VERAMARK TECHNOLOGIES INC - 10-Q Quarterly Report

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, 2003

Commission File Number 0-13898

Veramark Technologies, Inc.

(Exact name of registrant as specified in its charter)


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)

(585) 381-6000

(Registrant’s telephone number, including area code)

N.A.

(Former name, former address and former fiscal year, if changed since last report)

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 by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).

Yes No X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of September 30, 2003


Common stock, par value $.10		8,516,751 shares

This report consists of 23 pages

TABLE OF CONTENTS


FORM 10-Q
PART I — FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
	Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3 Quantitative and Qualitative Disclosures About Market Risk
	Item 4 Controls and Procedures
PART II — OTHER INFORMATION
	Item 5 Sections 302 and 906
	Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1 CERTIFICATION OF CEO PURSUANT TO RULE 302
EX-31.2 CERTIFICATION OF CFO PURSUANT TO RULE 302
EX-32.1 CERTIFICATION OF CEO PURSUANT TO RULE 906
EX-32.2 CERTIFICATION OF CFO PURSUANT TO RULE 906

INDEX


		Pages

PART I	FINANCIAL INFORMATION









Item 1	Financial Statements









	Condensed Consolidated Balance Sheets - September 30, 2003 and December 31, 2002		3 - 4









	Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2003 and 2002		5









	Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2003 and 2002		6









	Notes To Condensed Consolidated Financial Statements		7 - 10









Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11 - 15









Item 3	Quantitative and Qualitative Disclosures About Market Risk		16









Item 4	Controls and Procedures		16









PART II	OTHER INFORMATION









Item 5	Certification of Chief Executive Officer and Chief Accounting Officer		17









Item 6	Exhibits and Reports on Form 8-K		17

PART I — FINANCIAL INFORMATION

VERAMARK TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)


			September 30,			December 31,
			2003			2002

ASSETS

CURRENT ASSETS:

	Cash and cash equivalents		$	744,612		$	623,194




	Investments			997,314			924,682




	Accounts receivable, trade (net of allowance for doubtful accounts of $70,000 and $80,000 respectively)			1,339,841			1,135,776




	Inventories, net			25,488			92,276




	Prepaid expenses			178,860			182,630

		Total Current Assets		3,286,115			2,958,558


PROPERTY AND EQUIPMENT

	Cost			5,830,855			6,656,249




	Less accumulated depreciation			(4,763,067	)		(5,404,203	)

		Property and Equipment (Net)		1,067,788			1,252,046


OTHER ASSETS:

	Software development costs (net of accumulated amortization of $825,707 and $2,985,453, respectively)			1,451,034			1,590,054




	Pension related assets			2,424,083			2,303,580




	Deposits and other assets			838,674			742,474

	Total other assets			4,713,791			4,636,108

	TOTAL ASSETS		$	9,067,694		$	8,846,712


See notes to Condensed Consolidated Financial Statements		(Continued)

VERAMARK TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)


			September 30,			December 31,
			2003			2002

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:




	Accounts payable		$	273,820		$	265,184




	Accrued compensation and related taxes			586,074			392,808




	Deferred revenue			2,977,227			3,200,145




	Capital lease obligation — current			10,868			17,334




	Other accrued liabilities			176,709			167,808

		Total Current Liabilities		4,024,698			4,043,279

	Long term portion of capital lease obligation			—			7,400




	Pension obligation			3,915,646			3,625,000

	Total Liabilities			7,940,344			7,675,679

	STOCKHOLDERS’ EQUITY:




	Common Stock, par value $.10; shares authorized, 40,000,000; shares issued and outstanding 8,596,976 and 8,470,959, respectively			859,698			847,096




	Additional paid-in capital			21,788,946			21,686,196




	Retained deficit			(21,147,503	)		(20,976,502	)




	Accumulated other comprehensive income			11,966			—




	Treasury stock (80,225 shares, at cost)			(385,757	)		(385,757	)

	Total Stockholders’ Equity			1,127,350			1,171,033

	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	9,067,694		$	8,846,712


See notes to Condensed Consolidated Financial Statements		(Concluded)

VERAMARK TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


					Three Months Ended					Nine Months Ended
					September 30,					September 30,

					2003		2002			2003			2002

NET SALES




		Product Sales			$	1,094,131	$	1,024,305		$	3,219,868		$	3,350,351




		Service Sales				1,823,048		1,648,324			5,399,846			5,029,223

				Total Net Sales		2,917,179		2,672,629			8,619,714			8,379,574

COSTS AND OPERATING EXPENSES:




	Cost of sales					458,332		557,569			1,348,154			1,721,968




	Engineering and software development					432,449		726,747			1,683,106			2,170,085




	Selling, general and administrative					1,920,823		2,020,180			5,772,174			6,087,946

			Total Costs and Operating Expenses			2,811,604		3,304,496			8,803,434			9,979,999

INCOME (LOSS) FROM OPERATIONS						105,575		(631,867	)		(183,720	)		(1,600,425	)

OTHER INCOME						3,953		4,061			12,719			5,397

INCOME (LOSS) BEFORE INCOME TAXES						109,528		(627,806	)		(171,001	)		(1,595,028	)

INCOME TAXES						—		—			—			—

NET INCOME (LOSS)					$	109,528	$	(627,806	)	$	(171,001	)	$	(1,595,028	)

NET INCOME (LOSS) PER SHARE




		Basic			$	0.01	$	(0.07	)	$	(0.02	)	$	(0.19	)

		Diluted			$	0.01	$	(0.07	)	$	(0.02	)	$	(0.19	)

See notes to Condensed Consolidated Financial Statements.

VERAMARK TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


		Nine Months Ended
		September 30,

		2003			2002

OPERATING ACTIVITIES:




Net loss		$	(171,001	)	$	(1,595,028	)

Adjustments to reconcile net loss to net cash flows (used) provided by operating activities




	Depreciation and amortization		599,099			1,116,878




	Provision for bad debts		(14,151	)		52,500




	Provision for inventory obsolescence		37,494			25,750




	Loss on disposal of fixed assets		1,003			18




	Compensation expense-stock options		57,953			224,000




	Repayment of note receivable		—			11,171









Changes in assets and liabilities Accounts receivable			(189,914	)		180,592




	Inventories		29,294			(8,695	)




	Prepaid expenses		3,770			(258,507	)




	Deposits and other assets		(216,703	)		(100,143	)




	Accounts payable		8,636			47,755




	Accrued compensation and related taxes		193,266			63,539




	Deferred revenue		(222,918	)		507,851




	Other accrued liabilities		8,901			(63,695	)




	Pension obligation		290,646			154,736

Net cash flows provided by operating activities			415,375			358,722






INVESTING ACTIVITIES:




	Purchase of investments		(60,666	)		(329,286	)




	Additions to property and equipment		(64,350	)		(27,534	)




	Capitalized software development costs		(212,474	)		—

Net cash flows used by investing activities			(337,490	)		(356,820	)






FINANCING ACTIVITIES:




	Proceeds from exercise of stock options		48,752			—




	Repayment of capital lease obligation		(13,866	)		(11,839	)




	Proceeds from employee stock purchase plan		8,647			18,940

Net cash flows provided by financing activities			43,533			7,101

NET INCREASE IN CASH AND CASH EQUIVALENTS			121,418			9,003

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			623,194			633,138

CASH AND CASH EQUIVALENTS, END OF PERIOD		$	744,612		$	642,141

See notes to Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) GENERAL

The accompanying unaudited 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, 2003, the results of its operations for the three and nine months ended September 30, 2003 and 2002, and cash flows for the nine months ended September 30, 2003 and 2002.

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 consolidated financial statements should be read in conjunction with the 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, 2002.

The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year’s operation.

(2) INVENTORIES, NET

The composition of inventories at September 30, 2003 and December 31, 2002 was as follows:


	September 30,		December 31,
	2003		2002

Purchased parts and components	$	9,459	$	75,402




Work in process		7,944		10,344




Finished goods		8,085		6,530

	$	25,488	$	92,276

(3) PROPERTY AND EQUIPMENT

The major classifications of property and equipment at September 30, 2003, and December 31, 2002 were:


	September 30,		December 31,
	2003		2002

Machinery and equipment	$	789,131	$	788,131




Computer hardware and software		1,890,353		2,715,527




Furniture and fixtures		1,768,812		1,770,032




Leasehold improvements		1,382,559		1,382,559

	$	5,830,855	$	6,656,249

(4) STOCK-BASED COMPENSATION

In 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.

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 Ended					Nine Months Ended
			September 30,					September 30,

			2003		2002			2003			2002

Net income (loss)	As reported		$	109,528	$	(627,806	)	$	(171,001	)	$	(1,595,028	)




	Pro forma		$	45,287	$	(899,474	)	$	(532,240	)	$	(2,039,933	)




Net income (loss) per common share	As reported




		Basic	$	0.01	$	(0.07	)	$	(0.02	)	$	(0.19	)




		Diluted	$

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(4)		STOCK-BASED COMPENSATION

		In 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.

		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: