SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(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, 2004
|_| 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
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2445 Winnetka Avenue No. Golden Valley, MN 55427
------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 763-253-2670
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: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_| .
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant'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. |X|
Revenues for the year ended June 30, 2004 were $2,963,953.
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The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Company, computed by reference to the average bid price of
the common stock on September 13, 2004 was approximately $2,206,948.
Number of shares outstanding as of September 13, 2004: 7,071,849.
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.
DOCUMENTS INCORPORATED BY REFERENCE
Form 10-KSB for the period ended June 30, 1999 is hereby incorporated by
reference.
THIS DOCUMENT CONSISTS OF 52 PAGES, INCLUDING EXHIBIT PAGES.
THE EXHIBIT INDEX IS ON PAGE 51.
Page 2 of 52
VERITEC, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
TABLE OF CONTENTS
Page No.
PART I ...........................................................................................4
ITEM 1 DESCRIPTION OF BUSINESS...................................................................4
ITEM 2 DESCRIPTION OF PROPERTY..................................................................10
ITEM 3 LEGAL PROCEEDINGS........................................................................10
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................12
PART II..........................................................................................12
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................12
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................................13
ITEM 7 FINANCIAL STATEMENTS.....................................................................18
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES....42
ITEM 8A CONTROLS AND PROCEDURES.................................................................44
PART III.........................................................................................45
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT 45
ITEM 10 EXECUTIVE COMPENSATION..................................................................46
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................47
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................................47
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K.........................................................49
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES...................................................49
PART IV..........................................................................................50
SIGNATURES ......................................................................................50
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PART I
ITEM 1 DESCRIPTION OF BUSINESS
(A) Business Development
Veritec, Inc. (Veritec) 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.
In 1995 an involuntary proceeding under Chapter 7 of the United States
Bankruptcy Code was commenced against us. 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, 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, of the Annual Report on Form
10-KSB filed by us for the year ended June 30, 1999, which report is
incorporated herein by reference.
We develop, market, and sell a line of microprocessor-based encoding and
decoding system products that utilize our patented VERICODE(R)/ VSCODE(TM)
symbol technology. Our technology enables a manufacturer or distributor to
attach unique identifiers or coded symbols containing binary encoded data,
referred to as a "Vericode(R) Symbol" or "VSCode(TM) Symbol," to a product,
enabling automatic identification and collection of data with respect to the
marked product.
In 1999 we moved from our 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 our revenue primarily in the Asian
market. In February 2002, as part of our objective to increase sales in Asia, we
acquired 50% ownership of Veritec Iconix Ventures, Inc. (VIVI-USA). The other
50% of VIVI-USA was acquired by The Matthews Group, a related party. In April
2002, VIVI-USA acquired Iconix, Inc., a Japanese company. At this time Iconix,
Inc., was renamed Veritec Iconix Ventures, Inc. (VIVI-Japan). In June 2003, we
acquired The Matthews Groups 50% interest in VIVI-USA bringing our ownership of
VIVI-USA to 100%.
In June 2003, we also agreed to sell VIVI-Japan's textile customer to Com Techno
Alpha Inc., a Japanese corporation, for:
- 8,100,000 yen to be paid at a rate of 225,000 yen per month for
thirty-six months ($67,782 and $1,883 respectively in U.S. dollars).
- 120,000 shares of Veritec's common stock (subsequently returned and
cancelled).
Yoshihiro Tasaka, the principal of Com Techno, is a former employee and officer
of VIVI-Japan. The agreement does provide for acceleration of payments to be
received for each sale of a Tuft Controller by COM to this customer.
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In May 2004, VIVI-USA was dissolved and VIVI-USA's investment in VIVI-Japan was
transferred to the Veritec. Through VIVI-Japan, we provide services to our
expanding LCD markets in Japan and Korea, and to the emerging markets in Taiwan,
China and Southeast Asia. Veritec and VIVI-Japan are now expanding the market
into the Secure ID business worldwide.
In November 2003, Veritec formed a wholly owned subsidiary, Vcode Holdings, Inc.
(Vcode), a Minnesota corporation, to which it assigned three patents: U.S.
Patent Nos. 4,924,078; 5,612,524 and 5,331,176. Vcode, in turn, entered into an
exclusive license agreement with Vdata, LLC, an Illinois limited liability
company, for the purpose of enforcement and licensing of said patents. The
license agreement provides that all cost and expense related to the enforcement
and licensing of the patents will be the responsibility of Vdata, LLC. The
parties to the licensing agreement will share in net proceeds arising from the
enforcement or sublicensing of the patents. As of this date Vcode and Vdata,
LLC, have commenced patent enforcement litigation against Nokia Corporation in
the United States District Court for the Northern District of Illinois. The
litigation is in the discover phase and no opinion can be rendered with respect
to its outcome.
Veritec, VIVI-USA, VIVI-Japan and Vcode (Company) represent the consolidated
group.
(B) Company's Products
The Vericode(R) /VSCode(TM) Symbol
The VeriCode(R) /VSCode(TM) symbol is a two-dimensional, high data density,
machine-readable symbol that can contain 5 to 100 times more information than a
bar code in a smaller space. The VeriCode(R)/VSCode(TM) symbol 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 scrambled chessboard.
The matrix is enclosed within a solid border. The code's solid border in turn is
surrounded by a quiet zone of empty cells. This simple structure is the basis
for its space efficiency.
The size of the VeriCode(R) / VSCode(TM) symbol is variable and can be increased
or decreased depending on the application requirements. It can be configured to
fit virtually any space. The data capacity of the symbol 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(R) symbol could
contain 10, 28, 56, 72, or more than 100 characters, and the VSCode(TM) symbol
could contain 4,451 characters. The main limitation to the size and density of
the VeriCode(R) / VSCode(TM) symbol is the resolution of the marking and reading
devices.
Special orientation for reading of the code is not necessary. The VeriCode(R) /
VSCode(TM) symbol can be read at any angle of up to forty-five degrees from
vertical, in any direction relative to the reader. The VeriCode(R) / VSCode(TM)
symbol employs "error detection and correction" (EDAC) technology, similar to
that found on music CD's. That means that if a VeriCode(R) / VSCode(TM) 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. With EDAC, the code will return either accurate information
or no information, but it will not return false or wrong information.
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The VeriCode(R) / VSCode(TM) 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 authorized persons can create or read a VeriCode(R) /
VSCode(TM) symbol within that system.
The VeriCode(R) / VSCode(TM) symbol can hold any form of binary information that
can be digitized, including numbers, letters and biometric information.
The VSCode(TM) Symbol
The VSCode(TM) is a derivative of the two-dimensional Vericode(R) symbol. It is
built around the core competencies of the robust Vericode(R) symbol which
includes the solid border, omni-directional capability, error detection and
correction. The distinguishing factor for the VSCode(TM) is its ability to
encrypt a greater amount of data by increasing the data density. This matrix can
hold up to 4,451 bytes of data making it ideal for holding identification and
biometric information. The VSCode(TM) offers a high degree of security, which
can also be defined by the application requirements.
The limitations to the VSCode(TM) are based on the resolution of the marking /
printing devices and the reading devices.
The VSCode(TM) symbol can hold any form of binary information that can be
digitized, including numbers, letters, photos, fingerprints, graphics and
biometric information
The FCR-100 Finger Print Reader
The FCR-100 is a compact finger print card reader used to read and decode the
VSCode(TM) symbology containing biometric information and other secured data. It
consists of a combination of several modular components, including a quality
camera, lighting mechanism, digital fingerprint reader, software lock, USB cable
and housing, all tied into a PC operating system running the proprietary Veritec
software. Due to its modular design, the FCR-100 can be modified to meet
specific application needs.
The FCR-100 can be designed to work on most PC based operating system, including
Windows 2000. This allows the system to function with the many different types
of VSCode(TM) applications such as bankcards, access control, personnel
identification, border control, and hospital identification cards. The FCR-100
is connected to the PC or server via a USB cable, and it can be set up for a
wireless application or to allow multiple reading stations to be connected to a
single computer.
VITS 310 Hand Held Reader
The VITS 310 is a two-dimensional barcode reader built with a monochrome CMOS
type sensor. This scanner contains a built-in processor allowing it to read and
decode Vericode(R).
The light-weight (75g) hand-held scanner can run on multiple operating systems
such as Windows 98 SE, Win ME, Win 2000 and Windows XP. It can also utilize the
capabilities of a PDA running Pocket PC 2002.
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The VITS is connected to an output screen via a USB cable allowing mobility and
flexibility. Users of this scanner can embed their decoding functions inside the
reader or develop their own firmware based on the CPU.
HHP 4410 Hand Held Scanner
The HHP 4410 scanner is a hand held input device for reading and decoding two
dimensional (2D) symbology. The HHP 4410 scanner is configured to read a wide
range of Vericode(R) symbology. Meeting the high reliability requirements of
real life applications, it can read symbols ranging up 100 characters encoded.
It is also omni-directional, permitting the user to scan the codes from any
direction.
Due to its capability to be self-illuminating, the HHP 4410 can tolerate a wide
variety of ambient lighting conditions. This scanner is constructed for
industrial and other heavy-use environments.
Its integrated processing power is built into the firmware housed in the body of
the scanner allowing it to be used with multiple types of output methods
including PDA's.
Delphis
The Delphis reader is a lightweight (42grams) stylish and compact reader. It is
a contact type scanner that contains an internal LED light source enabling it to
be an easy one touch scan. This scanner can read Vericode(R) symbols up to 200
bytes with a minimum cell size of 0.15mm.
The Delphis contains a software keyboard wedge, that enables users to use the
scanner without having to develop interface software. It contains a USB
interface allowing it to easily connect to a standard PC or PDA running a
standard Windows operating system (Windows 98/ Me/2000/XP/CE).
