##### 



FORM 10-Q SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2004 Commission File Number 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 
  (585) 381-6000 
 N/A 
  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 October 31, 2004 Common stock, par value $.10
    
    8,646,262 sharesThis report consists of 25 pages.
 1




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##### 



INDEX PagePART I  FINANCIAL INFORMATIONItem 1 Financial StatementsCondensed Consolidated Balance Sheets  September 30, 2004 and December 31, 2003
    
    
    3 - 4Condensed Consolidated Statements of Operations   Three and Nine Months Ended September 30, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2004 and 2003
    
    
    6Notes To Condensed Consolidated Financial Statements
    
    
    7 - 11Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12 - 18Item 3 Quantative and Qualitative Disclosures About Market Risk
    
    
    18Item 4 Controls and Procedures
    
    
    19PART II OTHER INFORMATIONItem 5 Certification of Chief Executive Officer and Chief Accounting Officer
    
    
    20Item 6 Exhibits and Reports on Form 8-K
    
    
    20
  2




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##### 



PART I   FINANCIAL INFORMATION VERAMARK TECHNOLOGIES, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)September 30,
    
    December 31,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    351,697
    
    
    $
    644,005Investments
    
    
    479,443
    
    
    
    1,001,921Accounts receivable, trade (net
of allowance for doubtful accounts
of $52,000 and $65,000, respectively)
    
    
    1,186,376
    
    
    
    1,324,794Inventories, net
    
    
    43,026
    
    
    
    43,183Prepaid expenses and other current assets
    
    
    108,555
    
    
    
    130,509Total Current Assets
    
    
    2,169,097
    
    
    
    3,144,412PROPERTY AND EQUIPMENTCost
    
    
    5,723,400
    
    
    
    5,833,354Less accumulated depreciation
    
    
    (4,780,928
    )
    
    
    (4,792,509
    )Property and Equipment (Net)
    
    
    942,472
    
    
    
    1,040,845OTHER ASSETS:Software development costs (net of
accumulated amortization of $1,341,688
and $928,920, respectively)
    
    
    2,331,500
    
    
    
    1,817,438Pension and related assets
    
    
    2,653,462
    
    
    
    2,511,847Deposits and other assets
    
    
    797,745
    
    
    
    838,675Total other assets
    
    
    5,782,707
    
    
    
    5,167,960TOTAL ASSETS
    
    $
    8,894,276
    
    
    $
    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)September 30,
    
    December 31,2004
    
    2003LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    281,122
    
    
    $
    212,660Accrued compensation and related taxes
    
    
    456,654
    
    
    
    491,848Deferred revenue
    
    
    2,647,145
    
    
    
    2,918,337Capital lease obligation
    
    
    
    
    
    
    2,472Other accrued liabilities
    
    
    175,576
    
    
    
    209,364Total Current Liabilities
    
    
    3,560,497
    
    
    
    3,834,681Pension obligation
    
    
    4,316,502
    
    
    
    4,009,849Total Liabilities
    
    
    7,876,999
    
    
    
    7,844,530STOCKHOLDERS EQUITYCommon Stock, par value $.10; shares authorized,
40,000,000; shares issued and outstanding
8,726,487 and 8,643,054, shares respectively
    
    
    872,649
    
    
    
    864,305Additional paid-in capital
    
    
    21,724,100
    
    
    
    21,703,571Accumulated deficit
    
    
    (21,211,175
    )
    
    
    (20,681,568
    )Accumulated other comprehensive income
    
    
    17,460
    
    
    
    8,136Treasury stock (80,225 shares, at cost)
    
    
    (385,757
    )
    
    
    (385,757
    )Total Stockholders Equity
    
    
    1,017,277
    
    
    
    1,508,687TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    8,894,276
    
    
    $
    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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003NET SALESProduct Sales
    
    $
    1,079,564
    
    
    $
    1,094,131
    
    
    $
    2,817,021
    
    
    $
    3,219,868Service Sales
    
    
    1,702,422
    
    
    
