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FORM 10-Q SECURITIES AND EXCHANGE COMMISSION  Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934  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 Incorporation
or Organization)
    
    (IRS Employer Identification Number)
 3750 Monroe Avenue, Pittsford, NY 14534(Address of principal executive offices)(Zip Code)
 (585) 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 x   NO o Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). YES o  NO x Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of July 31, 2004 Common stock, par value $.10
    
    8,637,450 sharesThis report consists of 24 pages.
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INDEX  
 PagePART I FINANCIAL INFORMATIONItem 1 Financial StatementsCondensed Consolidated Balance Sheets - June 30, 2004 and December 31, 2003
    
    
    3-4Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2004 and 2003
    
    
    6Notes To Condensed Consolidated Financial Statements
    
    
    7-10Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11 - 17Item 3 Quantative and Qualitative Disclosures About Market Risk
    
    
    17Item 4 Controls and Procedures
    
    
    18PART II OTHER INFORMATIONItem 5 Certification of Chief Executive Officer and Chief Accounting Officer
    
    
    19Item 6 Exhibits and Reports on Form 8-K
    
    
    19EX-31.1 Certification of Chairman and CEOEX-31.2 Certification of Treasurer and CAOEX-32.1 Certification of President and CEOEX-32.2 Certification of Treasurer
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PART I -  FINANCIAL INFORMATION VERAMARK TECHNOLOGIES, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)June 30,
    
    December 31,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    470,178
    
    
    $
    644,005Investments
    
    
    564,270
    
    
    
    1,001,921Accounts receivable, trade (net
of allowance for doubtful accounts
of $42,000 and $65,000, respectively)
    
    
    1,239,856
    
    
    
    1,324,794Inventories, net
    
    
    41,591
    
    
    
    43,183Prepaid expenses and other current assets
    
    
    100,099
    
    
    
    130,509Total Current Assets
    
    
    2,415,994
    
    
    
    3,144,412PROPERTY AND EQUIPMENTCost
    
    
    5,701,096
    
    
    
    5,833,354Less accumulated depreciation
    
    
    (4,727,745
    )
    
    
    (4,792,509
    )Property and Equipment (Net)
    
    
    973,351
    
    
    
    1,040,845OTHER ASSETS:Software development costs (net of
accumulated amortization of $1,176,598
and $928,920, respectively)
    
    
    2,158,821
    
    
    
    1,817,438Pension and related assets
    
    
    2,582,832
    
    
    
    2,511,847Deposits and other assets
    
    
    797,746
    
    
    
    838,675Total other assets
    
    
    5,539,399
    
    
    
    5,167,960TOTAL ASSETS
    
    $
    8,928,744
    
    
    $
    9,353,217
 The accompanying notes are an integral part of these consolidated
financial statements. 3




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VERAMARK TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)June 30,
    
    December 31,2004
    
    2003LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    342,975
    
    
    $
    212,660Accrued compensation and related taxes
    
    
    365,943
    
    
    
    491,848Deferred revenue
    
    
    2,800,867
    
    
    
    2,918,337Capital lease obligation
    
    
    
    
    
    
    2,472Other accrued liabilities
    
    
    153,729
    
    
    
    209,364Total Current Liabilities
    
    
    3,663,514
    
    
    
    3,834,681Pension obligation
    
    
    4,214,284
    
    
    
    4,009,849Total Liabilities
    
    
    7,877,798
    
    
    
    7,844,530STOCKHOLDERS EQUITYCommon Stock, par value $.10; shares authorized,
40,000,000; shares issued and outstanding
8,685,675 and 8,643,054, shares respectively
    
    
    868,567
    
    
    
    864,305Additional paid-in capital
    
    
    21,738,944
    
    
    
    21,703,571Accumulated deficit
    
    
    (21,177,416
    )
    
    
    (20,681,568
    )Accumulated other comprehensive income
    
    
    6,608
    
    
    
    8,136Treasury stock (80,225 shares, at cost)
    
    
    (385,757
    )
    
    
    (385,757
    )Total Stockholders Equity
    
    
    1,050,946
    
    
    
    1,508,687TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    8,928,744
    
    
    $
    9,353,217
 The accompanying notes are an integral part of these consolidated financial
statements. 4




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VERAMARK TECHNOLOGIES, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003NET SALESProduct Sales
    
    $
    794,358
    
    
    $
    1,161,349
    
    
    $
    1,737,457
    
    
    $
    2,125,737Service Sales
    
    
    1,773,241
    
    
    
    1,791,165
    
    
    
    3,503,840
    
    
    
    3,576,798Total Net Sales
    
    
    2,567,599
    
    
    
    2,952,514
    
    
    
