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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934 (No fee required)
For the quarterly period ended September 30, 1999
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-15113
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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)
1430 ORKLA DRIVE, GOLDEN VALLEY, MN 55427
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(Address of principal executive offices, zip code)
(612) 545-0224
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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 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 October 31, 1999 the Company had 4,378,925 shares of
common stock.
This document consists of 16 pages, including 4 Exhibit pages..
The Exhibit index is on page 12.
1
PART 1: FINANCIAL INFORMATION
ITEM 1: Financial Statements
VERITEC INC.
BALANCE SHEET
(Unaudited)
September 30, June 30,
1999 1999
------------- ---------
ASSETS:
Current Assets:
Cash 13,243 3,664
Accounts receivable - 23,000
Inventory 26,279 11,463
------ ------
Total current assets 39,522 41,127
Furniture and equipment (net) 5,971 7,246
----- -----
45,493 48,373
====== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liaibilities:
Notes payable 45,000 45,000
Notes payable- secured 198,704 198,704
Administrative costs - per chapter 20,802 42,737
Accounts payable & accrued liab. 89,367 134,764
Deferred compensation 323,592 301,406
Accrued interest 74,347 60,262
Commissions payable 2,500 2,500
----- -----
Total current liabilities 754,312 785,373
Secured notes payable-long term 87,749 87,749
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842,061 873,122
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Prepayment on note receivable 82,354 -
Prepayment on stock 195,117 240,198
Shareholders' equity (deficiency)
Subscription receivable -1,284,750 -
Preferred stock, par value $1.00, authorized
10,000,000 shares, 276,000 shares of Series H
Peferred authorized, issued and outstanding 1,322,632 7,273
Common stock, par value $.01, authorized 20,000,000
shares, issued and outstanding 3,598,791 35,988 35,988
Additional paid in capital 9,644,401 9,644,401
Accumulated deficit -10,792,310 -10,752,609
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Net shareholders' equity -1,074,039 -1,064,947
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45,493 48,373
====== ======
See Accompanying Notes to the Financial Statements
2
VERITEC INC.
STATEMENT OF OPERATIONS
(Unaudited)
For the three months ended
September 30,
1999 1998
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Revenues 45,852 42,401
Cost of sales 3,583 18,485
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Gross profit 42,269 23,916
Commissions 13,785 5,000
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Gross profit after commissions 28,484 18,916
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Expenses:
General and administrative 50,975 89,791
Sales and marketing 3,792 13,434
Engineering, research and development 42,797 49,456
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97,564 152,681
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Gain (loss) from operations -69,080 -133,765
Interest income - (Note) 43,465 -
Interest expense -14,085 -5,982
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Net interest income (expense) 29,380 -5,982
Net loss 39,700 -139,747
====== ========
Net loss per common share -0.01 -0.04
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Weighted average common shares outstanding 3,598,791 3,308,791
========= =========
Note - Imputed interest on a related party transaction
See Accompanying Notes to the Financial Statements
3
VERITEC INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended September 30,
1999 1998
---- ----
Cash flow from operating activities:
Net loss -39,700 -139,747
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 1,275 1,587
(Increase) decrease in assets:
Inventory -11,816 9,615
Accounts receivable 23,000 -
Increase (decrease) in liabilities:
Accounts payable and accrued expenses -67,333 -31,040
Deferred compensation 22,186 61,620
Deferred revenue - -8,500
Accrued interest 14,085 -
------ --------
Net cash used by operating activities -58,303 -106,465
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Cash flow from investing activities:
Purchase of equipment - -
Net cash used for investing activities - -
------- -------
Cash flow from financing activities:
Subscriptions receivable -1,284,750 -
Issuance of notes payable - 20,000
Issuance of preferred stock from advances - 218,182
Prepayment on notes receivable 82,354 -
Prepayment on stock -45,081 -135,377
Issuance of Series H preferred stock 1,315,359 -
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Net cash provided by financing activities 67,882 102,805
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Increase (decrease) in cash position 9,579 -3,660
Cash at beginning of period 3,664 4,216
----- -----
Cash at end of period 13,243 556
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See Accompanying Notes to the Financial Statements
4
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 1999
(unaudited)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
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Veritec Inc. (the Company) was incorporated in Nevada on September 7, 1982,
The Company is primarily engaged in development, marketing and sale of a line of
microprocessors-based encoding and decoding system products that utilize its
patented VERICODE(R) Symbol technology. The Company's VeriSystem(TM) enables a
manufacturer or distributor to use unique identifiers or coded symbols
containing binary encoded data with a product. The VeriSystem enables automatic
identification and collection of a greater amount of data than conventional bar
codes. In addition to the Vericode symbol technology and VeriSystem, Veritec
also designs and integrates identification systems that utilize other
two-dimensional and single dimension symbols. Veritec's experience both in
marking and image processing has provided the knowledge and expertise necessary
for the successful implementation of simple to complex automatic identification
projects and installations.
Chapter 11 Bankruptcy
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At September 30, 1999 Veritec Inc. was a debtor in a Chapter 11 bankruptcy
case. See Subsequent Events for information on the Registrants emergence from
bankruptcy with a Final Decree signed by the Court on October 21, 1999.
On October 16, 1995, Thomas R. O'Malley, The Amy Howard Trust, and the Kandy
Limited Partnership commenced a bankruptcy case by filing an involuntary Chapter
7 petition. That Chapter 7 petition was subsequently converted to a Chapter 11
petition under the United States Bankruptcy Code ("Code") , 11 U. S. C. section
101 et seq. The Registrants Reorganization Plan was approved as indicated in the
"FINDINGS OF FACT; CONCLUSIONS OF LAW AND ORDER CONFIRMING THE DEBTOR'S SECOND
REVISED THIRD AMENDED CHAPTER 11 PLAN OF REORGANIZATION", included as an Exhibit
in the Company's 10-KSB for the period June 30, 1997 and included by reference
in this report.
The Reorganization Plan was confirmed on April 23, 1997 with the Bankruptcy
Judge signing the order on May 2, 1997. The Plan was expected to be effective by
August 6, 1997. Due to a variety of difficulties in arranging the asset
investment of $2,000,000, and financing ongoing operations of the Company, the
Plan was not been fully affected at September 30, 1999.
See Note 4 - Management Discussion , for comments on the Bankruptcy and the
financing being provided by the Matthews Group after the failure by HOMETREND
and its Affiliated Companies in being able to effect the Plan of Reorganization
in a timely manner.
The Reorganization Plan includes the following major items:
1. Transfer of a majority of the Registrants debt to equity, approximately
$4,500,000.
2. Investment of $2,000,000 in assets or asset equivalents into the
Registrant in exchange for 275,000 shares of a new Series H Preferred
Shares class of stock.
5
3. Changes in Directors and Management.
4. A one for ten reverse stock split for both common and preferred
shareholders. All preferred stock and formerly restricted common stock
changed to free trading common stock. This reverse split action reduced
the old common stock of 2,085,660 and old preferred stock of 441,840
shares to a combined 252,749 free trading shares.
5. Issuance of 300,000 shares of common stock as guaranty to certain
noteholders that are to be paid in cash and notes. HOMETREND, as
guarantor of these Notes, is to receive these shares upon satisfaction
of the payment of $60,000 as an initial payment per Plan of
Reorganization..
Items of Reorganization Plan Accomplished
- -----------------------------------------
All of the provisions of the Plan of Reorganization were completed by
September 30, 1999 and the Registrant had filed a motion with the Bankruptcy
Court for a Final Decree. A copy of the Court Order on the final Decree was
attached as an Exhibit to the Registrant's 10-KSB filed at June 30, 1999 and is
made a part of this filing by reference.
Basis of Presentation
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The unaudited financial statements presented herein have been prepared by
the Company, without audit, pursuant to the rules and regulations for interim
financial information and the instructions to Form 10-QSB and Regulation S-B.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been omitted. These unaudited consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Report on Form 10-KSB for the fiscal year ended June
30, 1999. In the opinion of management, the unaudited consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals
only) which are necessary to present fairly the consolidated financial position,
results of operations, and changes in cash flow of the company. Operating
results for interim periods are not necessarily indicative of the results for
interim periods are not necessarily indicative of the results which may be
expected for the entire year.
Per Share Computations
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Loss per share is based upon the weighted average number of shares of
common stock outstanding during the respective periods.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment on September 30, 1999 is comprised of the following:
Equipment $ 52,321
Furniture and fixtures 50,157
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102,478
Less accumulated depreciation and amortization 96,507
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$ 5,971
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NOTE 3 - COMMITMENTS AND CONTINGENCIES
6
Contingencies
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All major contingencies of the Company were included in the Confirmed Plan
or as a part of motions granted for debt to equity exchanges in the Company's
motion for a Final Decree. The Company is not aware of any contingencies other
than those discussed as Possible Unasserted Claims in PART II, ITEM I of this
report.
Pending Litigation
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As stated in Note 1, the Company is currently in Chapter 11 Bankruptcy,
therefore, all pending litigation or threats of litigation up to the date of
Confirmation of the Plan were addressed in conjunction with regular bankruptcy
proceedings. There is no litigation filed against the Registrant at the time of
this filing.
Notes payable to a group of secured creditors - "The Gant Group"
- ----------------------------------------------------------------
Included in the Plan of Reorganization was a secured note payable to "The
Gant Group" in the amount of $364,513. A payment of $60,000 was paid per note
Agreement on the scheduled effective date of the Plan and the balance was to be
paid in quarterly payments of $23,325.38 per quarter over a 4-year period. The
Gant Group was granted a lien on the patents of the company and ten percent
interest on the note. The first quarterly payment was made and then due to lack
of funds, additional payments became delinquent. This problem with the Gant
Group resulted in the Registrant being placed back into Chapter 7 bankruptcy.
The Matthews Group paid $182,345.87 on September 1, 1999 to bring the note with
the Gant Group current and has pledged to pay the quarterly payments to the Gant
Group as they become due. The Registrant owes the Matthews Group for the amounts
paid to the Gant Group and will owe additional amounts to the Matthews Group as
they continue to pay on the quarterly payments. The amounts owed to the Matthews
Group are accruing interest at 10%, the same as the interest being paid to the
Gant Group.
As stated in Note 2, the Company was in Chapter 11 Bankruptcy at September
1, 1999. The Plan of Reorganization was to be Effective on August 8, 1997. Due
to the inability of HOMETREND and its Affiliates to provide the assets
guaranteed in the Plan, the company was put in a difficult financial position.
Administrative, Engineering and Sales personnel were hired by the Company in
anticipation of the funding being in place. Operating activities were increased
to position the Company for increased sales. Due to this lack of funding, the
engineering and sales personnel left employment in the Company and the Company
had little operating activity for over a year.
In September and October 1999, the Registrant filed all 10-KSB and 10-QSB
reports that were due with the SEC and became current in all filings. The
Registrant also filed all Federal and State Income Tax returns through June 30,
1999.
NOTE 4 - GOING CONCERN AND MANAGEMENTS PLANS
At September 30, 1999, the Matthews Group had committed to invest the
$2,000,000 in assets required in the Plan of Reorganization, pay the amounts due
the Gant Group on their secured note, and finance the operations of the Company.
As proposed in the Plan, the Matthews Group received 275,000 shares of Series H
7
convertible preferred stock in exchange for a promissory note in the amount of
$2,000,000. This promissory note is a non-interest bearing note and calls for
monthly payments to the Company of $18,518.52 over a 9 year period. The Matthews
Group has been funding the Company operations for more than the amount required
by the note and at September 30, 1999 had funded an additional $82,354 to
support company operations.
The present value of the Promissory Note, using a ten percent imputed
interest factor, at the time of issuance was as follows:
Future Dollar Amount Less Imputed Interest Present Value
-------------------- --------------------- -------------
$2,000,000 $684,641 $1,315,359
There was approximately $750,000 in post confirmation debt and invested
amounts at September 30, 1999. In the Company's motion with the Court on
September 1, 1999, the Court granted the Company's request to allow the exchange
of debt for the Company's restricted common stock at 80 cents a share. The
majority of creditors have agreed to this exchange of debt for equity. After
this stock transaction, it will leave the Company with little debt, except for
the amounts due the Matthews Group and Gant Group on the secured note payable.
With the infusion of funds from the Matthew's Group, Management is
confident that it can move the Company forward with an aggressive sales and
marketing program. There is no assurance that such activity will result in
future profits to the company as the Company is still emerging from a very
difficult period of operational inactivity.
NOTE 5 - SUBSEQUENT EVENTS
As stated in Note 1, the Registrant was granted a Final Decree on October
21, 1999. A copy of the Court order is attached as Exhibit 1 to this report.
Also, the Registrant was granted the right to exchange Post Confirmation debt
for restricted common stock at eighty cents (80) per share. At October 31, 1999.
$623,305 of debt was exchanged for 779,134 shares of restricted common stock.
117,647 shares of restricted common stock has been reserved for payment of
$94,117 due either HOMETREND or Health Kinetics upon the determination as to
which party is owed the stock. It is expected that approximately 100,000
additional shares will be issued in payment of other debt amounts.
On October 12, 1999, the Registrant purchased certain software from Mark
Pinson. This software was developed by Mr. Pinson during periods he was not
either an employee of nor a contractor/consultant of the Registrant and includes
a source code, documentation, manuals and other written material, which relate
to the code. A copy of the Assignment and Agreement are attached as Exhibit 2 to
this report. Mr. Pinson received a cash payment of $50,000 and 187,500 shares of
restricted common stock in exchange for this software.
PART I. FINANCIAL INFORMATION
ITEM 2. Management' Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
8
Liquidity and Capital Resources -September 30, 1999, compared to June 30, 1999.
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During the quarter ended September 30, 1999, the Company received cash from
revenues totaling $45,852, collection of accounts receivable of $23,000,
$55,555.56 as payment on the note receivable and $10,895.52 as an advance on
notes payable from the Matthews Group. Cash on hand at September 30, 1999 was
$13,243.
Debt owed by the Company at September 30, 1999 was as follows:
Debt category Sept. 30, 1999 June 30, 1999 Incr./(Decr.)
--------------- ------------- -------------
Notes payable $ 45,000 $ 45,000 $ -
Notes payable, secured 286,453 286,453 -
Administrative costs per Plan 20,802 42,737 (21,935)
Accounts payable and accrued expenses 89,367 134,764 (45,397)
Accrued interest 74,347 60,262 14,085
Commissions payable 2,500 2,500 -
Deferred compensation 323,592 301,406 22,186
========= ======== =========
$ 842,061 $ 873,122 $ (31,061)
========= ======== =========
During the quarter ending September 30, 1999 the Company's liquidity
improved due to a reduction in administrative costs and accounts payable.
Company's liquidity (working capital) is reflected in the table below, which
shows comparative working capital as of September 30, 1999 and June 30, 1999.
Sept. 30, 1999 June 30, 1999
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Working capital (deficit) $ (714,790) $ (744,246)
The Company does not expect revenues from operations to be adequate to meet
all costs and expenses of the Company for several months. The Company first must
stabilize its operations and then move aggressively in sales and marketing of
its products and services. The Company is developing a web site, contacting
prospective customers, and continuing to service current customers in order to
increase revenues. The Company had revenues of $82,997 in the month of October
1999 from sales to a foreign customer. International sales are expected to
continue with this and other current customers. There is no assurance that
future sales to these or other customers will occur or that the Company will be
able to obtain adequate revenues to meet costs and expenses of operations.
Financial and Operational Outlook
- ---------------------------------
Although there is no assurance that the Company will generate any material
revenues or cash flows from operations in the next fiscal year, management
believes the Company has prospects for generating such revenues. Several
developments occurred during the year, which the Company believes have increased
that potential. The royalty from Mitsubishi for sales in Korea and other
countries is expected to bring a gradually increasing stream of revenues,
however, the amounts are expected to be less than $20,000 per quarter during the
next few quarters of agreement. Sales to companies in Korea have provided
revenues in the nine months ended September 30, 1999 and there is a good
possibility of additional sales to these companies.
9
Results of Operations - The quarter ended September 30, 1999 compared to
the quarter ended September 30, 1998.
The Company had revenues of $45,852 during the quarter ended September 30,
1999, as compared to $42,401 during the quarter ended September 30, 1998. The
revenues in the 1999 period were from the sale of products, engineering services
and a royalty payment of $10,067 from Mitsubishi Corporation. The revenues for
the 1998 period was primarily from the sale of products. The Company is in
discussions with several potential customers for systems sales but cannot
project future revenues, if any, at this time. The Company is also in the
discussion stage of potential licensing or partnering for product or industry
segment opportunities with several companies. Because of its cash flow and
liquidity problems, there are no assurances that the Company can ever generate
revenues.
Operating expenses decreased in the September 1999 quarter as compared to
the September 1998 quarter due to a reduction in operating activity associated
with the lack of funding.
For the nine months ended
Expense category Sept. 30, 1999 Sept. 30, 1998 Incr./(Decr.)
-------------- -------------- -------------
General and administrative $ 50,975 $ 89,791 $ (38,816)
Sales and marketing 3,792 13,434 (9,642)
Engineering, research and development 42,797 49,456 (6,659)
------------ ----------- -----------
$ 97,564 $ 152,681 $ (55,117)
============ =========== ===========
The decrease in General and Administrative expenses was due to a decrease
in administrative payroll and a payment of $20,000 to the Company's bankruptcy
attorney recorded in the September 1998 quarter. Other costs and expenses
remained about the same as those in the prior year first quarter.
The decrease in Sales and Marketing expense was due to the resignation of
all sales personnel due to the Company having insufficient funds to pay
salaries.
The decrease in Engineering and research was due to a decrease in operating
and R & D supplies and expenses.
Capital Expenditures and Commitments
- ------------------------------------
There were no Capital expenditures during the quarter ended September 30,
1999. Other than for nominal computer and office equipment needed to expand its
businesses, the Company has no current commitments for material capital
expenditures in the next 12 months. The Company believes its need for additional
capital will continue because of the need to develop and expand its business.
The amount of such additional capital required is uncertain and may be beyond
that generated from operations.
Factors that may effect future results
- --------------------------------------
The note receivable requires payment of $18,518.52 per month. This amount
is adequate to take care of the cost of engineering services, rent and supplies.
The Matthews Group has supplied finances in addition to the required monthly
amount on the note and has financed operations necessary to promote sales and
provide inventory for sales. In order for the Company to have an aggressive
10
sales and marketing program, it will require funds in excess of the monthly
amount of $18,518.52 until such time as the Company's profit from revenues and
the $18,518.52 is adequate to cover costs and expenses of the Company. The
Matthews Group has been willing to provide funding necessary to move the Company
forward in engineering, sales and marketing activities. Larry Matthews,
Chairman, and Ms. Van Tran, President, are principles in the Matthews Group and
are an integral part of managing the operations of the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Possible unasserted claims
- --------------------------
During its bankruptcy the Registrant sought an investment group to assist
it in funding the $2,000,000 called for under the Plan of Reorganization
approved by the Bankruptcy Court on May 2, 1997. In the intervening years the
various investment groups have attempted to help the company fund this required
investment. Until the Matthews Group provided the financing, no other group had
been successful in assisting the Registrant in funding this commitment. Partial
fundings received from these investment groups have been settled through stock
issuances by the Company or are recorded as stock advances that the Registrant
intends to settle through the issuance of stock. It is possible that these
investment groups will assert claims against the Registrant regarding: the
levels of their funding; the Registrant's termination of their funding
commitments; or for expenses incurred while they were assisting the Registrant.
Management feels it has appropriately reflected the activity with these
investment groups in the accompanying financial statements. Due to
uncertainties, however, it is at least reasonable possible that claims will be
asserted. The ultimate outcome of these claims, if asserted, cannot presently
be determined.
SEC reporting obligations
- -------------------------
The Company is 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"). To the Company's knowledge,
there is no current inquiry or investigation pending or threatened by the SEC in
regards to reports filed by the Company. However, there can be no assurance that
the Company 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, the Company may be subject to penalties, including among other things,
suspension of trading in the Company's securities, court actions, administrative
proceedings, preclusion from using certain registration forms under the 1994
Act, injunctive relief to prevent future violations and/or criminal prosecution.
ITEM 2. CHANGES IN SECURITIES.
None during the quarter ended September 30, 1999. In October 1999 there
were 779,134 shares of restricted common stock issued in satisfaction of Post
Confirmation debt.
11
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
There were no matters submitted to a vote of Security-Holders during the
three months ended September 30, 1999.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
2. Exhibits:
Item No. Description of Document Page No. (footnote)
-------- ----------------------- -------------------
1. Order on Final Decree Page 8, Note 5
2. Assignment and Assignment Agreement Page 8, Note 5
(Mark Pinson Agreement)
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities and 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.
------------
(Registrant)
Date: October 8, 1999
----------------
By: /s/ Jack E. Dahl
____________________________________
Jack E. Dahl
Chief Financial Officer and Chief
Accounting Officer
12