FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

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

Commission File Number 0-13898

Veramark Technologies, Inc.

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

INDEX

2

PART I – FINANCIAL INFORMATION

VERAMARK TECHNOLOGIES, INC.

CONDENSED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements.

3

VERAMARK TECHNOLOGIES, INC.

CONDENSED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements.

4

VERAMARK TECHNOLOGIES, INC.

CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

The accompanying notes are an integral part of these financial statements.

5

VERAMARK TECHNOLOGIES, INC.

6

The accompanying notes are an integral part of these financial statements.

7

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

     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.

8

9

Calculations of Earnings (Loss) Per Share

10

11

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

     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.

     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

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

Accounting Pronouncements

15

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:

     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

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:

17

18

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

PART II – OTHER INFORMATION

Item 5: Certification of Chief Executive Officer and Chief Accounting Officer

Item 6: Exhibits and Reports on Form 8-K

20

21

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

22