The Delphis can be used remotely via a PDA or other wireless system or be tied
into a PC system through a USB connection.
VIS-5RC Stationary Reader
The VRS-5RC, an industrial barcode smart reader, is the result of a partnership
between Veritec and DVT Sensors. The VIS-5RC includes OCR/OCV capabilities with
the ability to read 200 codes per second. It achieves absolute accuracy even in
less than ideal industrial environments. Character voids and blemishes present
no problems for the intelligent scanner and built in EDAC software.
The ability to read Vericode(R) is built directly into the firmware of the
camera allowing it to process information quickly and accurately, making it a
key requirement in the LCD manufacturing application. Multiple readers can be
connected to a central server making it ideal for large manufacturing
facilities.
The F-250 Fixed Station
The Veritec F-250 reading system is a complete system capable of reading and
decoding Vericode(R) symbols. The Veritec F-250 consists of several modular
elements. Depending upon the environment and operating conditions, an
appropriate video camera is selected and is cabled directly to a high
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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(R) 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.
Because the F-250's camera is designed to work on Windows-based computers, it
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(R) which is used to
encode biometric data into a 2-D matrix, called VSCode(TM), 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 and other
biometric encoding. This code can be printed or etched on a large range of
materials, most notably onto identification cards.
VSCode(TM) is ideal for bankcards or high security applications. Because the
code is encrypted on the card and not within a database, VSCode(TM) provides
high privacy for the individual while maintaining high security for the
institution. VIVI has filed for a patent in Japan for the VSCode(TM).
Manufacturing Operations and Supplies
In 2004 and 2003 the Company used one source for its hand-held scanner
purchases. If necessary, the Company believes it could locate an alternate
source for these hand-held scanners.
Patents
We have received U.S. patents on the Vericode(R): 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 U.S. patent related to the Vericode(R)
technology in 2002.
In November 2003, Veritec formed a wholly owned subsidiary, Vcode, a Minnesota
corporation, to which it assigned three patents: U.S. Patent Nos. 4,924,078;
5,612,524 and 5,331,176. Vcode, in turn, entered into an exclusive license
agreement with Vdata, LLC, an Illinois limited liability company, for the
purpose of enforcement and licensing of said patents. The license agreement
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provides that all cost and expense related to the enforcement and licensing of
the patents will be the responsibility of Vdata, LLC. The parties to the
licensing agreement will share in net proceeds arising from the enforcement or
sublicensing of the patents. As of this date Vcode and Vdata, LLC, have
commenced patent enforcement litigation against Nokia Corporation in the United
States District Court for the Northern District of Illinois. The litigation is
in the discover phase and no opinion can be rendered with respect to its
outcome.
Trademarks
We have filed applications to register the trademark "VeriSecure" in the United
States. We have also filed applications to trademark "VSCode(TM)" in the
following countries: Australia, Taiwan, South Korea, Singapore, Japan, China,
and Vietnam. In addition we have filed applications to register the VeriCode(TM)
in the following countries: China, Singapore, Vietnam, and Australia. We have a
registered trademark for VeriCode(R) in the United States, Taiwan and South
Korea.
Seasonality
We have not historically experienced seasonality.
Major Customers/Marketing
During the fiscal year ended June 30, 2004, four customers accounted for 80% of
our revenues. Our largest customer was Sungjin Neotech Co., Ltd. ("SNC"), our
Korean distributor. During the fiscal year ended June 30, 2003, two customers
accounted for 70% of our sales. Foreign revenues accounted for 85% of the
Company's revenues in fiscal year 2004 and 93% in fiscal year 2003. To date our
revenues are concentrated in Asia.
We previously 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 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 three full-time engineers and two consultants in Veritec-USA
and 3 full-time engineers in VIVI-Japan. 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. See "Item 6 - Management's
Discussion and Analysis - Operating Expenses" for a discussion of research and
development expenses.
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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(R) / VSCode(TM) 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(R). The Data Matrix code was popularized by Robotic Vision Systems,
Inc., which declared the Data Matrix symbol to be "in the public domain." In
contrast, our Vericode(R) 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.
Environmental Compliance
We believe that we are in compliance with all current federal and state
environmental laws.
Employees
As of June 30, 2004, we had thirteen full-time and one part-time employee
compared to six full-time employees and two part-time employees in 2003. In
addition, several consultants have worked on various projects and specific needs
throughout the year. As we grow we continually evaluate the employment needs of
the Company.
ITEM 2 DESCRIPTION OF PROPERTY
We are leasing approximately 4,200 square feet of office and laboratory space at
2445 Winnetka Avenue North, Golden Valley, MN 55427, which serves as our primary
place of business. This lease is with Van Thuy Tran, a director, chief executive
officer and chief financial officer of the Company. Our lease requires monthly
payments of $4,200 and runs through June 30, 2005.
We also lease approximately 1,400 square feet of office space in Osaka, Japan
which serves as VIVI-Japan's primary place of business. Our lease requires
monthly payments of 243,000 Yen per month ($2,244 per month at June 30, 2004)
and runs through February 28, 2006.
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)). This suit
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was brought by a shareholder and former director of the corporation. The action
was brought against us, and various individuals claiming that certain corporate
actions were taken without proper authority of the corporation's board of
directors and/or contrary to the plan of reorganization the corporation filed
and completed under Chapter 11 of the U.S. Bankruptcy Act. In December 2000,
this case was transferred to the United States District Court for the District
of Minnesota. Limited discovery has been undertaken. We intend to defend this
action vigorously.
On January 10, 2002, we initiated arbitration against Mitsubishi Corporation in
Los Angeles, California, alleging breach of contract, trade secret
misappropriation and interference with business opportunities; seeking several
million dollars in compensatory damages, punitive damages, legal fees and
accrued interest. Mitsubishi counterclaimed on similar grounds, also seeking
similar damages and amounts. The arbitration was split into two phases. The
first phase, completed in July 2003, resulted in an interim award dismissing
most of our claims. No decision on the second phase, completed in September
2004, has been issued by the arbitration panel. Veritec is seeking $1.5 million
in attorneys' fees and costs if it prevails on the second phase. Mitsubishi has
made a claim for compensatory damages of $11.25 million, punitive damages of $2
million and legal fees and costs of $3.9 million in the second phase. No opinion
can be given at this time as to the final outcome of the arbitration.
In 2003, a former employee of the Company asserted he was entitled to a fully
vested option to purchase 100,000 shares of Veritec common stock at an exercise
price of $.088 per share. The Company denies this claim. This former employee
has not proceeded further with this claim. Should such a claim be pursued the
Company would defend this action vigorously.
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"). Prior to September 1999, we did not comply
with several filing requirements. To our knowledge, there is no current inquiry
or investigation pending or threatened by the SEC in connection with our prior
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 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 us can be found at our website, www.veritecinc.com and by
contacting the Company at 2445 Winnetka Avenue North, Golden Valley, MN 55427.
Page 11 of 52
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters where submitted to a vote of security holders through solicitation of
proxies or otherwise during the fourth quarter.
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. Quotations 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).
Common Stock Fiscal 2004 Fiscal 2003
------------ ----------- -----------
Quarter Ended High Low High Low
September 30 .90 .25 .45 .26
December 31 .50 .17 .36 .19
March 31 .51 .25 .37 .20
June 30 .75 .25 .60 .16
Shareholders
As of September 13, 2004 there were approximately 845 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
Effective June 25, 2003, we issued 150,000 shares of Veritec common stock to The
Matthews Group as part of our purchase of their 50% ownership in VIVI-USA. The
shares were issued at a price of $0.23 per share, the reported market price at
the date of the original VIVI-USA acquisition. 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 September 2, 2003, we issued 25,000 shares of Veritec common stock to settle
an obligation to a former employee. The shares were issued at a price of $0.20
per share, the reported market price at the date the obligation was incurred. As
Page 12 of 52
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.
On September 2, 2003, we issued 25,000 shares of Veritec common stock to a new
director, Charles Boyer. The shares were issued at a price of $0.30 per share,
the reported market price at the date the 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'S 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, ("TMG"), to fund operations, as our revenue has
not been sufficient to cover expenses. As of June 30, 2004 TMG had paid
$1,148,440. This amount is $19,811 more than the amount specified in the
bankruptcy plan. The remaining obligation of TMG is $850,559, which is to be
paid over the next 4 years. We expect that TMG will continue to perform on this
obligation.
We had working capital deficits in the amount of $1,515,284 and $1,433,440 as of
June 30, 2004 and June 30, 2003, respectively. Working capital is an important
measure of our ability to meet our short-term obligations.
Results of Operations - June 30, 2004 compared to June 30, 2003
We had net loss of $(34,817) in the fiscal year ended June 30, 2004 compared to
a net loss of $(1,176,941) in the fiscal year ended June 30, 2003.
Revenue
Revenues rose from $2,352,391 in 2003 to $2,963,953 in 2004, an increase of 26%.
United States based sales rose from $1,181,870 in 2003 to $2,568,640 in 2004, an
increase of 117%. In 2004 we continued the policy begun in 2003 of providing
both hardware and software to customers. The acceptance of our security software
by the Asian market continued in 2004. Revenues from our major Korean
distributor remained strong in 2004. In addition, we added a major new Japanese
distributor in 2004. This new Japanese distributor accounted for 22% of our
sales in 2004. Also, sales to other customers remained strong or increased in
2004. Sales for VIVI-Japan, our wholly owned subsidiary, declined to $395,313 in
2004 compared to $1,190,650 in 2003, a decrease of 67%. $762,016 or 96% of this
decrease related to the sale of VIVI-Japan's textile customer. Adjusting for the
sale of this textile customer, sales for VIVI-Japan declined from $428,634 to
$395,313, a decrease of 8%.
