SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2001
Commission File Number 0-13898
Veramark Technologies, Inc.
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(Exact Name of Registrant as specified in its Charter)
Delaware 16-1192368
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
3750 Monroe Avenue, Pittsford, NY 14534
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(Address of principal executive offices) (Zip Code)
(585) 381-6000
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(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
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, 2002 was $7,442,874
The number of shares of Common Stock, $.10 par value, outstanding on
February 28, 2002 was 8,323,689.
1
DOCUMENTS INCORPORATED BY REFERENCE
PART I - None
PART II - None
PART III - Item 10 Portions of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held May 16, 2002, under the headings
"Election of Directors" and "Section 16 (a) Beneficial Ownership
Reporting Compliance."
Item 11 Portions of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held May 16, 2002, under the heading
"Executive Compensation."
Item 12 The tables contained in portions of the information under the
heading of "Election of Directors" of the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held May 16, 2002.
2
PART 1
ITEM 1 BUSINESS
Veramark Technologies, Inc. (the "Company" or "Veramark") was incorporated
originally under the name 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. The Company merged with the privately-owned
Angeles Group, Inc. on January 7, 2000.
Veramark produces a broad range of telecommunications management systems
for users of private branch exchange (PBX) based voice networks, Internet
protocol (IP) based voice networks and data networks. These products are used to
track, report and manage telephone usage, equipment location and maintenance
activity, and telecom fraud. Veramark's products consist primarily of software
running under Windows NT Systems and Windows 2000. Target end user customers
range from small businesses with 25 employees to the largest organizations in
industry, government and health care encompassing hundreds of locations with
over 100,000 employees. Veramark's large system products incorporate database
management software from Oracle Corporation and Microsoft Corporation.
Veramark is one of the world's leading producers of call accounting
systems and has sold, since its incorporation, approximately 93,000 of these
systems, 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 Avaya, Exp@Nets, SBC, Siemens,
ScanSource, VodaOne, Jenne and Badger Communications, Sprint, Graybar and Ronco
Communications.
Veramark's Enterprise Telemanagement Systems provide cable management,
inventory management, and service records in addition to call management. Due to
their higher levels of complexity and cost, these more comprehensive systems are
sold directly to end users.
PRODUCTS AND SERVICES
CALL ACCOUNTING
Veramark's primary products are CALL ACCOUNTING SYSTEMS, which connect to
a business telephone system (or PBX) to collect, store, and rate information on
every telephone call made or received.
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 essential information in
graphical, summary and detailed report formats, without monitoring actual phone
conversations.
The primary appeal of call accounting systems is that clients save an
average of 10% - 30% through heightened awareness and proactive management. As a
result, the cost of a call accounting system can generally be recovered in less
than one year through direct expense reduction.
3
Call accounting systems are purchased and used for many other valuable
reasons 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;
- Detecting fraudulent use of the phone system by hackers and unauthorized
use of company phones for personal calls or 900 numbers and
- Evaluating employee productivity.
Veramark's newest product, eCAS(TM) Web-based Call Accounting, was released in
October 2001 and is the first and only totally web-based system in the market.
The eCAS(TM) system is being sold in the U.S. market currently, with development
planned for the international marketplace in 2002. The eCAS(TM) software is
installed on the client's network and accessed entirely through a standard
Internet browser, like Microsoft Internet Explorer or Netscape Navigator. This
architecture allows clients to administer the system from virtually anywhere
without the added cost and inconvenience of additional client software. The
eCAS(TM) system's high-performance reporting engine delivers all reports
electronically to the Internet browser allowing the user to readily view and
manipulate the information, which makes the data more useful to the recipient
for understanding cost and productivity trends. Like its predecessor, Emerald
XP, the eCAS(TM) system collects and processes call records from up to 100
different remote locations and can be deployed in business environments that
range from 20 to 20,000 extensions.
Since its release in 1999, Emerald XP software has been sold in the U.S.,
U.K., Europe and South America. It supports worldwide call rating, all world
currencies, date schemes and privacy practices and general business environments
ranging in size 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 Pollable Storage Unit
(PSU) collects data from the remote PBX's and stores it until polled by a
central Emerald XP system. A private label version of Emerald XP is sold by
Avaya.
Veramark also produces call accounting software products based on the UNIX
operating system. These products are marketed by Avaya and Avaya dealers as an
integrated solution with Avaya's 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 toll fraud detection with the
eCAS(TM) call accounting system to automate the detection of fraud 24 hours per
day and send out alarms by email to initiate preventive measures.
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 network environments. DNT runs on highly
scalable single or multi-processor Windows NT computer platforms.
4
Veramark sells DNT to end user customers as a certified Avaya branded
product pursuant to a referral agreement with Avaya.
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.
QUANTUM SERIES
Veramark's Quantum Series is the Company's most comprehensive
telemanagement software product. It consists of fully integrated modules that
can also be separated as stand-alone products for Call Accounting, Cable
Management, Work Orders/Trouble-Tickets with Auto Escalation, Phone Bill
Management, Consolidated Billing, Inventory Management, Personnel Directory,
Directory Assistance, Telecom Fraud, Detection and Web Query. All products
feature user definable database views and customized reports.
- INVENTORY MANAGEMENT manages the allocation and maintenance of telephones,
LAN equipment, videoconferencing systems and other voice, data and imaging
apparatus, along with related warranty cost and vendor information.
- PHONE BILL MANAGEMENT automates the electronic receipt of bills from local
and long distance service providers plus competitive local exchange
carriers (CLECs), merges these billing statements and translates them into
an easily-understandable statement of external network charges. The
benefit of phone bill management is measurable cost savings through
detection of billing errors.
- CONSOLIDATED BILLING provides internal network users and clients with a
consolidated bill for network usage, trunk charges, special charges, taxes
and other recurring and non-recurring network services. Clients can
customize the format of internally generated bills and provide interfaces
to General Ledger and Accounts Payable systems.
- CALL INTRUDER ALERT (CIA) is a security system that constantly monitors
calling activity looking for potential fraud and provides administrators
with real-time pager alerts.
- CALL-MASTER is a high-performance call accounting module that tracks
telephone call usage. Of particular interest is the link to Vendor Data
Interface to be able to capture and track detailed call records directly
from vendor bills (from cellular phones, credit card calls and private
lines). Typical clients process up to 20 million calls per month collected
from as many as 35,000 sites.
- CABLE-MASTER manages network connections, tracks circuits and network
connectivity throughout a building or campus and determines who is
affected by a cable break or failure of network resources. The AUTOCAD AND
VISIO INTERFACES map network circuit connections to existing facilities
drawings and provides routing options for new cables.
- WORK ORDER/TROUBLE TICKET accelerates the provisioning of network service
changes, improves the accuracy of requests for moves, adds and changes
(MACs) and quickly routes trouble reports to the appropriate network
technicians.
- PERSONNEL DIRECTORY links each module to the person who "owns" the part or
circuit and associates proper cost allocation to the department. It can
maintain personal information as well as pictures.
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- DIRECTORY ASSISTANCE assists phone operators, security, reception or the
mail room in rapidly locating employees and services.
The Quantum Series is customized to meet the special requirements of
larger customers with complex voice, data and image networks.
The target for the Quantum Series is Fortune 1000 companies and comparably
sized organizations in health care, utilities, financial services and government
sectors. The Quantum Series is sold through a direct sales force and through
distributors such as SBC and Avaya.
OUTSOURCED TELEMANAGEMENT SOLUTIONS
For companies that recognize the benefits of telemanagement, but lack the
means or desire to utilize internal staff and equipment to perform it, Veramark
offers a completely outsourced solution. Using the same telemanagement tools
developed by Veramark for software customers, Veramark can remotely poll,
process and report on telecommunications activity and data. Outsource customers
can access standard as well as customized reports by email, fax, web or CD-ROM.
Outsource customers sign multi-year contracts and pay for services monthly based
on the number of call records processed.
CENTRAL OFFICES 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 and Sprint.
PROFESSIONAL SERVICES AND MAINTENANCE
To varying degrees all of the Company's products offer an opportunity to
provide professional services to customers on a fee basis. These sales typically
include installation, implementation and training services and often include
software customization and data conversion services. The vast majority of active
users of Veramark's products pay an annual maintenance fee, which entitles the
user to post warranty support via telephone or modem, and new software service
pack releases. Annual fees for maintenance range from 15-30% of the original
software license fee,
6
depending upon the hours and priority of support and whether a distributor plays
an intermediary support role.
