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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, 2005
 Commission
File Number 0-13898
 Veramark
Technologies, Inc.
  Delaware
    
    16-1192368(State or other jurisdiction of Incorporation
or Organization)
    
    (IRS Employer Identification Number)
  
   
   
   þ o
  o þ
  o þ
  Common stock, par value $.10
    
    8,820,500 shares




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INDEX
 PagePART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial StatementsCondensed Balance
Sheets - September 30, 2005 (Unaudited) and December 31, 2004
    
    3 - 4Condensed Statements
of Operations (Unaudited) Three and Nine Months Ended September 30, 2005 and 2004
    
    5Condensed Statements
of Cash Flows (Unaudited) Nine Months Ended September 30, 2005 and 2004
    
    6 - 7Notes To Condensed Financial Statements (Unaudited)
    
    8 - 12Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    13 - 21Item 3
    
    Quantative and Qualitative Disclosures About Market Risk
    
    22Item 4
    
    Controls and Procedures
    
    22PART II
    
    OTHER INFORMATIONItem 5
    
    Certification of Chief Executive Officer and Chief Accounting Officer
    
    23Item 6
    
    Exhibits and Reports on Form 8-K
    
    23Officers Certifications and Signatures
    
    24  28EX-31.1 Certification of Chairman and CEOEX-31.2 Certification of Treasurer and CAOEX-32.1 Certification of Chairman and CEOEX-32.2 Certification of Treasurer and CAO
  2




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PART I   FINANCIAL INFORMATION
 VERAMARK TECHNOLOGIES, INC.
 
 CONDENSED BALANCE SHEETS
 (Unaudited)September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    859,545
    
    
    $
    722,020Investments
    
    
    397,384
    
    
    
    381,237Accounts receivable, trade (net
of allowance for doubtful accounts
of $27,580 and $24,000, respectively)
    
    
    1,398,681
    
    
    
    1,276,204Inventories, net
    
    
    41,617
    
    
    
    30,717Prepaid expenses and other current assets
    
    
    150,544
    
    
    
    109,809Total Current Assets
    
    
    2,847,771
    
    
    
    2,519,987PROPERTY AND EQUIPMENTCost
    
    
    5,755,891
    
    
    
    5,740,535Less accumulated depreciation
    
    
    (4,972,680
    )
    
    
    (4,846,475
    )Property and Equipment (Net)
    
    
    783,211
    
    
    
    894,060OTHER ASSETS:Software development costs (net of
accumulated amortization of $2,110,566
and $1,506,777, respectively)
    
    
    2,831,725
    
    
    
    2,518,482Pension and related assets
    
    
    2,898,985
    
    
    
    2,778,482Deposits and other assets
    
    
    797,745
    
    
    
    797,745Total other assets
    
    
    6,528,455
    
    
    
    6,094,709TOTAL ASSETS
    
    $
    10,159,437
    
    
    $
    9,508,756
 The accompanying notes are an integral part of these financial statements.
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VERAMARK TECHNOLOGIES, INC.
 CONDENSED BALANCE SHEETS
 (Unaudited)September 30,
    
    
    December 31,2005
    
    
    2004LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    209,432
    
    
    $
    298,063Accrued compensation and related taxes
    
    
    408,042
    
    
    
    557,805Deferred revenue
    
    
    2,972,435
    
    
    
    2,572,120Other accrued liabilities
    
    
    118,224
    
    
    
    187,977Total Current Liabilities
    
    
    3,708,133
    
    
    
    3,615,965Pension obligation
    
    
    4,922,299
    
    
    
    4,439,398Total Liabilities
    
    
    8,630,432
    
    
    
    8,055,363STOCKHOLDERS EQUITY:Common Stock, par value $.10; shares authorized,
40,000,000; shares issued and outstanding.
8,900,725 and 8,749,179
    
    
    890,073
    
    
    
    874,918Additional paid-in capital
    
    
    21,686,467
    
    
    
    21,744,969Accumulated deficit
    
    
    (20,679,098
    )
    
    
    (20,795,128
    )Treasury stock (80,225 shares, at cost)
    
    
    (385,757
    )
    
    
    (385,757
    )Accumulated other comprehensive income
    
    
    17,320
    
    
    
    14,391Total Stockholders Equity
    
    
    1,529,005
    
    
    
    1,453,393TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    10,159,437
    
    
    $
    9,508,756
 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 Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004NET SALESProduct Sales
    
    $
    963,216
    
    
    $
    1,079,564
    
    
    $
    2,797,851
    
    
    $
    2,817,021Service Sales
    
    
    1,705,605
    
    
    
