U. S. 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, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 0-15113
VERITEC, INC.
(Exact name of small business issuer in its charter)
Nevada 95-3954373
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2445 Winnetka Avenue N. 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. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Revenues for the year ended June 30, 2007 were $2,205,566.
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 June 30, 2007, was approximately $3,822,147.
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Number of shares outstanding as of June 30, 2007 was: 15,096,088.
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. Yes [ ] No [ ].
THIS DOCUMENT CONSISTS OF 48 PAGES, INCLUDING THE EXHIBIT PAGES.
THE EXHIBIT INDEX IS ON PAGE 43.
Page 2 of 48
VERITEC, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 2007
TABLE OF CONTENTS
Page No.
--------
PART I .............................................................. 4
FORWARD - LOOKING STATEMENTS ............................. 4
ITEM 1 DESCRIPTION OF BUSINESS .................................. 4
ITEM 1A RISK FACTORS ............................................. 10
ITEM 2 DESCRIPTION OF PROPERTY .................................. 12
ITEM 3 LEGAL PROCEEDINGS ........................................ 13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...... 14
PART II ............................................................. 14
ITEM 5 MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES ............................................... 14
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION ................................................ 16
ITEM 7 FINANCIAL STATEMENTS ..................................... 21
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES ..................... 38
ITEM 8A CONTROLS AND PROCEDURES .................................. 38
ITEM 8B OTHER INFORMATION ........................................ 39
PART III ............................................................ 39
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION
16 (a) OF THE EXCHANGE ACT ............................... 39
ITEM 10 EXECUTIVE COMPENSATION ................................... 41
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS ............... 42
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE .................................... 43
ITEM 13 EXHIBITS ................................................. 43
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES ................... 44
SIGNATURES ....................................................... 44
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PART I
FORWARD-LOOKING STATEMENTS
This Form 10-KSB contains various "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements represent expectations and beliefs concerning a company's outlook,
future economic events, future performance and attainment of future goals and
are based on information available on the date of the filing, and are subject to
various risks and uncertainties.
The Private Securities Litigation Reform Act of 1995 provides "safe harbor" for
forward-looking statements. Certain information included in this Form 10-KSB and
other materials filed or to be filed with the Securities and Exchange Commission
(as well as information included in oral statements or other written statements
made or to be made) contain statements that are forward-looking and actual
results may materially differ from any future results expressed or implied by
such forward-looking statements. In addition to statements that explicitly
describe such risks and uncertainties readers are urged to consider statements
using the terms "anticipates" "belief", "believes", "can", "intends", "may",
"plans", "shall", or "will", and similar expressions to be uncertain and
forward-looking. Such forward-looking statements involve important risks and
uncertainties that could significantly affect anticipated results in the future
and accordingly, such results may materially differ from those expressed as our
desired outcome, goal, or result.
We undertake no obligation to update any forward-looking statements to reflect
events or circumstances that may arise after the date hereof unless specifically
required by the filing requirements of the Securities and Exchange Act as
amended or, the Regulations promulgated thereunder.
ITEM 1 DESCRIPTION OF BUSINESS
(a) General Development of Business
The Company refers to Veritec, Inc. (Veritec) and its wholly owned subsidiary,
Vcode Holdings, Inc. (Vcode).
Veritec was incorporated in the State of Nevada on September 8, 1982 for the
purpose of development, marketing and sales of a line of microprocessor based
encoding and decoding system products that utilize Matrix Symbology Technology,
a two-dimensional barcode technology originally invented by the founders of
Veritec under United States patents 4,924,078, 5,331,176, 5,612,524 and
7,159,780. As more fully described below, three of these patents are the
property of Vcode.
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.
In January 2002, Veritec initiated arbitration in the International Court of
Arbitration of the International Chamber of Commerce in Los Angeles, California,
against Mitsubishi Corporation (Mitsubishi), alleging five causes of action
arising out of various contracts and business dealings. Mitsubishi
counterclaimed and arbitration commenced.
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In November 2003, Veritec formed Vcode to which it assigned United States
patents 4,924,078, 5,331,176 and 5,612,524, together with all corresponding
patent applications, foreign patents, foreign patent applications, and all
continuations, continuations in part, divisions, extensions, renewals, reissues
and re-examinations. Vcode in turn entered into an Exclusive License Agreement
with VData LLC (VData), an Illinois limited liability company unrelated to
Veritec. The purpose of the Exclusive Licensing Agreement is to allow VData to
pursue enforcement and licensing of the patents against parties who wrongfully
exploit the technology of such patents. VData is the wholly owned subsidiary of
Acacia Research Corporation (NASDAQ: ACTG) (collectively Acacia). The Exclusive
License Agreement provides that all expenses related to the enforcement and
licensing of the patents will be the responsibility of VData, with the parties
sharing in the net proceeds, as specified under the terms of the agreement,
arising from enforcement or licensing of the patents.
