CURRENT ASSETS:

Cash and cash equivalents

Investments

Accounts receivable, trade (net of allowance for doubtful accounts of $33,000 for both periods)

Prepaid expenses

Other current assets

 

Total Current Assets

PROPERTY AND EQUIPMENT

Cost

Less accumulated depreciation

 

Property and Equipment (net)

OTHER ASSETS:

Software development costs (net of accumulated amortization of $2,480,084 and $2,245,268)

Pension assets

Intangibles, net

Goodwill

Deposits and other assets

 

 

Total Other Assets

 

TOTAL ASSETS

 

 

CURRENT LIABILITIES:

Accounts payable

Accrued compensation

Deferred revenue

Current portion of pension obligation

Contingent liability

Short term debt

Other accrued liabilities

 

Total Current Liabilities

 

Long-Term debt

Long-Term portion of pension obligation

 

Total Liabilities

STOCKHOLDERS’ EQUITY:

Common Stock, par value $.10; shares authorized, 40,000,000; 10,138,262 shares and 10,190,595 shares issued

Additional paid-in capital

Accumulated deficit

Treasury stock (80,225 shares, at cost)

Accumulated other comprehensive income

 

 

Total Stockholders’ Equity

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

NET REVENUES

Product revenues

Service revenues

 

Total Net Revenues

 

COSTS AND OPERATING EXPENSES:

Cost of revenues

Engineering and software development

Selling, general and administrative

 

Total Costs and Operating Expenses

 

INCOME FROM OPERATIONS

 

NET INTEREST INCOME

 

 

INCOME BEFORE TAXES

 

INCOME TAXES

 

 

NET INCOME

 

 

NET INCOME PER SHARE

Basic

 

Diluted

 

OPERATING ACTIVITIES:

Net income

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

Increase in bad debt reserve

Change in acquisition liabilities

Compensation expense — equity grants

Loss on disposal of fixed assets

Changes in assets and liabilities:

Accounts receivable

Prepaid expenses and other current assets

Pension assets

Deposits and other assets

Accounts payable

Accrued compensation

Deferred revenue

Other accrued liabilities

Prepaid rent liability

Pension obligation

 

Net cash provided by operating activities

 

INVESTING ACTIVITIES:

Acquisition — cash paid

Sale of investments

Additions to property and equipment

Capitalized software development costs

 

Net cash flows used by investing activities

 

FINANCING ACTIVITY:

Borrowing (repayment) — line of credit

Bank borrowing — repayment of term loan

Exercise of stock options

 

Net cash provided (used) by financing activities

 

 

Net change in cash and cash equivalents

Cash and cash equivalents, beginning of year

 

Cash and cash equivalents, end of quarter

 

Cash Transactions:

Income taxes paid

Interest paid

The major classifications of property and equipment at March 31, 2011, and December 31, 2010 were:

 

Machinery and equipment

Computer hardware and software

Furniture and fixtures

 

 

 

For the quarter ended March 31, 2011 and March 31, 2010, the Company recorded depreciation expense of $53,186 and $51,672, respectively.

The Company’s share-based compensation consists of restricted stock and stock options, vesting over periods ranging from one to four years. For the quarter ended March 31, 2011, the company awarded 169,375 stock options vesting over four years. During the first quarter of 2010 the Company awarded 3,000 stock options vesting over four years.

A summary of the status of the Company’s stock option plan as of March 31, 2011 is presented below:

Outstanding as of December 31, 2010

Granted

Exercised

Canceled

 

 

Outstanding as of March 31, 2011

 

 

Options exercisable at March 31, 2011

 

Total comprehensive income for the first quarter of 2011 and 2010 was as follows:

 

Net income

Unrealized change — pension

Unrealized change — investments

 

Total comprehensive income

 

ASC 260-10 (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.

 

Net income

 

Weighted average common shares outstanding

 

Net income per common share

 

 

 

Net income

 

 

Weighted average common shares outstanding

 

Additional dilutive effect of stock options and

 

warrants after application of treasury stock method

 

Weighted average dilutive shares outstanding

 

 

Net income per common share assuming full dilution

 

Our 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, 2011 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.

The Company sponsors an employee incentive savings plan under Section 401(k) for all eligible employees. The Company’s contributions to the plan are discretionary. During the first quarter of 2011 the Company contributed $26,589 to employee’s 401(k) accounts. During the first quarter of 2010 the Company’s contribution to employee 401(k) accounts totaled $24,644.

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, 2011 and 2010 consists of the following:

 

Interest Cost

Unrealized Actuarial Gain

 

 

Pension Expense

 

The Company paid pension obligations of $125,515 for both the three months ended March 31, 2011 and March 31, 2010.