    5,241,297
    
    
    
    5,702,535COSTS AND OPERATING EXPENSES:Cost of sales
    
    
    475,632
    
    
    
    429,245
    
    
    
    856,119
    
    
    
    889,822Engineering and software development
    
    
    573,653
    
    
    
    630,659
    
    
    
    811,701
    
    
    
    1,250,657Selling, general and administrative
    
    
    2,032,556
    
    
    
    1,973,819
    
    
    
    4,071,747
    
    
    
    3,851,351Total Costs and Operating Expenses
    
    
    3,081,841
    
    
    
    3,033,723
    
    
    
    5,739,567
    
    
    
    5,991,830LOSS FROM OPERATIONS
    
    
    (514,242
    )
    
    
    (81,209
    )
    
    
    (498,270
    )
    
    
    (289,295
    )NET INTEREST (EXPENSE) INCOME
    
    
    (7,144
    )
    
    
    5,758
    
    
    
    2,422
    
    
    
    8,766LOSS BEFORE INCOME TAXES
    
    
    (521,386
    )
    
    
    (75,451
    )
    
    
    (495,848
    )
    
    
    (280,529
    )INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET LOSS
    
    $
    (521,386
    )
    
    $
    (75,451
    )
    
    $
    (495,848
    )
    
    $
    (280,529
    )NET LOSS PER SHAREBasic
    
    $
    (0.06
    )
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.03
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.03
    )
 The accompanying notes are an integral part of these consolidated financial
statements. 5




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VERAMARK TECHNOLOGIES, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Six Months Ended June 30,2004
    
    2003OPERATING ACTIVITIES:Net loss
    
    $
    (495,848
    )
    
    $
    (280,529
    )Adjustments to reconcile net loss to net cash flows
provided by operating activitiesDepreciation and amortization
    
    
    388,630
    
    
    
    418,772Provision for bad debts
    
    
    (7,707
    )
    
    
    1,254Provision for inventory obsolescence
    
    
    
    
    
    
    24,996Loss on disposal of fixed assets
    
    
    11,548
    
    
    
    1,003Compensation expense-stock options
    
    
    9,200
    
    
    
    41,699Changes in assets and liabilitiesAccounts receivable
    
    
    92,645
    
    
    
    (99,866
    )Inventories
    
    
    1,592
    
    
    
    8,495Prepaid expenses and other current assets
    
    
    30,410
    
    
    
    (3,394
    )Deposits and other assets
    
    
    (30,056
    )
    
    
    (124,963
    )Accounts payable
    
    
    130,315
    
    
    
    75,175Accrued compensation and related taxes
    
    
    (125,905
    )
    
    
    4,491Deferred revenue
    
    
    (117,470
    )
    
    
    (307,997
    )Other accrued liabilities
    
    
    (55,635
    )
    
    
    (43,853
    )Pension obligation
    
    
    204,435
    
    
    
    160,431Net cash flows provided (used) by operating activities
    
    
    36,154
    
    
    
    (124,286
    )INVESTING ACTIVITIES:Sale (purchase) of investments
    
    
    437,651
    
    
    
    (50,320
    )Capitalized software development costs
    
    
    (589,061
    )
    
    
    Additions to property and equipment
    
    
    (85,006
    )
    
    
    (54,573
    )Decrease in other comprehensive income
    
    
    (1,528
    )
    
    
    Net cash flows used by investing activities:
    
    
    (237,944
    )
    
    
    (104,893
    )FINANCING ACTIVITY:Proceeds from exercise of stock options
    
    
    22,980
    
    
    
    5,555Repayment of capital lease obligation
    
    
    (2,472
    )
    
    
    (9,530
    )Proceeds from employee stock purchase plan
    
    
    7,455
    
    
    
    8,647Net cash flows provided by financing activities
    
    
    27,963
    
    
    
    4,672NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (173,827
    )
    
    
    (224,507
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    644,005
    
    
    
    623,194CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    470,178
    
    
    $
    398,687
 The accompanying notes are an integral part of these consolidated
financial statements. 6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) GENERAL The accompanying unaudited consolidated financial statements include all
adjustments of a normal and recurring nature which, in the opinion of Companys
management, are necessary to present fairly the Companys financial position as
of June 30, 2004 and the results of its operations and cash flows for the three
and six months ended June 30, 2004 and 2003. 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 consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes contained in the Companys annual report on Form
10-K to the Securities and Exchange Commission for the year ended December 31,
2003. The results of operations and cash flows for the three and six months
ended June 30, 2004 are not necessarily indicative of the results to be
expected for the full years operation. (2) PROPERTY AND EQUIPMENT The major classifications of property and equipment at June 30, 2004, and
December 31, 2003 were: June 30,
    
