821,244 3,197,588
Inventories 557,123 579,968
Prepaid expenses and other current assets 596,574 191,831
------------ ------------
Total current assets 13,006,709 10,185,206
------------ ------------
PROPERTY AND EQUIPMENT:
Cost 7,664,867 6,246,509
Less accumulated depreciation 4,563,669 4,789,193
------------ ------------
Property and equipment, net 3,101,198 1,457,316
Software development costs (net of
accumulated Amortization of $1,531,720
and $1,322,254) 2,691,807 3,393,542
Pension assets 1,977,710 1,873,721
Deposits and other assets 511,858 612,249
------------ ------------
Total other assets 5,181,375 5,879,512
------------ ------------
TOTAL ASSETS $ 21,289,282 $ 17,522,034
============ ============
The accompanying notes to the consolidated financial statements are
an integral part of these balance sheets.
VERAMARK TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
CURRENT LIABILITIES:
Accounts payable $ 827,837 $ 835,874
Accrued compensation and related taxes 2,021,102 999,191
Deferred revenue 3,515,957 3,746,319
Note Payable - current -0- -0-
Restructuring accrual -0- 166,650
Capital Lease Obligation - current 70,106 -0-
Other accrued liabilities 368,681 691,640
------------ ------------
Total current liabilities 6,803,683 6,439,674
Pension Obligation 3,043,771 2,882,847
Note Payable - long term 1,100,000 1,100,000
Capital Lease Obligation - long term 110,712 -0-
------------ ------------
Total liabilities 11,058,166 10,422,521
------------ ------------
COMMITMENTS (Note 9)
STOCKHOLDERS' EQUITY:
Common Stock, par value, $.10; shares
authorized, 40,000,000; issued 8,143,673
shares and 7,968,559 shares 814,367 796,856
Additional paid-in capital 20,109,463 19,098,759
Accumulated deficit (10,306,957) (12,582,887)
Treasury Stock (80,225 and 52,300 shares
at cost) (385,757) (213,215)
------------ ------------
Total stockholders' equity 10,231,116 7,099,513
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,289,282 $ 17,522,034
============ ============
The accompanying notes to the consolidated financial
statements are an integral part of these balance sheets.
VERAMARK TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
NET SALES $29,396,688 $22,329,113 $16,395,988
COSTS AND OPERATING EXPENSES: ----------- ----------- -----------
Cost of sales 3,796,209 3,234,450 3,569,638
Engineering and software development 5,942,262 3,644,863 3,398,509
Selling, general and administrative 17,209,307 13,612,451 12,080,118
Other expenses - - 2,613,359
----------- ----------- -----------
Total costs and operating expenses 26,947,778 20,491,764 21,661,624
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 2,448,910 1,837,349 (5,265,636)
NET INTEREST INCOME 47,883 167,456 87,305
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 2,496,793 2,004,805 (5,178,331)
INCOME TAX PROVISION 98,207 15,800 7,800
----------- ----------- -----------
NET INCOME (LOSS) $ 2,398,586 $ 1,989,005 $(5,186,131)
=========== =========== ===========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE
Basic $ .30 $ .25 $ (.67)
=========== =========== ===========
Diluted $ .27 $ .24 $ (.67)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC) 7,973,183 7,926,646 7,692,210
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
(DILUTED) 8,800,662 8,272,609 7,692,210
=========== =========== ===========
The accompanying notes to the consolidated financial
statements are an integral part of these balance sheets.
VERAMARK TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONAL CUMULATIVE TOTAL
COMMON STOCK PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) ADJUSTMENT EQUITY
BALANCE - December 31, 1996 7,295,722 $729,572 $15,755,030 $ (8,767,261) $(56,396) $7,660,945
Sale of Stock 501,934 50,193 2,429,824 - - 2,480,017
Exercise of stock options and
warrants 126,750 12,675 571,729 - - 584,404
Stock Retirements (13,853) (1,385) (86,363) - - (87,748)
Foreign currency translation
adjustment - - - - 56,396 56,396
Net loss - - - (5,186,131) - (5,186,131)
--------- -------- ----------- ------------- -------- -----------
BALANCE - December 31, 1997 7,910,553 $791,055 $18,670,220 $(13,953,392) $ - $ 5,507,883
--------- -------- ----------- ------------ -------- -----------
Sale of Stock 24,700 2,470 140,914 - - 143,384
Fair Value of Warrants Issued
with Debt - - 175,000 - - 175,000
Exercise of stock options and
warrants 26,044 2,605 79,951 - - 82,556
Stock Purchase Plan 9,981 998 49,905 - - 50,903
Stock Retirements (2,719) (272) (17,231) - - (17,503)
Treasury Stock (52,300) - (213,215) - - (213,215)
Shareholder Distributions - - - (618,500) - (618,500)
Net Income - - - 1,989,005 - 1,989,005
--------- -------- ----------- ------------ -------- -----------
BALANCE - December 31, 1998 7,916,259 $796,856 $18,885,544 $(12,582,887) $ - $ 7,099,513
--------- -------- ----------- ------------ -------- -----------
Exercise of stock options and
warrants 151,898 15,189 888,247 - - 903,436
Stock Purchase Plan 24,099 2,410 134,038 - - 136,448
Stock Retirements (883) (88) (11,581) - - (11,669)
Treasury Stock (27,925) - (172,542) - - (172,542)
Shareholder Distributions - - - (122,656) - (122,656)
Net Income - - - 2,398,586 - 2,398,586
--------- -------- ----------- ------------ -------- -----------
BALANCE - December 31, 1999 8,063,448 $814,367 $19,723,706 $(10,306,957) $ - $10,231,116
========= ======== =========== ============ ======== ===========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
VERAMARK TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
OPERATING ACTIVITIES:
Net income (loss) $2,398,586 $1,989,005 $(5,186,131)
Adjustments to reconcile net income (loss) ---------- ---------- -----------
