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FORM 10-Q
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 þ
    
    Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934
 or
 o
    
    Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For Quarter Ended March 31, 2011
 Commission File Number 0-13898
 Veramark Technologies, Inc.
  Delaware
    
    16-1192368(State or other jurisdiction of Incorporation 
or Organization)
    
    (IRS Employer Identification Number)
 1565 Jefferson Road, Suite 120 Rochester, NY 14623
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company þ
 o þ




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##### 



INDEX
 PagePART I FINANCIAL INFORMATIONItem 1 Financial StatementsCondensed Balance Sheets 
March 31, 2011 (Unaudited) and December 31, 2010
    
    
    3Condensed Statements of Operations (Unaudited)
Three Months Ended March 31, 2011 and 2010
    
    
    4Condensed Statements of Cash Flows (Unaudited)

Three Months Ended March 31, 2011 and 2010
    
    
    5Notes To Condensed Financial Statements (Unaudited)
    
    
    6 - 13Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14 - 21Item 3 Quantative and Qualitative Disclosures About Market Risk
    
    
    21Item 4 Controls and Procedures
    
    
    21PART II OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    22Item 1A Risk Factors
    
    
    22 - 24Item 5 Other Information
    
    
    25Item 6 Exhibits
    
    
    25 - 26EX-31.1EX-31.2EX-32.1EX-32.2
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PART I FINANCIAL INFORMATION
VERAMARK TECHNOLOGIES, INC.
 
 CONDENSED BALANCE SHEETS
 (Unaudited)March 31,
    
    
    December 31,2011
    
    
    2010ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    878,467
    
    
    $
    1,236,375Investments
    
    
    241,492
    
    
    
    265,962Accounts receivable, trade (net of allowance for
doubtful accounts of $33,000 for both periods)
    
    
    1,979,562
    
    
    
    1,911,693Prepaid expenses
    
    
    335,883
    
    
    
    294,090Other current assets
    
    
    678,200
    
    
    
    290,762Total Current Assets
    
    
    4,113,604
    
    
    
    3,998,882PROPERTY AND EQUIPMENTCost
    
    
    2,558,495
    
    
    
    2,512,162Less accumulated depreciation
    
    
    (1,941,375
    )
    
    
    (1,909,965
    )Property and Equipment (net)
    
    
    617,120
    
    
    
    602,197OTHER ASSETS:Software development costs (net of accumulated
amortization of $2,480,084 and $2,245,268)
    
    
    2,887,111
    
    
    
    2,961,617Pension assets
    
    
    3,111,741
    
    
    
    3,107,952Intangibles, net
    
    
    743,750
    
    
    
    804,000Goodwill
    
    
    336,219
    
    
    
    336,219Deposits and other assets
    
    
    1,062,152
    
    
    
    1,062,152Total Other Assets
    
    
    8,140,973
    
    
    
    8,271,940TOTAL ASSETS
    
    $
    12,871,697
    
    
    $
    12,873,019LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    392,829
    
    
    $
    360,382Accrued compensation
    
    
    559,959
    
    
    
    667,062Deferred revenue
    
    
    4,383,409
    
    
    
    4,250,933Current portion of pension obligation
    
    
    502,059
    
    
    
    502,059Contingent liability
    
    
    618,100
    
    
    
    899,400Short term debt
    
    
    66,667
    
    
    
    246,667Other accrued liabilities
    
    
    773,832
    
    
    
    415,459Total Current Liabilities
    
    
    7,296,855
    
    
    
    7,341,962Long-Term debt
    
    
    213,081
    
    
    
    174,555Long-Term portion of pension obligation
    
    
    4,849,243
    
    
    
    4,914,757Total Liabilities
    
    
    12,359,179
    
    
    
    12,431,274STOCKHOLDERS EQUITY:Common Stock, par value $.10; shares authorized,
40,000,000; 10,138,262 shares and 10,190,595 shares issued
    
    
    1,013,826
    
    
    
    1,019,059Additional paid-in capital
    
    
    22,689,293
    
    
    
    22,661,405Accumulated deficit
    
    
    (22,515,478
    )
    
    
    (22,568,440
    )Treasury stock (80,225 shares, at cost)
    
    
    (385,757
    )
    
    
    (385,757
    )Accumulated other comprehensive income
    
    
    (289,366
    )
    
