FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 0-13898
__________VERAMARK TECHNOLOGIES, INC. (FORMERLY MOSCOM CORPORATION)_____
(Exact Name of Registrant as specified in its Charter)
DELAWARE 16-1192368
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3750 MONROE AVENUE, PITTSFORD, NY 14534
(Address of principal executive offices)
(716) 381-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act
NONE N/A
(Title of Each Class) (Name of each exchange
on which registered)
COMMON STOCK, $.10 PAR VALUE
(Securities registered pursuant to Section 12 (g) of the Act)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
Amendment to this Form 10-K. ____
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
______ ______
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of January 30, 1999 was $54,300,000.
The number of shares of Common Stock, $.10 par value, outstanding on
January 28, 1999 was 7,555,409.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
PART I - None
PART II - None
PART III - Item 10 Pages 2 - 4 of the Company's Proxy Statement
for the Annual Meeting of Shareholders to be
held May 18, 1999.
Under "Election of Directors" and "Compliance
With Section 16 (a)."
Item 11 Pages 6 - 8 of the Company's Proxy Statement
for the Annual Meeting of Shareholders to be
held May 18, 1999.
under "Executive Compensation."
Item 12 The table contained on Pages 6 - 7 and the
information under "Election of Directors" on
Pages 2 - 4 of the Company's Proxy Statement
for the Annual Meeting of Shareholders to be
held May 18, 1999.
<PAGE>
PART I
ITEM 1 BUSINESS
VERAMARK Technologies was incorporated (as MOSCOM Corporation) in New
York in January 1983 and reincorporated in Delaware in 1984. The Company's
name was changed to Veramark Technologies, Inc. on June 15, 1998.
VERAMARK Technologies, Inc. produces telecommunications management
systems and cost control systems for corporations and other users of private
branch exchange (PBX) systems and billing and customer care systems for
providers of wireless and wireline network services in the global market.
VERAMARK's historical core business has been based on sales of
telemanagement systems and software packages including telephone call
accounting and fraud detection products. VERAMARK is one of the world's
leading producers of call accounting systems and has sold more than 80,000 of
these, and related products, to customers in more than 70 countries.
VERAMARK's call accounting systems are sold through leading manufacturers and
resellers of telephone systems including Ameritech, Lucent Technologies,
Philips, Siemens and Sprint.
VERAMARK'S VeraBill software is a network billing and customer care
system used by small to mid-range telephone and wireless network operators to
manage customer accounts, generate bills, track payments and support customer
service operations. VERAMARK has targeted start-up service providers and more
established telephone companies deploying new network services as potential
purchasers of VeraBill systems. VeraBill system size capability currently
ranges from 2,000 to 400,000 subscriber access lines. Growth in this market
has resulted from the deregulation and liberalization of monopoly telephone
markets throughout the world. Growth in this market has also been stimulated
by the introduction of many new wireless network services including digital
cellular and personal communications service (PCS) now being deployed widely
around the world. The VeraBill product is marketed worldwide by wireline and
wireless network equipment manufacturers including Alcatel and Nokia
Telecommunications.
VERAMARK's products are designed for the global market. During the past
year, 17% of VERAMARK's revenues were derived outside the United States, from
customers in more than 50 countries.
VERAMARK's headquarters, operations, engineering and support staff is
located in a 61,000 square foot leased facility located in Pittsford, New
York. Approximately 30 field sales and support personnel are located in
cities with high concentrations of VERAMARK's products.
<PAGE>
TELEMANAGEMENT SYSTEMS
VERAMARK is among the world's leading producers of telemanagement
products which are used by organizations to optimize the usage of their
telecommunications services and equipment, and to control telephone expenses.
Telemanagement products include call accounting systems, telephone fraud
detection products and facilities management systems.
CALL ACCOUNTING
VERAMARK's initial telemanagement product lines were CALL ACCOUNTING
SYSTEMS which connect to a business telephone system (or PBX) to collect,
store, and process information on every outside telephone call made.
Call accounting systems give businesses easy access to complete
information on telephone usage including the dialed number, calling extension,
call duration, time of day, destination, trunk line and cost of each call.
All of VERAMARK's call accounting products provide this fundamental
information, in graphical summary and detailed report formats, without
monitoring actual phone conversations.
The primary appeal of call accounting systems is that they save money on
telephone and network equipment bills. Telephone bills, which typically
represent the third largest business expense after payroll and facilities, can
be reduced by 10% - 30% through heightened awareness and management. As a
result, the cost of a call accounting system can generally be recovered in
less than one year through direct expense reduction.
Call accounting systems are purchased and used for many other valuable
reasons as well, including:
- Traffic analysis to determine an optimal number of trunks and best
long distance carrier configuration.
- Allocating telephone expense to specific cost centers or clients
based on actual use.
- Producing revenues by reselling phone services to clients or hotel
guests.
- Detecting fraudulent use of the phone system by hackers and
unauthorized use of company phones for personal calls or 900 numbers.
- Evaluating employee productivity.
VERAMARK's premier call accounting product is the Emerald CAS for Windows
software. Emerald CAS for Windows comes in affordable model sizes ranging
from 25 to 20,000 telephone extensions. The Emerald CAS for Windows system is
able to collect and process data from up to 100 different remote telephone
switches (PBX's) from one central location. VERAMARK's economical Pollable
Storage Unit (PSU) collects data from the remote PBX's and stores it until
polled by a central Emerald CAS for Windows system. Private label versions
of Emerald CAS for Windows are sold by Lucent Technologies and Philips.
Emerald CAS for Windows is designed to be an international product. It
supports worldwide call rating, all world currencies, date schemes and privacy
practices.
VERAMARK also produces call accounting software products based on the
UNIX operating system. These products are marketed very successfully by
Lucent Technologies as an integrated solution with Lucent Technologies'
smaller telephone systems and application processors.
<PAGE>
PBX FRAUD DETECTION SYSTEMS address a problem that is estimated to exceed
$1 billion annually - the theft of telephone service through PBX "hacking."
PBX owners use call accounting systems to spot potential fraud and take
corrective measures to minimize the loss. VERAMARK offers an optional
HackerTracker module with the Emerald CAS for Windows system to automate the
detection of fraud 24 hours per day and instantly send out alarms by printed
report, audio signal, pager or fax to initiate preventive measures.
The market for telemanagement products is a highly fragmented one
supplied primarily by small firms selling directly to end users. What sets
VERAMARK apart and enables VERAMARK to maintain a leading worldwide market
share is our distribution relationships with some of the largest sales and
support organizations in the industry. The strength, breadth and quality of
VERAMARK's distribution network is unsurpassed, including Lucent Technologies,
Ameritech, and Sprint in the United States, and Siemens, Philips, and Lucent
Technologies in international markets.
A typical range of end user prices for VERAMARK's call accounting and
fraud detection systems is from $2,000 to $40,000 per system.
TELECOMMUNICATIONS MANAGEMENT SOFTWARE FOR WINDOWS
Telecommunications Management Software for Windows ("TMS") is a
client/server based enterprise management system that automates cost control
and service operations in large corporate voice and multimedia network
environments. TMS for Windows goes beyond call accounting with fully
integrated modules for service and maintenance management, network equipment
tracking, as well as local and long distance call management. TMS for Windows
runs on highly scalable single or multi-processor Windows NT computer
platforms, the de facto standard for client/server computing in information
technology departments throughout the world.
VERAMARK markets TMS for Windows primarily through manufacturers and
distributors of telecommunications equipment including Lucent Technologies
which markets TMS for Windows as a Lucent product with the Lucent Definity
Enterprise Communications server.
Target customers for TMS for Windows are mid to large size enterprises
from all industries and include multi-national corporations, government
agencies, and medical and educational institutions. Typical users will have
2,000 to 50,000 telephone extensions in multiple facilities. End user prices
will typically range from $45,000 to $235,000 per system.
CENTRAL OFFICE TELEMANAGEMENT
VERAMARK's INFO/MDR products capture, at the central office, vital
information in the form of Message Detail Records on every call handled by
that particular central office switch. These raw detail records are then
processed into meaningful formats and distributed to a central telephone
company billing processor or to business subscribers.
Telephone companies use INFO/MDR to enhance the appeal of Centrex and
Virtual Private Network service. With Centrex service, business customers
utilize the telephone company's central office switch to route calls to
individual extensions rather than a PBX. INFO/MDR gives telephone companies
the ability to provide complete, timely and accurate call detail information
<PAGE>
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, Century Telephone, Citizens Utilities, Cable & Wireless, and
Sprint. End user prices for INFO/MDR range from $26,000 to $80,000 per system.