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,801,743 1,380,033 1,861,657
Deferred income taxes - - -
Provision for bad debts 107,000 68,973 129,369
Provision for inventory obsolescenc 73,101 274,996 166,334
Loss on disposal of fixed assets 4,497 2,719 301, 919
Changes in assets and liabilities:
Accounts receivable (730,656) (844,812) 1,133,123
Inventories (50,256) 309,833 556,677
Prepaid expenses and other current assets (404,743) (147,993) 40,002
License fees and purchased software - (30,405) (1,858)
Deposits and other assets (30,888) (1,026,649) 154,329
Accounts payable (8,037) (66,474) (438,477)
Accrued compensation and related taxes 1,021,911 519,302 (525,266)
Restructuring accrual (166,650) (79,816) 246,466
Deferred Revenue (230,362) 474,427 637,310
OTHER ACCRUED LIABILITIES (322,959) 459,288 (84,073)
---------- ---------- -----------
Net adjustments 1,063,701 1,293,422 4,177,512
---------- ---------- -----------
Net cash provided by (used in) operating activities 3,462,287 3,282,427 (1,008,619)
---------- ---------- -----------
INVESTING ACTIVITY:
Investments (418,574) (2,362,913) (2,105,601)
Additions to property and equipment (2,128,008) (790,700) (448,201)
Software development costs (393,907) (1,269,019) (1,323,846)
---------- ---------- -----------
Net cash used in investing activities (2,940,489) (4,422,632) (3,877,648)
---------- ---------- -----------
FINANCING ACTIVITIES:
Increase in Note Payable - 1,100,000 -
Payments on Capital Lease Obligations (18,364) - -
Increase in Pension Obligation 160,924 899,499 662,666
Distributions to Shareholders (122,656) (618,500) -
Proceeds from sale of stock - 143,384 2,480,017
Increase (Decrease) in Short-term Borrowings - (100,000) 10,000
Exercise of Stock Options and Warrants 891,767 65,053 496,656
Warrants issued as part of Debt - 175,000 -
Employee Stock Purchase Plan 136,448 50,903 -
Repayment of Shareholder Loan - - 305,000
Treasury Stock Purchases (172,542) (213,215) -
---------- ---------- -----------
Net cash provided by financing activities 875,577 1,502,124 3,954,339
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,397,375 361,919 (931,928)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,497,125 1,135,206 2,067,134
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,894,500 $1,497,125 $1,135,206
========== ========== ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
VERAMARK TECHNOLOGIES, INC. AND THE ANGELES GROUP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE ACCOMPANYING SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS include the
accounts of Veramark Technologies, Inc. (the Company), The Angeles Group
Division, reflecting the Company's acquisition of The Angeles Group
effective January 7, 2000 under the pooling of interest method, and its
wholly-owned subsidiaries, Votan Corporation, MOSCOM Limited and Global
Billing Services Limited (companies incorporated in England) and MOSCOM
GmbH (a company incorporated in Germany). During 1997 the Company closed
its wholly owned subsidiaries as discussed in Note 12. All significant
inter-company accounts and transactions have been eliminated. The Company
designs and manufactures telecommunication management systems and telephone
company billing systems for users and providers of telecommunication
services in the global market.
On January 7, 2000, Veramark Technologies, Inc., issued 360,580 shares of
common stock in exchange for all of the outstanding shares of The Angeles
Group, Inc. This business combination will be accounted for as poolings-
of-interests, and accordingly, the historical financial statements of the
Company have been restated on a supplemental basis to include the
condolidated financial statements of Veramark Technolgies, Inc. and The
Angeles Group, Inc. for all periods presented.
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the business combination with The Angeles
Group Inc.
Generally accepted accounting principles prohibit giving effect to a
consummated business combination accounted for by the pooling-of-
interest method in financial statements that do not include the date
of consummation. The accompanying supplemental consolidated financial
statements do not extend through the date of consummation, however,
they will become the historical consolidated financial statements of
the Company after financial statements covering the date of
consummation of the business combination are issued.
ESTIMATES - The preparation of consolidated financial statements, in
conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include management's best estimates
of the net realizable value of software development costs. Accordingly,
the Company periodically records adjustments to write down the carrying
value of software development costs to their net realizable value. The
amounts the Company will ultimately realize could differ materially from
the carrying value of the software development costs. (see Note 12).
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards (SFAS) No. 107 "Disclosures about Fair Value of Financial
Instruments," requires disclosures of the fair value of certain financial
instruments. The carrying amount of cash and cash equivalents,
investments, accounts receivable and accounts payable reflect fair value
due to their short-term nature.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
INVESTMENTS - The Company carries its investments in accordance with SFAS
No. 115, "Investments in Certain Debt and Equity Securities." As of
December 31, 1999, and 1998, the Company has deemed its portfolio to
consist of available for sale securities. At December 31, 1999 and 1998
the carrying value of investments approximated market.
