<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-KA
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
JANUARY 7, 2000
Date of Report (Date of earliest event reported)
VERAMARK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-13898 16-1192368
(State or other jurisdiction (Commission (IRS Employer
of incorporation or organization) File No.) Identification No.)
3750 MONROE AVENUE, PITTSFORD, NEW YORK 14534
(Address of principal executive offices and zip code)
(716) 381-6000
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Veramark Technologies, Inc. (NASDAQ: VERA) previously reported in its Form
8-K dated October 20, 1999 that it had entered into a letter of intent to
acquire The Angeles Group, Inc. ("TAG"), a supplier of enterprise software
solutions addressing the major telemanagement issues faced by large
corporations, governmental agencies, utilities, and health care providers.
As reported on its Form 8-K, dated January 7, 2000, the merger of TAG with and
into Veramark was consummated. TAG will be operated as a division of
Veramark. The transaction was structured as a stock for stock merger with the
shareholders of TAG receiving 360,850 shares of Veramark common stock, which
represents an aggregate value of approximately $4,059,562, assuming a price per
share of Veramark common stock of $11.25. In addition, Veramark assumed and
paid debt of TAG totaling approximately $1.1 million and transaction related
broker, accounting, and legal fees of approximately $600,000 were paid in
cash out of working capital.
TAG's most significant product, the Quantum Series, is a comprehensive
telemanagement software system for large enterprises. The Quantum Series
features integrated modules with full capability for call accounting,
directory, bill reconciliation, cable management, inventory and PBX intruder
alert capabilities. The TAG assets acquired by Veramark in the merger are used
in connection with the development, sale and service of enterprise software
solutions. Veramark intends to continue to use the assets for such purpose.
TAG was not affiliated with Veramark, any director or officer of Veramark
or any associate of any such director or officer prior to the merger.
Some of the information included in or incorporated by reference in this
Form 8-K may contain forward looking statements which are estimates by the
Company's management of future performance and are subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from management's current expectations. The success of integrating TAG and its
product line with Veramark's operations, together with the achievement of
product development goals and on-going customer support will affect such
results.
ITEM 7. PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(b) Supplemental Audited financial statements of Veramark reflecting the
business acquired. The financial statements of the acquired company have not
been included.
(c) Exhibits.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VERAMARK TECHNOLOGIES, INC.
Dated: March 16, 2000 By: /S/ DAVID G. MAZZELLA
David G. Mazzella
President and Chief Executive Officer
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Veramark Technologies, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Veramark Technologies, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related supplemental consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. The supplemental
consolidated financial statements give retroactive effect to the merger of
Veramark Technologies, Inc. and The Angeles Group, Inc. on January 7, 2000,
which has been accounted for using the pooling-of-interests method as described
in the notes to the supplemental consolidated financial statements. These
supplemental consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
supplemental consolidated financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Veramark Technologies, Inc. as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, after giving effect to the merger
of Veramark Technolgies, Inc. and The Angeles Group, Inc., as described in the
notes to the supplemental consolidated financial statements, in conformity with
accounting principles generally accepted in the United States.
Arthur Andersen LLP
Rochester, New York
February 4, 2000
<PAGE>
VERAMARK TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,894,500 $ 1,497,125
Investments 5,137,268 4,718,694
Accounts receivable, trade (net of allowance
for doubtful accounts of $260,000
and $150,000) 3,821,244 3,197,588
Inventories 557,123 579,968
Prepaid expenses and other current assets 596,574 191,831
------------ ------------
Total current assets 13,006,709 10,185,206
------------ ------------
PROPERTY AND EQUIPMENT:
Cost 7,664,867 6,246,509
Less accumulated depreciation 4,563,669 4,789,193
------------ ------------
Property and equipment, net 3,101,198 1,457,316
Software development costs (net of
accumulated Amortization of $1,531,720
and $1,322,254) 2,691,807 3,393,542
Pension assets 1,977,710 1,873,721
Deposits and other assets 511,858 612,249
------------ ------------
Total other assets 5,181,375 5,879,512
------------ ------------
TOTAL ASSETS $ 21,289,282 $ 17,522,034
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements are
an integral part of these balance sheets.