    1,823,048
    
    
    
    5,206,262
    
    
    
    5,399,846Total Net Sales
    
    
    2,781,986
    
    
    
    2,917,179
    
    
    
    8,023,283
    
    
    
    8,619,714COSTS AND OPERATING EXPENSES:Cost of sales
    
    
    486,782
    
    
    
    458,332
    
    
    
    1,342,901
    
    
    
    1,348,154Engineering and software development

    
    
    330,476
    
    
    
    432,449
    
    
    
    1,142,177
    
    
    
    1,683,106Selling, general and administrative
    
    
    1,996,384
    
    
    
    1,920,823
    
    
    
    6,068,131
    
    
    
    5,772,174Total Costs and Operating Expenses
    
    
    2,813,642
    
    
    
    2,811,604
    
    
    
    8,553,209
    
    
    
    8,803,434(LOSS) INCOME FROM OPERATIONS
    
    
    (31,656
    )
    
    
    105,575
    
    
    
    (529,926
    )
    
    
    (183,720
    )NET INTEREST (EXPENSE) INCOME
    
    
    (2,103
    )
    
    
    3,953
    
    
    
    319
    
    
    
    12,719(LOSS) INCOME BEFORE INCOME TAXES
    
    
    (33,759

    )
    
    
    109,528
    
    
    
    (529,607
    )
    
    
    (171,001
    )INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET (LOSS) INCOME
    
    $
    (33,759
    )
    
    $
    109,528
    
    
    $
    (529,607
    )
    
    $
    (171,001
    )NET (LOSS) INCOME PER SHAREBasic
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.06
    )
    
    $
    (0.02
    )Diluted
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.06
    )
    
    $
    (0.02
    )
 The accompanying notes are an integral part of these consolidated financial
statements. 5




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##### 



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months EndedSeptember 30,2004
    
    2003OPERATING ACTIVITIES:Net loss
    
    $
    (529,607
    )
    
    $
    (171,001
    )Adjustments to reconcile net loss to net cash flows
provided by operating activitiesDepreciation and amortization
    
    
    621,777
    
    
    
    599,099Provision for bad debts
    
    
    (5,086
    )
    
    
    (14,151
    )Provision for inventory obsolescence
    
    
    
    
    
    
    37,494(Gain) loss on disposal of fixed assets
    
    
    (1,983
    )
    
    
    1,003Compensation expense, net of forfeitures-stock options
    
    
    (27,136
    )
    
    
    57,953Changes in assets and liabilitiesAccounts receivable
    
    
    143,504
    
    
    
    (189,914
    )Inventories
    
    
    157
    
    
    
    29,294Prepaid expenses and other current assets
    
    
    21,954
    
    
    
    3,770Deposits and other assets
    
    
    (100,685
    )
    
    
    (216,703
    )Accounts payable
    
    
    68,462
    
    
    
    8,636Accrued compensation and related taxes
    
    
    (35,194
    )
    
    
    193,266Deferred revenue
    
    
    (271,192
    )
    
    
    (222,918
    )Other accrued liabilities
    
    
    (33,788
    )
    
    
    8,901Pension obligation
    
    
    306,653
    
    
    
    290,646Net cash flows provided by operating activities
    
    
    157,836
    
    
    
    415,375INVESTING ACTIVITIES:Sale (purchase) of investments
    
    
    522,478
    
    
    
    (72,632
    )Capitalized software development costs
    
    
    (926,829
    )
    
    
    (212,474
    )Additions to property and equipment
    
    
    (122,185
    )
    
    
    (64,350
    )Increase in other comprehensive income
    
    
    9,324
    
    
    
    11,966Proceeds from sale of equipment
    
    
    13,531
    
    
    
    Net cash flows used by investing activities:
    
    
    (503,681
    )
    
    
    (337,490
    )FINANCING ACTIVITY:Proceeds from exercise of stock options
    
    
    48,554
    
    
    
