SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A
(Mark one)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (fee required)
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File No. 0-15113
VERITEC INC.
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(Exact name of small business issuer in its charter)
Nevada 95-3954373
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1430 Orkla Drive, Golden Valley, MN 55427
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 651-552-9484
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common stock,
$.01 par value
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(Title of Class)
Check whether the issuer filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the Company was required to file such reports), and has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ].
Check of there is no disclosure of delinquent filers in response to Item 405 of
Regulation SB is not contained in this form, and no disclosure will be
contained, to the best of Company's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to the Form 10-KSB. [ ]
Revenues for the year ending June 30, 2002 were $564,768.
The aggregate market value of the voting stock held by non-affiliates of the
Company, based upon the average bid price of the common stock on September 25,
2002 was approximately $840,371.
Number of shares outstanding as of August 8, 2003: 6,946,849.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. [X] Yes [ ] No.
VERITEC INC.
FORM 10-KSB/A
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
TABLE OF CONTENTS
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Page No.
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PART I
Item 1 Description of Business 1
Item 2 Description of Property 5
Item 3 Legal Proceedings 5
Item 4 Submission of Matters to a vote of Security Holders 6
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 7
Item 6 Management's Discussion and Analysis or Plan of Operations 8
Item 7 Financial Statements 13
Item 8 Changes in and Disagreements with Accountants on Accounting 40
Financial Disclosure
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons; 40
Compliance with Section 16 (a of the Exchange Act)
Item 10 Executive Compensation 41
Item 11 Security Ownership of Certain Beneficial Owners and Management 42
Item 12 Certain Relationships and Related Transactions 43
PART IV
Item 13 Exhibits and Reports 44
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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(A) Business Development
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Veritec Inc. was incorporated in the State of Nevada on September 8, 1982 for
the purpose of developing, marketing and selling a line of microprocessor-based
encoding and decoding system products. We were a development stage enterprise
until June 30, 1995 at which time we had product available for sale and
therefore was no longer considered in the development stage.
In 1995 an involuntary proceeding under chapter 7 of the United States
Bankruptcy Code was commenced against Veritec. The proceeding was subsequently
converted to a Chapter 11 proceeding and a plan of reorganization was confirmed
on April 23, 1997. The plan was completed and the trustee was discharged and the
case closed on October 13, 1999. Further information with respect to the
bankruptcy proceeding is set forth in Item 3, pages 2 etc. of the Form 10-KSB
filed by Veritec Inc. for the year ended June 30, 1999 and is incorporated
herein by reference.
Veritec develops, markets, and sells a line of microprocessor-based encoding and
decoding system products that utilize its patented VERICODE (registered) symbol
technology. Our technology enables a manufacturer or distributor to attach
unique identifiers or coded symbols containing binary encoded data, referred to
by us as a "Vericode (registered) Symbol," to a product, enabling automatic
identification and collection of data with respect to the marked product.
In 1999 Veritec Inc. moved from its previous location in California to the
suburbs of Minneapolis, Minnesota. After moving to Minnesota, engineering
efforts were focused on converting the DOS based operating system to both
Windows and UNIX operating platforms, further augmenting the number of computers
with which our technology works, and the development of the Secure ID business.
At the same time personnel and facilities costs were restructured to reduce
overhead and the sales effort was focused on increasing the Company's revenue
primarily in the Asian market. As part of our objective to increase sales in
Asia, Veritec acquired 50% ownership of Iconix, Inc., a Japanese firm in the
fourth quarter of the fiscal year. Iconix, Inc. was renamed Veritec Iconix
Ventures, Inc. ("VIVI"). Veritec and VIVI share core technology and expertise in
two-dimensional matrixes. VIVI focuses on the LCD market in Asia, while Veritec
Inc. intends to concentrate on the Secure ID market in the U.S. and Asia.
Through VIVI, we expect to be better able to sell and provide service to our
markets in Japan and Korea, and to the emerging markets in Taiwan and China.
(B) The Company's Products
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The Vericode (registered) Symbol
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The Vericode (registered) symbol is a two-dimensional, high data density,
machine-readable symbol that can contain 5 to 100 times more information than a
1
bar code in a smaller space. The Vericode (registered) symbol (or "code") is
based on a matrix pattern. The matrix is made up of data cells, which are light
and dark contrasting squares. This part of the symbol looks like a mixed-up
chessboard. The matrix is enclosed within a solid border. The code's solid
border is surrounded by a quiet zone. Its simple structure is the basis for its
space efficiency.
The size of the Vericode (registered) symbol is variable and can be increased or
decreased depending on the requirements. It can be configured to fit virtually
any space. The data capacity is also variable. By using a greater number or a
smaller number of data cells, more or less information can be stored in the
symbol. For example, a Vericode (registered) symbol could contain 10, 28, 56,
72, or more than 100 characters. The main limitation to the size and density of
the Vericode (registered) Symbol is the resolution of the marking and reading
devices.
Special orientation of the code for reading is not necessary. The Vericode
(registered) symbol can be read at any angle of up to forty-five degrees from
vertical, in any direction in relationship to the reader. The Vericode
(registered) symbol employs "error detection and correction" technology, similar
to that found on music CD's. That means that if a Vericode (registered) symbol
is partially damaged or obscured, the complete set of data stored in the symbol
might still be recovered. Employing error detection and correction lowers the
symbol's data capacity, but it can permit data recovery if up to 25% of the
symbol is damaged. The code will return either accurate information or no
information, but it will not return wrong information.
The Vericode (registered) symbol can offer a high degree of security, and the
level of this security can be specified depending on the requirements. For any
specific application or organization, a unique encryption algorithm can be
created, so that only those authorized can create or read a Vericode
(registered) symbol within that system.
The Vericode (registered) symbol can hold any form of information that can be
digitized. These include: numbers, letters, photos, fingerprints, graphics and
biometrics information.
The F-250 Fixed Station
-----------------------
The Veritec F-250 reading system is a complete system capable of reading and
decoding Vericode (registered) symbols. The Veritec F-250 consists of several
modular elements. Depending upon the environment and operating conditions, an
appropriate video camera is selected. This camera is cabled directly to the high
performance computer. The computer is housed in a rugged chassis to permit
successful operation in industrial environments. A variety of modular software
programs, customized for the specific application, are installed in the
computer. Advanced gray-scale of color image processing and image analysis
software result in extremely high reading reliability.
The F-250 reader constitutes a significant advance from our earlier reader, the
F-225. The F-250 uses a Microsoft Windows (registered) operating system, while
the older model uses DOS. The F-250 also uses a relatively inexpensive camera
specifically designed for computerized vision work, whereas the F-225 used an
expensive scientific grade camera and a frame grabber.
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The F-250's camera, because it is designed to work on Windows-based computers,
should be able to be incorporated into a wide range of existing
computer-controlled manufacturing systems.
Secure ID Business
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The new creation of a specialized version of the Vericode (registered) which is
used to encode biometric data into a 2-D matrix, called VS code, will be
marketed in the arenas of corporate and national identification cards. Each
unique version of the encoding contains several hundred bytes of data for
fingerprint encoding. This code can be printed or etched on a large range of
materials, most notably onto identification cards.
VS code is ideal for bankcards or high security buildings. Since the code is
contained on the card and not within a database, this solution provides high
privacy for the individual while maintaining high security for the institution.
VIVI has filed for a patent in Japan for the VS code.
Manufacturing Operations and Supplies
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All our sales were of software written by our engineers. We contract with third
parties to manufacture and assemble our readers. We believe that there are a
number of suppliers and do not expect to be dependent on a single source for
such services.
Patents
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We have received U.S. patents on the Vericode (registered): number 4,924,078
issued in 1990 and number 5,612,524 issued in March 1997. We have a European
Patent, EP0438841, in France, Germany, and Great Britain. U.S. patent 5,331,176,
issued in 1994, covers a method for illuminating two-dimensional barcodes with
handheld readers. We believe that our core patents, 4,924,078 and 5,612,524
cover technology similar to that used by a wide range of companies. We have sent
copies of our patents to many of these companies, suggesting that they review
their products in light of these patents. To date we have received little
interest in licensing our patents, but we intend to continue to explore this
opportunity. We filed for an additional US patent related to the Vericode
technology.
Trademarks
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We filed an application to register a trademark ("VeriSecure Code") in the USA.
Seasonality
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We have not historically experienced seasonality.
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Major Customers/Marketing
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During the fiscal year ended June 30, 2002, three customers accounted for 96% of
our sales. Our largest customer was Sungjin Neotech Co., Ltd. ("SNC"), our
Korean distributor. SNC accounted for 41% of our fiscal 2002 revenue. During the
fiscal year ended June 30, 2001, two customers accounted for 90% of our sales.
Foreign sales accounted for 61% of our revenues in 2002 and 88% in 2001. Our
plans call for greater emphasis in U.S. sales for the fiscal 2003.
We received royalties from Mitsubishi Corporation under non-exclusive license
agreements for sales in Korea, Taiwan, and other countries. These royalties were
paid on a quarterly basis. We have terminated these agreements. Additional
information is supplied under "Item 3 - Legal Proceedings." We do not expect to
receive additional royalties past the last payment for the period of April
through June 2002 from Mitsubishi Corporation. We believe that Mitsubishi
violated the contracts in several respects and are currently in arbitration with
Mitsubishi over these issues.
There can be no assurance that our sales and licensing activities will be
successful or that they will generate significant revenues in the future.
Engineering, Research and Development
-------------------------------------
We currently have two full-time engineers. Despite the fact that we are trying
to improve our products, and to develop new ones, there is no certainty that we
will be able to develop, manufacture and market products that will receive broad
acceptance and permit us to become profitable.
Competition
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The "symbology" business in which we operate is intensely competitive. There can
be no assurance that we will be able to successfully compete in the "symbology"
business.
Our Vericode(registered) symbol competes with alternative machine-readable
symbologies such as conventional bar code systems, including UPC, EAN Code 39
and Code 49, and alphanumeric systems such as OCR-A and OCR-B. Competitors
offering these alternative symbologies include numerous label and bar code
printer equipment companies who offer various parts of bar code related systems.