<PAGE>
VERAMARK TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 827,837 $ 835,874
Accrued compensation and related taxes 2,021,102 999,191
Deferred revenue 3,515,957 3,746,319
Note Payable - current -0- -0-
Restructuring accrual -0- 166,650
Capital Lease Obligation - current 70,106 -0-
Other accrued liabilities 368,681 691,640
------------ ------------
Total current liabilities 6,803,683 6,439,674
Pension Obligation 3,043,771 2,882,847
Note Payable - long term 1,100,000 1,100,000
Capital Lease Obligation - long term 110,712 -0-
------------ ------------
Total liabilities 11,058,166 10,422,521
------------ ------------
COMMITMENTS (Note 9)
STOCKHOLDERS' EQUITY:
Common Stock, par value, $.10; shares
authorized, 40,000,000; issued 8,143,673
shares and 7,968,559 shares 814,367 796,856
Additional paid-in capital 20,109,463 19,098,759
Accumulated deficit (10,306,957) (12,582,887)
Treasury Stock (80,225 and 52,300 shares
at cost) (385,757) (213,215)
------------ ------------
Total stockholders' equity 10,231,116 7,099,513
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,289,282 $ 17,522,034
============ ============
</TABLE>
The accompanying notes to the consolidated financial
statements are an integral part of these balance sheets.
<PAGE>
VERAMARK TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
NET SALES $29,396,688 $22,329,113 $16,395,988
COSTS AND OPERATING EXPENSES: ----------- ----------- -----------
Cost of sales 3,796,209 3,234,450 3,569,638
Engineering and software development 5,942,262 3,644,863 3,398,509
Selling, general and administrative 17,209,307 13,612,451 12,080,118
Other expenses - - 2,613,359
----------- ----------- -----------
Total costs and operating expenses 26,947,778 20,491,764 21,661,624
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 2,448,910 1,837,349 (5,265,636)
NET INTEREST INCOME 47,883 167,456 87,305
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 2,496,793 2,004,805 (5,178,331)
INCOME TAX PROVISION 98,207 15,800 7,800
----------- ----------- -----------
NET INCOME (LOSS) $ 2,398,586 $ 1,989,005 $(5,186,131)
=========== =========== ===========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE
Basic $ .30 $ .25 $ (.67)
=========== =========== ===========
Diluted $ .27 $ .24 $ (.67)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC) 7,973,183 7,926,646 7,692,210
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
(DILUTED) 8,800,662 8,272,609 7,692,210
=========== =========== ===========
</TABLE>
The accompanying notes to the consolidated financial
statements are an integral part of these balance sheets.
<PAGE>
VERAMARK TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
COMMON STOCK PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) ADJUSTMENT EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE - December 31, 1996 7,295,722 $729,572 $15,755,030 $ (8,767,261) $(56,396) $7,660,945
Sale of Stock 501,934 50,193 2,429,824 - - 2,480,017
Exercise of stock options and
warrants 126,750 12,675 571,729 - - 584,404
Stock Retirements (13,853) (1,385) (86,363) - - (87,748)
Foreign currency translation
adjustment - - - - 56,396 56,396
Net loss - - - (5,186,131) - (5,186,131)
--------- -------- ----------- ------------- -------- -----------
BALANCE - December 31, 1997 7,910,553 $791,055 $18,670,220 $(13,953,392) $ - $ 5,507,883
--------- -------- ----------- ------------ -------- -----------
Sale of Stock 24,700 2,470 140,914 - - 143,384
Fair Value of Warrants Issued
with Debt - - 175,000 - - 175,000
Exercise of stock options and
warrants 26,044 2,605 79,951 - - 82,556
Stock Purchase Plan 9,981 998 49,905 - - 50,903
Stock Retirements (2,719) (272) (17,231) - - (17,503)
Treasury Stock (52,300) - (213,215) - - (213,215)
Shareholder Distributions - - - (618,500) - (618,500)
Net Income - - - 1,989,005 - 1,989,005
--------- -------- ----------- ------------ -------- -----------
BALANCE - December 31, 1998 7,916,259 $796,856 $18,885,544 $(12,582,887) $ - $ 7,099,513
--------- -------- ----------- ------------ -------- -----------
Exercise of stock options and
warrants 151,898 15,189 888,247 - - 903,436
Stock Purchase Plan 24,099 2,410 134,038 - - 136,448
Stock Retirements (883) (88) (11,581) - - (11,669)
Treasury Stock (27,925) - (172,542) - - (172,542)
Shareholder Distributions - - - (122,656) - (122,656)
Net Income - - - 2,398,586 - 2,398,586
--------- -------- ----------- ------------ -------- -----------
BALANCE - December 31, 1999 8,063,448 $814,367 $19,723,706 $(10,306,957) $ - $10,231,116
========= ======== =========== ============ ======== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
VERAMARK TECHNOLOGIES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $2,398,586 $1,989,005 $(5,186,131)
Adjustments to reconcile net income (loss) ---------- ---------- -----------
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,801,743 1,380,033 1,861,657