We continue to concentrate our efforts in the Asian market where we seem to have
the best opportunities to grow revenue rapidly.
Operating Expenses
Operating expenses in fiscal 2004 versus 2003 were as follows:
Page 13 of 52
June 30, 2004 June 30, 2003
------------- -------------
Selling, general and administrative expenses $1,416,996 $1,430,785
Legal 1,287,297 1,133,169
Research and development 74,589 148,163
---------- ----------
$2,778,882 $2,712,217
========== ==========
Selling, general and administrative expenses of $1,416,996 for the year ended
June 30, 2004 were $(13,789) or 1% lower than selling, general and
administrative expense of $1,430,785 for the year ended June 30, 2003. Legal and
court fees relating to the Mitsubishi lawsuit and the other legal matters were
$1,287,297 compared to $1,133,169, an increase of $154,128 for the year ended
June 30, 2004 compared to 2003. We anticipate legal and court fees will decrease
in 2005 as the Mitsubishi arbitration moves towards completion.
Research and development expenses of $74,589 for the year ended June 30, 2004
were $73,574 or 50% lower than research and development expense of $148,163 for
the year ended June 30, 2003. Research and development expense in 2003 included
expenses relating to a development agreement with Lite On Semiconductor,
additional staffing, and contract labor costs due to our research and
development focus on the development of the VSCode(TM) software. Research and
development costs in 2004 returned to historical levels.
Interest expense for the year ended June 30, 2004 was $108,986 or 47% higher
than interest expense of $74,056 for the year ended June 30, 2003. This higher
interest was the result of increased debt levels in fiscal 2004.
Strategic Restructuring and Operations Plan
We will continue to focus on expanding our LCD markets in Asia by licensing our
software and our patents. We believe that we can become a profitable company by
expanding out target to other lucrative markets such as the " Secure ID
business," such as driver's licenses, license plates, identification cards, and
credit cards.
Due to our VSCode(TM) capability of storing 4,451 bytes of data, our customers
will be able to include "biometric" (fingerprint, facial dimensions, etc.)
information in the symbol. This large data storage capability will allow the
user to retrieve the information without being connected to a database.
Additionally, our technology is proprietary, and we provide security features
within our hardware and software that protect against counterfeiting.
Capital Expenditures and Commitments
During the fiscal year ended June 30, 2004, we made $10,534 in capital purchases
compared to $11,520 in 2003. 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.
"Item 12. Certain Relationships and Related Transactions" describes principal
and accrued interest due on various outstanding indebtedness that we owe to
Page 14 of 52
related parties. This related party indebtedness totals $1,369,121 at June 30,
2004 (Notes Payable: Related Parties - $390,000; Convertible Notes: Related
Parties - $747,374; Accrued Interest - $231,747). This indebtedness is either
due on demand, past due, or due November 14, 2004. At this time the Company does
not have the monies needed to repay these obligations and to continue to meet
operating needs.
The Company also has notes payable to banks totaling $283,979 at June 30, 2004.
This indebtedness is due in monthly installments of $9,557, including interest
at 1.3% to 2.5%. These notes mature between March 2005 and December 2009.
Liquidity and Factors That May Affect Future Results
A number of uncertainties exist that may affect our future operating results.
These uncertainties include general economic conditions, market acceptance of
our products, legal and court costs associated with our various legal matters,
and our ability to manage expense growth. In particular, if we receive an
adverse outcome in Phase II of the arbitration proceeding that we initiated
against Mitsubishi, we will likely not have sufficient cash to fulfill any
awards against us or to pay our legal fees. Such an adverse outcome in the
arbitration proceeding could lead to our insolvency and have a serious adverse
effect on our operations.
We have sustained significant losses since inception. These losses could
continue into 2005 and future years. 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 flows from The Matthews Group. There is no
assurance that The Matthews Group will complete the obligations under the Plan
of Reorganization 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 2005. Sales leads continue to be strong.
Based on past success rates, we believe a percentage of these leads will agree
to purchase product. For 2005 we will continue to use our existing and possibly
new distributors to help market our products. The distributors who signed
distributorship agreements in 2004 and 2003 supported our stronger sales for
2004. Several more potential distributors have shown serious interest in
marketing our products in 2005. Cash will be generated by requiring distributors
to pay a one time up front license fee which will give the distributors the
opportunity of discounted software prices and allow the distributors to be more
competitive in their marketing region.
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.
Net cash from operating activities was $27,328 in 2004. Cash flows from the net
loss of $(34,817) were further reduced by a $768,517 increase in accounts
receivable. This was offset by a $825,028 increase in accounts payable and
accrued expenses. Net cash from operating activities was $(118,316) in 2003. The
2003 cash flows from the net loss of $(1,176,941) were offset by significant
Page 15 of 52
cash flows from reductions in accounts receivable, inventory, prepaid expenses.
This was further supplemented by a $656,528 increase in accounts payable and
accrued expenses primarily relating to legal and professional fees related to
the Mitsubishi lawsuit and to our reporting obligations as a public company.
Cash flows from financing activities decreased to $191,427 in 2004 compared to
$295,963 in 2003. In 2004 The Matthews Group used the prepayment on subscription
receivable to pay all of the $222,222 in scheduled payments on the subscription
receivable resulting in no cash inflow to the Company. In 2003 The Matthews
Group used the prepayment on subscription receivable to pay all but $82,300 of
the $222,222 in scheduled payments due on the subscription receivable. At June
30, 2004 the remaining prepayment on subscription receivable was $19,811. In
2005 The Matthews Group will need to resume payments on the subscription
receivable or apply other obligations owed to them by the Company to the
subscription receivable and/or the prepayment on subscription receivable. In
August 2004, Van Tran applied $84,333 in compensation owed her by the Company
against the prepayment on subscription receivable. This transaction means The
Matthews Group can use the prepayment to satisfy all of its scheduled payments
under the subscription agreement through November 2004. At this time this
appears to be The Matthews Group's intent. Cash flows from financing activities
were supplemented through borrowings from Van Tran and Larry Johanns, principals
in The Matthews Group, and The Matthews Group of $250,000 in 2004 and $290,200
in 2003.
At June 30, 2004 the Company had cash balances of $394,067 and bank certificates
of deposit of $120,257. Management has taken steps to manage expenses Management
is hopeful existing cash, together with cash flows generated by product sales
and raising capital will be sufficient to fund operations through 2005, but
there is there is no assurance we will be successful in these efforts. As
discussed above, if we receive an adverse ruling in the Mitsubishi arbitration,
we will likely not have sufficient cash available to meet our obligations.
Commitments and Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2004:
Payment due by Period
--------------------------------------------------------------
Obligations Total 1 Year 2-3 Years 4-5 Years Thereafter
----------- ---------- ----------- ---------- ---------- ----------
Notes Payable -
Related Parties $ 390,000 $ 390,000 None None None
Convertible Notes -
Related Parties $ 747,374 $ 747,374 None None None
Long-Term Debt $ 283,979 $ 114,681 $ 103,296 $ 52,742 $ 13,260
Operating Leases $ 56,127 $ 51,709 $ 4,418 None None
---------- ---------- ---------- ---------- ----------
$1,477,480 $1,303,764 $ 107,714 $ 52,742 $ 13,260
========== ========== ========== ========== ==========
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Page 16 of 52
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounts and Notes Receivable
The Company sells to domestic and foreign companies and grants uncollateralized
credit to customers, but requires deposits on unique orders. Management
periodically reviews its accounts receivable and provides an allowance for
doubtful accounts after analyzing the age of the receivable, payment history and
prior experience with the customer. The estimated loss that management believes
is probable is included in the allowance for doubtful accounts. While the
ultimate loss may differ, management believes that any additional loss will not
have a material impact on the Company's financial position. Due to uncertainties
in the settlement process, however, it is at least reasonably possible that
management's estimate will change during the near term.
Inventories
Inventories, consisting of purchased components for resale, are stated at the
lower of cost or market, applying the first-in, first-out (FIFO) method.
Revenue Recognition
The Company accounts for revenue recognition in accordance with Staff Accounting
Bulletin (SAB) 101 "Revenue Recognition in Financial Statements" and related
amendments. Revenues from software sales, product sales and engineering are
recognized when products are shipped or services performed. License fees are
recognized upon completion of all required terms under the agreement. The
process typically begins with a customer purchase order detailing its hardware
specifications so the Company can customize its software to the customer's
hardware. Once customization is completed the Company typically transmits the
software to the customer via the Internet. Revenue is recognized at that point.
Once the software is transmitted the customers do not have a right of refusal or
return. Under some agreements the customers remit payment prior to the Company
having completed customization or completion of any other required services. In
these instances the Company delays revenue recognition and reflects the
prepayments as deferred revenue.
Shipping and Handling Fees and Costs
Shipping and handling fees billed to customers are classified as revenue and
shipping and handling costs are classified as cost of sales.
Intangible Assets
Software Costs: 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 Veritec common stock valued at $.80 per
share. The Company has recorded this purchased software at cost, $200,000,
and is amortizing it over 5 years using the straight-line method.
Technology Rights: In 2003, the Company, through VIVI-Japan, acquired
technology rights for the Delphi scanner for $85,243 ($80,000 in debt;
25,000 shares of the Veritec common stock at $.20 per share; and $243 in
incidental costs). These technology rights are being amortized on a
straight-line basis over their estimated useful life of three years.
Page 17 of 52
Computer Software Costs
The Company capitalizes 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
consolidated financial statements.
Stock-Based Consideration
The Company has elected to continue following the accounting guidance of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees", for measurement and recognition of stock-based transactions with
employees. No compensation cost has been recognized for options issued under the
plans when the exercise price of the options is at least equal to the fair
market value of the common stock at the date of grant. Had compensation cost for
the stock options issued been determined based on the fair value at the grant
date, consistent with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", the effect
on the Company's 2004 and 2003 net loss and loss per common share would have
been insignificant.