In January 2004, the Mitsubishi arbitration continued with Veritec proceeding on
two claims against Mitsubishi (tortuous interference with prospective business
opportunities and termination of a licensing agreement); and, Mitsubishi
proceeded on various claims against Veritec for trade secret misappropriation
and copyright infringement based upon the Error Detection and Correction (EDAC)
Technology functionality utilized by Veritec, together with, assorted breach of
contract claims.
In February 2005, an adverse ruling was made in the arbitration preceding
against Veritec in favor of Mitsubishi, resulting in a monetary award of
$8,174,518 to Mitsubishi and enjoining Veritec and by extension Veritec's
customers from the future use or sale of Mitsubishi's EDAC Technology. This
ruling compelled Veritec to file a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
(Bankruptcy Court) for the District of Minnesota on February 28, 2005.
After reaching an agreement with Mitsubishi and other creditors, in April 2006,
Veritec's Third Amended Plan of Reorganization was confirmed by the Bankruptcy
Court. On August 8, 2006, the Bankruptcy Court entered an Order and Final Decree
closing the Chapter 11 case in its entirety. As a result of the Chapter 11
bankruptcy, Veritec settled $9,356,948 of debts including $7,874,518 owed to
Mitsubishi. In connection with the settlement with Mitsubishi, we obtained a
license to certain Mitsubishi EDAC technology and granted Mitsubishi a license
to VeriCode(R).
Since emerging from bankruptcy, we have been focused on development of new
applications for encoding and decoding technologies and continued enforcement of
our patents through VData.
(b) Nature of Business
The Company is primarily engaged in the development, marketing, and sales of a
line of microprocessor based encoding and decoding systems that utilize Matrix
Symbology technology, a two-dimensional barcode technology originally invented
by the founders of Veritec under United States patents 4,924,078, 5,331,176,
5,612,524 and 7,159,780. The Company's encoding and decoding systems allow a
manufacturer, distributor, reseller or user of products, to create and apply
unique identifiers to the products in the form of a coded symbol. The coded
symbol containing the binary encoded data applied to the product enable
automated manufacturing control, together with identification, tracking, and
collection of data through cameras, readers and scanners also marketed by the
Company. The collected data is then available for contemporaneous verification
or other user definable purposes. Veritec has also developed a Secured
Identification System based upon its proprietary VSCode(TM) and VeriCode(R)
Symbology. The Company's Secured Identification System enables the storage of
images, biometric information and data for contemporaneous verification of an
individual's unique identity. In addition to its United States patents, the
Company holds patents in Europe (German Patent No. 69033621.7; French Patent No.
Page 5 of 48
0438841; and Great Britain Patent No. 0438841); and has applications pending
with the United States Patent and Trademark Office for novel uses of its
Multi-Dimensional Matrix Symbology.
The Company also seeks fees from the enforcement and licensing of it patents
under its Exclusive License Agreement with VData. These fees have been a primary
source of revenue for the Company. The patents (4,924,078 and 5,612,524), which
are the subject of the infringement claims, are currently being reexamined by
the U.S. Patent and Trademark Office and are the subject of a declaratory
judgment action seeking to declare the patents invalid. All infringement actions
of these patents have been suspended pending the outcome of these proceedings.
Furthermore, the patents expire in November 2007. Therefore it is likely that
revenues from patent infringement claims will be significantly reduced or
ceased.
During 2007, VCode and VData filed and approved several infringement complaints
against alleged infringers of the 5,331,176 patent.
The Company's main products are as follows:
The VeriCode(R)
The VeriCode(R) symbol is a two-dimensional high data density machine-readable
symbol that can contain up to approximately 500 bytes of data in an area as
small as the head of a pin. The VeriCode(R) 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 at least two solid lines and/or a solid border. Surrounding
the solid border is a quiet zone of empty cells. This simple structure is the
basis for the symbol's space efficiency.
The size of the VeriCode(R) symbol is variable and can be increased or decreased
depending on application requirements. The symbol can be configured to fit
virtually any space. The data capacity of the symbol is also variable. By using
a greater or smaller number of data cells, more or less information can be
stored in the symbol. The main limitation to the size and density of the
VeriCode(R) symbol is the resolution of the marking and reading devices utilized
by the user.
Special orientation for reading the symbol is not necessary and is the basis of
the novelty of Vcode's United States Patent No. 5,612,524. The VeriCode(R)
symbol can be read at high degrees of angularity from vertical, in any direction
relative to the reader. Veritec's symbology and reading software presently
employs "Error Detection and Correction" (EDAC) technology of our own design,
similar to that on music CD's. That means if a symbol is partially damaged or
obscured, the complete data set stored in the symbol might be recovered. EDAC
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.
The VeriCode(R) symbol offers high degrees of security and the level of this
security can be specified depending on the user's 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) symbol within the
user's application.
The VeriCode(R) symbol can hold any form of binary information that can be
digitized including numbers, letters, images and the minutia for biometric
information to the extent of its data storage capacity.