    
    (284,522
    )Total Stockholders Equity
    
    
    512,518
    
    
    
    441,745TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    12,871,697
    
    
    $
    12,873,019
 The accompanying notes are an integral part of these financial statements.
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VERAMARK TECHNOLOGIES, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)
 Three Months EndedMarch 31,2011
    
    
    2010NET REVENUESProduct revenues
    
    $
    374,571
    
    
    $
    532,406Service revenues
    
    
    3,011,752
    
    
    
    2,249,323Total Net Revenues
    
    
    3,386,323
    
    
    
    2,781,729COSTS AND OPERATING EXPENSES:Cost of revenues
    
    
    1,081,613
    
    
    
    736,058Engineering and software development
    
    
    307,627
    
    
    
    320,039Selling, general and administrative
    
    
    1,964,193
    
    
    
    1,676,344Total Costs and Operating Expenses
    
    
    3,353,433
    
    
    
    2,732,441INCOME FROM OPERATIONS
    
    
    32,890
    
    
    
    49,288NET INTEREST INCOME
    
    
    20,072
    
    
    
    17,223INCOME BEFORE TAXES
    
    
    52,962
    
    
    
    66,511INCOME TAXES
    
    
    
    
    
    
    NET INCOME
    
    $
    52,962
    
    
    $
    66,511NET INCOME PER SHAREBasic
    
    $
    0.01
    
    
    $
    0.01Diluted
    
    $
    0.01
    
    
    $
    0.01
 The accompanying notes are an integral part of these financial statements.
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VERAMARK TECHNOLOGIES, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS 
(Unaudited)
 Three Months Ended March 31,2011
    
    
    2010OPERATING ACTIVITIES:Net income
    
    $
    52,962
    
    
    $
    66,511Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    367,318
    
    
    
    371,611Increase in bad debt reserve
    
    
    
    
    
    
    1,000Change in acquisition liabilities
    
    
    18,700
    
    
    
    Compensation expense  equity grants
    
    
    22,015
    
    
    
    30,255Loss on disposal of fixed assets
    
    
    
    
    
    
    140Changes in assets and liabilities:Accounts receivable
    
    
    (67,869
    )
    
    
    (64,566
    )Prepaid expenses and other current assets
    
    
    (429,231
    )
    
    
    72,311Pension assets
    
    
    (3,789
    )
    
    
    (20,120
    )Deposits and other assets
    
    
    
    
    
    
    (42,222
    )Accounts payable
    
    
    32,447
    
    
    
    28,804Accrued compensation
    
    
    (107,103
    )
    
    
    49,370Deferred revenue
    
    
    132,476
    
    
    
    217,586Other accrued liabilities
    
    
    358,373
    
    
    
    (127,905
    )Prepaid rent liability
    
    
    55,193
    
    
    
    Pension obligation
    
    
    (65,514
    )
    
    
    (63,016
    )Net cash provided by operating activities
    
    
    365,978
    
    
    
    519,759INVESTING ACTIVITIES:Acquisition  cash paid
    
    
    (300,000
    )
    
    
    Sale of investments
    
    
    19,626
    
    
    
    23,010Additions to property and equipment
    
    
    (68,109
    )
    
    
    (126,937
    )Capitalized software development costs
    
    
    (179,376
    )
    
    
    (302,811
    )Net cash flows used by investing activities
    
    
    (527,859
    )
    
    
    (406,738
    )FINANCING ACTIVITY:Borrowing (repayment)  line of credit
    
    
    (180,000
    )
    
    
    Bank borrowing  repayment of term loan
    
    
    (16,667
    )
    
    
    Exercise of stock options
    
    
    640
    
    
    
    Net cash provided (used) by financing activities
    
    
    (196,027
    )
    
    
    Net change in cash and cash equivalents
    
    
    (357,908
    )
    
    
    113,021Cash and cash equivalents, beginning of year
    
    
    1,236,375
    
    
    
    488,381Cash and cash equivalents, end of quarter
    
    $
    878,467
    
    
    $
    601,402
 2011
    
    
    2010SUPPLEMENTAL CASH FLOW INFORMATIONCash Transactions:Income taxes paid
    
    $
    800
    
    
    $
    250Interest paid
    
    $
    3,309
    
    
    $
    488
 The accompanying notes are an integral part of these financial statements.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
  (1)
    
