##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2006
 0-13898
 Veramark Technologies, Inc.
 
  Delaware
    
    16-1192368(State or other jurisdiction of Incorporation
or Organization)
    
    (IRS Employer Identification Number)
 3750 Monroe Avenue, Pittsford, NY
    
    14534(Address of principal executive offices)
    
    (Zip Code)
   
    
  þ o
 o
 o o þ
 o þ
    1




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INDEX
 PagePART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial StatementsCondensed Balance Sheets -June 30, 2006 (Unaudited) and December 31, 2005
    
    3 - 4Condensed Statements of Operations (Unaudited)Three and Six Months Ended June 30, 2006 and 2005
    
    5Condensed Statements of Cash Flows (Unaudited)Six Months Ended June 30, 2006 and 2005
    
    6 - 7Notes To Condensed Financial Statements (Unaudited)
    
    8 - 12Item 2
    
    Management's Discussion and Analysis ofFinancial Condition and Results of Operations
    
    12 - 20Item 3
    
    Quantative and Qualitative Disclosures About Market Risk
    
    20Item 4
    
    Controls and Procedures
    
    20 - 21PART II
    
    OTHER INFORMATIONItem 4
    
    Submission of Matters to a Vote of Security Holders
    
    21Item 5
    
    Certification of Chief Executive Officer and Chief Accounting Officer
    
    21Item 6
    
    Exhibits
    
    22Officers' Certifications and Signatures
    
    23 - 27EX-31.1EX-31.2EX-32.1EX-32.2
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 VERAMARK TECHNOLOGIES, INC.
 
 CONDENSED BALANCE SHEETS
 (Unaudited)June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    921,653
    
    
    $
    911,310Investments
    
    
    709,949
    
    
    
    600,324Accounts receivable, trade (net
of allowance for doubtful accounts
of $30,000 and $32,000, respectively)
    
    
    1,177,590
    
    
    
    1,522,190Inventories, net
    
    
    49,869
    
    
    
    31,724Prepaid expenses and other current assets
    
    
    231,623
    
    
    
    161,127Total Current Assets
    
    
    3,090,684
    
    
    
    3,226,675PROPERTY AND EQUIPMENTCost
    
    
    5,844,023
    
    
    
    5,796,427Less accumulated depreciation
    
    
    (5,129,050
    )
    
    
    (5,025,761
    )Property and Equipment (Net)
    
    
    714,973
    
    
    
    770,666OTHER ASSETS:Software development costs (net of
accumulated amortization of $2,870,922
and $2,373,896, respectively)
    
    
    3,019,105
    
    
    
    2,826,644Pension assets
    
    
    2,574,082
    
    
    
    2,501,636Deposits and other assets
    
    
    789,534
    
    
    
    797,745Total Other Assets
    
    
    6,382,721
    
    
    
    6,126,025TOTAL ASSETS
    
    $
    10,188,378
    
    
    $
    10,123,366
 The accompanying notes are an integral part of these financial statements.
 3




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VERAMARK TECHNOLOGIES, INC.
 CONDENSED BALANCE SHEETS
 (Unaudited)June 30,
    
    
    December 31,2006
    
    
    2005LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    187,370
    
    
    $
    275,756Accrued compensation and related taxes
    
    
    544,598
    
    
    
    565,096Deferred revenue
    
    
    3,113,083
    
    
    
    2,936,466Other accrued liabilities
    
    
    132,324
    
    
    
    135,430Total Current Liabilities
    
    
    3,977,375
    
    
    
    3,912,748Pension obligation
    
    
    4,671,237
    
    
    
    4,424,304Total Liabilities
    
    
    8,648,612
    
    
    
    8,337,052STOCKHOLDERS EQUITY:Common Stock, par value $.10; shares authorized,
40,000,000; shares issued and outstanding
8,927,498 and 8,917,840
    
    
    892,750
    
    
    
    891,784Additional paid-in capital
    
    
    21,709,524
    
    
    