    1,702,422
    
    
    
    5,158,698
    
    
    
    5,206,262Total Net Sales
    
    
    2,668,821
    
    
    
    2,781,986
    
    
    
    7,956,549
    
    
    
    8,023,283COSTS AND OPERATING EXPENSES:Cost of sales
    
    
    454,053
    
    
    
    486,782
    
    
    
    1,333,988
    
    
    
    1,342,901Engineering and software development
    
    
    265,597
    
    
    
    330,476
    
    
    
    746,384
    
    
    
    1,142,177Selling, general and administrative
    
    
    2,001,741
    
    
    
    1,996,384
    
    
    
    5,770,737
    
    
    
    6,068,131Total Costs and Operating Expenses
    
    
    2,721,391
    
    
    
    2,813,642
    
    
    
    7,851,109
    
    
    
    8,553,209INCOME (LOSS) FROM OPERATIONS
    
    
    (52,570
    )
    
    
    (31,656
    )
    
    
    105,440
    
    
    
    (529,926
    )NET INTEREST INCOME (EXPENSE)
    
    
    4,163
    
    
    
    (2,103
    )
    
    
    10,590
    
    
    
    319INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (48,407
    )
    
    
    (33,759
    )
    
    
    116,030
    
    
    
    (529,607
    )INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    (48,407
    )
    
    $
    (33,759
    )
    
    $
    116,030
    
    
    $
    (529,607
    )NET INCOME (LOSS) PER SHAREBasic
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.06
    )Diluted
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.06
    )
 The accompanying notes are an integral part of these financial statements.
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VERAMARK TECHNOLOGIES, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine Months Ended September 30,2005
    
    
    2004OPERATING ACTIVITIES:Net income (loss)
    
    $
    116,030
    
    
    $
    (529,607
    )Adjustments to reconcile net income (loss) to net cash flows
provided by operating activitiesDepreciation and amortization
    
    
    805,961
    
    
    
    621,777Provision for bad debts
    
    
    (2,776
    )
    
    
    (5,086
    )Loss on disposal of fixed assets
    
    
    
    
    
    
    (1,983
    )Compensation expense-stock options
    
    
    (113,545
    )
    
    
    (27,136
    )Increase in cash surrender value of company-owned life insurance
policies
    
    
    (120,503
    )
    
    
    (141,615
    )Changes in assets and liabilitiesAccounts receivable
    
    
    (119,701
    )
    
    
    143,504Inventories
    
    
    (10,900
    )
    
    
    157Prepaid expenses and other current assets
    
    
    (40,735
    )
    
    
    21,954Deposits and other assets
    
    
    
    
    
    
    40,930Accounts payable
    
    
    (88,631
    )
    
    
    68,462Accrued compensation and related taxes
    
    
    (149,763
    )
    
    
    (35,194
    )Deferred revenue
    
    
    400,315
    
    
    
    (271,192
    )Other accrued liabilities
    
    
    (69,753
    )
    
    
    (33,788
    )Pension obligation
    
    
    482,901
    
    
    
    306,653Net cash flows provided by operating activities
    
    
    1,088,900
    
    
    
    157,836INVESTING ACTIVITIES:Sale (purchase) of investments
    
    
    (13,218
    )
    
    
    531,802Capitalized software development costs
    
    
    (917,032
    )
    
    
    (926,829
    )Additions to property and equipment
    
    
    (91,323
    )
    
    
    (122,185
    )Proceeds from sale of equipment
    
    
    
    
    
    
    13,531Net cash flows used by investing activities:
    
    
    (1,021,573
    )
    
    
    (503,681
    )FINANCING ACTIVITY:Exercise of stock options
    
    
    63,841
    
    
    
    48,554Repayment of capital lease obligation
    
    
    
    
    
    
    (2,472
    )Proceeds from employee stock purchase plan
    
    
    6,357
    
    
    
    7,455Net cash flows provided by financing activities
    
    
    70,198
    
    
    
    53,537NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    137,525
    
    
    
    (292,308
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    722,020
    
    
    
    644,005CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    859,545
    
    
    $
    351,697
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Nine Months Ended September 30,2005
    
    
    2004SUPPLEMENTAL CASH FLOW INFORMATIONCash Transactions:Income taxes paid, net
    
    $
    4,756
    
    
    $
    34,624Interest paid
    
    $
    20
    
    
    $
    755
 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 EQUIPMENTThe major classifications of property and equipment at September 30, 2005, and December 31,
2004 were:
 September 30,
    
