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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
For the quarterly period ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _______________
Commission file number 0-15113
VERITEC INC.
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(Exact name of registrant as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation or organization)
95-3954373
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(IRS Employer Identification Number)
2445 Winnetka Avenue North, Golden Valley, MN 55427
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(Address of principal executive offices, zip code)
763-253-2670
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(Registrant's telephone number, including area code)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant 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. Yes [X] No [ ]
[Please check appropriate response]
1
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date. As of February 17,
2004 the Company had:
Number of Shares of Common Stock
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7,141,849
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Transition Small Business Disclosure Format (check one): Yes [ ] No [X]
[Please check appropriate response]
2
Table of Contents
FORM 10-QSB
VERITEC INC.
<Table>
<Caption>
INDEX
Page
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 10
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION 13
Item 1. Legal Proceedings 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</Table>
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VERITEC INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<Table>
<Caption>
December 31, June 30,
2003 2003
------------ ------------
ASSETS
Current Assets:
Cash $ 422,783 $ 325,193
Accounts receivable, net 25,932 185,174
Inventories 49,637 11,585
Prepaid expenses 86,330 32,791
------------ ------------
Total current assets 584,682 554,743
Fixed assets, net 10,031 14,669
Technology and software costs, net 98,160 119,874
Other 27,573 7,827
------------ ------------
Total assets $ 720,446 $ 697,113
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable - related parties $ 640,000 $ 340,000
Convertible note - related party 497,374 497,374
Current maturities of long-term debt 115,967 109,878
Accounts payable and accrued expenses 1,148,680 1,038,019
Customer deposits 20,768 2,912
------------ ------------
Total current liabilities 2,422,789 1,988,183
Long-term debt 229,276 256,720
Prepayment on stock subscription receivable 130,922 242,033
Stockholders' equity (deficit):
Preferred stock, par value $1.00, authorized 10,000,000 shares,
275,000 shares of Series H authorized, 76,000 shares outstanding 366,007 366,007
Common stock, par value $.01,authorized 20,000,000 shares, 7,141,849
and 7,126,849 shares outstanding 71,418 71,268
Subscription receivable (790,796) (860,326)
Additional paid in capital 11,967,322 11,922,440
Accumulated deficit (13,703,071) (13,288,631)
Accumulated other comprehensive income (loss) 26,579 (581)
------------ ------------
Stockholders' equity (deficit) (2,062,541) (1,789,823)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 720,446 $ 697,113
============ ============
</Table>
See Notes to Consolidated Financial Statements.
4
VERITEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<Table>
<Caption>
Three months ended December 31,
-------------------------------
2003 2002
--------- ---------
Revenues $ 355,057 $ 696,921
Cost of sales 52,924 179,749
--------- ---------
Gross profit 302,133 517,172
--------- ---------
Operating Expenses
Selling, general and administrative 590,574 494,466
Research and development 53,022 110,356
Depreciation and amortization 11,856 11,663
--------- ---------
Total operating expenses 655,452 616,485
--------- ---------
Loss from operations (353,319) (99,313)
--------- ---------
Other income (expense):
Interest expense, net (29,967) (21,566)
Other income, net 46,509 26,062
Minority interest in Veritec Iconix Ventures, Inc. -- (42,924)
--------- ---------
Total other income (expense) 16,542 (38,428)
--------- ---------
Loss before income taxes (336,777) (137,741)
Income tax expense (470) (376)
--------- ---------
Net loss $(337,247) $(138,117)
========= =========
Basic and diluted net loss per common share $ (0.05) $ (0.02)
========= =========
</Table>
See Notes to Consolidated Financial Statements.
5
VERITEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<Table>
<Caption>
Six months ended December 31,
-----------------------------
2003 2002
----------- -----------
Revenues $ 952,367 $ 1,319,230
Cost of sales 171,479 442,929
----------- -----------
Gross profit 780,888 876,301
----------- -----------
Operating Expenses
Selling, general and administrative 1,051,430 917,854
Research and development 110,938 197,996
Depreciation and amortization 23,712 23,517
----------- -----------
Total operating expenses 1,186,080 1,139,367
----------- -----------
Loss from operations (405,192) (263,066)
----------- -----------
Other income (expense):
Interest expense, net (62,990) (40,604)
Other income, net 54,648 47,222
Minority interest in Veritec Iconix Ventures, Inc. -- (23,524)
----------- -----------
Total other expense (8,342) (16,906)
----------- -----------
Loss before income taxes (413,534) (279,972)
Income tax expense (906) (742)
----------- -----------
Net loss $ (414,440) $ (280,714)
=========== ===========
Basic and diluted net loss per common share $ (0.06) $ (0.04)
=========== ===========
</Table>
See Notes to Consolidated Financial Statements.
6
VERITEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
Six months ended December 31,
-----------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss $(414,440) $(280,714)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 23,712 23,708
Changes in operating assets and liabilities:
Accounts receivable 159,242 (208,035)
Inventories (38,052) 64,851
Prepaid expenses (51,571) (135,082)
Accounts payable and accrued expenses 110,660 157,037
Customer deposits 17,856 6,517
--------- ---------
Net cash used by operating activities (192,593) (371,718)
--------- ---------
Cash flows from investing activities:
Minority interest in Veritec Iconix Venture, Inc. -- 22,701
--------- ---------
Cash flows from financing activities:
Proceeds from stock issuance, subscription
receivable, and prepayment on stock 3,451 74,999
Proceeds from notes payable - related parties 300,000 --
Proceeds from notes payable - related parties -- 188,073
Proceeds from (payments on) long-term debt payable (21,355) 146,833
--------- ---------
Net cash provided by financing activities 282,096 409,905
--------- ---------
Effect of exchange rate changes 8,087 (22,302)
--------- ---------
Increase in cash 97,590 38,586
Cash at beginning of period 325,193 158,760
--------- ---------
Cash at end of period $ 422,783 $ 197,346
========= =========
</Table>
See Notes to Consolidated Financial Statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with United States of America generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, the financial statements do not
include all of the information and footnotes required by United States of
America generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended December 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ended June 30, 2004. For further information, refer to the financial statements
and footnotes thereto included in our Form 10-KSB for the year ended June 30,
2003.
Certain amounts presented in the 2002 financial statements, as previously
reported, have been reclassified to conform to the 2003 presentation.
Cash
Cash balances are maintained in a single financial institution. The balances
from time to time exceed the federally insured limits of $100,000. We have
experienced no losses in these accounts and believe that we are not exposed to
any significant risk of loss on our cash balances. The cost and fair market
value of any financial instruments held are approximately equal.
Accounts Receivable
The Company sells to domestic and foreign companies. The Company 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.
Revenues
The Company accounts for revenue recognition in accordance with Staff Accounting
Bulletin (SAB) 101 "Revenue Recognition in Financial Statements." Revenues from
software sales, product sales and engineering are recognized when products are
shipped or services 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. Once the software is transmitted, the customers do not have a right to
refuse or return. Revenue is recognized at that point. 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 instead reflects the prepayments as customer deposits in
the accompanying financial statements.
Research and Development
Research and development costs are charged to expense as incurred.
Intangible Assets
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.
8
The Company has recorded this purchased software at cost, $200,000, and is
amortizing it over five years using the straight-line method.
In fiscal 2003, the Company, through VIVI (as defined below) acquired technology
rights for the Delphi scanner for $85,243 ($80,000 cash; 25,000 shares of the
Company's common stock at $.20 per share; and $243 in incidental costs). These
technology rights are recorded at cost in the accompanying financial statements
and are being amortized on a straight-line basis over their estimated useful
life of three years.
Stock-Based Consideration
We have applied the fair value-based method of accounting for employee and
nonemployee stock-based consideration and/or compensation in accordance with
FASB Statement 123.
Going Concern
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the accompanying financial
statements, the Company incurred a net loss of $337,247 during the quarter ended
December 31, 2003, $414,440 during the six month period ended December 31, 2003,
and has lost $13,703,073 from inception to December 31, 2003. At December 31,
2003, the Company had a $1,838,107 working capital deficiency and a
stockholders' deficit of $2,062,541. Those conditions raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. The Company has relied on its financing from The Matthews
Group LLC (see subscription receivable below).
The Company's management is pursuing new sales opportunities for the Company. On
June 25, 2003, the Company's management acquired the remaining 50% interest in
VIVI (as defined below) from The Matthews Group LLC, a related party, to improve
the Company's viability. Management believes 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.
Investment: Veritec Iconix Ventures, Inc. (VIVI)
On January 30, 2002, Veritec Inc. and The Matthews Group LLC formed Veritec
Iconix Ventures, Inc. (VIVI), a Delaware corporation. Each owned 50% of the
outstanding shares of common stock of VIVI. In April 2002, The Matthews Group
LLC loaned the Company $100,000, of which $50,000 was subsequently used to make
the Company's initial capital contribution to VIVI. The promissory note to The
Matthews Group LLC bears interest at 10% per annum and is due December 31, 2004.
Additionally, the promissory note is convertible into common stock of the
Company at $0.25 per share.
On February 13, 2002, VIVI entered into an agreement to purchase 100% of the
outstanding equity securities of Iconix, Inc., a Japanese corporation, pursuant
to a Stock Purchase Agreement dated February 13, 2002, by and among VIVI,
Iconix, Inc., Masayuki Kuriyama and Yoshihiro Tasaka. The total consideration
for the purchase consisted of 300,000 shares of the Company's common stock and
$100,000 in U.S. dollars. The 150,000 shares contributed by the Company
represented newly issued shares of the Company's common stock. The 150,000
shares contributed by The Matthews Group LLC represented a portion of the shares
already owned by The Matthews Group LLC.
On June 25, 2003, Veritec entered into an agreement with The Matthews Group LLC
to purchase The Matthews Group's 50% ownership of VIVI at the acquisition price
of $50,000 and 150,000 shares of stock, the original price paid by The Matthews
Group LLC on February 13, 2002. The Company issued 150,000 shares to The
Matthews Group LLC and a promissory note of $50,000. At the same time, the
Company agreed to sell VIVI's software developed for the textile industry and
certain intangible assets of its textile industry business to Com Techno Alpha
Inc., a Japanese corporation. As a part of the textile sale, Yoshihiro Tasaka,
the principal of Com Techno and a former employee and officer of VIVI, agreed to
return to the Company 120,000 shares of the Company's common stock. This stock
has been returned and was subsequently cancelled. In November 2003, the Company
9
finalized the agreement with Com Techno under which Com Techno will pay the
Company 8,100,000 yen at a rate of 225,000 yen per month for thirty-six months
($67,782 and $1,883 respectively in U.S. dollars). The agreement provides for
acceleration of payments to be received for each sale of a Tuft Controller by
COM Techno. The textile software business accounted for 33% of the Company's
sales in 2003 and 25% in 2002 (64% of VIVI's sales in 2003 and 69% in 2002).
Prepayment On Subscription Receivable
The Matthews Group made prepayments against its subscription payable to the
Company. These prepayments are unsecured and non-interest bearing. It is assumed
the prepayment at December 31, 2003 will ultimately be applied against the
subscription receivable.
Subscription Receivable
In September 1999, the Company accepted a commitment from The Matthews Group LLC
to fund the $2,000,000 required under the Company's bankruptcy plan of
reorganization. This funding is in the form of a promissory note that requires
108 monthly payments of $18,519. These payments are non-interest bearing and
were to be collateralized by a pledge of properties controlled by principals of
The Matthews Group LLC. In July 2001, the principals of The Matthews Group LLC
granted to the Company a security interest in certain California and Minnesota
properties to partially collateralize the subscription. Imputed interest on the
subscription is excluded from operating results and is instead credited directly
to additional paid-in capital.
The Matthews Group LLC is scheduled to fund the subscription receivable with
monthly payments of $18,519. As the Company has experienced cash shortfalls, The
Matthews Group LLC made payments on the subscription receivable in advance of
the due dates. Such advance payments are reflected as a liability in the
financial statements in the Prepayment on Stock Subscription Receivable account.
At December 31, 2003, The Matthews Group LLC had made prepayments of $130,922
towards scheduled payments on the subscription receivable. At The Matthews Group
LLC's discretion, the balance in this account may be used to satisfy any
scheduled payment due on the subscription receivable. When The Matthews Group
LLC does so, the Company reduces the Prepayment on Stock Subscription Receivable
account and credits the subscription receivable and additional paid-in-capital.
Historically, when the Company has experienced a cash shortfall, The Matthews
Group LLC has continued to make its monthly payments due on the subscription
receivable. However, there is no contractual obligation for it to do so as long
as prepayments exist to satisfy its scheduled payments. The Company has no
advance knowledge of whether, in any given month, The Matthews Group LLC may
make a scheduled payment on the subscription receivable or utilize the balance
in the Prepayment on Stock Subscription Receivable account. The Company also has
no assurance of The Matthews Group LLC's ability to continue to provide this
funding. Failure of The Matthews Group LLC to continue to make scheduled
payments on the subscription receivable could negatively impact the Company's
ability to meet its cash flow requirements.
Item 2. Management's Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
General
Veritec Inc. (the "Company") was incorporated in Nevada on September 8, 1982.
The Company is primarily engaged in developing, marketing and selling a line of
microprocessor-based encoding and decoding system products that utilize its
patented Vericode Symbol technology. The Company'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. The Company has also developed its
Secured Identification System with its VSCode that enables the storage of
biometric information of the two-dimensional VSCode for subsequent verification
of its authenticity.
10
The Company has incurred losses from operations since inception and has an
accumulated deficit of $13,703,071 as of December 31, 2003.
In the Company's Form 10-KSB filed with the Securities and Exchange Commission
for the year ended June 30, 2003, the Company identified critical accounting
policies and estimates for its business.
Results of Operations - December 31, 2003 compared to December 31, 2002
Revenues
Revenues of $355,057 for the quarter ended December 31, 2003 were $341,864, or
49%, lower than the quarter ended December 31, 2002. Revenues of $952,367 for
the six months ended December 31, 2003 were $366,863, or 28%, lower than the six
months ended December 31, 2002. The decrease in sales for the quarter and the
six-months ended December 31, 2003 compared to the quarter and the six-months
ended December 31, 2002 is related to the June 2003 sale of VIVI's textile
software business to Com Techno Alpha, as after the sale, the textile revenues
ceased. For the quarter ended December 31, 2003, the Company's revenues
consisted of $83,050 from VIVI-Japan and $272,007 from Veritec Inc. Revenues for
Veritec Inc. for the quarter remained flat from 2002 and 2003 of $272,983 and
$272,007, respectively. Revenues for the six-months ended for Veritec Inc.
increased $208,074 or 41% from July 1 through December 31, 2002 and 2003. The
fiscal 2004 over fiscal 2003 increase primarily relates to sales by the
Company's major distributor Sun Jin Neotech, the acceptance of the Company's
software in the Asian market and increased sales to other customers.
The Company continues to concentrate its efforts in the Asian market where the
Company believes it has the best opportunities to grow revenue.
Gross Profit
Gross profit of $302,133 for the quarter ended December 31, 2003 was $215,039,
or 42%, lower than the quarter ended December 31, 2002. Gross profit of $780,888
for the six months ended December 31, 2003 was $95,413, or 11%, lower than the
six months ended December 31, 2002. Gross profit percentage was 85% and 74% for
the quarter ended December 31, 2003 and 2002, respectively. Gross profit
percentage was 82% and 66% for the six months ended December 31, 2003 and 2002,
respectively. The increase in gross profit percentage is due to the higher
margin of our software products revenues in 2003. The prior period included
VIVI's sales of software to customers in the textile business that provided the
Company with lower margin. This portion of the business was sold to Com Techno
Alpha on June 25, 2003.
Operating Expense
Operating expenses for the quarter ended December 31, 2003 versus December 31,
2002 were as follows:
<Table>
<Caption>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Selling, general and $ 590,574 $ 494,466 $1,051,430 $ 917,854
administrative
Research and development 53,022 110,356 110,938 197,996
</Table>
Selling, general and administrative expenses for the quarter ended December 31,
2003 were $96,108, or 19%, higher than the quarter ended December 31, 2002.
Selling, general and administrative expenses for six months ended December 31,
2003 were $133,576, or 15%, higher than the six months ended December 31, 2002.
The increase is largely due to additional staffing and marketing campaigns to
promote public awareness about the Company and to market the new VSCode
technology.
11
Research and development expenses for the quarter ended December 31, 2003 were
$57,334, or 52%, lower than research and development expense for the quarter
ended December 31, 2002. Research and development expenses for the six months
ended December 31, 2003 were $87,058, or 44%, lower than the six months ended
December 31, 2002. The reduction in research and development expenses relates to
reduced staffing and contract labor expenses for engineering projects in 2002
that have been completed or are near completion. These research and development
expense savings have shifted to the sales and marketing department to market the
new VSCode technology. The Company currently markets software that authenticates
individuals through the use of fingerprints
Capital Expenditures and Future Commitments
No capital expenditures for equipment were made during either period.
On January 30, 2002, Veritec Inc. and The Matthews Group LLC formed Veritec
Iconix Ventures, Inc. ("VIVI"), a Delaware corporation. Each company owned 50%
of the outstanding shares of common stock of VIVI. In April 2002, The Matthews
Group LLC loaned Veritec $100,000, and Veritec subsequently used $50,000 of this
amount to make its initial capital contribution to VIVI. The promissory note to
The Matthews Group LLC bears interest at 10% per annum and is due December 31,
2004. Additionally, the promissory note is convertible into our common stock at
$0.25 per share.
Subsequent to the formation of VIVI, on February 13, 2002, VIVI entered into an
agreement to purchase 100% of the outstanding equity securities of Iconix, Inc.,
a Japanese corporation, pursuant to a Stock Purchase Agreement, dated February
13, 2002, by and among VIVI, Iconix, Inc., Masayuki Kuriyama and Yoshihiro
Tasaka. The total consideration for the purchase consisted of 300,000 shares of
Veritec common stock and $100,000 in U.S. dollars. The 150,000 shares
contributed by Veritec represented newly issued shares of its common stock. The
150,000 shares contributed by The Matthews Group LLC represented a portion of
the shares of the Company's common stock already owned by it.
Although the Company continues to minimize spending for capital expenditures, it
believes its need for additional capital equipment will continue because of the
need to develop and expand its business. The amount of such additional capital
is uncertain and may be beyond that generated from operations.
Liquidity and Capital Resources
A number of uncertainties exist that may affect the Company's future operating
results. These uncertainties include general economic conditions, market
acceptance of the Company's products and the Company's ability to manage expense
growth. The Company has sustained significant losses and expects the losses to
continue through fiscal year 2004 at a decreasing rate. The Company's cash on
hand is not sufficient to fund current operating needs. Therefore, the continued
operation of the Company will continue to be dependent on cash flows from The
Matthews Group LLC. There is no assurance that The Matthews Group LLC will
complete the obligations or that the payments required to be made by The
Matthews Group LLC will be adequate. The Company is 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 the Company's needs.
Although uncertainties exist, the Company feels that cash flows from operations
will at least partially fund cash needs in 2004. Sales leads continue to be
strong. Based on past success rates, the Company believes a percentage of these
leads will agree to purchase product. It is expected that cash from these new
sales will be more towards the second half of 2004 through fiscal 2005 because
of the long cycle in the selling process. For 2004, the Company will continue to
utilize distributors to help market its products. Several distributors signed
distributorship agreements in 2003 and several more have indicated serious
interest in 2004. Cash will be generated by requiring distributors to pay a
license fee which will give the distributors the opportunity of discounted
software prices and allow each distributor to be more competitive in its
marketing region.
Continued competition may drive down the price at which the Company can sell its
products, and reduced capital expenditures by the Company's customers may also
have a negative impact.
12
Net cash used in operating activities totaled $192,593 for the six months ended
December 31, 2003 as compared to $371,718 of cash used for operating activities
in the six months ending December 31, 2002. Cash used by operating activities
for the six months ended December 31, 2003 consisted primarily of net losses of
$414,440, prepaid expenses of $51,571 and inventory purchases of $38,052, offset
by increases in accounts receivable of $159,242 and accounts payable and accrued
expenses of $110,660. The Company made no capital expenditures for the quarter
and paid down long-term debt of $21,355. The operating and investing cash flow
deficits in six months ended December 31, 2003 were funded through proceeds from
scheduled payments on the subscription receivable of $111,114, all of which was
received from prior prepayment, and borrowing of $300,000 from the Company's
Chief Executive Officer, The Matthews Group and an investor. No additional
monies were received from The Matthews Group LLC on the subscription agreement
for the six months ended December 31, 2003. As of December 31, 2003 the
prepayment balance from The Matthews Group LLC was $130,922. This prepayment
could be used by The Matthews Group LLC to cover 7 payments under the
subscription receivable agreement or the remaining scheduled payments for fiscal
year 2004. From July 1, 2003 through the date of our second quarter report, The
Matthews Group LLC had used this prepayment to satisfy all of its scheduled
payments under the agreement, and no monies have been received under the
subscription receivable.
Management has taken steps to manage expense and believes that existing cash,
together with cash flows generated by product sales and raising capital will be
sufficient to fund operations through 2004 and until the Company achieves
positive cash flow.
Item 3. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, with the participation of its Chief Executive
Officer/Chief Financial Officer, has evaluated the effectiveness of the
Company's 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,
the Company's Chief Executive Officer/Chief Financial Officer has concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective.
Internal Control over Financial Reporting
There have not been any changes in the Company's 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, the
Company's internal control over financial reporting.
The Company's management, including its Chief Executive Officer/Chief Financial
Officer, does not expect that its 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 the 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
On June 30, 2000 the Company was 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
13
and named the Company and various individuals as defendants, 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. The Company
denied all allegations and in December 2000, forced the case to be transferred
to the United States District Court for the District of Minnesota. This case
has been dormant since the transfer.
On January 10, 2002, the Company initiated arbitration against Mitsubishi, Inc.
in Los Angeles, California alleging five causes of action arising out of various
contracts and business dealings. Mitsubishi asserted several counterclaims.
Pursuant to various motions in "Phase I" of the arbitration, the arbitration
panel dismissed three of the Company's five claims. On January 5, 2004, Phase II
of the arbitration, on the Company's remaining two claims (tortious interference
with prospective business opportunities and termination of a licensing
agreement) and on Mitsubishi's counterclaims, commenced. After three days, the
hearing was suspended due to procedural irregularities that may have
contaminated the entire arbitration. The parties are currently in discovery with
respect to this matter. No opinion can be given at this time as to the outcome
of this issue or of the arbitration proceeding as a whole.
The Company filed a lawsuit against Robotic Vision Systems, Inc. (RVSI) on March
20, 2003, in the United States District Court for the District of Massachusetts
for breach of a confidentiality agreement, seeking damages in excess of $75,000.
This case is currently in the discovery phase, and the Company intends to
vigorously pursue its claims.
Item 5. Other Information.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
securities laws. These forward-looking statements are subject to a number of
risks and uncertainties, many of which are beyond our control. All statements
other than statements of historical facts included in this report regarding our
strategy, future operations, financial position, estimated revenues, projected
costs, prospects, plans and objectives of management are forward-looking
statements. When used in this report, the words "will," "believe," "anticipate,"
"intend," "estimate," "expect," "project" and similar expressions are intended
to identify forward-looking statements, although not all forward-looking
statements contain such identifying words. All forward-looking statements speak
only as of the date of this report. We do not undertake any obligation to update
or revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. Although we believe that our plans,
intentions and expectations reflected in or suggested by the forward-looking
statements that we make in this report are reasonable, we can give no assurance
that such plans, intentions or expectations will be achieved. The cautionary
statements qualify all forward-looking statements attributable to us or persons
acting on our behalf.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
31. CEO/CFO Certification required by Rule 13a-14(a)/15d-14(a)
under the Securities Exchange Act of 1934.
32. Veritec Inc. Certification of CEO/CFO pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
b. Reports on Form 8-K.
The Company filed a current report on Form 8-K on October 30,
2003 relating to the resignation of the Company's auditors.
The Company filed a current report on Form 8-K on November 12,
2003 relating to the appointment of new auditors.
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SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Veritec Inc.
Date: February 19, 2004 /s/ Van Thuy Tran
------------------ --------------------------------------------
Van Thuy Tran
Chief Executive Officer and Chief
Financial Officer
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