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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934

For Quarter Ended September 30, 2002

Commission File Number 0-13898

Veramark Technologies, Inc.

(585) 381-6000

N.A.

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirement for the past 90 days.

Yes      X        No            

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of September 30, 2002

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INDEX

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PART I — FINANCIAL INFORMATION

VERAMARK TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to Condensed Consolidated Financial Statements.

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VERAMARK TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to Condensed Consolidated Financial Statements.

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VERAMARK TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to Condensed Consolidated Financial Statements.

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VERAMARK TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)    GENERAL

     The accompanying unaudited condensed consolidated financial statements include all adjustments of a normal and recurring nature which, in the opinion of Company’s management, are necessary to present fairly the Company’s financial position as of September 30, 2002 and the results of its operations and cash flows for the three and nine months ended September 30, 2002 and 2001.

     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 unaudited condensed consolidated financial statements should be read in conjunction with the supplemental consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K to the Securities and Exchange Commission for the year ended December 31, 2001.

     The results of operations for the three and nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year’s operation.

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Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Except for the historical information contained herein, the matters discussed in this report are forward-looking statements, which involve risks and uncertainties including, but not limited to, economic, competitive, governmental and technological factors, affecting the Company’s operations, markets, products, services and prices, as well as other factors discussed in the Company’s filings with the Securities and Exchange Commission.

Results of Operations

     Sales of $2,672,629 for the three months ended September 30, 2002 declined from sales of $3,003,438 for the three months ended September 30, 2001. For the nine months ended September 30, 2002, sales were $8,379,574 as compared to sales of $9,625,472 for the same nine month period of 2001

     The Company incurred a net loss of $627,806, or $0.07 per diluted share, for the three months ended September 30, 2002. For the nine months ended September 30, 2002, the Company has incurred a net loss of $1,595,028, or $0.19 per diluted share. For the three and nine months ended September 30, 2001, net losses totaled $443,218, or $0.05 per diluted share and $1,317,392, or $0.16 per diluted share, respectively. Results for 2001 included a gain of $315,676 for the sale of the Company’s former billing and customer care product line, Verabill, completed in March of 2001.

     Continuing a trend established in the first and second quarters of 2002, the Company continues to experience growth in sales of core call accounting products and services from prior year levels, but has seen these gains offset by a decrease in the sale of its enterprise level products.

     For the three and nine months ended September 30, 2002, the Company realized increases of 15% and 14%, respectively, in sales of core call accounting products and services from the same periods of 2001. The increased sales are attributable to the Company’s eCAS product, a web-based call accounting platform. The release of eCAS in mid October of 2001, has allowed the Company access to several new channels of distribution, as well as the ability to broaden its appeal with existing customers and distribution channels. Sales of call accounting products and services has accounted for 54% of the Company’s sales for the nine months ended September 30, 2002, versus 41% of Company sales for the nine months ended September 30, 2001.

     Sales of enterprise products, which consist of the Company’s Quantum Series and DNT product lines, continue to produce sales below 2001 levels. For the three months ended September 30, 2002, sales of enterprise products decreased 24% from the third quarter of 2001, and for the nine months ended September 30, 2002, sales of enterprise products have declined 27%, as compared to the same period of 2001. Enterprise level products continue to be adversely impacted by customers delaying major capital projects in response to current economic conditions.

     During the last week of the quarter, the Company received an order from Washington State University, valued at approximately $200,000, for several Quantum Series modules, including Call-Master™, Phone-Bill™ and Cable Master™. Installation of this order is currently scheduled for the fourth quarter of 2002. No revenue from this order was recognized during the third quarter of 2002.

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     Sales generated from service activities, which include training, installation, maintenance and customization, accounted for 62% of sales for the three months ended September 30, 2002 and 60% of sales for the nine months ended September 30, 2002. For the same three and nine month periods of 2001, services accounted for 55% and 50% of sales, respectively.

     Gross profit margins for the three and nine months ended September 30, 2002, of $2,115,060 and $6,657,606, both representing 79% of sales, compare with gross profit margins of $2,464,623 and $8,022,888, representing 82% and 83% of sales, respectively, for the three and nine months ended September 30, 2001. The lower percentage margins reflect increased amortization costs associated with the development of eCAS, now being amortized and charged to cost of sales.

     Engineering and development costs, net of capitalized costs, of $726,747 and $2,170,085 for the three and nine months ended September 30, 2002 respectively, increased by 21% and 4%, respectively, from the same three and nine months periods of 2001. Gross expenditures for engineering and development expenses however, were reduced by 26% and 33% from prior year levels. The chart below summarizes gross and net engineering and development costs, amounts capitalized, and the resulting net engineering and development costs included in the Company’s consolidated Statement of Operations for the three and nine months ended September 30, 2002 and 2001.

All of the development costs capitalized in 2001 were associated with the Company’s development of the eCAS product line.

