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, 2008
 Commission File Number 0-13898
 Veramark Technologies, Inc.
  Delaware
    
    16-1192368(State or other jurisdiction of Incorporation
or Organization)
    
    (IRS Employer Identification Number)3750 Monroe Avenue, Pittsford, NY
    
    14534(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
 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 
September 30, 2008 (Unaudited) and December 31, 2007
    
    
    3  4Condensed Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 2008 and 2007
    
    
    5Condensed Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2008 and 2007
    
    
    6Notes To Condensed Financial Statements (Unaudited)
    
    
    7  11Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12  19Item 3 Quantative and Qualitative Disclosures About Market Risk
    
    
    20Item 4 Controls and Procedures
    
    
    20PART II OTHER INFORMATIONItem 5 Items Required to be Disclosed on Form 8-K
    
    
    21Item 6 Exhibits
    
    
    21Officers Certifications and Signatures
    
    
    22
  2




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##### 



PART I   FINANCIAL INFORMATION
 VERAMARK TECHNOLOGIES, INC.
 
 CONDENSED BALANCE SHEETS
 (Unaudited)September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    551,913
    
    
    $
    713,342Investments
    
    
    998,998
    
    
    
    1,492,288Accounts receivable, trade (net
of allowance for doubtful accounts
of $40,000 and $30,000, respectively)
    
    
    1,333,237
    
    
    
    1,303,240Inventories, net
    
    
    39,863
    
    
    
    31,764Prepaid expenses and other current assets
    
    
    346,185
    
    
    
    254,274Total Current Assets
    
    
    3,270,196
    
    
    
    3,794,908PROPERTY AND EQUIPMENTCost
    
    
    3,805,218
    
    
    
    5,955,064Less accumulated depreciation
    
    
    (3,365,726
    )
    
    
    (5,433,650
    )Property and Equipment (Net)
    
    
    439,492
    
    
    
    521,414OTHER ASSETS:Software development costs (net of
accumulated amortization of $3,030,975
and $2,179,290, respectively)
    
    
    2,822,214
    
    
    
    3,038,410Pension assets
    
    
    3,206,189
    
    
    
    3,210,204Deposits and other assets
    
    
    905,761
    
    
    
    830,756Total Other Assets
    
    
    6,934,164
    
    
    
    7,079,370TOTAL ASSETS
    
    $
    10,643,852
    
    
    $
    11,395,692
 The accompanying notes are an integral part of these financial statements.
  3




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##### 



VERAMARK TECHNOLOGIES, INC.
 CONDENSED BALANCE SHEETS
 (Unaudited)September 30,
    
    
    December 31,2008
    
    
    2007LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    265,967
    
    
    $
    317,127Accrued compensation and related taxes
    
    
    589,444
    
    
    
    934,387Deferred revenue
    
    
    3,628,082
    
    
    
    3,369,324Current portion of pension obligation
    
    
    474,059
    
    
    
    440,084Other accrued liabilities
    
    
    164,462
    
    
    
    270,524Total Current Liabilities
    
    
    5,122,014
    
    
    
    5,331,446Pension obligation
    
    
    4,946,612
    
    
    
    5,072,447Total Liabilities
    
    
    10,068,626
    
    
    
    10,403,893STOCKHOLDERS EQUITY:Common Stock, par value $.10; shares authorized,
40,000,000; shares issued and outstanding,
9,783,213 and 9,169,093
    
    
    978,321
    
    
    
    916,909Additional paid-in capital
    
    
    22,255,704
    
    
    
    22,171,341Accumulated deficit
    
    
    (22,097,880
    )
    
    
    (21,607,785
    )Treasury stock (80,225 shares, at cost)
    
    
    (385,757
    )
    
    
    (385,757
    )Accumulated other comprehensive income
    
    
    (175,162
    )
    
    
    (102,909
    )Total Stockholders Equity
    
    
    575,226
    
    
    
    991,799TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    10,643,852
    
    
    $
    11,395,692
 The accompanying notes are an integral part of these financial statements.
  4




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##### 



VERAMARK TECHNOLOGIES, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007NET SALESProduct sales
    
    $
    777,691
    
    
    $
    799,167
    
    
    $
    1,931,852
    
    
    $
    2,364,184Service sales
    
    
    1,946,605
    
    
    
    2,129,073
    
    
    
    6,002,373
    
    
    
    6,960,781Total Net Sales
    
    
    2,724,296
    
    
    
    2,928,240
    
    
    
    7,934,225
    
    
    
    9,324,965COSTS AND OPERATING EXPENSES:Cost of sales
    
    
    721,239
    
    
    
    704,853
    
    
    
    2,144,146
    
    
    
    2,442,632Engineering and software development
    
    
    385,836
    
    
    
    322,887
    
    
    
