##### 



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 March 31, 2006
 Commission File Number 0-13898
 Veramark Technologies, Inc.
 
  Delaware
    
    16-1192368(State or other jurisdiction of
Incorporation or Organization)
    
    (IRS Employer Identification Number)
  
   
   
  þ o
 o
  o o þ
  o þ




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INDEX
 PagePART I FINANCIAL INFORMATIONItem 1 Financial StatementsCondensed Balance Sheets -
March 31, 2006 (Unaudited) and December 31, 2005
    
    
    3 - 4Condensed Statements of Operations (Unaudited)
Three Months Ended March 31, 2006 and 2005
    
    
    5Condensed Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2006 and 2005
    
    
    6 - 7Notes To Condensed Financial Statements (Unaudited)
    
    
    8 - 12Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12 - 20Item 3 Quantative and Qualitative Disclosures About Market Risk
    
    
    20Item 4 Controls and Procedures
    
    
    20PART II OTHER INFORMATIONItem 5 Certification of Chief Executive Officer and Chief Accounting Officer
    
    
    21Item 6 Exhibits
    
    
    21Officers Certifications and Signatures
    
    
    22 - 26
 2




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VERAMARK TECHNOLOGIES, INC.
 CONDENSED BALANCE SHEETS
 (Unaudited)March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    824,171
    
    
    $
    911,310Investments
    
    
    611,459
    
    
    
    600,324Accounts receivable, trade (net
of allowance for doubtful accounts
of $43,000 and $32,000, respectively)
    
    
    1,581,928
    
    
    
    1,522,190Inventories, net
    
    
    57,176
    
    
    
    31,724Prepaid expenses and other current assets
    
    
    205,735
    
    
    
    161,127Total Current Assets
    
    
    3,280,469
    
    
    
    3,226,675PROPERTY AND EQUIPMENTCost
    
    
    5,835,171
    
    
    
    5,796,427Less accumulated depreciation
    
    
    (5,078,552
    )
    
    
    (5,025,761
    )Property and Equipment (Net)
    
    
    756,619
    
    
    
    770,666OTHER ASSETS:Software development costs (net of
accumulated amortization of $2,622,409
and $2,373,896, respectively)
    
    
    2,951,222
    
    
    
    2,826,644Pension assets
    
    
    2,525,459
    
    
    
    2,501,636Deposits and other assets
    
    
    797,745
    
    
    
    797,745Total Other Assets
    
    
    6,274,426
    
    
    
    6,126,025TOTAL ASSETS
    
    $
    10,311,514
    
    
    $
    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)March 31,
    
    
    December 31,2006
    
    
    2005LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    224,048
    
    
    $
    275,756Accrued compensation and related taxes
    
    
    428,314
    
    
    
    565,096Deferred revenue
    
    
    3,230,144
    
    
    
    2,936,466Other accrued liabilities
    
    
    143,593
    
    
    
    135,430Total Current Liabilities
    
    
    4,026,099
    
    
    
    3,912,748Pension obligation
    
    
    4,547,770
    
    
    
    4,424,304Total Liabilities
    
    
    8,573,869
    
    
    
    8,337,052STOCKHOLDERS EQUITY:Common Stock, par value $.10; shares authorized,
40,000,000; shares issued and outstanding
8,919,590 and 8,917,840
    
    
    891,959
    
    
    
    891,784Additional paid-in capital
    
    
    21,696,910
    
    
    
    21,686,152Accumulated deficit
    
    
    (20,470,872
    )
    
    
    (20,413,395
    )Treasury stock (80,225 shares, at cost)
    
    
    (385,757
    )
    
    
    (385,757
    )Accumulated other comprehensive income
    
    
    5,405
    
    
    
    7,530Total Stockholders Equity
    
    
    1,737,645
    
    
    
    1,786,314TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    10,311,514
    
    
    $
    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 EndedMarch 31,2006
    
    
    2005NET SALESProduct sales
    
    $
    739,644
    
    
    $
    954,583Service sales
    
    
    1,704,552
    
    
    
    1,671,789Total Net Sales
    
    
    2,444,196
    
    
    
    2,626,372COSTS AND OPERATING EXPENSES:Cost of sales
    
    
    524,339
    
    
    
    440,051Engineering and software development
    
    
    152,709
    
    
    
    301,792Selling, general and administrative
    
    
    1,832,639
    
    
    
    1,971,107Total Costs and Operating Expenses
    
    
    2,509,687
    
    
    
