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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  Commission File Number 0-13898 Veramark Technologies, Inc. 
  Delaware
    
    16-1192368(State or other jurisdiction of Incorporation
or Organization)
    
    (IRS Employer Identification Number)
 3750 Monroe Avenue, Pittsford, NY 14534 
  (585) 381-6000 
  N/A 
  Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports) and (2) has been subject to
such filing requirement for the past 90 days. YES þ NO o Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of
the Act). YES o NO þ Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
March 31, 2005 Common stock, par value $.10                                         8,694,954 shares This report consists of 26 pages.   1




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INDEX PagePART I FINANCIAL INFORMATIONItem 1 Financial StatementsCondensed Balance Sheets -
March 31, 2005 (Unaudited) and December 31, 2004
    
    3 - 4Condensed Statements of Operations (Unaudited)
Three Months Ended March 31, 2005 and 2004
    
    5Condensed Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2005 and 2004
    
    6 - 7Notes To Condensed Financial Statements (Unaudited)
    
    8 - 11Item 2 Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    12 - 18Item 3 Quantative and Qualitative Disclosures About Market Risk
    
    19Item 4 Controls and Procedures
    
    19PART II OTHER INFORMATIONItem 5 Certification of Chief Executive Officer and Chief Accounting Officer
    
    20Item 6 Exhibits and Reports on Form 8-K
    
    20 - 21Officers Certifications and Signatures
    
    22  26EX-31.1 CEO Certification Pursuant to Rule 13A-14(A)EX-31.2 Treasure Certification Pursuant to Rule 13A-14(A)EX-32.1 CEO Certification Pursuant to 18 USC Sect. 1350EX-32.2 Treasurer Certification Pursuant to 18 USC Sect. 1350
  2




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PART I   FINANCIAL INFORMATION VERAMARK TECHNOLOGIES, INC. 
 CONDENSED BALANCE SHEETS (Unaudited)March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    590,902
    
    
    $
    722,020Investments
    
    
    387,360
    
    
    
    381,237Accounts receivable, trade (net
of allowance for doubtful accounts
of $25,000 and $24,000, respectively)
    
    
    1,350,159
    
    
    
    1,276,204Inventories, net
    
    
    36,385
    
    
    
    30,717Prepaid expenses and other current assets
    
    
    145,467
    
    
    
    109,809Total Current Assets
    
    
    2,510,273
    
    
    
    2,519,987PROPERTY AND EQUIPMENTCost
    
    
    5,743,894
    
    
    
    5,740,535Less accumulated depreciation
    
    
    (4,893,000
    )
    
    
    (4,846,475
    )Property and Equipment (Net)
    
    
    850,894
    
    
    
    894,060OTHER ASSETS:Software development costs (net of
accumulated amortization of $1,708,040
and $1,506,777, respectively)
    
    
    2,597,673
    
    
    
    2,518,482Pension and related assets
    
    
    2,802,304
    
    
    
    2,778,482Deposits and other assets
    
    
    797,745
    
    
    
    797,745Total other assets
    
    
    6,197,722
    
    
    
    6,094,709TOTAL ASSETS
    
    $
    9,558,889
    
    
    $
    9,508,756
 The accompanying notes are an integral part of these financial statements. 3




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VERAMARK TECHNOLOGIES, INC. CONDENSED BALANCE SHEETS (Unaudited)March 31,
    
    
    December 31,2005
    
    
    2004LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    278,059
    
    
    $
    298,063Accrued compensation and related taxes
    
    
    447,750
    
    
    
    557,805Deferred revenue
    
    
    2,676,591
    
    
    
    2,572,120Other accrued liabilities
    
    
    171,330
    
    
    
    187,977Total Current Liabilities
    
    
    3,573,730
    
    
    
    3,615,965Pension obligation
    
    
    4,600,367
    
    
    
    4,439,398Total Liabilities
    
    
    8,174,097
    
    
    