The "Data Matrix" two-dimensional bar code is an established competitor to the
Vericode (registered). The Data Matrix code was popularized by Robotic Vision
Systems, Inc., which declared the Data Matrix symbol to be "in the public
domain." In contradistinction, our Vericode (registered) Symbol and technology
are protected by various U.S. and European patents. We believe that while many
potential customers will prefer to use a system that is believed to be in the
public domain, other companies, especially those in the ID card business, will
prefer to purchase "closed" or proprietary systems, and that our technology may
be well-suited for these potential customers.
4
Environmental Compliance
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We believe that we are in compliance with all current federal and state
environmental laws.
Employees
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As of June 30, 2002 we had five full-time employees and one part-time for a
total of six employees compared to four the previous year. In addition several
consultants have worked on various projects or specific needs throughout the
year. As we grow we continually evaluate the needs of the company and try to
fill those needs. For the fiscal year ended June 30, 2002, the additions of
staff include part time sales and marketing person and a full-time software
programmer.
ITEM 2. DESCRIPTION OF PROPERTY
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We are leasing approximately 2,000 square feet of office and laboratory space at
1163 Kruse Street, St. Paul, MN 55118, which serves as our primary place of
business, for $2,000 per month, on a month-to-month basis. Subsequent to the
date of this report, we moved our office and laboratory space to 9400 Golden
Valley Road, Golden Valley, Minnesota, where we lease approximately 2,800 square
feet of space for $2,845 per month, under a one-year lease.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
On June 30, 2000 we were served as a defendant in the matter of Wolodymyr M.
Starosolsky vs. Veritec Inc., et al., in the United States District Court for
the Central District of California (Case Number CV-00-7516DT (Wx)). However,
because Mr. Starosolsky has failed to prosecute the case, it is unclear as to
what relief actually is being sought. Mr. Starosolsky originally filed suit in
the Central District of California claiming that we failed to act pursuant to
our plan of reorganization approved by the bankruptcy court. No monetary damages
were sought; rather, Mr. Starosolsky requested that any actions we took in
violation of the bankruptcy plan, or without proper board approval, be
rescinded. In December 2000, that court granted our motion to transfer venue,
and the case was subsequently transferred to the District of Minnesota. However,
Mr. Starosolsky has failed to take any action to prosecute the case in
Minnesota. Because of this failure to prosecute the case for the last two years,
and because the only relief sought in the case is equitable, we believe the
likelihood is remote that this litigation will have any material adverse impact
on us. In the event Mr. Starosolsky resumes prosecution of this case, we intend
to vigorously defend this action.
In 2001, we filed a complaint against a former employee citing breach of
contract. This year a settlement was reached. As part of this settlement, we
obtained a software library that reads and decodes a wide range of
one-dimensional and two-dimensional barcodes, including QR code and Data Matrix.
This settlement agreement also relieved us of any future obligations to this
5
former employee. This settlement resulted in a recognized gain from debt
forgiveness of $75,988.
We have also initiated an arbitration process with Mitsubishi Corporation in
California. We believe that Mitsubishi failed to pay past royalties due to us
and failed to honor a letter of intent the parties executed. In the event we
prevail in this arbitration, we will receive additional royalty payments from
Mitsubishi. However, because we have not received an accounting from Mitsubishi,
we are unable to estimate the royalties that may be due. We have not recorded a
receivable for these claimed royalties. Mitsubishi also raised a counterclaim
against us, alleging that we misused confidential information belonging to
Mitsubishi. This counterclaim asserts unspecified damages; therefore, we are
unable to estimate the effect an adverse decision regarding this claim may have
on us.
SEC Reporting Obligations
-------------------------
We are subject to the continuing reporting obligations of the Securities
Exchange Act of 1934 (the "1934 Act"), which, among other things, requires the
filing of annual and quarterly reports and proxy materials with the Securities
and Exchange Commission (the "SEC"). We filed a 10-KSB in 1998 covering the
years through June 30, 1997. We did not comply with the filings of 10-QSB's for
the periods September 30, 1995, December 31, 1995, March 31, 1996, September 30,
1996, December 31, 1996, March 31, 1997, September 30, 1997, December 31, 1997,
March 31, 1998, September 30, 1998, December 31, 1998, and March 31, 1999, on a
timely basis as required under the 1934 Act. These 10-QSB filings were made in
September 1999. To our knowledge, there is no current inquiry or investigation
pending or threatened by the SEC in connection with these reporting violations.
However, there can be no assurance that we will not be subject to such inquiry
or investigation in the future. As a result of any potential or pending inquiry
by the SEC or other regulatory agency, we may be subject to penalties, including
among other things, suspension of trading in our securities, court actions,
administrative proceedings, preclusion from using certain registration forms
under the 1933 Act, injunctive relief to prevent future violations and/or
criminal prosecution. We have timely filed reports under the 1934 Act since
September 1999.
We do not plan to issue an annual report to our shareholders.
The public may read and copy any materials we have filed with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. We electronically file. Filings may be
found on the Internet site maintained by the SEC at www.SEC.gov. Other
information about the company can be found at the Veritec Inc. website,
www.veritecinc.com and by contacting the company at 1430 Orkla Drive, Golden
Valley, MN 55427.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders through solicitation of
proxies or otherwise during the fourth quarter.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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Market Information
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Our common stock is traded in the over-the-counter market. Reported prices are
available on the OTC bulletin board. The common shares are not traded or quoted
on any automated quotation system. The OTC Bulletin Board Symbol for our common
stock is "VRTC." The following table sets forth the range of high and low bid
quotes of our common stock per quarter as provided by the National Quotation
Bureau (which reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions). All reported
prices are adjusted for the one for ten reverse stock split per our bankruptcy
Plan of Reorganization which was approved on October 23, 1999.
Common Stock Fiscal 2001 Fiscal 2002
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Quarter Ended High Low High Low
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September 30 .75 .3125 .42 .18
December 31 .53125 .15625 .21 .15
March 31 .53125 .28125 .29 .18
June 30 .39 .22 1.00 .11
Shareholders
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As of September 28, 2002 there were approximately 841 shareholders of record,
inclusive of those brokerage firms and/or clearinghouses holding our common
shares for their clientele (with each such brokerage house and clearing house
being considered as one holder).
Dividend Information
--------------------
We have not paid or declared any dividends upon our common stock since our
inception and, by reason of our present financial status and our contemplated
financial requirements, we do not anticipate paying any dividends in the
foreseeable future.
Current Sales of Unregistered Securities
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On December 4, 2001, we issued 25,000 shares of common stock to KPMG LLP. This
issuance was in connection with KPMG's (formerly Peat Marwick) prepetition claim
for $20,000 in our bankruptcy proceeding. The shares were issued at a price of
$0.80 per share, as provided for in the Plan of Reorganization. Because this
stock issuance was in compliance with the Plan of Reorganization approved by the
bankruptcy court, it was exempt from registration pursuant to Section 3(a)(7) of
the Securities Act of 1933.
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On March 28, 2002, our board of directors approved the issuance of 1,000 shares
of common stock to Lori Simonson, 50,000 shares of common stock to Erin Binder,
and 25,000 shares of common stock to Mass Kuriyama. Ms. Binder is a consultant
to the Company, and the shares issued to here were in consideration of past
services. Mr. Kuriyama is the former principal of Iconix, and the shares issued
to him were in consideration of services to be rendered to the Company. The
shares were issued at a price of $0.23 per share, the reported market price at
the date of issuance. As these stock issuances did not involve any public
offering, they were exempt from registration pursuant to section 4(2) of the
Securities Act of 1933.
On April 1, 2002, we issued 150,000 shares of common stock to Veritec Iconix
Ventures, Inc. as a part of our investment in such entity. The shares were
issued at a price of $0.23 per share, the reported market price at the date of
grant. As this stock issuance did not involve any public offering, it was exempt
from registration pursuant to section 4(2) of the Securities Act of 1933.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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Veritec was incorporated in the state of Nevada on September 8, 1982. Since we
emerged from bankruptcy in 1999, we have relied on payments from our principal
shareholder, The Matthews Group, to fund operations, as our revenue has not been
sufficient to cover expenses. As of June 30, 2002 The Matthews Group had paid
$1,067,141. This amount is $381,956 more than the amount specified in the
bankruptcy plan. The remaining obligation of The Matthews Group is $932,859,
which is to be paid over the next 6 years. We expect that The Matthews Group
will continue to perform on this obligation.
During the fiscal year ended June 30, 2002, we had continuing losses from
operations. We had working capital deficits in the amount of $671,858 and
$920,269 as of June 30, 2002 and June 30, 2001, respectively. Working capital is
an important measure of our ability to meet our short-term obligations.
Results of Operations - June 30, 2002 compared to June 30, 2001
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We had revenues of $564,768 during the year ended June 30, 2002. Of this amount,
$517,671 was for product sales, $0 from engineering services and $47,097 from
licenses and royalties. In the fiscal year ended June 30, 2001, we had revenues
of $179,493 with $126,732 from product sales, $208 from engineering services and
$52,553 from license and royalties. Revenues in 2002 increased $385,275, or 215%
in 2002. $231,392 of this increase can be attributed to revenues from Sung Jin
Neotech, a new customer in 2002. Sales to our other major customers also
increased in 2002. In all three major customers accounted for 96% of revenues in
2002 compared to two major customers accounting for 90% of revenues in 2001. The
increase in accounts receivable to $98,287 in 2002 compared to $3,938 in 2001
can be attributed to an $84,800 sale to this new customer in May 2002. This
receivable was collected in July and August 2002.
There are several reasons for this revenue increase in 2002. First, we have
concentrated on software sales only, rather than trying to sell both software
and hardware as we did over the previous years. However in order to assure that
our customer needs were still being met we relied on our new Korean distributor,
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Sung Jin Neotech, to supply the hardware. This relationship with Sung Jin
Neotech accounted for revenues of $231,392 in 2002. In 2001, we had no revenues
from Sung Jin Neotech. Second, we have concentrated our sales effort on the
Asian market where we seem to have the best opportunities to grow revenue
rapidly.
We did not have any cost of sales in 2002, compared with $55,482 in 2001. In
2002, we decided to focus on software sales rather than both software and
hardware sales. As a result of this change, in 2002, we did not have any
inventoriable costs that would have been expensed as cost of goods sold.