     The company has continued to significantly reduce its expenditures for selling, general, and administrative functions during 2002, as compared with 2001 levels. For the three months ended September 30, 2002, selling, general, and administrative costs of $2,020,180 were 13% below the costs of $2,331,240, incurred for the same quarter of 2001. For the nine months ended September 30, 2002, selling, general, and administrative cots of $6,087,946 have been reduced by 20% from total costs of $7,633,541 for the same nine month period of 2001. The cost reductions are primarily due to headcount reductions undertaken during the second half of 2001 and the first half of 2002. As of September 30, 2002, the Company’ employment level was 111 employees, versus 139 employees at September 30, 2001.

     The Company continues to carefully monitor its operating expenses in an effort to keep expenses in line with expected future revenues.

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Liquidity and Capital Resources

     Despite the net operating losses incurred throughout 2002, the Company continues to generate positive cash flows. As of September 30, 2002, the Company’s total cash position, which includes cash on hand plus short-term investments, was $1,589,076. This represents positive cash flows of $266,002 from the June 30, 2002 total cash position of $1,323,074, and $338,289 from the cash position of $1,250,787 at December 31, 2001. The cash and investment positions noted above, do not include the cash surrender value of company-owned life insurance policies of approximately $1,400,000 available to fund operations, should it become necessary. As of September 30, 2002, the Company remains free of debt and does not foresee the need to incur debt to support current operations.

     Accounts receivable as September 30, 2002, are $1,389,754, net of an allowance for doubtful accounts of $185,000. This compares with accounts receivable of $1,622,846, net of an allowance for doubtful accounts of $139,000 at December 31, 2001. There have been no significant write-offs of uncollectible accounts during the first nine months of 2002.

     Net inventories of $138,104 at September 30, 2002 are down from $155,159 at December 31, 2001. The Company expects that inventory will continue to decrease in future quarters, as sales of products containing a hardware component continue to be phased out.

     The Company continues to monitor capital equipment expenditures carefully. For the first nine months of 2002, capital spending totals $27,534, most of which has been invested in upgrades to software development tools and equipment.

     The net value of development costs capitalized at September 30, 2002 is $1,818,829, down from $2,505,156 at December 31, 2001, reflecting $686,327 of previously capitalized costs being amortized and charged to cost of sales during 2002. There have been no development costs capitalized in 2002, nor are any expected to be capitalized through the balance of 2002.

     The total current liabilities at September 30, 2002 are $5,772,249 versus $4,991,391 at December 31, 2001, an increase of 16%. It should be noted however, that the largest increase in current liabilities has occurred in deferred revenues, which has increased from $2,839,332 at December 31, 2001 to $3,347,183 at September 30, 2002. Deferred revenues consist of services for which the company has billed customers, but has not yet performed the service, and accordingly has not recorded the associated revenue as of September 30, 2002, and essentially, represents backlog to the company. These services typically include maintenance, training, installation and consulting services. Substantially all of the current deferred revenue balance will be recorded as sales revenue over the ensuing twelve months.

     The company maintains a private equity line of credit agreement with a single institutional investor. Under the equity line, the Company has the right to sell, to the investor, shares of the Company’s common stock at a price equal to 94% of the average bid price of the stock for the prior ten trading days. During the term of the agreement, the Company may sell up to $6 million of common stock to this investor with no more than $500,000 in any single month. The term of this agreement extends through August 31, 2004.

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     While the Company has continued to incur operating losses through the first three quarters of 2002, the Company feels that given its increasing cash resources, reduced operating expense levels, and the access to cash surrender values of current insurance policies, that more than adequate financial resources are available to meet all financial obligations for the next twelve months.

New Accounting Pronouncements

     In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for an asset retirement obligation, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The provisions of SFAS No. 143 will be required to be adopted by the Company in fiscal 2003. The Company does not currently believe adoption of this statement will have a material effect on its financial position or its results of operations.

     In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement supercedes SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS No. 144 addresses the accounting model for long-lived assets to be disposed of by sale and resulting implementation issues. This statement requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. It also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001 and was adopted by the Company January 1, 2002. The Company does not believe the adoption of SFAS No. 144 will have a material effect on its financial position or its results of operations.

     In May 2002, the FASB No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 eliminates the requirement that gains and losses from the extinguishments of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. However, an entity is not prohibited from classifying such gains and losses as extraordinary items, so long as they meet the criteria outlined in Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 145 also eliminates the inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transaction. This statement is effective for financial statements issued for fiscal years beginning after May 15, 2002. The Company will adopt SFAS No. 145 in the fiscal year beginning January 1, 2003 and has determined that adoption will not have a material effect on its financial position or its results of operations.

     In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs

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covered by the standard included lease terminations costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 replaces EITF Issue No. 94-3. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The company will adopt SFAS No. 146 in the fiscal year beginning January 1, 2003.

Item 4 Controls and Procedures

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PART II — OTHER INFORMATION

Item 6:    Exhibits and Reports on Form 8-K

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CERTIFICATIONS

I, David G. Mazzella, certify that:

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I, Ronald C. Lundy, certify that:

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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

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Exhibit A

VERAMARK TECHNOLOGIES, INC.

Calculations of Earnings (Loss) Per Share

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Exhibit B

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Veramark Technologies, Inc., (the Company) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David G. Mazzella, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

/s/ David G. Mazzella

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Exhibit C

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Veramark Technologies, Inc., (the Company) on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Ronald C. Lundy, Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

/s/ Ronald C. Lundy

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