MARKETING AND SALES
Veramark's marketing and sales personnel are located at its headquarters
in Pittsford, New York and 15 locations throughout the United States.
Veramark's marketing and distribution strategy is founded on building
mutually beneficial relationships with companies with established distribution
networks. The nature of the relationship varies depending on the product and
market. For some, Veramark develops and manufactures customized products under a
private label while others resell Veramark's products.
Veramark's marketing strategy is focused upon telephone switch vendors and
sellers and providers of telephone services. A partial listing of companies
using or selling Veramark products follows:
TELECOMMUNICATIONS EQUIPMENT MANUFACTURERS
- Avaya
- Siemens
DISTRIBUTORS
- Exp@nets
- Badger
- Ronco
- Graybar
- Jenne
TELEPHONE SERVICE PROVIDERS
- SBC
- AT&T
- Sprint
NEW PRODUCT DEVELOPMENT
Veramark is currently pursuing several opportunities to expand its
telemanagement lines and to offer products for related markets.
Software development costs, meeting recoverability tests, are capitalized
in accordance with Statement of Financial Accounting Standard No. 86 when
technological feasibility has been established for the software. The costs
capitalized are amortized on a product-by-product basis over its estimated 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.
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BACKLOG
At December 31, 2001, Veramark had a backlog of $2,084,791. Backlog as of
December 31, 2000 was $3,878,070. Backlog is not deemed to be a material
indicator of 2002 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 and international basis.
There are fewer competitors in the market for large-scale telemanagement
systems for telephone service providers, although several existing competitors
are substantially larger than Veramark and may be able to devote significantly
more resources to product development and marketing.
With respect to all of Veramark's products, 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, breadth 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. 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.
Veramark offers warranty coverage on all its products for 90 days or one
year on parts and 90 days on labor. Customer support services are offered at the
Pittsford, New York and Westlake Village, California facilities.
EMPLOYEES
As of December 31, 2001, Veramark employed 118 full-time personnel.
Veramark's employees are not represented by any labor unions.
8
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. The term of the lease
expires on October 31, 2007.
The Company also 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 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.
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PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Veramark Common Stock, $0.10 par value, is traded on the NASDAQ Smallcap
Market System (symbol: VERA). The following quotations are furnished by NASDAQ
for the periods indicated. The quotations reflect inter-dealer prices that do
not include retail markups, markdowns or commissions and may not represent
actual transactions.
QUARTERS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
2001 $ 2.13 $ 0.69 $ 1.84 $ 0.63 $ 1.30 $ 0.51 $ 0.96 $ 0.42
2000 $12.25 $ 4.38 $ 5.00 $ 3.50 $ 4.13 $ 2.75 $ 3.19 $ 0.63
As of January 31, 2002, there were 597 holders of record of the Company's Common
Stock and approximately 2,650 additional beneficial holders.
The Company last paid a dividend on common stock in January 1996. No dividend is
planned for 2002.
ITEM 6 SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
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2001 2000 1999 1998 1997
------------ ------------ ----------- ----------- ------------
Net Sales $ 12,512,690 $ 16,525,357 $29,396,688 $22,329,113 $ 16,395,988
Net Income (Loss) $ (1,802,457) $ (6,858,645) $ 2,398,586 $ 1,989,005 $ (5,186,131)
Net Income (Loss) per
Diluted Share $ (0.22) $ (0.85) $ 0.27 $ 0.24 $ (0.67)
Weighted Average Diluted
Shares Outstanding 8,242,615 8,079,281 8,800,662 8,272,609 7,692,210
Total Assets $ 10,236,666 $ 11,859,330 $21,289,282 $17,522,034 $ 12,724,178
Long Term Obligations $ 3,495,210 $ 3,373,399 $ 4,254,483 $ 3,982,847 $ 1,983,348
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
2001 COMPARED WITH 2000
Like many others in the telecommunications industry, the Company's sales
for 2001 were adversely impacted throughout the year by the continued weakness
of the overall global economy. Sales for the quarter ended December 31, 2001
were $2,887,218 as compared to $3,609,955 for the quarter ended December 31,
2000, a decrease of 20%. For the year ended December 31, 2001, sales totaled
$12,512,690, which represented a decrease of 24% from sales of $16,525,357 for
the year ended December 31, 2000.
For the quarter ended December 31, 2001, the Company incurred a net loss
of $485,065, or $0.06 per share, as compared to a net loss of $484,042, or $0.06
per share, for the quarter ended December 31, 2000. For the full year ended
December 31, 2001, the Company's net loss of $1,802,457, or $0.22 per share, was
significantly reduced from the net loss of $6,858,645, or $0.85 per share, for
the year ended December 31, 2000.
Sales of the Company's core call accounting products for the year ended
December 31, 2001, declined 31% from the sales recognized for the year ended
December 31, 2000, representing 42% of 2001 sales, and 46% of total 2000 sales.
Call accounting sales for 2001 continued to be negatively impacted by Lucent
Technologies' decision in early 2000 to exit the PBX switch market through the
sale of one business unit to Exp@nets and the creation of Avaya Communications.
The Company has successfully retained the business of these successors to the
Lucent PBX market, including several Avaya master dealer channels. While the
Company has seen steady growth throughout 2001 through the Exp@nets and Avaya
master distributor channels, direct sales to Avaya itself have been lower than
expected. A number of recent developments however, lead the Company to believe
that telemanagement sales in 2002 have the potential to exceed those achieved in
2001. Among those developments are:
- In October of 2001, the Company announced the release of a major new
product, eCAS(TM). This new telemanagement system is the first entirely
web-based product of its type in the market and provides small to large
businesses with a powerful and easy-to-use method for controlling
telecom-related expenses, managing staff productivity, and providing
enhanced security. The eCAS(TM) software is designed for use in single or
multi-switch environments and is compatible with traditional PBX's, key
systems and hybrid communication systems from all leading manufacturers.
It is also compatible with IP-PBX's from leading suppliers such as Avaya
and Cisco. Initial shipments of eCAS(TM) began in limited quantities
during the fourth quarter of 2001, and the reception of customers has been
favorable.
- On January 7, 2002, the Company announced the signing of a three-year
distribution agreement with SBC, one of the worlds largest communications
companies. This new agreement includes the entire portfolio of Veramark's
product offerings and covers all of SBC's regional operating groups,
including Ameritech, Pac Bell, Southwestern Bell,
11
Southern New England Telephone, and Nevada Bell. Sales through this new
channel are expected to begin late in the first quarter of 2002.
- On January 29, 2002, the Company announced the start of a cooperative
software trial program with Siemens Communications Limited ("Siemens") and
Solitaire Communications Limited ("Solitaire") in the United Kingdom.
Siemens will provide a free 90-day trial version of Emerald XP software
with every HiPath 3500 and 3700 series switch it sells in the UK.
Solitaire, the Company's UK-based distributor, will provide direct
localized support to Siemens, their dealers, and ultimately end-users that
require assistance during the trial period, application training and
post-trial support. During the trial period customers will be able to
obtain valuable call management reports that demonstrate calling trends,
measure employee productivity, and easily allocate telecom costs across
the organization. It is an excellent solution for professional services,
call centers, and general businesses. At any time during the trial, the
customer has the option to license the software off the Internet and
continue use of the system without interruption. The Company also expects
that this program will be expanded to include the new eCAS(TM)solution
following international certification in late 2002.
Sales of the Company's Enterprise/OSS products, Quantum and DNT, decreased
3% for the year ended December 31, 2001 from the prior year and accounted for
47% of total 2001 sales, versus 37% of total sales for 2000. The Company's
Quantum series of products offer premise-based solutions for small to large
enterprises in all industries. Features of Quantum include call accounting,
tie-line reconciliation, phone bill consolidation and validation, assets and
facilities management, cable management, toll fraud, web query, and interface to
Auto Cad, among other features. During the fourth quarter of 2001, the Company
announced the receipt of a number of significant orders for Quantum series
products from a diversified group of customers. These customers included a
global financial services group, an internationally known insurance company, a
major defense contractor, and a United States military base. Portions of the
revenue associated with these contracts will be recognized over the first four
months of 2002 as installations and related services occur.
Sales of the Company's Centrex and Virtual Private Network product
offering, Info/MDR declined 29% for the year ended December 31, 2001 from 2000
levels, and accounted for 6% of total sales in both years.