    8,055,363STOCKHOLDERS EQUITY:Common Stock, par value $.10; shares authorized,
40,000,000; shares issued and outstanding
8,775,179 and 8,749,179
    
    
    877,518
    
    
    
    874,918Additional paid-in capital
    
    
    21,757,517
    
    
    
    21,744,969Accumulated deficit
    
    
    (20,880,414
    )
    
    
    (20,795,128
    )Treasury stock (80,225 shares, at cost)
    
    
    (385,757
    )
    
    
    (385,757
    )Accumulated other comprehensive income
    
    
    15,928
    
    
    
    14,391Total Stockholders Equity
    
    
    1,384,792
    
    
    
    1,453,393TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    9,558,889
    
    
    $
    9,508,756
 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 EndedMarch 31,2005
    
    
    2004NET SALESProduct Sales
    
    $
    954,583
    
    
    $
    943,099Service Sales
    
    
    1,671,789
    
    
    
    1,730,599Total Net Sales
    
    
    2,626,372
    
    
    
    2,673,698COSTS AND OPERATING EXPENSES:Cost of sales
    
    
    440,051
    
    
    
    380,487Engineering and software development
    
    
    301,792
    
    
    
    238,048Selling, general and administrative
    
    
    1,971,107
    
    
    
    2,039,191Total Costs and Operating Expenses
    
    
    2,712,950
    
    
    
    2,657,726INCOME (LOSS) FROM OPERATIONS
    
    
    (86,578
    )
    
    
    15,972NET INTEREST INCOME
    
    
    1,292
    
    
    
    9,566INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (85,286
    )
    
    
    25,538INCOME TAXES
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    (85,286
    )
    
    $
    25,538NET INCOME (LOSS) PER SHAREBasic
    
    $
    (0.01
    )
    
    $
    0.00Diluted
    
    $
    (0.01
    )
    
    $
    0.00
 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)
 Three Months Ended March 31,2005
    
    
    2004OPERATING ACTIVITIES:Net income (loss)
    
    $
    (85,286
    )
    
    $
    25,538Adjustments to reconcile net income (loss) to net cash flows
provided by operating activitiesDepreciation and amortization
    
    
    269,018
    
    
    
    171,911Provision for bad debts
    
    
    (5,512
    )
    
    
    (12,207
    )Loss on disposal of fixed assets
    
    
    
    
    
    
    11,548Compensation expense-stock options
    
    
    4,043
    
    
    
    15,248Increase in cash surrender value of company-owned life insurance
policies
    
    
    (23,822
    )
    
    
    (23,823
    )Changes in assets and liabilitiesAccounts receivable
    
    
    (68,443
    )
    
    
    90,282Inventories
    
    
    (5,668
    )
    
    
    (27,711
    )Prepaid expenses and other current assets
    
    
    (35,658
    )
    
    
    19,349Deposits and other assets
    
    
    
    
    
    
    39,930Accounts payable
    
    
    (20,004
    )
    
    
    147,888Accrued compensation and related taxes
    
    
    (110,055
    )
    
    
    (28,480
    )Deferred revenue
    
    
    104,471
    
    
    
    (149,114
    )Other accrued liabilities
    
    
    (16,647
    )
    
    
    (67,642
    )Pension obligation
    
    
    160,969
    
    
    
    102,218Net cash flows provided by operating activities
    
    
    167,406
    
    
    
    314,935INVESTING ACTIVITIES:Sale (purchase) of investments
    
    
    (4,586
    )
    
    
    18,114Capitalized software development costs
    
    
    (280,454
    )
    
    
    (458,476
    )Additions to property and equipment
    
    
    (24,589
    )
    
    
    (53,786
    )Net cash flows used by investing activities:
    
    
    (309,629
    )
    
    
    (494,148
    )FINANCING ACTIVITY:Exercise of Stock Options
    
    
    11,105
    
    
    
    Repayment of capital lease obligation
    
    
    
    
    
    
    (1,842
    )Net cash flows provided (used) by financing activities
    
    
    11,105
    
    
    