    
    December 31,2005
    
    
    2004Machinery and equipment
    
    $
    794,314
    
    
    $
    794,314Computer hardware and software
    
    
    1,951,341
    
    
    
    1,935,985Furniture and fixtures
    
    
    1,627,677
    
    
    
    1,627,677Leasehold improvements
    
    
    1,382,559
    
    
    
    1,382,559$
    5,755,891
    
    
    $
    5,740,535
 For the three and nine months ended September 30, 2005, the Company recorded depreciation
expense of $66,973 and $202,172. Depreciation expense for the three and nine months ended
September 30, 2004 was $68,057 and $209,369.(3)
    
    STOCK-BASED COMPENSATIONIn 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
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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net income (loss)
    
    As reported
    
    $
    (48,407
    )
    
    $
    (33,759
    )
    
    $
    116,030
    
    
    $
    (529,607
    )Add: total
stock-based
compensation
expense included in
net income, net of
forfeitures and
related tax effects
    
    
    
    
    (15,506
    )
    
    
    (36,337
    )
    
    
    (113,545
    )
    
    
    (27,136
    )Deduct: total
stock-based
compensation
expense determined
under fair value,
net of forfeitures
and related tax
effects
    
    
    
    
    (15,724
    )
    
    
    113,771
    
    
    
    (51,729
    )
    
    
    (70,944
    )Pro forma
    
    $
    (79,637
    )
    
    $
    43,675
    
    
    $
    (49,244
    )
    
    $
    (627,687
    )Net income
(loss) per common share
    
    As reportedBasic
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.06
    )Diluted
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.06
    )Pro formaBasic
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.07
    )Diluted
    
    $
    (0.01
    )
    
    $
    0.01
    
    
    $
    (0.01
    )
    
    $
    (0.07
    )
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected volatility
    
    
    151.33
    %
    
    
    146.14
    %
    
    
    151.33
    %
    
    
    145.05
    %Risk-free interest rate
    
    
    N/A
    
    
    
    3.33
    %
    
    
    N/A
    
    
    
    3.29
    %Expected life
    
    5 years
    
    5 years
    
    5 years
    
    5 years
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(4)
    
    TOTAL COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    (48,407
    )
    
    $
    (33,759
    )
    
    $
    116,030
    
    
    $
    (529,607
    )Accumulated other comprehensive
income (loss)
    
    
    (2,443
    )
    
    
    10,852
    
    
    
    2,929
    
    
    
    9,324Total comprehensive income (loss)
    
    $
    (50,850
    )
    
    $
    (22,907
    )
    
    $
    118,959
    
    
    $
    (520,283
    )
 (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.
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Calculations of Earnings (Loss) Per Share
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004BasicNet income (loss)
    
    $
    (48,407
    )
    
    $
    (33,759
    )
    
    $
    116,030
    
    
    $
    (529,607
    )Weighted average common shares outstanding
    
    
    8,793,951
    
    
    
    8,637,328
    
    
    
    8,733,267
    
    
    
    8,592,863Net income (loss) per common share
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    .01
    
    
    $
    (.06
    )DilutedNet income (loss)
    
    $
    (48,407
    )
    
    $
    (33,759
    )
    
    $
    116,030
    
    
    $
    (529,607
    )Weighted average common shares outstanding
    
    
    8,793,951
    
    
    
    8,637,328
    
    
    
    8,733,267
    
    
    
    8,592,863Additional dilutive effect of stock options
and warrants after application of treasury
stock method
    
    
    
    (1)
    
    
    
    (1)
    
    
    652,450
    
    
    
    
    (1)Weighted average dilutive shares outstanding
    
    
    8,793,951
    
    
    
    8,637,328
    
    
    
    9,385,717
    
    
    
    8,592,863Net income (loss) per common share assuming
full obligation
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    0.01
    
    
    $
    (0.06
    )
 
 (1)
    
    There were no dilutive effects of stock options, as the effect would have been anti-dilutive
due to the net loss incurred. (6)
    
    INDEMNIFICATION OF CUSTOMERSOur agreements with customers generally require us to indemnify the customer against claims
that our software infringes third party patent, copyright, trademark or other proprietary
rights. Such indemnification obligations are generally limited in a variety of
industry-standard respects, including our right to replace an infringing product. As of
September 30, 2005 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.
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(7)
    
    BENEFIT PLANSThe Company sponsors an employee incentive savings plan under Section 401(k) for all eligible
employees. The Companys contributions to the plan are discretionary. There were no
contributions to the plan for the nine months ended September 30, 2005 and 2004.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, 2005 and 2004
consisted of the following:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Current Service Cost
    