Sales generated by the Company's service bureau operation in 2001
increased 16% over sales in 2000. The Company plans to more aggressively market
out-sourced solutions to its customer base in 2002, providing another option for
potential customers who desire a wide variety of telemanagement services, but
lack the means or internal staff to deliver them. The Company's current service
bureau offerings allow clients to remotely poll, process, and report on
telecommunication activity and data, and then provides standard or customized
reports by email, fax or CD-Rom.
The Company has seen a larger percentage of its sales being generated from
a variety of service and support activities over the last two years. These
activities include installation, training, customization and consulting
services, as well as maintenance and support. For the quarter ended December 31,
2001, service revenues accounted for 59% of total sales, versus 46% for the same
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quarter of 2000. For the year ended December 31, 2001, service and support
activities accounted for 52% of total sales as compared with 46% of total sales
for the year ended December 31, 2000.
The gross profit margin for the quarter ended December 31, 2001 was
$2,322,887 or 80% of sales, as compared to a gross profit margin of $2,905,345,
also representing 80% for the quarter ended December 31, 2000. For the year
ended December 31, 2001, the gross profit margin of $10,345,775 or 83% compared
with a gross profit margin of $13,396,481, or 81% for the year ended December
31, 2000.
The Company continued to reduce its operating expenses during 2001 through
a combination of staff reductions, a tightening of controls over discretionary
expenses, and a streamlining and consolidation of certain functional areas.
Employment at December 31, 2001 totaled 118 versus 174 at December 31, 2000. As
a result of these cost-cutting initiatives, operating expenses of $2,813,000 for
the fourth quarter of 2001 were 20% lower than the $3,512,000 of operating
expenses incurred during the fourth quarter of 2000. For the year ended December
31, 2001, operating expenses were reduced by 37% to $12,553,449 from the
operating expenses incurred for the year ended December 31, 2000 of $19,812,644.
Net engineering and development expenses for the year ended December 31,
2001 of $2,946,350 decreased 43% from $5,145,352 for the year ended December 31,
2000. A significant portion of the decrease in engineering and development
expense is attributable to the sale of the Verabill product line in March 2001,
the effect of which greatly reduced the amount of engineering resources
required.
The table below summarizes gross engineering and development expenses,
costs capitalized, net engineering and development costs, and the amount of
previously capitalized expenditures amortized and charged to cost of sales, for
the years ended December 31, 2001 and 2000.
2001 2000
---- ----
Gross Expenditures for Engineering and
Development $ 4,108,238 $ 6,047,731
Less: Costs Capitalized (1,161,888) (902,379)
----------- -----------
Net Expenditures for Engineering and
Development 2,946,350 5,145,352
Plus: Amounts Amortized and Charged
to Cost of Sales 605,460 1,020,134
----------- -----------
Total Expense Recognized $ 3,551,810 $ 6,165,486
=========== ===========
Selling, general and administrative expenses incurred for the year ended
December 31, 2001 of $9,587,099 represents a reduction of $5,080,193 or 35% from
the $14,667,292 of selling, general and administrative expenses incurred for the
year ended December 31, 2000. A comparison of these expenses by functional area
for the years ended December 31, 2001 and 2000 follows:
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2001 2000
---- ----
Marketing/Product Management $ 962,593 $ 2,670,988
Sales 3,063,533 3,477,004
Sales Support and Service 3,214,953 5,171,576
Administration 2,346,020 3,347,724
----------- -----------
$ 9,587,099 $14,667,292
=========== ===========
On March 26, 2001, the Company completed the sale of Verabill, its billing
and customer care product line, to MIND CTI Ltd. of Yokneam, Israel. The net
proceeds from the sale were $941,000, representing cash received at closing of
$1,000,000, less transaction related fees and expenses of $59,000. After all
fees, expenses, and the write-off of remaining capitalized software associated
with the Verabill product line, the Company recognized a net gain on the
transaction of $315,676, which is reported as other income on the Company's 2001
statement of operations.
2000 COMPARED WITH 1999
The year 2000 was a very difficult one for the Company. Early in 2000 the
Company's largest customer, Lucent Technologies announced that they were exiting
the PBX switch business via the sale of one business unit to Exp@nets and the
spin-off of another (now known as Avaya Communications). The resulting
disruption and turmoil within the Company's major distribution channel
negatively impacted financial results for the year. However, by the end of the
year, the Company had reacted to these events, significantly reducing its
expense base, streamlining its operations, and most importantly, retaining the
business of the resulting successors to the PBX market. On December 20, 2000,
the Company announced a new three-year distribution contract, with Avaya
Communications, covering the Company's complete line of telemanagement products.
Primarily as a result of this disruption in the Company's major
distribution channel, sales for the year decreased from $29,396,688 for the year
ended December 31, 1999, to $16,525,357 for the year ended December 31, 2000, a
decline of 44%. Hardest hit by the changes in the former Lucent channel were
sales of the Company's core call accounting software products, which declined by
57% from 1999 sales. For the year ended December 31, 2000, call accounting
products and services accounted for 46% of total sales, versus 60% of total
sales for the year ended December 31, 1999.
Sales of the Company's enterprise products, DNT and Quantum, were down 3%
from 1999 sales and represented 37% of total sales for 2000 versus 22% of total
sales for 1999. The Company sells DNT to end-user customers as a certified Avaya
branded product, pursuant to a referral agreement with Avaya. Quantum is the
Company's most comprehensive telemanagement product and is sold and marketed by
The Angeles Group Division of the Company. The Company's acquisition of The
Angeles Group was successfully completed in January 2000, and the Quantum
product line has become a major component of the Company's total telemanagement
and network management solutions offering. During 2000, the Company signed major
contracts for the Quantum product with San Francisco Airport, M & I Data Systems
and K-Mart.
Sales of Info/MDR for 2000, decreased by 34% from 1999 sales and accounted
for 6% of total 2000 revenues. Despite the drop in 2000 sales, the Company
believes that there is sufficient
14
activity in the Centrex and Virtual Private Network market to warrant continued
sales efforts and investment.
During 2000, the Company announced that it was seeking a strategic buyer
for Verabill, its billing and customer care product. The Company's management
made the decision that the Company's long-term interests were best served by
focusing on marketing, sales and development within its core telemanagement and
network management markets. The Company completed the sale of Verabill on March
26, 2001. The Company continued to sell and support the Verabill product as
negotiations continued with potential buyers of the product line. For 2000,
Verabill sales and services accounted for 9% of the Company's total sales,
versus 12% of total sales for 1999.
For the year ended December 31, 2000, product sales accounted for 54% of
total sales, with services, consisting of maintenance and support, training and
installation, accounting for the remaining 46% of total sales. For the year
ended December 31, 1999, product sales accounted for 65% of total sales, and
services accounted for 35% of sales.
The gross profit margin for the year ended December 31, 2000 was 81% of
sales or $13,396,481 versus 87% of sales, or $25,600,480 for the year ended
December 31, 1999. The lower percentage gross margin for 2000, as compared to
1999, reflects overhead and amortization expenses, both of which are relatively
fixed in nature, being applied to lower sales volumes recognized in 2000 versus
those recognized in 1999.
In reaction to lower sales volumes, the Company sharply reduced its
operating expenses, primarily through staff reductions beginning in the second
quarter of 2000 and continuing through the end of the year. As of December 31,
2000, the Company employed 174 full-time personnel, compared with an employment
level of 266 as late as March 31, 2000. The result of these expense reductions
was a 14% decrease in overall operating expenses for the year ended December 31,
2000, versus the year ended December 31, 1999. The reductions are more evident
when comparing operating expenses for the Company's quarter ended December 31,
2000, for which operating expenses totaled $3,997,487, and the quarter ended
December 31, 1999, for which operating expenses were $7,011,384, representing a
decrease of 43%. Since March 31, 2000, the Company has been able to reduce its
quarterly breakeven point from approximately $7.7 million, to approximately $4.4
million at December 31, 2000.
Net engineering and software development expenses for the year ended
December 31, 2000 were $5,145,352 as compared to $5,942,262 for the year ended
December 31, 1999, a decrease of 13%. Engineering and development efforts in
2000 included an upgrade to the Company's CAS/Emerald call management product
line to include e-mail and Internet capabilities, and the release of CAS/Emerald
Lite, a shrink-wrapped, user-installable, telemanagement software solution.
The table below details gross engineering and development expenses, costs
capitalized, net engineering and development expense, and the amount of
previously capitalized expenditures amortized and charged to cost of sales, for
the years ended December 31, 2000 and 1999.