    December 31,2004
    
    2003Machinery and equipment
    
    $
    794,314
    
    
    $
    792,579Computer hardware and software
    
    
    1,905,683
    
    
    
    1,889,404Furniture and fixtures
    
    
    1,618,540
    
    
    
    1,768,812Leasehold improvements
    
    
    1,382,559
    
    
    
    1,382,559$
    5,701,096
    
    
    $
    5,833,354
  For the three and six months ended June 30, 2004, the Company recorded
depreciation expense of $72,615 and $141,312, respectively. (3) STOCK-BASED COMPENSATION  In 2002, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 148, Accounting for Stock-Based Compensation  Transition
and Disclosure. This standard provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. Additionally, the standard also
requires prominent disclosures in 7




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the Companys financial statements about the method of accounting used for
stock-based employee compensation, and the effect of the method used when
reporting financial results.The Company accounts for stock-based compensation in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation. As permitted by SFAS
No. 123, 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. 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 loss and net loss per common share would have been adjusted to the pro
forma amounts indicated below: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    As reported
    
    $
    (521,386
    )
    
    $
    (75,451
    )
    
    $
    (495,848
    )
    
    $
    (280,529
    )Pro forma
    
    $
    (605,162
    )
    
    $
    (224,858
    )
    
    $
    (671,362
    )
    
    $
    (609,616
    )Net loss per common share
    
    As reportedBasic
    
    $
    (0.06
    )
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.03
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.03
    )Pro formaBasic
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.07
    )Diluted
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
    
    $
    (0.07
    )
  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 weighted-average assumptions used for grants in
2004 and 2003. There were no stock options issued in the second quarter of
2004. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    N/A
    
    
    
    143.42
    %
    
    
    144.43
    %
    
    
    142.05
    %Risk-free interest
rate
    
    
    N/A
    
    
    
    2.48
    %
    
    
    3.27
    %
    
    
    2.65
    %Expected life
    
    
    N/A
    
    
    5 years
    
    5 years
    
    5 years
 (4) TOTAL COMPREHENSIVE INCOME (LOSS)  Total comprehensive income (loss) for the three and six months ended
June 30, 2004 and 2003 was as follows: 8




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (521,386
    )
    
    $
    (75,451
    )
    
    $
    (495,848
    )
    
    $
    (280,529
    )Accumulated other
comprehensive income
(loss)
    
    
    (6,193
    )
    
    
    3,142
    
    
    
    (1,528
    )
    
    
    16,805Total comprehensive loss
    
    $
    (527,579
    )
    
    $
    (72,309
    )
    
    $
    (497,376
    )
    
    $
    (263,724
    )
 (5) NET INCOME (LOSS) PER SHARE (EPS)  SFAS 128 Earnings Per Share requires the Company to calculate net income
(loss) per share based on basic and diluted net income (loss) per share,
as defined. Basic EPS excludes dilution and is computed by dividing net
income (loss) by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. The dilutive effect of outstanding options
issued by the Company are reflected in diluted EPS using the treasury
stock method. Under the treasury stock method, options will only have a
dilutive effect when the average market price of common stock during the
period exceeds the exercise price of the options. Calculations of Earnings (Loss) Per Share Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003BasicNet loss
    
    $
    (521,386
    )
    
    $
    (75,451
    )
    
    $
    (495,848
    )
    
    $
    (280,529
    )Weighted average common shares outstanding
    
    
    8,578,431
    
    
    
    8,394,314
    
    
    
    8,570,630
    
    
    
    8,392,524Net loss per common share
    
    $
    (0.06
    )
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.03
    )DilutedNet loss
    
    $
    (521,386
    )
    
    $
    (75,451
    )
    
    $
    (495,848
    )
    
    $
    (280,529
    )Weighted average common shares outstanding
    
    
    8,578,431
    
    
    
    8,394,314
    
    
    
    8,570,630
    
    
    
    8,392,524Additional dilutive effect of stock options and
warrants after application of treasury stock method
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average dilutive shares outstanding
    
    
    8,578,431
    
    
    
    8,394,314
    
    
    
    8,570,630
    
    
    
    8,392,524Net loss per common share assuming full dilution
    
    $
    (0.06
    )
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.03
    )
 9