BILLING PRODUCTS AND SERVICES
Deregulation and the introduction of new wireless services are the most
significant forces affecting the telecommunications industry worldwide. One
result is to significantly expand demand for products designed for new
entrants to the industry. Another is to drastically change the requirements
of established service providers suddenly facing a dramatically new
environment. VERAMARK's VeraBill family of software products is designed for
this new telecommunications world. VeraBill is a comprehensive network and
operations support system for telecommunications, paging and internet service
providers. Based on highly scalable Windows NT client/server architecture,
VeraBill can be configured to support operators with as few as 2,000 or as
many as 400,000 subscriber access lines. VeraBill supports wireline as well
as cellular, PCS, and other wireless services. VeraBill is an operations
support system for managing billing, receivables, service and work orders,
plus network and customer premises equipment. These functions are fully
integrated with a common database but modular in design to enable customers to
select the functionality required. VeraBill's client server architecture
allows users to easily add subscriber capacity as demanded. This is a
particularly attractive feature for emerging service providers with rapid
expansion plans. Since VeraBill is based on Microsoft's pervasive Windows
operating system, operator training is very straightforward. Computer
hardware costs are significantly lower than with traditional billing systems.
VeraBill is capable of rating and billing telecommunications services
worldwide. Billing formats and schemes can be adjusted quickly by the network
operators to accommodate new marketing plans or to meet competitive offerings.
Event message rating is highly flexible and supports rating schemes based on
dialed number, rating bands or meter pulse algorithms. VeraBill is also
designed to manage multiple dialing plans simultaneously and provide tariff
options specific for individual telephone numbers. This flexibility affords
service providers limitless tools for creating competitive marketing
promotions.
The market for VeraBill is worldwide -- wherever new service providers
are entering the market or existing providers find their billing and customers
care systems inadequate to meet changing market conditions. Demand for
billing systems is growing rapidly as a result of monopoly markets being
opened to competition and by the introduction of new wireless technologies.
To reach this expansive market VERAMARK is forming distribution and marketing
relationships with the leading global providers of switches and support
systems sold to land line and wireless telecommunications companies. VeraBill
is currently marketed worldwide by leading switch manufacturers including
Alcatel and Nokia Telecommunications.
End user prices for VeraBill systems range from $150,000 to over $1
million per system.
<PAGE>
MARKETING AND SALES
VERAMARK's marketing and sales personnel are located at its headquarters
in Pittsford, New York, and in 30 locations throughout the United States.
VERAMARK's marketing and distribution strategy is founded on building
mutually beneficial relationships with companies with large, established
distribution networks for telecommunications and computer products. The
nature of the relationships varies depending on the product and market. For
some, VERAMARK develops and manufactures customized products under a private
label while others purchase and resell VERAMARK's standard products.
VERAMARK's marketing strategy is focused upon telephone switch
manufacturers and sellers and providers of telephone services. A partial
listing of companies using or selling VERAMARK products follows:
TELECOMMUNICATIONS EQUIPMENT MANUFACTURERS
Alcatel
Lucent Technologies
Nokia Telecommunications
Philips
Siemens
TELEPHONE SERVICE PROVIDERS
Ameritech
AT&T
Cable & Wireless
Sprint
Sales to Lucent Technologies accounted for 69% of VERAMARK's 1998
revenue.
NEW PRODUCT DEVELOPMENT
VERAMARK is currently pursuing several opportunities to expand its
telemanagement and billing product lines and to offer products for related
markets.
Software development costs meeting recoverability tests are capitalized
under Statement of Financial Accounting Standard No. 86 effective January 1,
1986. The cost of software capitalized is amortized on a product-by-product
basis over its estimated economic life, or the ratio of current revenues to
current and anticipated revenues from such software, whichever provides the
greater amortization. The Company periodically records adjustments to write
down certain capitalized costs to their net realizable value.
BACKLOG
At December 31, 1998 VERAMARK had a backlog of $2,194,031. Backlog as of
December 31, 1997 was $1,828,087. Backlog is not deemed to be a material
indicator of 1999 revenues.
The Company's policy is to recognize orders only upon receipt of firm
purchase orders.
<PAGE>
COMPETITION
The telecommunications management industry is highly competitive and highly
fragmented. The number of domestic suppliers of telemanagement systems for
business users is estimated to exceed 100 companies. The vast majority of
those are regional firms with limited product lines and limited sales and
development resources. Several competitors are established companies that are
able to compete with VERAMARK on a national basis.
There are fewer competitors in the market for billing systems for
telephone service providers. Competition in this market is expected to
increase as the market matures. In addition several existing competitors are
substantially larger than VERAMARK and devote significantly more resources to
this market on a worldwide basis.
Some competing firms have greater name recognition and more financial,
marketing and technological resources than VERAMARK. Competition in the
industry is based on price, product performance, depth of product line and
customer service. VERAMARK believes its products are priced competitively
based upon their performance and functionality. However, VERAMARK does not
strive to be consistently the lowest priced supplier in its markets.
In common with other information industries, the markets into which the
Company sells have recently been characterized by rapid shift toward the
software component of product content and away from the hardware element.
Historically, prices for application software have declined rapidly in the
face of competition. Increased competition for the Company's software
products could adversely affect the Company's volume and profits.
MANUFACTURING
VERAMARK assembles its products from components purchased from a large variety
of suppliers both domestic and international. Wherever feasible, the Company
secures multiple sources, but in some cases it is not possible.
VERAMARK offers warranty coverage on all products for 90 days or one year
on parts and 90 days on labor. Repair services are offered at the Pittsford,
New York facility and by some of the Company's larger customers.
EMPLOYEES
As of December 31, 1998, VERAMARK employed 166 full-time personnel.
VERAMARK's employees are not represented by any labor unions.
ITEM 2 FACILITIES
The Company's principal administrative office and manufacturing facility
is located in a one-story building in Pittsford, New York. VERAMARK presently
leases approximately 61,000 square feet of the building of which approximately
5,000 square feet is devoted to manufacturing. The term of the lease expires
on October 31, 2001.
<PAGE>
ITEM 3 LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company or to
which the Company is a party or of which any of its property is the subject.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
VERAMARK Technologies, Inc. Common Stock, $.10 par value, is traded on
the NASDAQ National Market System (symbol: VERA). The following quotations
are furnished by NASDAQ for the periods indicated. The quotations reflect
inter-dealer quotations that do not include retail markups, markdowns or
commissions and may not represent actual transactions.
COMMON STOCK PRICE RANGE
Quarters Ended
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
1998 7.00-5.56 7.25-5.25 8.44-3.88 6.88-3.00
1997 9.25-5.38 6.44-2.75 6.63-4.25 8.00-5.63
As of December 31, 1998, there were 595 holders of record of the
Company's Common Stock and approximately 3,400 additional beneficial holders.
The Company paid dividends of $.02 per share during the months of January
and July of each year from 1990 through 1995. The Company paid a dividend of
$.02 per share in January 1996. No dividends were paid in 1997 or 1998 and no
dividend is planned for 1999.
ITEM 6 SELECTED FINANCIAL DATA (Restated under Statement of Financial
Accounting Standards No. 128)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
SALES $17,119,540 $12,408,269 $13,380,862 $17,570,381 $14,260,683
Net Income (Loss) $1,019,427 $(5,030,507) $(5,936,096) $881,950 $(387,743)
Net Income (Loss) per
share $.13 $(.69) $(.86) $.13 $(.06)
Total Assets $15,182,501 $11,909,527 $13,604,623 $18,014,394 $16,083,483
Long term obligations $2,882,847 $1,983,348 $1,320,682 $1,126,786 $955,464
Weighted average shares
outstanding 7,911,759 7,331,360 6,866,154 6,909,874 6,707,449
Cash Dividends paid per
share $.00 $.00 $.02 $.04 $.04
</TABLE>
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements which involve risks
and uncertainties, including, but not limited to, economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, as well as other factors discussed in
the Company's filings with Securities and Exchange Commission.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
Sales for the year ended December 31, 1998 were $17,119,540, representing
an increase of 38% from the sales of $12,408,269 realized for the year ended
December 31, 1997. The Company's net income of $1,019,427 or $0.13 per share
for the year ended December 31,1998 compared to a net loss for the year ended
December 31, 1997 of $5,030,507, or $0.69 per share. Since a major
restructuring undertaken during 1997, the Company has achieved six consecutive
quarters of increasing sales and profitability.
The increase in 1998 sales resulted from a combination of significant
growth in the Company's traditional call accounting markets and contributions
from the Company's newer network product offerings, Verabill and TMS.
For the year ended December 31, 1998 sales of core call accounting
products and services increased by 28% over the level realized during 1997,
representing 87% of company sales for 1998 versus 94% of company sales during
1997. Subsequent to December 31 1998, the company announced that it has begun
shipping CAS NT, a new enterprise call accounting system to Lucent
Technologies, the company's largest distributor. CAS NT is a 32 bit call
accounting application specifically designed to run on computers utilizing the
Microsoft Windows NT operating system and contains new features and
functionality that exceed the capabilities and range of Veramark's previous
call accounting systems.
Sales of Verabill, the company's billing and customer care product more
than doubled over 1997 sales, and accounted for 9% of total 1998 revenues.
Verabill is a comprehensive system for wireline, wireless, and other network
providers, with up to 400,000 subscriber access lines. Through the end of
1998 twenty-two Verabill systems are installed, providing billing and customer
care services for carriers on five continents. Verabill is currently marketed
by a number of the world's leading wireline and wireless switch vendors
including Alcatel, Nokia, and Lucent Technologies.
Sales of TMS, the Company's mid to high-end telemanagement product, while
below company expectations for 1998, accounted for 4% of the Company's total
sales. Customer interest and quote activity however, remains high and the
company expects sales of TMS to increase significantly in 1999.