Deferred income taxes - - -
Provision for bad debts 107,000 68,973 129,369
Provision for inventory obsolescenc 73,101 274,996 166,334
Loss on disposal of fixed assets 4,497 2,719 301, 919
Changes in assets and liabilities:
Accounts receivable (730,656) (844,812) 1,133,123
Inventories (50,256) 309,833 556,677
Prepaid expenses and other current assets (404,743) (147,993) 40,002
License fees and purchased software - (30,405) (1,858)
Deposits and other assets (30,888) (1,026,649) 154,329
Accounts payable (8,037) (66,474) (438,477)
Accrued compensation and related taxes 1,021,911 519,302 (525,266)
Restructuring accrual (166,650) (79,816) 246,466
Deferred Revenue (230,362) 474,427 637,310
OTHER ACCRUED LIABILITIES (322,959) 459,288 (84,073)
---------- ---------- -----------
Net adjustments 1,063,701 1,293,422 4,177,512
---------- ---------- -----------
Net cash provided by (used in) operating activities 3,462,287 3,282,427 (1,008,619)
---------- ---------- -----------
INVESTING ACTIVITY:
Investments (418,574) (2,362,913) (2,105,601)
Additions to property and equipment (2,128,008) (790,700) (448,201)
Software development costs (393,907) (1,269,019) (1,323,846)
---------- ---------- -----------
Net cash used in investing activities (2,940,489) (4,422,632) (3,877,648)
---------- ---------- -----------
FINANCING ACTIVITIES:
Increase in Note Payable - 1,100,000 -
Payments on Capital Lease Obligations (18,364) - -
Increase in Pension Obligation 160,924 899,499 662,666
Distributions to Shareholders (122,656) (618,500) -
Proceeds from sale of stock - 143,384 2,480,017
Increase (Decrease) in Short-term Borrowings - (100,000) 10,000
Exercise of Stock Options and Warrants 891,767 65,053 496,656
Warrants issued as part of Debt - 175,000 -
Employee Stock Purchase Plan 136,448 50,903 -
Repayment of Shareholder Loan - - 305,000
Treasury Stock Purchases (172,542) (213,215) -
---------- ---------- -----------
Net cash provided by financing activities 875,577 1,502,124 3,954,339
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,397,375 361,919 (931,928)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,497,125 1,135,206 2,067,134
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,894,500 $1,497,125 $1,135,206
========== ========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
<PAGE>
VERAMARK TECHNOLOGIES, INC. AND THE ANGELES GROUP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE ACCOMPANYING SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS include the
accounts of Veramark Technologies, Inc. (the Company), The Angeles Group
Division, reflecting the Company's acquisition of The Angeles Group
effective January 7, 2000 under the pooling of interest method, and its
wholly-owned subsidiaries, Votan Corporation, MOSCOM Limited and Global
Billing Services Limited (companies incorporated in England) and MOSCOM
GmbH (a company incorporated in Germany). During 1997 the Company closed
its wholly owned subsidiaries as discussed in Note 12. All significant
inter-company accounts and transactions have been eliminated. The Company
designs and manufactures telecommunication management systems and telephone
company billing systems for users and providers of telecommunication
services in the global market.
On January 7, 2000, Veramark Technologies, Inc. issued 360,850 shares of
common stock in exchange for all of the outstanding shares of The Angeles
Group, Inc. This business combination will be accounted for as poolings-
of-interests, and accordingly, the historical financial statements of the
Company have been restated on a supplemental basis to include the
consolidated financial statements of Veramark Technologies, Inc. and The
Angeles Group, Inc. for all periods presented.
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the business combination with The Angeles Group,
Inc. Generally accepted accounting principles prohibit giving effect to a
consummated business combination accounted for by the pooling-of-interest
method in financial statements that do not include the date of
consummation. The accompanying supplemental consolidated financial
statements do not extend through the date of consummation, however, they
will become the historical consolidated financial statements of the Company
after financial statements covering the date of consummation of the
business combination are issued.
ESTIMATES - The preparation of consolidated financial statements, in
conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include management's best estimates
of the net realizable value of software development costs. Accordingly,
the Company periodically records adjustments to write down the carrying
value of software development costs to their net realizable value. The
amounts the Company will ultimately realize could differ materially from
the carrying value of the software development costs. (see Note 12).
FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards (SFAS) No. 107 "Disclosures about Fair Value of Financial
Instruments," requires disclosures of the fair value of certain financial
instruments. The carrying amount of cash and cash equivalents,
investments, accounts receivable and accounts payable reflect fair value
due to their short-term nature.
<PAGE>
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.
INVESTMENTS - The Company carries its investments in accordance with SFAS
No. 115, "Investments in Certain Debt and Equity Securities." As of
December 31, 1999, and 1998, the Company has deemed its portfolio to
consist of available for sale securities. At December 31, 1999 and 1998
the carrying value of investments approximated market.
Investments at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Commercial Paper $ 550,000 $3,389,479
Certificates of Deposit 483,541 914,015
US Government Securities 662,267 473,621
Bond Funds 3,991,460 1,201,665
Money Market Funds 1,979,695 155,257
---------- ----------
$7,666,963 $6,134,037
========== ==========
</TABLE>
The contractual maturities of the Company's investments as of
December 31, 1999 are as follows:
Due within one year $3,705,602
Due within one to two years 1,807,885
Due within two to three years 995,255
Due within three to four years 1,100,506
Due within four to six years 57,715
----------
$7,666,963
==========
CONCENTRATIONS OF CREDIT RISK - Financial instruments, which potentially
subject the Company to concentration of credit risk, consist principally of
investments and accounts receivable. The Company places its investments
($7,666,963 and $6,134,037 as of December 31, 1999 and 1998, respectively)
with quality financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution.
The Company's customers are not concentrated in any specific geographic
region, but are concentrated in the telecommunications industry. As of
December 31, 1999 and 1998, one customer in this industry accounted for
approximately $1,100,834 and $996,209 respectively, of the total accounts
receivable balance. The Company performs ongoing credit evaluations of its
customers' financial conditions but does not require collateral to support
customer receivables. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
INVENTORIES are stated at the lower of cost (first-in, first-out) or
market. The Company evaluates the net realizable value of inventory on
hand considering deterioration, obsolescence, replacement costs and other
pertinent factors, and records adjustments as necessary.
PROPERTY AND EQUIPMENT is recorded at cost and depreciated on either a
straight-line basis or double declining method basis utilizing the
following useful lives:
Computer hardware and software 3-5 years
Machinery and equipment 4-7 years
Furniture and fixtures 5-10 years
Leasehold improvements Term of lease
<PAGE>
All maintenance and repair costs are charged to operations as incurred.
LONG-LIVED ASSETS AND INTANGIBLES - In January 1996, the Company adopted
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-
lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable on an undiscounted cash
flow basis. The statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair values less cost to sell. The adoption of SFAS No.
121 did not have a material effect on the financial statements. In 1997
the Company wrote off certain amounts of capitalized software as discussed
in Note 12. The Company did not record any impairments in 1998 or 1999.
SOFTWARE DEVELOPMENT COSTS meeting recoverability tests are capitalized,
and amortized on a product-by-product basis over their economic life,
ranging from three to five years, or the ratio of current revenues to
current and anticipated revenues from such software, whichever provides the
greater amortization.
REVENUE RECOGNITION - The Company recognizes revenue from product sales
upon shipment to the customer. Revenues from maintenance and extended
warranty agreements are recognized ratably over the term of the agreements.
The Company recognizes revenue from previously deferred billings for
services, which have not been, and are not expected to be utilized by
customers, based on historical experience. The Company also enters into
license agreements for certain of its software products. These revenues
are recognized in accordance with the provisions of Statement of Position
(SOP) No. 97-2, Software Revenue Recognition, as amended by SOP 98-4.
INCOME TAXES are provided on the income earned in the financial statements.
Deferred income taxes are provided to reflect the impact of "temporary
differences" between the amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and
regulations. Tax credits are recognized as a reduction to income taxes in
the year the credits are earned. The Angeles Group was treated as an S-
Corporation for federal income tax purposes.
SHAREHOLDER DISTRIBUTIONS - During 1999 and 1998, the Company paid
distributions to its TAG Division shareholders in the amount of $122,656
and $618,500, respectively.
NET INCOME (OR LOSS) PER COMMON SHARE is computed in accordance with the
provisions of SFAS No. 128, "Earnings Per Share." Basic EPS is computed by
dividing reported earnings available to common stockholders by weighted
average shares outstanding. No dilution for common share equivalents is
included. Diluted EPS is computed on a similar basis to the previously
calculated fully diluted EPS. The Company was required to adopt SFAS No.