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(6) INDEMNIFICATION OF CUSTOMERS  Our agreements with customers generally require us to indemnify the
customer against claims that our software infringes third party patent,
copyright, trademark or other proprietary rights. Such indemnification
obligations are generally limited in a variety of industry-standard
respects, including our right to replace an infringing product. As of
June 30, 2004 we had not experienced any material losses related to these
indemnification obligations and no material claims with respect thereto
were outstanding. We do not expect significant claims related to these
indemnification obligations, and consequently, we have not established any
related reserves. (7) 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. There were no contributions to the plan for the
three and six months ended June 30, 2004 and 2003.The Company also sponsors an unfunded Supplemental Executive Retirement
Program (SERP), which is a non-qualified plan that provides certain key
employees defined pension benefits. Periodic pension expense for the
three and six months ended June 30, 2004 and 2003 consists of the
following: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Current Service Costs
    
    $
    74,693
    
    
    $
    55,946
    
    
    $
    149,386
    
    
    $
    111,892Prior Service Costs
    
    
    21,721
    
    
    
    21,721
    
    
    
    43,442
    
    
    
    43,442Interest Cost
    
    
    47,337
    
    
    
    62,332
    
    
    
    94,674
    
    
    
    84,664Pension Expense
    
    $
    143,751
    
    
    $
    139,999
    
    
    $
    287,502
    
    
    $
    239,998
  The Company paid pension obligations of $83,067 and $79,567 for the six
months ended June 30, 2004 and 2003, respectively.The discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit
obligation were 6% and 3% respectively, for the three and six months ended
June 30, 2004 and 7% and 3%, respectively, for the three and six months
ended June 30, 2003.The Company maintains life insurance covering certain key employees under
its Supplemental Executive Retirement Program with the Company named as
beneficiary. The Company intends to use the death benefits of these
policies, as well as loans against the accumulating cash surrender value
of the policies, to fund the pension obligation. The total death benefit
associated with these policies is $10.2 million, with an associated
accumulated cash surrender value of approximately $1,930,000 at June 30,
2004. The accumulated cash surrender values of these policies at December
31, 2003 was approximately $1,858,000. 10




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Item 2 Managements Discussion and Analysis of Financial Condition and Results
of Operations Results of Operations Managements Discussion and Analysis contains statements that are
forward-looking. Such statements are identified by the use of words like
plans, expects, intends, believes, will, anticipates, estimates
and other words of similar meaning in conjunction with, among other things,
discussions of future operations, financial performance, the Companys strategy
for growth, product development, regulatory approvals, market position and
expenditures. Forward-looking statements are based on managements expectations
as of the date of this report. The Company cannot guarantee that any
forward-looking statement will be accurate, although the Company believes that
it has been reasonable in its expectations and assumptions. Forward-looking
statements are subject to the risks identified in Issues and Risks and
elsewhere in this report. Readers are cautioned not to place undue reliance on
forward-looking statements and are advised to review the risks identified in
Issues and Risks and elsewhere in this report. The Company has no obligation
to update forward-looking statements. Sales for the quarter ended June 30, 2004 of $2,567,599, were 13% lower
than sales of $2,952,514 for the quarter ended June 30, 2003. For the six
months ended June 30, 2004, sales of $5,241,297 were 8% lower than the sales of
$5,702,535 recognized for the first six months of 2003. Veramark incurred a net loss of $521,386, or $0.06 per share for the
quarter ended June 30, 2004, which compared with a net loss of $75,451, or
$0.01 per share for the quarter ended June 30, 2003. For the six months ended
June 30, 2004, the company has incurred a net loss of $495,848, or $0.06 per
share. For the same six month period of 2003, Veramark reported a net loss of
$280,529, or $0.03 per share. We continue to see customer order rates fluctuate significantly on a
week-to-week basis, with no sustainable trend emerging. Though orders received
for the second quarter of 2004 increased 15% over the first quarter of 2004,
overall, orders remain below expectations. The increase in second quarter
orders, does however, allow us to begin the third quarter of 2004 with a higher
sales backlog than we had entering the second quarter. During the first and second quarters of 2004, Veramark has realized a net
cash outflow of approximately $600,000. This outflow is the result of the
lower sales volumes, coupled with higher gross operating expenses for the first
six months of 2004 as compared with the first six months of 2003. The Company
had anticipated a reduction in its total cash position through the first six
months of 2004 as a result of the increased operating expenses associated with
the launch of the VeraSMART 2.0 product, but the decline has been greater than
expected as a result of the lower sales. Management believes that with the
increased sales expected from VeraSMART 2.0 in the third and fourth quarters of
2004, as well as with careful monitoring of operating expenses, the Company
will be cash flow positive for the second half of the year. The lower sales for both the three and six months ended June 30, 2004 are
attributable to two major factors. The first was the 2003 acquisition of one
of our largest distributors, Expanets, by Avaya Inc. Prior to the acquisition,
both Expanets and Avaya served as separate channels of distribution for the
Companys core call accounting products. The integration of these formerly
separate channels has progressed slowly, resulting in a 40% decrease in sales
to the combined channel for the first six months of 2004, as compared to the
first six months of 2003, when Avaya and Expanets were separate channels. 11