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The VSCode(TM)
The VSCode(TM) is a derivative of the two-dimensional VeriCode(R) symbol. It is
built around the core competencies of the VeriCode(R) symbol which includes the
solid border, omni-directional reading and EDAC capability. The distinguishing
factor for the VSCode(TM) is its ability to encrypt a greater amount of data by
increasing data density. This matrix can hold up to approximately 4,151 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 of the user.
The VSCode(TM) symbol can hold any form of binary information that can be
digitized, including numbers, letters, images, photos, graphics, the minutia for
biometric information, including fingerprints, to the extent of its data storage
capacity, that are likewise limited by the resolution of the marking and reading
devices employed by the user.
VSCode(TM) is designed for bankCards and high security applications. Because the
code is encrypted on the Card it can be an independent portable database
containing non-duplicative information that is unique to the individual owner of
the bank account or credit Card; or, the data can be verified through a central
database while maintaining high security for the Card issuer without the need of
a PIN.
PhoneCode(C)
The Company has developed software products, which will allow individuals or
companies to receive or distribute gift Cards, tickets, coupons, receipts or
votes using the VeriCode(R) technology via wireless phone or PDA.
The GiftCode(C) allows an individual to purchase, by phone, by internet or in
person a gift Card for a specific dollar amount from a retailer. The gift Card
can be sent to the recipient via wireless phone and include a message, a musical
tune, such as Happy Birthday or Jingle Bells, and a two-dimensional matrix code
that has the detailed information of the gift Card including the amount, the
retailer, etc. That recipient can redeem the gift Card by selecting merchandise
from the retailer and redeeming the gift Card value via a code reader at the
register at the time of checkout.
TicketCode(C) for concerts, sporting events, theme parks, etc. can be purchased
by phone or internet and received via wireless phone. The TicketCode(C) also haS
the capabilities of including a message, a musical tune such as "Take Me Out to
the Ballgame" and the two-dimensional matrix code along with the event
information (date, time, row, seat number, etc.) When arriving at the event, the
wireless phone can be scanned at the gate via a code reader allowing immediate
entrance.
The CouponCode(C) is a means for a retailer to increase sales through
personalized targeted marketing campaigns. The retailer can tailor the
CouponCode(C) with company graphics, text messages and musical tunes along with
the two-dimensional matrix code and send it directly to the customer's wireless
phone. The customer redeems the coupon by passing the wireless phone over the
code reader and crediting the coupon value against the purchase.
The ReceiptCode(C) is the means for financial institutions, retailers and
consumers to add security to electronic on-line transactions by sending a
receipt electronically in the form of a 2-D barcode. One example, banking over
the Internet, the present system allows a purchase to take place by simply
filling out the credit card number, expiration date and the three digit code on
the back of the plastic card. Presently, the cardholder receives notification of
the transaction at much later time via mail or Internet. A
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ReceiptCode(C) would help prevent the fraudulent use of the card by notifying
all parties involved instantly in real time by way of an electronic 2-D barcode
which can be received over the cell phone.
The VotingCode(C) provides a unique identifying number, each voter needing to
file an absentee ballet can do so in the form of a 2-D VeriCode(R) symbol, via
their cell phone or PDA. The entire voting process is quick, convenient, and
secure.
Secure Identification Cards
The Company's secure identification cards (ID Card) are distinctive in that they
present the cardholder's picture, fingerprint minutia and other pertinent data
that can be produced in either a soft or hard card material. There are several
choices when determining what data and material should be used in the production
of the ID Card. A soft ID Card is a low cost method to produce an ID Card. The
soft card is produced using a specially designed blank card stock that can be
printed on using a simple inkjet printer. Once printed, the lamination material
is folded over the print and laminated producing a durable long life ID Card at
a cost effective price. The hard ID Card is the same material that can be found
in credit cards. The hard ID Card, although more expensive to produce, can be
designed to suit the needs of the customer. It can have print on both sides of
the card, the card can include a mag stripe and depending on the required life
expectancy of the card, it can be coated with different materials. Both the soft
and the hard ID Cards can contain the usual data, such as name, address,
identification number, etc. plus with the use of Veritec's patented VSCode(TM).
The ID Card can contain its own portable database of personal information such
as the individual's fingerprint minutia, social security number, phone number or
any other pertinent data that can only be deciphered with a Veritec reader. The
ID Card, along with the individual's picture and the VSCode(TM), offer a unique
and secure method of identifying individuals.
Time and Attendance Software
The time and attendance software is a robust, user friendly program that
includes the capabilities of time recording and reporting and also includes a
card maker and card reader program. The card maker and card reader component of
the program offer a unique security feature such that the program can produce ID
Cards including photo fingerprint minutia and any other information the employer
may request, plus the ability to decode the VSCode(TM) printed on the ID Card.