128 retroactively for periods ending after December 15, 1997. Included in
diluted earnings per share in 1998 and 1999 are 345,963 and 827,479,
respectively, which represents the dilutive effect of stock options and
warrants issued. There is no dilutive effect of stock options and warrants
in 1997 as the effect would be anti-dilutive.
RECLASSIFICATIONS - Certain prior year balances have been reclassified to
conform with current year presentation.
STOCK-BASED COMPENSATION - In October 1995, SFAS No. 123. "Accounting for
Stock-Based Compensation" was issued which sets forth a fair value method
of recognizing stock-based compensation expense. The Company continues to
measure compensation for such plans using the intrinsic value based method
of accounting prescribed by Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and will disclose the
additional information relative to issued stock options and pro forma net
income and earnings per share, as if the options granted were expensed at
their estimated fair value at the time of grant.
<PAGE>
2. INVENTORIES
The major classifications of inventories as of December 31, 1999 and 1998
are:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Purchased parts and components $423,460 $340,350
Work in process 94,991 116,228
Finished goods 38,672 123,390
-------- --------
$557,123 $579,968
======== ========
</TABLE>
3. PROPERTY AND EQUIPMENT
The major classifications of property and equipment as of December 31, 1999
and 1998 are:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Machinery and equipment $1,241,036 $1,377,179
Computer hardware and software 3,679,595 3,243,721
Furniture and fixtures 1,376,024 1,277,834
Leasehold improvements 1,368,212 347,775
---------- ----------
$7,664,867 $6,246,509
========== ==========
</TABLE>
Depreciation expense was approximately $677,000, $366,000 and $386,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
During 1999 the Company wrote off fully depreciated assets totaling
approximately $908,000.
<PAGE>
4. ENGINEERING AND SOFTWARE DEVELOPMENT EXPENDITURES
Engineering and software development expenditures incurred during the
years ended December 31, 1999, 1998 and 1997 were recorded as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Engineering and software development
expense included in the consolidated
statements of operations $ 5,942,262 $ 3,644,863 $ 3,398,509
Amounts capitalized and included in
the consolidated balance sheets 393,907 1,269,019 1,323,846
------------ ------------ ------------
Total expenditures for engineering
and software development $ 6,336,169 $ 4,913,882 $ 4,722,355
============ ============ ============
</TABLE>
Additionally, the Company recorded amortization of capitalized
software development costs of approximately $1,096,000,
$984,000, and $1,361,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Such amortization is included in
cost of sales in the consolidated statements of operations.
5. BENEFIT PLANS
The Company sponsors an employee incentive savings plan under
section 401(k) for all eligible employees. The Company's
contributions to the plan are discretionary and totaled
$100,000 in 1999 and $50,000 in 1998. There were no
contributions in 1997.
The Company also sponsors an unfunded Supplemental Executive
Retirement Program, which is a nonqualified plan that provides
certain key employees defined pension benefits. Periodic
pension expense for the years ended December 31, 1999, 1998 and
1997 consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Service cost $307,637 $279,957 $123,231
Interest cost 173,356 120,933 92,448
Net amortization and deferral 86,883 49,444 36,965
-------- -------- --------
Pension expense $567,876 $450,334 $252,644
======== ======== ========
</TABLE>
<PAGE>
A reconciliation of the pension plan's funded status with
amounts recognized in the Company's balance sheets
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Actuarial present value of accumulated
benefit obligation $ 3,043,771 $ 2,882,847
============ ============
Actuarial present value of projected benefit
Obligation $ 3,043,771 $ 2,882,847
Plan assets - -
------------ ------------
Projected benefit obligation in excess of
plan assets 3,043,771 2,882,847
Prior service cost not yet recognized in
net periodic pension cost (1,000,538) (1,087,422)
Additional minimum liability 1,000,538 1,087,422
------------ ------------
Accrued pension expense $ 3,043,771 $ 2,882,847
============ ============
</TABLE>
Included in the pension asset caption in the
consolidated balance sheets as of December 31, 1999
and 1998 is an intangible asset of $1,000,538 and
$1,087,422, respectively, related to the minimum
liability adjustment for the unfunded accumulated
benefit obligation.
The discount rate and rate of increase in future
compensation levels used in determining the
actuarial present value of the projected benefit
obligation were 7% and 3% respectively.
The Company maintains life insurance covering the
lives of certain key employees covered under its
Supplemental Executive Retirement Program with the
Company named as beneficiary. The Company intends
to use death benefits as well as loans against the
accumulating cash surrender value of the policies to
fund the pension obligation.