Investments at December 31, 1999 and 1998 consisted of the following:
1999 1998
Commercial Paper $ 550,000 $3,389,479
Certificates of Deposit 483,541 914,015
US Government Securities 662,267 473,621
Bond Funds 3,991,460 1,201,665
Money Market Funds 1,979,695 155,257
---------- ----------
$7,666,963 $6,134,037
========== ==========
The contractual maturities of the Company's investments as of December 31, 1999
are as follows:
Due within one year $3,705,602
Due within one to two years 1,807,885
Due within two to three years 995,255
Due within three to four years 1,100,506
Due within four to six years 57,715
----------
$7,666,963
==========
CONCENTRATIONS OF CREDIT RISK - Financial instruments, which potentially
subject the Company to concentration of credit risk, consist principally of
investments and accounts receivable. The Company places its investments
($7,666,963 and $6,134,037 as of December 31, 1999 and 1998, respectively)
with quality financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution.
The Company's customers are not concentrated in any specific geographic
region, but are concentrated in the telecommunications industry. As of
December 31, 1999 and 1998, one customer in this industry accounted for
approximately $1,100,834 and $996,209 respectively, of the total accounts
receivable balance. The Company performs ongoing credit evaluations of its
customers' financial conditions but does not require collateral to support
customer receivables. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
INVENTORIES are stated at the lower of cost (first-in, first-out) or
market. The Company evaluates the net realizable value of inventory on
hand considering deterioration, obsolescence, replacement costs and other
pertinent factors, and records adjustments as necessary.
PROPERTY AND EQUIPMENT is recorded at cost and depreciated on either a
straight-line basis or double declining method basis utilizing the
following useful lives:
Computer hardware and software 3-5 years
Machinery and equipment 4-7 years
Furniture and fixtures 5-10 years
Leasehold improvements Term of lease
All maintenance and repair costs are charged to operations as incurred.
LONG-LIVED ASSETS AND INTANGIBLES - In January 1996, the Company adopted
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-
lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable on an undiscounted cash
flow basis. The statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair values less cost to sell. The adoption of SFAS No.
121 did not have a material effect on the financial statements. In 1997
the Company wrote off certain amounts of capitalized software as discussed
in Note 12. The Company did not record any impairments in 1998 or 1999.
SOFTWARE DEVELOPMENT COSTS meeting recoverability tests are capitalized,
and amortized on a product-by-product basis over their economic life,
ranging from three to five years, or the ratio of current revenues to
current and anticipated revenues from such software, whichever provides the
greater amortization.
REVENUE RECOGNITION - The Company recognizes revenue from product sales
upon shipment to the customer. Revenues from maintenance and extended
warranty agreements are recognized ratably over the term of the agreements.
The Company recognizes revenue from previously deferred billings for
services, which have not been, and are not expected to be utilized by
customers, based on historical experience. The Company also enters into
license agreements for certain of its software products. These revenues
are recognized in accordance with the provisions of Statement of Position
(SOP) No. 97-2, Software Revenue Recognition as amended by SOP 98-4.
INCOME TAXES are provided on the income earned in the financial statements.
Deferred income taxes are provided to reflect the impact of "temporary
differences" between the amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and
regulations. Tax credits are recognized as a reduction to income taxes in
the year the credits are earned. The Angeles Group was treated as an
S-Corporation for federal income tax purposes.
SHAREHOLDER DISTRIBUTIONS - During 1999 and 1998, the Company paid
distributions to its TAG Division shareholders in the amount of $122,656
and $618,500, respectively.
NET INCOME (OR LOSS) PER COMMON SHARE is computed in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." Basic EPS is computed by
dividing reported earnings available to common stockholders by weighted
average shares outstanding. No dilution for common share equivalents is
included. Diluted EPS is computed on a similar basis to the previously
calculated fully diluted EPS. The Company was required to adopt SFAS No.
128 retroactively for periods ending after December 15, 1997. Included in
diluted earnings per share in 1998 and 1999 are 345,963 and 827,479
respectively, which represents the dilutive effect of stock options and
warrants in 1997 as the effect would be anti-dilutive.
RECLASSIFICATIONS - Certain prior year balances have been reclassified to
conform with current year presentation.
STOCK-BASED COMPENSATION - In October 1995, SFAS No. 123. "Accounting for
Stock-Based Compensation" was issued which sets forth a fair value method
of recognizing stock-based compensation expense. The Company continues to
measure compensation for such plans using the intrinsic value based method
of accounting prescribed by Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and will disclose the
additional information relative to issued stock options and pro forma net
income and earnings per share, as if the options granted were expensed at
their estimated fair value at the time of grant.
2. INVENTORIES
The major classifications of inventories as of December 31, 1999 and 1998 are:
1999 1998
Purchased parts and components $ 423,460 $ 340,350
Work in process 94,991 116,228
Finished goods 38,672 123,390
---------- ----------
$ 557,123 $ 579,968
========== ==========
3. PROPERTY AND EQUIPMENT
The major classifications of property and equipment as of December 31, 1999
and 1998 are:
1999 1998
Machinery and equipment $1,241,036 $1,377,179
Computer hardware and software 3,679,595 3,243,721
Furniture and fixtures 1,376,024 1,277,834
Leasehold improvements 1,368,212 347,775
---------- ----------
$7,664,867 $6,246,509
========== ==========
Depreciation expense was approximately $677,000, $366,000 and $386,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
During 1999 the Company wrote off fully depreciated assets totaling
approximately $908,000.