Operating expenses in fiscal 2002 versus 2001 were as follows:
June 30, 2002 June 30, 2001
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General and administrative expenses $503,774 $582,711
Sales and marketing 52,129 40,249
Engineering services and R&D 289,297 147,087
Amortization 40,000 40,000
For the year ended June 30, 2002, General and Administrative expenses were down
by $82,000 from the previous year. This is a result of personnel changes that
reduced our consultant and salary costs, as well as reduced legal expenses.
Sales and marketing expenses increased $11,880 or 30% in 2002. This increase was
caused by an increase in travel costs associated with establishing our
distribution agreement with our new Korean distributor, Sung Jin Neotech.
We incurred $289,297 and $147,087 of engineering sales support, research, and
development expenses in the fiscal years ending June 30, 2002 and June 30, 2001
respectively. The increase in these expenses is attributable to additional
staffing and contract labor costs required due to our research and development
focus on the development of the VS Code software code. The software, which
authenticates an individual through the use of fingerprints, will be marketed in
fiscal year 2003.
We continued to amortize the cost of our purchased software over five years
resulting in $40,000 in amortization expense in 2002 as in 2001.
Strategic Restructuring and Operations Plan
-------------------------------------------
We expect to continue to make a major effort in marketing our products during
fiscal 2003. Our primary focus will be on expanding our market in Asia and in
licensing our software and our patents.
Our market has historically been limited to LCD business and, therefore, faced
stiff competition. Our ability to sell in this market was limited due to pricing
and name recognition. By shifting our R&D and marketing efforts to focus on the
development of today's business and governmental needs, we have had tremendous
enthusiasm over our new secure software known as Veri-secure for the ID card
business. The "ID card business," the market consisting of identification cards
like driver's license cards, may be well suited to our technology for several
reasons. First, ID card companies may be able to increase sales if they are able
9
to more easily include "biometric" (fingerprint, facial dimensions, etc.)
technology on a card. By doing so these companies may offer their customers the
ability to "authenticate" their cards automatically. In the ID card business to
"authenticate" means to prove that the person who is presenting an ID card is
actually the person to whom the card was issued. Bank ATM machines use "PINS" to
provide authentication, but use of biometrics may provide enhanced security.
A second reason for us to shift to the ID card business is that our code is
proprietary, thus enhancing its security. In addition, much of the ID card
business is in the U.S., Europe, and Asia where we have patent protection.
Although management believes it is making progress in maintaining itself in face
of its severe financial problems, there is no assurance that we will be
successful in holding off aggressive collection action or litigation. Further,
we may incur additional unexpected costs to defend ourselves against any such
claims or allegations that may be filed against it.
Capital Expenditures and Commitments
------------------------------------
During the fiscal year ended June 30, 2002, Veritec made $1,849 in capital
purchases compared to $3,239 in 2001.
On January 30, 2002, Veritec Inc. and The Matthews Group LLC formed Veritec
Iconix Ventures, Inc. (VIVI), a Delaware corporation. Each of them own 50% of
the outstanding shares of common stock of VIVI. In April 2002, The Matthews
Group loaned Veritec $100,000, $50,000 of which Veritec subsequently used to
make its initial capital contribution to VIVI. The promissory note to The
Matthews Group bears interest at a rate of 10% per annum and is due in one year.
Additionally, the promissory note is convertible into common stock of the
company at a price of $0.25 per share.
Subsequent to the formation of VIVI, on February 13, 2002, VIVI entered into an
agreement to purchase 100% of the outstanding equity securities of Iconix, Inc.,
a Japanese corporation, pursuant to a Stock Purchase Agreement, dated February
13, 2002, by and among VIVI, Iconix, Inc., Masayuki Kuriyama and Yoshihiro
Tasaka. The total consideration for the purchase consisted of 300,000 shares of
Veritec common stock and $100,000 in U.S. dollars. The 150,000 shares
contributed by Veritec represented newly issued shares of the company. The
150,000 shares contributed by The Matthews Group represented a portion of the
shares already owned.
Although we continue to minimize spending for capital expenditures, we believe
our need for additional capital equipment will continue because of the need to
develop and expand our business. The amount of such additional capital is
uncertain and may be beyond that generated from operations.
Liquidity and Factors That May Affect Future Results
----------------------------------------------------
A number of uncertainties exist that may affect our future operating results.
These uncertainties include the uncertain general economic conditions, market
acceptance of our products and our ability to manage expense growth. We have
sustained significant losses and expect the losses will continue through fiscal
10
year 2003. Our cash on hand is not sufficient to fund current operating needs.
Therefore, the continued operation of our company will continue to be dependent
on cash payments from The Matthews Group pursuant to the Stock Subscription
Agreement. While The Matthews Group has made payments to us in excess of the
required monthly payments, there is no assurance that The Matthews Group will
complete its obligations or that the payment required to be made by The Matthews
Group will be adequate. We are seeking additional debt or equity financing, but
there is no assurance that additional financing will be obtained, or that any
such financing will be sufficient for our needs.
Although no certainties exist, we feel that cash flows from operations will at
least partially fund cash needs in 2003. Because of the long sales cycle related
to our products, it is expected that cash from new sales will be weighted toward
the latter part of 2003. For 2003, we will be enlisting distributors to help
market our products. Several distributors have shown interest in representing
our products. We intend to generate cash by requiring distributors to pay a
$200,000 license fee in exchange for allowing the distributors to sell at
discounted software prices. However, there is no assurance that distributors
will agree to pay this license fee. The balance of our cash requirements is
expected to be provided by The Matthews Group as stated in the previous
paragraph.
Because of our reduced reliance on selling hardware, we believe our primary
exposure to the risk of inflation is through wages. We do not believe that wage
inflation will play a material role in our expense.
Continued competition may drive down the price at which we can sell our
products, and reduced capital expenditures by our customers may also have a
negative impact.
Cash flows from operations was a deficit of $428,286 in 2002 compared to a
deficit of $392,958 in 2001. Cash flows from operations were negatively impacted
by a $94,349 increase in accounts receivable at June 30, 2002 as a result of
large sales in May and June 2002 that were not collected until July and August
2002. Cash flows from operations in 2001 were benefited by a $135,000 prepayment
on an order that was recorded in revenue in fiscal year 2002. Cash flows from
operations were also negatively impacted by a 188,417 gain on debt forgiveness,
which resulted from us settling two claims made against us and eliminating a
pre-bankruptcy liability. (See "Debt Forgiveness" below). Cash flows from
investing activities in 2002 resulted in a deficit of $62,149 in 2002 compared
to a deficit of $3,239 in 2001. This increased deficit can be attributed to the
$50,000 cash investment required in Veritec Iconix Ventures, Inc. (VIVI) and
$10,300 in operating advances made to VIVI in 2002. The operating and investing
cash flow deficits in 2002 were funded through proceeds from scheduled payments
on the subscription receivable of $222,222; additional advances form The
Matthews Group against future installments on the subscription receivable of
$162,278; and a $100,000 loan from The Matthews Group. Without this funding from
The Matthews Group, we would have had a cash flow deficit of $562,829 in 2002.
In 2003 The Matthews Group is only contractually obligated to advance the
Company $222,222 as scheduled payments due on the subscription receivable. At
June 30, 2002 The Matthews Group had made prepayments of $381,956 towards
scheduled payments due on the subscription receivable. The Matthews Group could
use this prepayment to satisfy the next twenty scheduled payments due on the
subscription receivable at June 30, 2002. The Matthews Group has indicated an
11
intent to continue to make the scheduled payments due under the subscription
receivable, but there can be no assurance it will honor this commitment and
there is no contractual obligation for it to do so as long as prepayments exist
to satisfy its scheduled payments. Failure of The Matthews Group to continue to
make scheduled payments on the subscription receivable could negatively impact
our ability to meet our cash flow requirements.
As seen in the cash flow statement as of June 30, 2002, our higher sales and
lower costs have resulted in a significantly smaller loss than the year ended
June 30, 2001. The Matthews Group has continued to honor its commitment and has
provided additional cash as evidenced by the increase in Notes Payable. The
additional cash was used to decrease debt and acquire ownership in VIVI
resulting in a small decrease of our cash position.
Debt Forgiveness
----------------
During the year we recognized debt forgiveness of $70,429 related to the
elimination of a liability we disputed. It is our position that if this
liability was valid, it constituted pre-bankruptcy indebtedness. The individual
claiming this obligation never filed a claim in our bankruptcy. As such, we
determined that the liability should be eliminated.
During the year we also settled another remaining bankruptcy obligation through
issuance of 25,000 shares of Veritec common stock as provided for in our Plan of
Reorganization. This settlement resulted in recognition of gains on debt
forgiveness totaling $42,000.
The total amount of debt forgiveness as of June 30, 2002, resulted in a total
gain of $188,417. This amount is comprised of the $70,429 and $42,000 as
described above plus $75,988 from a settlement with a former employee, discussed
under "Item 3 - Legal Proceedings."
12
ITEM 7. FINANCIAL STATEMENTS
VERITEC INC.
FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
TABLE OF CONTENTS
-----------------
Page
Independent Auditors' Report ....................................... 14
Financial Statements:
Balance Sheets ..................................................... 15
Statements of Operations ........................................... 17
Statements of Stockholders' Equity (Deficit) ....................... 18
Statements of Cash Flows ........................................... 19
Notes to Financial Statements ...................................... 20
The accompanying notes are an integral part of these financial statements.
13
Callahan, Johnston & Associates, LLC
Certified Public Accountants and Consultants
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Board of Directors
Veritec Inc.
St. Paul, Minnesota
We have audited the accompanying balance sheets of Veritec Inc., as of June 30,
2002, and 2001, and the related statements of operations, stockholders' equity
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits of the financial
statements provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Veritec Inc., as of June 30,
2002, and 2001, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 2, the Company
incurred a net loss of $182,646 during the year ended June 30, 2002, and, as of
that date, had an excess of liabilities over assets of $870,522. Those
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this matter.
/s/ Callahan, Johnston & Associates, LLC
CALLAHAN, JOHNSTON & ASSOCIATES, LLC
Minneapolis, Minnesota
September 23, 2002
7400 Lyndale Avenue South, Suite 140, Richfield, MN 55423
Telephone: (612)861-0970 Fax: (612)861-5827
Email: cjacallahan@qwest.net
The accompanying notes are an integral part of these financial statements.
14
VERITEC INC.
