FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September
30, 1999
Commission File Number 0-13898
VERAMARK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1192368
(State or otherjurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
3750 MONROE AVENUE, PITTSFORD, NY 14534
(Address of principal executive offices) (Zip Code)
(716) 381-6000
(Registrant's telephone number, including area code)
N.A.
(Former name, former address and former fiscal year, if changed since last
report)
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 Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
YES XX NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of September 30, 1999.
Common stock, par value $.10 7,632,635 shares
This report consists of 15 pages.
<PAGE>
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Balance Sheets - 3 - 4
September 30, 1999 and December 31, 1998
Condensed Statements of Operations - 5
Three and Nine Months Ended September 30, 1999 and 1998
Condensed Statements of Cash Flows - 6
Nine Months Ended September 30, 1999 and 1998
Notes To Condensed Financial Statements 7 - 8
Item 2 Management's Discussion and Analysis of 9 - 13
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 14 - 15
<PAGE>
PART I - FINANCIAL INFORMATION
VERAMARK TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998*
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 766,040 $ 371,209
Investments 5,172,784 4,718,694
Accounts Receivable, trade (net of
allowance for doubtful accounts of
$117,000 and $110,000, respectively) 3,180,995 2,273,705
Inventories 576,887 579,968
Prepaid Expenses 210,108 155,831
------------ ------------
Total Current Assets 9,906,814 8,099,407
PROPERTY AND EQUIPMENT 7,611,129 5,864,469
Less Accumulated Depreciation (4,840,947) (4,455,539)
------------ ------------
Property and Equipment (Net) 2,770,182 1,408,930
OTHER ASSETS:
Software Development Costs
(Net of accumulated amortization of
$1,263,467 and $1,322,254
respectively) 2,960,060 3,393,542
Pension Assets 1,873,721 1,873,721
Deposits and Other Assets 505,973 406,901
------------ ------------
Total Other Assets 5,339,754 5,674,164
------------ ------------
TOTAL ASSETS $ 18,016,750 $ 15,182,501
============ ============
</TABLE>
See notes to Condensed Financial Statements.
* DERIVED FROM AUDITED FINANCIAL STATEMENTS
<PAGE>
VERAMARK TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998*
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable $ 701,084 $ 740,576
Accrued Compensation and Related Taxes 1,418,473 891,186
Deferred Revenue 2,263,707 2,061,475
Other Accrued Expenses 338,442 838,713
------------ ------------
Total Current Liabilities 4,721,706 4,531,950
Pension Obligation 3,153,244 2,882,847
------------ ------------
Total Liabilities 7,874,950 7,414,797
STOCKHOLDERS' EQUITY:
Common Stock, par value $.10,
40,000,000 shares authorized; issued and
outstanding, 7,712,860 and 7,607,709,
respectively 771,286 760,771
Additional Paid-in Capital 19,397,491 18,954,579
Retained Earnings (9,641,220) (11,734,431)
Treasury Stock (80,225 and 52,300 shares
at cost, respectively) (385,757) (213,215)
Total Stockholders' Equity 10,141,800 7,767,704
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,016,750 $ 15,182,501
============ ============
</TABLE>
See notes to Condensed Financial Statements.
