FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2000
Commission File Number 0-13898
VERAMARK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1192368
(State or other jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
3750 MONROE AVENUE, PITTSFORD, NY 14534
(Address of principal executive offices) (Zip Code)
(716) 381-6000
(Registrant's telephone number, including area code)
N.A.
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirement for the past 90 days.
YES XX NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of March 31, 2000.
Common stock, par value $.10 8,063,548 shares
This report consists of 15 pages.
<PAGE>
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Balance Sheets - 3 - 4
March 31, 2000 and December 31, 1999
Condensed Statements of Operations - 5
Three Months Ended March 31, 2000 and 1999
Condensed Statements of Cash Flows - 6
Three Months Ended March 31, 2000 and 1999
Notes To Condensed Financial Statements 7 - 8
Item 2 Management's Discussion and Analysis of 9 - 13
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 14 - 15
<PAGE>
PART I - FINANCIAL INFORMATION
VERAMARK TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS: (Unaudited)
Cash and Cash Equivalents $ 1,186,651 $ 2,894,500
Investments 4,404,053 5,137,268
Accounts Receivable, trade (net of
allowance for doubtful accounts of
$269,000 and $260,000, respectively) 2,340,319 3,821,244
Net Inventories 589,915 557,123
Prepaid Expenses 205,975 596,574
------------ ------------
Total Current Assets 8,726,913 13,006,709
PROPERTY AND EQUIPMENT 7,670,003 7,664,867
Less Accumulated Depreciation (4,614,427) (4,563,669)
------------ ------------
Property and Equipment (Net) 3,055,576 3,101,198
OTHER ASSETS:
Software Development Costs
(Net of accumulated amortization of
$1,588,463 and $1,531,720,
respectively) 2,457,240 2,691,807
Pension Assets 1,977,710 1,977,710
Deposits and Other Assets 547,211 511,858
------------ ------------
Total Other Assets 4,982,161 5,181,375
------------ ------------
TOTAL ASSETS $ 16,764,650 $ 21,289,282
============ ============
</TABLE>
See notes to Condensed Financial Statements.
<PAGE>
VERAMARK TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable $ 1,097,828 $ 827,837
Accrued Compensation and Related Taxes 1,651,876 2,021,102
Deferred Revenue 3,310,262 3,515,957
Other Accrued Expenses and Current Liabilities 314,609 438,787
------------ ------------
Total Current Liabilities 6,374,575 6,803,683
Note Payable - 1,100,000
Long Term Portion of Capital Leases 51,047 110,712
Pension Obligation 3,130,822 3,043,771
------------ ------------
Total Liabilities 9,556,444 11,058,166
STOCKHOLDERS' EQUITY:
Common Stock, par value $.10, 20,000,000 shares
authorized; issued and outstanding, 8,143,773
and 8,143,673, respectively 814,377 814,367
Additional Paid-in Capital 19,946,508 20,109,463
Retained Earnings (Deficit) (13,166,922) (10,306,957)
Treasury Stock (80,225 shares at cost) (385,757) (385,757)
------------ ------------
Total Stockholders' Equity 7,208,206 10,231,116
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,764,650 $ 21,289,282
============ ============
</TABLE>
See notes to Condensed Financial Statements.