15
2000 1999
---- ----
Gross Expenditures for Engineering and
Software Development $ 6,047,731 $ 6,336,169
Less: Costs Capitalized (902,379) (393,907)
----------- -----------
Net Expenditures for Engineering and
Software Development 5,145,352 5,942,262
Plus: Amounts Amortized and Charged
to Cost of Sales 1,020,134 1,095,642
----------- -----------
Total Expense Recognized $ 6,165,486 $ 7,037,904
=========== ===========
Selling, general and administrative expenses for the year ended December
31, 2000 were $14,667,292 as compared to $17,209,308 for the year ended December
31, 1999, a decrease of 15%. The reduction in expense levels reflects a
combination of the staffing reductions across all functional areas referred to
above, plus the consolidation of certain functions, particularly in the
administration and marketing areas, subsequent to the acquisition of The Angeles
Group. A comparison of the selling, general and administrative expense by
functional area for the year ended December 31, 2000 and 1999, is as follows:
2000 1999
---- ----
Marketing/Product Management $ 2,670,988 $ 2,775,031
Sales 3,477,004 4,230,159
Sales Support and Service 5,171,576 5,574,735
Administration 3,347,724 4,629,383
----------- -----------
$14,667,292 $17,209,308
=========== ===========
The Company recognized $156,460 of other income for the year ended
December 31, 2000 versus $47,883 for the year ended December 31, 1999. Other
income primarily consists of interest income generated from the investment of
excess cash balances, reduced by associated management fees, and interest
expense. In 2000, other income included $55,000 of capital gain recognized on
the sale of securities.
For the year ended December 31, 2000, the Company recognized a net loss of
$6,858,645, or $0.85 per diluted share. This compared with a net profit of
$2,398,586, or $.27 per diluted share for the year ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, the Company's total cash position, consisting of
cash in general operating accounts, and short-term investments, was $1,250,787.
This represents a decrease of $216,087 from the total cash position of
$1,466,874 at December 31, 2000. The total cash balances referenced above do not
include cash surrender values of company-owned life insurance policies available
to fund current operations should it become necessary. As of December 31, 2001,
the cash surrender value of these policies totaled $1,292,502, an increase from
$1,212,223, at December 31,
16
2000. These cash surrender values are included in the Pension Assets category of
the Company's balance sheet.
As a result of the aggressive downsizing and streamlining of operations
undertaken throughout the past six quarters in response to reduced revenue
streams, the Company has stabilized its net cash outflow during the second half
of 2001, resulting in growth in its cash and investment position and a positive
cash flow of $291,140 since June 30, 2001.
As of December 31, 2001, the Company continues to have no debt on its
balance sheet other than capital leases on various equipment, totaling $40,600.
Accounts receivable at December 31, 2001 total $1,622,846, net of an
allowance for doubtful accounts of $139,000, compared with an accounts
receivable balance of $2,104,505, net of an allowance for doubtful accounts of
$201,000 at December 31, 2000. During 2001, the Company wrote off approximately
$26,000 of receivables as uncollectable. The decline in receivables reflects the
lower sales volumes recognized throughout 2001, as compared to the prior year.
Inventories of $155,159 at December 31, 2001 were 53% lower than the
balance of $332,003 at December 31, 2000. Only one of the Company's product
lines, Info/MDR, includes a significant hardware component in its design, with
all other products being software-based solutions, which has eliminated the need
to stock significant raw components and finished goods inventories. Accordingly,
inventories are expected to further decrease during 2002.
Prepaid expenses of $76,175 at December 31, 2001 consist primarily of
premiums paid for business insurance renewals in 2001 for policy periods
extending into 2002. Prepaid expenses at December 31, 2000 were $96,336.
Spending on capital equipment for the year ended December 31, 2001 was
$22,395, reflecting a significant reduction from the $334,038 of capital
spending incurred for the year ended December 31, 2000. The decrease in capital
spending results from reduced employment levels in 2001, as compared to 2000, as
well as an internal Company policy of deferring new capital purchases, whenever
possible, until such time as economic conditions improve in general, and the
Company's financial results begin to show sustained improvement.
Software development costs capitalized and included on the Company's
balance sheet at December 31, 2001, total $2,505,156, as compared to $1,948,728
at December 31, 2000. The December 31, 2001 balance consists of unamortized
development costs associated with the Company's DNT and eCAS(TM) product lines.
During 2001, the Company capitalized $1,161,888 of development costs and
amortized $605,460 of previously capitalized costs.
Included in the Other Assets caption of the Company's balance sheet at
December 31, 2001, is $127,509 representing the principal and accumulated
interest due on a promissory note from the Company's Chief Executive Officer.
The principal amount of the note of $99,000 represents funds advanced solely for
the purchase of the Company's common stock. Payment of the note is secured by
the shares purchased. According to the terms of the note, all outstanding
principal and interest is due and payable in October 2002, unless otherwise
stipulated by the Company's Board of Directors.
17
Total current liabilities at December 31, 2001 of $4,991,391, decreased
$27,682 from $5,019,073 at December 31, 2000. Accounts payable have decreased
51% from $385,779 at December 31, 2000 to $190,783 at December 31, 2001. Accrued
compensation and related taxes increased $103,283 from the December 31, 2000
balance of $1,606,886, to $1,710,169 at December 31, 2001. Accrued compensation
includes provision for payroll, commission, vacation and benefit accruals, in
addition to an accrual for deferred compensation associated with the intrinsic
value of unexercised stock options awarded to employees of the Company at below
fair market value on the date of grant. The largest increase in current
liabilities was the value of deferred revenue, which increased $663,346 from
December 31, 2000 to $2,839,332 at December 31, 2001, which the Company views as
a positive indicator. Deferred revenues represent services for which the Company
has billed customers, but for which the Company has not yet performed the
associated service. These services typically include training, installation, and
maintenance and support, and will be recognized as revenues during the
subsequent twelve months, as the services are performed. Other accrued
liabilities declined from $836,689 at December 31, 2000 to $235,678 at December
31, 2001, due primarily to a decrease in the amount of customer deposits of
$629,050.
Long-term liabilities, which consist of current and future pension
obligations and the long-term portion of capital leases, increased 4% from the
December 31, 2000 balance of $3,373,399 to $3,495,210 at December 31, 2001.
Stockholders equity of $1,750,065 at December 31, 2001 decreased from
$3,466,858 at December 31, 2000, primarily reflecting the operating loss of
$1,802,457 incurred for the year-ended December 31, 2001. The Company sponsors
an employee stock purchase plan to provide employees the opportunity to purchase
common stock of the Company through accumulated payroll deductions. During 2001,
employees of the Company purchased 134,780 shares of Common Stock at an
aggregate cost of $85,664.
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 94% of the average bid price of the stock for the prior ten trading days.
During the term of the agreement the Company may sell up to $6 million of common
stock to this investor with no more than $500,000 of common stock in any single
month. The Company did not utilize this agreement during 2001. The term of this
agreement extends through August 31, 2004.
Through December 31, 2001, the Company had maintained a secured demand
line of credit agreement with a commercial bank in the amount of $3,000,000.
Subsequent to December 31, 2001, citing the operating losses the Company has
incurred over the past two years and that the Company would no longer qualify
for a credit facility of that magnitude, the bank has notified the Company that
it is withdrawing the credit arrangement. The Company does not view the
withdrawal of this credit arrangement as being significant in carrying out its
operational plans. The original agreement was put in place in October 1998 for
the primary purpose of providing greater flexibility in acquisition activity
being contemplated at that time, and in the period since. The Company had never
accessed the line, and was not contemplating its use in the foreseeable future.
Despite the operating loss incurred during 2001 and the withdrawal of its
credit arrangement, the Company believes that, at its current reduced operating
expenses levels, its cash on hand, and the immediate access to the cash
surrender value of current insurance policies referred to earlier,
18
sufficient resources will be available to meet the Company's financial
obligations, as well as support its current operating plans.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported therein. The most
significant of these involving difficult or complex judgments in 2001 include:
- Revenue recognition; and
- Capitalization of software development costs
In each situation, management is required to make estimates about the
effects of matters or future events that are inherently uncertain.
The Company's overall policies with regard to revenue recognition are set
forth in Note 1 - Description of Business and Summary of Significant Accounting
Policies. As noted therein, revenue is recognized based on the terms of sale
with the customer. The terms and arrangements vary by product and services
provided, owing to the differing nature of the customers and channels. The
Company believes its revenue recognition policies are appropriate in all
circumstances, and that its policies are reflective of complexities arising from
customer arrangements involving such features as maintenance, warranty
agreements, license agreements, and other normal course of business
arrangements.
As set forth in Note 1 - Description of Business and Summary of
Significant Accounting Policies, the Company capitalizes software development
costs when technological feasibility has been established for the software in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed." Such capitalized costs are amortized on
a product-by-product basis over their economic life or the ratio of current
revenues to current and anticipated revenues from such software, whichever
provides the greater amortization. Should the Company inaccurately determine
when a product reaches technological feasibility or the economic life of a
product, results could differ materially from those reported.
Veramark used what it believes are reasonable assumptions and where
applicable, established valuation techniques in making its estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ( FASB ) No. 142,
"Goodwill and Other Intangible Assets." This statement requires that ratable
amortization of goodwill be replaced with periodic tests of the goodwill
impairment and that intangible assets other than goodwill be amortized over
their useful lives. The provisions of SFAS No. 142 are effective for all fiscal
years beginning after December 15, 2001, and will therefore be adopted by the
Company January 1, 2002. The Company does not believe the adoption of SFAS No.
142 will have a material effect on the Company's financial position or its
results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that obligations associated with
the retirement of a tangible
19
long-lived asset be recorded as a liability when those obligations are incurred,
with the amount of the liability initially measured at fair value. Upon
initially recognizing a liability for an asset retirement obligation, an entity
must capitalize the cost by recognizing an increase in the carrying amount of
the related long-lived asset. Over time, the liability is accreted to its
present value each period and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The provisions of SFAS No. 143 will be required to be adopted
by the Company in fiscal 2003. The Company does not currently believe adoption
of this statement will have a material effect on its financial position or its
results of operations
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS
No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 144 addresses the accounting model for
long-lived assets to be disposed of by sale and resulting implementation issues.
This statement requires that those long-lived assets be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. It also broadens the reporting of
discontinued operations to include all components of an entity with operations
that can be distinguished from the rest of the entity and that will be
eliminated form the ongoing operations of the entity in a disposal transaction.
This statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and will adopted by the Company January 1,
2002. The Company does not believe the adoption of SFAS No. 144 will have a
material effect on its financial position or its results of operations.
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-K
may contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
such as those that are not in the present or past tense, that discuss the
Company's beliefs, expectations or intentions or those pertaining to the
Company's operations, markets, products, services, price and performance.
Forward-looking statements involve numerous risks and uncertainties. The
following factors, among others discussed herein and in the Company's filings
under the Securities Exchange Act of 1934, could cause actual results and future
events to differ materially from those set forth or contemplated in the
forward-looking statements: economic, competitive, governmental and
technological factors, increased operating costs, failure to obtain necessary
outside financing, risks related to natural disasters and financial market
fluctuations. The success of the Company also depends upon the trends of the
economy, including interest rates, income tax laws, governmental regulations,
legislation and those risk factors discussed elsewhere in the Company's filings
under the Securities Exchange Act of 1934. Readers are cautioned not to place
undue reliance on forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company assumes no obligation to update
forward-looking statements.
20
ITEM 8 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
REPORTS OF INDEPENDENT ACCOUNTANTS 22 - 23
Consolidated balance sheets 24 - 25
Consolidated statements of operations 26
Consolidated statements of stockholders' equity 27
Consolidated statements of cash flows 28
Notes to consolidated financial statements 29 - 42
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Veramark Technologies, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Veramark Technologies, Inc. and its subsidiary at December 31, 2001 and December
31, 2000, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14(c) on page 46 presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Rochester, New York
February 7, 2002
22
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 4, 2000 included in
Veramark Technologies, Inc.'s Form 10-K for the year ended December 31, 1999. It
should be noted that we have not audited any financial statements of the company
subsequent to December 31, 1999 or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
Rochester, New York
March 28, 2002
23
VERAMARK TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS 2001 2000
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 633,138 $ 1,072,421
Investments 617,649 394,453
Accounts receivable, trade (net of allowance for doubtful
accounts of $139,000 and $201,000) 1,622,846 2,104,505
Inventories, net 155,159 332,003
Prepaid expenses and other current assets 76,175 96,336
Assets held for sale (Note 4) -- 625,324
------------ ------------
Total current assets 3,104,967 4,625,042
------------ ------------
PROPERTY AND EQUIPMENT:
Cost 6,660,276 6,733,928
Less accumulated depreciation (4,911,570) (4,203,173)
------------ ------------
Property and equipment, net 1,748,706 2,530,755
------------ ------------
Software development costs (net of accumulated amortization
of $2,070,351 and $1,464,890) 2,505,156 1,948,728
Pension assets 2,119,274 2,125,878
Deposits and other assets 758,563 628,927
------------ ------------
Total other assets 5,382,993 4,703,533
------------ ------------
TOTAL ASSETS $ 10,236,666 $ 11,859,330
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
24
VERAMARK TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 190,783 $ 385,779
Accrued compensation and related taxes 1,710,169 1,606,886
Deferred revenue 2,839,332 2,175,986
Capital lease obligation 15,429 13,733
Other accrued liabilities 235,678 836,689
------------ ------------
Total current liabilities 4,991,391 5,019,073
Long-term portion of capital leases 25,171 41,582
Pension obligation 3,470,039 3,331,817
------------ ------------
Total liabilities 8,486,601 8,392,472
STOCKHOLDERS' EQUITY:
Common stock, par value, $0.10; shares authorized, 40,000,000;
8,403,914 shares and 8,269,134 shares issued 840,391 826,913
Additional paid-in capital 20,263,490 20,191,304
Accumulated deficit (18,968,059) (17,165,602)
Treasury stock (80,225 shares at cost) (385,757) (385,757)
------------ ------------
Total stockholders' equity 1,750,065 3,466,858
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,236,666 $ 11,859,330
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
25
VERAMARK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ -----------
NET SALES
Product Sales $ 5,952,275 $ 8,967,353 $19,054,312
Service Sales 6,560,415 7,558,004 10,342,376
------------ ------------ -----------
Total Net Sales $ 12,512,690 $ 16,525,357 $29,396,688
------------ ------------ -----------
COSTS AND OPERATING EXPENSES:
Cost of sales 2,166,915 3,128,876 3,796,208
Engineering and software development 2,946,350 5,145,352 5,942,262
Selling, general and administrative 9,587,099 14,667,292 17,209,308
Other expenses (Note 11) -- 598,942 --
------------ ------------ -----------
Total costs and operating expenses 14,700,364 23,540,462 26,947,778
------------ ------------ -----------
INCOME (LOSS) FROM OPERATIONS (2,187,674) (7,015,105) 2,448,910
NET INTEREST INCOME 69,541 156,460 47,883
OTHER INCOME (Note 12) 315,676 -- --
------------ ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,802,457) (6,858,645) 2,496,793
INCOME TAXES -- -- 98,207
------------ ------------ -----------
NET INCOME (LOSS) $ (1,802,457) $ (6,858,645) $ 2,398,586
============ ============ ===========
NET INCOME (LOSS) PER SHARE
Basic $ (0.22) $ (0.85) $ 0.30
============ ============ ===========
Diluted $ (0.22) $ (0.85) $ 0.27
============ ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC) 8,242,615 8,079,281 7,973,183
============ ============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED) 8,242,615 8,079,281 8,800,662
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
26
VERAMARK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ADDITIONAL TOTAL
COMMON STOCK PAID IN ACCUMULATED STOCKHOLDERS
SHARES PAR VALUE CAPITAL DEFICIT EQUITY
--------- --------- ------------ ------------ ------------
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)
Stockholder Distribution -- -- -- *(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
--------- --------- ------------ ------------ ------------
Liquidation of Warrants Issued -- -- (163,589) -- (163,589)
Sale of Stock 8,400 840 22,848 -- 23,688
Exercise of stock options and warrants 20,536 2,054 54,790 -- 56,844
Stock Purchase Plan 96,525 9,652 97,792 -- 107,444
Fair Value of Warrants Issued -- -- 70,000 -- 70,000
Net loss -- -- -- (6,858,645) (6,858,645)
--------- --------- ------------ ------------ ------------
BALANCE - December 31, 2000 8,188,909 $ 826,913 $ 19,805,547 $(17,165,602) $ 3,466,858
--------- --------- ------------ ------------ ------------
Stock Purchase Plan 134,780 13,478 72,186 -- 85,664
Net loss -- -- -- (1,802,457) (1,802,457)
--------- --------- ------------ ------------ ------------
BALANCE - December 31, 2001 8,323,689 $ 840,391 $ 19,877,733 $(18,968,059) $ 1,750,065
--------- --------- ------------ ------------ ------------
* Represents distributions to TAG Division Shareholders
The accompanying notes are an integral part of these consolidated financial
statements.