For the year ended December 31, 1998, 28% of Company sales were derived
from previously deferred billings for a variety of services, including
training, installation, and custom rate updates. This compared with 20% of
sales for the year ended December 31, 1997. During 1998, approximately 7% of
Company sales were from previously deferred billings for services, which have
not been, and are not expected to be, utilized by customers, based on
historical experience.
<PAGE>
The gross margin earned on sales for the year ended December 31, 1998 was
82% compared to the 72% margin earned on sales for the year ended December
31, 1997. The increased gross margin reflects significantly lower direct
product and associated overhead cost as the product mix continues to shift to
software based products and away from older hardware based product offerings.
In addition, the amortization expense charged to cost of sales related to
previously capitalized development costs continues to decline as a percentage
of the total company sales.
Net engineering and software development expenses of $2,656,511 for the
year ended December 31, 1998 were 24% higher than the net engineering and
software development expenses of $2,148,107 incurred for the year ended
December 31, 1997. The table presented below summarizes the impact on the
Company's operations of it's engineering and development efforts for the years
ended December 31, 1998 and 1997, by detailing engineering and development
expenses on both a gross and net of capitalization basis, and adding back
charges to cost of sales resulting from the amortization of previously
capitalized development costs.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
GROSS EXPENDITURES FOR ENGINEERING AND
Software Development $3,925,530 $3,471,953
LESS: COST CAPITALIZED 1,269,019 1,323,846
--------- ---------
NET EXPENDITURES FOR ENGINEERING AND
Software Development 2,656,511 2,148,107
PLUS: AMOUNTS AMORTIZED AND CHARGED
to Cost of Sales 983,945 1,360,676
--------- ---------
TOTAL EXPENSE RECOGNIZED $3,640,456 $3,508,783
========== ==========
</TABLE>
Engineering and development efforts for 1998 focused on new releases and
enhancements to the Company's network products, Verabill and TMS.
Selling, general and administrative expenses increased from $9,343,880
for the year ended December 31, 1997 to $10,506,360 for the year ended
December 31, 1998, an increase of 12%.
The increased expense level is attributable to a number of factors
including:
1. An increase of just over $1 million dollars in the Company's support and
customer service costs. This includes significant investments in staffing,
training of existing and new staff members, and upgrades in the tools and
processes required to provide more efficient and effective service to
customers. The Company believes this investment is necessary to properly
support not only customers needs but those of marketing partners as well,
particularly for the new network product offerings, to enhance the
prospects of future sales growth and profitability.
2. An increase of approximately $400,000 in the marketing and project
management functions designed to increase both internal product marketing
and scheduling capability, and to strengthen resources committed to
external competitive market analysis.
<PAGE>
3. The continuation of a major effort begun in late 1997 and carrying
throughout 1998 to upgrade and fully integrate the Company's internal
management information systems. The goal of this program was to replace a
large number of standalone departmental systems that had been developed
over the years with a single integrated system allowing all functional
areas of the company to communicate more effectively and share common data
bases.
Net interest income earned on the short term investment of excess cash
balances increased from $97,912 during 1997 to $179,094 for the year ended
December 31, 1998 due to higher average cash balances available for
investment as a result of 1998's positive cash flows.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
Sales for the year ended December 31, 1997 were $12,408,269, which
represented a decline of 7% from the sales of $13,380,862 for the year ended
December 31, 1996. The Company incurred a net loss of $5,030,507 or $.69 per
share for the year ended December 31, 1997, which compared with a net loss of
$5,936,096 or $.86 per share incurred for the year ended December 31, 1996.
Despite the decline in sales and the significant operating losses
incurred during the past two years, 1997 was a year defined by a series of
events and actions taken by the Company's management to restructure the
Company and return it to profitability. As a result of these activities, the
Company realized profitable operations during both the third and fourth
quarters of 1997, earning net income of $27,246 and $87,772 respectively,
following six consecutive quarters of losses. In addition, the Company's
balance sheet was strengthened as a result of the positive cash flows
generated by the return of profitable operations.
The most significant aspect of the Company's restructuring entailed the
closing of the Company's European subsidiaries MOSCOM Gmbh located in Germany,
MOSCOM Ltd. and Global Billing Systems Ltd., located in England, and the
closing of the Votan subsidiary located in California, all of which had been
operating unprofitably. This has allowed the Company to focus its attentions
and resources on the remaining core businesses and profitable markets, while
at the same time significantly reducing operating expenses. While the closing
of the subsidiaries led to the decline in Company's sales for 1997 versus
1996, the reduction in associated operating expenses more than offset the
reduced sales levels and was a major factor in the Company's profitable
operations during the third and fourth quarters of 1997. Also offsetting the
loss of sales generated by the European subsidiaries has been a significant
increase in sales of the Company's core call accounting products through new
Lucent and Siemens sales offices and dealers in South American, the Middle
East and Asia.
During the fourth quarter of 1997, the Company announced that it had
received certification of its new telecommunications management systems
("TMS") by Lucent Technologies. The new TMS product is a secure integrated
network usage management system which goes far beyond VERAMARK's traditional
call accounting products in managing the cost and logistics of large scale
voice and data networks. Designed for enterprise networks encompassing
hundreds of geographical locations with tens of thousands of users, TMS
provides online computerized tracking of all network assets including PBX
equipment, telephones, network hubs, routers and bridges.
<PAGE>
Beta testing of the TMS product was undertaken with a number of customers
during the fourth quarter of 1997, and was subsequently approved for general
release by Lucent in late January of 1998.
Progress on the marketing efforts associated with the VeraBill product,
initially released late in 1996, were also very encouraging. VeraBill is a
comprehensive billing and operations support system for telecommunications
service providers with up to 400,000 subscribers. During 1997, the Company
focused on forming distribution and marketing relationships with global
providers of switches and support systems sold to land line and wireless
telecommunications companies. VeraBill is currently marketed worldwide by two
leading switch manufacturers: Alcatel and Nokia Telecommunications.
The Company's expectation is that these two network products, TMS and
VeraBill, will be major contributors to sales growth beginning in 1998.
Another significant event occurring in 1997 was the appointment of David
G. Mazzella as VERAMARK's Chief Executive Officer and President. Mr. Mazzella
replaced Albert J. Montevecchio, founder of VERAMARK and its CEO and President
since 1982. Mr. Mazzella has over 16 years of senior management experience in
the telecommunications industry. Previously he was President and CEO of
NPC/Scotgroup, Corporate Vice President of Glenayre Electronics, and President
and CEO of Multitone Electronics Incorporated. In addition, John E. Mooney,
an outside Director on the Company's Board since 1985, was appointed to the
position of Chairman of the Board, and two new outside Directors, John E.
Gould and William J. Reilly were appointed.
Gross profit margins on sales for the year ended December 31, 1997 were
72%, increasing from a gross profit margin of 70% earned during the year ended
December 31, 1996. The increased margin reflects the continuing demand for
software based products and solutions in the telecommunications industry,
which typically have higher margins than the older, traditional, standalone,
hardware based product offerings.
Gross engineering and development costs for the year ended December 31,
1997 of $3,471,953 were 29% lower than the year ended December 31, 1996,
primarily as a result of the closing of the Votan subsidiary. Net engineering
and development expenses after the effects of capitalization, fell from
$3,197,002 for the year ended December 31, 1996 to $2,148,107 for the year
ended December 31, 1997, a decrease of 33%.
<PAGE>
The table below presents a comparison of net and gross engineering and
development expenses, amounts capitalized and amortized, and the resulting
impact on the Company's operations attributable to its engineering and
development efforts for the years ended December 31, 1997 and 1996;
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Gross Expenditures for Engineering and
Software Development $3,471,953 $4,859,996
Less: Costs Capitalized 1,323,846 1,662,994
---------- ----------
Net Expenditures for Engineering and
Software Development $2,148,107 $3,197,002
Plus: Amounts Amortized and Charged
to Cost of Sales 1,360,676 $1,756,808
---------- ----------
Total Expense Recognized $3,508,783 $4,953,810
========== ==========
</TABLE>
During 1997, the major emphasis of the engineering and development effort
was focused on completing the development of TMS and support issues related to
the Company's other network product, VeraBill released in 1996. During 1998,
the Company will be stressing further enhancement and additional functionality
to both of these products, in addition to upgrading its traditional core call
accounting products.
Selling, general and administrative expenses incurred during the year
ended December 31, 1997 were $9,343,880. This represented a decline for 13%
from the $10,756,381 of selling general and administrative expenses incurred
for the year ended December 31, 1996. The reduction in spending is the direct
result of the closing of the Company's foreign subsidiaries and Votan during
the second and third quarters of 1997. The savings realized by the closing of
these segments of the business are currently being re-invested in
strengthening the staffs of the Company's marketing, project management,
customer support and training groups. The Company believes this investment is
necessary to properly support our partners marketing initiatives, particularly
for the new network product offerings, to enhance the prospects of future
sales growth and profitability.