BALANCE SHEETS
June 30,
----------------------------
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash $ 1,260 $ 10,267
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $-0- in 2002 and $180 in 2001 98,287 3,938
Prepaids 2,517 9,792
------------ ------------
Total current assets 102,064 23,997
------------ ------------
Fixed assets:
Furniture 10,613 18,764
Equipment 32,781 32,781
Vehicle 12,000 12,000
------------ ------------
Total cost 55,394 53,545
Less accumulated depreciation 44,160 35,805
------------ ------------
Fixed assets, at book value 11,234 17,740
------------ ------------
Other assets:
Software costs, net of accumulated
amortization of $106,667 in 2002 and
$66,664 in 2001 93,333 133,336
Investment - Veritec Iconix Ventures, Inc. 76,588 --
Notes receivable - Veritec Iconix Ventures, Inc. 10,300 --
------------ ------------
Total other assets 180,221 133,336
------------ ------------
Total assets $ 293,519 $ 175,073
============ ============
The accompanying notes are an integral part of these financial statements.
15
VERITEC INC.
BALANCE SHEETS
June 30,
----------------------------
2002 2001
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable - related parties $ 100,000 $ 25,000
Convertible note - related party 397,374 397,374
Current maturities of long-term debt 23,533 --
Bank overdraft 35,523 5,862
Accounts payable:
Current 65,699 55,915
Disputed -- 217,702
Accrued expenses:
Payroll and related 86,833 84,333
Interest 64,660
23,080
Other 300 --
Deferred revenue -- 135,000
------------ ------------
Total current liabilities 773,922 944,266
Long-term debt 8,163 --
------------ ------------
Total liabilities 782,085 944,266
------------ ------------
Prepayment on stock and subscription
receivable - related party 381,956 219,678
------------ ------------
Stockholders' equity (deficit):
Preferred stock, par value $1.00,
authorized 10,000,000 shares,
275,000 shares of Series H
authorized 366,007 366,007
Common stock, par value $.01,
authorized 20,000,000 shares 69,469 66,959
Subscription receivable - related party (989,417) (1,106,271)
Additional paid in capital 11,795,109 11,613,478
Accumulated deficit (12,111,690) (11,929,044)
------------ ------------
Stockholders' equity (deficit) (870,522) (988,871)
------------ ------------
Total liabilities and
stockholders' equity (deficit) $ 293,519 $ 175,073
============ ============
The accompanying notes are an integral part of these financial statements.
16
VERITEC INC.
STATEMENTS OF OPERATIONS
Years Ended June 30,
----------------------------
2002 2001
------------ ------------
Revenues:
Product and software sales $ 517,671 $ 126,732
Licenses and royalties 47,097 52,553
Other -- 208
------------ ------------
Total revenues 564,768 179,493
Cost of sales -- 55,482
------------ ------------
Gross profit 564,768 124,011
------------ ------------
Expenses:
Administration 503,774 582,711
Sales and marketing 52,129 40,249
Engineering and R & D 289,297 147,087
Amortization 40,000 40,000
------------ ------------
Total expenses 885,200 810,047
------------ ------------
Income (loss) from operations (320,432) (686,036)
------------ ------------
Other income (expense):
Loss on investment in Veritec Iconix
Ventures, Inc. (7,912) --
Debt forgiveness 188,417 --
Interest income (expense), net (42,419) (47,330)
------------ ------------
Total other income (expense) 138,086 (47,330)
------------ ------------
Net income before income taxes (182,346) (733,366)
Income tax expense 300 --
------------ ------------
Net income (loss) (182,646) (733,366)
------------ ------------
Comprehensive income (loss) $ (182,646) $ (733,366)
============ ============
Basic loss per common share $ (.03) $ (.11)
============ ============
Diluted loss per common share $ (.03) $ (.11)
============ ============
The accompanying notes are an integral part of these financial statements.
17
VERITEC INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 2002 AND 2001
Additional Stockholders'
Preferred Stock Common Stock Subscription Paid in Treasury Accumulated Equity
Shares Amount Shares Amount Receivable Capital Stock Deficit (Deficit)
------ -------- --------- ------- ------------ ----------- --------- ------------ -----------
BALANCE, June 30, 2000 76,000 $366,007 6,530,612 $65,306 $(1,212,049) $11,431,439 $ - $(11,195,678) $(544,975)
Settlement of accounts payable
for stock at $.80 per share - - 55,000 550 - 43,450 - - 44,000
Common stock issued for services
at $.30 per share - - 70,237 703 - 13,345 - - 14,048
Common stock issued for services
at $.23 per share - - 40,000 400 - 8,800 - - 9,200
Imputed interest on
subscription receivable - - - - (116,444) 116,444 - - -
Payments received on
subscription receivable - - - - 222,222 - - - 222,222
Loss from operations - - - - - - - (733,366) (733,366)
------ -------- --------- ------- ----------- ----------- -------- ------------ ----------
BALANCE, June 30, 2001 76,000 366,007 6,695,849 66,959 (1,106,271) 11,613,478 - (11,929,044) (988,871)
Settlement of accounts payable
for stock at $.80 per share - - 25,000 250 - 19,750 - - 20,000
Receipt of 317,932 shares of
Company's common stock as part
of legal settlement - - - - - - (25,000) - (25,000)
Resale of 317,932 shares of
treasury stock at $.10 per
share to a principal of
The Matthews Group - - - - - 6,793 25,000 - 31,793
Common stock issued for services
at $.23 per share - - 76,000 760 - 16,720 - - 17,480
Common stock issued for investment
at $.23 per share - - 150,000 1,500 - 33,000 - - 34,500
Imputed interest on
subscription receivable - - - - (105,368) 105,368 - - -
Payments received on
subscription receivable - - - - 222,222 - - - 222,222
Loss from operations - - - - - - - (182,646) (182,646)
------ -------- --------- ------- ----------- ----------- -------- ------------ ----------
BALANCE, June 30, 2002 76,000 $366,007 6,946,849 $69,469 $ (989,417) $11,795,109 $ - $(12,111,690) $(870,522)
====== ======== ========= ======= =========== =========== ======== ============ =========
The accompanying notes are an integral part of these financial statements.
18
VERITEC INC.
STATEMENTS OF CASH FLOW
Years Ended June 30,
----------------------------
2002 2001
------------ ------------
Cash flow from operating activities:
Net loss $ (182,646) $ (733,366)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 48,609 44,696
Issuance of stock for services 76,000 23,248
Gain on debt forgiveness (188,417) --
Interest on note payable - related party
transferred to prepayment on subscription -- 4,853
Interest on convertible note - related
party incorporated into note -- 36,686
(Increase) decrease in assets:
Accounts receivable (94,349) 45,712
Inventory -- 44,559
Prepaid expenses 7,275 (7,292)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 40,242 12,946
Deferred revenue (135,000) 135,000
------------ ------------
Net cash used by operating activities (428,286) (392,958)
------------ ------------
Cash flow from investing activities:
Purchase of equipment (1,849) (3,239)
Investment in Veritec Iconix Ventures, Inc. (50,000) --
Notes receivable - Veritec Iconix Ventures, Inc. (10,300) --
------------ ------------
Net cash used by investing activities (62,149) (3,239)
------------ ------------
Cash flow from financing activities:
Bank overdraft 29,661 (29,500)
Proceeds from stock issuance, subscription
receivable, and prepayment on stock 384,500 281,000
Proceeds from notes payable - related parties 110,000 151,000
Payments on notes payable - related parties (35,000) --
Payments on long-term debt payable (7,733) --
------------ ------------
Net cash provided by financing activities 481,428 402,500
------------ ------------
Increase (decrease) in cash position (9,007) 6,303
Cash at beginning of year 10,267 3,964
------------ ------------
Cash at end of year $ 1,260 $ 10,267
============ ============
The accompanying notes are an integral part of these financial statements.
19
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
Business
--------
Veritec Inc. (the "Company") was incorporated in Nevada on September 8, 1982.
The Company is primarily engaged in development, marketing and sales of a line
of microprocessor-based encoding and decoding system products that utilize its
patented Vericode Symbol technology. The Company's VeriSystem enables a
manufacturer or distributor to attach unique identifiers or coded symbols
containing binary encoded data to a product which enables automatic
identification and collection of data. The Company has also developed its
Veritaggant Covert Identification System, which enables the application of a
label or tag to a product for subsequent verification of its authenticity. The
Veritaggant Covert Identification System is not currently being marketed by the
Company.
Equity Method
-------------
The Company accounts for its fifty percent ownership interest in Veritec Iconix
Ventures, Inc. using the equity method (see Note 3).
Cash Equivalents
----------------
For purposes of reporting cash flows, cash equivalents include investment
instruments purchased with a maturity of three months or less. There were no
cash equivalents in 2002 or 2001.
Furniture and Equipment
-----------------------
Furniture and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets. When
assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
recognized in income for the period. The cost of maintenance and repairs is
expensed as incurred; significant renewals and betterments are capitalized.
Deduction is made for retirements resulting from renewals and betterments.
Useful Life
------------
Furniture 3 years
Equipment 3 to 7 years
Vehicle 3 years
Depreciation expense was $8,609 in 2002 and $4,699 in 2001.
20
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
(Continued)
Revenue Recognition
-------------------
The Company accounts for revenue recognition in accordance with Staff Accounting
Bulletin (SAB) 101 "Revenue Recognition in Financial Statements." Revenues from
software sales, product sales and engineering are recognized when products are
shipped or services are performed. License fees are recognized upon completion
of all required terms of the applicable license agreement. The process typically
begins with a customer purchase order detailing the customer's hardware
specifications, which allows the Company to customize its software to the
customer's hardware. Once customization is completed, the Company typically
transmits the software to the customer via the Internet or by mail. Upon
transmittal, the customer has no right of refusal or return, and the Company has
no further obligations under the sale. Any additional changes to the program are
the responsibility of the customer and would require a new billable order. The
Company is under no obligation to perform future product upgrades or
enhancements without first obtaining a new billable order. Under some
agreements, the customers remit payment prior to the Company's completion of
customization or other required services. In such instances, the Company delays
revenue recognition and reflects the prepayments as deferred revenue in the
financial statements.