    21,686,152Accumulated deficit
    
    
    (20,677,924
    )
    
    
    (20,413,395
    )Treasury stock (80,225 shares, at cost)
    
    
    (385,757
    )
    
    
    (385,757
    )Accumulated other comprehensive income
    
    
    1,173
    
    
    
    7,530Total Stockholders Equity
    
    
    1,539,766
    
    
    
    1,786,314TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    10,188,378
    
    
    $
    10,123,366
 The accompanying notes are an integral part of these financial statements.
 4




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VERAMARK TECHNOLOGIES, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005NET SALESProduct sales
    
    $
    829,043
    
    
    $
    880,053
    
    
    $
    1,568,687
    
    
    $
    1,834,636Service sales
    
    
    1,777,238
    
    
    
    1,781,303
    
    
    
    3,481,790
    
    
    
    3,453,092Total Net Sales
    
    
    2,606,281
    
    
    
    2,661,356
    
    
    
    5,050,477
    
    
    
    5,287,728COSTS AND OPERATING EXPENSES:Cost of sales
    
    
    574,093
    
    
    
    439,884
    
    
    
    1,098,432
    
    
    
    879,935Engineering and software development
    
    
    198,301
    
    
    
    178,995
    
    
    
    351,010
    
    
    
    480,787Selling, general and administrative
    
    
    2,048,755
    
    
    
    1,797,889
    
    
    
    3,881,394
    
    
    
    3,768,996Total Costs and Operating Expenses
    
    
    2,821,149
    
    
    
    2,416,768
    
    
    
    5,330,836
    
    
    
    5,129,718INCOME (LOSS) FROM OPERATIONS
    
    
    (214,868
    )
    
    
    244,588
    
    
    
    (280,359
    )
    
    
    158,010INTEREST INCOME
    
    
    7,816
    
    
    
    5,135
    
    
    
    15,830
    
    
    
    6,427INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (207,052
    )
    
    
    249,723
    
    
    
    (264,529
    )
    
    
    164,437INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    (207,052
    )
    
    $
    249,723
    
    
    $
    (264,529
    )
    
    $
    164,437NET INCOME (LOSS) PER SHAREBasic
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.02Diluted
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.02
 The accompanying notes are an integral part of these financial statements.
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VERAMARK TECHNOLOGIES, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005OPERATING ACTIVITIES:Net Income (loss)
    
    $
    (264,529
    )
    
    $
    164,437Adjustments to reconcile net income (loss) to net cash flows
provided by operating activities:Depreciation and amortization
    
    
    630,749
    
    
    
    537,725Expense (recovery) of bad debts
    
    
    (1,506
    )
    
    
    (5,776
    )Compensation expense-stock options (net of forfeitures)
    
    
    18,700
    
    
    
    (98,039
    )Increase in cash surrender value of company-owned life insurance
policies
    
    
    (72,446
    )
    
    
    (70,985
    )Realized (gain) loss on sale of investments
    
    
    (1,356
    )
    
    
    1,191Changes in assets and liabilitiesAccounts receivable
    
    
    346,106
    
    
    
    (101,402
    )Inventories
    
    
    (18,145
    )
    
    
    (9,985
    )Prepaid expenses and other current assets
    
    
    (70,496
    )
    
    
    (26,480
    )Deposits and other assets
    
    
    8,211
    
    
    
    Accounts payable
    
    
    (88,386
    )
    
    
    (63,537
    )Accrued compensation and related taxes
    
    
    (20,498
    )
    
    
    (108,573
    )Deferred revenue
    
    
    176,617
    
    
    
    100,621Other accrued liabilities
    
    
    (3,106
    )
    
    
    (9,695
    )Pension obligation
    
    
    246,933
    
    
    
    321,935Net cash flows provided by operating activities:
    
    
    886,848
    
    
    
    631,437INVESTING ACTIVITIES:Purchase of investments
    
    
    (114,626
    )
    
    
    (5,963
    )Capitalized software development costs
    
    
    (689,486
    )
    