The program requires an employee clocking in or out for the day to insert their
ID Card into the reader and place their finger on the reader so that the program
can perform a comparison of data and verify the fingerprint minutia. When the
verification has been confirmed, the program records the approved clock in or
out time for that employee. Should the fingerprint not match, the information
will be rejected. This unique security feature prevents employees from clocking
in another employee or other fraudulent time recording issues.
The FCR-100 Fingerprint Card Reader
The FCR-100 is a compact fingerprint 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 systems,
including the full suite of Windows(R) operating systems. This allows the
operating 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 and powered
by a USB cable connection to a PC
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or server. The FCR-100 can be utilized with wireless applications and will allow
multiple reading stations to be connected to a single computer.
Patents
United States Patent No. 4,924,078 was issued on May 8, 1990 on our founders'
application filed November 25, 1987. United States Patent No. 5,612,524 is a
continuation of the 4,924,078 patent. U.S. Patent No. 5,331,176 was issued on
July 19, 1994 on our founders' application filed on April 10, 1992. Veritec has
filed for additional U.S. patents related to novel uses of the Matrix
Symbologies. The Company holds the following European Patents: Germany Patent
No. 69033621.7; French and Great Britain Patent No. 0438841.
Trademarks
We have filed applications to register the trademark "VeriSecure" in the United
States. We have also filed applications to trademark "VSCode" in the following
countries: Australia, Taiwan, South Korea, Singapore, Japan, China, and Vietnam.
In addition we have filed applications to register VeriCode(R) in the following
countries: China, Singapore, Vietnam, and Australia. We have registered
trademarks for VeriCode(R) in the United States, Taiwan and South Korea. The
Company uses the following copyrights VeriWrite(C), VeriRead(C), VSWrite(C),
VSRead(C), PhoneCode(C), TicketCode(C), GiftCode(C), CouponCode(C),
ReceiptCode(C) and VotingCode(C).
Seasonality
We have not historically experienced seasonality.
Major Customers
During the fiscal year ended June 30, 2007 and 2006, 80% and 33% respectively,
of our revenue was from our Exclusive License Agreement with VData. Of the
remaining revenue, 19% and 65% was from foreign customers for the years ended
June 30, 2007 and 2006, respectively.
Engineering, Research and Development
As of June 30, 2007, Veritec employed three full-time engineers, two consultants
and is currently contracting with three engineering consulting firms. For fiscal
year 2007, we have concentrated on several projects, which include the FCR-100
reader, the PhoneCodes(C), improvements to our VeriCode(R) and VSCode(TM),
secure ID Cards, implementation of our 2-D matrix codes into other
manufacturer's readers, the time and attendance software and the development of
several of our own new readers. All of these projects are currently in various
stages of development or have been completed.
Competition
The "symbology" business is intensely competitive. The Company is presently
under-capitalized and recently emerged from bankruptcy. Consequently, there can
be no assurance that the Company will be able to successfully compete in the
"symbology" business.
Our VeriCode(R) and VSCode(TM) Matrix Symbologies compete with alternative
machine-readable codes 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 alternative symbologies include numerous well capitalized
publicly traded companies who offer a spectrum of bar code related systems
including
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Motorola Inc (NYSE: MOT); Zebra Technologies Corporation (NASDAQ: ZBRA); and
Siemens Energy and Automation, Inc., a subsidiary of Siemens AG (NYSE: SI).
The "DataMatrix" two-dimensional bar code is an established competitor to the
VeriCode(R). The DataMatrix code was popularized by Robotic Vision Systems,
Inc., which declared the DataMatrix symbol to be "in the public domain." In
contrast, our VeriCode(R) Symbol and technology are protected by various U.S.
and European patents and our software source codes are proprietary and protected
by copyright.
Veritec believes that while many potential customers and users of symbology
prefer to use a system that is believed to be in the public domain with open
source code software applications, other companies, especially those requiring
high security encoding and decoding capability will prefer to purchase "closed"
or proprietary systems. Our technology may be the technology of choice for these
potential customers.
Employees
As of June 30, 2007, inclusive of the three full-time engineers and two
contracted consultants employed by the Company in its engineering, research and
development department as described above, the Company employs nine full-time
employees, one part-time employee and three consultants.
Financial Information about Geographic Areas
In fiscal 2007, United States customers accounted for 81% (35% in fiscal 2006)
of the total Company's revenue. The remaining revenue of 19% (65% in fiscal
2006) was from foreign customers. To date, our foreign revenues are concentrated
in Japan, Korea, Taiwan and Germany.
Available Information
The public may read and copy any materials we have filed with the Securities and
Exchange Commission (SEC) at the SEC's Public Reference Room at 100 F Street,
N.E., 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 reports with the SEC. Filings may be found on the Internet
site maintained by the SEC at www.SEC.gov; or, by accessing www.freeedgar.com;
and other Internet based financial service providers. 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, Minnesota 55427 (763) 253-2670.