    48,752Repayment of capital lease obligation
    
    
    (2,472
    )
    
    
    (13,866
    )Proceeds from employee stock purchase plan
    
    
    7,455
    
    
    
    8,647Net cash flows provided by financing activities
    
    
    53,537
    
    
    
    43,533NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (292,308
    )
    
    
    121,418CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    644,005
    
    
    
    623,194CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    351,697
    
    
    $
    744,612
 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 September 30, 2004, the results of its operations for the three and nine
months ended September 30, 2004 and 2003, and cash flows for the nine months
ended September 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 nine months
ended September 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 September 30, 2004,
and December 31, 2003 were: September 30,
    
    December 31,2004
    
    2003Machinery and equipment
    
    $
    794,314
    
    
    $
    792,579Computer hardware and software
    
    
    1,918,850
    
    
    
    1,889,404Furniture and fixtures
    
    
    1,627,677
    
    
    
    1,768,812Leasehold improvements
    
    
    1,382,559
    
    
    
    1,382,559$
    5,723,400
    
    
    $
    5,833,354
 For the three and nine months ended September 30, 2004, the Company
recorded depreciation expense of $68,057 and $209,369, 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
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. 7




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##### 



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. The 2003 proforma information
inadvertently omitted forfeited options. Current proforma information
appropriately reflects this information. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net (loss) income
    
    As reported
    
    $
    (33,759
    )
    
    $
    109,528
    
    
    $
    (529,607
    )
    
    $
    (171,001
    )Pro forma
    
    $
    43,675
    
    
    $
    (9,344
    )
    
    $
    (627,687
    )
    
    $
    (618,960
    )Pro forma as previously reported
    
    
    
    
    
    $
    45,287
    
    
    
    
    
    
    $
    (532,240
    )Net (loss) income
    
    As reportedBasic
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.06
    )
    
    $
    (0.02
    )Diluted
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.06
    )
    
    $
    (0.02
    )Pro formaBasic
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    (0.07
    )
    
    $
    (0.07
    )Diluted
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    (0.07
    )
    
    $
    (0.07
    )Pro forma as previously reportedBasic
    
    
    
    
    
    $
    0.01
    
    
    
    
    
    
    $
    (0.06
    )Diluted
    
    
    
    
    
    $
    0.01
    
    
    
    
    
    
    $
    (0.06
    )
 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. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    146.14
    %
    
    
    145.91
    %
    
    
    145.05
    %
    
    
    142.68
    %Risk-free interest
rate
    
    
    3.33
    %
    
    
    3.11
    %
    
    
    3.29
    %
    
    
    2.72
    %Expected life
    
    5 years
    
    5 years
    
    5 years
    
    5 years
 8




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##### 



(4) TOTAL COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss) for the three and nine months ended
September 30, 2004 and 2003 was as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net (loss) income
    
    $
    (33,759
    )
    
    $
    109,528
    
    
    $
    (529,607
    )
    
    $
    (171,001
    )Accumulated other comprehensive
income (loss)
    
    
    10,852
    
    
    
    (4,839
    )
    
    
    9,324
    
    
    
    11,966Total comprehensive (loss) income
    
    $
    (22,907
    )
    
    $
    104,689
    
    
    $
    (520,283
    )
    
    $
    (159,035
    )
 (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. 9




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##### 



Calculations of Earnings (Loss) Per Share Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003BasicNet (loss) income
    
    $
    (33,759
    )
    
    $
    109,528
    
    
    $
    (529,607
    )
    
    $
    (171,001
    )Weighted average common shares outstanding
    
    
    8,637,328
    
    
    
    8,461,134
    
    
    
    8,592,863
    
    
    
    8,415,394Net (loss) income per common share
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.06
    )
    
    $
    (0.02
    )DilutedNet (loss) income
    
    $
    (33,759
    )
    
    $
    109,528
    
    
    $
    (529,607
    )
    
    $
    (171,001
    )Weighted average common shares outstanding
    
    
    8,637,328
    
    
    