6. STOCKHOLDERS' EQUITY
During 1997, the Company entered into a private equity
line of credit agreement with a single institutional
investor. Under the equity line for a period of two
years, the Company has the right to sell to the
investor shares of the Company's common stock at a
price equal to 88% of the average bid price of the
stock for the subsequent ten trading days. During
the two year period the Company may sell up to $6
million of common stock to the investor with no more
than $500,000 in any single month. There were no
shares of common stock sold to this investor during
1999. During 1998, the Company sold 24,700 shares
of common stock to this investor realizing net
proceeds of $143,384. During 1997, the Company sold
501,934 shares of common stock to this investor
realizing net proceeds of $2,480,017. During 1998
the expiration date of this agreement was extended
from June 2, 1998 to August 30, 2000.
The Company has reserved 650,000 shares of its
common stock for issuance under its 1993 Stock
Option Plan, the successor plan to the 1983 Stock
Option Plan. The Company's Board of Directors
approved a 1998 Stock Option Plan on December 15,
1997 covering up to 2,500,000 shares of common stock
and on that date granted options to purchase 755,000
shares, subject to shareholder approval, which was
obtained in May, 1998. Both plans provide for
options which may be issued as nonqualified or
qualified incentive stock options. All options
granted are exercisable in increments of 20 - 25%
per year beginning one year from the date of grant.
All options granted to employees have a ten year
term.
<PAGE>
The Company accounts for its stock-based
compensation plans under APB Opinion No. 25.
Accordingly, compensation expense has been
recognized only to the extent the exercise price was
below the fair market value at the time of the
grant. Had compensation cost for the Company's
stock-based compensation plans been determined based
on the fair value at the grant dates for awards
consistent with the method of SFAS No. 123, the
Company's net income (loss) per share would have
been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C> <C>
Net income (loss) As reported $2,398,586 $1,989,005 $(5,186,131)
Pro forma $1,855,680 $1,359,147 $(5,594,350)
Net income (loss) per common share As reported
Basic $.30 $.25 $(.67)
Diluted $.27 $.24 $(.67)
Pro forma
Basic $.23 $.17 $(.73)
Diluted $.21 $.16 $(.73)
</TABLE>
Compensation expense recognized in the statement of
operations for the year ended December 31, 1999,
1998 and 1997 was approximately $355,638, $215,991,
and $-0- respectively, for options issued at an
exercised price below fair market values at the time
of the grant. The SFAS No. 123 method of accounting
has not been applied to options granted prior to
January 1, 1995, so the resulting pro forma
compensation cost may not be representative of that
to be expected in future years.
For purposes of the disclosure above, the fair value
of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model
with the following weighed-average assumptions used
for grants in 1999, 1998, and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Dividend yield .00% .00% .00%
Expected volatility 64.47% 59.00% 58.86%
Risk-free interest rate 4.58% 5.61% 6.79%
Expected life 7 years 7 years 7 years
</TABLE>
<PAGE>
A summary of stock option and warrant transactions for
the years ended December 31, 1999, 1998 and 1997 is
shown below:
<TABLE>
<CAPTION>
1999 1998 1997
OPTIONS SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
AVERAGE AVERAGE AVERAGE
PRICE PRICE PRICE
<S> <C> <C> <C> <C> <C> <C>
Shares under option, beginning of
year 1,715,475 $4.16 655,746 $2.40 231,489 $5.53
Options granted 536,537 6.55 1,163,720 5.15 797,246 3.00
Options exercised (47,517) 3.14 (22,450) 2.31 (68,128) 3.64
Options terminated (22,975) 5.43 (81,541) 4.61 (304,861) 6.06
--------- ----- --------- ----- -------- -----
Shares under option, end of year 2,181,520 4.76 1,715,475 4.16 655,746 2.40
========= ===== ========= ===== ======== =====
Shares exercisable 656,556 $4.15 379,146 $4.11 46,292 $3.01
========= ===== ========= ===== ======== =====
Weighted average fair value of
options granted $4.35 $3.33 $3.53
========= ========= ========
WARRANTS
Warrants outstanding, beginning
of year 196,672 $7.20 194,770 $7.12 92,799 $6.21
Warrants granted 5,289 6.38 10,850 11.25 165,412 6.49
Warrants exercised (104,381) 6.92 (3,594) 4.87 (58,622) 4.69
Warrants expired (8,685) 5.76 (5,354) 5.37 (4,819) 6.80
-------- ----- ------- ----- ------- -----
Warrants outstanding, end of year 88,895 $7.68 196,672 $7.20 194,770 $7.12
======== ======= ===== =======
</TABLE>
7. SALES INFORMATION
Sales to one customer were approximately $16,287,000 or
55% of the Company's total sales in 1999. Sales to
this same customer were approximately $11,763,000 or
53% of the Company's total sales in 1998 and
approximately $6,748,000 or 41% of the Company's
total sales in 1997.