During 1997 the Company recorded a non-recurring charge against earnings
of $2,613,359, attributable to the closing of the foreign subsidiaries, the
impact of accelerated retirement benefits related to the retirement of the
Company's former CEO and President, and expenses associated with the
withdrawal of an initial public offering for the Company's former Votan
subsidiary. For additional details of this charge against earnings, please
refer to Note 11 of the Notes to Financial Statements.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash position (cash on hand plus short-term
investments) at December 31, 1998 was $5,089,903. This compares with a total
cash position of $3,462,725 as of December 31, 1997, an increase of 47%.
Accounts receivable increased from $1,724,047 at December 31, 1997 to
$2,273,705 at December 31, 1998 due to increased sales volumes. The associated
allowance for doubtful accounts was increased from $75,000 at the end of 1997
to $110,000 at the end of 1998 in response to the overall increase in
receivables, though the company has seen no significant changes in payment
trends among its major customers.
Inventories continue to decrease reflecting the shift toward software
based products that began some years ago resulting in significantly lower
stocks of hardware components and accessories required to support current
hardware sales requirements. As of December 31, 1998 inventory totaled
$579,968 versus $1,164,797 one year ago.
Spending on capital equipment during 1998 of $785,633 represented an
increase of 80% from the 1997 spending level of $437,533. As referred to in
the results of operations section of this report capital spending focused on
the implementation of the Company's over-all internal management information
capabilities and upgrading tools in the development and customer
service/support functions.
Software development expenses capitalized and carried on the balance
sheet at December 31, 1998 of $3,393,542, or 22% of total assets, compared
with capitalized development costs of $3,108,468, representing 26% of total
assets as of December 31, 1997. Virtually all of the current capitalized
costs relate to the development of the TMS and Verabill product lines and are
being amortized over a three to five year period.
Total assets as of December 31, 1998 of $15,182,501 are 27% higher than
the December 31,1997 figure of $11,909,527.
Accrued compensation and related taxes rose significantly from the
December 31, 1997 total of $348,602 to $891,186 at the end of 1998. The
increase reflects higher accruals for salaries and wages based on increased
employment levels (166 employees at December 31, 1998 versus 140 at December
31, 1997) and increases in accruals for commissions, profit sharing and bonus
payments, and deferred compensation.
Deferred revenues increased 21% from $1,703,803 at December 31, 1997 to
$2,061,475 at December 31, 1997. Deferred revenues represent the value of
unrecognized revenues related to a variety of services for which the company
has billed customers but has not yet performed the associated service. These
services typically include training, installation, custom rate updates, and
maintenance and support, which ultimately may or may not be utilized by
customers. For the year ended December 31, 1998, 28% of company revenues were
derived from previously deferred revenues. This compared with 20% of revenues
for the year ended December 31, 1997. During 1998 approximately 7% of company
sales were from previously deferred billings for services, which have not
been, and are not expected to be utilized by customers, based on historical
experience.
<PAGE>
Other accrued liabilities of $672,063 at December 31,1998 increased from
$178,927 at December 31, 1997. The increase is attributable to deposits
received from a single customer as part of a Verabill implementation contract.
During the third and fourth quarters of 1998 the Company repurchased
52,300 shares of its common stock on the open market for $213,215, an average
price of $4.08. This was part of an on-going program to purchase shares as
market conditions, profitability, and cash requirements warrant.
The Company maintains a private equity line of credit agreement with a
single institutional investor. Under the equity line, the Company has the
right to sell to the investor shares of the Company's common stock at a price
equal to 88% of the average bid price of the stock for the subsequent ten
trading days. During the term of the agreement the Company may sell up to $6
million to this investor with no more than $500,000 in any single month.
During 1998 the Company sold 24,700 shares of common stock to this investor
realizing proceeds of $143,384. The expiration date of this agreement has been
extended from June 2, 1999 to August 30, 2000.
The Company also maintains an agreement with a major commercial bank for
a secured demand line of credit arrangement. During 1998 the Bank increased
the amount available under the agreement from $500,000 to $3,000,000. There
were no borrowings against this agreement during 1998.
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.
YEAR 2000 ISSUE
The company continues the process of working to resolve the potential
impact of the Y2K on its products, internal computerized information systems,
and external third party service and information providers. The Y2K issue is
the result of computer logic being written using two digits rather than four
to define the applicable year. Any of the Company's or vendors' computers
that processes date sensitive information may recognize a date using `00" as
the year 1900 rather than the year 2000, which could result in miscalculations
or system failures.
All products currently being sold by Veramark Technologies are believed
to be Y2K compliant based on internal tests. Several discontinued products or
product versions are not compliant. For most of those products the company
offers an upgrade or replacement product at a discounted price. The company
feels that the net costs associated with non-compliant discontinued products
will not have a material impact on the company's financial results or cash
flows in future periods.
As part of this process the Company has reviewed Y2K compliance with all
third party suppliers of licensed software and or components contained in
Veramark products.
<PAGE>
During 1998 the Company installed a comprehensive internal management
information system which is fully Y2K compliant. In addition the company has
completed compliance reviews with regard to its telephone system, security
systems, banking institutions, and payroll service provider. In addition, all
internal computer equipment used in house is currently being tested, a process
that is expected to be complete by June 30, 1999. The Company will continue
to actively identify, assess and resolve Y2K related issues as they may arise.
The Company estimates that it will incur approximately $150,000 of
incremental expense directly associated with the Y2K issue, of which
approximately $100,000 is reflected in the financial results for the year
ended December 31, 1998.
Based on an internal evaluation of its state of preparedness, the Company
believes the Y2K issue will not have a material adverse effect on the company,
its financial position, results of operations or cash flows. It must be noted
however, that the company must rely on representations of Y2K readiness from
its vendors and service providers, over which the Company exerts no direct
control. If such representations should be in error, the effects of the
wrongful representation could have material adverse effects on the results of
Veramark.
The Company has not completed an assessment of a worst case scenario of
major non-compliance by a material supplier or customer. However, the company
does have a contingency plan to remedy the potential impact of such failures.
This plan includes an assessment of the magnitude and probability of potential
risks and focuses on steps required to prevent Y2K failures from occurring,
rapid detection of potential problems, and resolution. The Y2K contingency
plans will include measures such as selecting alternative suppliers or
licensed software if necessary. Development of Y2K contingency plans are
expected to be substantially complete by September 1999.
<PAGE>
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REQUIRED TO BE INCLUDED HEREIN AS FOLLOWS:
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 20
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated balance sheets 21 - 22
Consolidated statements of operations 23
Consolidated statements of stockholders' equity 24
Consolidated statements of cash flows 25
Notes to consolidated financial statements 26 - 37
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Veramark Technologies Inc.:
We have audited the accompanying consolidated balance sheets of Veramark
Technologies Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Veramark
Technologies, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Rochester, New York
February 8, 1999
<PAGE>
<TABLE>
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 371,209 $ 1,106,944
Investments 4,718,694 2,355,781
Accounts receivable, trade (net of allowance
for doubtful accounts of $110,000 and $75,000) 2,273,705 1,724,047
Inventories 579,968 1,164,797
Prepaid expenses and other current assets 155,831 30,582
----------- -----------
Total current assets 8,099,407 6,382,151
----------- -----------
PROPERTY AND EQUIPMENT:
Cost 5,864,469 5,293,751
Less accumulated depreciation 4,455,539 4,334,164
----------- -----------
Property and equipment, net 1,408,930 959,587
----------- -----------
OTHER ASSETS:
Purchased software (net of accumulated
amortization of $440 and $62,876) 27,290 28,612
Software development costs (net of accumulated
amortization of $1,322,254 and $767,537) 3,393,542 3,108,468
Pension assets 1,873,721 1,158,092
Deposits and other assets 379,611 272,617
----------- -----------
Total other assets 5,674,164 4,567,789
----------- -----------
TOTAL ASSETS $15,182,501 $11,909,527
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are
an integral part of these balance sheets.
<PAGE>
<TABLE>
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 740,576 $ 746,229
Accrued compensation and related taxes 891,186 348,602
Deferred revenue 2,061,475 1,703,803
Restructuring accrual 166,650 246,466
Other accrued liabilities 672,063 178,927
----------- -----------
Total current liabilities 4,531,950 3,224,027
PENSION OBLIGATION 2,882,847 1,983,348
----------- -----------
Total liabilities 7,414,797 5,207,375
----------- -----------
COMMITMENTS (Note 9)
STOCKHOLDERS' EQUITY:
Common Stock, par value, $.10; shares
authorized, 20,000,000; issued 7,607,709
shares and 7,549,703 shares 760,771 754,970
Additional paid-in capital 18,954,579 18,701,040
Accumulated deficit (11,734,431) (12,753,858)
Treasury Stock (52,300, shares at cost) (213,215) -
----------- -----------
Total stockholders' equity 7,767,704 6,702,152
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,182,501 $11,909,527
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these balance sheets.