4. ENGINEERING AND SOFTWARE DEVELOPMENT EXPENDITURES
Engineering and software development expenditures incurred during the
years ended December 31, 1999, 1998 and 1997 were recorded as follows:
1999 1998 1997
Engineering and software development
expense included in the consolidated
statements of operations $ 5,942,262 $ 3,644,863 $ 3,398,509
Amounts capitalized and included in
the consolidated balance sheets 393,907 1,269,019 1,323,846
------------ ------------ ------------
Total expenditures for engineering
and software development $ 6,336,169 $ 4,913,882 $ 4,722,355
============ ============ ============
Additionally, the Company recorded amortization of capitalized
software development costs of approximately $1,096,000,
$984,000, and $1,361,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Such amortization is included in
cost of sales in the consolidated statements of operations.
5. BENEFIT PLANS
The Company sponsors an employee incentive savings plan under
section 401(k) for all eligible employees. The Company's
contributions to the plan are discretionary and totaled $100,000
in 1999 and $50,000 in 1998. There were no contributions in
1997.
The Company also sponsors an unfunded Supplemental Executive
Retirement Program, which is a nonqualified plan that provides
certain key employees defined pension benefits. Periodic
pension expense for the years ended December 31, 1999, 1998 and
1997 consists of the following:
1999 1998 1997
Service cost $307,637 $279,957 $123,231
Interest cost 173,356 120,933 92,448
Net amortization and deferral 86,883 49,444 36,965
-------- -------- --------
Pension expense $567,876 $450,334 $252,644
======== ======== ========
A reconciliation of the pension plan's funded status with
amounts recognized in the Company's balance sheets
follows:
1999 1998
Actuarial present value of accumulated
benefit obligation $ 3,043,771 $ 2,882,847
============ ============
Actuarial present value of projected benefit
Obligation $ 3,043,771 $ 2,882,847
Plan assets - -
------------ ------------
Projected benefit obligation in excess of
plan assets 3,043,771 2,882,847
Prior service cost not yet recognized in
net periodic pension cost (1,000,538) (1,087,422)
Additional minimum liability 1,000,538 1,087,422
------------ ------------
Accrued pension expense $ 3,043,771 $ 2,882,847
============ ============
Included in the pension asset caption in the
consolidated balance sheets as of December 31, 1999
and 1998 is an intangible asset of $1,000,538 and
$1,087,422, respectively, related to the minimum
liability adjustment for the unfunded accumulated
benefit obligation.
The discount rate and rate of increase in future
compensation levels used in determining the actuarial
present value of the projected benefit obligation
were 7% and 3% respectively.
The Company maintains life insurance covering the
lives of certain key employees covered under its
Supplemental Executive Retirement Program with the
Company named as beneficiary. The Company intends to
use death benefits as well as loans against the
accumulating cash surrender value of the policies to
fund the pension obligation.
6. STOCKHOLDERS' EQUITY
During 1997, the Company entered into a private equity
line of credit agreement with a single institutional
investor. Under the equity line for a period of two
years, the Company has the right to sell to the
investor shares of the Company's common stock at a
price equal to 88% of the average bid price of the
stock for the subsequent ten trading days. During
the two year period the Company may sell up to $6
million of common stock to the investor with no more
than $500,000 in any single month. There were no
shares of common stock sold to this investor during
1999. During 1998, the Company sold 24,700 shares of
common stock to this investor realizing net proceeds
of $143,384. During 1997, the Company sold 501,934
shares of common stock to this investor realizing net
proceeds of $2,480,017. During 1998 the expiration
date of this agreement was extended from June 2, 1998
to August 30, 2000.
The Company has reserved 650,000 shares of its common
stock for issuance under its 1993 Stock Option Plan,
the successor plan to the 1983 Stock Option Plan.
The Company's Board of Directors approved a 1998
Stock Option Plan on December 15, 1997 covering up to
2,500,000 shares of common stock and on that date
granted options to purchase 755,000 shares, subject
to shareholder approval, which was obtained in May,
1998. Both plans provide for options which may be
issued as nonqualified or qualified incentive stock
options. All options granted are exercisable in
increments of 20 - 25% per year beginning one year
from the date of grant. All options granted to
employees have a ten year term.
The Company accounts for its stock-based compensation
plans under APB Opinion No. 25. Accordingly,
compensation expense has been recognized only to the
extent the exercise price was below the fair market
value at the time of the grant. Had compensation
cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant
dates for awards consistent with the method of SFAS
No. 123, the Company's net income (loss) per share
would have been reduced to the pro forma amounts
indicated below:
1999 1998 1997
Net income (loss) As reported $2,398,586 $1,989,005 $(5,186,131)
Pro forma $1,855,680 $1,359,147 $(5,594,350)
Net income (loss) per common share As reported
Basic $.30 $.25 $(.67)
Diluted $.27 $.24 $(.67)
Pro forma
Basic $.23 $.17 $(.73)
Diluted $.21 $.16 $(.73)
Compensation expense recognized in the statement of
operations for the year ended December 31, 1999, 1998
and 1997 was approximately $355,638, $215,991, and $-
0- respectively, for options issued at an exercised
price below fair market values at the time of the
grant. The SFAS No. 123 method of accounting has not
been applied to options granted prior to January 1,
1995, so the resulting pro forma compensation cost
may not be representative of that to be expected in
future years.