    $
    114,244
    
    
    $
    74,693
    
    
    $
    342,736
    
    
    $
    224,079Amortization of
Prior Service Cost
    
    
    22,650
    
    
    
    21,721
    
    
    
    67,950
    
    
    
    65,163Interest Cost
    
    
    65,605
    
    
    
    47,337
    
    
    
    196,815
    
    
    
    142,011Pension Expense
    
    $
    202,499
    
    
    $
    143,751
    
    
    $
    607,501
    
    
    $
    431,253
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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
  Overview
      Sales
  13




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Cost of Sales
  Operating Expenses
  14




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Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Gross expenses for engineering
and software development
    
    $
    526,010
    
    
    $
    668,244
    
    
    $
    1,663,416
    
    
    $
    2,069,006Less:
Software development costs capitalized
    
    
    (260,413
    )
    
    
    (337,768
    )
    
    
    (917,032
    )
    
    
    (926,829
    )Net expenses for engineering
and software development
included in the Companys
statements of operations
    
    
    265,597
    
    
    
    330,476
    
    
    
    746,384
    
    
    
    1,142,177Plus: Software development
costs amortized and charged
to cost of sales
    
    
    201,263
    
    
    
    165,089
    
    
    
    603,789
    
    
    
    412,767Total Expense Recognized
    
    $
    466,860
    
    
    $
    495,565
    
    
    $
    1,350,173
    
    
    $
    1,554,944
   Liquidity and Capital Resources
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Accounting Pronouncements
 1)
    
    In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition, which updates the guidance in SAB No. 101,
integrates the related set of Frequently Asked Questions, and recognizes the role of EITF
00-21. The adoption of SAB No. 104 did not have a material effect on the Companys
consolidated financial statements.2)
    
    In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables. Issue 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of Issue 00-21 applied to revenue
arrangements entered into in periods beginning after June 15, 2003. The adoption of Issue
00-21 did not have a material effect on the Companys financial position or results of
operations.3)
    
    In December 2004, the FASB issued SFAS 123(R), which replaces SFAS 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123(R) requires compensation costs relating to share-based payment
transactions be recognized in financial statements. The pro forma disclosure previously
permitted under SFAS 123 will no longer be an acceptable alternative to recognition of
expenses in the financial statements. SFAS 123(R) is effective as of the beginning of the
first annual reporting period that begins after June 15, 2005, with early adoption
encouraged. We currently measure compensation costs related to share-based payments under APB
25, as allowed by SFAS 123, and provide disclosure in notes to financial statements as
required by SFAS 123. We are required to adopt SFAS 123(R) starting from the first fiscal
quarter of 2006. The adoption of SFAS 123(R) is not expected to have an adverse impact on our
net income and net income per share.4)
    
    In December 2004, FASB issued SFAS 153, Exchanges of Nonmonetary Assetsan amendment to
APB Opinion No. 29. This statement amends APB 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. Adoption of this statement is not expected to have
a material impact on our results of operations or financial condition.5)
    
    In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections  a
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 changes
the requirements for the accounting for and reporting of a change in accounting principle.
These requirements apply to all voluntary changes and changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific
transition provisions. SFAS 154 is effective for fiscal years beginning after December 15,
2005. As such, the Company is required to adopt these provisions at the beginning of the
fiscal year ended December 31, 2006. The Company does not expect that the adoption of SFAS
154 to have a significant impact on its financial statements.
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Critical Accounting Policies
  
    
    Revenue recognition
    
    Capitalization of software development costs
    
    Allowance for Doubtful Accounts
    
    Pension liability
  Revenue Recognition
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Capitalization of Software Development Costs
  Allowance for Doubtful Accounts
  Pension Liability
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Issues and Risks
  Intellectual
Property Rights
  New
Products and Services
  Declines
in Demand for Software
  Product
Development Schedule
  Competition
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Marketing
and Sales
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Item 3 Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4 Controls and Procedures
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PART II  OTHER INFORMATION
 
 Item 5: Certification of Chief Executive Officer and Chief Accounting Officer
  
 Item 6: Exhibits and Reports on Form 8-K
 (a)
    
    Exhibits required by Item 601 of Regulation S-K
       (b)
    
    Reports filed on 8-K during quarter for which report is filed
 (1)
    
    On August 11, 2005, 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, 2005. A copy of such press
release, was attached as Exhibit 99.1.
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/s/ David G. MazzellaDavid G. MazzellaPresident and CEO
  /s/ Ronald C. LundyRonald C. LundyTreasurer (Chief Accounting Officer)
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