ITEM 1A RISK FACTORS
Risk Factors
Investing in our Company entails substantial risk. In addition to the other
risks and uncertainties discussed herein or available from outside sources, a
number of risks and uncertainties that could cause actual results to differ
materially from the plans, intentions and expectations reflected in or suggested
by forward-looking statements of the Company set forth within the body and
Exhibits hereof include amongst other things:
We Have a History of Operating Losses
We have a history of operating losses that were a substantial factor in the
Company having been twice placed in bankruptcy. Once from October 1995 through
October 1999 and again from February 2005
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through August 2006. To halt the continuation of these losses, we are developing
new products, entering new markets and developing strategic alliances to grow
revenue. There can be no assurance that we will be successful in these efforts,
and even if we are, whether we can become profitable.
Loss of the Services of Key Employees Could Harm Our Operations
The Company's performance depends on the talents and efforts of our key
management and technical employees. The loss of certain key individuals could
diminish our ability to maintain relationships with current and potential
customers or to meet development and implementation schedules for existing
technology and the technology that the Company intends to introduce in the
future. Our future success also depends on our continuing ability to identify,
hire, train and retain highly qualified technical and managerial personnel. If
we fail to attract or retain these key individuals in the future, our business
could be disrupted.
Continuing Licensing Revenues from VData and Intellectual Property
The Company has been dependent on VData for a significant portion of its
revenue. In the event of an adverse determination either with regard to the
Patent Reexaminations or the Declaratory Judgment being sought by Cognex, our
future ability to obtain licensing fees for the 4,924,078 and 5,612,524 patents
could cease. In addition to Cognex, future challenges of our intellectual
property could be made by other claimants. Our business would be materially
impacted in the event such claims are raised and ruled against us.
Competition in the Asian Market
The Company currently relies heavily on its sales to the Asian markets. The
cross-licensing agreement we executed with Mitsubishi that allowed for our
emergence from bankruptcy and rights to use the Mitsubishi EDAC Technology, gave
Mitsubishi a license to our VeriCode(R) Technology that may result in increased
competition. We believe competition in the Machine Readable Information and
symbology sector, coupled with the strain on our relationships with our
licensees and distributors while we were in bankruptcy may continue to impact
future sales.
Dependence on the Matthews Group
The Company has traditionally been dependent on The Matthews Group for its
financial support. Management does not believe additional monies above the stock
subscription obligation, described in our financial statements, will be required
in the immediate future. However additional capital may be required at some
future point. The Company cannot guarantee going forward that The Matthews Group
will continue to provide additional funding.
Ability to Obtain Access to Capital
Due to the Company's prior bankruptcies and history of losses, the Company's
ability to raise funds, may be difficult. The Company may need to raise
additional capital for the development or marketing of new products. If the
Company cannot raise such capital, or if the cost of such capital is too high,
we may be unable to successfully develop and launch new products.
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Effect of the Bankruptcy
The Company having been in bankruptcy has made it difficult for the Company to
establish new trade credit relationships with both vendors and customers.
Although the Company believes it will restore its credibility going forward, the
lack of trade credit could impair the Company's ability to grow and implement
its plans.
Competition
Our VeriCode(R) and VSCode(TM) Matrix Symbologies compete with alternative
machine-readable codes such as conventional bar code systems, including UPC, EAN
Code 39 and Code 49; and, alphanumeric systems such as OCR-A, OCR-B, PDF-417,
Data Matrix and many others. Competitors offering alternative symbologies
include numerous well capitalized private and publicly traded companies who
offer a wide variety of bar code systems and solutions, as well as, alternative
product solutions such as Radio Frequency Identification (RFID) and Global
Positioning Satellite (GPS) technology. Our competitors include but are not
limited to: Intermec (NYSE: IN); Siemens Energy and Automation, Inc., a
subsidiary of Siemens AG (NYSE: SI); Motorola Inc (NYSE: MOT); and, Zebra
Technologies Corporation (NASDAQ: ZBRA). These companies have more resources
than the Company, already have a strong customer base, and their products are
widely used in the market place. Competition from such companies may further
reduce the future level of demand for the Company's products and/or the
Company's future margins of profit.
Effect of Bonus
On February 6, 2007, the Company authorized a bonus to the Company's CEO in the
amount of $300,000. The bonus is payable in either cash or stock equivalents to
be determined at the sole discretion of the CEO. If the CEO elects to receive
such bonus in the form of restricted stock, the stock price to be used to
calculate the number of shares of restricted stock will be the closing market
price on February 6, 2007 of $1.15 per share. The timing of the bonus payment,
either as partial payment or payment in full and the form of the bonus is at the
sole discretion of the CEO. Although we believe the bonus payment would only be
distributed when the Company has sufficient cash reserves, timing of the bonus
payment could have a material impact on the Company's liquidity. At June 30,
2007, $259,000 of the bonus is unpaid.