    GENERAL
    (2)
    
    PROPERTY AND EQUIPMENT
 The major classifications of property and equipment at March 31, 2011, and December 31, 2010
were:
 March 31,
    
    
    December 31,2011
    
    
    2010Machinery and equipment
    
    $
    117,541
    
    
    $
    117,541Computer hardware and software
    
    
    1,258,473
    
    
    
    1,216,120Furniture and fixtures
    
    
    1,182,481
    
    
    
    1,178,501$
    2,558,495
    
    
    $
    2,512,162
 For the quarter ended March 31, 2011 and March 31, 2010, the Company recorded depreciation
expense of $53,186 and $51,672, respectively.
 (3)
    
    STOCK-BASED COMPENSATION
 The Companys share-based compensation consists of restricted stock and stock options, vesting
over periods ranging from one to four years. For the quarter ended March 31, 2011, the
company awarded 169,375 stock options vesting over four years. During the first quarter of
2010 the Company awarded 3,000 stock options vesting over four years.
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A summary of the status of the Companys stock option plan as of March 31, 2011 is presented
below:
 Weighted
    
    
    Weighted
    
    
    AverageAverage
    
    
    Average
    
    
    RemainingExercise
    
    
    Grant-Date
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Fair Value
    
    
    Term (Yrs)
    
    
    ValueOutstanding as of December 31, 2010
    
    
    1,557,768
    
    
    $
    0.62
    
    
    $
    0.58
    
    
    
    4.1
    
    
    $
    79,154Granted
    
    
    169,375
    
    
    
    0.69
    
    
    
    0.67
    
    
    
    
    
    
    
    0Exercised
    
    
    (1,000
    )
    
    
    0.64
    
    
    
    
    
    
    
    
    
    
    
    (110
    )Canceled
    
    
    (32,500
    )
    
    
    0.60
    
    
    
    
    
    
    
    
    
    
    
    (2,348
    )Outstanding as of March 31, 2011
    
    
    1,693,643
    
    
    $
    0.63
    
    
    $
    0.59
    
    
    
    4.4
    
    
    $
    76,696Options exercisable at March 31, 2011
    
    
    1,411,018
    
    
    $
    0.63
    
    
    $
    0.59
    
    
    
    3.5
    
    
    $
    76,696
  (4)
    
    COMPREHENSIVE INCOME
 Total comprehensive income for the first quarter of 2011 and 2010 was as follows:
 Three Months Ended March 31,2011
    
    
    2010Net income
    
    $
    52,962
    
    
    $
    66,511Unrealized change  pension
    
    
    
    
    
    
    (29,400
    )Unrealized change  investments
    
    
    (4,844
    )
    
    
    (13,547
    )Total comprehensive income
    
    $
    48,118
    
    
    $
    23,564
 (5)
    
    NET INCOME (LOSS) PER SHARE (EPS)
 ASC 260-10 (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.
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Calculations of Earnings Per Share
 Three Months EndedMarch 31,2011
    
    
    2010BasicNet income
    
    $
    52,962
    
    
    $
    66,511Weighted average common shares outstanding
    
    
    10,092,860
    
    
    
    9,828,727Net income per common share
    
    $
    0.01
    
    
    $
    0.01DilutedNet income
    
    $
    52,962
    
    
    $
    66,511Weighted average common shares outstanding
    
    
    10,092,860
    
    
    
    9,828,727Additional dilutive effect of stock options and
    
    
    346,280
    
    
    
    18,850warrants after application of treasury stock methodWeighted average dilutive shares outstanding
    
    
    10,439,140
    
    
    
    9,847,577Net income per common share assuming full dilution
    
    $
    0.01
    
    
    $
    0.01
 (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
March 31, 2011 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. During the first
quarter of 2011 the Company contributed $26,589 to employees 401(k) accounts. During the
first quarter of 2010 the Companys contribution to employee 401(k) accounts totaled $24,644.
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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, 2011 and 2010 consists of the
following:
 Three Months Ended March 31,2011
    
    
    2010Interest Cost
    
    $
    60,000
    
    
    $
    91,899Unrealized Actuarial Gain
    
    
    
    
    