The discount rate used in determining the actuarial present value of the projected benefit obligation was 5.0% for the three months ended March 31, 2011 and 5.5% for the three months ended March 31, 2010.

The Company maintains life insurance covering certain current and former 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 future pension obligations. The total death benefit associated with these policies is $10.2 million, with an associated accumulated cash surrender value of approximately $3,112,000 at March 31, 2011. The accumulated cash surrender values of these policies at December 31, 2010 was approximately $3,108,000.

The projected pension benefits paid or expected to be paid under this plan are as follows, assuming retirement at 65 and a life expectancy of 80 years for all participants:

Q2 - Q4 2011

2012

2013

2014

2015

2016 - 2020

The Company has a contractual obligation to maintain certain health benefits for two of its former executive officers. These benefits are accounted for as Post Retirement Healthcare Benefits, (“PRHB”). Periodic PRHB expensed and paid for the three months ended March 31, 2011 and 2010 consists of the following:

 

Current Service Cost

Interest Cost

 

 

PRHB Expense

 

The projected PRHB paid or expected to be paid are as follows:

Q2 - Q4 2011

2012

2013

2014

2015

2016 - 2020

On June 18, 2010 we acquired the enterprise telecom expense management (TEM) consulting business of privately held Source Loop, LLC, based in Alpharetta, Georgia. The aggregate purchase price paid for those assets was up to $1.5 million, plus the issuance of up to 500,000 shares of Veramark’s common stock. At closing, $300,000 in cash was paid and 100,000 shares of Veramark common stock issued to the principals of Source Loop. In addition, Source Loop retained $300,000 in accounts receivable and cash on hand prior to the acquisition date, leaving contingent consideration of $900,000 and 400,000 shares of Veramark common stock that could be earned, subject to attaining certain revenue and employee retention parameters through December 31, 2011. Subsequent to closing we have paid the Principals of Source Loop $300,000 and issued 100,000 shares of common stock reflecting the attainment of 100% of the performance targets for 2010.

As of March 31, 2011, based on management’s projections of actual performance against targets contained in the asset purchase agreement for 2011, the estimated remaining contingent liability is $618,000 in cash and common stock. Under the purchase method of accounting, the remaining contingent stock consideration (300,000 shares) is treated as a financial derivative, and recorded as a liability, as it does not have a fixed settlement provision. This liability will vary in a mark-to-market fashion with the value of the Company’s stock, until the settlement amount is known. Increases in the Company’s stock price will result in an accounting expense, and any decrease in the Company’s stock price will be recorded as income.

The unaudited financial information in the table below summarizes the combined results of operations on a pro-forma basis, as if we had acquired Source Loop on January 1, 2010.

 

Revenue

 

Income

 

Earnings Per Share

 

Under the purchase method of accounting, we allocated the fair value of the total consideration expected to be transferred, to the tangible and identifiable intangible assets acquired from Source Loop based on their estimated fair values on the date of acquisition. The fair values assigned to the identifiable intangible assets were based on estimates and assumptions determined by management. The table below summarizes the fair values assigned by asset class at the time of acquisition, and the subsequent amortization through March 31, 2011 of those intangible assets.

Customer Contracts

Customer Relationships

Key Employee Agreements

Other

Sub-Total Intangibles

 

Subject to Amoritization

 

Goodwill

 

Total Intangible Assets Acquired

 

Customer Contracts

Customer Relationships

Key Employee Agreements

Other

 

Sub-Total Intangibles

Subject to Amoritization

 

On October 4, 2010, the Company was served with a complaint in an action brought by Asentinel LLC, against the Company. AnchorPoint, a division of MTS, and CASS Information Systems, were also served with the same complaint. The complaint alleges infringement of two telecom expense management (TEM) patents held by Asentinel concerning systems and methods for identifying and processing billing exceptions in telecommunications invoices. The Company has challenged the allegations made in the complaint. The litigation is still in the discovery stage at this time, and it is not possible to determine the ultimate resolution of, or estimate the liability, if any, related to this matter. The Company’s policy is to expense legal costs as incurred, and no provision for losses has been provided in connection with this litigation.

On October 31, 2008, Veramark Technologies, Inc. entered into a Revolving Demand Note Agreement (the “Agreement”), effective as of October 31, 2008, with Manufacturers and Traders Trust Company (the “Bank”) to provide working capital in the ordinary course of business. This agreement was amended in October 2010 increasing the amount available under the agreement from $400,000 to $750,000. At March 31, 2011, the Company did not have any outstanding balance under this Agreement.

The maximum outstanding principal balance under the Agreement is Seven Hundred Fifty Thousand Dollars ($750,000).