General Conditions Beyond the Companies Control
The general economic condition of the United States and other regions of the
world, work disruptions, labor negotiations both at the Company and with our
licensees and distributors, actions of the U.S. and foreign governments, foreign
currency exchange rate fluctuations, inflation and other economic events all to
varying degrees do, could and would have an effect upon the Company some of
which could have a material adverse impact.
ITEM 2 DESCRIPTION OF PROPERTY
We lease approximately 3,200 square feet of office and laboratory space at 2445
Winnetka Avenue North, Golden Valley, Minnesota, which serves as our primary
place of business. This lease is with Van Thuy Tran, a director and chief
executive officer of the Company. Our lease requires monthly payments of $3,150
and runs through June 30, 2012, with an option to automatically extend the lease
for two one-year extensions.
Page 12 of 48
Veritec leased on a month-to-month basis, a single-family residence located at
10310 -39th Avenue North, Plymouth, Minnesota to house visitors, consultants and
employees hired from outside the State of Minnesota versus the high cost of
hotel lodging. The lease required a monthly payment of $1,500. The residence is
owned by Larry Johanns, a principal of The Matthews Group. This lease expired on
September 1, 2007.
In January 2007, the Company began leasing on a month-to-month basis, a
single-family residence located at 2415 Winnetka Ave. N., Golden Valley,
Minnesota to house visitors and consultants. Our lease requires a monthly
payment of $1,700. The residence is owned by Van Thuy Tran, a director and chief
executive officer of the Company.
ITEM 3 LEGAL PROCEEDINGS
On June 30, 2000, we were served as a defendant in the matter of Starsolsky vs.
Veritec, Inc., et al., in the United Stated District Court for the Central
District of California. The suit was later transferred to Minnesota. This suit
was brought by a shareholder and former director of the Company against Veritec
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 United States Bankruptcy Code in the United States Bankruptcy Court in the
1990's. The complaint sought equitable relief to set aside the issuance of
Series H preferred stock (now converted into common stock) issued to The
Matthews Group that was authorized by the previously approved bankruptcy
reorganization plan in 1999, to prevent The Matthews Group from voting its stock
at any meetings of stockholders and to remove certain of the individual
defendants as directors of the Company. No damages were sought. In September
2007, judgment was entered in favor of the Company and the other defendants
dismissing with prejudice the Federal claims and dismissing without prejudice
the remaining State claims. The plaintiff has 30 days from the date of entry of
the judge to appeal.
Vcode joined with VData as Plaintiffs in patent enforcement litigation filed on
October 4, 2005, against Brother Industries, Ltd., Sato Corporation, Toshiba
Corporation and US Bank National Association in the United States District Court
for the District of Minnesota alleging violations of the Company's patents. US
Bank National Association has entered into a licensing agreement with the
Company and the case as to that defendant was dismissed. The remaining
defendants, Brother Industries, Ltd., Sato Corporation, and Toshiba Corporation,
did not settle but were dismissed from the case without prejudice. VData and the
Company must wait for resolution of the patent reexaminations, described below,
before re-asserting claims against the remaining defendants.
On March 13, 2006, in response to notices of infringement sent to its customers
by VData, Cognex Corporation filed a preemptive action seeking a Declaratory
Judgment against VData and the Company in the United States District Court for
the District of Minnesota. Amongst other remedies the action seeks a ruling from
the court that Vcode's United States Patent No. 5,612,524 is not enforceable
against Cognex Corporation and its customers, that the Company has defamed
Cognex and that the Company has engaged in unfair and deceptive business
practices in violation of Minnesota law. On December 27, 2006, an answer and
affirmative defense was filed to contest the plaintiff's allegations and claims
for damages, injunctive relief, attorney's fees, and costs. A counterclaim was
also filed for infringement of United States Patent No. 5,612,524. A claim
construction hearing in this case is scheduled for September 7, 2007. This case
is currently scheduled for trial on January 14, 2008.
On April 6, 2006, the U.S. Patent and Trademark Office granted a Third Party
Request for an Ex Parte Reexamination of Vcode's United States Patent No.
5,612,524. A response on behalf of the Company rebutting the allegations in the
Request for Reexamination has been filed with the U.S. Patent and Trademark
Office. The Company is awaiting a determination by the U.S. Patent and Trademark
Office
Page 13 of 48
on whether to proceed with the reexamination process or dismiss the request for
lack of merit. The Company has been advised by legal counsel that a preemptive
filing of such a request for Ex Parte Reexaminations is commonplace in the
enforcement areas of patent law and practice. Because, not all claims of the
patent have been challenged, the Company believes that a determination adverse
to the patent would not be detrimental to the Company's ability to market its
products, but could be detrimental to the collection of licensing fees based
upon this patent.