    8,461,134
    
    
    
    8,592,863
    
    
    
    8,415,394Additional dilutive effect of stock options and
warrants after application of treasury stock method
    
    
    
    
    
    
    933,524
    
    
    
    
    
    
    
    Weighted average dilutive shares outstanding
    
    
    8,637,328
    
    
    
    9,394,658
    
    
    
    8,592,863
    
    
    
    8,415,394Net (loss) income per common share
assuming full dilution
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.06
    )
    
    $
    (0.02
    )
  (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
September 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 nine months ended September 30, 2004 and 2003. 10




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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 and nine months ended September 30, 2004 and 2003 consists of the
following: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Current Service Costs
    
    $
    74,693
    
    
    $
    70,946
    
    
    $
    224,079
    
    
    $
    182,838Prior Service Costs
    
    
    21,721
    
    
    
    21,721
    
    
    
    65,163
    
    
    
    65,163Interest Cost
    
    
    47,337
    
    
    
    77,332
    
    
    
    142,011
    
    
    
    161,996Pension Expense
    
    $
    143,751
    
    
    $
    169,999
    
    
    $
    431,253
    
    
    $
    409,997
 The Company paid pension obligations of $124,600 and $119,351 for the nine
months ended September 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 nine months
ended September 30, 2004 and 7% and 3%, respectively, for the three and
nine months ended September 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 $2 million at September
30, 2004. The accumulated cash surrender values of these policies at
December 31, 2003 was approximately $1,858,000. 11




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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 of $2,781,986 for the three months ended September 30, 2004
decreased 5% from sales of $2,917,179 for the three months ended September 30,
2003. For the nine months ended September 30, 2004, sales of $8,023,283 were
7% less than sales of $8,619,714 for the first nine months of 2003. For the three months ended September 30, 2004, Veramark recorded a net
loss of $33,759, or $0.00 per share, which compared with net income of
$109,528, or $0.01 per share for the same quarter of the prior year. For the
nine months ended September 30, 2004, Veramarks net loss is $529,607, or $0.06
per share. For the nine months ended September 30, 2003, the net loss was
$171,001, or $0.02 per share. For the nine months ended September 30, 2004, the company capitalized
$926,829 of software development expenses, which compared with capitalization
of $212,474 for the same nine months of 2003. The companys policy is to
capitalize software development costs when technological feasibility has been
established in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed. Veramark continues to experience fluctuating monthly order rates and their
corresponding impact on sales revenues and cash balances. Orders for the third
quarter of 2004 were encouraging, increasing 7% from orders received during the
second quarter of 2004, and 26% from orders received during the first quarter
of 2004. Veramark incurred a net cash outflow of approximately $203,000 for the
quarter ended September 30, 2004. Net cash consists of cash in the bank and
short-term investments. The reduction in net cash results from a 6% increase
in gross operating expenses for the first nine months of 2004 versus the same
nine months of 2003, combined with the 7% decrease in sales for the same nine
month periods. The increased operating expenses are attributable to costs
associated with the development and launch of VeraSMART® 2.0, our new
enterprise level product offering, which was released for sale late in the
second quarter of this year. Management is pleased with the customer
acceptance of VeraSMART, which was the primary factor in the increased order
rates experienced in the second and third quarters of 2004. It is managements
expectation that the additional revenues generated from sales of VeraSMART will
be instrumental in providing future positive cash flows. Major VeraSMART
orders received during the third quarter included orders from ESPN, Marshall
University, Rainbow Media, and US Food Services, Inc. 12