<PAGE>
<TABLE>
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET SALES $17,119,540 $12,408,269 $13,380,862
----------- ----------- -----------
COSTS AND OPERATING EXPENSES:
Cost of sales 3,101,336 3,431,342 4,017,224
Engineering and software development 2,656,511 2,148,107 3,197,002
Selling, general and administrative 10,506,360 9,343,880 10,756,381
Other expenses - 2,613,359 1,560,407
----------- ----------- -----------
Total costs and operating expenses 16,264,207 17,536,688 19,531,014
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 855,333 (5,128,419) (6,150,152)
INTEREST INCOME 179,094 97,912 214,056
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 1,034,427 (5,030,507) (5,936,096)
INCOME TAX PROVISION 15,000 - -
----------- ----------- -----------
NET INCOME (LOSS) $ 1,019,427 $(5,030,507) $(5,936,096)
=========== =========== ===========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE
Basic $ .13 $ (.69) $ (.86)
=========== =========== ===========
Diluted $ .13 $ (.69) $ (.86)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
(BASIC) 7,565,796 7,331,360 6,866,154
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
(DILUTED) 7,911,759 7,331,360 6,866,154
=========== =========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
<PAGE>
<TABLE>
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
SHARES PAR VALUE PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
CAPITAL (DEFICIT) ADJUSTMENT EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE - December 31, 1995 6,818,654 $681,865 $15,294,653 $ (1,650,778) $8,845 $14,334,585
--------- -------- ----------- ------------ --------- -----------
Exercise of stock options and
warrants 118,471 11,847 509,347 - - 521,194
Stock retirements (2,253) (225) (18,150) - - (18,375)
Foreign currency translation
adjustment - - - - (65,241) (65,241)
Dividends declared on common
stock ($.02 per share) - - - (136,477) - (136,477)
Net loss - - - (5,936,096) - (5,936,096)
--------- -------- ----------- ------------ -------- -----------
BALANCE - December 31, 1996 6,934,872 $693,487 $15,785,850 $ (7,723,351) $(56,396) $ 8,699,590
Sale of Stock 501,934 50,193 2,429,824 - - 2,480,017
Exercise of stock options and
warrants 126,750 12,675 571,729 - - 584,404
Stock retirements (13,853) (1,385) (86,363) - - (87,748)
Foreign currency translation
adjustment - - - - 56,396 56,396
Net loss - - - (5,030,507) - (5,030,507)
--------- -------- ----------- ------------ -------- -----------
BALANCE - December 31, 1997 7,549,703 $754,970 $18,701,040 $(12,753,858) $ - $ 6,702,152
Sale of Stock 24,700 2,470 140,914 - - 143,384
Exercise of stock options and
warrants 26,044 2,605 79,951 - - 82,556
Stock Purchase Plan 9,981 998 49,905 - - 50,903
Stock retirements (2,719) (272) (17,231) - - (17,503)
Treasury Stock (52,300) - (213,215) - - (213,215)
Net Income - - - 1,019,427 - 1,019,427
--------- -------- ----------- ------------ -------- -----------
BALANCE - December 31, 1998 7,555,409 $760,771 $18,741,364 $(11,734,431) $ - $ 7,767,704
========= ======== =========== ============ ======== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $1,019,427 $(5,030,507) $(5,936,096)
---------- ----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,349,243 1,738,518 2,657,205
Deferred income taxes - - 90,133
Provision for bad debts 28,973 135,369 18,000
Provision for inventory obsolescence 274,996 166,334 168,337
Loss on disposal of fixed assets 2,719 301,919 -
Changes in assets and liabilities:
Accounts receivable (578,631) 1,617,968 662,994
Inventories 309,833 556,677 (409,204)
Prepaid expenses and other current
assets (125,249) 39,137 62,486
License fees and purchased software (30,405) (1,858) (48,522)
Deposits and other assets (822,623) 89,421 (6,994)
Accounts payable (5,653) (424,279) 555,372
Accrued compensation and related
taxes 542,584 (612,553) (58,079)
Restructuring accrual (79,816) 246,466 -
Deferred Revenue 357,672 494,733 651,694
OTHER ACCRUED LIABILITIES 493,136 (8,295) (79,137)
---------- ---------- ----------
Net adjustments 1,716,779 4,339,557 4,264,285
---------- ---------- ----------
Net cash provided (used) by operating
activities 2,736,206 (690,950) (1,671,811)
---------- ---------- ----------
INVESTING ACTIVITY:
Investments (2,362,913) (2,105,601) 2,717,629
Additions to property and equipment (785,633) (437,533) (450,971)
Software development costs (1,269,019) (1,323,846) (1,662,994)
---------- ---------- ----------
Net cash (used) provided in investing
activities (4,417,565) (3,866,980) 603,664
---------- ---------- ----------
FINANCING ACTIVITIES:
Increase in Pension Obligation 899,499 662,666 -
Proceeds from sale of stock 143,384 2,480,017 -
Exercise of stock options and warrants 65,053 496,656 502,819
Employee Stock Purchase Plan 50,903 - -
Payment of dividends on common stock - - (136,477)
Treasury Stock Purchases (213,215) - -
---------- ---------- ----------
Net cash provided by financing activities 945,624 3,639,339 366,342
---------- ---------- ----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (735,735) (918,591) (701,805)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,106,944 2,025,535 2,727,340
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 371,209 $1,106,944 $2,025,535
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS include the accounts
of Veramark Technologies, Inc. (the Company) and its wholly-owned
subsidiaries, Votan Corporation, MOSCOM Limited and Global Billing
Services Limited (companies incorporated in England) and MOSCOM GmbH (a
company incorporated in Germany). During 1997 the Company closed these
subsidiaries as discussed in Note 11. All significant inter-company
accounts and transactions have been eliminated. The Company designs
and manufactures telecommunication management systems and telephone
company billing systems for users and providers of telecommunication
services in the global market.
ESTIMATES - The preparation of consolidated financial statements, in
conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets
and liabilities, at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The consolidated financial statements include management's best
estimates of the net realizable value of software development costs.
Accordingly, the Company periodically records adjustments to write down
the carrying value of software development costs to their net
realizable value. The amounts the Company will ultimately realize
could differ materially from the carrying value of the software
development costs. (see Note 11).
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards (SFAS) No. 107 "Disclosures about Fair Value of Financial
Instruments," requires disclosures of the fair value of certain
financial instruments. The carrying amount of cash and cash
equivalents, investments, accounts receivable and accounts payable
reflect fair value due to their short-term nature.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less to be
cash equivalents.
INVESTMENTS - The Company carries its investments in accordance with
SFAS No. 115, "Investments in Certain Debt and Equity Securities." As
of December 31, 1998, and 1997, the Company has deemed its portfolio to
consist of available for sale securities. At December 31, 1998 and
1997 the carrying value of investments approximated market.
<PAGE>
Investments at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commercial Paper $2,289,479 $1,120,902
Certificates of Deposit 914,015 293,182
US Government Securities 473,621 831,962
Bond Funds 1,201,665 748,288
Money Market Funds 155,257 118,523
---------- ----------
$5,034,037 $3,112,857
========== ==========
</TABLE>
The contractual maturities of the Company's investments as of December 31,
1998 are as follows:
Due within one year $3,766,193
Due within one to two years 190,000
Due within two to three years 734,375
Due within three to four years 297,219
Due within four to five years 46,250
----------
$5,034,037
==========
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 ($5,034,037 and $3,112,857 as of December 31, 1998 and
1997, respectively) with quality financial institutions and, by policy,
limits the amount of credit exposure to any one financial institution.
The Company's customers are not concentrated in any specific geographic
region, but are concentrated in the telecommunications industry. As of
December 31, 1998 and 1997, one customer in this industry accounted
for approximately $996,209 and $716,504 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.
<PAGE>
LONG-LIVED ASSETS AND INTANGIBLES - In January 1996, the Company
adopted SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable on
an undiscounted cash flow basis. The statement also requires that
long-lived assets and certain identifiable intangibles to be disposed
of be reported at the lower of carrying amount or fair values less cost
to sell. The adoption of SFAS No. 121 did not have a material effect
on the financial statements. In 1997 the Company wrote off certain
amounts of capitalized software as discussed in Note 11. The Company
did not record any impairments in 1998.
SOFTWARE DEVELOPMENT COSTS meeting recoverability tests are
capitalized, and amortized on a product-by-product basis over their
economic life, ranging from three to five years, or the ratio of
current revenues to current and anticipated revenues from such
software, whichever provides the greater amortization.
REVENUE RECOGNITION - The Company recognizes revenue from product sales
upon shipment to the customer. Revenues from maintenance and extended
warranty agreements are recognized ratably over the term of the
agreements. The Company recognizes revenue from previously deferred
billings for services, which have not been, and are not expected to be
utilized by customers, based on historical experience. The Company also
enters into license agreements for certain of its software products.
These revenues are recognized in accordance with the provisions of
Statement of Position (SOP) No. 97-2, Software Revenue Recognition.
Included in other liabilities is a deposit of $388,000, from a single
customer, related to a software license agreement.
INCOME TAXES are provided on the income earned in the financial
statements. Deferred income taxes are provided to reflect the impact
of "temporary differences" between the amounts of assets and
liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations. Tax credits are recognized as a
reduction to income taxes in the year the credits are earned.