    
    (656,619
    )Additions to property and equipment
    
    
    (78,031
    )
    
    
    (49,417
    )Net cash flows used by investing activities:
    
    
    (882,143
    )
    
    
    (711,999
    )FINANCING ACTIVITY:Exercise of stock options
    
    
    932
    
    
    
    47,461Proceeds from employee stock purchase plan
    
    
    4,706
    
    
    
    Net cash flows provided by financing activities:
    
    
    5,638
    
    
    
    47,461NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    10,343
    
    
    
    (33,101
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    911,310
    
    
    
    722,020CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    921,653
    
    
    $
    688,919
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Six Months EndedJune 30,2006
    
    
    2005SUPPLEMENTAL CASH FLOW INFORMATIONCash Transactions:Income taxes paid (received), net
    
    $
    4,500
    
    
    $
    (3,000
    )Interest paid
    
    $
    144
    
    
    $
    9
 The accompanying notes are an integral part of these financial statements.
 7




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NOTES TO CONDENSED FINANCIAL STATEMENTS
  (1) GENERAL
    (2) PROPERTY AND EQUIPMENT
  June 30,
    
    
    December 31,2006
    
    
    2005Machinery and equipment
    
    $
    798,603
    
    
    $
    794,314Computer hardware and software
    
    
    1,998,912
    
    
    
    1,991,877Furniture and fixtures
    
    
    1,663,949
    
    
    
    1,627,677Leasehold improvements
    
    
    1,382,559
    
    
    
    1,382,559$
    5,844,023
    
    
    $
    5,796,427
  (3) STOCK-BASED COMPENSATION
  8




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|                                                                                                                       |  |             |  |                    |          |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | ----------- |  | ------------------ | -------- | - | ---------------- | - | ------- | -
|                                                                                                                       |  |             |  | Three Months Ended |          |   | Six Months Ended |  
|                                                                                                                       |  |             |  | June 30, 2005      |          |   | June 30, 2005    |  
|Net Income                                                                                                             |  | As reported |  | $                  | 249,723  |   |                  | $ | 164,437 |  
|                                                                                                                       |  |             |  |                    |          |   |                  |   |         |  
|Add: total stock-based compensation
expense included in net income, net of
forfeitures and tax effects                 |  |             |  |                    | (102,082 | ) |                  |   | (98,039 | )
|                                                                                                                       |  |             |  |                    |          |   |                  |   |         |  
|Deduct: total stock-based compensation
expense determined under fair value, net of
forfeitures and related tax effects |  |             |  |                    | (460     | ) |                  |   | (36,006 | )
|                                                                                                                       |  |             |  |                    |          |   |                  |  
|                                                                                                                       |  | Pro forma   |  | $                  | 147,181  |   |                  | $ | 30,392  |  
|                                                                                                                       |  |             |  |                    |          |   |                  |  
|                                                                                                                       |  |             |  |                    |          |   |                  |   |         |  
|Net loss per common share                                                                                              |  | As reported |  |                    |          |   |                  |   |         |  
|                                                                                                                       |  | Basic       |  | $                  | 0.03     |   |                  | $ | 0.02    |  
|                                                                                                                       |  |             |  |                    |          |   |                  |  
|                                                                                                                       |  | Diluted     |  | $                  | 0.03     |   |                  | $ | 0.02    |  
|                                                                                                                       |  |             |  |                    |          |   |                  |  
|                                                                                                                       |  | Pro forma   |  |                    |          |   |                  |   |         |  
|                                                                                                                       |  | Basic       |  | $                  | 0.02     |   |                  | $ | 0.00    |  
|                                                                                                                       |  |             |  |                    |          |   |                  |  
|                                                                                                                       |  | Diluted     |  | $                  | 0.02     |   |                  | $ | 0.00    |  
|                                                                                                                       |  |             |  |                    |          |   |                  |  





Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    RemainingExercise
    
    
    Grant-Date
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Fair Value
    
    
    Term (Yrs)
    