ITEM 7 FINANCIAL STATEMENTS
VERITEC, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2004 AND 2003
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.....................19
INDEPENDENT AUDITORS' REPORT................................................20
CONSOLIDATED BALANCE SHEETS.................................................21
CONSOLIDATED STATEMENTS OF OPERATIONS.......................................23
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS...............................24
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT............................25
CONSOLIDATED STATEMENTS OF CASH FLOW........................................26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................27
Page 18 of 52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Veritec, Inc.
Golden Valley, Minnesota
We have audited the accompanying consolidated balance sheet of Veritec, Inc. and
subsidiaries (Company) as of June 30, 2004, and the related consolidated
statements of operations, comprehensive loss, stockholders' deficit and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 audit of the consolidated financial statements provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Veritec, Inc. and
subsidiaries as of June 30, 2004, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 2, the
Company has accumulated losses of $13,323,448 from inception to June 30, 2004
and at June 30, 2004 the Company has a working capital deficiency of $1,515,284
and an excess of liabilities over assets of $1,602,789. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also discussed in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 11, the Company is involved in various litigation, which
could have a significant effect on the Company.
/s/ Lurie Besikof Lapidus & Company, LLP
Lurie Besikof Lapidus & Company, LLP
Minneapolis, Minnesota
October 12, 2004
Page 19 of 52
CALLAHAN, JOHNSTON & ASSOCIATES, LLC
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Veritec, Inc.
Golden Valley, Minnesota
We have audited the accompanying consolidated balance sheet of Veritec, Inc., as
of June 30, 2003, and the related consolidated statements of operations,
comprehensive loss, stockholders' equity (deficit) and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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
audit of the consolidated financial statements provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Veritec, Inc., as of
June 30, 2003, and the results of its operations and its cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated 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 $1,176,941 during the year ended June 30, 2003,
and, as of that date, had an excess of liabilities over assets of $1,789,823.
Those conditions raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated 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 24, 2003
7400 Lyndale Avenue South, Suite 140, Richfield, MN 55423
Telephone: (612) 861-0970 Fax: (612) 861-5827
Email: cjacallahan@qwest.net
Page 20 of 52
VERITEC, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND 2003
2004 2003
---------- ----------
ASSETS
Current Assets:
Cash $ 394,067 $ 325,193
Certificates of deposit 120,257 --
Accounts and notes receivable:
Trade, net of allowance for doubtful
accounts of $35,000 and $25,000 949,802 185,174
Inventories 20,730 11,585
Prepaid expense - legal retainer 100,000 --
Prepaid expenses - other 10,291 32,791
---------- ----------
Total Current Assets 1,595,147 554,743
---------- ----------
Property and Equipment:
Furniture and equipment 66,032 62,511
Vehicle 41,481 41,481
---------- ----------
107,513 103,992
Less accumulated depreciation 94,662 89,323
---------- ----------
12,851 14,669
---------- ----------
Other Assets:
Software costs, net of accumulated amortization
of $198,473 and $158,473 13,334 53,334
Technology rights, net of accumulated amortization
of $43,716 and $18,703 41,527 66,540
Note receivable 19,622 --
Security deposits and other assets 14,270 7,827
---------- ----------
88,753 127,701
---------- ----------
Total Assets $1,696,751 $ 697,113
========== ==========
See notes to consolidated financial statements
Page 21 of 52
VERITEC, INC.
BALANCE SHEETS
JUNE 30, 2004 AND 2003
2004 2003
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable - related parties $ 390,000 $ 340,000
Convertible notes - related party 747,374 497,374
Current maturities of long-term debt 114,681 109,878
Accounts payable 1,485,851 777,414
Accrued expenses:
Payroll and related 129,915 107,015
Interest 231,747 130,763
25,739
Other 10,863
------------ ------------
Total Current Liabilities 3,110,431 1,988,183
Long-Term Debt, less current maturities 169,298 256,720
Prepayment on Stock and Subscription Receivable 19,811 242,033
------------ ------------
Total Liabilities 3,299,540 2,486,936
------------ ------------
Commitments and Contingencies
Stockholders' Deficit:
Preferred stock, par value $1.00;
authorized 10,000,000 shares,
275,000 shares of Series H
authorized, 76,000 shares issued 366,007 366,007
Common stock, par value $.01;
authorized 20,000,000 shares, 7,071,849
and 7,126,849 shares issued 70,718 71,268
Subscription receivable (717,717) (860,326)
Additional paid-in capital 11,990,954 11,922,440
Accumulated deficit (13,323,448) (13,288,631)
Cumulative translation adjustment 10,697 (581)
------------ ------------
Total Stockholders' Deficit (1,602,789) (1,789,823)
------------ ------------
Total Liabilities and
Stockholders' Deficit $ 1,696,751 $ 697,113
============ ============
See notes to consolidated financial statements
Page 22 of 52
VERITEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
----------- -----------
Revenues $ 2,963,953 $ 2,352,391
Cost of sales 261,474 741,769
----------- -----------
Gross profit 2,702,479 1,610,622
----------- -----------
Operating Expenses:
Selling, general and administrative 1,416,996 1,430,785
Legal 1,287,297 1,133,169
Research and development 74,589 148,163
----------- -----------
Total Expenses 2,778,882 2,712,117
----------- -----------
Loss from Operations (76,403) (1,101,495)
----------- -----------
Other Income (Expense):
Interest expense (108,986) (74,056)
Lease buyout 45,098 --
Sale of textile customer 102,806 --
Other income 4,568 --
----------- -----------
Total Other Income (Expense) 43,486 (74,056)
----------- -----------
Net Loss before Income Taxes (32,917) (1,175,551)
Foreign Income Tax Expense 1,900 1,390
----------- -----------
Net Loss $ (34,817) $(1,176,941)
=========== ===========
Basic Loss Per Common Share $ (0.00) $ (0.17)
=========== ===========
Diluted Loss Per Common Share $ (0.00) $ (0.17)
=========== ===========
Weighted Average Common Shares
Outstanding - Basic and Diluted 7,074,767 7,031,846
=========== ===========
See notes to consolidated financial statements
Page 23 of 52
VERITEC, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
----------- -----------
Net Loss $ (34,817) $(1,176,941)
Foreign Currency Translation Adjustment
11,278 (581)
----------- -----------
Comprehensive Loss $ (23,539) $(1,177,522)
=========== ===========
See notes to consolidated financial statements
Page 24 of 52
VERITEC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 2004 AND 2003
Accumulated
Other
Compre-
Preferred Stock Common Stock Additional hensive
---------------- -------------------- Subscription Paid in Income Accumulated Stockholders'
Shares Amount Shares Amount Receivable Capital (Loss) Deficit (Deficit)
------ -------- --------- --------- ---------- ----------- ------- ------------ ------------
BALANCE, July 1, 2002 76,000 $366,007 6,946,849 $ 69,469 $(989,417) $11,795,109 $ -- $(12,111,690) $ (870,522)
Issuance of common stock
for Technology rights
and services at $.20
per share -- -- 30,000 300 -- 5,700 -- -- 6,000
Issuance of restricted
common stock to related
party as part of
acquisition at $.20 per
share -- -- 150,000 1,500 -- 28,500 -- -- 30,000
Imputed interest on
subscription receivable -- -- -- -- (93,131) 93,131 -- -- --
Received on
subscription receivable -- -- -- -- 222,222 -- -- -- 222,222
Foreign currency
translation adjustments -- -- -- -- -- -- (581) -- (581)
Net loss -- -- -- -- -- -- -- (1,176,941) (1,176,941)
------------ -----------
BALANCE, June 30, 2003 76,000 366,007 7,126,849 71,268 (860,326) 11,922,440 (581) (13,288,631) (1,789,823)
Acquisition and
retirement of shares at
$.23 per share -- -- (120,000) (1,200) -- (26,400) -- -- (27,600)
Exercise of option to
purchase shares at $.23
per share -- -- 15,000 150 -- 3,300 -- -- 3,450
Issuance of common stock
to settle liability at
$.20 per share -- -- 25,000 250 -- 4,750 -- -- 5,000
Issuance of common stock
for Board of Director
fees at $.30 per share -- -- 25,000 250 -- 7,250 -- -- 7,500
Imputed interest on
subscription receivable -- -- -- -- (79,614) 79,614 -- ------------ ------------
Received on
subscription receivable -- -- -- -- 222,223 -- -- -- 222,223
Foreign currency
translation adjustments -- -- -- -- -- -- 11,278 -- 11,278
Net loss -- -- -- -- -- -- -- (34,817) (34,817)
------------ -----------
BALANCE, June 30, 2004 76,000 $366,007 7,071,849 $ 70,718 $(717,717) $11,990,954 $10,697 $(13,323,448) $(1,602,789)
See notes to consolidated financial statements
Page 25 of 52
VERITEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED JUNE 30, 2004 AND 2003
2004 2003
----------- -----------
Cash flow from operating activities:
Net loss $ (34,817) $(1,176,941)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation 10,714 11,207
Amortization of intangibles 65,013 58,703
Issuance of stock for services 7,500 1,000
Loss on disposal property and equipment 449 --
Common stock retired from sale of textile customer (27,600) --
(Increase) decrease in operating assets:
Accounts receivable (768,517) 115,765
Inventories (8,956) 106,953
Prepaid expenses (85,067) 108,469
Security deposits and other assets 43,581 --
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 825,028 656,528
----------- -----------
Net cash provided (used) by operating activities 27,328 (118,316)
----------- -----------
Cash flow from investing activities:
Purchase of certificates of deposit (117,469) --
Purchases of equipment (10,534) (11,520)
----------- -----------
Net cash used by investing activities (128,003) (11,520)
----------- -----------
Cash flow from financing activities:
Checks issued in excess of deposits -- (35,523)
Proceeds from stock issuance, subscription
receivable, and prepayment on stock -- 82,300
Proceeds from exercise of stock option 3,450 --
Proceeds from notes payable - related parties 305,000 290,200
Payments on notes payable - related parties (5,000) (10,000)
Proceeds from long-term debt -- 72,500
Payments on long-term debt (112,023) (103,514)
----------- -----------
Net cash provided by financing activities 191,427 295,963
----------- -----------
Effect of exchange rate changes on cash (21,878) 306
----------- -----------
Increase in cash 68,874 166,433
Cash at beginning of year 325,193 158,760
----------- -----------
Cash at end of year $ 394,067 $ 325,193
=========== ===========
See notes to consolidated financial statements
Page 26 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Veritec, Inc. (Veritec) was incorporated in Nevada on September 8, 1982. Veritec
is primarily engaged in development, marketing and sales of a line of
microprocessor-based encoding and decoding system products that utilize our
patented Vericode(R) Symbol technology. Veritec's readers and scanners enable a
manufacturer or distributor to attach unique identifiers or coded symbols
containing binary encoded data to a product that enables automatic
identification and collection of data. Veritec has also developed its Secured
Identification System with its VSCode(TM) that enables the storage of biometric
information of the two-dimensional VSCode(TM) for subsequent verification of its
authenticity. Veritec is a world leader in creating two-dimensional barcode
technology and holds key patents in Europe and the United States.