* DERIVED FROM AUDITED FINANCIAL STATEMENTS
<PAGE>
VERAMARK TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C> <C>
SALES $ 6,180,796 $ 4,693,706 $ 17,212,903 $ 12,280,856
COSTS AND OPERATING EXPENSES:
Cost of Sales 829,046 784,957 2,656,190 2,328,014
Engineering & Software Development 1,375,976 672,092 3,145,100 2,054,088
Selling, General and Administrative 3,137,249 2,992,890 9,384,113 7,450,443
----------- ---------- ----------- ------------
Total Costs and Operating 5,342,271 4,449,939 15,185,403 11,832,545
Expenses
INCOME FROM OPERATIONS 838,525 243,767 2,027,500 448,311
INTEREST INCOME 22,031 59,404 140,711 138,272
----------- ---------- ----------- ------------
INCOME BEFORE INCOME TAXES 860,556 303,171 2,168,211 586,583
INCOME TAXES 30,000 - 75,000 -
----------- ---------- ----------- ------------
NET INCOME $ 830,556 $ 303,171 $ 2,093,211 $ 586,583
=========== ========== ============ ============
INCOME PER SHARE
Basic $ .11 $ .04 $ .27 $ .07
===== ===== ===== =====
Diluted $ .10 $ .04 $ .26 $ .07
===== ===== ===== =====
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
<PAGE>
VERAMARK TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 2,093,211 $ 586,583
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 1,258,043 937,188
Provision for Losses on Accounts Receivable (23,000) 14,503
Provision for Inventory Obsolescence 69,500 224,997
Loss on Disposal of Fixed Assets 2,492 2,719
Changes in Assets and Liabilities
Accounts Receivable (884,290) (191,732)
Inventories (66,419) 232,684
Prepaid Expenses and Other Current Assets (54,277) (71,251)
Deposits and Other Assets (99,073) (70,106)
Accounts Payable (39,492) (27,826)
Accrued Compensation and Related Taxes 527,287 516,326
Deferred Revenue 202,232 576,115
Other Current Liabilities (500,271) 152,333
----------- -----------
Net Adjustments 392,732 2,295,950
----------- -----------
Net Cash Provided by Operating Activities 2,485,943 2,882,533
----------- -----------
INVESTING ACTIVITIES:
Investments (454,090) (1,646,419)
Additions to Property and Equipment (1,794,397) (658,843)
Software Development Costs (393,907) (753,982)
----------- -----------
Net Cash Flows Used by Investing Activities (2,642,394) (3,059,244)
----------- -----------
FINANCING ACTIVITIES:
Increase in Pension Obligation 270,397 71,981
Proceeds from Sales of Stock - 143,384
Employee Stock Purchase Plan 66,287 -
Exercise of Stock Options and Warrants 387,140 73,326
Treasury Stock Purchases (172,542) (126,514)
Stock Retirements - (8,752)
----------- -----------
Net Cash Flows Provided by Financing Activities 551,282 153,425
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 394,831 (23,286)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 371,209 1,106,944
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 766,040 $ 1,083,658
=========== ===========
</TABLE>
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
The accompanying unaudited financial statements include all
adjustments of a normal and recurring nature which are, in the opinion of
Registrant's management, necessary to present fairly the Registrant's
financial position as of September 30, 1999 and the results of its
operations and cash flows for the three and nine months ended September 30,
1999 and 1998.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These condensed
financial statements should be read in conjunction with the financial
statements and related notes contained in the Annual Report for the fiscal
year ended December 31, 1998.
The results of operations for the three and nine months ended
September 30, 1999 are not necessarily indicative of the results to be
expected for a full year's operation.
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements which involve risks
and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
(2) INVENTORIES
The composition of inventories at September 30, 1999 and December 31,
1998 was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Purchased parts and components $ 412,151 $ 340,350
Work in process 110,355 116,228
Finished goods 54,381 123,390
--------- ---------
$ 576,887 $ 579,968
========= =========
</TABLE>
<PAGE>
(3) PROPERTY AND EQUIPMENT
The major classifications of property and equipment at September 30,
1999, and December 31, 1998 are:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Machinery and equipment $ 1,650,953 $ 1,377,179
Computer hardware and software 3,593,604 3,075,398
Furniture and fixtures 1,090,998 1,064,117
Leasehold improvements 1,275,574 347,775
----------- -----------
$ 7,611,129 $ 5,864,469
=========== ===========
</TABLE>
(4) Included in selling, general and administrative expense for the three and
nine months ended September 30, 1999 is the recovery of $166,650 in
connection with the termination of a facilities lease held by a former
subsidiary. This accrual had been established in 1997 as part of a
company wide restructuring effort.
(5) EARNINGS PER SHARE
Earnings per share have been calculated under SFAS 128, "Earnings Per
Share."
