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FORM 10-Q SECURITIES AND EXCHANGE COMMISSION   
 Commission File Number 0-13898 Veramark Technologies, Inc.   Delaware
    
    16-1192368(State or other jurisdiction of Incorporation
    
    (IRS Employer Identification Number)or Organization)
 3750 Monroe Avenue, Pittsford, NY
    
    14534(Address of principal executive offices)
    
    (Zip Code)
 (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 [   ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). YES [   ]     NO [X] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of March 31, 2004 Common stock, par value $.10
    
    8,562,829 sharesThis report consists of 25 pages.
 1




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INDEX PagePART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial StatementsCondensed Consolidated Balance Sheets - March 31, 2004 and December 31, 2003
    
    
    3 - 4Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 and 2003
    
    
    6Notes To Condensed Consolidated Financial Statements
    
    
    7 - 10Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11 - 17Item 3
    
    Quantative and Qualitative Disclosures About Market Risk
    
    
    17Item 4
    
    Controls and Procedures
    
    
    17-18PART II
    
    OTHER INFORMATIONItem 5
    
    Certification of Chief Executive Officer and Chief Accounting Officer
    
    
    19Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    19Exhibit 31.1 302 Certification- CEOExhibit 31.2 302 Certification- TreasurerExhibit 32.1 906 Certification - CEOExhibit 32.2 906 Certification - Treasurer
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PART I -  FINANCIAL INFORMATION VERAMARK TECHNOLOGIES, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) March 31,
    
    December 31,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    462,950
    
    
    $
    644,005Investments
    
    
    988,472
    
    
    
    1,001,921Accounts receivable, trade (net
of allowance for doubtful accounts
of $55,000 and $65,000, respectively)
    
    
    1,246,719
    
    
    
    1,324,794Inventories, net
    
    
    70,894
    
    
    
    43,183Prepaid expenses and other current assets
    
    
    111,160
    
    
    
    130,509Total Current Assets
    
    
    2,880,195
    
    
    
    3,144,412PROPERTY AND EQUIPMENTCost
    
    
    5,688,623
    
    
    
    5,833,354Less accumulated depreciation
    
    
    (4,674,237
    )
    
    
    (4,792,509
    )Property and Equipment (Net)
    
    
    1,014,386
    
    
    
    1,040,845OTHER ASSETS:Software development costs (net of
accumulated amortization of $1,032,134
and $928,920, respectively)
    
    
    2,172,700
    
    
    
    1,817,438Pension and related assets
    
    
    2,535,670
    
    
    
    2,511,847Deposits and other assets
    
    
    798,745
    
    
    
    838,675Total other assets
    
    
    5,507,115
    
    
    
    5,167,960TOTAL ASSETS
    
    $
    9,401,696
    
    
    $
    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) March 31,
    
    December 31,2004
    
    2003LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    360,548
    
    
    $
    212,660Accrued compensation and related taxes
    
    
    463,368
    
    
    
    491,848Deferred revenue
    
    
    2,769,223
    
    
    
    2,918,337Capital lease obligation
    
    
    630
    
    
    
    2,472Other accrued liabilities
    
    
    141,722
    
    
    
    209,364Total Current Liabilities
    
    
    3,735,491
    
    
    
    3,834,681Pension obligation
    
    
    4,112,067
    
    
    
    4,009,849Total Liabilities
    
    
    7,847,558
    
    
    
    7,844,530STOCKHOLDERS EQUITY:Common Stock, par value $.10; shares authorized,
40,000,000; shares issued and outstanding
for both periods, 8,643,054
    
    
    864,305
    
    
    
    864,305Additional paid-in capital
    
    
    21,718,819
    
    
    
    21,703,571Accumulated deficit
    
    
    (20,656,030
    )
    
    
    (20,681,568
    )Accumulated other comprehensive income
    
    
    12,801
    
    
    
    8,136Treasury stock (80,225 shares, at cost)
    
    
    (385,757
    )
    
    
    (385,757
    )Total Stockholders Equity
    
    
    1,554,138
    
    
    
    1,508,687TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    9,401,696
    
    
    $
    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)
(Unaudited) Three Months EndedMarch 31,2004
    
    2003NET SALESProduct Sales
    
    $
    943,099
    
    
    $
    964,388Service Sales
    
    
    1,730,599
    
    
    