    
    (29,400
    )Pension Expense
    
    $
    60,000
    
    
    $
    62,499
 The Company paid pension obligations of $125,515 for both the three months ended March 31,
2011 and March 31, 2010.
 The discount rate used in determining the actuarial present value of the projected benefit
obligation was 5.0% for the three months ended March 31, 2011 and 5.5% for the three months
ended March 31, 2010.
 The Company maintains life insurance covering certain current and former 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 future pension obligations. The
total death benefit associated with these policies is $10.2 million, with an associated
accumulated cash surrender value of approximately $3,112,000 at March 31, 2011. The
accumulated cash surrender values of these policies at December 31, 2010 was approximately
$3,108,000.
 The projected pension benefits paid or expected to be paid under this plan are as follows,
assuming retirement at 65 and a life expectancy of 80 years for all participants:
 Period Ending December 31, Unless Stated Otherwise,
 Q2 - Q4 2011
    
    
    376,5442012
    
    
    507,1392013
    
    
    517,3002014
    
    
    419,1662015
    
    
    377,5662016 - 2020
    
    
    2,194,441
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The Company has a contractual obligation to maintain certain health benefits for two of its
former executive officers. These benefits are accounted for as Post Retirement Healthcare
Benefits, (PRHB). Periodic PRHB expensed and paid for the three months ended March 31,
2011 and 2010 consists of the following:
 Three Months Ended March 31,2011
    
    
    2010Current Service Cost
    
    $
    2,253
    
    
    $
    2,125Interest Cost
    
    
    1,159
    
    
    
    1,287PRHB Expense
    
    $
    3,412
    
    
    $
    3,412
 The projected PRHB paid or expected to be paid are as follows:
 Period Ending December 31, Unless Stated Otherwise,
 Q2 - Q4 2011
    
    
    10,2372012
    
    
    13,6492013
    
    
    13,6492014
    
    
    10,1492015
    
    
    6,6492016 - 2020
    
    
    33,245
 8.
    
    ACQUISITION
 On June 18, 2010 we acquired the enterprise telecom expense management (TEM) consulting
business of privately held Source Loop, LLC, based in Alpharetta, Georgia. The aggregate
purchase price paid for those assets was up to $1.5 million, plus the issuance of up to
500,000 shares of Veramarks common stock. At closing, $300,000 in cash was paid and 100,000
shares of Veramark common stock issued to the principals of Source Loop. In addition, Source
Loop retained $300,000 in accounts receivable and cash on hand prior to the acquisition date,
leaving contingent consideration of $900,000 and 400,000 shares of Veramark common stock that
could be earned, subject to attaining certain revenue and employee retention parameters
through December 31, 2011. Subsequent to closing we have paid the Principals of Source Loop
$300,000 and issued 100,000 shares of common stock reflecting the attainment of 100% of the
performance targets for 2010.
 As of March 31, 2011, based on managements projections of actual performance against targets
contained in the asset purchase agreement for 2011, the estimated remaining contingent
liability is $618,000 in cash and common stock. Under the purchase method of accounting, the
remaining contingent stock consideration (300,000 shares) is treated as a financial derivative, and
recorded as a liability, as it does not have a fixed settlement provision. This liability
will vary in a mark-to-market fashion with the value of the Companys stock, until the
settlement amount is known. Increases in the Companys stock price will result in an
accounting expense, and any decrease in the Companys stock price will be recorded as income.
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The unaudited financial information in the table below summarizes the combined results of
operations on a pro-forma basis, as if we had acquired Source Loop on January 1, 2010.
 Three Months EndedMarch 31,Unaudited (In 000s)
    
    2011
    
    
    2010Revenue
    
    $
    3,386
    
    
    $
    3,181Income
    
    $
    53
    
    
    $
    43Earnings Per Share
    
    $
    0.01
    
    
    $
    0.00
 9.
    
    INTANGIBLE ASSETS AND GOODWILL
 Under the purchase method of accounting, we allocated the fair value of the total
consideration expected to be transferred, to the tangible and identifiable intangible assets
acquired from Source Loop based on their estimated fair values on the date of acquisition.
The fair values assigned to the identifiable intangible assets were based on estimates and
assumptions determined by management. The table below summarizes the fair values assigned by
asset class at the time of acquisition, and the subsequent amortization through March 31,
2011 of those intangible assets.
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Weighted
    
    
    FMV at
    
    
    Current
    
    
    Accumulated
    
    
    Net Value byAvg Life
    
    
    Acquisition
    
    
    Year
    
    
    Amortization
    
    
    Asset ClassIntangible Asset Class
    
    Years
    
    
    Date
    
    
    Amortization
    
    
    at 3/31/11
    
    
    at 3/31/11Customer Contracts
    
    
    3
    
    
    $
    526
    
    
    $
    28
    
    
    $
    106
    
    
    $
    420Customer Relationships
    
    
    3
    
    
    
    260
    
    
    
    18
    
    
    
    68
    
    
    
    192Key Employee Agreements
    
    
    1
    
    
    
    177
    
    
    
    12
    
    
    
    62
    
    
    
    115Other
    
    
    1
    
    
    
    30
    
    
    
    2
    
    
    
    13
    
    
    
    17Sub-Total IntangiblesSubject to Amoritization
    
    
    3
    
    
    
    993
    
    
    $
    60
    
    
    $
    249
    
    
    $
    744Goodwill
    
    
    
    
    
    
    336Total Intangible Assets Acquired
    
    
    
    
    
    $
    1,329
  Intangible Asset Class
    
    Q2 - Q4
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015Customer Contracts
    
    $
    84
    
    
    $
    88
    
    
    $
    67
    
    
    $
    60
    
    
    $
    51Customer Relationships
    
    
    55
    
    
    
    42
    
    
    
    31
    
    
    
    25
    
    
    
    19Key Employee Agreements
    
    
    34
    
    
    
    42
    
    
    
    39
    
    
    
    
    
    
    
    Other
    
    
    8
    
    
    
    5
    
    
    
    3
    
    
    
    1
    
    
    
    Sub-Total IntangiblesSubject to Amoritization
    
    $
    181
    
    
    $
    177
    
    
    $
    140
    
    
    $
    86
    
    
    $
    70
  10.
    
    COMMITMENTS AND CONTINGENCIES
 On October 4, 2010, the Company was served with a complaint in an action brought by Asentinel
LLC, against the Company. AnchorPoint, a division of MTS, and CASS Information Systems, were
also served with the same complaint. The complaint alleges infringement of two telecom expense
management (TEM) patents held by Asentinel concerning systems and methods for identifying and
processing billing exceptions in telecommunications invoices. The Company has challenged the
allegations made in the complaint. The litigation is still in the discovery stage at this time,
and it is not possible to determine the ultimate resolution of, or estimate the liability, if
any, related to this matter. The Companys policy is to expense legal costs as incurred, and
no provision for losses has been provided in connection with this litigation.
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11.
    
    REVOLVING DEMAND NOTE AGREEMENT
 On October 31, 2008, Veramark Technologies, Inc. entered into a Revolving Demand Note
Agreement (the Agreement), effective as of October 31, 2008, with Manufacturers and Traders
Trust Company (the Bank) to provide working capital in the ordinary course of business.
This agreement was amended in October 2010 increasing the amount available under the
agreement from $400,000 to $750,000. At March 31, 2011, the Company did not have any
outstanding balance under this Agreement.
  
    
    The maximum outstanding principal balance under the Agreement is Seven Hundred
Fifty Thousand Dollars ($750,000).
 
    
    Veramark may borrow under the Agreement, from time to time, an amount less than
or equal to, but not greater than the available balance.
 
    
    The outstanding principal balance will bear interest at a per annum rate equal to
LIBOR rate plus 3.5% with a minimum rate of 4.0%.
 
    
    The Bank may demand payment of the outstanding principal balance at any time.
 12.
    
    TERM NOTE AGREEMENT
 On October 29, 2010 the Company entered into an agreement with Manufacturers and Traders
Trust Company to provide a three year term note in the amount of $200,000, the proceeds of
which were used to purchase furnishings and fixtures for the Companys new headquarters
facility. The loan bears an interest rate of LIBOR plus 4.0%, with a minimum interest rate of
4.5%. At March 31, 2011 the remaining balance of the term loan was $172,222.
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Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
  Overview
    Revenues
  Gross Margin
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Engineering and Software Development Costs
  Three Months Ended March 31,2011
    
    
    2010Gross expenditures for engineering & software
development
    
    $
    487,000
    
    
    $
    623,000Less: Software development costs capitalized
    
    
    (179,000
    )
    
    
    (303,000
    )Net expense for engineering and software
    
    $
    308,000
    
    
    $
    320,000
 Selling, General, and Administrative Costs
  Liquidity and Capital Resources
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Accounting Pronouncements
 
    
    In October 2009, the FASB issued Accounting Standards Update No. 2009-13,
Multiple-Deliverable Revenue Arrangements,which amends existing revenue recognition
accounting pronouncements that are currently within the scope of FASB Codification Subtopic
605-25 (previously included within EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, or EITF 00-21). The consensus to EITF Issue No. 08-01, Revenue Arrangements
with Multiple Deliverables, or EITF 08-01, provides accounting principles and application
guidance on whether multiple deliverables exist, how the arrangement should be separated,
and the consideration allocated. This guidance eliminates the requirement to establish the
fair value of undelivered products and services and instead provides for separate revenue recognition based upon managements estimate of the selling price for an
undelivered item when there is no other means to determine the fair value of that undelivered
item. EITF 00-21 previously required that the fair value of the undelivered item be the price
of the item either sold in a separate transaction between unrelated third parties or the
price charged for each item when the item is sold separately by the vendor. This was
difficult to determine when the product was not individually sold because of its unique
features. Under EITF 00-21, if the fair value of all of the elements in the arrangement was
not determinable, then revenue was deferred until all of the items were delivered or fair
value was determined. This new approach is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010. This
update does not have a material effect on the Companys financial statements.
 
    
    In January 2010, the FASB issued Accounting Standards Update No. 2010-06, topic 820,
Fair Value Measurements and Disclosures, which amends existing fair value disclosure
pronouncements. This update provides amendments to Subtopic 820-10 that require new
disclosures as follows:
 1.
    
    Transfers in and out of Levels 1 and 2. A reporting entity should
disclose separately the amounts of significant transfers in and out of Level 1 and
Level 2 fair value measurements and describe the reasons for the transfers.
 2.
    
    Activity in Level 3 fair value measurements. In the reconciliation for
fair value measurements using significant unobservable inputs (Level 3), a reporting
entity should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number).
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##### Table of Contents



1.
    
    Level of disaggregation. A reporting entity should provide fair value
measurement disclosures for each class of assets and liabilities. A class is often
a subset of assets or liabilities within a line item in the statement of financial
position. A reporting entity needs to use judgment in determining the appropriate
classes of assets and liabilities.
 2.
    
    Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to measure
fair value for both recurring and nonrecurring fair value measurements. Those
disclosures are required for fair value measurements that fall in either Level 2 or
Level 3.
 major categories classes
  Compensation  Stock Compensation
 
    
    In April 2010, the FASB issued Accounting Standards Update No. 2010-17, topic 605,
Revenue Recognition  Milestone Method, which provides guidance on the criteria that
should be met for determining whether the milestone method of revenue recognition is
appropriate. A vendor can recognize consideration that is contingent upon achievement of a
milestone in its entirety as revenue in the period in which the milestone is achieved only
if the milestone meets all criteria to be considered substantive. This update is effective
on a prospective basis for milestones achieved in fiscal years, and interim periods within
those years, beginning on or after June 15, 2010. This update does not have a material
effect on the Companys financial statements.
 
    
    In July 2010, the FASB issued Accounting Standards Update No. 2010-20, topic 310,
Receivables, which requires disclosures about the credit quality of financing receivables
and the allowance for credit losses. The disclosures as of the end of a reporting period
are effective for interim and annual reporting periods ending on or after December 15,
2010. This update does not have a material effect on the Companys financial statements.
 
    
    In December 2010, the FASB issued Accounting Standards Update No. 2010-28, topic 350,
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts.For those reporting units with zero or negative carrying value,
step 2 of the impairment test is required to be performed, even if step 1 indicates it is
not necessary. The Company does not expect this to have a material effect on the Companys
financial statements.
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##### Table of Contents




    
    In December 2010, the FASB issued Accounting Standards Update No. 2010-29, topic 805,
Disclosure of Supplementary Pro Forma Information for Business Combinations, to clarify
diversity in practice of applying this topic. Paragraph 805-10-50-2(h) requires a public
entity to disclose pro forma information for business combinations that occurred in the
current reporting period. The disclosures include pro forma revenue and earnings of the
combined entity for the current reporting period as though the acquisition date for all
business combinations that occurred during the year had been as of the beginning of the
annual reporting period. If comparative financial statements are presented, the pro forma
revenue and earnings of the combined entity for the comparable prior reporting period
should be reported as though the acquisition date for all business combinations that
occurred during the current year had been as of the beginning of the comparable prior
annual reporting period. The Company properly reports such supplementary information in
its filings.
 Critical Accounting Policies
  Revenue Recognition
     
    
    Vendor Specific Objective Evidence of the fair value (VSOE),
 
    
    Third Party Evidence (TPE)
 
    
    Best Estimate of the Selling Price (ESP)
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Capitalization of Software Development
  Allowance for Doubtful Accounts
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Pension Liability
   
 Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4
    
    Controls and Procedures
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Item 1
    
    Legal Proceedings
  
 Item 1A
    
    Risk Factors
  Intellectual Property Rights
  Existing Customer Base
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Product Development
  Declines in Demand for Software
  Competition
  Marketing and Sales
  Security and Privacy Breaches in our Systems May Damage Client Relations and Inhibit our Growth
  Loss of Key Employees
  Changing Market
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Access to Capital
  Public Company
  Stock Price Volatility
   24




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Item 5:
    
    Other Information
  
 Item 6:
    
    Exhibits
 (a
    )
    
    Financial Statements as set forth under Item 1 of this report on Form 10-Q(b
    )
    
    Exhibits required to be filed by Item 601 of Regulation S-K3.1
    
    
    Restated Certificate of Incorporation (incorporated by reference to
Exhibit 4.1 to the Companys Registration Statement on Form S-18
(File No. 2-96787) filed on March 22, 1985)3.2
    
    
    Bylaws (incorporated by reference to Exhibit 3 to the Companys
Registration Statement on Form S-8 filed on October 5, 1992)10.1
    
    
    Letter Agreement dated as of March 29, 2007 by and between the
Company and David G. Mazzella (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K filed on April 3,
2007)10.2
    *
    
    Amended and Restated Board of Directors Deferred Compensation Plan
(incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on November 26, 2007)10.3
    *
    
    Employment Agreement dated as of December 17, 2007 by and between
the Company and Anthony C. Mazzullo (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on
December 19, 2007)10.4
    *
    
    Restricted Stock Award Agreement dated as of January 1, 2008 by and
between the Company and Anthony C. Mazzullo (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on March 25, 2008)10.5
    *
    
    2008 Incentive Plan for Management and Key Employees (incorporated
by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on April 2, 2008)10.6
    *
    
    2008 Employee Stock Purchase Plan (incorporated by reference to
Exhibit F to the Companys Proxy Statement for its 2008 Annual
Meeting of Shareholders filed on April 29, 2008)10.7
    *
    
    Description of non-employee director compensation (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on August 18, 2008)10.8
    *
    
    Amended Salary Continuation Agreement dated as of October 10, 2008
by and between the Company and Ronald C. Lundy (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on October 17, 2008)
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##### Table of Contents



10.9
    *
    
    Form of 2008 Employee Stock Purchase Plan Enrollment Agreement
(incorporated by reference to Exhibit 4.2 to the Companys
Registration Statement on Form S-8 (File No. 333-155286) filed on
November 12, 2008)10.10
    *
    
    2010 Bonus Compensation Plan dated as of March 1, 2010 by and
between the Company and Anthony C. Mazzullo (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on March 5, 2010)10.11
    *
    
    2010 Incentive Plan for Management and Key Employees (incorporated
by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K filed on March 5, 2010)14
    
    
    Code of Business Conduct and Ethics (incorporated by reference to
Exhibit E to the Companys Proxy Statement for its 2008 Annual
Meeting of Shareholders filed on April 29, 2008)31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
 *
    
    Management contract or compensatory plan or arrangement(c)
    
    Schedules required to be filed by Regulation S-XnoneAll other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
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Date: May 12, 2011/s/ Anthony C. Mazzullo

Anthony C. MazzulloPresident and CEODate: May 12, 2011/s/ Ronald C. Lundy

Ronald C. LundyVice President of Finance and CFO
  27