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With the release of VeraSMART 2.0, sales of enterprise level products and
services for the three months ended September 30, 2004 increased 4% from the
same three months of 2003. For the nine months ended September 30, 2004, sales
of enterprise products and services decreased 9% from the first nine months of
2003. The year to date decline is attributable to the strategic 2003 phase-out
of the Quantum Series® product, VeraSMARTs predecessor, which significantly
reduced enterprise level product sales during the first half of 2004. Sales of core call accounting products and services for the three and nine
months ended September 30, 2004, decreased 7% and 5%, respectively from the
same three and nine month periods ended September 30, 2003. Sales of core call

accounting products and services continue to be adversely impacted by Avaya,
Inc.s 2003 acquisition of Expanets, a significant source of distribution for
the Company prior to 2004. Sales to the newly formed single channel of
distribution are 37% less for the nine months ended September 30, 2004 than for
the same nine months of 2003 when Avaya and Expanets were separate channels for
the Company. Though we have seen an increase of 10% in sales of call
accounting products and services through other distribution channels through
September 30, 2004, they have not been sufficient enough to offset the loss of
the Expanets sales realized in prior years. Sales generated by Veramarks Outsourced Management Solutions group
increased 5% for the three months ended September 30, 2004, and 12% for the
nine months ended September 30, 2004 from the same three and nine month periods
of 2003. By selecting Veramarks Outsourcing capabilities, companies are able
to realize the benefit of controls on their telemanagement expenses without
making significant investments in equipment or internal staff to carry out
those functions. Gross margins, defined as net sales less cost of sales, of $2,295,204 for
the three months ended September 30, 2004 and $6,680,382 for the nine months
ended September 30, 2004, represented 82% and 83% of total sales respectively.
Gross Margins for the three and nine months ended September 30, 2003 were
$2,458,847 and $7,271,560, representing 84% of total sales for both periods.
The reduced margins in 2004 versus 2003, reflect increased amortization costs
in 2004 associated with capitalized development expenses of VeraSMART 1.0 and
2.0 in prior periods. Net engineering and software development expenses of $330,476 for the
three months ended September 30, 2004, decreased 24% from net engineering and
software development expenses of $432,449 for the three months ended September
30, 2003. For the nine months ended September 30, 2004, net engineering and
software development expenses of $1,142,177 were 32% less than the expense
level of $1,683,106 for the first nine months of 2003. Gross spending for engineering and software development, before the
effects of software capitalization, increased by 4% and 9% for the three and
nine months ended September 30, 2004, as compared to the same three and nine
months periods of 2003. The table below details the gross expenses incurred 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 nine months ended
September 30, 2004 and 2003: 13




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Gross expenditures for engineering
and software development
    
    $
    668,244
    
    
    $
    644,923
    
    
    $
    2,069,006
    
    
    $
    1,895,580Less: Software development costs
 capitalized
    
    
    (337,768
    )
    
    
    (212,474
    )
    
    
    (926,829
    )
    
    
    (212,474
    )Net expenses for engineering and
software development expenses
    
    
    330,476
    
    
    
    432,449
    
    
    
    1,142,177
    
    
    
    1,683,106Plus: Software development costs
amortized and charged to cost of sales
    
    
    165,089
    
    
    
    103,214
    
    
    
    412,767
    
    
    
    351,494Total Expense Recognized
    
    $
    495,565
    
    
    $
    535,663
    
    
    $
    1,554,944
    
    
    $
    2,034,600
 Our engineering and software development expenses continue to be
concentrated on the further expansion of the functionality of the VeraSMART
product, with the next version of the product scheduled for January 2005. Selling, general and administrative expenses of $1,996,384 and $6,068,131
for the three and nine months ended September 30, 2004, represent increases of
4% and 5% respectively from the selling, general and administrative expense of
$1,920,823 and $5,772,174 for the three and nine months ended September 30,
2003. The reasons for the increased operating expenses for both the three and
nine months ended September 30, 2004, as compared with the same three and nine
months periods of 2003, are two-fold. The first is a 15% increase in marketing
costs primarily associated with the sales launch of VeraSMART 2.0. Secondly,
the Company has increased direct selling expenses by 9% from the prior year,
primarily through staffing additions to support the new enterprise level
business generated by VeraSMART and to increase its penetration into potential
new markets for call accounting products and services. Liquidity and Capital Resources Veramarks total cash position as of September 30, 2004 was $831,140
consisting of cash on hand plus short-term investments. This compares with a
total cash position of $1,645,926 at December 31, 2003. The decline in cash
position results primarily from the decrease in total sales, combined with
increased gross operating expenses, for the nine months ended September 30,
2004, as compared with the first nine months of 2003. In addition to the cash
balance referenced above, the Company has immediate access to approximately $2
million of cash surrender values of company-owned insurance policies to fund
current operations should that become necessary. Accounts receivable at September 30, 2004 total $1,186,376 net of an
allowance for doubtful accounts of $52,000. At December 31, 2003, accounts
receivable were $1,324,794 net of an allowance for doubtful 14