For purposes of the disclosure above, the fair value
of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model
with the following weighed-average assumptions used
for grants in 1999, 1998, and 1997.
1999 1998 1997
Dividend yield .00% .00% .00%
Expected volatility 64.47% 59.00% 58.86%
Risk-free interest rate 4.58% 5.61% 6.79%
Expected life 7 years 7 years 7 years
A summary of stock option and warrant transactions for
the years ended December 31, 1999, 1998 and 1997 is shown
below:
1999 1998 1997
OPTIONS SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
AVERAGE AVERAGE AVERAGE
PRICE PRICE PRICE
Shares under option, beginning
of year 1,715,475 $4.16 655,746 $2.40 231,489 $5.53
Options granted 536,537 6.55 1,163,720 5.15 797,246 3.00
Options exercised (47,517) 3.14 (22,450) 2.31 (68,128) 3.64
Options terminated (22,975) 5.43 (81,541) 4.61 (304,861) 6.06
-------- ----- --------- ----- -------- -----
Shares under option, end of year 2,181,520 4.76 1,715,475 4.16 655,746 2.40
========= ===== ========= ===== ======== =====
Shares exercisable 656,556 $4.15 379,146 $4.11 46,292 $3.01
========= ===== ========= ===== ======== =====
Weighted average fair value of
options granted $4.35 $3.33 $3.53
========= ========= ========
WARRANTS
Warrants outstanding, beginning
of year 196,672 $7.20 194,770 $7.12 92,799 $6.21
Warrants granted 5,289 6.38 10,850 11.25 165,412 6.49
Warrants exercised (104,381) 6.92 (3,594) 4.87 (58,622) 4.69
Warrants expired (8,685) 5.76 (5,354) 5.37 (4,819) 6.80
-------- ----- ------- ----- ------- -----
Warrants outstanding, end of year 88,895 $7.68 196,672 $7.20 194,770 $7.12
======== ======= =======
7. SALES INFORMATION
Sales to one customer were approximately $16,287,000 or
55% of the Company's total sales in 1999. Sales to
this same customer were approximately $11,763,000 or
53% of the Company's total sales in 1998 and
approximately $6,748,000 or 41% of the Company's
total sales in 1997.
Export sales to unaffiliated customers, primarily in
Europe and South America were approximately
$5,219,000, $3,435,000, and $3,290,000 in 1999, 1998
and 1997, respectively.
In accordance with SFAS No. 131 related to segment reporting, the
Company has determined that it operates in one segment.
8. INCOME TAXES
The components of the income (loss) before income taxes
for the years ended December 31, 1999, 1998 and 1997
is presented below:
1999 1998 1997
Domestic (loss) income $2,789,452 $1,034,427 $(4,214,949)
Foreign loss - - (815,558)
---------- ---------- -----------
$2,789,452 $1,034,427 $(5,030,507)
========== ========== ===========
The income tax provision (benefit) includes the
following:
1999 1998 1997
Current income tax payable
(refundable):
Federal $80,908 $12,775 $ -
State 17,299 3,025 10,025
Foreign - - -
------- ------- ------------
$98,207 $15,800 10,025
------- ------- ------------
Deferred income tax:
Federal 510,123 236,281 (1,483,659)
State 48,660 93,738 (97,872)
Foreign - - -
Increase (decrease) in valuation (558,783) (330,019) 1,579,306
allowance - - (2,225)
-------- --------
$98,207 $15,800 $ 7,800 -
======== ======== ============
The income tax (benefit) provision differs
from those computed using the statutory
federal tax rate of 34%, due to the
following:
1999 1998 1997
Tax at statutory federal rate $948,414 $351,705 $(1,710,372)
US tax effect of foreign losses (312,024) - 302,572
State taxes, net of federal tax benefit 4,857 64,136 (107,671)
Utilization of tax credits - (31,977) -
(Decrease) increase in valuation (558,783) (354,118) 1,528,621
allowance
Other 15,743 (13,946) (5,350)
-------- -------- -----------
$ 98,207 $ 15,800 $ 7,800 -
======== ======== ===========
The deferred income tax asset (liability) recorded in the consolidated
balance sheets results from differences between financial statement and tax
reporting of income and deductions. A summary of the composition of the
deferred income tax asset (liability) follows:
1999 1998
DOMESTIC DOMESTIC
General business credits $1,055,314 $ 944,253
Net operating losses 1,305,396 2,537,748
Deferred compensation 956,317 694,091
Alternative minimum tax credits 329,273 256,755
Inventory 165,173 157,079
Accounts receivable 35,457 40,805
Capitalized software (1,004,616) (1,258,848)
Fixed assets (65,687) (54,634)
Restructuring 205,314 204,071
Other 46,264 65,668
---------- ----------
3,028,205 3,586,988
Valuation allowance (3,028,205) (3,586,988)
---------- ----------
Deferred asset (liability) $ - $ -
========== ==========
The Company has $3,613,311 of federal net operating loss carryforwards
available as of December 31, 1999, of that total, $782,000 is limited
to a utilization of approximately $100,000 annually. The
carryforwards expire in varying amounts in 1999 through 2012. The
valuation allowance has decreased by $558,783 during the year ended
December 31, 1999.