On May 23, 2006, Vcode joined with VData as a Plaintiff in a pending patent
enforcement litigation filed against Aetna, Inc., PNY Technologies, Inc.,
Merchants' Credit Guide Co., The Allstate Corporation, and American Heritage
Life Insurance Company in the United States District Court for the District of
Minnesota alleging violations of the Company's patents. The Allstate Corporation
and American Heritage Life Insurance Company have entered into a licensing
agreement with the Company and the case as to those defendants has been
dismissed. Aetna, Inc., and Merchants' Credit Guide Co., have filed responsive
pleadings in the action. PNY Technologies, Inc. has counterclaimed with
allegations of non-infringement, invalidity, and inequitable conduct and is
seeking attorney's fees and costs. Defendant Aetna, Inc. filed a Motion to
Dismiss and a Motion for Rule 11 Sanctions. The Court denied both of Aetna's
motions. Defendant Merchant's Credit Guide Co. filed a Motion to Stay
Alternative Motion for Sanctions. The Court recently granted Merchants' Motion
to Stay and the case is currently stayed pending reexamination of the patents.
This case has not been set for trial.
On October 26, 2006, a Third Party Request for an Ex Parte Reexamination of
Vcode's United States Patent No. 4,924,078 was made. The Company was awaiting a
determination from the U.S. Patent and Trademark Office as to whether a grant of
the request for reexamination was merited. On January 17, 2007, the
reexamination for United States Patent No. 4,924,078 was ordered. The Company
has been advised by legal counsel that a preemptive filing of such a request for
Ex Parte Reexaminations is commonplace in the enforcement areas of patent law
and practice. The Company believes that a determination adverse to the patent
would not be detrimental to the Company's ability to market its products, but
could be detrimental to the collection of licensing fees based upon this patent.
During 2007, VCode and VData filed and approved several infringement complaints
against alleged infringers of the 5,331,176 patent.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded in the over-the-counter market. Quotations are
available on the OTC Pink Sheets. The common shares are not traded or quoted on
any automated quotation system. The OTC Pink Sheet Symbol for our common stock
is "VRTC.PK". 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).
Page 14 of 48
Market Price Range of Common Stock
Fiscal 2007 Fiscal 2006
----------- -----------
Quarter Ended High Low High Low
------------- ---- ---- ----- ---
September 30 1.75 1.20 .52 .12
December 31 1.95 .90 .64 .13
March 31 1.77 .84 .65 .17
June 30 1.02 .57 2.95 .47
Shareholders
As of July 31, 2007, there were approximately 795 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 contemplated
financial requirements, we do not anticipate paying any dividends in the
foreseeable future.
Current Sales of Unregistered Securities
5,000 shares of common stock were issued to a company employee in June 2007. The
Company also issued 12,500 shares of common stock to a consultant for services
pertaining to a November 2003 agreement.
The following table sets forth information with respect to shares of common
stock issuable under outstanding options and warrants.
Current Sales of Unregistered Securities
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
-------------------------- ------------------------- -------------------------
Equity Compensation plans approved -- -- --
by security holders
Equity Compensation plans not approved
by security holders (1) 156,000 $1.04 290,000
------- ----- -------
Total 156,000 $1.04 290,000
======= ===== =======
(1) These equity compensation plans are comprised of individual compensation
arrangements with certain employees of the company.
Page 15 of 48
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations - June 30, 2007 compared to June 30, 2006
We had net loss of $261,203 in the fiscal year ended June 30, 2007 compared to a
net income of $10,112,971 in the fiscal year ended June 30, 2006. Income
generated in 2006 was mostly related to settlement with creditors totaling
$9,356,948.
Revenues
Details of revenues are as follows:
Year Ended June 30, Increase (Decrease)
---------------------------------------------
2007 2006 $ %
---------- ---------- ----------- ----
License $ 383,266 $1,531,735 $(1,148,469) (75%)
Hardware 30,426 61,482 (31,056) (51%)
Identification Card 23,980 -- 23,980 --
Infringement 1,767,894 769,267 998,627 130%
---------- ---------- -----------
Total Revenues $2,205,566 $2,362,484 $ (156,918) (7%)
========== ========== ===========
The license and hardware revenue decrease was attributed to the following
factors: increased competition that has developed hardware equivalent or
superior in the performance to that of our distributors, impact from our
bankruptcy causing us to lose market share, the Mitsubishi arbitration award,
our cross-licensing agreement with Mitsubishi which provided them a license to
use our technology, and the economic slowdown resulting in manufacturers not
investing in new facilities. The majority of our license and hardware sales are
concentrated in the Asian market which decreased $356,277 in Taiwan, $765,414 in
Korea, and $41,739 in Japan and Singapore.
The identification Card revenues were a result of our acquisition of Secure
Environments Inc. (SEI) in October 2006.
The increase in our infringement revenues was the result of VData being
successful in settling numerous license contracts against companies using Data
Matrix Two-Dimensional Symbology.