Royalties are recognized as earned. To date these royalties have been earned in
a foreign currency. The Company records these revenues in U. S. dollars at the
exchange rate in effect at the date of remittance. Accordingly, the Company has
historically not been susceptible to translations gains or losses.
Research and Development
------------------------
Research and development costs are charged to expense as incurred.
Intangible Asset
----------------
On October 12, 1999, the Company purchased certain software, source code,
documentation, manuals and other written material for $50,000 and 187,500 shares
of restricted common stock valued at $.80 per share, the stated value of the
Company's restricted common stock per the Company's bankruptcy plan of
reorganization for which a final decree was issued on October 21, 1999. The
Company has recorded this purchased software at cost, $200,000, and is
amortizing it over 5 years using the straight-line method.
21
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
(Continued)
Computer Software Costs
-----------------------
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," issued by the Financial Accounting Standards Board, the Company is to
capitalize certain software development and production costs once technological
feasibility has been achieved. Software development costs incurred prior to
achieving technological feasibility were expensed as incurred.
Management determined that technological feasibility occurred at the time the
Company's software was available for general release to customers. Accordingly,
no computer software development costs have been capitalized in the accompanying
financial statements. In accordance with SFAS No. 86, costs of software
maintenance and customer support since the software became available for general
release have been charged to expense as incurred. Amounts expensed for ongoing
software maintenance in the accompanying financial statements are as follows:
2002 $ 35,000
2001 $ 44,000
Long-Lived Assets
-----------------
In accordance with SFAS 144, Accounting For The Impairment Of Long-Lived Assets
And For Long-Lived Assets To Be Disposed Of, the Company reviews its long-lived
assets and intangibles related to those assets periodically to determine
potential impairment by comparing the carrying value of the long-lived assets
outstanding with estimated future cash flows expected to result from the use of
the assets, including cash flows from disposition. Should the sum of the
expected future cash flows be less than the carrying value, the Company would
recognize an impairment loss. An impairment loss would be measured by comparing
the amount by which the carrying value exceeds the fair value of the long-lived
assets and intangibles. Management determined that no impairment of long-lived
assets existed at June 30, 2002 or 2001.
Earnings (Loss) Per Common Share
--------------------------------
Basic earnings (loss) per common share is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings (loss) per common share, in
addition to the weighted average determined for basic earnings per shares,
includes potential dilution that could occur if securities or other contracts to
22
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
(Continued)
issue common stock were exercised or converted into common stock. Common stock
equivalents issuable upon exercise of stock options and warrants using the
treasury stock method were antidilutive and, therefore, were not included in the
computations of diluted earnings (loss) per common share. Common stock
equivalents issuable upon conversion of the Series H Preferred stock and the
conversion of the notes payable and related accrued interest using the if -
converted method were antidilutive and, therefore, were not included in the
computations of diluted earnings (loss) per common share.
2002 2001
----------- -----------
Income available to common stockholders $ (182,646) $ (733,366)
=========== ===========
Weighted - average number of common
shares outstanding for basic EPS 6,767,202 6,605,037
=========== ===========
Income available to common stockholders $ (182,646) $ (733,366)
Adjustment for after-tax amount of
interest on convertible debt (excluded -
antidilutive -- --
----------- -----------
Adjusted income available for common
stockholders for diluted EPS $ (182,646) $ (733,366)
=========== ===========
Weighted - average number of common
shares outstanding for basic EPS 6,767,202 6,605,037
Shares from exercise of options and
warrants (excluded - antidilutive) -- --
Shares from conversion of Series H
preferred stock (excluded - antidilutive) -- --
Shares from conversion of notes payable
and related accrued interest (excluded
antidulitive -- --
----------- -----------
Weighted - average number of common
shares for diluted EPS 6,767,202 6,605,037
=========== ===========
23
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
(Continued)
Stock-Based Consideration
-------------------------
The Company has applied the fair value-based method of accounting for employee
and nonemployee stock-based consideration and/or compensation in accordance with
FASB Statement 123 (based on reported market prices at the date of grant and/or
as earned).
Financial Instruments
---------------------
Financial instruments consist of the following:
Short-Term Assets and Liabilities: The fair value of cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses and
short-term debt approximate their carrying values due to the short-term
nature of these financial instruments.
Subscription Receivable: The carrying value of the subscription receivable
is estimated to approximate its fair value as a result of the 10% interest
rate used for imputing interest. No quoted market value is available for
this instrument.
Concentrations, Risks and Uncertainties
---------------------------------------
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates
Cash Concentrations
-------------------
The Company maintains its cash balances at one financial institution. At
times, the balances may exceed federally insured limits of $100,000. The
Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on its cash balances. The fair
market value of these financial instruments approximates cost.
24
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
(Continued)
Accounts Receivable
-------------------
The Company sells to domestic and foreign companies. The Company grants
uncollateralized credit to customers, but requires deposits on unique
orders. Management deemed all accounts receivable collectible and did not
provide for an allowance for doubtful accounts at June 30, 2002. At June
30, 2001, management provided for an allowance for doubtful accounts of
$180. The trade accounts receivable at June 30, 2002 were from two
customers. These receivables were collected in fiscal year 2003.
Subscription Receivable
-----------------------
The Company's largest asset (presented as a contra equity amount in the
accompanying financial statements) is the subscription receivable from The
Matthews Group (see Note 8: Stockholders' Equity (Deficit); Subscription
Receivable). This subscription receivable is partially collateralized by a
pledge of properties controlled by a principal of The Matthews Group. The
Company perfected a security interest in the pledged properties in July
2001.
Management has deemed this receivable to be fully collectible. Due to
uncertainties in the collection process, however, it is at least reasonably
possible that management's estimate will change during the next year. That
amount, if any, cannot be estimated.
Major Customers
---------------
Three major customers accounted for 96% of revenues in fiscal year 2002.
Two major customers accounted for 90% of revenues in fiscal year 2001.
Foreign Revenues
----------------
Foreign revenues accounted for 61% of the Company's revenues in 2002 and
88% in 2001.
Investment in Veritec Iconix Ventures, Inc. (Foreign Operation)
---------------------------------------------------------------
The investment in Veritec Iconix Ventures, Inc. (VIVI) is recorded under
the equity method (see Note 3). No fair value information exists relating
to this investment. Business activities of VIVI are concentrated in Asia,
25
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
(Continued)
primarily Japan, and all assets of the Company are in Japan. The ability of
the Company to realize the value of its investment is dependent on future
operating successes for VIVI. This investment is further subject to foreign
currency exchange rate changes. Future financial statements for the Company
will include a category of comprehensive income for these changes. No
fluctuation had affected the Company's investment in VIVI through June 30,
2002.
Financing Concentration
-----------------------
The Company is dependent on The Matthews Group to meet operating needs (see
Notes 2, 7 and 8).
Litigation, Unasserted Claims and Disputed Liabilities
------------------------------------------------------
The Company is subject to asserted claims and to possible unasserted and
claims as described in Note 12. Management is of the opinion that these
unasserted and asserted claims are without merit and that settlement, if
any, will not have a material effect on the Company's financial position.
Nevertheless, it is at least reasonably possible that claims will be
pursued. The ultimate outcome of these claims, if pursued, cannot presently
be determined.
Income Taxes
------------
The Company has implemented SFAS 109: Accounting for Income Taxes. Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. See Note 11.
Reclassifications
-----------------
Certain reclassifications have been made to the 2001 financial statements to
conform to the 2002 presentation. These reclassifications had no net income
effect.
26
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in accompanying financial statements,
the Company incurred a net loss of $182,646 during the year ended June 30, 2002,
and has lost $12,111,690 from inception to June 30, 2002. At June 30, 2002, the
Company had a $671,858 working capital deficiency and a stockholders' deficit of
$870,522. Those conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In September 1999, The Matthews Group committed to:
o Invest the $2,000,000 in assets required under the Plan of Reorganization
(see Note 8: Stockholders' Equity (Deficit); Subscription Receivable),
o Pay the delinquent amounts due under the secured note (see Note 6), and
o Finance the operations of the Company.
To date The Matthews Group has funded $685,185 under the subscription receivable
and made prepayments on the subscription receivable of $381,956 to assist the
Company in meeting its cash flow needs. The Matthews Group further made payments
toward and subsequently paid off the secured note to prevent the secured note
holders from foreclosing (see Note 6). Historically, in months in which the
Company has not generated sufficient revenue to meet its obligations, The
Matthews Group has continued to make payments under the subscription receivable,
notwithstanding the amount that has already been prepaid (see Note 8). However,
The Matthews Group is not obligated to do so, and it could use the prepayments
to satisfy future installments on the subscription receivable. See Note 10 for a
description of the Company's related party transactions with The Matthews Group.
The Company's management is aggressively pursuing new sales opportunities for
the Company. The Company's management also acquired a fifty percent interest in
Veritec Iconix Ventures, Inc. to increase the Company's viability (see Note 3.)
Management is hopeful it will be successful in these efforts and that the
Company will continue as a going concern which will allow it to realize assets
and settle liabilities in the normal course of operations.
NOTE 3 - INVESTMENT: VERITEC ICONIX VENTURES, INC.
In June 2001, the Company entered into a tentative agreement to merge with
Iconix, Inc., a Japanese company the Company had partnered with in the past. The
Company could not complete this merger on its own so it was instead decided to
form a new corporation with The Matthews Group to complete this acquisition. On
February 25, 2002, Veritec Iconix Ventures, Inc. (VIVI) was incorporated under
the laws of the State of Delaware. In April 2002, the Company and The Matthews
Group each contributed $50,000 and 150,000 shares of Veritec Inc. common stock
for fifty percent ownership in VIVI. The 150,000 shares of the Company's common
stock contributed by The Matthews Group was previously owned by them (see Note
8).
27
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 3 - INVESTMENT: VERITEC ICONIX VENTURES, INC. (Continued)
In April 2002, VIVI completed the acquisition of Iconix, Inc. for consideration
of $100,000 and 300,000 shares of Veritec Inc. common stock. Iconix, Inc. was
formed in 1995 and is located in Osaka, Japan. Iconix, Inc. is a system
integrator and developer of two dimensional identification software, hardware
and solutions. The Company feels synergies with VIVI made the acquisition of a
fifty percent interest in VIVI desirable. Veritec is a world leader in creating
two-dimensional barcode technology and holds key patents in Europe and the
United States. VIVI is currently the sole licensee of the CP code patents in
Asia.