Export sales to unaffiliated customers, primarily in
Europe and South America were approximately
$5,219,000, $3,435,000, and $3,290,000 in 1999, 1998
and 1997, respectively.
In accordance with SFAS No. 131 related to segment
reporting, the Company has determined that it
operates in one segment.
<PAGE>
8. INCOME TAXES
The components of the income (loss) before income taxes
for the years ended December 31, 1999, 1998 and 1997
is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Domestic (loss) income $2,789,452 $1,034,427 $(4,214,949)
Foreign loss - - (815,558)
---------- ---------- -----------
$2,789,452 $1,034,427 $(5,030,507)
========== ========== ===========
</TABLE>
The income tax provision (benefit) includes the
following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current income tax payable
(refundable):
Federal $ 80,908 $ 12,775 $ -
State 17,299 3,025 10,025
Foreign - - -
-------- -------- -----------
$ 98,207 $ 15,800 $ 10,025
-------- -------- -----------
Deferred income tax:
Federal 510,123 236,281 (1,483,659)
State 48,660 93,738 (97,872)
Foreign - - -
Increase (decrease) in valuation (558,783) (330,019) 1,579,306
allowance -------- -------- -----------
- - (2,225)
-------- -------- -----------
$ 98,207 $ 15,800 $ 7,800
======== ======== ===========
</TABLE>
The income tax (benefit) provision differs
from those computed using the statutory
federal tax rate of 34%, due to the
following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Tax at statutory federal rate $948,414 $351,705 $(1,710,372)
US tax effect of foreign losses (312,024) - 302,572
State taxes, net of federal tax benefit 4,857 64,136 (107,671)
Utilization of tax credits - (31,977) -
(Decrease) increase in valuation
allowance (558,783) (354,118) 1,528,621
Other 15,743 (13,946) (5,350)
-------- -------- -----------
$ 98,207 $ 15,800 $ 7,800
======== ======== ===========
</TABLE>
<PAGE>
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>
1999 1998
DOMESTIC DOMESTIC
<S> <C> <C>
General business credits $1,055,314 $ 944,253
Net operating losses 1,305,396 2,537,748
Deferred compensation 956,317 694,091
Alternative minimum tax credits 329,273 256,755
Inventory 165,173 157,079
Accounts receivable 35,457 40,805
Capitalized software (1,004,616) (1,258,848)
Fixed assets (65,687) (54,634)
Restructuring 205,314 204,071
Other 46,264 65,668
---------- -----------
3,028,205 3,586,988
Valuation allowance (3,028,205) (3,586,988)
---------- -----------
Deferred asset (liability) $ - $ -
========== ===========
</TABLE>
The Company has $3,613,311 of federal net operating loss carryforwards
available as of December 31, 1999, of that total, $782,000 is limited
to a utilization of approximately $100,000 annually. The
carryforwards expire in varying amounts in 1999 through 2012. The
valuation allowance has decreased by $558,783 during the year ended
December 31, 1999.
As of December 31, 1999, the Company had approximately $909,000
of net operating loss carryforwards available to offset future earnings
of MOSCOM Limited, and approximately $1,594,000 of net
operating loss carryforwards to offset future earnings of MOSCOM
GmbH. These subsidiaries were closed in 1997.
The Company's tax credit carryforwards as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT EXPIRATION DATES
<S> <C> <C>
General business credits $ 990,052 1999 - 2019
New York State investment tax credits $ 65,262 2001 - 2014
Alternative minimum tax credits $ 329,273 No expiration date
</TABLE>
Cash paid (received) for income taxes during the years ended December 31, 1999,
1998 and 1997 totaled $11,705, $(87,018) and $-0-, respectively.
9. COMMITMENTS
OPERATING LEASE OBLIGATIONS - The Company
leases current manufacturing and office
facilities and certain equipment under
operating leases, and capital leases, which
expire at various dates through 2005. The
facility leases provide for extension
privileges. Rent expense under all
operating leases (exclusive of real estate
taxes and other expenses payable under the
leases) was $453,000, $534,000, and $830,000
for the years ended December 31, 1999, 1998
and 1997, respectively.