<PAGE>
VERAMARK TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
2000 1999
<S> <C> <C>
SALES $ 4,914,417 $ 6,434,695
COSTS AND OPERATING EXPENSES:
Cost of Sales 868,140 804,300
Engineering & Software Development 1,897,942 978,330
Selling, General and Administrative 4,439,431 3,987,864
----------- -----------
Total Costs and Operating Expenses 7,205,513 5,770,494
INCOME (LOSS) FROM OPERATIONS (2,291,096) 664,201
NET INTEREST INCOME 30,073 32,411
MERGER EXPENSES (Note 4) 598,942 -
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (2,859,965) 696,612
INCOME TAXES - 20,000
----------- -----------
NET INCOME (LOSS) $(2,859,965) $ 676,612
=========== ===========
NET INCOME (LOSS) PER SHARE
Basic $ (.36) $ .09
====== =====
Diluted $ (.36) $ .08
====== =====
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
<PAGE>
VERAMARK TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(Unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $(2,859,965) $ 676,612
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided (used) by Operating Activities
Depreciation and Amortization 495,023 315,011
Provision for Losses on Accounts Receivable 9,000 5,000
Provision for Inventory Obsolescence 24,999 47,500
Loss on Disposal of Fixed Assets 426 2,399
Changes in Assets and Liabilities
Accounts Receivable 1,471,925 (165,333)
Inventories (57,791) (19,436)
Prepaid Expenses and Other Current Assets 227,010 (182,535)
Deposits and Other Assets (35,353) 202,385
Accounts Payable 269,991 133,036
Accrued Compensation and Related Taxes (369,226) 159,294
Deferred Revenue (205,695) 151,318
Other Current Liabilities (66,656) (58,278)
Increase in Pension Obligation 87,051 123,466
----------- -----------
Net Adjustments 1,850,704 713,827
----------- -----------
Net Cash Flows Provided (Used) by Operating (1,009,261) 1,390,439
Activities
INVESTING ACTIVITIES:
Investments 733,215 598,421
Additions to Property and Equipment (181,574) (646,853)
Software Development Costs (33,686) (393,907)
Net Cash Flows Provided (Used) by Investing ----------- -----------
Activities: 517,955 (442,339)
FINANCING ACTIVITIES:
Repayment of Note Payable (1,100,000) -
Repayment of Capital Leases (117,187) -
Exercise of Stock Options and Warrants 644 212,320
Treasury Stock Purchases - (62,500)
----------- -----------
Net Cash Flows Provided (Used) by Financing (1,216,543) 149,820
Activities ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,707,849) 1,097,920
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,894,500 1,497,125
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,186,651 $ 2,595,045
=========== ===========
</TABLE>
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
The accompanying unaudited financial statements include all
adjustments of a normal and recurring nature which are, in the opinion of
Company's management, necessary to present fairly the Company's financial
position as of March 31, 2000 and the results of its operations and cash
flows for the three months ended March 31, 2000 and 1999.
On January 7, 2000, Veramark Technologies, Inc. (the "Company") issued
360,850 shares of common stock in exchange for all of the outstanding
shares of The Angeles Group, Inc. This business combination was accounted
for as a pooling of interests, and accordingly, the historical financial
statements of the Company have been restated to include the consolidated
financial statements of Veramark Technologies, Inc. and The Angeles Group,
Inc. for all periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These condensed
financial statements should be read in conjunction with the supplemental
financial statements and related notes contained in the Company's annual
10-K report to the Securities and Exchange Commission for the year ended
December 31, 1999.
The results of operations for the three months ended March 31, 2000
are not necessarily indicative of the results to be expected for a full
year's operation.
(2) INVENTORIES
The composition of inventories at March 31, 2000 and December 31, 1999
was as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
<S> <C> <C>
Purchased parts and components $ 484,633 $ 423,460
Work in process 59,442 94,991
Finished goods 45,840 38,672
--------- ---------
$ 589,915 $ 557,123
========= =========
</TABLE>
<PAGE>
(3) PROPERTY AND EQUIPMENT
The major classifications of property and equipment at March 31, 2000,
and December 31, 1999 are:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
<S> <C> <C>
Machinery and equipment $ 1,259,164 $ 1,241,036
Computer hardware and software 3,642,637 3,679,595
Furniture and fixtures 1,401,356 1,376,024
Leasehold improvements 1,366,846 1,368,212
----------- -----------
$ 7,670,003 $ 7,664,867
=========== ===========
</TABLE>
(1) On January 7, 2000, the Company acquired all of the outstanding shares
of The Angeles Group in a stock for stock merger accounted for as a
pooling of interests. In connection with the merger, the Company
issued 360,850 shares of common stock with an aggregate value of
$4,059,562. In connection with the acquisition, the Company paid the
debt of The Angeles Group of $1.1 million and incurred transaction
costs of approximately $600,000.