Veritec Inc. has accounted for its investment in VIVI as follows:
Cash investment $ 50,000
Fair value of 150,000 shares of
Veritec Inc. common stock at $.23 per share 34,500
---------
Total investment 84,500
Equity method loss (7,912)
---------
Investment at June 30, 2002 $ 76,588
=========
Summarized financial information for VIVI is as follows:
Balance sheet:
Current assets $ 498,739
Fixed assets 7,526
Other assets 126,521
---------
Total assets $ 632,786
=========
Current liabilities $ 242,921
Long-term liabilities 236,689
Equity 153,176
---------
Total liabilities and equity $ 632,786
=========
Operating results (April 1, 2002 to June 30, 2002):
Revenue $ 309,324
Cost of goods sold (159,282)
Selling, general and administrative (166,516)
Other income (expense) 1,079
Income tax expense (429)
---------
Net loss $ (15,824)
=========
28
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 3 - INVESTMENT: VERITEC ICONIX VENTURES, INC. (Continued)
One customer accounted for 69% of VIVI's revenues during the period from April
1, 2002 to June 30, 2002. This same customer accounted for 39% of VIVI's
accounts receivable at June 30, 2002.
NOTE 4 - NOTES RECEIVABLE - VIVI
The Company has advanced $10,300 to VIVI. These advances are unsecured, non
interest bearing and due on demand.
NOTE 5 - NOTES PAYABLE - RELATED PARTIES
A principal of The Matthews Group advanced the Company $126,000 from July to
November 2000 to cover working capital needs associated with sales. These
advances were unsecured and bore interest at 10%. In March 2001, these advances
and associated interest of $4,583 were incorporated into the Prepayment on
Subscription (see Note 7).
On June 22, 2001, this principal of The Matthews Group advanced $25,000 to the
Company under similar terms. In July 2001, an additional $10,000 was advanced.
These advances and the related interest of $600 were repaid in August 2001.
In April 2002, The Matthews Group loaned $100,000 to the Company for working
capital needs and to fund its investment in VIVI (see Note 3). This note is
unsecured, bears interest at 10% and is due March 28, 2003. Accrued expenses in
the accompanying financial statements includes $1,842 relating to this note. At
the option of The Matthews Group, all or a portion of this indebtedness can be
converted into Veritec Inc. common stock at $.25 per share.
NOTE 6 - CONVERTIBLE NOTE
The holders of the notes payable formerly referred to as the "notes payable -
secured" were collectively called "The Gant Group" in the Plan of
Reorganization. At June 30, 1995 the principal amount of these notes was
$265,400. Interest on these notes at that date amounted to $18,783. During 1995
additional interest accrued and the balance at June 30, 1996, including both
principal and interest amounted to $321,339. The holders of these notes had
secured a lien on the patents of the Registrant with filings with the U. S.
Patent Office and therefore claimed title to all patents of the Registrant. Due
to the Registrant being delinquent in payment of interest on the notes, the Gant
Group brought action against the Registrant for payment of both principal and
interest. The suit was transferred to the Bankruptcy Court and settlement with
the Gant Group was a part of the Plan of Reorganization. The Gant Group was
issued an interest bearing ten percent per annum note, secured by the assets of
29
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 6 - CONVERTIBLE NOTE (Continued)
the Company secured with UCC1 filings. The total amount of settlement due the
Gant Group and approved in this Plan of Reorganization, including principal,
interest and legal fees amounted to $364,513. $60,000 of this amount was to be
paid in cash with the balance due in quarterly payments over a four year period.
The $60,000 was paid in July 1997 and the first installment payment for the
October 1, 1997 was made.
Subsequent payments due under this agreement were not made and the Gant Group
made a motion that was granted and the Company's Chapter 11 was converted to
Chapter 7. On September 1, 1999, The Matthews Group made a payment of $182,346
to the Gant Group to cure the existing default to the Gant Group. The Matthews
Group subsequently made five quarterly payments to the Gant Group of $23,325,
including the October 1, 2000 installment. On December 1, 2000, The Matthews
Group paid the remaining amounts due to the Gant Group.
The Matthews Group paid this obligation on behalf of the Company. The Matthews
Group received a convertible note allowing for either a cash payment or
conversion into Veritec common stock at $.10 per share, at The Matthews Group's
sole option, for these amounts.
Payments by The Matthews Group to the Gant Group were as follows:
Principal $286,453
Interest 75,069
Legal fees 5,000
--------
$366,522
These amounts paid to the Gant Group plus accrued interest of $30,853 owed to
The Matthews Group on these advances were incorporated into a $397,374 note on
December 1, 2000. This note is unsecured, bears interest at 10%, and is due on
demand for either cash or convertible into Veritec common stock at $.10 per
share. Conversion is solely at the option of The Matthews Group.
Interest expense to The Matthews Group relating to this indebtedness totaled
$41,580 in 2002 and $38,187 in 2001. Accrued interest at June 30, 2002 of
$62,818 related to this indebtedness is reflected in the accompanying financial
statements.
30
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 7 - PREPAYMENT ON SUBSCRIPTION RECEIVABLE
The Matthews Group has made prepayments against its Subscription Payable to the
Company (see Note 2 and Note 8). These prepayments are unsecured and non
interest bearing. It is assumed the prepayment at June 30, 2002 will also
ultimately be applied against the subscription receivable.
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
---------------
The Articles of Incorporation of the Company authorize 10,000,000 shares of
preferred stock with a par value of $1.00 per share. The Board of Directors is
authorized to determine any number of series into which shares of preferred
stock may be divided and to determine the rights, preferences, privileges and
restrictions granted to any series of the preferred stock.
As part of the Plan of Reorganization, a new Series H Convertible Preferred
Stock was authorized. The Plan called for the Registrant to issue 275,000 shares
of restricted Series H Convertible Preferred Stock in exchange for assets of
$2,000,000 being invested into the Company. Each share of Series H Convertible
Preferred Stock is convertible into 10 restricted shares of the Company's common
stock at the option of the holder.
In September 1999, The Matthews Group received 275,000 shares of Series H
Convertible Preferred stock in exchange for a promissory note in the amount of
$2,000,000 (see Note 8 Stockholders' Equity (Deficit); Subscription Receivable).
The Matthews Group exercised the conversion privilege and converted 200,000
preferred shares to 2,000,000 restricted shares of the Company's common stock.
Stock Option
------------
The Company has issued options to various directors, employees and consultants
on a discretionary basis. These options are for the purchase of a fixed number
of shares of common stock at a stated price for a specified period. Compensation
cost is measured by the difference between the reported market price of the
stock at the date of grant and the price, if any, to be paid for the stock at
exercise. In 2002 and 2001, the Company only issued options at the reported
market price at the date of grant and has not recognized any expense relating to
these issuances. A summary of stock options as is as follows:
31
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Weighted-Average
Number of Price Per
Shares Share
Balance at June 30, 2000 - N/A
Granted 80,000 $ .447
Exercised - -
------ ------
Balance at June 30, 2001 80,000 $ .447
Granted - -
Exercised - -
------ ------
Balance at June 30, 2002 80,000 $ .447
====== ======
Subscription Receivable
-----------------------
In September 1999, the Company accepted a commitment from The Matthews Group,
LLC to fund the $2,000,000 required under the Plan of Reorganization (see Note
10 - Stockholders' Equity (Deficit); Preferred Stock). This funding is in the
form of a promissory note that calls for 108 monthly payments to the Company of
$18,518.52. These payments are non interest bearing and are secured by a pledge
of properties controlled by principals of The Matthews Group. In July 2001, a
California Deed of Trust and Minnesota Mortgages were filed against various
pledged properties to partially collateralize the subscription.
The present value of the subscription receivable, using a ten percent interest
factor, is as follows:
32
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
Future
Dollar Imputed Present
Amount Interest Value
----------- ----------- -----------
At inception $ 2,000,000 $ (684,641) $ 1,315,359
Imputed interest - FY 2000 -- 137,431 137,431
Subscription payments (240,741) -- (240,741)
----------- ----------- -----------
At June 30, 2000 1,759,259 (547,210) 1,212,049
Imputed interest - FY 2001 -- 116,444 116,444
Subscription payments (222,222) -- (222,222)
----------- ----------- -----------
At June 30, 2001 1,537,037 (430,766) 1,106,271
Imputed interest - FY 2002 -- 105,368 105,368
Subscription payments (222,222) -- (222,222)
----------- ----------- -----------
At June 30, 2002 $ 1,314,815 $ (325,398) $ 989,417
=========== =========== ===========
Imputed interest on the subscription is excluded from operating results and is
instead credited directly to additional paid-in capital.
The Matthews Group has made prepayments toward this subscription receivable (see
Note 2 and Note 7).
Common Stock Purchase Warrants
------------------------------
A summary of the various warrants provided for under the Plan of Reorganization
is as follows:
"A" warrants; extended expiration date August 5, 2001 "B" warrants; extended
expiration date August 5, 2002 "C" warrants; extended expiration date August
5, 2003
The Board of Directors had previously extended the expiration dates of these
warrants, but now they have all expired.
Each "A" warrant authorized the holder to purchase one share of non-restricted
new common stock of the Registrant at $2.50 per share. In fiscal year 1998,
33
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 8 - STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
10,021 "A" warrants were exercised at $2.50 per share. In fiscal year 2000, 75
"A" warrants were exercised at $2.50 per share.
If the "A" warrant is not exercised, then the "A" warrant expires, and the "B"
and "C" warrants of the Warrant Unit terminates. The remaining "A" warrants
expired August 5, 2001 and the related "B" and "C" warrants terminated.
The remaining 10,096 "B" warrants authorize the purchase of non-restricted new
common stock of the Registrant at $5.00 per share expired August 5, 2002, and
the related "C" warrants terminated.
Sale of Restricted Shares
-------------------------
On November 7, 2001, the Company's Board of Directors approved a settlement with
a former employee. This settlement resulted in the former employee returning to
the Company technical manuals and 317,932 shares of the Company's common stock
owned by him. The Company, in turn, agreed to pay this former employee $25,000.