    1,785,633Total Net Sales
    
    
    2,673,698
    
    
    
    2,750,021COSTS AND OPERATING EXPENSES:Cost of sales
    
    
    380,487
    
    
    
    460,577Engineering and software development
    
    
    238,048
    
    
    
    619,998Selling, general and administrative
    
    
    2,039,191
    
    
    
    1,877,532Total Costs and Operating Expenses
    
    
    2,657,726
    
    
    
    2,958,107INCOME (LOSS) FROM OPERATIONS
    
    
    15,972
    
    
    
    (208,086
    )NET INTEREST INCOME
    
    
    9,566
    
    
    
    3,008INCOME (LOSS) BEFORE INCOME TAXES
    
    
    25,538
    
    
    
    (205,078
    )INCOME TAXES
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    25,538
    
    
    $
    (205,078
    )NET INCOME (LOSS) PER SHAREBasic
    
    $
    0.00
    
    
    $
    (0.02
    )Diluted
    
    $
    0.00
    
    
    $
    (0.02
    )
 The accompanying notes are an integral part of these consolidated financial
statements. 5




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VERAMARK TECHNOLOGIES, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Three Months Ended March 31,2004
    
    2003OPERATING ACTIVITIES:Net income (loss)
    
    $
    25,538
    
    
    $
    (205,078
    )Adjustments to reconcile net income (loss) to net cash flows
provided by operating activitiesDepreciation and amortization
    
    
    171,911
    
    
    
    235,546Provision for bad debts
    
    
    (12,207
    )
    
    
    12,501Provision for inventory obsolescence
    
    
    
    
    
    
    12,498Loss on disposal of fixed assets
    
    
    11,548
    
    
    
    1,003Compensation expense-stock options
    
    
    15,248
    
    
    
    30,000Changes in assets and liabilitiesAccounts receivable
    
    
    90,282
    
    
    
    (110,014
    )Inventories
    
    
    (27,711
    )
    
    
    1,759Prepaid expenses and other current assets
    
    
    19,349
    
    
    
    (13,262
    )Deposits and other assets
    
    
    16,107
    
    
    
    (22,773
    )Accounts payable
    
    
    147,888
    
    
    
    21,667Accrued compensation and related taxes
    
    
    (28,480
    )
    
    
    75,062Deferred revenue
    
    
    (149,114
    )
    
    
    35,309Other accrued liabilities
    
    
    (67,642
    )
    
    
    (40,946
    )Pension obligation
    
    
    102,218
    
    
    
    60,215Net cash flows provided by operating activities
    
    
    314,935
    
    
    
    93,487INVESTING ACTIVITIES:Sale (purchase) of investments
    
    
    13,449
    
    
    
    (31,170
    )Capitalized software development costs
    
    
    (458,476
    )
    
    
    Additions to property and equipment
    
    
    (53,786
    )
    
    
    (26,020
    )Increase in other comprehensive income
    
    
    4,665
    
    
    
    Net cash flows used by investing activities:
    
    
    (494,148
    )
    
    
    (57,190
    )FINANCING ACTIVITY:Repayment of capital lease obligation
    
    
    (1,842
    )
    
    
    (4,778
    )NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (181,055
    )
    
    
    31,519CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    644,005
    
    
    
    623,194CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    462,950
    
    
    $
    654,713
 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 March 31, 2004 and the results of its operations and cash flows for the
three months ended March 31, 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 months ended March
31, 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 March 31, 2004, and
December 31, 2003 were: March 31,
    
    December 31,2004
    
    2003Machinery and equipment
    
    $
    795,779
    
    
    $
    792,579Computer hardware and software
    
    
    1,914,929
    
    
    
    1,889,404Furniture and fixtures
    
    
    1,595,356
    
    
    
    1,768,812Leasehold improvements
    
    
    1,382,559
    
    
    
    1,382,559$
    5,688,623
    
    
    $
    5,833,354
 For the quarter ended March 31, 2004, the Company recorded depreciation
expense of $68,697. Depreciation expense for the quarter ended March 31,
2003 was $90,479. (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 income (loss) and net income (loss) per common share would have been
adjusted to the pro forma amounts indicated below: Three Months EndedMarch 31,2004
    
    2003Net income (loss)
    
    As reported
    
    $
    25,538
    
    
    $
    (205,078
    )Pro forma
    
    $
    (66,200
    )
    