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Except for the historical information contained herein, the matters
discussed in this report are forward-looking statements, which involve
risks and uncertainties including, but not limited to, economic,
competitive, governmental and technological factors, affecting the
Company's operations, markets, products, services and prices, as well as
other factors discussed in the Company's filings with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
Sales for the three months ended March 31, 2000 were $4,914,417,
representing a 24% decrease from the $6,434,695 of sales for the three
months ended March 31, 1999. The decline in sales is believed to be
primarily the result of a major reorganization currently being undertaken
by the Company's largest customer, Lucent Technologies. Among other
changes, on March 1, 2000, Lucent announced its intention to spin-off a
portion of its PBX business into a new company. On April 3, 2000, Lucent
announced the sale of the remainder of its PBX business to an unaffiliated
company, which will be a reseller of Lucent branded products. All of the
products sold by Veramark to Lucent are part of the business units that
were either sold or will be spun-off. Veramark expects to continue to sell
all of its Lucent branded products to these two new customers. However, due
to the transition, sales to Lucent of Veramark's core telemanagement
products and related services have declined 28% from the levels for the
first quarter of 1999. At this time it is not possible for the Company to
determine, with accuracy, as to what the impact of the reorganization will
be or know how long it will continue.
Subsequent to the end of the first quarter, the Company announced that
Lucent had completed the certification of the Company's VeraWeb Internet
Accounting software, and will sell the product to existing and new Lucent
customers on an OEM basis beginning May 1, 2000. Veramark's new Internet
accounting software has been integrated with Veramark's telemanagement
software providing Lucent's business customers with a consolidated view of
telecom and network usage costs. Veramark's integrated telemanagement
software will also be sold through Veramark's other distributors of
telecommunications and network products.
Sales of Quantum, the Company's comprehensive telemanagement systems
for large enterprises, which are sold by the Company's recently acquired
Angeles Group Division, grew by 4% over 1999 first quarter levels. On
March 2, 2000, it was announced that the Company had been awarded a
contract for the Quantum product by M&I Data Services through The Angeles
Group's distribution partner, Ameritech/SBC. The value of this contract to
the Company is in excess of $500,000, with the revenue expected to be
recognized during the second and third quarters of 2000.
Sales of VeraBill, the Company's billing and customer care product,
and DNT, the Company's enterprise-wide telemanagement system, declined 12%
and 41% respectively from last years' first quarter levels. DNT is now
being sold directly by the Company to end-users as a Lucent branded product
on a referral basis, instead of Original Equimpent Manufacturer (OEM). By
eliminating a layer of distribution, the Company should enjoy higher
revenues per unit while offering end-users an attractive discount.
<PAGE>
Service bureau revenues increased 72% for the three months ended March
31, 2000 as compared to the same three months of 1999. During the first
quarter of fiscal 2000, the Company received a three year extension of its
telemanagement service bureau contract with Travelers Indemnity Company.
The new contract runs through April 1, 2003, and is valued at approximately
$500,000 in the aggregate.
For the quarter ended March 31, 2000, product sales accounted for 56%
of sales, with the remaining 44% derived from services such as maintenance
and support, training, and installation services. For the same three
months of 1999, product sales accounted for 66% of total sales, with
services accounting for 34%.
The gross margin earned for the quarter ended March 31, 2000 was 82%
of sales, versus 88% for the quarter ended March 31, 1999. The lower gross
margin is the result of manufacturing overhead and the amortization of
capitalized software, both of which are relatively fixed in nature, therefore
representing a higher percentage of the reduced sales volume.
For the three months ended March 31, 2000, net engineering and
development expenses of $1,897,942 were nearly double the net engineering
and development expenses incurred of $978,330 for the same three month
period of 1999. The increased expense reflects a combination of increased
staffing and a reduction in development costs capitalized. The table below
details gross engineering and development expenses, costs capitalized, and
net engineering and development expenses for the three month periods ended
March 31, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
<S> <C> <C>
Gross Expenditures for Engineering & Development $ 1,931,628 $ 1,372,237
Less: Development Costs Capitalized (33,686) (393,907)
----------- -----------
Net Expenditures for Engineering & Development $ 1,897,942 $ 978,330
=========== ===========
</TABLE>
For the three months ended March 31, 2000, $268,253 of previously
capitalized development costs were amortized and charged to cost of sales.
This compares with $217,036 amortized and charged to cost of sales for the
three months ended March 31, 1999.
Selling, general, and administrative expenses of $4,439,431 for the
three months ended March 31, 2000 rose 11% from $3,987,864 incurred for the
three months ended March 31, 1999. The increased expense level reflects
the expansion of the Company's staffing levels, primarily in the marketing,
sales, and support groups over the past year.
<PAGE>
The Company incurred a net operating loss of $2,291,096 for the three
months ended March 31, 2000, as compared with a net operating profit of
$664,201 for the same three month period of 1999. In addition, the Company
recorded a one-time charge of $598,942 for transaction costs in connection
with the acquisition of The Angeles Group, which was completed January 7,
2000. After the effect of this charge, the Company recorded a net loss of
$2,859,965, or $0.36 per share, for the first quarter ended March 31, 2000.
For the three month period ended March 31, 1999, the Company realized a
profit of $676,612 or $.08 per diluted share. Subsequent to the end of the
first quarter, the Company took several steps, including selected staff
reductions, in order to reduce its operating expenses. The Company will
continue to investigate methods of further reducing operating expenses
going forward.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash position (cash on hand plus short-term
investments) at March 31, 2000 was $5,590,704, compared with a total cash
position at December 31, 1999 of $8,031,768. The decline in the cash
balance reflects the combination of lower than anticipated sales revenues
for the quarter ended March 31, 2000, and a cash outlay of approximately
$1,700,000 attributable to the Company's acquisition of The Angeles Group
(TAG), completed in early January of 2000. The outlay included the
repayment of a $1,100,000 note carried by TAG, and approximately $600,000
in brokers fees, legal, and accounting expenses.
Accounts receivable declined from $3,821,244 at December 31, 1999 to
$2,340,319 at March 31, 2000. The decline in receivables is primarily the
result of the lower sales volume achieved during the first quarter of 2000
as compared to the fourth quarter of 1999. The Company has seen no
unfavorable change in payment trends from its major customers.
Prepaid expenses of $205,975 at March 31, 2000 compare with a balance
of $596,574 at December 31, 1999. The reduction in prepaid expenses was a
result of the elimination of prepaid interest associated with a warrant
held by The Angeles Group's bank in connection with the above-referenced
note payable, and acquisition expenses incurred through December 31, 1999,
subsequently expensed in January.
Capital spending for the quarter ended March 31, 2000 was $181,574
consisting primarily of computer hardware and software used in the
development process. During the quarter, approximately $176,000 of fully
depreciated equipment was disposed of and written off.
Capitalized development costs of $2,457,240 at March 31, 2000 were
down 9% from $2,691,807 at December 31, 1999. During the first quarter the
Company capitalized $33,686 of development costs, and amortized $268,253 of
costs previously capitalized related to the VeraBill and DNT product lines.
Accrued compensation and related taxes declined from $2,021,102 at
December 31, 1999 to $1,651,876 at March 31, 2000. The decrease reflects
the payment of employee incentives paid during the first quarter based on
1999 operating results, and a reduction in commission expenses payable.
Deferred revenues of $3,310,262 at March 31, 2000, compares with
$3,515,957 at December 31, 1999. Deferred revenues represent the amount 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 quarter ended March 31, 2000, 37% of
company revenues were derived from previously deferred revenues, as
compared with 30% of revenues for the quarter ended March 31, 1999.
<PAGE>
As a result of the net loss realized for the first quarter ended March
31, 2000, stockholders' equity decreased from $10,231,116 at December 31,
1999 to $7,208,206 at March 31, 2000.
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. On March 29, 2000, the expiration date of this agreement was
extended from August 30, 2000 to August 30, 2001. There were no
transactions under this agreement during the first quarter of 2000.