    (1,842
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (131,118
    )
    
    
    (181,055
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    722,020
    
    
    
    644,005CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    590,902
    
    
    $
    462,950
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Three Months Ended March 31,2005
    
    
    2004SUPPLEMENTAL CASH FLOW INFORMATIONCash Transactions:Income taxes paid (received), net
    
    $
    (3,000
    )
    
    $
    25,123Interest paid
    
    $
    
    
    
    $
    53
 The accompanying notes are an integral part of these financial statements. 7




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NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)  (1)
    GENERAL The accompanying unaudited 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, 2005 and the results of its operations and cash flows
for the three months ended March 31, 2005 and 2004. 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 financial
statements should be read in conjunction with the 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, 2004. The results of operations and cash flows for the three months ended March 31, 2005 are not
necessarily indicative of the results to be expected for the full years operation.  (2)
    PROPERTY AND EQUIPMENTThe major classifications of property and equipment at March 31, 2005, and December 31, 2004
were: March 31,
    
    
    December 31,2005
    
    
    2004Machinery and equipment
    
    $
    794,314
    
    
    $
    794,314Computer hardware and software
    
    
    1,939,344
    
    
    
    1,935,985Furniture and fixtures
    
    
    1,627,677
    
    
    
    1,627,677Leasehold improvements
    
    
    1,382,559
    
    
    
    1,382,559$
    5,743,894
    
    
    $
    5,740,535
  For the quarter ended March 31, 2005, the Company recorded depreciation expense of $67,755.
Depreciation expense for the quarter ended March 31, 2004 was $68,697.(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 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. 8




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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 31,2005
    
    
    2004Net income (loss)
    
    As reported
    
    $
    (85,286
    )
    
    $
    25,538Add: total stock-based
compensation expense included in
net income, net of related tax
effects
    
    
    
    
    4,044
    
    
    
    15,248Deduct: total stock-based
compensation expense determined
under fair value, net of related
tax effects
    
    
    
    
    (35,546
    )
    
    
    (106,986
    )Pro forma
    
    $
    (116,788
    )
    
    $
    (66,200
    )Net income (loss) per common share
    
    As reportedBasic
    
    $
    (0.01
    )
    
    $
    0.00Diluted
    
    $
    (0.01
    )
    
    $
    0.00Pro formaBasic
    
    $
    (0.01
    )
    
    $
    (0.01
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
  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 2005 and 2004: 2005
    
    
    2004Dividend yield
    
    
    
    
    
    
    Expected volatility
    
    
    147.56
    %
    
    
    144.43
    %Risk-free interest rate
    
    
    3.89
    %
    
    
    3.27
    %Expected life
    
    5 years
    
    5 years
  During the quarter ending March 31, 2005, no options were granted(4)
    TOTAL COMPREHENSIVE INCOME (LOSS)Total comprehensive income (loss) for the first quarter of 2005 and 2004 was as follows: 9




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Three Months Ended March 31,2005
    
    
    2004Net income (loss)
    
    $
    (85,286
    )
    
    $
    25,538Accumulated other comprehensive income
    
    
    1,537
    
    
    
    4,665Total comprehensive income (loss)
    
    $
    (83,749
    )
    
    $
    30,203
  (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 31,2005
    
    
    2004BasicNet income (loss)
    
    $
    (85,286
    )
    
    $
    25,538Weighted average common shares outstanding
    
    
    8,673,998
    
    
    
    8,562,829Net income (loss) per common share
    
    $
    (0.01
    )
    
    $
    0.00DilutedNet income (loss)
    
    $
    (85,286
    )
    
    $
    25,538Weighted average common shares outstanding
    
    
    8,673,998
    
    
    
    8,562,829Additional dilutive effect of stock options and
warrants after application of treasury stock method
    
    
    
    (1)
    
    
    1,254,428Weighted average dilutive shares outstanding
    
    
    8,673,998
    
    
    
    9,817,257Net income (loss) per common share assuming full
obligation
    
    $
    (0.01
    )
    
    $
    0.00
   (1)
    
    There were no dilutive effects of stock options in 2005, as the effect would be anti-dilutive
due to the net loss incurred. 10




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(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
March 31, 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.(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 three months ended March 31, 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 months ended March 31, 2005 and 2004 consists of the
following: Three Months Ended March 31,2005
    
    
    2004Current Service Cost
    
    $
    114,248
    
    
    $
    74,693Amortization of Prior Service Cost
    
    
    22,650
    
    
    
    21,721Interest Cost
    
    
    65,605
    
    
    
    47,337Pension Expense
    
    $
    202,503
    
    
    $
    143,751
  The Company paid pension obligations of $41,534 for both the three months ended March 31,
2005 and 2004.The discount rate used in determining the actuarial present value of the projected benefit
obligation was 6% for the three months ended March 31, 2005 and 2004.The Company maintains life insurance covering certain key employees under its Supplemental
Executive Retirement Program with the Company named as beneficiary. The Company intends to
use the death benefits of these policies, as well as loans against the accumulating cash
surrender value of the policies, to fund the pension obligation. The total death benefit
associated with these policies is $10.2 million, with an associated accumulated cash
surrender value of approximately $2,237,000 at March 31, 2005. The accumulated cash
surrender values of these policies at December 31, 2004 was approximately $2,214,000. 
 11




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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Managements Discussion and Analysis contains statements that are forward-looking. Such
statements are identified by the use of words like plans, expects, intends, believes,
will, anticipates, estimates and other words of similar meaning in conjunction with, among
other things, discussions of future operations, financial performance, the Companys strategy for
growth, product development, regulatory approvals, market position and expenditures.
Forward-looking statements are based on managements expectations as of the date of this report.
The Company cannot guarantee that any forward-looking statement will be accurate, although the
Company believes that it has been reasonable in its expectations and assumptions. Forward-looking
statements are subject to the risks identified in Issues and Risks and elsewhere in this report.
Readers are cautioned not to place undue reliance on forward-looking statements and are advised to
review the risks identified in Issues and Risks and elsewhere in this report. The Company has no
obligation to update forward-looking statements. Sales for Veramarks first quarter ended March 31, 2005 were $2,626,000 a decrease of 2% from
sales of $2,674,000 for the first quarter of 2004. The net loss incurred for the quarter ended
March 31, 2005 was $85,000 or $0.01 per share, which compares with a net profit of $26,000, or
$0.00 per diluted share for the quarter ended March 31, 2004. The change in net income for the quarter ended March 31, 2005, versus the prior year, is
primarily attributable to a reduction in the amounts of engineering and development expenses capitalized.
For the quarter ended March 31, 2005, we capitalized $281,000 of development costs as opposed to
$459,000 of capitalization for the same quarter of 2004. Amounts capitalized for the second and
third quarters of 2005 are expected to increase as we continue the development efforts of
VeraSMART® version 4.0, currently scheduled for release in the third quarter of this year. While recent reports state that general economic conditions appear favorable, we remain
concerned with the current levels of capital equipment spending particularly in the Telecom
Industry. We continue to see a significant number of customers delaying major purchases, and/or
upgrades to their telecommunication networks, the result of which has impacted sales of VeraSMART,
our enterprise-level product. For the quarter ended March 31, 2005, sales of VeraSMART and its predecessor product, Quantum
Series ® decreased 9% from the quarter ended March 31, 2004. In addition, although new proposal
activity remains strong, the sales cycle, from initial proposal to final implementation, continues
to lengthen. For example, a number of new orders, that we had anticipated receiving during the
first quarter of 2005, were delayed to at least the second quarter of the year. In January of 2005, we released VeraSMART version 3.0. This most recent version of VeraSMART
incorporates a series of invoice management tools that allows companies to collect their billing
data from a wide range of service providers, and once collected, allows them to review, approve and
budget more efficiently. Sales of telemanagement products and their associated services have been less affected by
economic conditions. For the quarter ended March 31, 2005 revenues generated by eCAS the
Companys core telemanagement product, increased 2% from the same quarter of 2004, accounting for
63% of total sales versus 61% of total sales a year ago. 12