As of December 31, 1999, the Company had approximately $909,000 of net
operating loss carryforwards available to offset future earnings
of MOSCOM Limited, and approximately $1,594,000 of net operating loss
carryforwards to offset future earnings of MOSCOM GmbH. These
subsidiaries were closed in 1997.
The Company's tax credit carryforwards as of December 31, 1998 are as follows:
DESCRIPTION AMOUNT EXPIRATION DATES
General business credits 990,052 1999 - 2019
New York State investment tax credits 65,262 2001 - 2014
Alternative minimum tax credits 329,273 No expiration date
Cash paid (received) for income taxes during the years ended December 31,
1999, 1998 and 1997 totaled $11,705, $(87,018) and $-0-, respectively.
9. COMMITMENTS
OPERATING LEASE OBLIGATIONS - The Company leases current manufacturing
and office facilities and certain equipment under operating leases, and
capital leases, which expire at various dates through 2005. The facility
leases provide for extension privileges. Rent expense under all operating
leases (exclusive of real estate taxes and other expenses payable under
the leases) was $453,000, $534,000, and $830,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Minimum lease payments as of December 31, 1999 under operating leases
are as follows:
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES TOTAL
2000 $ 89,297 $627,257 $716,554
2001 69,993 541,452 611,445
2002 32,973 197,241 230,214
2003 19,370 197,241 216,611
2004 8,071 33,741 41,812
Thereafter - 1,796 1,796
--------- ---------- ----------
$ 219,704 $1,598,728 $1,818,432
Less: Amounts representing interest (38,886)
Present Value of Minimum
Capital lease payments 180,818
Less: Current Portion (70,106)
---------
$ 110,712
=========
Legal Matters - The Company is subject to litigation from time to time in
the ordinary course of business. Although the amount of any liability with
respect to such litigation cannot be determined, in the opinion of management,
such liability will not have a material adverse effect on the Company's
financial condition or results of operations.
10. LONG-TERM DEBT
In November 1998, the TAG Division of the Company entered
into a note payable in the amount of $1,100,000.
Interest is payable monthly at the rate of thirteen
percent per annum, through December 1, 2003, at which
time the principal balance is due. The note is secured
by substantially all the assets and intellectual
property of the company.
In connection with the note, the Company granted
warrants to the lender to purchase up to four and a half
percent of the common stock of the Company as set forth
in the agreement. The Company has determined the fair
value of the warrants to be $175,000 and has capitalized
this amount in other assets. This amount will be
amortized as interest expense over the term of the note.
Subsequent to year end in connection with the
acquisition the note payable was repaid.
11. LINES OF CREDIT
The Company maintains a secured line of credit agreement
with a major commercial bank for up to $3,000,000, all
of which is available as of December 31, 1999. The
Company also maintains a separate $7,000,000 three year
acquisition revolving credit agreement with the same
bank. There have been no borrowings against either
agreement as of December 31, 1999.
12. OTHER EXPENSES
THE COMPANY RECORDED A 1997 CHARGE AGAINST EARNINGS OF
$2,613,359 CONSISTING OF THE FOLLOWING:
Restructuring Charges $ 854,444
Accelerated Retirement Benefits 509,576
Other Non-Recurring Charges 1,249,339
----------
$2,613,359
==========
The restructuring charges were attributable to the closing
of the Company's European subsidiaries and its Votan
subsidiary located in California, all of which had been
operating unprofitably. These closings were part of a
restructuring plan developed by the Company's management and
approved by its Board of Directors during May 1997. The
plan allowed the Company to focus its attentions and
resources on its core businesses and profitable markets,
while at the same time significantly reducing operating
expenses. The charge of $854,444 consists of lease
termination charges, currency translation losses, the
disposal of certain fixed assets, and severance and accrued
compensation payments to effected employees. In total,
employment was reduced by 28 employees as a result of the
restructuring of these subsidiaries. This restructuring
met the criteria set forth in Emerging Issues Task Force
Issue ("EITF") 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit and
Activity (Including Certain Costs Incurred in a
Restructuring)."
The charge of $509,576 for accelerated retirement benefits
relate to the retirement of the Company's former President
and CEO, Albert J. Montevecchio, who submitted a proposal
for his retirement to the Board of Directors on May 21.
This charge represents an acceleration of charges that
normally would have been accrued by the Company over the
next four years had Mr. Montevecchio remained with the
Company to age 65 as assumed by his employment agreement
with the Company.
The other non-recurring charges of $1,249,339 consist of a
variety of items including $276,712 of costs incurred in
connection with the withdrawn Votan initial public offering,
the write-off accounts receivable of $492,500, the write-off
of capitalized software associated with the Votan voice
technologies of $470,876 and miscellaneous expenses of
$9,251. During the third quarter of 1999 the Company recovered
$166,650 previously charged against income in connection with
the termination of a facilites lease held by a former subsidiary.
This recovery completes the accounting for the restructuring
accrual recorded in 1997.