NET INCOME (OR LOSS) PER COMMON SHARE is computed in accordance with
the provisions of SFAS No. 128, "Earnings Per Share." SFAS No. 128
replaces primary Earnings Per Share (EPS) with basic EPS. Basic EPS is
computed by dividing reported earnings available to common stockholders
by weighted average shares outstanding. No dilution for common share
equivalents is included. Diluted EPS is computed on a similar basis to
the previously calculated fully diluted EPS. The Company was required
to adopt SFAS No. 128 retroactively for periods ending after December
15, 1997.
RECLASSIFICATIONS - Certain prior year balances have been reclassified
to conform with current year presentation.
STOCK-BASED COMPENSATION - In October 1995, SFAS No. 123. "Accounting
for Stock-Based Compensation" was issued which sets forth a fair value
method of recognizing stock-based compensation expense. The Company
continues to measure compensation for such plans using the intrinsic
value based method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees"
and will disclose the additional information relative to issued stock
options and pro forma net income and earnings per share, as if the
options granted were expensed at their estimated fair value at the time
of grant.
<PAGE>
2. INVENTORIES
The major classifications of inventories as of December 31, 1998 and 1997
are:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Purchased parts and components $340,350 $ 454,617
Work in process 116,228 120,566
Finished goods 123,390 589,614
-------- ----------
$579,968 $1,164,797
======== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT
The major classifications of property and equipment as of December 31, 1998
and 1997 are:
<TABLE>
<CAPTION> 1998 1997
<S> <C> <C>
Machinery and equipment $1,377,179 $1,460,479
Computer hardware and software 3,075,398 2,627,442
Furniture and fixtures 1,064,117 914,085
Leasehold improvements 347,775 291,745
---------- ----------
$5,864,469 $5,293,751
========== ==========
</TABLE>
Depreciation expense was approximately $334,000, $311,000 and
$471,000 for the years ended December 31, 1998, 1997 and
1996, respectively. During 1998 the Company wrote off
fully depreciated assets totaling $214,915.
<PAGE>
4. ENGINEERING AND SOFTWARE DEVELOPMENT EXPENDITURES
Engineering and software development expenditures incurred during the
years ended December 31, 1998, 1997 and 1996 were recorded as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Engineering and software development
expense included in the consolidated
statements of operations $2,656,511 $2,148,107 $3,197,002
Amounts capitalized and included in
the consolidated balance sheets 1,269,019 1,323,846 1,662,994
---------- ---------- ----------
Total expenditures for engineering
and software development $3,925,530 $3,471,953 $4,859,996
========== ========== ==========
</TABLE>
Additionally, the Company recorded amortization of capitalized
software development costs of approximately $984,000, $1,361,000, and
$1,757,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Such amortization is included in cost of sales in the
consolidated statements of operations.
5. BENEFIT PLANS
The Company sponsors an employee incentive savings plan under section
401(k) for all eligible employees. The Company's contributions to the
plan are discretionary and totaled $50,000 in 1998. There were no
contributions in 1997 or 1996.
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, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost $279,957 $123,231 $115,021
Interest cost 120,933 92,448 78,875
Net amortization and deferral 49,444 36,965 36,965
-------- -------- --------
Pension expense $450,334 $252,644 $230,861
======== ======== ========
</TABLE>
<PAGE>
A reconciliation of the pension plan's funded status with amounts
recognized in the Company's balance sheets follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Actuarial present value of accumulated
benefit obligation $2,882,847 $1,983,348
Actuarial present value of projected benefit
Obligation $2,882,847 $1,983,348
Plan assets - -
---------- ----------
Projected benefit obligation in excess of
plan assets 2,882,847 1,983,348
Prior service cost not yet recognized in
net periodic pension cost (1,087,422) (371,793)
Additional minimum liability 1,087,422 371,793
---------- ----------
Accrued pension expense $2,882,847 $1,983,348
========== ==========
</TABLE>
Included in the pension asset caption in the consolidated balance sheets
as of December 31, 1998 and 1997 is an intangible asset of $1,087,422
and $371,793, respectively, related to the minimum liability adjustment
for the unfunded accumulated benefit obligation.
The discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit
obligation were 7% and 3% respectively.
The Company maintains life insurance covering the lives of certain key
employees covered under its Supplemental Executive Retirement Program
with the Company named as beneficiary. The Company intends to use death
benefits as well as loans against the accumulating cash surrender value
of the policies to fund the pension obligation.
6. STOCKHOLDERS' EQUITY
During 1997, the Company entered into a private equity line of credit
agreement with a single institutional investor. Under the equity line
for a period of two years, the Company has the right to sell to the
investor shares of the Company's common stock at a price equal to 88%
of the average bid price of the stock for the subsequent ten trading
days. During the two year period the Company may sell up to $6 million
of common stock to the investor with no more than $500,000 in any
single month. During 1998, the Company sold 24,700 shares of common
stock to this investor realizing net proceeds of $143,384. During 1997,
the Company sold 501,934 shares of common stock to this investor realizing
net proceeds of $2,480,017. During 1998 the expiration date of this
agreement was extended from June 2, 1999 to August 30, 2000.
<PAGE>
The Company has reserved 650,000 shares of its common stock for issuance
under its 1993 Stock Option Plan, the successor plan to the 1983 Stock Option
Plan. The Company's Board of Directors approved a 1998 Stock Option Plan on
December 15, 1997 covering up to 2,500,000 shares of common stock and on that
date granted options to purchase 755,000 shares, subject to shareholder
approval, which was obtained in May 1998. Both plans provide for options which
may be issued as nonqualified or qualified incentive stock options. All
options granted are exercisable in increments of 20 - 25% per year beginning
one year from the date of grant. All options granted to employees have a ten
year term.
The Company accounts for its stock-based compensation plans under APB Opinion
No. 25. Accordingly, compensation expense has been recognized only to the
extent the exercise price was below the fair market value at the time of
the grant. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for awards
consistent with the method of SFAS No. 123, the Company's net income (loss) per
share presented on a diluted basis (as basic EPS would equal diluted EPS) would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C>
Net income (loss) As reported $1,019,427 $(5,030,507) $(5,936,096)
Pro forma $ 389,569 $(5,438,726) $(6,138,533)
Net income(loss) per common As reported
share Basic $.13 $(.69) $(.86)
Diluted $.13 $(.69) $(.86)
Pro forma
Basic $ .05 $ (.74) $(.89)
Diluted $ .05 $ (.74) $(.89)
</TABLE>
Compensation expense recognized in the statement of operations for the year
ended December 31, 1998, 1997 and 1996 was approximately $215,991, $0, and
$38,052 respectively, for options issued at an exercised price below fair
market values at the time of the grant. The SFAS No. 123 of accounting has
not been applied to options granted prior to January 1, 1995, so the
resulting pro forma compensation cost may not be representative of that to
be expected in future years.
For purposes of the disclosure above, the fair value of each option grant
is estimated on the date of the grant using the Black-Scholes option-pricing
model with the following weighed-average assumptions used for grants in 1998,
1997, and 1996.
<TABLE>
<<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Dividend yield .00% .00% .01%
Expected volatility 59.00% 58.86% 51.49%
Risk-free interest rate 5.61% 6.79% 6.71%
Expected life 7 years 7 years 8 years
</TABLE>
<PAGE>
A summary of stock option and warrant transactions for the years ended
December 31, 1998, 1997 and 1996 is shown below:
<TABLE>
<CAPTION>
1998 1997 1996
OPTIONS SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
AVERAGE PRICE AVERAGE PRICE AVERAGE PRICE
<S> <C> <C> <C> <C> <C> <C>
Shares under option, beginning
of year 655,746 $2.40 231,489 $5.53 312,340 $4.59
Options granted 1,163,720 5.15 797,246 3.00 57,410 8.22
Options exercised (22,450) 2.31 (68,128) 3.64 (106,175) 3.62
Options terminated (81,541) 4.61 (304,861) 6.06 (32,086) 7.55
--------- ----- -------- ----- ------- -----
Shares under option, end of year 1,715,475 4.16 655,746 2.40 231,489 5.53
========= ==== ======== ===== ======= =====
Shares exercisable 379,146 $4.11 46,292 $3.01 134,959 $3.88
========= ===== ======== ===== ======= =====
Weighted average fair value of
options granted $3.33 $3.53 $7.69
========= ======== ======
WARRANTS
Warrants outstanding, beginning
of year 194,770 $7.12 92,799 $6.21 88,228 $5.58
Warrants granted - - 165,412 6.49 17,999 8.14
Warrants exercised (3,594) 4.87 (58,622) 4.69 (12,296) 4.67
Warrants expired (5,354) 5.37 (4,819) 6.80 (1,132) 4.75
------- ----- ------- ----- ------- -----
Warrants outstanding, end of year 185,822 $7.20 194,770 $7.12 92,799 $6.21
======= ======= =======
</TABLE>
7. SALES INFORMATION
Sales to one customer were approximately $11,763,000 or 69% of the Company's
total sales in 1998. Sales to this same customer were approximately
$6,748,000 or 54% of the Company's total sales in 1997. Sales to two customers
were approximately $6,669,000 and $1,943,000, or 50% and 15% of the Company's
total sales in 1996.
Export sales to unaffiliated customers, primarily in Europe and South America
were approximately $2,893,000, $3,138,000 and $4,031,200 in 1998, 1997 and
1996, respectively.