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Additionally, we realized a 5% increase in sales generated by our Outsourced Solutions Group
for the first quarter of 2005 from the same quarter a year ago. A number of new outsourcing
proposals were made during the quarter, which we have hopes of finalizing during the second and
third quarters of 2005. Revenues from Outsourced Solutions accounted for 5% of total sales for the
quarter ended March 31, 2005, up from 4% for the first quarter of 2004. The Company earned a gross margin (defined as sales less cost of sales) of $2,186,000, or 83%
of sales for the quarter ended March 31, 2005. For the same period a year ago, we earned a gross
margin of $2,293,000 or 86% of sales. The lower margin is attributable to an $87,000 increase in
the amortization of previously capitalized software development costs, attributable to VeraSMART
versions 2.0 and 3.0. These amortization costs are charged directly to cost of sales. Net engineering and development expenses of $302,000 for the quarter ended March 31, 2005
increased 27% from the first quarter of 2004 due to the reduced level of software capitalization
referred to earlier, which offset a reduction of $115,000 in actual gross expenses for engineering
and development from the prior year. The table below details gross expenses incurred in
engineering and development, amounts capitalized and amortized, and the overall impact of
engineering and development efforts on the Companys Statement of Operations for the quarters ended
March 31, 2005 and 2004. Three Months Ended March 31,2005
    
    
    2004Gross expenditures for engineering and software development
    
    $
    582,246
    
    
    $
    696,524Less: Software development costs capitalized
    
    
    (280,454
    )
    
    
    (458,476
    )Net expenses for engineering and software development included in the
Companys statement of operations
    
    
    301,792
    
    
    
    238,048Plus: Software development costs amortized and charged to cost of sales
    
    
    201,263
    
    
    
    103,214Total Expense Recognized
    
    $
    503,055
    
    
    $
    341,262
 During the first quarter of 2005, our engineering and development team began work on VeraSMART
version 4.0. This version of VeraSMART will contain additional functionality to our operational
support modules, and a new module for work orders. The addition of these improvements will
compliment the billing elements currently available in VeraSMART and allow us to enter markets
outside of our traditional telecom environment. Selling, general, and administrative expenses incurred of $1,971,000 for the quarter ended
March 31, 2005 decreased 3% from $2,039,000 for the quarter ended March 31, 2004. The reduction in
expense was attributable to lower payroll and benefit expenses incurred as a result of a lower
average employment level from a year ago, particularly in the marketing and customer support
functions. We do, however, continue to expand our direct sales force in an effort to reach
additional VeraSMART opportunities, as well as expand our penetration of new and existing
distribution channels associated with sales of our core telemanagement products. 13