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Sales of $6,180,796 for the three months ended September 30, 1999
established a record quarterly sales figure for the Company and reflect a
32% increase over the sales of $4,693,706 achieved for the three month
period ended September 30, 1998. Sales of $17,212,903 for the nine months
ended September 30, 1999 increased 40% from the $12,280,856 of sales
realized for the same nine month period of 1998 and have, in fact,
surpassed the sales achieved for all of 1998. Third quarter 1999 results
represented the Company's ninth consecutive quarter of increased sales and
net income.
The increased sales realized for both the three and nine month periods
ended September 30, 1999 reflect a continued strong demand for the
Company's core telemanagment products combined with a growing contribution
to sales from Verabill, the Company's billing and customer care product.
For the three month and nine month periods ended September 30, 1999, sales
of Telemangement products and services rose 16% and 37% respectively, from
the levels realized for the same three and nine month periods of 1998.
Sales of Verabill increased 191% and 105% for the three and nine month
periods ended September 30, 1999 versus the same three and nine months
periods ended September 30, 1998, accounting for 12% of the Company's third
quarter 1999 sales versus 5% of the Company's sales for the third quarter
of 1998. During the third quarter the Company announced a $1.3 million
order for Verabill from the Malawi Post and Telecommunications Corporation,
as well as an additional order from the Antigua Public Utilities Authority
(APUA) for a Verabill wireless module. No revenues were recognized from
either of these orders in the third quarter.
During the first nine months of 1999, the Company has also seen
increased sales of both INFO/MDR, its Centrex and virtual private network
offering and Telecommunications Management Software (TMS), the medium to
high end telemanagement product. For the nine months ended September 30,
1999, sales of INFO/MDR have increased 23% and sales of TMS have increased
76% over the sales levels realized for the same three quarters of 1998.
For the nine months ended September 30, 1999, 32% of Company sales
were generated from previously deferred billings for a variety of services,
including training, installation, custom rate updates, and implementation
services. This compares with 27% of Company sales being derived from
previously deferred billings for the first nine months of 1998. For the
three months ended September 30, 1999, 7% of sales were from previously
deferred billings for services which have not been and are not expected to
be utilized by customers, based on historical experience.
Net income of $830,556 earned for the three months ended September 30,
1999, representing $.10 per diluted share, increased 174% from the $303,171
or $.04 diluted share earned for the three months ended September 30, 1998.
Net income for the nine months ended September 30, 1999 was $2,093,211,
representing $.26 per diluted share, versus $586,583 or $.07 per diluted
share for the first nine months of 1998, an increase of 257%. Net income
as a percentage of sales for the quarter ended September 30, 1999 was 13.4%
versus 6.5% for the quarter ended September 30, 1998. For the nine months
ended September 30, 1999, net income was 12.2% of sales versus 4.8% for the
nine months ended September 30, 1998.
<PAGE>
The table below depicts comparative EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization) for the three and nine month periods
ended September 30, 1999, detailing growth percentages of 116% and 132%
respectively from the comparative three and nine month periods of 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Income $830,556 $303,171 $2,093,211 $586,583
Net Interest Income (22,031) (59,404) (140,711) (138,272)
Income Taxes 30,000 -0- 75,000 -0-
Depreciation and Amoritzation 441,216 347,715 1,257,941 967,593
---------- -------- ---------- ----------
EBITDA $1,279,741 $591,482 $3,285,441 $1,415,904
========== ======== ========== ==========
</TABLE>
For the third quarter ended September 30, 1999, the Company earned a
gross margin of $5,351,750, an increase of $1,443,001 or 37% from the gross
margin of $3,908,749 earned for the quarter ended September 30, 1998. For
the nine months ended September 30, 1999, the gross margin of $14,556,713
is 46% higher than the gross margin of $9,952,842 earned for the same nine
months of 1998.
Net engineering and software development expenses of $1,375,976 for
the three months ended September 30, 1999, representing 22% of sales, were
105% higher than the net engineering and development expenses incurred for
the third quarter of 1998. Net engineering and development expenses for
the nine months ended September 30, 1999 of $3,145,100 were 53% higher than
the expense incurred during the first nine months of 1998.