<PAGE>
8. INCOME TAXES
The components of the income (loss) before income taxes for the years
ended December 31, 1998, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Domestic (loss) income $1,034,427 $(4,214,949) $(4,467,551)
Foreign loss - (815,558) (1,468,545)
---------- ----------- -----------
$1,034,427 $(5,030,507) $(5,936,096)
========== =========== ===========
</TABLE>
The income tax provision (benefit) includes the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current income tax payable
(refundable):
Federal $12,775 - $(92,369)
State 2,225 2,225 2,236
Foreign - - -
------- ----- --------
$15,000 2,225 (90,133)
------- ----- --------
Deferred income tax:
Federal 236,281 (1,483,659) (1,515,585)
State 93,738 (97,872) (205,975)
Foreign - - (499,305)
Increase (decrease) in valuation
allowance (330,019) 1,579,306 2,310,998
-------- --------- ---------
- (2,225) 90,133
-------- --------- ---------
$15,000 $ - $ -
======== ========= =========
</TABLE>
The income tax (benefit) provision differs from those computed using the
statutory federal tax rate of 34%, due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Tax at statutory federal rate $351,705 $(1,710,372) $(2,018,273)
Foreign losses not benefited - 302,572 -
State taxes, net of federal tax benefit 63,336 (115,471) (136,258)
Utilization of tax credits (31,977) - -
(Decrease) increase in valuation (354,118) 1,528,621 2,164,917
allowance
Other (13,946) (5,350) (10,386)
-------- ----------- -----------
$15,000 $ - $ -
======== =========== ===========
<PAGE>
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
DOMESTIC DOMESTIC
<S> <C> <C>
General business credits $944,253 $912,276
Net operating losses 2,537,748 2,884,242
Deferred compensation 694,091 462,324
Alternative minimum tax credits 256,755 244,034
Inventory 157,079 236,476
Accounts receivable 40,805 27,822
Capitalized software (1,258,848) (1,153,099)
Fixed assets (54,634) (62,924)
Restructuring 204,071 327,210
Other 65,668 38,646
---------- ----------
3,586,988 3,917,007
Valuation allowance (3,586,988) (3,917,007)
---------- ----------
Deferred asset (liability) $ - $ -
========== ==========
</TABLE>
The Company has $ 8,084,854 federal net operating loss
carryforwards available as of December 31, 1998, of that
total, $782,000 is limited to a utilization of approximately
$100,000 annually. The carryforwards expire in varying
amounts in 1999 through 2013. The valuation allowance has
decreased by $330,019 during the year ended December 31, 1998.
As of December 31, 1997, the Company had approximately $909,000
of net operating loss carryforwards available to offset future
earnings of MOSCOM Limited, approximately $1,594,000 of net operating
loss carryforwards to offset future earnings of MOSCOM GmbH, and
approximately $918,000 of net operating loss carryforwards to offset
future earnings of Global Billing Services Limited. These subsidiaries
were closed in 1997.
The Company's tax credit carryforwards as of December 31, 1998
are as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT EXPIRATION DATES
<S> <C> <C>
General business credits 861,356 1999 - 2011
New York State investment tax credits 82,897 1999 - 2005
Alternative minimum tax credits 256,755 No expiration date
</TABLE>
Cash paid (received) for income taxes during the years ended December 31,
1998, 1997 and 1996 totaled $(87,018), $-0-, and $45,000, respectively.
<PAGE>
9. COMMITMENTS
OPERATING LEASE OBLIGATIONS - The Company leases current manufacturing
and office facilities and certain equipment under operating leases, which
expire at various dates through 2001. The facility leases provide for
extension privileges. Rent expense under all operating leases (exclusive
of real estate taxes and other expenses payable under the leases) was $405,000,
$707,000, and $734,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Minimum lease payments as of December 31, 1998 under operating leases are
as follows:
YEAR ENDING DECEMBER 31,
1999 $402,206
2000 402,206
2001 335,172
----------
Total minimum lease payments $1,139,584
==========
Legal Matters - The Company is subject to litigation from time to
time in the ordinary course of business. Although the amount of
any liability with respect to such litigation cannot be determined, in
the opinion of management, such liability will not have a material
adverse effect on the Company's financial condition or results of
operations.
10. LINE OF CREDIT
The Company maintains a secured line of credit agreement with a
major commercial bank for up to $3,000,000, all of which is
available as of December 31, 1998. There have been no borrowings under
this agreement.
11. OTHER EXPENSES
The Company recorded a 1997 charge against earnings of $2,613,359
consisting of the following:
Restructuring Charges $ 854,444
Accelerated Retirement Benefits 509,576
Other Non-Recurring Charges 1,249,339
----------
$2,613,359
==========
The restructuring charges were attributable to the closing of the
Company's European subsidiaries and its Votan subsidiary located in California,
all of which had been operating unprofitably. These closings were part
of a restructuring plan developed by the Company's management and approved
by its Board of Directors during May 1997. The plan allowed the Company to
focus its attentions and resources on its core businesses and profitable
markets, while at the same time significantly reducing operating
expenses.
<PAGE>
The charge of $854,444 consists of lease termination charges,
currency translation losses, the disposal of certain fixed assets, and
severance and accrued compensation payments to effected employees. In
total, employment was reduced by 28 employees as a result of the
restructuring of these subsidiaries. This restructuring met the criteria set
forth in Emerging Issues Task Force Issue ("EITF") 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit and Activity (Including Certain Costs Incurred in a Restructuring)."
The charge of $509,576 for accelerated retirement benefits relate to the
retirement of the Company's former President and CEO, Albert J.
Montevecchio, who submitted a proposal for his retirement to the Board of
Directors on May 21. This charge represents an acceleration of charges
that normally would have been accrued by the Company over the next four years
had Mr. Montevecchio remained with the Company to age 65 as assumed by his
employment agreement with the Company.
The other non-recurring charges of $1,249,339 consist of a variety of
items including $276,712 of costs incurred in connection with the
withdrawn Votan initial public offering, the write-off accounts
receivable of $492,500, the write-off of capitalized software associated with
the Votan voice technologies of $470,876 and miscellaneous expenses of
$9,251.
12. STOCKHOLDERS' RIGHTS PLAN
In December 1997, the Company adopted a stockholder rights plan. The plan is
intended to protect shareholders from unfair or coercive takeover practices.
In accordance with the plan, the Board of Directors declared a dividend
distribution of one common stock purchase right for each share of common
stock payable January 9, 1998 to holders of record of common stock
issued and outstanding at the close of business on that date. Upon the
occurrence of certain trigger events that may be related to an unfriendly
attempt to purchase a controlling interest in the Company, the Board of
Directors may permit each rights holder to purchase from the Company shares of
common stock for one-half market value. The rights will not be detachable or
exercisable until certain events occur. The Board of Directors may elect to
terminate the rights at any time.
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors of the Company is
incorporated herein by reference to page 3 - 5 of the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 18, 1999
{see "Election of Directors" and "Compliance With Section 16 (a)".}
The following lists the names and ages of all executive officers
of the Company, all persons chosen to become executive officers, all
positions and offices with the Company held by such persons, and
the business experience during the past five years of such persons.
All officers were elected or re- elected to their present positions
for terms ending on May 18, 1999 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:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
David G. Mazzella 58 Chairman of the Board, President and C.E.O.
John E. Mooney 54 Director
William J. Reilly 50 Director
John E. Gould 54 Director
James R. Scielzo 56 Director
Robert Stubbs 64 Director
Paul T. Babarik 57 Vice President - Telemanagement Sales
Robert L. Boxer 45 Vice President, Secretary, General Counsel
James W. Karr 55 Vice President - Sales, Billing And Customer Care
John P. King 61 Vice President - Product Management
Ronald C. Lundy 47 Treasurer
Douglas F. Smith 55 Vice President - Operations
</TABLE>
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.
<PAGE>
DAVID G. MAZZELLA, JR. was appointed Chief Executive Officer in
June 1997, he previously served as President and Chief Operating Officer
of the Company from February 1997. He became Chairman of the Board on
December 19, 1998. From June 1994 to February 1997, he was engaged in
management consulting. From February 1992 to June 1994, he was the President
and CEO of Scotgroup Enterprises, Inc., which was engaged in the development
and sale of telecommunications software equipment and the sale of paging and
cellular telephone services. From 1988 - 1991 Mr. Mazzella was Vice President
of Glenayre Electronics, a manufacturer of software based telecommunications
equipment. He was President and CEO of Multitone Electronics, Inc., a company
engaged in the manufacture, sale and servicing of telecommunications
equipment from 1983 until its acquisition by Glenayre Electronics in 1988.
JOHN E. MOONEY rejoined the Board of Directors and served as Chairman of
the Board of Veramark from June 1997 until December 19, 1998. He had
previously been a director of Veramark from May 1985 until his resignation in
May 1997. Until August 1998 and for the past five years, he has been Chief
Executive Officer of Essex Investment Group, Inc., an investment management
and financial services firm. Since August 1998 Mr. Mooney has been Chief
Executive Officer of Jem Properties, Inc., a real estate investment and
management firm.