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Liquidity and Capital Resources For the quarter ended March 31, 2005, net cash decreased by $125,000 from $1,103,000 at
December 31, 2004 to $978,000 at March 31, 2005. Net cash consists of cash and cash equivalents
plus short-term investments. The reduction in net cash primarily resulted from reducing our trade
accounts payable and the payment of accrued compensation due to employees from December 31, 2004
balances. Accounts receivable at March 31, 2005 of $1,350,000 increased 6% from the December 31, 2004
balance of $1,276,000. The increase in receivables is a function of the timing of payments from
customers and does not reflect any change in the historical payment patterns of major customers. Prepaid expenses of $145,000 increased from $110,000 at December 31, 2004 due to the first
quarter renewal of the Companys general business insurance policies for 2005. It is expected that
prepaid expenses will increase again in the second quarter as the remaining policies pertaining for
2005 coverages come up for renewal. During the quarter ended March 31, 2005, the Company purchased $25,000 of capital equipment
largely related to upgrades to our internal communication network infrastructure. Additionally we
wrote off approximately $22,000 of obsolete equipment during the quarter, all of which had been
fully depreciated in past years. The carrying value of capitalized software related to the Companys software development
efforts increased from $2,518,000 at December 31, 2004 to $2,598,000 at March 31, 2005. During the
first quarter of 2005, we capitalized $280,000 of current software development costs, all related
to further VeraSMART® expansion, and amortized $201,000 of development costs capitalized in
previous years. Pension and related assets increased $24,000 during the first quarter of 2005 to $2,802,000,
reflecting an increase in 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. Accounts payable were reduced by $20,000 during the quarter to $278,000, from $298,000 at
December 31, 2004. There have been no significant changes in our payment policies with vendors and
suppliers, and it is expected that the level of accounts payable will remain stable throughout the
balance of the year. Accrued compensation at March 31, 2005 is $448,000, down $110,000 from $558,000 at December
31, 2004. The reduction is the result of the January 2005 payment of $105,000 in sales commissions
and incentives earned by members of our sales force during the fourth quarter of 2004. Total stockholders equity of $1,385,000 at March 31, 2005 decreased from $1,453,000 at
December 31, 2004. The change in equity includes the first quarter 2005 loss of $85,000, partially
offset by $11,000 of proceeds received from employees of the Company from the exercise of 26,000
stock options. The
Company believes, given current cash and investment levels, combined
with the access to cash surrender values of company-owned life
insurance policies, that more than sufficient liquidity exists to
fund operations for the next twelve months and beyond. 14




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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 15




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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 reporting period that begins after June 15, 2006, 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. We
expect the adoption of SFAS 123(R) will have a material adverse impact on our net income and
net income per share. We are currently in the process of evaluating the extent of such
impact.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. 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 2005 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 16




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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. The Company capitalizes software development costs when technological feasibility has been
established for the software in accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. Such capitalized costs are amortized on a
product-by-product basis over their economic life or the ratio of current revenues to current and
anticipated revenues from such software, whichever provides the greater amortization. The Company
periodically reviews the carrying value of capitalized software development costs and impairments
are recognized in the results of operations when the expected future undiscounted operating cash
flow derived from the capitalized software is less than its carrying value. Should the Company
inaccurately determine when a product reaches technological feasibility or the economic life of a
product, results could differ materially from those reported. Veramark uses what it believes are
reasonable assumptions and where applicable, established valuation techniques in making its
estimates. The Company maintains allowances for doubtful accounts for estimated losses resulting from the
potential inability of its customers to make required payments. Management specifically analyzes
accounts receivable, historical bad debts, credit concentrations and customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. The Company sponsors an unfunded Supplemental Executive Retirement Program (SERP), which is
a nonqualified plan that provides certain key employees a defined pension benefit. In order to
properly record the net present value of future pension obligations a number of assumptions are
required to be made by Companys management. These assumptions include years of service, life
expectancies, and projected future salary increases for each participant. In addition, management
must make assumptions with regard to the proper long-term interest and liability discount rates to
be applied to these future obligations. Should the Company need to alter any of these assumptions, there is the potential for
significant adjustments to future projected pension liabilities. Issues and Risks The following factors, among others discussed herein and in the Companys filings under the
Act, could cause actual results and future events to differ materially from those set forth or
contemplated in the forward-looking statements: economic, competitive, governmental and
technological factors, increased operating costs, failure to obtain necessary outside financing,
risks related to natural disasters and financial market fluctuations. Such factors also include:  Intellectual Property RightsVeramark regards its software as proprietary and attempts to protect it with a combination of
copyright, trademark and trade secret protections, employee and third-party non-disclosure
agreements and other methods of protection. Despite those precautions, it may be possible for
unauthorized third parties to copy certain portions of Veramarks products, reverse engineer
or obtain and use information that 17