    1,017,937
    
    
    
    870,334Selling, general and administrative
    
    
    1,682,512
    
    
    
    1,980,160
    
    
    
    5,325,415
    
    
    
    6,319,178Total Costs and Operating Expenses
    
    
    2,789,587
    
    
    
    3,007,900
    
    
    
    8,487,498
    
    
    
    9,632,144LOSS FROM OPERATIONS
    
    
    (65,291
    )
    
    
    (79,660
    )
    
    
    (553,273
    )
    
    
    (307,179
    )NET INTEREST INCOME
    
    
    29,032
    
    
    
    19,593
    
    
    
    63,178
    
    
    
    44,480LOSS BEFORE INCOME TAXES
    
    
    (36,259
    )
    
    
    (60,067
    )
    
    
    (490,095
    )
    
    
    (262,699
    )INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET LOSS
    
    $
    (36,259
    )
    
    $
    (60,067
    )
    
    $
    (490,095
    )
    
    $
    (262,699
    )NET LOSS PER SHAREBasic
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )Diluted
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
 The accompanying notes are an integral part of these financial statements.
  5




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##### 



VERAMARK TECHNOLOGIES, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007OPERATING ACTIVITIES:Net income (loss)
    
    
    (490,095
    )
    
    
    (262,699
    )Adjustments to reconcile net income (loss) to net cash flows
provided by operating activitiesDepreciation and amortization
    
    
    1,067,467
    
    
    
    876,737Bad debt expense
    
    
    11,333
    
    
    
    3,486Share based compensation expense
    
    
    76,882
    
    
    
    289,000Pension assets
    
    
    4,015
    
    
    
    (120,503
    )Loss on disposal of fixed assets
    
    
    17,623
    
    
    
    Unrealized loss on sale of investments
    
    
    (29,879
    )
    
    
    Changes in assets and liabilitiesAccounts receivable
    
    
    (41,329
    )
    
    
    268,284Inventories
    
    
    (8,099
    )
    
    
    2,089Prepaid expenses and other current assets
    
    
    (91,911
    )
    
    
    (47,144
    )Deposits and other assets
    
    
    (75,005
    )
    
    
    (42,222
    )Accounts payable
    
    
    (51,160
    )
    
    
    (49,636
    )Accrued compensation and related taxes
    
    
    (344,943
    )
    
    
    162,694Deferred revenue
    
    
    258,758
    
    
    
    (44,663
    )Other accrued liabilities
    
    
    (106,062
    )
    
    
    (131,903
    )Pension obligation
    
    
    (134,234
    )
    
    
    331,200Net cash flows provided by operating activities
    
    
    63,361
    
    
    
    1,234,720INVESTING ACTIVITIES:Sale (purchase) of investments
    
    
    493,290
    
    
    
    (706,030
    )Capitalized software development costs
    
    
    (635,488
    )
    
    
    (703,124
    )Additions to property and equipment
    
    
    (151,485
    )
    
    
    (79,970
    )Net cash flows used by investing activities:
    
    
    (293,683
    )
    
    
    (1,489,124
    )FINANCING ACTIVITY:Exercise of stock options
    
    
    57,150
    
    
    
    98,979Proceeds from employee stock purchase plan
    
    
    11,743
    
    
    
    7,041Net cash flows provided by financing activities
    
    
    68,893
    
    
    
    106,020NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (161,429
    )
    
    
    (148,384
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    713,342
    
    
    
    845,384CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    551,913
    
    
    $
    697,000SUPPLEMENTAL CASH FLOW INFORMATIONCash Transactions:Income taxes paid, net
    
    $
    13,129
    
    
    $
    4,042Interest paid
    
    $
    553
    
    
    $
    1,075
 The accompanying notes are an integral part of these financial statements.
  6




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##### 



NOTES TO CONDENSED FINANCIAL STATEMENTS
  (1)
    
    GENERAL
    (2)
    
    PROPERTY AND EQUIPMENT
  September 30,
    
    
    December 31,2008
    
    
    2007Machinery and equipment
    
    $
    128,390
    
    
    $
    795,905Computer hardware and software
    
    
    1,249,519
    
    
    
    2,093,026Furniture and fixtures
    
    
    1,041,512
    
    
    
    1,677,783Leasehold improvements
    
    
    1,385,797
    
    
    
    1,388,350$
    3,805,218
    
    
    $
    5,955,064
  (3)
    
    STOCK-BASED COMPENSATION
   7




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##### 



Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    RemainingExercise
    
    
    Grant-Date
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Fair Value
    
    
    Term (Yrs)
    
    
    ValueOutstanding as of December 31, 2007
    
    
    2,257,943
    
    
    $
    1.60
    
    
    $
    1.32
    
    
    