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accounts of $65,000. The reduction in accounts receivable reflects lower
sales volumes realized for 2004 versus 2003. We have not incurred any
significant write-offs during 2004. For the nine months ended September 30, 2004, the Company has purchased
$122,185 of new capital equipment, primarily computer hardware and software
utilized in its development efforts. For the first nine months of 2003,
spending on new capital equipment was $64,350. Additionally, the Company has
disposed of $232,139 of obsolete equipment during 2004. A gain of
approximately $2,000 was realized after the effects of accumulated depreciation
and cash proceeds from the sale of a portion of these assets, and included in
the Statement of Operations. Software development costs of $2,331,500 at September 30, 2004, have
increased from $1,817,438 at December 31, 2003. For the first nine months of
2004, Veramark has capitalized $926,829 of development costs, and amortized
$412,767 of previously capitalized costs, which has been charged to cost of
sales. Development costs capitalized in 2004 have been entirely devoted to
further development and expansion of the Companys enterprise level VeraSMART®
product line. Pension and related assets of $2,653,462 at September 30, 2004 include
$2,000,457 of cash surrender values associated with Company-owned life
insurance policies. The death benefit and cash values of these policies are
intended to fund future pension obligations, though the cash values are also
available, with Board of Director approval, to fund current operations, should
that become necessary. Total current liabilities at September 30, 2004, of $3,560,497 have
decreased from $3,834,681 at December 31, 2003, primarily as a result of a
$271,192 decrease in deferred revenues. Deferred revenues decreased from
$2,918,337 at December 31, 2003 to $2,647,145 at September 30, 2004. Deferred
revenues are services for which the Company has billed customers for services
such as maintenance and support, training and installation, but for which it
has not yet performed the associated service. The majority of currently
deferred services are expected to be provided over the next twelve months and
recorded as revenue. As of September 30, 2004 the Company has an accumulated pension obligation
of $4,316,502, under a non-qualified, unfunded, Supplemental Executive
Retirement Program. The Company maintains life insurance policies covering
certain key employees and intends to use the death benefits of these policies,
as well as loans against the accumulating cash surrender value of these
policies, to fund the pension obligation. The total death benefit associated
with these policies is $10.2 million, and the accumulated cash surrender values
as of September 30, 2004 is approximately $2.0 million. Stockholders equity at September 30, 2004 was $1,017,277, down from
$1,508,687 at December 31, 2003, primarily reflecting the net loss incurred for
the first nine months of 2004 of $529,607. For the nine months ended
September 30, 2004, employees of the Company have exercised 76,937 stock
options, and purchased 6,496 shares of common stock through the Companys
Employee Stock Purchase Plan, yielding proceeds to the Company of approximately
$56,000. 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. 15




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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 not 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 16




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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 17




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##### 



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. 18




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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. 19




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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
nine months ended September 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 August 13, 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 June 30, 2004, a copy of such press release,
which was attached as Exhibit 99.1.(2)
    
    On September 2, 2004, the Company filed a current
report on Form 8-K reporting the election of Mr. Andrew W.
Moylan to the Board of Directors. 20




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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: November 12, 2004 /s/ David G. MazzellaDavid G. MazzellaPresident and CEO
 Date: November 12, 2004 /s/ Ronald C. LundyRonald C. LundyTreasurer (Chief Accounting Officer)
 21