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Though we have experienced increased sales through other channels of
distribution for call accounting and telemanagement products and services,
overall Veramark realized a decrease of 4% in sales of call accounting and
telemanagement products and services for both the three and six months ended
June 30, 2004 as compared with the same three and six months ended June 30,
2003. The second factor affecting sales for the three and six months ended June
30, 2004 was the phase-out of sales of the Quantum Series® of enterprise-level
products, in anticipation of the planned second quarter release of VeraSMART
2.0®. Development of VeraSMART 2.0, a critical component of the next
generation replacement of the Quantum Series, in terms of significant new
technology and functionality, was completed ahead of schedule, late in the
second quarter and is now available for sale. Initial interest from customers
has been very encouraging, and within the first month of availability, the
Company has received several significant orders for VeraSMART 2.0 including one
from Avaya for the Commonwealth of Massachusetts, and a direct sale to Cal
State University. Revenue from these orders will be recognized during the
third and fourth quarters of 2004. Primarily, as a result of the phase-out of Quantum Series products, sales
of enterprise-level products decreased 30% and 15%, respectively, for the three
and six months ended June 30, 2004, as compared with the same three and six
months periods of 2003. The Company expects to realize an increase in sales of
enterprise-level products over the second half of 2004 with the release of
VeraSMART 2.0. Revenues generated from the Veramarks Service Bureau operation, a
provider of outsourced solutions, increased 26% and 16%, respectively for the
three and six months ended June 30, 2004, as compared to prior year results.
The increase in Service Bureau revenues includes initial revenues from a
division of Lockheed Martin, a new customer added during the first quarter of
2004, plus a significant order from Travelers Insurance, expanding their
Service Bureau offering to include an additional 57 sites. Additionally, at
the same time, Travelers extended their service contract for an extra year. Gross profit margins, determined by subtracting cost of sales from total
sales were 81% and 84% for the three and six months ended June 30, 2004. For
the three and six months ended June 30, 2003, gross profit margins were 85% and
84%, respectively. The decrease in the gross profit margin for the three
months ended June 30, 2004 versus the prior year is attributable to an increase
in amortization expense charged to cost of sales as we initiate the
amortization of the previously capitalized development costs of VeraSMART 2.0. Net expenses for engineering and software development expenses, after the
effects of software capitalization were $573,653 for the three months ended
June 30, 2004, and $811,701 for the six months ended June 30, 2004. This
compares with net engineering and software development expenses of $630,659 and
$1,250,657 for the same three and six month periods of 2003. However, gross
spending for engineering and development efforts increased 12% for both the
three and six months ended June 30, 2004 as compared to the prior year. The table below encapsulates the gross expense for engineering and
software development, costs capitalized, net engineering and software
development expenses, amounts amortized, and the overall impact on the
Companys Statements of Operations for the three and six months ended June 30,
2004 and 2003: 12




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Gross expenditures for engineering
and software development
    
    $
    704,238
    
    
    $
    630,659
    
    
    $
    1,400,762
    
    
    $
    1,250,657Less: Software development costs
capitalized
    
    
    (130,585
    )
    
    
    
    
    
    
    (589,061
    )
    
    
    Net expenses for engineering and
software development expenses
    
    
    573,653
    
    
    
    630,659
    
    
    
    811,701
    
    
    
    1,250,657Plus: Software development costs
amortized and charged to cost of sales
    
    
    144,464
    
    
    
    103,213
    
    
    
    247,678
    
    
    