    5.1
    
    
    $
    548,550Granted
    
    
    140,500
    
    
    $
    0.64
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (119,000
    )
    
    
    0.48
    
    
    
    
    
    
    
    
    
    
    
    (10,150
    )Canceled
    
    
    (373,860
    )
    
    
    3.19
    
    
    
    
    
    
    
    
    
    
    
    (192,125
    )Outstanding as of September 30, 2008
    
    
    1,905,583
    
    
    $
    1.28
    
    
    $
    1.07
    
    
    
    5.0
    
    
    $
    346,275Options exercisable at September 30, 2008
    
    
    1,768,583
    
    
    $
    1.33
    
    
    $
    1.11
    
    
    
    4.6
    
    
    $
    346,275
  (4)
    
    TOTAL COMPREHENSIVE
INCOME (LOSS)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (36,259
    )
    
    $
    (60,067
    )
    
    $
    (490,095
    )
    
    $
    (262,699
    )Reclassification to net periodic benefit cost
    
    
    22,122
    
    
    
    15,700
    
    
    
    66,367
    
    
    
    47,100Unrealized change  pension
    
    
    (36,247
    )
    
    
    
    
    
    
    (108,741
    )
    
    
    Unrealized change on investments
    
    
    (36,947
    )
    
    
    12,390
    
    
    
    (29,879
    )
    
    
    11,267Total comprehensive loss
    
    $
    (87,331
    )
    
    $
    (31,977
    )
    
    $
    (562,348
    )
    
    $
    (204,332
    )
 (5)
    
    NET INCOME (LOSS) PER SHARE (EPS)
   8




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##### 



Calculations of Earnings (Loss) Per Share
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007BasicNet Loss
    
    $
    (36,259
    )
    
    $
    (60,067
    )
    
    $
    (490,095
    )
    
    $
    (262,699
    )Weighted average common shares outstanding
    
    
    9,620,814
    
    
    
    9,004,789
    
    
    
    9,490,905
    
    
    
    8,933,593Net loss per common share
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )DilutedNet loss
    
    $
    (36,259
    )
    
    $
    (60,067
    )
    
    $
    (490,095
    )
    
    $
    (262,699
    )Weighted average common shares outstanding
    
    
    9,620,814
    
    
    
    9,004,789
    
    
    
    9,490,905
    
    
    
    8,933,593Additional
dilutive effect of stock options and warrants after application of treasury stock method
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average dilutive shares outstanding
    
    
    9,620,814
    
    
    
    9,004,789
    
    
    
    9,490,905
    
    
    
    8,933,593Net loss per common share assuming full obligation
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
  (6)
    
    INDEMNIFICATION OF CUSTOMERS
  (7)
    
    BENEFIT PLANS
   9




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##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Current Service Cost
    
    $
    (38,063
    )
    
    $
    68,180
    
    
    $
    (13,355
    )
    
    $
    204,540Amortization
of Prior Service Cost
    
    
    22,122
    
    
    
    15,700
    
    
    
    66,367
    
    
    
    47,100Interest Cost
    
    
    82,688
    
    
    
    78,720
    
    
    
    248,064
    
    
    
    236,160Unrealized change
    
    
    (36,247
    )
    
    
    
    
    
    
    (108,741
    )
    
    
    Pension Expense
    
    $
    30,500
    
    
    $
    162,600
    
    
    $
    192,335
    
    
    $
    487,800
     Period Ending December 31, Unless Stated Otherwise,
 Q4 2008
    
    
    113,5142009
    
    
    498,1922010
    
    
    498,1922011
    
    
    468,0582012
    
    
    513,8422013  2016
    
    
    2,717,021
  10




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##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Current Service Cost
    
    $
    1,892
    
    
    $
    1,130
    
    
    $
    5,676
    
    
    $
    3,390Interest Cost
    
    
    1,521
    
    
    
    620
    
    
    
    4,563
    
    
    
    1,860PRHB Expense
    
    $
    3,413
    
    
    $
    1,750
    
    
    $
    10,239
    
    
    $
    5,250
  Period Ending December 31, Unless Stated Otherwise,
 Q4 2008
    
    
    3,4102009
    
    
    13,6492010
    
    
    13,6492011
    
    
    13,6492012
    
    
    13,6492013  2016
    
    
    37,096
  11




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##### 



Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Results of Operations
  Overview
    Sales
    12




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##### 



Cost of Sales
  Operating Expenses
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Gross expenditures for engineering &
software development
    
    $
    609,000
    
    
    $
    501,000
    
    
    $
    1,654,000
    
    
    $
    1,573,000Less: Software development costs capitalized
    
    
    (223,000
    )
    
    
    (178,000
    )
    
    
    (636,000
    )
    