The increased spending reflects a nearly 50% increase in the staffing
levels of the Company's development and test groups. Additionally, as was
the case in the second quarter of 1999, no development efforts were
capitalized in the third quarter. The table below summarizes the impact on
the Company's results of its engineering and development expenses on a
gross and net of capitalization basis, and adds back charges to cost of
sales from the amortization of previously capitalized development costs.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Gross Expenditures for
Engineering and Software
Development $1,395,976 $988,463 $3,539,007 $2,808,070
Less: Costs Capitalized -0- (316,371) (393,907) (753,982)
---------- -------- ---------- ----------
Net Engineering and Software
Development Expense 1,395,976 672,092 3,145,100 2,054,088
Plus: Amounts Amortized and
Charged to Cost of Sales 268,252 258,845 827,389 734,870
---------- -------- ---------- ----------
Total Expense Recognized $1,664,228 $930,937 $3,972,489 $2,788,958
========== ======== ========== ==========
</TABLE>
Selling, general and administrative expenses of $3,137,249 for the
three months ended September 30, 1999, increased by 5% over the $2,992,890
of expense incurred for the three months ended September 30, 1998. For the
nine months ended September 30, 1999, selling, general and administrative
expenses of $9,384,113 have increased 26% over the expense level incurred
for the first nine months of 1998. Selling, general and administrative
expenses represented 55% of sales for the first nine months of 1999, down
from 61% for the first nine months of 1998. The higher expense levels
reflect the substantial increase in employment levels the Company has
experienced during 1999 across all functional levels. As of September 30,
1999, the Company's employment totaled 210 versus 160 at September 30,
1998. During the third quarter of 1999, the Company recovered $166,650
previously charged against income in connection with the termination of a
facilities lease held by a former subsidiary.
Veramark plans to introduce enhanced versions of the Emerald Call
Accounting Software, in the fourth quarter of 1999, in order to expand the
appeal of Emerald and to meet competitive offerings. Older versions of
Emerald products, without these enhanced features, will continue to be
offered through major distributors with a reduction in price. It is
anticipated that over the course of the next year, virtually all sales of
Emerald will shift to the enhanced versions. How quickly that transition
occurs will determine the impact, if any, of the price reduction on overall
Emerald profit margins.
Prices for the Verabill Billing and Customer Care Software will be
increased to distributors effective January 1, 2000.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company's total cash position (cash on
hand plus investments) was $5,938,824, representing a 17% increase from
the total cash position of $5,089,903 at December 31, 1998. The increased
cash flow has been achieved during a period in which the Company has
invested heavily in upgrading its development tools, in-house information
systems, and undertaken a substantial expansion of its corporate
headquarters. During the first nine months of 1999, capital spending has
totaled $1,794,397, compared with $658,843 of capital spending during the
first nine months of 1998.
Software Development Costs of $2,960,060 at September 30, 1999 have
decreased from $3,393,542 at December 31, 1998. No new development
expenses have been capitalized in either the second or third quarters of
1999.
Total Assets have increased 19% from $15,182,501 at December 31, 1998
to $18,016,750 at September 30, 1999.
Total current liabilities of $4,721,706 at September 30, 1999 are 4%
higher than total current liabilities of $4,531,950 at December 31, 1998.
Accrued compensation of $1,418,473 compares with $891,186 at December 31,
1998, an increase attributable to the significant growth in employment
levels experienced throughout 1999, requiring higher accruals for payroll,
fringe benefits, payroll taxes and deferred compensation.
Deferred revenues have increased from $2,061,475 at December 31, 1998
to $2,263,707 at September 30, 1999. Deferred revenues represent the value
of unrecognized revenues related to a variety of services for which the
Company has billed customers, but not yet performed the associated service.
These services typically include training, installation, maintenance and
support, and implementation services. It is expected that the revenue
associated with these services will be recognized over the next twelve
months as the actual services are provided.