The Company also maintains an agreement with a major commercial bank
for a secured demand line of credit arrangement in the amount of
$3,000,000. In August 1999 the Company entered into an agreement with the
same bank for a $7,000,000 three year acquisition revolving credit
facility. This is in addition to the $3,000,000 demand line of credit
agreement referenced above. There have been no borrowings against either
agreement as of March 31, 2000.
In light of its current cash position, past and anticipated reductions
in operating expenses, and the credit arrangements referred to above, the
Company believes that it has sufficient resources to meet its financial
needs over the next twelve months.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(1) Registrant's Condensed Financial Statements for the three months ended
March 31, 2000 and 1999 are set forth in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
(2) Calculation of earnings per share.
(3) On January 13, 2000, the Company filed a report on form 8-K announcing
that it had completed its merger with The Angeles Group, Inc. ("TAG"), a
supplier of telemanagement software systems for large enterprises. The
transaction was structured as a stock-for-stock merger with the
shareholders of TAG receiving 360,850 share of Veramark common stock,
which represented 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,
transaction related broker, accounting, and legal fees of approximately
$600,000 were paid in cash out of working capital.
(4) On March 16, 2000, the Company filed a report on form 8-KA providing, on a
pro-forma basis, the consolidated financial statements of Veramark
Technologies, Inc. and The Angeles Group, Inc. for the years 1997 - 1999.
(5) On April 3, 2000, the Company filed a report on form 8-K announcing a
change in the Company's certifying accountants, effective March 28, 2000.
The Company's Board of Directors approved the engagement of the accounting
firm of PricewaterhouseCoopers LLP as independent auditors for the Company
and its Divisions and subsidiaries for the year ending December 31, 2000,
subject to approval of stockholders. The audit relationship between the
Company and its past independent auditors, Arthur Andersen LLP was
continued through an orderly completion of all matters related to the
year, which ended December 31, 1999. During the two most recent fiscal
years and interim period subsequent to December 31, 1999, there were no
disagreements with Arthur Andersen LLP or any matter of accounting
principles or parties, financial statements disclosure, or auditing scope
or procedure.
<PAGE>
EXHIBIT A: (2)
VERAMARK TECHNOLOGIES, INC.
CALCULATIONS OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
Basic
Net Income (Loss) $(2,859,965) $ 676,612
=========== ===========
Weighted Average Common Shares Outstanding 8,039,698 7,950,987
=========== ===========
Income (Loss) Per Common Share $ (.36) $ .09
====== =====
DILUTED
Net Income (Loss) $(2,859,965) $ 676,612
=========== ===========
Weighted Average Common Shares Outstanding 8,039,698 7,950,987
Additional Dilutive Effect of Stock Options
and Warrants after Application of Treasury
Stock Method - 613,381
----------- -----------
Weighted Average Common Shares Outstanding 8,039,698 8,564,368
=========== ===========
Income (Loss) per Common Share and Common
Equivalent Share $ (.36) $ .08
====== =====
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERAMARK TECHNOLOGIES, INC.
REGISTRANT
Date: May 15, 2000
_____________________________________
David G. Mazzella
President and CEO
Date: May 15, 2000
_____________________________________
Ronald C. Lundy
Treasurer (Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1186651
<SECURITIES> 4404053
<RECEIVABLES> 2609319
<ALLOWANCES> 269000
<INVENTORY> 589915
<CURRENT-ASSETS> 8726913
<PP&E> 7670003
<DEPRECIATION> 4614427
<TOTAL-ASSETS> 16764650
<CURRENT-LIABILITIES> 6374575
<BONDS> 0
0
0
<COMMON> 814377
<OTHER-SE> 6393829
<TOTAL-LIABILITY-AND-EQUITY> 16764650
<SALES> 4914417
<TOTAL-REVENUES> 4914417
<CGS> 868140
<TOTAL-COSTS> 7205513
<OTHER-EXPENSES> 598942
<LOSS-PROVISION> 269000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2859965)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2859965)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2859965)
<EPS-BASIC> (.36)
<EPS-DILUTED> (.36)
</TABLE>
