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 ------------- ( ) 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. -------------------------------------------------- (Exact name of small business issuer in its charter) Nevada 95-3954373 ------ ---------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 1430 Orkla Drive, Golden Valley, MN 55427 ----------------------------------- ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: 651-552-9484 ------------ Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common stock, $.01 par value ---------------------- (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 ----------------- Page No. -------- 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 i PART I ITEM 1. DESCRIPTION OF BUSINESS -------------------------------- (A) Business Development -------------------- 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 ---------------------- The Vericode (registered) Symbol -------------------------------- 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. 2 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 ------------------ 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 ------------------------------------- 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 ------- 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 ---------- We filed an application to register a trademark ("VeriSecure Code") in the USA. Seasonality ----------- We have not historically experienced seasonality. 3 Major Customers/Marketing ------------------------- 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 ----------- 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 ------------------------ We believe that we are in compliance with all current federal and state environmental laws. Employees --------- 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 -------------------------------- 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 ------------------------------------------------------------ No matters were submitted to a vote of security holders through solicitation of proxies or otherwise during the fourth quarter. 6 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ----------------------------------------------------------------- Market Information ------------------ 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 ------------ ----------- ----------- Quarter Ended High Low High Low ------------- ---- --- ---- --- 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 ------------ 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 ---------------------------------------- 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. 7 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 ---------------------------------------------------------------- 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 --------------------------------------------------------------- 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, 8 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 ------------- ------------- 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