27
VERAMARK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $(1,802,457) $(6,858,645) $ 2,398,586
----------- ----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,404,213 1,905,776 1,801,743
Provision for bad debts (35,854) 4,000 107,000
Provision for inventory obsolescence 21,295 139,996 73,101
Loss on disposal of fixed assets 5,691 18,839 4,497
Fair value of warrants issued -- 70,000 --
Gain on sale of Verabill (315,676) -- --
Changes in assets and liabilities:
Accounts receivable 517,513 1,712,739 (730,656)
Inventories 155,549 85,124 (50,256)
Prepaid expenses and other current assets 20,161 336,649 (404,743)
Deposits and other assets (123,032) (265,237) (30,888)
Accounts payable (194,996) (442,058) (8,037)
Accrued compensation and related taxes 103,283 (414,216) 1,021,911
Deferred revenue 663,346 (862,740) (230,362)
Other accrued liabilities (601,011) (65,596) (489,609)
Pension obligation 138,222 288,046 160,924
----------- ----------- -----------
Net adjustments 1,758,704 2,511,322 1,224,625
----------- ----------- -----------
Net cash (used in) provided by operating activities (43,753) (4,347,323) 3,623,211
----------- ----------- -----------
INVESTING ACTIVITY:
Sale (purchase) of investments (223,196) 4,742,815 (418,574)
Additions to property and equipment (22,395) (334,038) (2,128,008)
Capitalized software development costs (1,161,888) (902,379) (393,907)
Proceeds on sale of Verabill, net of selling expenses 941,000 -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities (466,479) 3,506,398 (2,940,489)
----------- ----------- -----------
FINANCING ACTIVITIES:
Repayment of Note Payable -- (1,100,000) --
Repayment of Capital Lease obligation (14,715) (69,130) (18,364)
Distributions to Shareholders -- -- (122,656)
Proceeds from sale of stock -- 23,688 --
Exercise of stock options and warrants -- 56,844 891,767
Employee stock purchase plan 85,664 107,444 136,448
Treasury stock purchases -- -- (172,542)
----------- ----------- -----------
Net cash provided by (used in) financing activities 70,949 (981,154) 714,653
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (439,283) (1,822,079) 1,397,375
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 1,072,421 2,894,500 1,497,125
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 633,138 $ 1,072,421 $ 2,894,500
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
28
VERAMARK TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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 The Angeles Group Division
("TAG"), reflecting the Company's merger with The Angeles Group effective
January 7, 2000. Veramark Technologies, Inc. issued 360,850 shares of
common stock in exchange for all of the outstanding shares of The Angeles
Group, Inc. The business combination was accounted for as a
pooling-of-interests, and accordingly, the historical financial statements
of the Company have been restated to include the consolidated financial
statements of Veramark Technologies, Inc. and The Angeles Group, Inc. for
all periods presented. All significant intercompany accounts and
transactions have been eliminated. The Company designs and produces
telecommunication management, Internet management and billing systems for
users and providers of telecommunication services in the global market.
(See Note 11)
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 5)
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 approximate 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 records its investments in accordance with SFAS
No. 115, "Investments in Certain Debt and Equity Securities." As of
December 31, 2001 and 2000, the Company has classified its portfolio as
available-for-sale securities. At December 31, 2001 and 2000 the carrying
value of investments approximated fair market value.
29
Investments at December 31, 2001 and 2000 consisted of the following:
2001 2000
---- ----
Bond Funds $ 617,649 $ 394,452
Money Market Funds 265,272 1,022,886
---------- ----------
$ 882,921 $1,417,338
========== ==========
The contractual maturities of the Company's investments as of December 31,
2001 are primarily due within one year.
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
with quality financial institutions and, by policy, limits the amount of
investment 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, 2001 and 2000, one customer in this industry accounted for
approximately $133,269 and $527,101, 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.
The cost and accumulated depreciation for property and equipment sold,
retired, or otherwise disposed of are removed from the accounts, and the
resulting gains or losses are reflected in earnings.
LONG-LIVED ASSETS AND INTANGIBLES - In accordance with Statement of
Financial Accounting Standard, ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The Company assesses long-lived assets and certain identifiable
intangibles 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.
30
SOFTWARE DEVELOPMENT COSTS meeting recoverability tests are capitalized,
under SFAS No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," 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 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. In accordance with SFAS 109, "Accounting for Income Taxes,"
the Company applies the liability method of accounting for income taxes,
under which 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. The Angeles Group was treated as an S-Corporation for Federal
Income Tax purposes for all years prior to 2000.
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. Included in diluted earnings per share in
1999 are 827,479 shares, which represent the dilutive effect of stock
options and warrants issued. There were no dilutive effects of stock
options and warrants in 2000 or 2001 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. As permitted by SFAS No.
123, 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.
NEW ACCOUNTING PRONOUNCEMENTS - In July 2001, the Financial Accounting
Standards Board (FASB) No. 142, "Goodwill and Other Intangible Assets."
This statement requires that ratable amortization of goodwill be replaced
with periodic tests of the goodwill impairment and that intangible assets
other than goodwill be amortized over their useful lives. The provisions
of SFAS No. 142 are effective for all fiscal years beginning after
December 15, 2001, and will therefore be adopted by the Company January 1,
2002. The Company does not believe the adoption of SFAS No. 142 will have
a material effect on the Company's financial position or its results of
operations.
31
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that obligations associated
with the retirement of a tangible long-lived asset be recorded as a
liability when those obligations are incurred, with the amount of the
liability initially measured at fair value. Upon initially recognizing a
liability for an asset retirement obligation, an entity must capitalize
the cost by recognizing an increase in the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present
value each period and the capitalized cost is depreciated over the useful
life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or
loss upon settlement. The provisions of SFAS No. 143 will be required to
be adopted by the Company in fiscal 2003. The Company does not currently
believe adoption of this statement will have a material effect on its
financial position or its results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes
SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 144 addresses the
accounting model for long-lived assets to be disposed of by sale and
resulting implementation issues. This statement requires that those
long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer
be measured at net realizable value or include amounts for operating
losses that have not yet occurred. It also broadens the reporting of
discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that
will be eliminated form the ongoing operations of the entity in a disposal
transaction. This statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001 and will adopted by the
Company January 1, 2002. The Company does not believe the adoption of SFAS
No. 144 will have a material effect on its financial position or its
results of operations.
CRITICAL ACCOUNTING POLICIES - The preparation of financial statements
requires management to make estimates and assumptions that affect amounts
reported therein. The most significant of these involving difficult or
complex judgments in 2001 include:
- Revenue recognition
- Capitalization of software development costs
In each situation, management is required to make estimates about the
effects of matters or future events that are inherently uncertain.
The Company's overall policies with regard to revenue recognition are set
forth in Note 1 - Description of Business and Summary of Significant
Accounting Policies. As noted therein, revenue is recognized based on the
terms of sale with the customer. The terms and arrangements vary by
product and services provided, owing to the differing nature of the
customers and channels. The company believes its revenue recognition
policies are appropriate in all circumstances, and that its policies are
reflective of complexities arising from customer arrangements involving
such features as maintenance, warranty agreements, license agreements, and
other normal course of business arrangements.
As set forth in Note 1 - Description of Business and Summary of
Significant Accounting Policies, the Company capitalizes software
development costs when technological feasibility has been established for
the software in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to be
32
Sold, Leased, or Otherwise Marketed." Such capitalized costs are amortized
on a product-by-product basis over their economic life or the ratio of
current revenues to current and anticipated revenues from such software,
whichever provides the greater amortization. Should the Company
inaccurately determine when a product reaches technological feasibility or
the economic life of a product, results could differ materially from those
reported.
Veramark used what it believes are reasonable assumptions and where
applicable, established valuation techniques in making its estimates.