Minimum lease payments as of December 31,
1999 under operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES TOTAL
<S> <C> <C> <C>
2000 $ 89,297 $ 627,257 $ 716,554
2001 69,993 541,452 611,445
2002 32,973 197,241 230,214
2003 19,370 197,241 216,611
2004 8,071 33,741 41,812
Thereafter - 1,796 1,796
--------- ---------- ----------
$ 219,704 $1,598,728 $1,818,432
Less: Amounts representing interest (38,886)
Present Value of Minimum
Capital lease payments 180,818
Less: Current Portion (70,106)
---------
$ 110,712
=========
</TABLE>
Legal Matters - The Company is subject to litigation
from time to time in the ordinary course of business.
Although the amount of any liability with respect to
such litigation cannot be determined, in the opinion of
management, such liability will not have a material
adverse effect on the Company's financial condition or
results of operations.
10. LONG-TERM DEBT
In November 1998, the TAG Division of the Company entered
into a note payable in the amount of $1,100,000.
Interest is payable monthly at the rate of thirteen
percent per annum, through December 1, 2003, at which
time the principal balance is due. The note is secured
by substantially all the assets and intellectual
property of the company.
In connection with the note, the Company granted
warrants to the lender to purchase up to four and a
half percent of the common stock of the Company as set
forth in the agreement. The Company has determined the
fair value of the warrants to be $175,000 and has
capitalized this amount in other assets. This amount
will be amortized as interest expense over the term of
the note.
Subsequent to year end in connection with the
acquisition, the note payable was repaid.
<PAGE>
11. LINES OF CREDIT
The Company maintains a secured line of credit
agreement with a major commercial bank for up to
$3,000,000, all of which is available as of December
31, 1999. The Company also maintains a separate
$7,000,000 three year acquisition revolving credit
agreement with the same bank. There have been no
borrowings against either agreement as of December 31,
1999.
12. OTHER EXPENSES
THE COMPANY RECORDED A 1997 CHARGE AGAINST EARNINGS OF
$2,613,359 CONSISTING OF THE FOLLOWING:
Restructuring Charges $ 854,444
Accelerated Retirement Benefits 509,576
Other Non-Recurring Charges 1,249,339
----------
$2,613,359
==========
The restructuring charges were attributable to the closing
of the Company's European subsidiaries and its Votan
subsidiary located in California, all of which had been
operating unprofitably. These closings were part of a
restructuring plan developed by the Company's
management and approved by its Board of Directors
during May 1997. The plan allowed the Company to focus
its attentions and resources on its core businesses and
profitable markets, while at the same time
significantly reducing operating expenses. The charge
of $854,444 consists of lease termination charges,
currency translation losses, the disposal of certain
fixed assets, and severance and accrued compensation
payments to effected employees. In total, employment
was reduced by 28 employees as a result of the
restructuring of these subsidiaries. This
restructuring met the criteria set forth in Emerging
Issues Task Force Issue ("EITF") 94-3, "Liability
Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)."
The charge of $509,576 for accelerated retirement
benefits relate to the retirement of the Company's
former President and CEO, Albert J. Montevecchio, who
submitted a proposal for his retirement to the Board of
Directors on May 21. This charge represents an
acceleration of charges that normally would have been
accrued by the Company over the next four years had Mr.
Montevecchio remained with the Company to age 65 as
assumed by his employment agreement with the Company.
The other non-recurring charges of $1,249,339 consist
of a variety of items including $276,712 of costs
incurred in connection with the withdrawn Votan initial
public offering, the write-off accounts receivable of
$492,500, the write-off of capitalized software
associated with the Votan voice technologies of
$470,876 and miscellaneous expenses of $9,251. During
the third quarter of 1999 the Company recovered
$166,650 previously charged against income in
connection with the termination of a facilities lease
held by a former subsidiary. This recovery completes
the accounting for the restructuring accrual recorded
in 1997.
13. STOCKHOLDERS' RIGHTS PLAN
In December 1997, the Company adopted a stockholder
rights plan. The plan is intended to protect
shareholders from unfair or coercive takeover
practices. In accordance with the plan, the Board
of Directors declared a dividend distribution of
one common stock purchase right for each share of
common stock payable January 9, 1998 to holders of
record of common stock issued and outstanding at
the close of business on that date. Upon the
occurrence of certain trigger events that may be
related to an unfriendly attempt to purchase a
controlling interest in the Company, the Board of
Directors may permit each rights holder to
purchase from the Company shares of common stock
for one-half market value. The rights will not be
detachable or exercisable until certain events
occur. The Board of Directors may elect to
terminate the rights at any time.
<PAGE>