    248,280Total Expense Recognized
    
    $
    718,117
    
    
    $
    733,872
    
    
    $
    1,059,379
    
    
    $
    1,498,937
 Engineering and development efforts for the first six months of 2004 were
primarily focused on the successful completion of the VeraSMART 2.0
development. The expanded VeraSMART 2.0 suite includes five fully integrated
modules: SMART Directory, SMART Invoice Management, SMART Allocation, SMART
Call Accounting and SMART Online Directory, and is designed to meet the unique
needs of large enterprises. It is designed to allow businesses to consolidate
all communications costs, including: invoices from services providers one-time
and recurring costs for assets and services; and call detail from an unlimited
number of sources, such as IP-PBXs, circuit-switched PBXs, key systems, cell
phones, credit cards and other third party sources. This gives customers an
understanding of network requirements and usage trends, with a goal of
ultimately reducing their overall costs. With VeraSMART 2.0 now complete, engineering and software development
efforts will concentrate on expansion of the present VeraSMART
suite to further broaden the products appeal to the enterprise-level customer
base. Selling, general and administrative expense of $2,032,556 for the three
months ended June 30, 2004 increased 3% from the expense level of $1,973,819
for the three months ended June 30, 2003. Selling, general and administrative
expenses of $4,071,747 for the six months ended June 30, 2004 are 6% higher
than expenses incurred of $3,851,351 for the first six months of 2003. The
increased costs reflect increases in marketing costs as well as an expansion of
our direct sales force required to support an effective launch of the VeraSMART
2.0 product. Liquidity and Capital Resources As of June 30, 2004, Veramarks total cash position, consisting of cash in
operating accounts plus short-term investments, totaled $1,034,448. This
compares with a total cash position at December 31, 2003 of $1,645,926, and is
a reduction of $416,974 from the March 31, 2004 cash position. The net cash
outflow stems 13




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from a combination of lower sales volumes and higher gross operating expenses
for the first six months of 2004, as compared with the first six months of
2003. Accounts receivable at June 30, 2004 of $1,239,856 compares with accounts
receivable of $1,324,794 at December 31, 2003. We continue to experience
virtually no collection problems with our customers, nor any significant
changes in the payment patterns of customers. As a result, the allowance for
doubtful accounts has been reduced from $65,000 at December 31, 2003, to
$42,000 at June 30, 2004. At June 30, 2004, the cost value of property and equipment total
$5,701,096, down from $5,833,354 at December 31, 2003. During the first six
months of 2004, the Company purchased $85,006 of capital equipment and wrote
off approximately $217,000 of obsolete capital assets, the majority of which
had been fully depreciated. Software development costs of $2,158,821 at June 30, 2004 compare with
software development costs of $1,817,438 at December 31, 2003. The increase
reflects the capitalization of $589,061 of software development costs in the
first six months of 2004, less the amortization of $247,678 of previously
capitalized development costs. Pension and related assets have increased from $2,511,847 at December 31,
2003 to $2,582,832 at June 30, 2004. Included in pension and related assets is
approximately $1,930,000 representing the cash surrender value of Company-owned
life insurance policies. The death benefit and accumulated cash values of
these policies are intended to fund future pension obligations. The
accumulated cash values referred to above are also available to fund our
current operations, should that become necessary. Total current liabilities of $3,663,514 at June 30, 2004 have decreased 4%
from the December 31, 2003 balance of $3,834,681. Accounts payable have
increased by approximately $130,000 at June 30, 2004 from December 31, 2003,
but are approximately at the same level as of March 31, 2004. Accrued
compensation and related taxes have declined by approximately $126,000 from the
December 31, 2003 total as a result of the timing of the payment of the
Companys payrolls, and a reduction in commissions payable to salespeople. Deferred revenues of $2,800,867 at June 30, 2004 are down from the balance
of $2,918,337 at December 31, 2003, but have increased from $2,769,223 at March
31, 2004. Deferred revenues represent services such as training, installation
and maintenance and support, for which the company has billed customers, but
for which it has not yet performed the associated services. Most of the
services currently deferred, are expected to be provided over the next twelve
months and recorded as sales revenue at the time those services are actually
rendered. Stockholders equity of $1,050,946 at June 30, 2004 compares with
stockholders equity of $1,508,687 at December 31, 2003, with the decrease being
attributable to the loss of $495,848 incurred for the first six months of 2004.
During the second quarter of 2004, employees exercised 36,125 stock options,
and purchased 6,496 shares of Common Stock through the Company-sponsored
Employee Stock Purchase Plan. 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. 14




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##### Table of Contents



The adoption of SAB No. 104 did not have a material effect on the
Companys consolidated financial statements.2)
    
    In January 2003, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 46, Consolidation of variable
Interest entities  and interpretation of ARB 51 (FIN 46). FIN 46
addresses when a company should include in its financial statements
the assets, liabilities and activities of a variable interest entity.
It defines variable interest entities as those entities with a
business purpose that either do no have equity investors with voting
rights in proportion to such investors equity for the entity to
support its activities and have equity investors that lack a
controlling financial interest. FIN 46 also requires disclosures
about variable interest entities that a company is not required to
consolidate, but in which it has a significant variable interest.
FIN 46 consolidation requirements apply immediately to variable
interest entities created on or obtained after January 31, 2003, but
this had no impact on the Companys 2003 financial statements. A
modification to FIN 46 (FIN 46R) was released on December 17, 2003.
FIN 46R delayed the effective date for variable interest entities
created before February 1, 2003, with the exception of
special-purpose entities, until the first fiscal year or interim
period after December 15, 2003. As of January 1, 2004, the Company
adopted FIN 46R. In conjunction with this adoption, the Company
performed an evaluation of variable interest entities in which it has
an ownership, contractual or other monetary interest and adopted FIN
46R. The adoption of FIN 46R did not have a material effect on the
Companys condensed consolidated financial statements. Critical Accounting Policies The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported therein. The most
significant of these involving difficult or complex judgments in 2004 include:  
    