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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 takes steps to prevent unlawful
infringement of others intellectual property, there can be no assurance that third parties
will not assert infringement claims against Veramark in the future with respect to current or
future products. Any such assertion could require Veramark to enter into royalty
arrangements or result in costly litigation.New Products and ServicesVeramark has made significant investments in research, development and marketing for new
products, services and technologies, including the VeraSMART software offering and its
service bureau outsourced solutions. Significant revenue from new product and service
investments may not be achieved for a number of years, if at all. Moreover, for such
products or services, operating margins may not be as high as the margins historically
experienced by Veramark.Declines in Demand for SoftwareIf overall market demand for software and computer devices generally, as well as call
accounting software or enterprise level products specifically, declines, or corporate
spending for such products declines, Veramarks revenue will be adversely affected.
Additionally, Veramarks revenues would be unfavorably impacted if customers were to reduce
their purchases of new software products or upgrades to existing products.Product Development ScheduleThe development of software products is a complex and time-consuming process. New products
and enhancements to existing products can require long development and testing periods.
Significant delays in new product releases or significant problems in creating new products,
particularly any delays in future releases of the VeraSMART suite of products, could
adversely affect Veramark revenues.CompetitionVeramark experiences intensive competition across all markets for its products and services.
Some competing firms have greater name recognition and more financial, marketing and
technological resources than Veramark. These competitive pressures may result in decreased
sales volumes, price reductions, and/or increased operating costs, such as for marketing and
sales incentives, resulting in lower revenues, gross margins and operating income.Marketing and SalesVeramarks marketing and distribution strategy is founded on building mutually beneficial
relationships with companies that have established distribution networks. Some sell
privately labeled, customized products developed and manufactured by Veramark to their
specific specifications, while others resell Veramarks products. Any loss of the continued
availability of those relationships could have a material adverse effect on Veramarks
business and results of operations. 18




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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 the Companys Treasurer (Chief Accounting Officer) concluded that the Companys
disclosure controls and procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported, within the
time periods specified in the SECs rules and forms and (ii) accumulated and communicated to the
Companys management, including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure. There have been no changes in the Companys internal controls over financial reporting,
that occurred during the period covered by this report, that have materially affected, or are
reasonably likely to materially affect the Companys internal controls over financial reporting. The Companys disclosure controls and procedures and internal controls over financial
reporting provide reasonable, but not absolute, assurance that all deficiencies in design or
operation of those control systems, or all instances of errors or fraud, will be prevented or
detected. Those control systems are designed to provide reasonable assurance of achieving the goals
of those systems in light of the Companys resources and nature of the Companys business
operations. The Companys disclosure controls and procedures and internal control over financial
reporting remain subject to risks of human error and the risk that controls can be circumvented for
wrongful purposes by one or more individuals in management or non-management positions. 19




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PART II  OTHER INFORMATION 
 Item 5:
Certification of Chief Executive Officer and Chief Accounting Officer  The Companys Chief Executive Officer and the Companys 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,
2005 and 2004 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, 2005
and 2004, 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 January 19, 2005, the Company filed a current report on Form
8-K reporting that the Company had modified the method of compensation to be
paid to non-executive directors. A copy of such plan detailing non-executive
director compensation was attached at Exhibit 10.1.(2)
    On February 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 and year ended December 31, 2004. A copy of
such press release, was attached as Exhibit 99.1. 20




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(3)
    On March 17, 2005, the Company filed a current report on Form 8-K
announcing that the Companys Board of Directors had adopted a Directors
Deferred Compensation Plan. A copy of such plan was attached as Exhibit 10.1.(4)
    On March 31, 2005, the Company filed a current report on Form 8-K
announcing that the Company had entered into an Amended and Restated Employment
Agreement with David G. Mazzella, effective as of January 31, 2005. A copy of
such plan was attached as Exhibit 10.1 21




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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, 2005 /s/ David G. MazzellaDavid G. Mazzella
President and CEODate: May 13, 2005/s/ Ronald C. LundyRonald C. Lundy
Treasurer (Chief Accounting Officer)
 22