    2,712,950LOSS FROM OPERATIONS
    
    
    (65,491
    )
    
    
    (86,578
    )NET INTEREST INCOME
    
    
    8,014
    
    
    
    1,292LOSS BEFORE INCOME TAXES
    
    
    (57,477
    )
    
    
    (85,286
    )INCOME TAXES
    
    
    
    
    
    
    NET LOSS
    
    $
    (57,477
    )
    
    $
    (85,286
    )NET LOSS PER SHAREBasic
    
    $
    (0.01
    )
    
    $
    (0.01
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
 The accompanying notes are an integral part of these financial statements.
 5




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##### 



VERAMARK TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 Three Months Ended March 31,2006
    
    
    2005OPERATING ACTIVITIES:Net loss
    
    $
    (57,477
    )
    
    $
    (85,286
    )Adjustments to reconcile net loss to net cash flows
provided by operating activitiesDepreciation and amortization
    
    
    315,707
    
    
    
    269,018Expense (recovery) of bad debts
    
    
    11,000
    
    
    
    (5,512
    )Compensation expense-stock options (net of forfeitures)
    
    
    10,000
    
    
    
    4,043Increase in cash surrender value of company-owned life insurance
policies
    
    
    (23,823
    )
    
    
    (23,822
    )Realized gain (loss) on sale of investments
    
    
    (2,125
    )
    
    
    1,537Changes in assets and liabilitiesAccounts receivable
    
    
    (70,738
    )
    
    
    (68,443
    )Inventories
    
    
    (25,452
    )
    
    
    (5,668
    )Prepaid expenses and other current assets
    
    
    (44,608
    )
    
    
    (35,658
    )Accounts payable
    
    
    (51,708
    )
    
    
    (20,004
    )Accrued compensation and related taxes
    
    
    (136,782
    )
    
    
    (110,055
    )Deferred revenue
    
    
    293,678
    
    
    
    104,471Other accrued liabilities
    
    
    8,163
    
    
    
    (16,647
    )Pension obligation
    
    
    123,466
    
    
    
    160,969Net cash flows provided by operating activities
    
    
    349,301
    
    
    
    168,943INVESTING ACTIVITIES:Purchase of investments
    
    
    (11,135
    )
    
    
    (6,123
    )Capitalized software development costs
    
    
    (373,091
    )
    
    
    (280,454
    )Additions to property and equipment
    
    
    (53,147
    )
    
    
    (24,589
    )Net cash flows used by investing activities:
    
    
    (437,373
    )
    
    
    (311,166
    )FINANCING ACTIVITY:Exercise of stock options
    
    
    933
    
    
    
    11,105Net cash flows provided by financing activities
    
    
    933
    
    
    
    11,105NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (87,139
    )
    
    
    (131,118
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    911,310
    
    
    
    722,020CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    824,171
    
    
    $
    590,902
 6




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Three Months EndedMarch 31,2006
    
    
    2005SUPPLEMENTAL CASH FLOW INFORMATIONCash Transactions:Income taxes paid (received), net
    
    $
    500
    
    
    $
    (3,000
    )Interest paid
    
    $
    83
    
    
    $
    
 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
  March 31,
    
    
    December 31,2006
    
    
    2005Machinery and equipment
    
    $
    795,606
    
    
    $
    794,314Computer hardware and software
    
    
    2,004,565
    
    
    
    1,991,877Furniture and fixtures
    
    
    1,652,441
    
    
    
    1,627,677Leasehold improvements
    
    
    1,382,559
    
    
    
    1,382,559$
    5,835,171
    
    
    $
    5,796,427
  (3)
    
    STOCK-BASED COMPENSATIONIn December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R
requires all share-based payments to employees, including grants of employee stock options, to
be recognized as compensation expense in the financial statements based on their fair values.
That expense will be recognized over the period during which an employee is required to
provide services in exchange for the award, known as the requisite service period (usually the
vesting period). We adopted SFAS No. 123R effective beginning January 1, 2006, using the
Modified Prospective Application. SFAS No. 123R applies to the new awards modified,
repurchased or cancelled after the effective date. The impact of adopting SFAS No. 123R was
an increase of $10,000 to operating expenses for three months ended March 31, 2006.
 8




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##### 



For the three months ended March 31, 2005, the following table includes disclosures required
by SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure, and illustrates the
effect on net earnings and net earnings per share as if we had applied the fair value
recognition provisions of SFAS No. 123:
 Three Months EndedMarch 31,2005Net loss
    