2. INVENTORIES, NET
The major classifications of inventories as of December 31, 2001 and 2000
are:
2001 2000
-------- --------
Purchased parts and components $119,107 $198,995
Work in process 32,394 65,127
Finished goods 3,658 67,881
-------- --------
$155,159 $332,003
======== ========
3. PROPERTY AND EQUIPMENT
The major classifications of property and equipment as of December 31,
2001 and 2000 are:
2001 2000
---------- ----------
Machinery and equipment $ 795,098 $ 802,355
Computer hardware and software 2,706,067 2,785,033
Furniture and fixtures 1,776,552 1,763,981
Leasehold improvements 1,382,559 1,382,559
---------- ----------
$6,660,276 $6,733,928
========== ==========
Depreciation expense was approximately $799,000, $886,000 and $677,000 for
the years ended December 31, 2001, 2000 and 1999, respectively. The
Company recorded a loss of approximately $6,000, representing the net book
value of assets written-off during 2001.
4. ASSET HELD FOR SALE
During 2000, the Company announced its intention to either spin-off into a
separate company or sell to a strategic buyer, Verabill, the billing and
customer care product line. As of December 31, 2000, the unamortized
portion of capitalized software attributable to the Verabill product was
$625,324. The Company continued to sell and support the Verabill product
during the process of negotiation with interested parties. The Company
completed the sale of this product line on March 26, 2001, recognizing a
net gain on the sale of $315,676. (See Note 12 to the Financial
Statements).
5. ENGINEERING AND SOFTWARE DEVELOPMENT EXPENDITURES
33
Engineering and software development expenditures incurred during the
years ended December 31, 2001, 2000 and 1999 were recorded as follows:
2001 2000 1999
---------- ---------- ----------
Engineering and software development expense included
in the consolidated statements of operations $2,946,350 $5,145,352 $5,942,262
Amounts capitalized and included in the
consolidated balance sheets 1,161,888 902,379 393,907
---------- ---------- ----------
Total expenditures for engineering and software
development $4,108,238 $6,047,731 $6,336,169
========== ========== ==========
Additionally, the Company recorded amortization of capitalized software
development costs of approximately $605,000, $1,020,000, and $1,096,000
for the years ended December 31, 2001, 2000 and 1999, respectively. Such
amortization is included in cost of sales in the consolidated statements
of operations.
6. 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. There have been no
contributions in 2000 or 2001.
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, 2001, 2000 and 1999 consists of the following:
34
2001 2000 1999
-------- -------- --------
Service cost $ 92,009 $320,413 $307,637
Interest cost 250,435 215,210 173,356
Net amortization and deferral 86,883 86,883 86,883
-------- -------- --------
Pension expense $429,327 $622,506 $567,876
======== ======== ========
A reconciliation of the pension plan's funded status with amounts
recognized in the Company's consolidated balance sheets is as follows:
2001 2000
----------- -----------
Actuarial present value of accumulated
benefit obligation $ 3,470,039 $ 3,331,817
=========== ===========
Actuarial present value of projected benefit
obligation $ 3,470,039 $ 3,331,817
Plan assets -- --
----------- -----------
Projected benefit obligation in excess of
plan assets 3,470,039 3,331,817
Prior service cost not yet recognized in
net periodic pension cost (826,772) (913,655)
Additional minimum liability 826,772 913,655
----------- -----------
Accrued pension obligation $ 3,470,039 $ 3,331,817
=========== ===========
Included in the pension assets caption in the consolidated balance sheets
as of December 31, 2001 and 2000 is an intangible asset of $826,772 and
$913,655, 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, for all years presented.
The Company maintains life insurance covering certain key employees under
its Supplemental Executive Retirement Program with the Company named as
beneficiary. The Company intends to use death
35
benefits as well as loans against the accumulating cash surrender value of
the policies to fund the pension obligation.
7. STOCKHOLDERS' EQUITY
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 94% of the average bid price of the stock for the prior ten
trading days. During the term of the agreement the Company may sell up to
$6 million of common stock to the investor with no more than $500,000 of
common stock in any single month. There were no shares of common stock
sold to this investor during 2001. During 2000, the Company sold 8,400
shares of common stock to this investor, realizing net proceeds of
$23,688. There were no shares of common stock sold to this investor during
1999. This agreement extends through August 31, 2004.
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,
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 - 100% 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 adjusted to the pro forma
amounts indicated below:
2001 2000 1999
----------- ----------- ----------
Net income (loss) As reported $(1,802,457) $(6,858,645) $2,398,586
Pro forma $(3,182,088) $(9,166,081) $1,855,680
Net income (loss) per common
share As reported
Basic $ (.22) $ (.85) $ .30
Diluted $ (.22) $ (.85) $ .27
Pro forma
Basic $ (0.39) $ (1.13) $ .23
Diluted $ (0.39) $ (1.13) $ .21
Compensation expense recognized in the statement of operations for the
years ended December 31, 2001, 2000 and 1999 was $226,248, $448,562 and
$355,638, respectively, for options issued at an exercise price below fair
market value 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.
36
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 weighted-average assumptions used
for grants in 2001, 2000, and 1999.
2001 2000 1999
------- ------- -------
Dividend yield -- -- --
Expected volatility 85.90% 66.98% 64.47%
Risk-free interest rate 4.95% 6.24% 4.58%
Expected life 7 years 7 years 7 years
A summary of stock option and warrant transactions for the years ended
December 31, 2001, 2000 and 1999 is shown below:
2001 2000 1999
------------------------- ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
Shares under option, beginning of year 2,700,510 $4.38 2,181,520 $4.76 1,715,475 $4.16
Options granted 1,482,050 0.52 1,131,550 4.70 536,537 6.55
Options exercised -- -- (20,536) 2.36 (47,517) 3.14
Options terminated (456,685) 4.58 (592,024) 6.44 (22,975) 5.43
---------- ----- ---------- ----- ---------- -----
Shares under option, end of year 3,725,875 $2.82 2,700,510 $4.38 2,181,520 $4.76
========== ===== ========== ===== ========== =====
Shares exercisable 1,386,660 $3.71 893,371 $4.05 656,556 $4.15
========== ===== ========== ===== ========== =====
Weighted average fair value of options
granted $ 0.50 $ 4.70 $ 4.35
========== ========== ==========
WARRANTS
Warrants outstanding, beginning of year 114,744 $5.92 78,045 $7.68 185,822 $7.20
Warrants granted -- -- 50,000 3.12 5,289 6.38
Warrants exercised -- -- -- -- (104,381) 6.92
Warrants expired (21,863) 8.51 (13,301) 5.74 (8,685) 5.76
---------- ----- ---------- ----- ---------- -----
Warrants outstanding, end of year 92,881 $5.31 114,744 $5.92 78,045 $7.68
---------- ---------- ----------
37
8. SALES INFORMATION
Sales to one customer were approximately $3,488,000 or 28% of the
Company's total sales in 2001. Sales to this same customer were
approximately $7,394,000 or 45% of the Company's total sales in 2000 and
approximately $16,287,000 or 55% of the Company's total sales in 1999.
Export sales to unaffiliated customers, primarily in Canada, Europe and
South America, were approximately $793,000, $1,990,000, and $5,219,000 in
2001, 2000, and 1999 respectively.