    
    ValueOutstanding as of December 31, 2005
    
    
    2,865,028
    
    
    $
    2.37
    
    
    $
    1.93
    
    
    
    4.3
    
    
    $
    1,198,974Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (1,750
    )
    
    
    0.53
    
    
    
    
    
    
    
    
    
    
    
    (170
    )Canceled
    
    
    (102,400
    )
    
    
    2.45
    
    
    
    
    
    
    
    
    
    
    
    (44,175
    )Outstanding as of June 30, 2006
    
    
    2,760,878
    
    
    $
    2.37
    
    
    $
    1.93
    
    
    
    3.8
    
    
    $
    1,154,629Options exercisable at June 30, 2006
    
    
    2,689,903
    
    
    $
    2.41
    
    
    $
    1.96
    
    
    
    3.7
    
    
    $
    1,145,555


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(4) TOTAL COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net Income (loss)
    
    $
    (207,052
    )
    
    $
    249,723
    
    
    $
    (264,529
    )
    
    $
    164,437Accumulated other comprehensive income (loss)
    
    
    (4,232
    )
    
    
    3,835
    
    
    
    (6,357
    )
    
    
    5,372Total comprehensive Income (loss)
    
    $
    (211,284
    )
    
    $
    253,558
    
    
    $
    270,886
    
    
    $
    169,809
 (5) NET INCOME (LOSS) PER SHARE (EPS)
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Calculations of Earnings (Loss) Per Share
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 302006
    
    
    2005
    
    
    2006
    
    
    2005BasicNet Income (loss)
    
    $
    (207,052
    )
    
    $
    249,723
    
    
    $
    (264,529
    )
    
    $
    164,437Weighted average common shares outstanding
    
    
    8,839,452
    
    
    
    8,731,852
    
    
    
    8,838,913
    
    
    
    8,702,925Net Income (loss) per common share
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.02DilutedNet Income (loss)
    
    $
    (207,052
    )
    
    $
    249,723
    
    
    $
    (264,529
    )
    
    $
    164,437Weighted average common shares outstanding
    
    
    8,839,452
    
    
    
    8,731,852
    
    
    
    8,838,913
    
    
    
    8,702,925Additional dilutive effect of stock options and
warrants after application of treasury
stock method
    
    
    
    
    
    
    635,728
    
    
    
    
    
    
    
    758,647Weighted average dilutive shares outstanding
    
    
    8,839,452
    
    
    
    9,367,580
    
    
    
    8,838,913
    
    
    
    9,461,572Net Income (loss) per common share
assuming full dilution
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.02
  (6) INDEMNIFICATION OF CUSTOMERS
  (7) BENEFIT PLANS
   11




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Current Service Cost
    
    $
    69,503
    
    
    $
    114,244
    
    
    $
    139,006
    
    
    $
    228,492Amortization of Prior Service Cost
    
    
    22,123
    
    
    
    22,650
    
    
    
    44,246
    
    
    
    45,300Interest Cost
    
    
    73,374
    
    
    
    65,605
    
    
    
    146,748
    
    
    
    131,210Pension Expense
    
    $
    165,000
    
    
    $
    202,499
    
    
    $
    330,000
    
    
    $
    405,002
    
 Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
  Overview
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Sales
    13




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Cost of Sales
 Operating Expenses
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gross expenditures for engineering & software
development
    
    $
    514,000
    
    
    $
    555,000
    
    
    $
    1,040,000
    
    
    $
    1,137,000Less: Software development costs capitalized
    
    
    (316,000
    )
    
    
    (376,000
    )
    
    
    (689,000
    )
    
    
    (656,000
    )Net expense for engineering and software
    
    $
    198,000
    
    
    $
    179,000
    
    
    $
    351,000
    
    
    $
    481,000
    14




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Liquidity and Capital Resources
         15




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Accounting Pronouncements
 1)
    