On February 25, 2002, Veritec Iconix Ventures, Inc. (VIVI-USA) was incorporated
under the laws of the State of Delaware. In April 2002, the Veritec and The
Matthews Group, a related party, each contributed $50,000 and 150,000 shares of
the Veritec's common stock for 50% ownership interests each in VIVI-USA.
In April 2002, VIVI-USA completed the acquisition of Iconix, Inc. for
consideration of $100,000 and 300,000 shares of Veritec 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. At the time of its purchase by VIVI-USA, Iconix, Inc. was renamed
Veritec Iconix Ventures, Inc. (VIVI-Japan). VIVI-Japan is currently the sole
licensee of the CP code patents in Asia. Veritec feels synergies with VIVI-Japan
made the acquisition of a 50% ownership interest in VIVI-USA desirable.
On June 25, 2003, Veritec entered into an agreement to purchase The Matthews
Group's 50% interest in VIVI-USA at the acquisition price of $50,000 and 150,000
shares of Veritec common stock, the original price paid by The Matthews Group.
Veritec issued 150,000 shares of Veritec common stock to The Matthews Group and
issued a promissory note of $50,000 (Note 4). At the same time, we agreed to
sell VIVI-Japan's textile business to Com Techno Alpha Inc. (Com Techno), a
Japanese corporation. As a part of the sale, Yoshihiro Tasaka, the principal of
Com Techno and a former employee and officer of VIVI-Japan, agreed to return to
us 120,000 shares of Veritec common stock. This stock was returned and cancelled
in fiscal 2004. Com Techno also agreed to pay us 8,100,000 yen to be paid at a
rate of monthly rate of 225,000 yen for 36 months ($67,782 and $1,883
respectively in U.S. dollars). The agreement provides for acceleration of
payments for each sale of a Tuft Controller by Com Techno to this customer.
In May 2004 VIVI-USA was dissolved and VIVI-USA's investment in VIVI-Japan was
transferred to the Veritec.
Page 27 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Business (Continued)
In November 2003, Veritec formed a wholly owned subsidiary, Vcode Holdings, Inc.
(Vcode), a Minnesota corporation, to which it assigned three patents: U.S.
Patent Nos. 4,924,078; 5,612,524 and 5,331,176. Vcode, in turn, entered into an
exclusive license agreement with Vdata, LLC, an Illinois limited liability
company, for the purpose of enforcement and licensing the patents. The license
agreement provides that all expenses related to the enforcement and licensing of
the patents will be the responsibility of Vdata, LLC. The parties to the
licensing agreement will share in net proceeds arising from the enforcement or
sublicensing of the patents. As of June 30, 2004, there has been no such
proceeds.
Principles of Consolidation
Veritec, VIVI-USA, VIVI-Japan and Vcode (collectively referred to as the
Company) represent the consolidated group. The accompanying consolidated
financial statements include the accounts of the Veritec and its wholly owned
subsidiaries, VIVI-USA, VIVI-Japan, and in 2004, Vcode. All intercompany
transactions and balances were eliminated in consolidation.
Use of Estimates
The preparation of consolidated 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 consolidated
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 United States based bank balance at one financial
institution. At times, this balance 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.
Bank balances in Japan are at four banks. These balances are governmentally
insured up to 10,000,000 Yen per bank ($92,336 at June 30, 2004). At times,
these balances may exceed the governmentally insured limits. 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.
Page 28 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Accounts and Notes Receivable
The Company sells to domestic and foreign companies and grants uncollateralized
credit to customers, but require deposits on unique orders. Management
periodically reviews its accounts receivable and provides an allowance for
doubtful accounts after analyzing the age of the receivable, payment history and
prior experience with the customer. The estimated loss that management believes
is probable is included in the allowance for doubtful accounts. While the
ultimate loss may differ, management believes that any additional loss will not
have a material impact on the Company's financial position. Due to uncertainties
in the settlement process, however, it is at least reasonably possible that
management's estimate will change during the near term.
Inventories
Inventories, consisting of purchased components for resale, are stated at the
lower of cost or market, applying the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of 3 to 7 years. 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. The cost of maintenance and
repairs is expensed as incurred; significant renewals and betterments are
capitalized.
Financial Instruments
The fair value of cash, certificates of deposit, accounts and notes receivable,
accounts payable, accrued expenses, and short-term debt approximate their
carrying values due to the short-term nature of these financial instruments.
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.
Page 29 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Intangible Assets
Software Costs:
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 Company
recorded this purchased software at cost, $200,000, and is amortizing it
over 5 years using the straight-line method.
Technology Rights:
In 2003, the Company, through VIVI-Japan, acquired technology rights for
the Delphi scanner for $85,243 ($80,000 in debt; 25,000 shares of
Veritec's common stock at $.20 per share; and $243 in incidental costs).
These technology rights are being amortized on a straight-line basis over
their estimated useful life of three years.
Future amortization of software and technology rights is as follows:
Year Ending June 30, Amount
-------------------- ------
2005 $42,647
2006 12,214
-------
$54,861
=======
Computer Software Costs
The Company capitalizes certain software development and production costs once
technological feasibility has been achieved. Software development costs incurred
prior to achieving technological feasibility are 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
consolidated financial statements.
Long-Lived Assets
The Company reviews its long-lived and intangibles assets 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. Management determined that no impairment of long-lived or
intangible assets existed at June 30, 2004 or 2003.
Page 30 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Revenue Recognition
The Company accounts for revenue recognition in accordance with Staff Accounting
Bulletin (SAB) 101 "Revenue Recognition in Financial Statements" and related
amendments. Revenues from software sales, product sales and engineering are
recognized when products are shipped or services performed. License fees are
recognized upon completion of all required terms under the agreement. The
process typically begins with a customer purchase order detailing its hardware
specifications so the Company can customize its software to the customer's
hardware. Once customization is completed the Company typically transmits the
software to the customer via the Internet. Revenue is recognized at that point.
Once the software is transmitted the customers do not have a right of refusal or
return. Under some agreements the customers remit payment prior to the Company
having completed customization or completion of any other required services. In
these instances the Company delays revenue recognition and reflects the
prepayments as deferred revenue.
Shipping and Handling Fees and Cost
Shipping and handling fees billed to customers are included in revenues and
shipping and handling costs are included as cost of sales.
Advertising
Advertising costs are expensed as incurred and totaled $4,951 in fiscal 2004 and
$19,797 in fiscal 2003.
Research and Development
Research and development costs are expensed as incurred.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share (EPS) is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the year. Diluted earnings (loss) per common share, in addition
to the weighted-average determined for basic earnings per share, includes
potential dilution that could occur if securities or other contracts to 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, conversion of the Series H Preferred stock and the
conversion of the notes payable and related accrued interest using the
"if-converted" method are included in the diluted earning (loss) per common
share when dilutive. All such potentially dilutive instruments were antidulitive
for 2004 and 2003.
Page 31 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock-Based Consideration
The Company has elected to continue following the accounting guidance of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," for measurement and recognition of stock-based transactions with
employees. No compensation cost has been recognized for options issued under the
plans when the exercise price of the options is at least equal to the fair
market value of the common stock at the date of grant. Had compensation cost for
the stock options issued been determined based on the fair value at the grant
date, consistent with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," the effect
on the Company's 2004 and 2003 net loss and loss per common share would have
been insignificant.
Reclassifications
Certain reclassifications have been made to the fiscal 2003 consolidated
financial statements to conform the to fiscal 2004 presentation. These
reclassifications had no effect on net loss or net cash flows.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, Veritec has lost $13,323,448 from inception
to June 30, 2004. At June 30, 2004, the Company had a $1,515,284 working capital
deficiency and a stockholders' deficit of $1,602,789. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated 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
(Note 8)
o Pay the delinquent amounts due under the secured note (Note 5), and
o Finance the operations of the Company.
The Company is dependent on The Matthews Group to meet its operating needs.
Through June 30, 2004, The Matthews Group has funded $1,129,629 under the
subscription receivable and made prepayments on the subscription receivable of
$19,811 to assist the Company in meeting its cash flow needs. The Matthews Group
further made payments toward and subsequently paid off a secured note to prevent
the secured noteholders from foreclosing (Note 5). The Matthews Group has
indicated it will continue to meet its obligation under the subscription
receivable (Note 8). There is no assurance The Matthews Group will be available
to continue to meet its obligation under the subscription receivable.