Larry Johanns, a principal of The Matthews Group, agreed to fund the $25,000
needed for the settlement in exchange for the right to acquire the 317,932
shares of the Company's common stock at a price of $0.10 per share. On December
28, 2001, the Company sold 317,932 shares of common stock to Larry Johanns at a
price of $0.10 per share. At the time of the sale to Larry Johanns, the reported
sale price of the Company's common stock was $0.18 per share. The price arrived
at with Mr. Johanns was negotiated with Mr. Johanns based on the number of
shares sold, the fact that the shares were restricted and the benefit to the
Company to complete the settlement with its former employee.
Stock Offering
--------------
The Company's Board of Directors has approved a stock offering to raise $500,000
(minimum) to $2,000,000 (maximum) through the sale of Series A preferred stock.
Series A preferred stock would be entitled to receive 8% per annum dividends and
would be convertible into common stock on a one-for-one basis at the option of
the holder.
To date no shares have been subscribed under this offering.
34
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 9 - OFFICE LEASE
In fiscal year 2001, the Company leased its office facilities under a
month-to-month operating lease at $2,500 per month. In fiscal year 2002, the
Company leased its office facilities from a principal of The Matthews Group
under a month-to-month agreement at $2,000 per month. Commencing October 1,
2002, the Company will lease from a non related party. This lease calls for
future minimum payments as follows:
Fiscal year 2003 $ 25,605
Fiscal year 2004 8,535
--------
$ 34,140
Rent expense was $22,000 (related party) in 2002 and $38,237 in 2001.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Matthews Group is the Company's largest stockholder. Related party
transactions with The Matthews Group are as follows:
o Investment in Veritec Iconix Ventures, Inc. (see Note 3).
o Convertible note - unsecured (see Note 5).
o Convertible Note - Secured (see Note 6).
o Prepayment on Subscription Receivable (see Note 7).
o Subscription Receivable (see Note 8: Stockholders' Equity (Deficit);
Subscription Receivable).
A principal of The Matthews Group provided factoring and loans to the Company in
2001 (see Note 5).
The Company leases its office facilities from a principal of The Matthews Group
(see Note 9).
On December 28, 2001, the Company sold 317,932 restricted shares of its common
stock to a principal of The Matthews Group (see Note 8: Stockholders' Equity
(Deficit); Sale of Restricted Shares).
At June 30, 2002 The Matthews Group had made prepayments of $381,956 towards
scheduled payments due on the subscription receivable (See Note 7). The Matthews
Group could apply this prepayment to satisfy the next twenty scheduled payments
due on the subscription receivable at June 30, 2002. The Matthews Group has
indicated an intent to continue to make the scheduled payments due under the
subscription receivable, but there can be no assurances they will honor this
35
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 10 - RELATED PARTY TRANSACTIONS (Continued)
commitment and there is no contractual obligation for them to do so as long as
prepayments exist to satisfy their scheduled payments. The Company also has no
assurance of The Matthews Group's ability to continue to provide this funding.
Failure of The Matthews Group to continue to make scheduled payments on the
subscription receivable could negatively impact the Company's ability to meet
its cash flow requirements (See Note 2). The subscription receivable is
partially collateralized by a security interest in certain real estate (See Note
8: Stockholders' Equity (Deficit); Subscription Receivable).
NOTE 11 - INCOME TAXES
Income taxes consisted of the following at June 30,
2002 2001
Current: ----------- -----------
Federal $ -- $ --
State -- --
State minimum fee 300 --
----------- -----------
300 --
Deferred: ----------- -----------
Federal -- --
State -- --
----------- -----------
Income tax benefit (expense) $ 300 $ --
=========== ===========
The tax effects of net operating loss carryforwards gives rise to a significant
deferred tax asset. FASB 109 requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
2002 2001
Gross deferred tax asset relating to: ----------- ---------
Accrued expenses $ 900 $ --
Related party accruals 24,000 34,000
Book/tax amortization 16,000 16,000
Net operating loss carryforwards 3,763,000 3,740,000
----------- -----------
Gross deferred tax asset 3,803,900 3,790,000
Valuation allowance (3,803,900) (3,790,000)
Net deferred tax asset -- --
Deferred tax liability -- --
----------- -----------
Net deferred tax asset (liability) $ -- $ --
=========== ===========
36
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 11 - INCOME TAXES (Continued)
At June 30, 2002, the Company has net operating loss carryforwards available to
offset future taxable income as follows:
States
------------------------
Year Federal California Minnesota
----------------------------------- ---------- ---------- ----------
2003 $ 913,000 $ 480,000 $ --
2004 829,000 451,000 --
2005 643,000 -- --
2006 452,000 -- --
2007 657,000 -- --
2008 979,000 -- --
2009 1,410,000 -- --
2010 1,227,000 -- --
2011 457,000 -- --
2012 301,000 -- --
2013 480,000 -- --
2014 451,000 -- --
2015 298,000 -- 298,000
2016 733,000 -- 733,000
2017 101,000 -- 101,000
---------- ---------- ----------
$9,931,000 $ 931,000 $1,132,000
========== ========== ==========
NOTE 12 - ASSERTED AND UNASSERTED CLAIMS AND DISPUTED LIABILITIES
Asserted Claims
---------------
The Company was named in a suit brought by a stockholder and former
director of the Company, Wolodymyr M. Starosolsky. The plaintiff in the
pending litigation has failed to prosecute the case. Consequently, it is
unclear as to what relief actually is being sought. The plaintiff
originally filed suit in the Central District of California claiming that
the Company failed to act pursuant to the Company's plan of reorganization
approved by the bankruptcy court. No monetary damages were sought; rather,
the plaintiff requested that any actions the Company took in violation of
the bankruptcy plan, or without proper board approval, be rescinded. In
December 2000, that court granted the Company's motion to transfer venue,
and the case was subsequently transferred to the District of Minnesota.
37
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 12 - ASSERTED AND UNASSERTED CLAIMS AND DISPUTED LIABILITIES (Continued)
However, the plaintiff has failed to take any action to prosecute the case
in Minnesota. Because of the plaintiff's failure to prosecute the case for
the last two years, and because the only relief sought in the case is
equitable, the Company believes the likelihood is remote that this
litigation will have any material adverse impact on the Company.
The Company is in arbitration with Mitsubishi Corporation. The Company
claims that Mitsubishi failed to pay past royalties due to the Company and
failed to honor a letter of intent the parties executed. In the event the
Company prevails in this arbitration, the Company will receive additional
royalty payments from Mitsubishi. However, because the Company has not
received an accounting from Mitsubishi, the Company is unable to estimate
the royalties that may be due. The Company has not recorded a receivable
for these claimed royalties. Mitsubishi also raised a counterclaim against
the Company, alleging that the Company misused confidential information
belonging to Mitsubishi. This counterclaim asserts unspecified damages;
therefore, the Company is unable to estimate the effect an adverse decision
regarding this claim may have on the Company.
Unasserted Claims
-----------------
During its bankruptcy the Company has sought an investment group to assist
it in funding the $2,000,000 called for under the Plan of Reorganization
approved by the Bankruptcy Court on May 2, 1997. In the intervening years
various investment groups attempted to help the Company fund this required
investment. Partial fundings received from these investment groups were
settled through stock issuances by the Company. One of these former
investment groups made claims totaling $166,697 against the Company,
$90,980 in cash and $75,717 in stock (94,646 shares at $.80 per share), but
has not pursued legal action relating to these claims. It is possible that
other investment groups will assert claims against the Company regarding:
the levels of their funding; the Company's termination of their funding
commitments; or for expenses incurred while they were assisting the
Company.
Management believes it has appropriately reflected the activity with these
investment groups in the accompanying financial statements. Management
further feels these claims were settled in the bankruptcy. Due to
uncertainties, however, it is at least reasonably possible that claims will
be asserted and/or pursued. The ultimate outcome of these claims, if
asserted and/or pursued, cannot presently be determined.
Two individuals have made claims totaling $76,674 against the Company, but
have not pursued legal action relating to these claims. Management feels
38
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2002 AND 2001
NOTE 12 - ASSERTED AND UNASSERTED CLAIMS AND DISPUTED LIABILITIES (Continued)
these claims are without merit and/or that these claims were settled by or
are barred by the Company's bankruptcy. Due to uncertainties, however, it
is at least reasonably possible that these claims will be asserted. The
ultimate outcome of these claims, if pursued, cannot presently be
determined.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
2002 2001
------ ------
Cash paid for:
Interest $ 600 $ -
====== ======
Income taxes $ - $ 100
====== ======
Summary of Noncash Activity:
In fiscal year 2001, the Company issued 55,000 shares of its common stock to
settle a $44,000 obligation. ($.80 per common share as stated in the Company's
bankruptcy plan of reorganization).
In fiscal year 2001, the Company issued 110,237 shares of its common stock to
various directors and consultants at prices ranging from $.20 to $.23 per share
(reported market prices at the dates of grant), $23,248 in aggregate.
In fiscal year 2001, a vehicle valued at $12,000 (based on "bluebook" value) was
transferred to the Company as part of the Prepayment on Subscription (see Note
7).
In fiscal year 2002, the Company issued 25,000 shares of its common stock to
settle a $20,000 obligation relating to its bankruptcy ($.80 per common share as
stated in the Company's bankruptcy plan of reorganization).
In fiscal year 2002, the Company issued 76,000 shares of its common stock for
services at $.23 per share (reported market price at date of grant).
In fiscal year 2002, the Company issued 150,000 shares of its common stock as
part of its investment in Veritec Iconix Ventures, Inc. at $.23 per share
(reported market price at date of grant). See Note 3.
39
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
There have been no disagreements with our independent certified public
accountants on accounting principles or practices or financial statements
disclosures.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
--------------------------------------------------
The members of the present Board of Directors and Officers are:
----------------------------- -------------------------------------- --------
Name Office Age
----------------------------- -------------------------------------- --------
Mr. Larry Matthews Director 74
----------------------------- -------------------------------------- --------
Mr. Gerald Okerman Chairman of the Board 56
----------------------------- -------------------------------------- --------
Ms. Van Thuy Tran Director, CEO, Treasurer, Secretary 58
----------------------------- -------------------------------------- --------
Each director will serve until the next annual meeting of shareholders, or until
their respective successors have been elected and duly qualified. Directors
serve one-year terms. The Board of Directors appoints officers. There are no
family relationships between any director and officer.