    
    (703,000
    )Net expense for engineering and software
    
    $
    386,000
    
    
    $
    323,000
    
    
    $
    1,018,000
    
    
    $
    870,000
   13




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##### 



Liquidity and Capital Resources
           14




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##### 



Recent Accounting Pronouncements
 1)
    
    In December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141(R), Business Combinations. SFAS 141(R)
establishes principles and requirements for how the acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase, and determines what information
to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141(R) is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December 15, 2008. As
such, the Company is required to adopt these provisions at the beginning of the fiscal year
ending December 31, 2009. The Company does not expect adoption of SFAS 141(R) to have a
material effect on its financial statements.
 2)
    
    In December 2007, the Financial Accounting Standards Board issued Statement of
Financial
Accounting Standards (SFAS) No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51. SFAS 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. As such, the Company is required to adopt
these provisions at the beginning of the fiscal year ending December 31, 2009. The Company
does not expect SFAS 160 to have a material effect on its financial statements.
 3)
    
    In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (SAB 110). SAB
110 permits companies to continue to use the simplified
method, under certain circumstances, in estimating the expected term of plain vanilla
options beyond December 31, 2007. SAB 110 updates guidance provided in SAB 107 that
previously stated that the Staff would not expect a company to use the simplified method
for share option grants after December 31, 2007. Adoption of SAB 110 did not have a
material impact on the Companys financial statements.
 4)
    
    In March 2007, the Financial Accounting Standards Board ratified Emerging Issues Task
Force (EITF) Issue No. 06-10, Accounting for Collateral Assignment Split-Dollar Life
Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the
postretirement benefit obligation as well as recognition and measurement of the associated
asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is
effective for fiscal years beginning after December 15, 2007. As such, the Company adopted
these provisions at the beginning of the fiscal year ending December 31, 2008. Adoption of
EITF 06-10 did not have a material impact on the Companys financial statements.
 5)
    
    In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial
Accounting Standard (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging
Activitiesan amendment of FASB Statement No. 133. SFAS 161 requires enhanced
disclosures about an entitys derivative and hedging activities. SFAS 161 is effective
for financial statements issued for fiscal years and interim periods beginning after November
15, 2008 with early application encouraged. As such, the Company is required to adopt these
provisions at the beginning of the fiscal year ended December 31, 2009. The Company is
currently evaluating the impact of SFAS 161 on its financial statements, but does not expect
it to have a material effect.
  15




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##### 



6)
    
    In May 2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting
Standard (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles.
SFAS 162 identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of nongovernmental entities
that are presented in conformity with generally accepted accounting principles (GAAP) in the
United States. SFAS 162 is effective 60 days following the SECs approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles. The Company is currently
evaluating the impact of SFAS 162 on its financial statements, but does not expect it to
have a material effect.
 7)
    
    In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 163, Accounting for Financial Guarantee
Insurance Contractsan interpretation of FASB Statement No. 60 (SFAS 163). SFAS 163
interprets Statement 60 and amends existing accounting pronouncements to clarify their
application to the financial guarantee insurance contracts included within the scope of that
Statement. SFAS 163 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal years. As such, the
Company is required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of SFAS 163 on its
financial statements, but does not expect it to have a material effect.
  16




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##### 



Critical Accounting Policies
  
    
    Revenue recognition
 
    
    Capitalization of software development costs
 
    
    Allowance for Doubtful Accounts
 
    
    Pension liability
         17




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##### 



18




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##### 



Issues and Risks
  Intellectual Property Rights
  New Products and Services
 ®
 Declines in Demand for Software
  Product Development Schedule
 ®
 Competition
  Marketing and Sales
   19




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Item 3 Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4 Controls and Procedures
    20




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PART II  OTHER INFORMATION
 
 Item 5: Items Required to be Disclosed on Form 8-K
    
    
    The maximum outstanding principal balance under the Agreement is Four Hundred
Thousand Dollars ($400,000).
 
    
    The Registrant may borrow against the Agreement, from time to time, an amount
less than or equal to, but not greater than the available balance of the Note.
 
    
    The outstanding principal balance shall bear interest at a per annum rate equal
to One-Half Percent (0.5%) above the Prime Rate.
 
    
    The Bank may demand payment of the outstanding principal balance at any time.
 
 Item 6: Exhibits and Reports on Form 8-K
 (a)
    
    Exhibits required by Item 601 of Regulation S-K
       21




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SIGNATURES
 
 VERAMARK TECHNOLOGIES, INC.
REGISTRANTDate: November 13, 2008
    /s/ Anthony C. MazzulloAnthony C. MazzulloPresident and Chief Executive OfficerDate: November 13, 2008
    /s/ Ronald C. LundyRonald C. LundyVice President of Finance and Chief Financial Officer  22




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EXHIBIT INDEX
   Sarbanes-Oxley
 Sarbanes-Oxley
  23