WILLIAM J. REILLY has been a Director of Veramark since June 1997.
He is the Executive Vice President and General Manager of International Sales
and Operations for Checkpoint Systems, Inc., a manufacturer and distributor of
systems for electronic article surveillance, electronic access
control, closed circuit television and radio frequency identifications. He
has served in that capacity for more than five years.
JOHN E. GOULD has been a Director of Veramark since August 1997. For
more than five years Mr. Gould has been a partner in Gould & Wilkie, a general
practice law firm in New York City. Mr. Gould is also Chairman of the
American Geographical Society.
JAMES R. SCIELZO was appointed to the Board of Directors of Veramark in
March 1999. Since 1994, he's held the position of Senior Vice President and
Chief Technology Officer for Young & Rubicam, Inc., a global corporate
communications, advertising and public relations firm. Prior to that, he was
Senior vice President/Chief Technology Officer at Wundermann Cajo Johnson, the
direct response advertising subsidiary of Young & Rubicam, and the Director of
systems Development for Young & Rubicam.
ROBERT W. STUBBS was appointed to the Board of Directors of Veramark in
July 1998. Mr. Stubbs was President and Chief Executive Officer of Bell
Atlantic Capital Corporation, the financial services organization of Bell
Atlantic Corporation from 1986 until his retirement in 1993. Prior to that,
he was the CEO of TriContinental Leasing Company which he founded in
1968 and sold to Bell Atlantic in 1984. Mr. Stubbs has served on the Board of
Directors of the Equipment Leasing Association, the trade association of
the equipment leasing industry and was elected its Chairman in 1989. He has
been Director of Corporate Affairs for ELA since 1993. Presently, Mr. Stubbs
is a Director of BMC Credit Corporation, a Director of Aviation
Facilities Company, Inc., and a Trustee of Manhattan College.
<PAGE>
PAUL T. BABARIK was appointed Vice President of Sales in April 1996.
After joining Veramark in 1987 as a Regional Sales Manager he held several
sales management positions, the most recent as Director of AT&T sales from
1989 to 1996. Prior to joining Veramark Mr. Babarik was employed by
AT&T from 1977 - 1986 in various sales management positions.
ROBERT L. BOXER became a Vice President of Veramark in November 1991.
Prior to that he had been Secretary and Corporate Counsel of Veramark since
March 1983. Prior to that he had been Counsel at Sykes Datatronics, Inc. and
an attorney with the firm of Middleton-Wilson.
JAMES W. KARR has been Vice President - Sales, Billing and Customer
Care since May 1, 1989. After joining Veramark in 1983, he had held various
sales management positions. Prior to that he held sales management positions
with Sykes Datatronics, Inc., Itel Corporation, Honeywell Information
Systems, and NCR Corporation.
JOHN P. KING was appointed Vice President of Product Management in
September 1998 after being Director of Product Management since January 1998.
Mr. King was the company's Vice President of Customer Support and
Quality from September 1992 unit February 1996. Prior to that Mr. King
had been President of Computer Consoles, Inc. and a Group Director of
Northern Telecom Ltd. Prior to rejoining Veramark, Mr. King was Vice
President of Manufacturing of Performance Telecom, Inc.
RONALD C. LUNDY was appointed Treasurer of Veramark in July 1993.
Since joining Veramark in 1984 he has held a variety of financial management
positions, the most recent having been Corporate Controller since December of
1992. Prior to that he held various financial positions with Rochester
Instrument Systems from 1974-1983.
DOUGLAS F. SMITH was appointed Vice President of Operations in
December 1998. Mr. Smith has been an employee of the Company since 1984 as
Order Administration Manager and then as Director of Operations. Prior to
joining the Company, Mr. Smith held various management positions with
Rochester Instruments Systems, Inc.
<PAGE>
ITEM 11 EXECUTIVE COMPENSATION
Information relating to executive compensation is incorporated by
reference on pages 21-26 of the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held May 18, 1999. (See "Executive
Compensation" and "Corporate Governance Information.")
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to the security holdings of more than five
percent holders and directors and officers of the Company is incorporated
herein by reference to pages 2-4 of the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held May 18, 1999.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE>
PART IV
ITEM 14 EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K
(a) The following document is filed as part of this report:
II. Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because they
are not applicable.
Individual financial statements of the subsidiaries of the Company have
been omitted as the Company is primarily an operating company and the
subsidiaries included in the consolidated financial statements
filed, in the aggregate, do not have minority equity interest and/or
indebtedness to any person other than the Company in amounts which together
(excepting indebtedness incurred in the ordinary course of business which is
not overdue and matures within one year from the date of its creation, whether
or not evidenced by securities, and indebtedness of the subsidiary which is
collateralized by the Company by guarantee, pledge, assignment or
otherwise) exceed 5 percent of the total assets as shown by the most
recent year-end statement of consolidated financial position. There
are no unconsolidated subsidiaries or 50% or less owned persons accounted for
by the equity method.
(b) REPORTS ON FORM 8-K
1. Registrant filed a form 8-K with the Securities and Exchange
Commission on February 18, 1997 announcing that the Company
completed the sale of 281,593 shares of its common stock to the
institutional investors for a total consideration of $1,620,000, before
associated expenses.
2. Registrant filed a form 8-K with the Securities and Exchange
Commission on September 8, 1997 announcing that it had reached final
agreement with Albert J. Montevecchio, its founder and former
President, CEO and Chairman of the Board, regarding his retirement
compensation.
(c) Exhibits (numbered in accordance with item 601 of regulation S-K)
(11.1) Calculation of earnings per share
(23.1) Consent of Arthur Andersen LLP
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 333-30991 and 333-55665.
ARTHUR ANDERSEN LLP
Rochester, New York
March 29, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders of
Veramark Technologies, Inc.:
We have audited in accordance with generally accepted aduiting
standards, the consolidated financial statements included in
Veramark Technologies, Inc.'s annual report to shareholders
incorporated by reference in the Form 10-K, and have issued
our report thereon dated February 8, 1999. Our audit was
made for the purpose of forming an opinion on those statements
taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented
for the purposes of complying with the Securities and
Exchange Commissions rules and is not part of the
basic consolidated financial statements. The schedule has
been subjected to the auditing procedures applied in the
audit of the basic consolidated financial statements and,
in our opinion, fairly states in all materal respects the
financial data required to be set forth therein in relation
to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Rochester, New York,
February 8, 1999
<PAGE>
VERAMARK TECHNOLOGIES, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Allowance for Doubtful Balance At Charged To Costs Accounts Written Balance
Accounts Beginning Of Year And Expenses Off (Recovered) At End of Year
<S> <C> <C> <C> <C>
1998 $ 75,000 $ 28,973 $ (6,027) $110,000
1997 $ 118,000 $ 135,369 $ 178,369 $ 75,000
1996 $ 71,000 $ 18,000 $ (29,000) $118,000
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VERAMARK TECHNOLOGIES, INC.
_________________________________________
David G. Mazzella, President and CEO
Dated: ______________
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
______________________________ Chairman of the Board, Director March 12, 1999
David G. Mazzella
______________________________ Director March 12, 1999
John E. Gould
______________________________ Director March 12, 1999
John E. Mooney
______________________________ Director March 12, 1999
William J. Reilly
______________________________ Director March 12, 1999
Robert Stubbs
______________________________ Director March 12, 1999
James R. Scielzo
______________________________ Treasurer March 12, 1999
Ronald C. Lundy
</TABLE>
<PAGE>
Exhibit 11.1
VERAMARK TECHNOLOGIES, INC.
and Subsidiaries
Calculation of Earnings per Share
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
BASIC
Net Earnings (Loss) $1,019,427 $(5,030,507) $(5,936,096)
========== =========== ===========
Average common shares outstanding 7,565,796 7,331,360 6,866,154
Earnings (Loss) per common & common
equivalent share $.13 $(.69) $(.86)
========== =========== ===========
DILUTED
Net Earnings (Loss) $1,019,427 $(5,030,507) $(5,936,096)
========== =========== ===========
Weighted average shares outstanding 7,565,796 7,331,360 6,866,154
Additional dilutive effect of stock options &
warrants after application of treasury stock
method 345,963 - -
---------- ----------- -----------
Weighted average shares outstanding 7,911,759 7,331,360 6,866,154
========== =========== ===========
Earnings (Loss) per common share assuming full
dilution $.13 $(.69) $(.86)
========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 371209
<SECURITIES> 4718694
<RECEIVABLES> 2383705
<ALLOWANCES> 110000
<INVENTORY> 579968
<CURRENT-ASSETS> 8099407
<PP&E> 5864469
<DEPRECIATION> 4455539
<TOTAL-ASSETS> 15182501
<CURRENT-LIABILITIES> 4531950
<BONDS> 0
0
0
<COMMON> 760771
<OTHER-SE> 7006933
<TOTAL-LIABILITY-AND-EQUITY> 15182501
<SALES> 17119540
<TOTAL-REVENUES> 17119540
<CGS> 3101336
<TOTAL-COSTS> 16264207
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 110000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1034427
<INCOME-TAX> 15000
<INCOME-CONTINUING> 1019427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1019427
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