    Revenue recognition
    
    Capitalization of software development costs
    
    Allowance for Doubtful Accounts
    
    Pension liability In each situation, management is required to make estimates about the
effects of matters or future events that are inherently uncertain. The Company recognizes revenue in accordance with SOP 97-2, Software
Revenue Recognition, and related interpretations. Our software licensing with
customers typically have terms and conditions that are described in signed
orders. Revenue from perpetual licenses is recognized upon delivery of the
licensed product, provided that acceptance has occurred and a signed
contractual obligation has been received, the price is fixed and determinable,
and collectibility of the receivable is probable. Service revenues consist principally of software installation,
implementation, upgrades, and customer training, as well as software
maintenance agreements that include both customer support and the right to
upgrades. The Company estimates the value of post-contract customer support
sold together with perpetual licenses by reference to published price lists
which generally represent the prices at which customers could purchase renewal
contracts for such services. Revenue from maintenance contracts is recognized
ratably over 15




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the term of the contract, usually one year. Revenue from training,
support and other services is recognized as the services are performed. The Company believes its revenue recognition policies are appropriate, in
all circumstances, and that its policies are reflective of complexities arising
from customer arrangements involving such features as maintenance, warranty
agreements, license agreements, and other normal course of business
arrangements. The Company capitalizes software development costs when technological
feasibility has been established for the software in accordance with SFAS No.
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed. Such capitalized costs are amortized on a
product-by-product basis over their economic life or the ratio of current
revenues to current and anticipated revenues from such software, whichever
provides the greater amortization. The Company periodically reviews the
carrying value of capitalized software development costs and impairments are
recognized in the results of operations when the expected future undiscounted
operating cash flow derived from the capitalized software is less than its
carrying value. Should the Company inaccurately determine when a product
reaches technological feasibility or the economic life of a product, results
could differ materially from those reported. Veramark uses what it believes
are reasonable assumptions and where applicable, established valuation
techniques in making its estimates. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the potential inability of its customers to make required
payments. Management specifically analyzes accounts receivable, historical bad
debts, credit concentrations and customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts. The Company sponsors an unfunded Supplemental Executive Retirement Program
(SERP), which is a nonqualified plan that provides certain key employees a
defined pension benefit. In order to properly record the net present value of
future pension obligations a number of assumptions are required to be made by
Companys management. These assumptions include years of service, life
expectancies, and projected future salary increases for each participant. In
addition, management must make assumptions with regard to the proper long-term
interest and liability discount rates to be applied to these future
obligations. Should the Company need to alter any of these assumptions, there is the
potential for significant adjustments to future projected pension liabilities. Issues and Risks The following factors, among others discussed herein and in the Companys
filings under the Act, could cause actual results and future events to differ
materially from those set forth or contemplated in the forward-looking
statements: economic, competitive, governmental and technological factors,
increased operating costs, failure to obtain necessary outside financing, risks
related to natural disasters and financial market fluctuations. Such factors
also include:  Intellectual Property RightsVeramark regards its software as proprietary and attempts to protect it
with a combination of copyright, trademark and trade secret protections,
employee and third-party non-disclosure agreements and other methods of
protection. Despite those precautions, it may be possible for unauthorized
third parties to copy certain portions of Veramarks products, reverse
engineer or obtain and use information that Veramark regards as
proprietary. In addition, Veramark sometimes use click-wrap licenses,
under 16