    In December 2003, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition, which updates the guidance in
SAB No. 101, integrates the related set of Frequently Asked Questions, and recognizes the
role of EITF 00-21. The adoption of SAB No. 104 did not have a material effect on the
Companys financial statements.2)
    
    In November 2002, the Emerging Issues Task Force reached a consensus on Issue No.
00-21, Revenue Arrangements with Multiple Deliverables. Issue 00-21 provides guidance on
how to account for arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. The provisions of Issue 00-21 applied to
revenue arrangements entered into in periods beginning after June 15, 2003. The adoption
of Issue 00-21 did not have a material effect on the Companys financial position or
results of operations.3)
    
    In December 2004, the FASB issued SFAS 123(R), Share-Based Payment, which establishes
standards for transactions in which an entity exchanges its equity instruments for goods or
services. This standard requires an issuer to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value
of the award and the recording of such expense in the consolidated financial statements.
This eliminates the exception to account for such awards using the intrinsic value method
previously allowable under Accounting Principles Board (APB) Opinion No. 25. Pro forma
disclosure of fair value recognition will no longer be an alternative. In addition, the
adoption of SFAS No. 123(R) will require additional accounting related to the income tax
effects and disclosure regarding the cash flow effects resulting from share-based payment
arrangements.SFAS 123(R) permits public companies to adopt its requirements using one of two methods:
   16




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SFAS 123(R) became effective for our fiscal 2006 and we utilized the modified prospective
method. We have selected the Black-Scholes option-pricing model as the most appropriate
fair-value method for our awards and will recognize compensation cost on a straight-line
basis over our awards vesting periods. Although the adoption of SFAS No. 123(R) had no
adverse impact on our balance sheet or total cash flows, it is expected to negatively impact
our net income and earnings per share for 2006 by less than $50,000. The actual effects of
adopting SFAS No. 123(R) will depend on numerous factors including
the amounts of share-based payments granted in the future, our stock price volatility,
estimated forfeiture rates and employee stock option exercise behavior.4)
    
    In December 2004, FASB issued SFAS 153, Exchanges of Nonmonetary Assetsan
amendment to APB Opinion No. 29. This statement amends APB 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. Adoption of this statement
did not have a material impact on our results of operations or financial condition.5)
    
    In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections 
a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154
changes the requirements for the accounting for and reporting of a change in accounting
principle. These requirements apply to all voluntary changes and changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. SFAS 154 is effective for fiscal years beginning after
December 15, 2005. Adoption of this statement did not have a material impact on our
results of operations or financial condition.
 Critical Accounting Policies
  
    
    Revenue recognition
    
    Capitalization of software development costs
    
    Allowance for Doubtful Accounts
    
    Pension liability
    17




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18




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Issues and Risks
  Intellectual Property Rights
 New Products and Services  ®
 Declines in Demand for Software
 19




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Product Development Schedule  ®
 Competition
  Marketing and Sales
 
 Item 3 Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4 Controls and Procedures
   20




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PART II  OTHER INFORMATION
 
 Item 4: Submission of Matters to a Vote of Security Holders
  Election of Directors
 Votes CastWithheldDirector
    
    For
    
    
    AuthorityCharles A. Constantino
    
    
    7,899,551
    
    
    
    521,329John E. Gould
    
    
    7,892,551
    
    
    
    528,329Andrew W. Moylan
    
    
    7,883,051
    
    
    
    537,829David G. Mazzella
    
    
    7,837,827
    
    
    
    583,053William J. Reilly
    
    
    7,883,051
    
    
    
    537,829
 Ratification of the appointment of independent auditors for the year ending December
31, 2006
 For:
    
    
    8,127,508Against:
    
    
    24,972Abstain
    
    
    268,400
 
 Item 5: Certification of Chief Executive Officer and Chief Accounting Officer
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Item 6: Exhibits and Reports on Form 8-K
 (a) Exhibits required by Item 601 of Regulation S-K
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##### Table of Contents



/s/ David G. Mazzella
  /s/ Ronald C. Lundy
 23