9. INCOME TAXES
The components of the income (loss) before income taxes for the years
ended December 31, 2001, 2000 and 1999 is presented below:
2001 2000 1999
----------- ----------- -----------
Net (loss) income $(1,802,457) $(6,858,645) $ 2,398,586
=========== =========== ===========
The income tax provision (benefit) includes the following:
2001 2000 1999
----------- ----------- -----------
Current income tax expense:
Federal -- -- $ 80,908
State -- -- 17,299
----------- ----------- -----------
$ -- $ -- $ 98,207
----------- ----------- -----------
Deferred income tax provision (benefit):
Federal (677,271) (2,000,921) 510,123
State (58,893) (173,993) 48,660
Increase (decrease) in valuation allowance 736,164 2,174,914 (558,783)
----------- ----------- -----------
$ -- $ -- $ 98,207
=========== =========== ===========
38
The income tax (benefit) provision differs from those computed using the
statutory federal tax rate of 34%, due to the following:
2001 2000 1999
--------- ----------- ---------
Tax at statutory federal rate $(612,835) $(2,331,939) $ 948,414
US Tax effect of foreign losses -- -- (312,024)
State taxes, net of federal tax benefit (46,307) (69,425) 4,857
Merger costs -- 209,300 --
Increase (decrease) in valuation allowance 736,164 2,174,914 (558,783)
Other 9,397 17,150 15,743
General Business Credits (85,348) -- --
--------- ----------- ---------
$ 1,071 $ -- $ 98,207
========= =========== =========
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:
2001 2000
----------- -----------
General business credits 1,537,095 1,451,747
Net operating losses 3,987,290 2,907,598
Deferred compensation 1,181,061 1,203,943
Alternative minimum tax credits 322,216 322,216
Inventory 88,552 104,762
Accounts receivable 5,017 28,060
Capitalized software (926,908) (952,400)
Fixed assets (450,617) (78,685)
Other 125,998 145,402
New York State ITC 69,579 70,476
----------- -----------
5,939,283 5,203,119
Valuation allowance (5,939,283) (5,203,119)
----------- -----------
Deferred asset (liability) $ -- $ --
=========== ===========
The Company has $10,776,460 of federal net operating loss carryforwards
available as of December 31, 2001. Of that total, $682,000 is limited to a
utilization of approximately $100,000 annually. The carryforwards expire
in varying amounts in 2011 through 2020. The valuation allowance has
increased by $736,164 during the year ended December 31, 2001
39
The Company's tax credit carryforwards as of December 31, 2001 are as
follows:
DESCRIPTION AMOUNT EXPIRATION
DATES
General business credits 1,537,095 2001 - 2020
New York State investment tax credits 101,821 2001 - 2015
Alternative minimum tax credits 322,216 No expiration date
Cash paid (received) for income taxes during the years ended December 31,
2001, 2000 and 1999 totaled $1,425, $11,705, and $(87,018) respectively.
10. COMMITMENTS
LEASE OBLIGATIONS - The Company leases current manufacturing and office
facilities and certain equipment under operating leases, which expire at
various dates. 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 approximately $616,000,
$621,000, and $453,000 for the years ended December 31, 2001, 2000 and
1999, respectively.
Minimum lease payments as of December 31, 2001 under capital and operating
leases are as follows:
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES TOTAL
-------------- ---------------- ----------
2002 $19,370 $ 671,551 $ 690.921
2003 19,370 659,880 679,250
2004 8,069 468,905 476,974
2005 0 433,165 433,165
2006 0 433,165 433,165
Thereafter 0 360,971 360,971
------- ---------- ----------
46,809 $3,027,637 $3,074,446
Less: Amounts representing interest (6,209)
Present value of minimum
capital lease payments 40,600
Less: Current portion (15,429)
-------
$25,171
=======
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.
40
11. OTHER EXPENSES
On January 7, 2000, the Company completed its merger with TAG, a supplier
of telemanagement software systems for large enterprises. The transaction
was structured as a stock-for-stock merger with the shareholders of TAG
receiving 360,850 shares of the Company's common stock, which represented
an aggregate value of approximately $4,060,000, assuming a per share
amount of $11.25. In addition, Veramark assumed and paid debt of TAG
totaling approximately $1.1 million. Transaction related broker,
accounting, and legal fees of $598,942 are included in the accompanying
consolidated statements of operations.
12. OTHER INCOME
On March 26, 2001, the Company completed the sale of Verabill, its billing
and customer care product line, to MIND CTI Ltd. Of Yokneam, Israel. The
net proceeds from the sale were $941,000, representing cash received at
closing of $1,000,000, less transaction related fees and expenses of
$59,000. After all fees, expenses, and the write-off of remaining
capitalized software associated with the Verabill product line, the
Company recognized a net gain on the transaction of $315,676.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for the years ended December
31, 2001 and 2000 is as follows:
THREE MONTHS ENDED
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
2001
Net sales $ 3,324,315 $ 3,297,719 $ 3,003,438 $ 2,887,218
Gross profit $ 2,778,620 $ 2,779,645 $ 2,464,623 $ 2,322,887
Net loss $ (382,473) $ (491,701) $ (443,218) $ (485,065)
Net loss per share
- Basic $ (0.05) $ (0.06) $ (0.05) $ (0.06)
- Diluted $ (0.05) $ (0.06) $ (0.05) $ (0.06)
2000
Net sales $ 4,914,417 $ 3,111,859 $ 4,889,126 $ 3,609,955
Gross profit $ 4,046,277 $ 2,376,770 $ 4,068,089 $ 2,905,345
Net loss $(2,859,965) $(3,292,588) $ (222,050) $ (484,042)
Net loss per share
- Basic $ (0.36) $ (0.40) $ (0.03) $ (0.06)
- Diluted $ (0.36) $ (0.40) $ (0.03) $ (0.06)
41
14. SUBSEQUENT EVENTS
Through December 31, 2001, the Company had maintained a secured demand
line of credit agreement, with a major commercial bank, in the amount of
$3,000,000. On February 5, 2002, citing the operating losses the Company
has incurred over the past two years, and that the Company would no longer
qualify for a credit facility of that magnitude, the bank has notified the
Company that it is withdrawing the credit agreement with formal written
communications following on February 26, 2002. The Company does not view
the withdrawal of this credit arrangement as being significant in carrying
out its operation plans. The original agreement was put in place in
October 1998 for the primary purpose of providing greater flexibility in
acquisition activity being contemplated at that time, and in the period
since, the Company had never accessed the line and was not contemplating
the use in the foreseeable future. The Company believes it has adequate
liquid assets and operating cash flow ability to sustain its operations
for the foreseeable future.
42
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors of the Company is incorporated herein by
reference to the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held May 16, 2002.
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 16, 2002 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 61 Chairman of the Board, President and CEO
William J. Reilly 53 Director
John E. Gould 57 Director
James R. Scielzo 59 Director
Paul T. Babarik 60 Vice President - Telemanagement Sales
Ronald C. Lundy 50 Treasurer
Douglas F. Smith 57 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.
43
WILLIAM J. REILLY has been a Director of Veramark since June 1997. He is
the Chief Operating Officer for Checkpoint Systems, Inc., a manufacturer and
distributor of systems for electronic article surveillance, electronic access
control, closed circuit television and radio frequency identifications
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.
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.
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.
44
ITEM 11 EXECUTIVE COMPENSATION
Information relating to executive compensation is incorporated by
reference to the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held May 16, 2002.
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 the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held May 16, 2002.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
45
PART IV
ITEM 14 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM
8-K
(b) Exhibits (numbered in accordance with item 601 of regulations S-K)
(11.1) Page 48 Calculation of earnings per share
(c) Schedule II Page 47 Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
46
VERAMARK TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged to Accounts Balance at
Beginning of Costs and Written Off End of
Year Ended Year Expenses (Recovered) Year
---------- ------------ ---------- ----------- -----------
2001 $201,000 $(36,000) $ 26,000 $139,000
2000 $260,000 $4,000 $ 63,000 $201,000
1999 $110,000 $ 107,000 $(43,000) $260,000
47
Exhibit 11.1
VERAMARK TECHNOLOGIES, INC.
CALCULATION OF EARNINGS PER SHARE
Year Ended December 31,
2001 2000 1999
----------- ----------- ----------
BASIC
Net Earnings (Loss) $(1,802,457) $(6,858,645) $2,398,586
=========== =========== ==========
Weighted average common shares outstanding 8,242,615 8,079,281 7,973,183
=========== =========== ==========
Earnings (Loss) per common & common equivalent
share $ (0.22) $ (0.85) $ 0.30
=========== =========== ==========
DILUTED
Net Earnings (Loss) $(1,802,457) $(6,858,645) $2,398,586
=========== =========== ==========
Weighted average common shares outstanding 8,242,615 8,079,281 7,973,183
Additional dilutive effect of stock options & warrants
after application of treasury stock method -- -- 827,479
----------- ----------- ----------
Weighted average dilutive shares outstanding 8,242,615 8,079,281 8,800,662
=========== =========== ==========
Earnings (Loss) per common share assuming full
dilution $ (0.22) $ (0.85) $ 0.27
=========== =========== ==========
48
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., Registrant
/s/ David G. Mazzella
--------------------------------------------------------
David G. Mazzella, President and CEO
Dated: March 27, 2002
/s/ Ronald C. Lundy
--------------------------------------------------------
Ronald C. Lundy, Treasurer, Principal Accounting Officer
Dated: March 27, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ David G. Mazzella Chairman of the Board, Director March 27, 2002
-------------------------
David G. Mazzella
/s/ John E. Gould Director March 27, 2002
-------------------------
John E. Gould
/s/ William J. Reilly Director March 27, 2002
-------------------------
William J. Reilly
/s/ James R. Scielzo Director March 27, 2002
-------------------------
James R. Scielzo
49