Veramark may borrow under the Agreement, from time to time, an amount less than or equal to, but not greater than the available balance.

The outstanding principal balance will bear interest at a per annum rate equal to LIBOR rate plus 3.5% with a minimum rate of 4.0%.

The Bank may demand payment of the outstanding principal balance at any time.

On October 29, 2010 the Company entered into an agreement with Manufacturers and Traders Trust Company to provide a three year term note in the amount of $200,000, the proceeds of which were used to purchase furnishings and fixtures for the Company’s new headquarters facility. The loan bears an interest rate of LIBOR plus 4.0%, with a minimum interest rate of 4.5%. At March 31, 2011 the remaining balance of the term loan was $172,222.

 

Gross expenditures for engineering & software development

Less: Software development costs capitalized

 

Net expense for engineering and software

 

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, which amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB Codification Subtopic 605-25 (previously included within EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21). The consensus to EITF Issue No. 08-01, Revenue Arrangements with Multiple Deliverables, or EITF 08-01, provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. EITF 00-21 previously required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the product was not individually sold because of its unique features. Under EITF 00-21, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. This update does not have a material effect on the Company’s financial statements.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, topic 820, Fair Value Measurements and Disclosures, which amends existing fair value disclosure pronouncements. This update provides amendments to Subtopic 820-10 that require new disclosures as follows:

Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.

Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).

Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities.

Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.

In April 2010, the FASB issued Accounting Standards Update No. 2010-17, topic 605, Revenue Recognition — Milestone Method, which provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. This update is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. This update does not have a material effect on the Company’s financial statements.

In July 2010, the FASB issued Accounting Standards Update No. 2010-20, topic 310, Receivables, which requires disclosures about the credit quality of financing receivables and the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. This update does not have a material effect on the Company’s financial statements.

In December 2010, the FASB issued Accounting Standards Update No. 2010-28, topic 350, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. For those reporting units with zero or negative carrying value, step 2 of the impairment test is required to be performed, even if step 1 indicates it is not necessary. The Company does not expect this to have a material effect on the Company’s financial statements.

In December 2010, the FASB issued Accounting Standards Update No. 2010-29, topic 805, Disclosure of Supplementary Pro Forma Information for Business Combinations, to clarify diversity in practice of applying this topic. Paragraph 805-10-50-2(h) requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. The Company properly reports such supplementary information in its filings.

Vendor Specific Objective Evidence of the fair value (VSOE),

Third Party Evidence (TPE)

Best Estimate of the Selling Price (ESP)

Financial Statements as set forth under Item 1 of this report on Form 10-Q

 

Exhibits required to be filed by Item 601 of Regulation S-K

 

Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-18 (File No. 2-96787) filed on March 22, 1985)

 

Bylaws (incorporated by reference to Exhibit 3 to the Company’s Registration Statement on Form S-8 filed on October 5, 1992)

 

Letter Agreement dated as of March 29, 2007 by and between the Company and David G. Mazzella (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 3, 2007)

 

Amended and Restated Board of Directors Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 26, 2007)

 

Employment Agreement dated as of December 17, 2007 by and between the Company and Anthony C. Mazzullo (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 19, 2007)

 

Restricted Stock Award Agreement dated as of January 1, 2008 by and between the Company and Anthony C. Mazzullo (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 25, 2008)

 

2008 Incentive Plan for Management and Key Employees (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 2, 2008)

 

2008 Employee Stock Purchase Plan (incorporated by reference to Exhibit F to the Company’s Proxy Statement for its 2008 Annual Meeting of Shareholders filed on April 29, 2008)

 

Description of non-employee director compensation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 18, 2008)

 

Amended Salary Continuation Agreement dated as of October 10, 2008 by and between the Company and Ronald C. Lundy (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 17, 2008)

 

Form of 2008 Employee Stock Purchase Plan Enrollment Agreement (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (File No. 333-155286) filed on November 12, 2008)

 

2010 Bonus Compensation Plan dated as of March 1, 2010 by and between the Company and Anthony C. Mazzullo (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 5, 2010)

 

2010 Incentive Plan for Management and Key Employees (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 5, 2010)

 

Code of Business Conduct and Ethics (incorporated by reference to Exhibit E to the Company’s Proxy Statement for its 2008 Annual Meeting of Shareholders filed on April 29, 2008)

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Management contract or compensatory plan or arrangement

 

Schedules required to be filed by Regulation S-X

 

none

 

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

Date: May 12, 2011

 

/s/ Anthony C. Mazzullo Anthony C. Mazzullo

President and CEO

 

Date: May 12, 2011

 

/s/ Ronald C. Lundy Ronald C. Lundy

Vice President of Finance and CFO