    $
    (384,758
    )Net income (loss) per common share
    
    As reportedBasic
    
    $
    0.00
    
    
    $
    (0.02
    )Diluted
    
    $
    0.00
    
    
    $
    (0.02
    )Pro formaBasic
    
    $
    (0.01
    )
    
    $
    (0.05
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.05
    )
 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: 2004
    
    2003Dividend yield
    
    
    
    
    
    
    Expected volatility
    
    
    144.43
    %
    
    
    138.54
    %Risk-free interest rate
    
    
    3.27
    %
    
    
    3.07
    %Expected life
    
    5 years
    
    5 years
 (4) TOTAL COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss) for the first quarter of 2004 and 2003
was as follows: Quarter Ended March 31,2004
    
    2003Net income (loss)
    
    $
    25,538
    
    
    $
    (205,078
    )Accumulated other comprehensive income
    
    
    4,665
    
    
    
    13,663Total comprehensive income (loss)
    
    $
    30,203
    
    
    $
    (191,415
    )
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(5) NET INCOME (LOSS) PER SHARE (EPS) SFAS 128 Earnings Per Share requires the Company to calculate net income
(loss) per share based on basic and diluted net income (loss) per share,
as defined. Basic EPS excludes dilution and is computed by dividing net
income (loss) by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. The dilutive effect of outstanding options
issued by the Company are reflected in diluted EPS using the treasury
stock method. Under the treasury stock method, options will only have a
dilutive effect when the average market price of common stock during the
period exceeds the exercise price of the options. Calculations of Earnings (Loss) Per Share Three Months EndedMarch 31,2004
    
    2003BasicNet income (loss)
    
    $
    25,538
    
    
    $
    (205,078
    )Weighted average common shares outstanding
    
    
    8,562,829
    
    
    
    8,390,734Net income (loss) per common share
    
    $
    0.00
    
    
    $
    (0.02
    )DilutedNet income (loss)
    
    $
    25,538
    
    
    $
    (205,078
    )Weighted average common shares outstanding
    
    
    8,562,829
    
    
    
    8,390,734Additional dilutive effect of stock options and
warrants after application of treasury stock method
    
    
    1,254,428
    
    
    
    Weighted average dilutive shares outstanding
    
    
    9,817,257
    
    
    
    8,390,734Net income (loss) per common share assuming full obligation
    
    $
    0.00
    
    
    $
    (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
March 31, 2004 we had not experienced any material losses 9




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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 months ended March 31, 2004 and 2003. The Company also sponsors an unfunded Supplemental Executive Retirement
Program (SERP), which is a non-qualified plan that provides certain key
employees defined pension benefits. Periodic pension expense for the
three months ended March 31, 2004 and 2003 consists of the following: Three Months Ended March 31,2004
    
    2003Current Service Costs
    
    $
    74,693
    
    
    $
    55,946Prior Service Costs
    
    
    21,721
    
    
    
    21,721Interest Cost
    
    
    47,337
    
    
    
    22,332Pension Expense
    
    $
    143,751
    
    
    $
    99,999
 The Company paid pension obligations of $41,534 and $39,784 for the three
months ended March 31, 2004 and 2003. 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 months ended March
31, 2004 and 7% and 3% for the three months ended March 31, 2003. The Company maintains life insurance covering certain key employees under
its Supplemental Executive Retirement Program with the Company named as
beneficiary. The Company intends to use the death benefits of these
policies, as well as loans against the accumulating cash surrender value
of the policies, to fund the pension obligation. The total death benefit
associated with these policies is $10.2 million, with an associated
accumulated cash surrender value of approximately $1,883,000 at March 31,
2004. The accumulated cash surrender values of these policies at December
31, 2003 was approximately $1,858,000. 10




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Item 2 Managements Discussion and Analysis of Financial Condition and Results
of Operations Results of Operations Managements Discussion and Analysis contains statements that are
forward-looking. Such statements are identified by the use of words like
plans, expects, intends, believes, will, anticipates, estimates
and other words of similar meaning in conjunction with, among other things,
discussions of future operations, financial performance, the Companys strategy
for growth, product development, regulatory approvals, market position and
expenditures. Forward-looking statements are based on managements expectations
as of the date of this report. The Company cannot guarantee that any
forward-looking statement will be accurate, although the Company believes that
it has been reasonable in its expectations and assumptions. Forward-looking
statements are subject to the risks identified in Issues and Risks and
elsewhere in this report. Readers are cautioned not to place undue reliance on
forward-looking statements and are advised to review the risks identified in
Issues and Risks and elsewhere in this report. The Company has no obligation
to update forward-looking statements. Sales for the Companys first quarter ended March 31, 2004 were
$2,673,698, a decrease of 3% from sales of $2,750,021 for the quarter ended
March 31, 2003. Net income for the quarter ended March 31, 2004 was $25,538,
or $0.00 per diluted share, as compared with a net loss of $205,078 or a loss
of $0.02 per share, for the first quarter of 2003. The improvement in net income results from the reduction of engineering
and software development expenses as a result of the capitalization of certain
software development costs as required by Statement of Financial Accounting
Standards (SFAS) no. 86, Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed. During the first quarter of 2004, the
Company capitalized approximately $458,000 of software development costs
associated with the Companys yet to be released enterprise-level product,
VeraSMART 2.0. There were no development costs capitalized during the first
quarter of 2003. Absent the capitalization of these software development
costs, the Company would have incurred a net loss of approximately $433,000 for
the quarter ended March 31, 2004. The Company continues to be concerned with the state of the economy in
general, particularly as it affects the capital spending habits of customers.
Order rates continue to fluctuate significantly from month to month, which
makes long-term forecasting and strategic planning difficult. Throughout the
first quarter of 2004, the company continued to focus its attention and
resources on the development of VeraSMART 2.0, the next generation replacement
of the Companys current Quantum Series® enterprise-class product. VeraSMART
2.0 is currently scheduled for general release to the marketplace late in the
second quarter of 2004. The Company believes the introduction of VeraSMART 2.0
will lead to increased sales during the third and fourth quarters of 2004. As
a result of this focus on the development and impending product launch of
VeraSMART 2.0, the Company has incurred an increase in gross operating expenses
in 2004, before the effects of software capitalization, as compared with the
first quarter of 2003, particularly in engineering, software development, and
marketing expenses. For the quarter ended March 31, 2004, the Company experienced a 3%
decrease in sales of its call accounting and telemanagement products and
services. The decrease is primarily attributable to the acquisition of one of
the Companys largest distributors, Exp@nets, by Avaya, Inc., and the
integration of these previously separate companies that served as channels of
distribution, which occurred late in 2003. The effect of this acquisition has
been a 39% reduction in sales of call accounting products and services during
first quarter of 11




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2004, as compared to the first quarter of 2003, to the combined Avaya and
Expanets from the sales level realized when they were separate channels of
distribution. In total, sales of call accounting and telemanagement products and
services accounted for 61% of first quarter 2004 sales, the same percentage as
realized for the first quarter of 2003. Sales of enterprise-level products and services increased 2% during the
first quarter of 2004 from the first quarter of 2003, accounting for 34% of
total sales for the quarter. The increase was attributable to sales of
VeraSMART 1.0, the call accounting module of the VeraSMART suite, which was
released late in the second quarter of 2003. VeraSMART 1.0 will become a
separate module within the VeraSMART suite of products with the completion of
VeraSMART 2.0. The increase in sales of enterprise-level products is
encouraging, as the Company has now completely phased out sales of its Quantum
Series product line. The Company will continue to provide support and
maintenance services to existing Quantum Series customers for a limited time. The expanded VeraSMART 2.0 suite will include five fully integrated
modules: SMART Directory, SMART Invoice Management, SMART Allocation, SMART
Call Accounting and SMART Online Directory, and is designed to meet the unique
needs of large enterprises. It is designed to allow businesses to consolidate
all communications costs, including: invoices from service providers, one-time
and recurring costs for assets and services; and call detail from an unlimited
number of sources, such as IP-PBSs, circuit-switched PBXs, key systems, cell
phones, credit cards and other third party sources. This gives customers an
understanding of network requirements and usage trends, with a goal of
ultimately reducing their overall costs. The Companys Service Bureau operation achieved a 4% increase in sales for
the first quarter of 2004 as compared to first quarter of 2003, accounting for
4% of total sales in both years. In March 2004, the Company announced that it
had entered into a multi-year agreement to provide outsourced communications
management services to the Telecommunications, EWI, and Information Security
Services Department of Lockheed Martin Aeronautics Company. The Company will
provide administrative support, and predefined reports for Lockheed Martin at
scheduled intervals. Future expansion plans will include calling cards,
cellular telephones and pager services. Revenue from this contract will begin
during the second quarter of 2004. Despite lower sales, the gross profit margin, determined by subtracting
cost of sales from total net sales, of $2,293,211, for the quarter ended March
31, 2004, increased from $2,289,444 for the quarter ended March 31, 2003,
primarily due to lower direct product costs and a reduction in amortization
costs of previously capitalized development costs charged to cost of sales. Net engineering and software development expenses of $238,048 for the
quarter ended March 31, 2004, decreased 62% from net engineering and software
development costs of $619,998 for the quarter ended March 31, 2003, reflecting
the capitalization of costs associated with the development of the VeraSMART
2.0 enterprise platform. Gross expenses for engineering and development
expenses, before the effects of capitalization increased 12% from prior year
levels due to higher payroll costs as a result of increased staffing.
Capitalization of the development expenses associated with VeraSMART 2.0 is
expected to end mid-second quarter 2004, the effect of which will be an
increase in net engineering and development expenses incurred and charged to
the Companys Statements of Operations for the second quarter of 2004 and
beyond. The table below details gross spending for engineering and software
development, costs capitalized, amounts amortized, and the overall impact on
the Companys Statements of Operations for the quarters ended March 31, 2004
and 2003: 12