Mr. Larry Matthews was appointed as Acting President and Chief Executive Officer
and Director on January 28, 1999, in conjunction with a plan from "The Matthews
Group" to evaluate and possibly fund us out of bankruptcy. Mr. Matthews was
Chairman and Co-Owner of Vendtronics (sold to Food Engineering Corporation) from
1994 to 1998. From 1963 to 1983 he had various positions at Control Data
Corporation, including Vice President of Operations. Currently, Mr. Matthews is
on the Board of Directors of Artesyn Technologies (merger of ZYTEC, of which he
was a cofounder, and Computer Products), Crosswork, Inc., Third Wave Systems,
Solar Attic and ECO Fuels.
Ms. Van Thuy Tran is our current CEO. Ms. Tran was President of Asia Consulting
and Trading Company, a company dealing with trade in the Pacific Rim countries.
She is the co-founder of Circle of Love, providing mission works in Vietnam. She
was the founder of Equal Partners, Inc., a construction and building company in
Minnesota. Ms. Van Tran has a medical degree and worked in the medical field for
over 17 years. For the last twenty years, she has been an entrepreneur involved
in building businesses, providing opportunity for minorities and creating
solutions for people in distress.
40
Gerald A. (Jerry) Okerman was the Corporate Development Manager in the Corporate
Enterprise Department of Minnesota Mining and Manufacturing Company (3M), until
his retirement in 2001. Mr. Okerman was responsible for 3M's Venture Capital
Program from 1983-2001. This program under Mr. Okerman's management committed
over $150 million to 55 venture funds managed by 30 management groups in the
U.S., Europe, and Japan. In addition to managing 3M's Venture Capital program,
Jerry identified, analyzed, facilitated, negotiated, and closed numerous
acquisitions, divestitures, equity investments and other types of alliances on
behalf of 3M. His national recognition and insight has given him the opportunity
to be an advisor to some of the leading venture capital firms in the world
including NEA, Summit, Oak, Partech, and Arch. He is the Chairman of the IBF
Corporate Venture Capital Conference Mr. Okerman is president of Sotatec, a
Minnesota Venture Fund, and is a member of the board of managers of the J.P.
Morgan Institutional, Corporate Finance, and Venture Funds (New York). He serves
on the advisory boards of Blueline Ventures (Chicago), HMS Hawaii (Hawaii), and
Oak Partners (Westport, Minneapolis, Menlo Park). Mr. Okerman is also a director
of College Enterprises, Inc./icollege.com (Los Angeles), Majestic Communications
(Atlanta), Norse Building Systems Inc. (Ladysmith, WI), Abbott Resource Group
(Irvine) and is a member of the European Venture Capital Association and finance
committee for Young Life, Stillwater, Minnesota. Mr. Okerman has a Bachelor of
Arts degree from Gustavus Adolphus College, a Juris Doctorate degree from the
University of Denver College of Law.
Committee and Board Meetings
----------------------------
Two meetings of the Board of Directors were held in fiscal 2002, and all board
members attended all meetings. We had no standing audit, nominating or
compensation committees of our Board or committees performing similar functions
during fiscal 2002. Our Directors regularly communicated to discuss the
company's affairs, and attended to formal board meetings to transact and approve
appropriate business.
ITEM 10. EXECUTIVE COMPENSATION
--------------------------------
Van Thuy Tran, CEO, received compensation in the amount of $100,000.00 for the
fiscal year ended June 30, 2002.
Miles Finn, COO, received compensation in the amount of $135,000.00 for the
fiscal year ended June 30, 2002. Mr. Finn also received a two-year warrant to
purchase 25,000 shares at an exercise price of $.3125 per share.
No cash bonuses were paid by the Registrant to any executive officer during the
fiscal year ended June 30, 2002.
Compensation pursuant to plans including pension, stock option, and stock
-------------------------------------------------------------------------
appreciation rights plan
------------------------
As of June 30, 2002, we did not have any stock option, stock appreciation,
rights plans, phantom stock plans, or any other incentive or compensation plan
41
or arrangement pursuant to which benefits, remuneration, value or compensation
was or is to be granted, awarded, entered, set aside, or accrued for the benefit
of any of our executive officers. During the year ended June 30, 2001, Mr.
Gerald Okerman assumed the duties of the Chairman of the Board. Mr. Okerman was
granted 25,000 shares of common stock for services rendered and also received a
three-year warrant to purchase 25,000 shares of common stock at $.50 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
The following table sets forth, as of June 30, 2002 certain information with
respect to all shareholders known by us to be beneficial owners of more than 5%
of our outstanding common stock, all directors, and all officers and directors
as a group.
------------------------------------------ ----------------------- ----------
Name & Address Number of Shares Percent of
Beneficially Owned Shares
------------------------------------------ ----------------------- ----------
Common Common
(see 1, 2, and 3 below)
------------------------------------------ ----------------------- ----------
Larry Matthews None N/A
7601 5th Avenue, Richfield, MN 55423
------------------------------------------ ----------------------- ----------
Van Thuy Tran (see note 1) 3,196,898 25.1%
1430 Orkla Drive, Golden Valley, MN 55427
------------------------------------------ ----------------------- ----------
The Matthews Group, LLC (see note 2) 5,797,875 45.5
1430 Orkla Drive, Golden Valley, MN 55427
------------------------------------------ ----------------------- ----------
Gerald Okerman (see note 3) 50,000 --
10050 Arcola Trail, Stillwater, MN 55082
------------------------------------------ ----------------------- ----------
Larry Johanns (see note 1) 3,216,875 25.2
518 North 12 Street, Osage, IA 50461
------------------------------------------ ----------------------- ----------
All Officers and Directors as a group (3 persons) 6,463,767 50.7
Van Thuy Tran, Gerald Okerman, and Larry Matthews
------------------------------------------ ----------------------- ----------
(1) The above shares include 50% of the shares owned or issuable to The
Matthews Group. Van Thuy Tran and Larry Johanns each own 50% of The
Matthews Group.
(2) Includes shares issuable upon the conversion of the Series H preferred
stock of 760,000 shares and the conversion of the convertible notes
payable and related accrued interest of 5,009,288 shares.
(3) Includes 25,000 shares issuable upon exercise of warrant.
42
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
Related Party Transactions
--------------------------
In September 1999, we accepted a commitment from The Matthews Group, LLC to fund
the $2,000,000 required under our Plan of Reorganization. This funding is in the
form of a promissory note that calls for 108 monthly payments to us of
$18,518.52. These payments are non-interest bearing and are secured by a pledge
of properties controlled by a principal of The Matthews Group, LLC. The note
partially collateralized by mortgages on income-producing real estate having an
assessment value in excess of $800,000, three properties owned by Van Thuy Tran
and one property by Larry Johanns. The current remaining balance on the note is
$989,417.
Subscription receivable and notes from The Matthews Group, LLC
--------------------------------------------------------------
On September 1, 1999 The Matthews Group, LLC paid the Gant Group $182,345.87 to
bring the note between the Gant Group and us up to date on both principal and
interest. The Matthews Group also committed to the remaining payments on the
note.
The Matthews Group paid this obligation on behalf us and The Gant Group released
its security interest in the our assets, including the patents. The Matthews
Group received a convertible note allowing for either a cash payment or
conversion into our common stock at $.10 per share, at The Matthews Group's sole
option, for these amounts.
Payments by The Matthews Group to the Gant Group were as follows:
Principal $286,453
Interest 75,069
Legal fees 5,000
----------
$366,522
These amounts paid to the Gant Group plus accrued interest of $30,853 owed to
The Matthews Group on these advances were incorporated into a $397,374 note on
December 1, 2000. This note bears interest at 10%, and is due on demand for
either cash or convertible into our common stock at $.10 per share. Conversion
is solely at the option of The Matthews Group.
Interest expense to The Matthews Group relating to this indebtedness totaled
$41,580 in 2002 and $38,187 in 2001. Accrued interest at June 30, 2002 of
$62,818 related to this indebtedness is reflected in the accompanying financial
statements.
A principal of The Matthews Group advanced us $126,000 from July to November
2000 to cover working capital associated with sales. These advances were
unsecured and bore interest at 10%. In March 2001, these advances and associated
interest of $4,583 were incorporated into the Prepayment on Subscription.
43
A principal of The Matthews Group provided factoring to us in 2000 and 2001. We
paid factoring fees totaling $15,000 in 2000 on a $100,000 ninety-day note and a
$100,000 sixty-day note. Factoring interest totaled $4,583 in 2001.
In July 2001, we commenced leasing our office facilities from a principal of The
Matthews Group under a month-to-month agreement calling for payments of $2,000 a
month.
On June 22, 2001, this principal of The Matthews Group advanced $25,000 to us
under similar terms. In July 2001, an additional $10,000 was advanced. These
advances and the related interest of $600 were repaid in August 2001.
In April 2002, The Matthews Group loaned us $100,000. $50,000 was for the
purchase of 50% ownership of Iconix stock and $50,000 for operating expenses.
The note is for 12 months due March 28, 2003 and accrues interest at 10% and is
convertible into our common stock at $.25 per share in full or part. Interest
accrued on this note totaled $1,842 through June 30, 2002.
PART IV
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
-------------------------------------------------
(a) Exhibits
--------
99.1 Certificate pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) On April 16, 2002, we filed a Current Report on Form 8-K relating to
our investment in Veritec Iconix Ventures, Inc.
44
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act
of 1934 (the "Exchange Act"), the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VERITEC INC.
By /s/ Van Thuy Tran Dated: August 12, 2003.
-------------------------------------------------
Van Thuy Tran
Director, Chief Executive and Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Larry Matthews Director August 12, 2003
------------------------------------
Larry Matthews
45
I, Van Thuy Tran, certify that:
1. I have reviewed this amended annual report on Form 10-KSB/A for the year
ended June 30, 2002 of Veritec Inc.;
2. Based on my knowledge, this amended annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this amended
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this amended annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this amended annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of the date within 90 days prior to the filing date of
this amended annual report (the "Evaluation Date"); and
c) Presented in this amended annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
amended annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: August 12, 2003 /s/ Van Thuy Tran
---------------------------------------------------
Van Thuy Tran
Chief Executive Officer and Chief Financial Officer
46
Exhibit Index
Exhibit 99.1 Certificate pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
47