13. STOCKHOLDERS' RIGHTS PLAN
In December 1997, the Company adopted a stockholder
rights plan. The plan is intended to protect
shareholders from unfair or coercive takeover
practices. In accordance with the plan, the Board of
Directors declared a dividend distribution of one
common stock purchase right for each share of common
stock payable January 9, 1998 to holders of record of
common stock issued and outstanding at the close of
business on that date. Upon the occurrence of certain
trigger events that may be related to an unfriendly
attempt to purchase a controlling interest in the
Company, the Board of Directors may permit each rights
holder to purchase from the Company shares of common
stock for one-half market value. The rights will not
be detachable or exercisable until certain events
occur. The Board of Directors may elect to terminate
the rights at any time.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors of the Company is
incorporated herein by reference to page 3 - 5 of the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 18, 2000
{see "Election of Directors" and "Compliance With Section 16 (a)".}
The following lists the names and ages of all executive officers
of the Company, all persons chosen to become executive officers, all
positions and offices with the Company held by such persons, and
the business experience during the past five years of such persons.
All officers were elected or re- elected to their present positions
for terms ending on May 18, 2000 and until their respective successors
are elected and qualified.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and executive officers of Veramark are as follows:
NAME AGE POSITION
David G. Mazzella 59 Chairman of the Board, President and C.E.O.
John E. Mooney 55 Director
William J. Reilly 51 Director
John E. Gould 55 Director
James R. Scielzo 57 Director
Robert Stubbs 65 Director
Paul T. Babarik 58 Vice President - Telemanagement Sales
Robert L. Boxer 46 Vice President, Secretary, General Counsel
James W. Karr 56 Vice President - Sales, Billing And Customer Care
John P. King 62 Vice President - Product Management
Ronald C. Lundy 48 Treasurer
Douglas F. Smith 56 Vice President - Operations
All Directors hold office until the next annual meeting of
stockholders, and until their successors are duly elected and
qualified. Officers are elected annually by the Board of Directors and
serve at the discretion of the Board.
DAVID G. MAZZELLA, JR. was appointed Chief Executive Officer in
June 1997, he previously served as President and Chief Operating Officer
of the Company from February 1997. He became Chairman of the Board on
December 19, 1998. From June 1994 to February 1997, he was engaged in
management consulting. From February 1992 to June 1994, he was the President
and CEO of Scotgroup Enterprises, Inc., which was engaged in the development
and sale of telecommunications software equipment and the sale of paging and
cellular telephone services. From 1988 - 1991 Mr. Mazzella was Vice President
of Glenayre Electronics, a manufacturer of software based telecommunications
equipment. He was President and CEO of Multitone Electronics, Inc., a company
engaged in the manufacture, sale and servicing of telecommunications
equipment from 1983 until its acquisition by Glenayre Electronics in
1988.
JOHN E. MOONEY rejoined the Board of Directors and served as Chairman of
the Board of Veramark from June 1997 until December 19, 1998. He had
previously been a director of Veramark from May 1985 until his resignation in
May 1997. Until August 1998 and for the past five years, he has been Chief
Executive Officer of Essex Investment Group, Inc., an investment management
and financial services firm. Since August 1998 Mr. Mooney has been Chief
Executive Officer of Jem Properties, Inc., a real estate investment and
management firm. Mr. Mooney has chosen not to stand for re-election as a
Director of Veramark following the completion of the current term in May,
2000.
WILLIAM J. REILLY has been a Director of Veramark since June 1997.
He is the Executive Vice President for Checkpoint Systems, Inc., a
manufacturer and distributor of systems for electronic article surveillance,
electronic access control, closed circuit television and radio frequency
identifications. He has served in that capacity for more than five years.
JOHN E. GOULD has been a Director of Veramark since August 1997. For
more than five years Mr. Gould has been a partner in Gould & Wilkie, a general
practice law firm in New York City. Mr. Gould is also Chairman of the
American Geographical Society.
JAMES R. SCIELZO was appointed to the Board of Directors of Veramark in
March 1998. From 1994, until his retirement in 1999, Mr. Scielzo held
the position of Senior Vice President and Chief Technology Officer for Young
& Rubicam, Inc., a global corporate communications, advertising and public
relations firm. Prior to that, he was Senior vice President/Chief Technology
Officer at Wundermann Cajo Johnson, the direct response advertising subsidiary
of Young & Rubicam, and the Director of systems Development for Young &
Rubicam.
ROBERT W. STUBBS was appointed to the Board of Directors of Veramark in
July 1998. Mr. Stubbs was President and Chief Executive Officer of Bell
Atlantic Capital Corporation, the financial services organization of Bell
Atlantic Corporation from 1986 until his retirement in 1993. Prior to that,
he was the CEO of TriContinental Leasing Company which he founded in
1968 and sold to Bell Atlantic in 1984. Mr. Stubbs has served on the Board of
Directors of the Equipment Leasing Association, the trade association of
the equipment leasing industry and was elected its Chairman in 1989. He has
been Director of Corporate Affairs for ELA since 1993. Presently, Mr. Stubbs
is a Director of BMC Credit Corporation, a Director of Aviation
Facilities Company, Inc., and a Trustee of Manhattan College.
PAUL T. BABARIK was appointed Vice President of Sales in April 1996.
After joining Veramark in 1987 as a Regional Sales Manager he held several
sales management positions, the most recent as Director of AT&T sales from
1989 to 1996. Prior to joining Veramark Mr. Babarik was employed by
AT&T from 1977 - 1986 in various sales management positions.