    As reported
    
    $
    (85,286
    )Add: total stock-based
compensation expense included
in net income, net of
forfeitures and related tax
effects
    
    
    
    
    
    
    4,044Deduct: total stock-based
compensation expense
determined under fair value,
net of forfeitures and related
tax effects
    
    
    
    
    
    
    (35,546
    )Pro forma
    
    $
    (116,788
    )Net loss per common share
    
    As reportedBasic
    
    $
    (0.01
    )Diluted
    
    $
    (0.01
    )Pro formaBasic
    
    $
    (0.01
    )Diluted
    
    $
    (0.01
    )
   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
    
    
    (5,100
    )
    
    
    2.76
    
    
    
    
    
    
    
    
    
    
    
    (2,489
    )Outstanding as of March 31, 2006
    
    
    2,858,178
    
    
    $
    2.37
    
    
    $
    1.93
    
    
    
    4.1
    
    
    $
    1,196,315Options exercisable at March 31, 2006
    
    
    2,718,453
    
    
    $
    2.46
    
    
    $
    2.00
    
    
    
    3.9
    
    
    $
    1,181,442
 9




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(4)
    
    TOTAL COMPREHENSIVE INCOME (LOSS)
  Three Months Ended March 31,2006
    
    
    2005Net loss
    
    $
    (57,477
    )
    
    $
    (85,286
    )Accumulated other
comprehensive income (loss)
    
    
    (2,125
    )
    
    
    1,537Total comprehensive loss
    
    $
    (59,602
    )
    
    $
    (83,749
    )
 (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.
 10




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Calculations of Earnings (Loss) Per Share
 Three Months EndedMarch 31,2006
    
    
    2005BasicNet loss
    
    $
    (57,477
    )
    
    $
    (85,286
    )Weighted average common shares outstanding
    
    
    8,838,373
    
    
    
    8,673,998Net loss per common share
    
    $
    (0.01
    )
    
    $
    (0.01
    )DilutedNet loss
    
    $
    (57,477
    )
    
    $
    (85,286
    )Weighted average common shares outstanding
    
    
    8,838,373
    
    
    
    8,673,998Additional dilutive effect of stock options and
warrants after application of treasury stock method
    
    
    
    
    
    
    Weighted average dilutive shares outstanding
    
    
    8,838,373
    
    
    
    8,673,998Net loss per common share assuming full obligation
    
    $
    (0.01
    )
    
    $
    (0.01
    )
  (6)
    
    INDEMNIFICATION OF CUSTOMERSOur 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
March 31, 2006 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 PLANSThe 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 months ended March 31, 2006 and 2005.
 11




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##### 



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 months ended March 31, 2006 and 2005 consists of the
following:
 Three Months Ended March 31,2006
    
    
    2005Current Service Cost
    
    $
    69,503
    
    
    $
    114,248Amortization of Prior Service Cost
    
    
    22,123
    
    
    
    22,650Interest Cost
    
    
    73,374
    
    
    
    65,605Pension Expense
    
    $
    165,000
    
    
    $
    202,503
    Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
  Overview
  12




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Sales
     Cost of Sales
  13




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Operating Expenses
  Three Months EndedMarch 31,2006
    
    
    2005Gross expenditures for engineering and software development
    
    $
    526,000
    
    
    $
    582,000Less: Software development costs capitalized
    
    
    (373,000
    )
    
    
    (280,000
    )Net expenses for engineering and software development included in the
Companys statement of operations
    
    
    153,000
    
    
    
    302,000Plus: Software development costs amortized and charged to cost of sales
    
    
    249,000
    
    
    
    201,000Total Expense Recognized
    
    $
    402,000
    
    
    $
    503,000
   Liquidity and Capital Resources
  14




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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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##### 



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 is not
expected to 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. As such, the Company is required to adopt these provisions at the
beginning of the fiscal year ended December 31, 2006. Adoption of SFAS 154 is not expected
to have a significant impact on the Companys financial statements.
 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 5: Certification of Chief Executive Officer and Chief Accounting Officer
  Item 6: Exhibits and Reports on Form 8-K
 (a)
    
    Exhibits required by Item 601 of Regulation S-K
      21




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##### 



/s/ David G. Mazzella

David G. MazzellaPresident and CEODate: May 12, 2006/s/ Ronald C. Lundy

Ronald C. LundyTreasurer (Chief Accounting Officer)
 22