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Three Months Ended March 31,2004
    
    2003Gross expenditures for engineering and software development
    
    $
    696,524
    
    
    $
    619,998Less: Software development costs capitalized
    
    
    (458,476
    )
    
    
    Net expenses for engineering and software development included in the
Companys statement of operations
    
    
    238,048
    
    
    
    619,998Plus: Software development costs amortized and charged to cost of sales
    
    
    103,214
    
    
    
    145,067Total Expense Recognized
    
    $
    341,262
    
    
    $
    765,065
 For the quarter ended March 31, 2004, expenses of $2,039,181 incurred for
selling general, and administrative expenses represented an increase of 9% from
selling, general, and administrative expenses of $1,877,532 for the quarter
ended March 31, 2003. The increased expenses reflect the hiring of seven new
employees since December 31, 2003, primarily in marketing and sales to support
the second quarter launch of the VeraSMART platform. Additionally, the Company
has incurred additional costs with regard to VeraSMART in terms of promotional
efforts, trade shows and marketing literature and collaterals. Liquidity and Capital Resources As of March 31, 2004, the Companys total cash position, consisting of
cash in operating accounts plus short-term investments, was $1,451,422. This
represents a reduction of approximately $195,000 for the first quarter of 2004.
The net cash outflow was the result of the decrease in sales and higher
operating expenses incurred in the first quarter of 2004, as compared with the
fourth quarter of 2003. Accounts receivable of $1,246,719 at March 31, 2004, decreased $78,000 or
6% from $1,324,794 at December 31, 2003, due to lower sales volumes. The
Company has experienced virtually no collection problems with its customers,
nor any significant changes in the overall aging of receivables, and as a
result, has reduced the allowance for bad debts from $65,000 at December 31,
2003 to $55,000 at March 31, 2004. Inventories of $70,894 at March 31, 2004 increased from $43,183 at
December 31, 2003, due to the purchases of certain components required to
service multi-site customer environments. Inventories will fluctuate from
quarter to quarter throughout 2004, but are expected to remain below $100,000
at any given time Prepaid expenses decreased from $130,509 at December 31, 2003 to $111,160
at March 31, 2004. The decrease represents utilization of business insurance
policies during the first quarter of 2004 that had been prepaid as of December
31, 2003. The carrying value of capital equipment decreased from $5,833,354 at
December 31, 2003 to $5,688,623 at March 31, 2004. Total new capital spending
for the quarter ended March 31, 2004 totaled $53,786, but was offset by the
disposal of approximately $199,000 of obsolete and excess office furniture and
equipment, most of which was located at the Companys Westlake, California,
office. After the effects of accumulated depreciation, the Company recorded a
loss of approximately $12,000 on the disposal of these assets. 13




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Software development cost capitalization of $2,172,700 at March 31, 2004,
increased $355,262 from the December 31, 2003 balance of $1,817,438. The
increase reflects the first quarter 2004 capitalization of development costs of
$458,476, less the amortization of $103,214 of development costs capitalized in
prior years. Pension and related assets increased $23,823 during the first quarter of
2004 to $2,535,670, at March 31, 2004. Of this total $1,882,664 represents the
cash surrender values of Company-owned life insurance policies. The death
benefit and accumulated cash values of these policies are intended to fund
future pension obligations of the Company. The accumulated cash surrender
values, referred to above, are also available to fund current operations of the
Company in the event that should become necessary. Accrued compensation and related taxes decreased from $491,848 at December
31, 2003 to $463,368 at March 31, 2004, primarily due to a reduction in the
amount of commissions payable due Company salespeople. Accounts payable increased from $212,660 at December 31, 2003 to $360,548
at March 31, 2004. The increase primarily is due to the timing of payments to
vendors and suppliers and is expected to stabilize at the March 31, 2004 level
throughout the balance of 2004. Deferred revenues decreased from $2,918,337 at December 31, 2004 to
$2,769,223 at March 31, 2003 as a result of the suspension of sales of the
Companys Quantum Series, enterprise-level, products, which have been phased
out and scheduled to be replaced the Companys VeraSMART solution during the
second quarter of 2004. Deferred revenues represent services such as training,
installation and maintenance and support for which the company has billed
customers, but for which it has not yet performed the associated services.
Most of the services currently deferred, are expected to be provided over the
next twelve months and recorded as sales revenue at the time those services are
actually rendered. Other accrued liabilities decreased from $209,364 at December 31, 2003 to
$141,722 at March 31, 2004. The decreased is primarily the result of a
reduction in the amount of sales taxes due the state of New York based on an
audit completed by the State in early 2004. Stockholder equity of $1,554,138 at March 31, 2004 compares with
$1,508,687 at December 31, 2003. Changes to stockholders equity in the first
quarter 2004 consisted of net income of $25,538, a $15,248 increase in paid-in
capital related to the compensation expense associated with outstanding stock
options, and an increase of $4,665 in comprehensive income. 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 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 14




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




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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 Rights Veramark 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 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 take 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 16




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future products. Any such assertion could require Veramark to enter into royalty
arrangements or result in costly litigation. New Products and Services Veramark 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 Software If 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 Schedule The 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. Competition Veramark 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 Sales Veramark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. 
 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 17




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




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PART II - OTHER INFORMATION 
 Item 5:The Companys Chief Executive Officer and Chief Accounting Officer
have provided the certifications with respect to this Form 10-Q
that are required by Sections 302 and 906 of the Sarbanes-Oxley
Act of 2002. These certifications have been filed as Exhibits
31.1 and 31.2 and Exhibits 32.1 and 32.2, respectively. 
 Item 6: Exhibits and Reports on Form 8-K  (a)
    
    Exhibits required by Item 601 of Regulation S-K (I) Registrants Condensed Financial Statements for the three months
ended March 31, 2004 and 2003 are set forth in Part I, Item 1 of
this Quarterly Report on Form 10-Q. (II) Calculation of income (loss) per share for the three months
ended March 31, 2004 and 2003, as set forth as Exhibit II. (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 February 17, 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 year
ended December 31, 2003, a copy of such press release, which
was attached as Exhibit 99.1. 19




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. VERAMARK TECHNOLOGIES, INC. REGISTRANT Date: May 13, 2004 /s/ David G. Mazzella  
 Date: May 13, 2004 /s/ Ronald C. Lundy  
 20




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Exhibit II: VERAMARK TECHNOLOGIES, INC. Calculations of Earnings (Loss) Per Share Three Months EndedMarch 31,2004
    
    2003BasicNet income (loss)
    
    $
    25,538
    
    
    $
    (205,078
    )Weighted average common shares outstanding
    
    
    8,562,829
    
    
    
    8,390,734Net income (loss) per common share
    
    $
    0.00
    
    
    $
    (0.02
    )DilutedNet income (loss)
    
    $
    25,538
    
    
    $
    (205,078
    )Weighted average common shares outstanding
    
    
    8,562,829
    
    
    
    8,390,734Additional dilutive effect of stock options and
warrants after application of treasury stock method
    
    
    1,254,428
    
    
    
    Weighted average dilutive shares outstanding
    
    
    9,817,257
    
    
    
    8,390,734Net income (loss) per common share assuming full obligation
    
    $
    0.00
    
    
    $
    (0.02
    )
 21