ROBERT L. BOXER became a Vice President of Veramark in November 1991.
Prior to that he had been Secretary and Corporate Counsel of Veramark since
March 1983. Prior to that he had been Counsel at Sykes Datatronics, Inc. and
an attorney with the firm of Middleton-Wilson.
JAMES W. KARR has been Vice President - Sales, Billing and Customer
Care since May 1, 1989. After joining Veramark in 1983, he had held various
sales management positions. Prior to that he held sales management positions
with Sykes Datatronics, Inc., Itel Corporation, Honeywell Information
Systems, and NCR Corporation.
JOHN P. KING was appointed Vice President of Product Management in
September 1998 after being Director of Product Management since January 1998.
Mr. King was the Company's Vice President of Customer Support and
Quality from September 1992 unit February 1996. Prior to that Mr. King
had been President of Computer Consoles, Inc. and a Group Director of
Northern Telecom Ltd. Prior to rejoining Veramark, Mr. King was Vice
President of Manufacturing of Performance Telecom, Inc.
RONALD C. LUNDY was appointed Treasurer of Veramark in July 1993.
Since joining Veramark in 1984 he has held a variety of financial management
positions, the most recent having been Corporate Controller since December of
1992. Prior to that he held various financial positions with Rochester
Instrument Systems from 1974-1983.
DOUGLAS F. SMITH was appointed Vice President of Operations in
December 1998. Mr. Smith has been an employee of the Company since 1984 as
Order Administration Manager and then as Director of Operations. Prior to
joining the Company, Mr. Smith held various management positions with
Rochester Instruments Systems, Inc.
ITEM 11 EXECUTIVE COMPENSATION
Information relating to executive compensation is incorporated by
reference on pages 21-26 of the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held May 18, 2000. (See "Executive
Compensation" and "Corporate Governance Information.")
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to the security holdings of more than five
percent holders and directors and officers of the Company is incorporated
herein by reference to pages 2-4 of the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held May 18, 2000.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K
(a) REPORTS ON FORM 8-K
1. Registrant filed a form 8-K with the Securities and Exchange
Commission on October 20, 1999 announcing that the Company had
entered a Letter of Intent to acquire The Angeles Group, Inc.
2. Registrant filed a form 8-K with the Securities and Exchange
Commission on January 13, 2000 announcing that the Company on
January 7, 2000 had consummated its acquisition of The Angeles Group
("TAG"), a supplier of enterprise software solutions.
TAG has it's headquarters located in Westlake village, California, and
will be operated as a division of Veramark. The transaction was
structured as a stock for stock merger with the shareholders of TAG
receiving 360,850 shares of Veramark common stock, which represents an
aggregate value of approximately $4,059,562, assuming a price per
share of Veramark common stock of $11.25. In addition, Veramark
assumed and paid debt of TAG totaling approximately $1.1 million
and transaction related broker, accounting, and legal fees of
approximately $600,000 were paid in cash out of working capital.
TAG's most significant product, the Quantum Series, is a comprehensive
telemanagement software system for large enterprises. The Quantum
Series features integrated modules with full capability for call
accounting, directory, bill reconciliation, cable management,
inventory and PBX intruder alert capabilities. The TAG assets
acquired by Veramark in the merger are used in connection with the
development, sale and service of enterprise software solutions.
Veramark intends to continue to use the assets for such purpose.
TAG was not affiliated with Veramark, any director or officer of
Veramark or any associate of any such directory or officer prior to
the merger.
(b) Exhibits (numbered in accordance with item 601 of regulation S-K)
(11.1) Calculation of earnings per share
(23.1) Consent of Arthur Andersen LLP
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.
VERAMARK TECHNOLOGIES, INC.
_________________________________________
David G. Mazzella, President and CEO
Dated: ______________
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.
Signature Capacity Date
______________________________ Chairman of the Board, Director March 14, 1999
David G. Mazzella
______________________________ Director March 14, 1999
John E. Gould
______________________________ Director March 14, 1999
John E. Mooney
______________________________ Director March 14, 1999
William J. Reilly
______________________________ Director March 14, 1999
Robert Stubbs
______________________________ Director March 14, 1999
James R. Scielzo
______________________________ Treasurer March 14, 1999
Ronald C. Lundy
Exhibit 11.1
VERAMARK TECHNOLOGIES, INC.
and Subsidiaries
Calculation of Earnings per Share
Twelve Months Ended December 31,
1999 1998 1997
BASIC
Net Earnings (Loss) $2,694,452 $1,019,427 $(5,030,507)
========== ========== ===========
Weighted Average common shares outstanding 7,612,333 7,565,796 7,331,360
Earnings (Loss) per common & common equivalent
share $.35 $.13 $(.69)
========== ========== ===========
DILUTED
Net Earnings (Loss) $2,694,452 $1,019,427 $(5,030,507)
========== ========== ===========
Weighted average shares outstanding 7,612,333 7,565,796 7,331,360
Additional dilutive effect of stock options &
warrants after application of treasury stock
method 827,479 345,963 -
---------- ---------- -----------
Weighted average shares outstanding 8,439,812 7,911,759 7,331,360
========== ========== ===========
Earnings (Loss) per common share assuming full
dilution $.32 $.13 $(.69)
========== ========== ===========
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-30991.
ARTHUR ANDERSEN LLP
Rochester, New York
March 13, 2000