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##### Table of Contents



which it license its products, which may be unenforceable under the laws
of certain jurisdictions. Also, the laws of some foreign countries do not
protect Veramarks proprietary rights to the same extent as the laws of
the United States. Any misappropriation of Veramarks intellectual
property could have a material adverse effect on its business and results
of operations. Furthermore, although Veramark takes steps to prevent
unlawful infringement of others intellectual property, there can be no
assurance that third parties will not assert infringement claims against
Veramark in the future with respect to current or future products. Any
such assertion could require Veramark to enter into royalty arrangements
or result in costly litigation.New Products and ServicesVeramark has made significant investments in research, development and
marketing for new products, services and technologies, including the
VeraSMART software offering and its service bureau outsourced solutions.
Significant revenue from new product and service investments may not be
achieved for a number of years, if at all. Moreover, for such products or
services, operating margins may not be as high as the margins historically
experienced by Veramark.Declines in Demand for SoftwareIf overall market demand for software and computer devices generally, as
well as call accounting software or enterprise level products
specifically, declines, or corporate spending for such products declines,
Veramarks revenue will be adversely affected. Additionally, Veramarks
revenues would be unfavorably impacted if customers were to reduce their
purchases of new software products or upgrades to existing products.Product Development ScheduleThe development of software products is a complex and time-consuming
process. New products and enhancements to existing products can require
long development and testing periods. Significant delays in new product
releases or significant problems in creating new products, particularly
any delays in future releases of the VeraSMART suite of products, could
adversely affect Veramark revenues.CompetitionVeramark experiences intensive competition across all markets for its
products and services. Some competing firms have greater name recognition
and more financial, marketing and technological resources than Veramark.
These competitive pressures may result in decreased sales volumes, price
reductions, and/or increased operating costs, such as for marketing and
sales incentives, resulting in lower revenues, gross margins and operating
income.Marketing and SalesVeramarks marketing and distribution strategy is founded on building
mutually beneficial relationships with companies that have established
distribution networks. Some sell privately labeled, customized products
developed and manufactured by Veramark to their specific specifications,
while others resell Veramarks products. Any loss of the continued
availability of those relationships could have a material adverse effect
on Veramarks business and results of operations. 
 Item 3 Quantitative and Qualitative Disclosures About Market Risk The Company has no long-term bank debt obligations. The Company has no
foreign currency exchange risk and has no foreign currency exchange contracts. 17




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Item 4 Controls and Procedures Based upon an evaluation as of the end of the period covered by this
report, the Companys Chief Executive Officer and Treasurer (Chief Accounting
Officer) concluded that the Companys disclosure controls and procedures are
effective to provide reasonable assurance that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms and
(ii) accumulated and communicated to the Companys management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure. There have been no changes in the Companys internal controls over
financial reporting, that occurred during the period covered by this report,
that have materially affected, or are reasonably likely to materially affect
the Companys internal controls over financial reporting. The Companys disclosure controls and procedures and internal controls
over financial reporting provide reasonable, but not absolute, assurance that
all deficiencies in design or operation of those control systems, or all
instances of errors or fraud, will be prevented or detected. Those control
systems are designed to provide reasonable assurance of achieving the goals of
those systems in light of the Companys resources and nature of the Companys
business operations. The Companys disclosure controls and procedures and
internal control over financial reporting remain subject to risks of human
error and the risk that controls can be circumvented for wrongful purposes by
one or more individuals in management or non-management positions. 18




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PART II - OTHER INFORMATION 
 Item 5:
    
    The Companys Chief Executive Officer and Chief Accounting Officer
have provided the certifications with respect to this Form 10-Q
that are required by Sections 302 and 906 of the Sarbanes-Oxley
Act of 2002. These certifications have been filed as Exhibits
31.1 and 31.2 and Exhibits 32.1 and 32.2, respectively.
 
 Item 6: Exhibits and Reports on Form 8-K  (a)
    
    Exhibits required by Item 601 of Regulation S-K (I) Registrants Condensed Financial Statements for the three and
six months ended June 30, 2004 and 2003 are set forth in Part I,
Item 1 of this Quarterly Report on Form 10-Q. (31.1) CEO Certification Pursuant to Rule 13a-14(a) and 15d-14(a),
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (31.2) Treasurer Certification Pursuant to Rule 13a-14(a) and
15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. (32.1) CEO Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (32.2) Treasurer Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.  (b)
    
    Reports filed on 8-K during quarter for which report is filed  (1)
    
    On May 14, 2004, the Company filed a Current Report
on Form 8-K reporting that the Company issued a press release
announcing the Companys financial results for the quarter
ended March 31, 2004, a copy of such press release, which was
attached as Exhibit 99.1.(2)
    
    On May 12, 2004, the Company filed a current report
on Form 8-K reporting that the accounting firm of Deloitte and
Touche LLP was ceasing its client-auditor relationship with the
Company effective with completion of the review of the
Companys interim financial statements for the quarter ended
March 31, 2004.(3)
    
    On June 7, 2004, the Company filed a current report
on Form 8-K announcing that the audit Committee of the Board of
Directors approved, on June 2, 2004, the accounting firm of
Rotenberg and Company LLP as independent accountants for the
year ending December 31, 2004. 19




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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: August 12, 2004 /s/ David G. MazzellaDavid G. MazzellaPresident and CEO
 Date: August 12, 2004 /s/ Ronald C. LundyRonald C. LundyTreasurer (Chief Accounting Officer)
 20