Other accrued expenses declined from $838,713 at December 31, 1998 to
$338,442 at September 30, 1999. This decline resulted primarily from the
completion of a Verabill contract for the Antigua Public Utilities
Authority, and the resultant recognition of a deposit as revenue.
The Company maintains a private equity line of credit agreement with a
single institutional investor. Under the original equity line agreement,
the Company had the right to sell to the investor shares of the Company's
common stock at a price equal to 88% of the average bid price of the stock
for the subsequent ten trading days. During the third quarter the discount
in the average bid price was reduced from 12% to 6%. During the term of
the agreement the Company may sell up to $6 million to this investor, with
no more than $500,000 in any single month. This agreement expires on
August 30, 2000. There have not been any transactions under this agreement
during the first three quarters of 1999.
<PAGE>
The Company maintains an agreement with a major commercial bank for a
secured demand line of credit arrangement in the amount of $3,000,000. In
August of 1999, the Company entered into a new agreement with the same bank
for a $7,000,000 three year acquisition revolving credit facility. This is
in addition to the $3,000,000 demand line of credit agreement referenced
above. There have been no borrowings against either agreement as of
September 30, 1999.
In light of its current cash position, profitable operations, and the
credit arrangements referred to above, the Company believes that it has
sufficient resources to meet its financial needs and support anticipated
growth over the next twelve months.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(1) Registrant's Condensed Financial Statements for the three and nine months
ended September 30, 1999 and 1998 are set forth in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
(2) Calculation of earnings per share.
(1) On September 29, 1999 the Company filed a report on form 8-K announcing a
letter of intent to acquire The Angeles Group, a privately held developer
and marketer of high-end, enterprise telemanagement software. The Angeles
Group stockholders will receive an estimated 660,000 shares of Veramark
common stock in consideration. In addition, Veramark will assume debt and
other obligations of The Angeles Group totaling $1.93 million. Due
diligence is currently underway and the companies expect the
transaction to be completed in January of 2000.
<PAGE>
EXHIBIT A: (2)
VERAMARK TECHNOLOGIES, INC.
CALCULATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic
Net Income $ 830,556 $ 303,171 $2,093,211 $ 586,583
========== ========== ========== =========
Weighted Common Shares Outstanding 7,613,961 7,589,694 7,594,760 7,572,004
========== ========== ========== =========
Income Per Common Share $ .11 $ .04 $ .27 $ .07
===== ===== ===== =====
DILUTED
Net Income $ 830,556 $ 303,171 $2,093,211 $ 586,583
========== ========== ========== =========
Weighted Average Shares Outstanding 7,613,961 7,589,698 7,594,760 7,572,004
Additional Dilutive Effect of Stock
Options and Warrants after
Application of Treasury Stock Method 980,356 379,958 670,565 393,546
--------- --------- --------- ---------
Weighted Average Shares Outstanding 8,594,317 7,969,656 8,265,325 7,965,550
========= ========= ========= =========
Income per Common Share and Common
Equivalent Share $ .10 $ .04 $ .26 $ .07
===== ===== ===== =====
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements 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
Date: _________________________
_____________________________________
David G. Mazzella
President and CEO
Date: _________________________
_____________________________________
Ronald C. Lundy
Treasurer (Chief Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 776040
<SECURITIES> 5172784
<RECEIVABLES> 3297995
<ALLOWANCES> 117000
<INVENTORY> 576887
<CURRENT-ASSETS> 9906814
<PP&E> 7611129
<DEPRECIATION> 4840947
<TOTAL-ASSETS> 18016750
<CURRENT-LIABILITIES> 4721706
<BONDS> 0
0
0
<COMMON> 771286
<OTHER-SE> 9370514
<TOTAL-LIABILITY-AND-EQUITY> 18016750
<SALES> 6180796
<TOTAL-REVENUES> 6180796
<CGS> 829046
<TOTAL-COSTS> 5342271
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 117000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 860556
<INCOME-TAX> 30000
<INCOME-CONTINUING> 830556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 830556
<EPS-BASIC> .11
<EPS-DILUTED> .10
</TABLE>