Page 32 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - GOING CONCERN (Continued)
The Company's management is aggressively pursuing new sales opportunities for
the Company. Management is hopeful that it will be successful in these efforts,
which will improve its ability to realize assets and settle liabilities in the
normal course of operations. However, there is no assurance that the Company
will succeed in these efforts or that the Company will continue as a going
concern.
NOTE 3 - CERTIFICATES OF DEPOSIT
The certificates of deposit are marketable debt securities and are classified as
held-to-maturity securities. Cost plus accrued interest approximates fair value.
These securities mature from May 2005 to June 2005.
NOTE 4 - NOTES PAYABLE - RELATED PARTIES
In October 2002, the Company's President, Van Tran, loaned $90,000 to the
Company for working capital. This note is unsecured, bears 10% interest and is
due on demand. As of June 30, 2004 and June 30, 2003 this note has not been
repaid. Interest expense on this indebtedness totaled $9,000 in 2004 and $6,633
in 2003. Accrued interest on this indebtedness totaled $15,633 at June 30, 2004
and $6,633 at June 30, 2003.
In fiscal years 2003 and 2002 The Matthews Group loaned the Company an aggregate
of $250,000 for working capital. These notes are unsecured, bear 10% interest
and were due May 25, 2003 to June 23, 2003. As of June 30, 2004, these notes
have not been repaid. Interest expense on this indebtedness totaled $25,000 in
2004 and $11,585 in 2003. Accrued interest on this indebtedness totaled $35,069
at June 30, 2004 and $10,069 at June 30, 2003.
In June 2003, Veritec entered into an agreement to purchase The Matthews Group's
50% ownership of VIVI-USA. As part of this agreement, the Company issued The
Matthews Group a promissory note of $50,000. The promissory note to The Mathews
Group bears interest at an annual rate of 10% and was due June 25, 2004. At June
30, 2004, this indebtedness has not been repaid. Interest expense on this
indebtedness totaled $5,000 in 2004 and $68 in 2003. Accrued interest on this
indebtedness totaled $5,068 at June 30, 2004 and $68 at June 30, 2003.
In November 2003, a consultant and shareholder of the Company loaned $50,000 to
the Company for working capital. This note is unsecured, bears 10% interest
payable monthly and is due November 12, 2004. Interest expense on this
indebtedness totaled $4,428 in 2004. Accrued interest on this indebtedness
totaled $174 at June 30, 2004. This note and all accrued interest were repaid in
September 2004.
Page 33 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - CONVERTIBLE NOTES - RELATED PARTIES
In April 2002, The Matthews Group loaned $100,000 to the Company for working
capital and to fund its investment in VIVI-USA (Note 1). This note is unsecured,
bears annual 10% interest and was due March 28, 2003. Interest expense to The
Matthews Group on this indebtedness totaled $10,000 in 2004 and $9,664 in 2003.
Accrued interest on this indebtedness totaled $21,506 at June 30, 2004 and
$11,506 at June 30, 2003. 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.
The Matthews Group paid an obligation on behalf of the Company to holders of
secured notes payable collectively called "The Gant Group." Payments by The
Matthews Group to the Gant Group totaled $366,522 (principal - $286,453;
interest - $75,069; and legal fees - $5,000). 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 $397,375 note on December 1, 2000. This note
is unsecured, bears 10% annual interest and is due on demand. Interest expense
on this indebtedness totaled $39,737 in 2004 and 2003. Accrued interest related
to this indebtedness totaled $142,293 at June 30, 2004 and $102,556 at June 30,
2003. At the option of The Matthews Group, all or a portion of this indebtedness
can be converted into Veritec, Inc. common stock at $.10 per share.
In November 2003, Van Tran (the Company's President) and Larry Johanns (a
principal of The Matthews Group) loaned $250,000 to the Company for working
capital. These notes are unsecured, bear 10% annual interest and are due
November 14, 2004. Interest expense on this indebtedness totaled $15,822 in
2004. Accrued interest on this indebtedness totaled $15,822 at June 30, 2004. At
the option of these related parties, all or a portion of this indebtedness can
be converted into Veritec, Inc. common stock at $.25 per share.
NOTE 6 - LONG-TERM DEBT
2004 2003
--------- ---------
Notes payable to banks are due in monthly installments of
$9,557, including interest at 1.3% to 2.5%, collateralized by all
corporate assets of VIVI-Japan and the personal guarantee of
VIVI-Japan's President, due March 2005 to December 2009. $ 283,979 $ 351,911
Less current maturities 114,681 109,878
--------- ----------
$ 169,298 $ 242,033
========= =========
Page 34 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG-TERM DEBT (Continued)
Future maturities of long-term debt are as follows:
Year Ending June 30,
--------------------
2005 $ 114,681
2006 76,925
2007 26,371
2008 26,371
2009 26,371
Thereafter 13,260
---------
$ 283,979
=========
NOTE 7 - PREPAYMENT ON SUBSCRIPTION RECEIVABLE
The Matthews Group has made prepayments against its subscription payable to the
Company (Note 8). These prepayments are unsecured and non-interest bearing. It
is assumed the prepayment at June 30, 2004, will also ultimately be applied
against the subscription receivable.
NOTE 8 - STOCKHOLDERS' DEFICIT
Preferred Stock
The Articles of Incorporation of Veritec authorize 10,000,000 shares of
preferred stock with a par value of $.01 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 approved in 1999, a new Series H
Convertible Preferred Stock was authorized. The Plan called for Veritec to issue
275,000 shares of restricted Series H convertible preferred stock in exchange
for assets of $2,000,000 being invested into Veritec. Each share of Series H
Convertible Preferred Stock is convertible into 10 shares of the Veritec'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 (Note 8 - Subscription Receivable). The Matthews Group exercised the
conversion privilege and converted 200,000 preferred shares to 2,000,000
restricted shares of the Veritec's common stock.
Page 35 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' DEFICIT (Continued)
Preferred Stock (Continued)
Stock Options
Veritec 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 stock of Veritec at a stated price for a specified period.
Compensation cost is measured by the difference between the quoted market price
of the stock at the date of grant and the price, if any, to be paid for the
stock at exercise date. In 2004 and 2003, the Company did not issue any options.
The current options expire in June 2006.
A summary of stock options is as follows:
Option Price
Number of Range Per
Shares Share
--------- ------------
Balance at June 30, 2002 180,000 $.09 to $.80
Expired (25,000) $0.31
--------
Balance at June 30, 2003 155,000 $.09 to $.80
Expired (125,000) $.09 to $.50
Exercised (15,000) $0.23
--------
Balance at June 30, 2004 15,000* $.80
======== =============
*Options are fully vested and exercisable.
Page 36 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' DEFICIT (Continued)
Subscription Receivable
In September 1999, the Company accepted a commitment from The Matthews Group to
fund the $2,000,000 required under the Plan of Reorganization (Note 8). This
funding is in the form of a promissory note that requires monthly payments to
the Company of $18,518.52 through fiscal 2009. These payments are non-interest
bearing and are collateralized by a pledge of properties controlled by
principals of The Matthews Group. A California Deed of Trust and Minnesota
mortgages were filed against various pledged properties to partially
collateralize the subscription.
The Company imputes a 10% interest rate on this subscription receivable. 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
(Note 7).
NOTE 9 - CONCENTRATIONS
Major Customers:
Customers with revenues in excess of 10% of total revenues are as follows:
2004 2003
---- ----
Customer A 19% -0-%
Customer B 22% -0-%
Customer C 16% -0-%
Customer D 23% 37%
Customer E (Textile Customer) -0-% 33%
---- ----
80% 70%
==== ====
The rights to Customer E were sold in fiscal year 2004 by VIVI-Japan (Note 1).
At June 30, 2004, Customer A accounted for 36% of the accounts and notes
receivable and Customer B accounted for 47% of the accounts and notes
receivable. At June 30, 2003, Customer D accounted for 47% of the accounts and
notes receivable and Customer E accounted for 34% of the accounts and notes
receivable.
Major Supplier:
In 2004 and 2003, the Company used one source for its hand-held scanner
purchases. If necessary, the Company believes it could locate an alternate
source for these hand-held scanners.
Foreign Revenues:
Foreign revenues accounted for 85% of the Company's revenues in fiscal 2004 and
93% in fiscal 2003. These revenues are concentrated in Asia.
Page 37 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - 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 carry forwards 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.
Veritec, VIVI-USA, and VIVI-Japan, file separate income tax returns. Veritec and
VIVI-USA file separate income tax returns in the United States and VIVI-Japan
files a separate income tax return in Japan. Vcode is a single member limited
liability company and is included in the income tax returns of Veritec. The
Company is also in compliance with information return filing requirements in the
United States of America with respect to VIVI-Japan.
A reconciliation between the expected federal income tax rate and the actual tax
rates is as follows:
2004 2003
----------------------------- ------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
Expected federal tax (benefit) $ (11,100) (34.0)% $(399,600) (34.0)%
Surtax exemption 6,200 19.0 -- --
State income tax, net of federal
tax benefit (2,100) (6.4) (76,000) (6.5)
Valuation and utilization of deferred
tax assets 7,000 21.4 475,600 40.5
Foreign taxes 1,900 5.8 1,390 .1
--------- ---- --------- -----
Income tax expense (benefit) $ 1,900 5.8 $ 1,390 .1%
========= ==== ========= =====
The tax effect of net operating loss carryforwards gives rise to a significant
deferred tax asset. Deferred tax assets have been reduced by a valuation
allowance as it is unlikely they will be realized. The following is a summary of
the deferred tax assets:
Page 38 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (Continued)
2004 2003
----------- -----------
Deferred tax asset relate to:
Allowance for doubtful accounts $ 8,800 $ --
Inventory valuation allowance 11,600 --
Accrued expenses 3,800 1,800
Related party accruals 100,900 48,100
Intangible assets 42,800 26,100
Net operating loss carryforwards 4,142,100 3,600,000
----------- -----------
Deferred tax asset 4,310,000 3,676,000
Valuation allowance (4,310,000) (3,676,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
Veritec has net operating loss carryforwards available to offset future taxable
income as follows:
Year
Ending
June 30, Federal Minnesota
------------- ---------- ---------
2005 $ 658,000 $ --
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 330,000 --
2016 654,000 --
2017 105,000 113,000
2018 1,068,000 392,000
---------- --------
$9,229,000 $505,000
========== ========
Page 39 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its U.S. office facilities from its President, Van Tran,
under a lease that expires June 30, 2005 and requires monthly payments of $4,200
plus common area costs. The Company leases its Japanese office facilities under
a lease that expires February 28, 2006 and requires monthly payments of 243,000
Yen ($2,244 per month at June 30, 2004) plus common area costs. Rent expense was
$58,952 in 2004 ($35,542 to related party) and $75,225 in 2003 ($8,000 to
related party). In December 2003 the office building in which VIVI-Japan was
located was sold. VIVI-Japan received a $45,098 buyout of its old lease which is
reflected in other income (expense). These leases require future minimum
payments as follows:
Year Ending June 30,
--------------------
2005 $ 51,709
2006 4,418
--------
$ 56,127
========
Contingencies
During bankruptcy, the Company sought an investment group to assist in funding
the $2,000,000 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 funding received from
these investment groups were settled through stock issuances by the Company. One
of these former investment groups has 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 consolidated 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 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 claims will be asserted. The ultimate outcome of these claims, if
pursued, cannot presently be determined.
Page 40 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
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)). This suit
was brought by a shareholder and former director of the Company. The action was
brought against us and various individuals claiming that certain corporate
actions were taken without proper authority of the Company's board of directors
and/or contrary to the plan of reorganization the Company filed and completed
under Chapter 11 of the U.S. Bankruptcy Act. In December 2000, this case was
transferred to the United States District Court for the District of Minnesota.
Limited discovery has been undertaken. We intend to defend this action
vigorously.
On January 10, 2002, we initiated arbitration against Mitsubishi Corporation in
Los Angeles, California, alleging breach of contract, trade secret
misappropriation and interference with business opportunities; seeking several
million dollars in compensatory damages, punitive damages, legal fees and
accrued interest. Mitsubishi counterclaimed on similar grounds, also seeking
similar damages and amounts. The arbitration was split into two phases. The
first phase, completed in July 2003, resulted in an interim award dismissing
most of our claims. No decision on the second phase, completed in September
2004, has been issued by the arbitration panel. Veritec is seeking $1.5 million
in attorneys' fees and costs if it prevails on the second phase. Mitsubishi has
made a claim for compensatory damages of $11.25 million, punitive damages of $2
million and legal fees and costs of $3.9 million in the second phase. No opinion
can be given at this time as to the final outcome of the arbitration.
In 2003 a former employee of the Company asserted he was entitled to a fully
vested option to purchase 100,000 shares of Veritec common stock at an exercise
price of $.088 per share. The Company denies this claim. This former employee
has not proceeded further with this claim. Should such a claim be pursued, the
Company would defend this action vigorously.
Vcode and Vdata, LLC have commenced patent enforcement litigation against Nokia
Corporation in the United States District Court for the Northern District of
Illinois. The litigation is in the discovery phase and no opinion can be
rendered with respect to its outcome (Note 1).
Page 41 of 52
VERITEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
2004 2003
------- -------
Cash paid for:
Interest $ 9,042 $13,416
======= =======
Income taxes $ 1,900 $ 1,390
======= =======
Summary of Noncash Activity:
In fiscal year 2003, the Company incurred $80,000 in debt and issued 25,000
shares of Veritec common stock at $.20 per share as part of its purchase of
technology rights relating to the Delphi scanner.
In fiscal year 2003, the Company incurred $50,000 in debt and issued 150,000
restricted shares of Veritec common stock as part of its investment in VIVI-USA
at $.20 per share.
In fiscal year 2004, the Company issued 25,000 shares of Veritec common stock to
settle a $5,000 obligation.
In fiscal year 2004, the Company issued 25,000 shares of Veritec restricted
common stock to a new Board member for services. These shares were valued at
$.30 per share.
In fiscal year 2004 the Company received 120,000 shares of Veritec common stock,
which were retired, valued at $27,600 as part of the selling price of
VIVI-Japan's textile customer.
In fiscal 2004, the Company reduced subscriptions receivable by $222,223 through
a reduction of the prepayment on stock and subscription receivable.
NOTE 14 - SUBSEQUENT EVENT
In August 2004 the Company's President, Van Tran, contributed deferred
compensation of $84,333 owed her to the Prepayment on Subscription Receivable
(Note 7).
Page 42 of 52
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
On October 27, 2003, Callahan, Johnston & Associates, LLC resigned as our
independent accountants as the firm was ceasing performing auditing services for
public companies.
The reports on our consolidated financial statements for the fiscal years ended
June 30, 2003 and 2002 were opined on by Callahan, Johnston & Associates, LLC.
These reports contained no adverse opinion or disclaimer of opinion, and were
not qualified or modified as to uncertainty, audit scope or accounting
principle, except that such reports were modified to express substantial doubt
as to our ability to continue as a going concern.
In connection with its audits for the fiscal years ended June 30, 2003 and 2002,
and during the interim period from July 1, 2003 to October 27, 2003, there were
no disagreements between the Company and Callahan, Johnston & Associates, LLC on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Callahan, Johnston & Associates, LLC would have caused
them to make reference to the subject matter of such disagreements in their
reports.
During the fiscal years ended June 30, 2003 and 2002, and during the interim
period from July 1, 2003 to October 27, 2003, Callahan, Johnston & Associates,
LLC did not advise us of any reportable events as described in Item
304(a)(1)(iv)(B) of Regulation S-B.
We provided the former accountants with a copy of our Current Report on Form 8-K
before its filing with the SEC. We requested the former accountants to furnish
us with a letter addressed to the SEC stating whether they agreed with the
statements made by us in our Current Report on Form 8-K and, if not, stating the
respects in which they did not agree. We filed the former accountants' letter as
an exhibit to our Current Report on Form 8-K, filed with the SEC on October 27,
2003.
In response to Callahan, Johnston & Associates, LLC's resignation, the Company
on November 6, 2003 retained Lurie Besikof Lapidus & Company, LLP as its
independent auditor to report on our consolidated balance sheet as of June 30,
2004, and the related consolidated statements of operations, comprehensive loss,
stockholders deficit and cash flows for the year then ended. The change in
independent accountants was approved by our Board of Directors.
During the two most recent fiscal years and the interim period prior to the
engagement of Lurie Besikof Lapidus & Company, LLP, neither the Company nor
anyone on our behalf consulted with Lurie Besikof Lapidus & Company, LLP
regarding either (i) the application of accounting principles to a specified
transaction, either contemplated or proposed, or the type of audit opinion that
might be rendered on our consolidated financial statements or (ii) any mater
that was either the subject of a "disagreement" or a "reportable event".
Page 43 of 52
ITEM 8A CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of the period
covered by this report. Based on such evaluation, our Chief Executive Officer
and Chief Financial Officer has concluded that, as of the end of such period,
our disclosure controls and procedures are effective.
Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting
during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within our company have
been detected. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Page 44 of 52
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 Director Since
-----------------------------------------------------------------------------------------------------
Mr. Larry Matthews Director 77 1999
-----------------------------------------------------------------------------------------------------
Mr. Dean Westberg Director 72 2003
-----------------------------------------------------------------------------------------------------
Ms. Van Thuy Tran Director, CEO, Treasurer, Secretary 60 1999
-----------------------------------------------------------------------------------------------------
Charles Boyer Director 45 2003
-----------------------------------------------------------------------------------------------------
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.
Mr. Dean W. Westberg was with 3M for 37 years, most of that time as a
photographic chemist. At 3M he did factory scale-up of introductory photographic
and printing products, quality control and technical service work; and he spent
much time in trouble shooting for 3M. After retiring from 3M he expanded his
education in international law and foreign trade. He became involved with
various start-up companies in establishing trading relations between the United
States and Asia. He has established a company to link small businesses in Mexico
and the United States with larger North American companies. Mr. Westberg has a
B.S. from Hamline University in chemistry and mathematics. He has studied at
University of St. Thomas with specialties in international finance,
international marketing, and law.
Ms. Van Thuy Tran is the current CEO of the company. 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.
Dr. Charles (Charlie) Boyer is currently the Chief Operating Officer of Tech
Logic Corporation. Dr. Boyer received his B.S. in Materials Engineering from
Wilkes University, and both a M.S., and Ph.D. in Materials Science from the
University of Virginia. Dr. Boyer has over 17 years of experience in various
technical and managerial positions with 3M, and has served in these functions
while living in St. Paul, MN, Austin, TX, and Singapore. Previous assignments
include managing government contracts, heading 3M's Electronic and
Telecommunications Sector Laboratory, leading one of 3M's business units focused
on the health and beauty aids industry, serving as the Technical Director of
3M's Safety and Security Systems Division, which housed the businesses of
Library Systems, Personal Safety, Intelligent Transportation, and the Security
Markets Center. Dr. Boyer was also 3M's Technical Director of Asia Pacific
Operations. In that position, his responsibilities spanned across Asia,
Australia, and New Zealand, where he functioned as the company's Chief
Technology Officer for the region. Dr. Boyer has been awarded 11 US Patents,
with additional applications pending. He has been a member of the Singapore
Economic Development Board's Enterprise Challenge Committee, an invited speaker
on innovation, an adjunct Materials Science professor, and served as the
Chairman of his Church Board.
Page 45 of 52
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
us under Rule 16a-3(e) during fiscal 2004 and Form 5 and amendments thereto
furnished to us with respect to fiscal 2004, no person who was a director,
officer, or beneficial owner of more than ten percent of any class of our common
stock failed to file on a timely basis reports required by Section 16(a) of the
Securities Exchange Act during our most recent fiscal year or prior fiscal
years.
Committee and Board Meetings
Two meetings of our Board of Directors were held in fiscal 2004, and all board
members attended all meetings. We have no standing audit, nominating or
compensation committees of our Board or committees performing similar functions
during fiscal 2004. The directors have regularly communicated to discuss our
affairs in addition to formal board meetings to transact and approve appropriate
business. Our Board has determined that we do not have an audit committee
financial expert. We do not have an audit committee financial expert given the
small size of our company and business and or inability attract a board member
who would qualify as a financial expert given our current financial position.
Code of Ethics
We have not adopted a code of ethics at this time because of our small number of
employees and that our only executive officer at this time is Van Thuy Tran.
Directors Compensation
Non-employee directors receive director's fees of $150 for each meeting
attended. These directors' fees totaled $900 in fiscal 2004 and $150 in fiscal
2003. Director compensation in fiscal 2004 also included $7,500 representing the
fair value of common stock issued to a new director issued to him as an
inducement to join the board (25,000 shares of common stock with a fair value of
$.30 per share).
ITEM 10 EXECUTIVE COMPENSATION
Van Thuy Tran, CEO, received compensation in the amount of $100,000 for the
fiscal years ended June 30, 2004, 2003 and 2002. Ms. Tran received no other
compensation from the Company.
Page 46 of 52
Compensation pursuant to plans including pension, stock option, and stock
appreciation rights plan
As of June 30, 2004, we did not have any stock option, stock appreciation,
rights plans, phantom stock plans, or any other incentive or compensation plan
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.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 2004 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 of our officers and
directors as a group.
------------------------------------------------------------------------------------------------------------
Name & Address Number of Shares Percent of Shares
Beneficially Owned
------------------------------------------------------------------------------------------------------------
Common Common
(see 1 and 2 below)
------------------------------------------------------------------------------------------------------------
Larry Matthews None N/A
7601 5th Avenue, Richfield, MN 55423
------------------------------------------------------------------------------------------------------------
Dean Westberg None N/A
4124 Jay Lane, White Bear Lake, MN 55110
------------------------------------------------------------------------------------------------------------
Charles Boyer None N/A
895 Mark Avenue Court North, Lake Elmo, MN 55042
------------------------------------------------------------------------------------------------------------
Van Thuy Tran (see note 1) 4,170,512 28.2%
1430 Orkla Drive, Golden Valley, MN 55427
------------------------------------------------------------------------------------------------------------
The Matthews Group, LLC (see note 2) 7,581,282 51.3%
1430 Orkla Drive, Golden Valley, MN 55427
------------------------------------------------------------------------------------------------------------
Larry Johanns (see note 1) 4,150,540 28.1%
518 North 12 Street, Osage, IA 50461
------------------------------------------------------------------------------------------------------------
All Officers and Directors as a group (4 persons) 8,197,174 51.3%
Van Thuy Tran 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 6,945,161 shares.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Subscription Receivable
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 is
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
$870,370.
Page 47 of 52
The Matthews Group has made prepayments against its Subscription Payable to us.
These prepayments are unsecured and non-interest bearing. It is assumed the
prepayment of $19,811 at June 30, 2004 will also ultimately be applied against
the subscription receivable.
Notes Payable - The Matthews Group, LLC
The Matthews Group paid an obligation on behalf of the Company to holders of
secured notes payable collectively called "The Gant Group." Payments by The
Matthews Group to the Gant Group totaled $366,522 (Principal - $286,453;
interest - $75,069; and legal fees - $5,000). 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 $397,375 note on December 1, 2000. This note
is unsecured, bears 10% interest and is due on demand. Interest expense on this
indebtedness totaled $39,737 in 2004 and 2003. Accrued interest related to this
indebtedness totaled $142,293 at June 30, 2004 and $102,556 at June 30, 2003. At
the option of The Matthews Group, all or a portion of this indebtedness can be
converted into Veritec, Inc. common stock at $.10 per share.
In fiscal years 2003 and 2002 The Matthews Group loaned us an aggregate of
$250,000 for working capital needs. These notes are unsecured, bear interest at
10% and were due May 25, 2003 to June 23, 2003. As of June 30, 2004, these notes
have not been repaid. Interest expense on this indebtedness totaled $25,000 in
2004 and $11,585 in 2003. Accrued interest on this indebtedness totaled $35,069
at June 30, 2004 and $10,069 at June 30, 2003.
In June 2003, we entered into an agreement with The Matthews Group to purchase
50% ownership of VIVI-USA. As part of this agreement, we issued The Matthews
Group a promissory note of $50,000. The promissory note to The Mathews Group
bears interest at a rate of 10% per annum and is now due on demand. Interest
expense on this indebtedness totaled $5,000 in 2004 and $68 in 2003. Accrued
interest on this indebtedness totaled $5,068 at June 30, 2004 and $68 at June
30, 2003.
Other Related Party Transactions
In October 2002, our President, Van Tran, loaned $90,000 to us for working
capital needs. This note is unsecured, bears interest at 10% and is due on
demand. As of June 30, 2004 and June 30, 2003 this note has not been repaid.
Interest expense on this indebtedness totaled $9,000 in 2004 and $6,633 in 2003.
Accrued interest on this indebtedness totaled $15,633 at June 30, 2004 and
$6,633 at June 30, 2003.
In November 2003, Van Tran and Larry Johanns, the principals of The Matthews
Group loaned $250,000 to us for working capital needs. These notes are
unsecured, bear interest at 10% and are due November 14, 2004. Interest expense
to these related parties on this indebtedness totaled $15,822 in 2004 and $-0-
in 2003. Accrued expenses in the accompanying consolidated financial statements
include $15,822 in 2004 and $-0- in 2003 relating to these notes. At the option
of these related parties, all or a portion of this indebtedness can be converted
into our common stock at $.25 per share.
In November 2003, a consultant and shareholder of the Company, Bill Newfield,
loaned $50,000 to the Company for working capital. This note is unsecured, bears
10% interest payable monthly and is due November 12, 2004. Interest expense on
this indebtedness totaled $4,428 in 2004 (including 1,250 shares of common stock
to be issued). Accrued interest on this indebtedness totaled $174 at June 30,
2004. This note and all accrued interest were repaid in September 2004.
Page 48 of 52
We lease our U.S. office facilities from our President, Van Tran, under a lease
running through June 30, 2005 and calling for monthly payments of $4,200 plus
common area costs. In July and August 2002 we had leased our office space from
Larry Johanns, a principal in The Matthews Group, under operating lease
agreement. Related party rent expense was $35,542 in fiscal 2004 and $8,000 in
fiscal 2003.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31 Section 302 CEO and CFO Certification
32 Section 906 CEO and CFO Certification
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
The aggregate fees billed by Lurie Besikof Lapidus & Company, LLP for
professional services rendered for the audit of our annual consolidated
financial statements for fiscal year ended June 30, 2004 were $20,369 to date.
The aggregate fees billed by Callahan, Johnston & Associates, LLC for
professional services rendered for the audit of our annual consolidated
financial statements for fiscal year ended June 30, 2004 were none.
The aggregate fees billed by Callahan, Johnston & Associates, LLC for
professional services rendered for the audit of our annual consolidated
financial statements for fiscal year ended June 30, 2003 were $20,490. The
aggregate fees billed by Lurie Besikof Lapidus & Company, LLP for professional
services rendered for the audit of our annual consolidated financial statements
for fiscal year ended June 30, 2003 were none.
AUDIT-RELATED FEES
The aggregate audit-related fees billed Lurie Besikof Lapidus & Company,
LLP for professional services rendered for the audit of our annual consolidated
financial statements for fiscal year ended June 30, 2004 were $30,970. The
aggregate audit-related fees billed by Callahan, Johnston & Associates, LLC for
professional services rendered for the audit of our annual consolidated
financial statements for fiscal year ended June 30, 2004 were $2,000.
The aggregate audit-related fees billed by Callahan, Johnston &
Associates, LLC for professional services rendered for the audit of our annual
consolidated financial statements for fiscal year ended June 30, 2003 were
$1,073. The aggregate audit-related fees billed Lurie Besikof Lapidus & Company,
LLP for professional services rendered for the audit of our annual consolidated
financial statements for fiscal year ended June 30, 2003 were none.
ALL OTHER FEES
There were no other fees billed by Lurie Besikof Lapidus & Company, LLP or
Callahan, Johnston & Associates, LLC for professional services rendered, other
than as stated under the captions Audit Fees, Audit-Related Fees, and Tax Fees.
Page 49 of 52
PART IV
We do not have an audit committee and have not established a pre-approval
policy. All services provided by the auditors for fiscal 2004 were approved by
the Board.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VERITEC, INC.
By /s/ Van Thuy Tran October 13, 2004
------------------
Van Thuy Tran
Director, Chief Executive and Financial Officer
Pursuant to the requirements of the Securities Act of 1934, 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/ Dean Westberg Director October 13, 2004
-----------------------
Dean Westberg
/s/ Larry Matthews Director October 13, 2004
-----------------------
Larry Matthews
/s/ Charles Boyer Director October 13, 2004
-----------------------
Charles Boyer
Page 50 of 52