Cost of Goods Sold
Cost of sales for the year ended June 30, 2007, totaled $74,030 and for the year
ended June 30, 2006, cost of sales were $37,849, an increase of $36,181. As a
percentage of revenue, for the year ended June 30, 2007, cost of sales was 3.3%
compared to 1.6% for the year ended June 30, 2006. Charges of $48,125 for a
designated site and maintenance services of a computer database to store
information in conjunction with our Independent Sales Organization (ISO)
license, purchased in December 2006, accounted for 65% of the total cost of
goods sold. Cost of goods sold associated with the license, hardware and
identification revenue was $25,905 or 5.9% of total licensing and hardware
revenue for the year ended June 30, 2007, compared to 2.4% for the year ended
June 30, 2006. The increased cost percent was the result of larger hardware
revenue in fiscal 2007 that yields a higher cost compared to more license
revenue which carried almost no cost in fiscal 2006.
Page 16 of 48
Operating Expenses
Research and development expense for the year ended June 30, 2007 totaled
$391,984 versus $193,525 for the year ended June 30, 2006. The increase of
$198,459 was a result of resuming research and development activity upon exiting
bankrupting in August 2006.
Sales and marketing expense for the fiscal year ended June 30, 2007 were
$238,988 compared to $30,132 for the fiscal year ended June 30, 2006, an
increase of $208,857. The same issues of bankruptcy in fiscal 2006, as described
for research and development expenses plus staffing increases accounted for the
increase. For the fiscal year ended June 30, 2007, the sales and marketing staff
was increased from one to a high of four individuals with the current staff of
three accounting for $158,000 of the increase over the prior year ended June 30,
2006.
General and administrative expense for the fiscal year ended June 30, 2007 were
$1,805,422 an increase of $443,901 over the prior year ended June 30, 2006. As
stated above, the effects of bankruptcy and lower expenditures in fiscal 2006
contribute to the increase in administrative expenses in fiscal 2007. Other
contributing factors were increased staffing, bonus and stock option expense
plus additional benefit cost due to the increase in staffing which, when
combined, amounts to $331,000 of the increase. Legal expenses for the year ended
June 30, 2007 were down $232,000 compared to the year ended of June 30, 2006. In
fiscal year 2007, the Company spent approximately $132,000 to bring it into
compliance with its SEC reporting requirements which had lapsed during
bankruptcy. Bad debt expense for the year ended June 30, 2007 was $245,000
compared to $1,750 for the year ended June 30, 2006, a difference of $243,000.
The $243,000 increase is primarily due to the write-off and reserve of RBA notes
receivable.
Other Income (Expense)
As a result of the completion of the Chapter 11 bankruptcy on August 8, 2006,
the Company recorded income of $9,356,948 ($0.62 per common share, basic and
diluted) from settlement with creditors, including $7,874,518 owed to
Mitsubishi.
Interest income for the fiscal year ended June 30, 2007 was $44,860 compared to
$16,566 for the fiscal year ended June 30, 2006 an increase of $28,294. The
increase was a result of our investment of infringement revenues received in
fiscal 2007.
Capital Expenditures and Commitments
During the fiscal year ended June 30, 2007, we made capital purchases of $78,179
compared to $6,002 in 2006. The PhoneCode(C) program developed in fiscal 2007,
accounted for $66,500 of capital expenditures for the year ended June 30, 2007.
Also in fiscal year 2007, the Company acquired SEI for $6,296. The remaining
amount of $5,383 was primarily purchases of computers.
Liquidity
For the years ended June 30, 2007 and 2006, the Company received cash for
licensing revenue of $1,767,894 and $769,267, respectively, through its
relationship with VData. This license revenue should not be viewed as unlimited
and is likely to decline or cease in the near future considering the potential
adverse determination in regard to the Patent Reexaminations or the Declaratory
Judgment being sought by Cognex of Patent Nos. 4,924,078 and 5,612,524.
Page 17 of 48
The Company has relied on The Matthews Group for funding. Through August 2007,
The Matthews Group has funded $1,796,296, including prepayments, of the original
$2,000,000 stock subscription receivable.
At June 30, 2007, the Company has $790,089 and $472,924 of cash and working
capital, respectively. The Company believes its cash and forecasted cash flow
from operations will be sufficient to continue operations through fiscal 2008.
The Company may require additional funds to continue to develop its existing and
future projects; there can be no assurance that the Company would be successful
in raising such funds.
Commitments and Contractual Obligations
The Company has one annual lease commitment of $37,800 for the corporate office
building which is leased from Van Tran, a director and chief executive officer
of the Company, that expires June 30, 2012. The commitment is for the corporate
offices at 2445 Winnetka Avenue North, Golden Valley, Minnesota. The total
amount of the 5 year lease commitment is $189,000.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies
Stock-Based Compensation:
The Company accounts for stock-based compensation under Statement of Financial
Accounting Standards (SFAS) No. 123(R), "Share-Based Payment" using the modified
prospective application method. SFAS No. 123(R) requires the cost of employee
compensation paid with equity instruments to be measured based on grant-date
fair values and recognized over the vesting period.
Revenue Recognition:
The Company accounts for revenue recognition in accordance with SEC Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements"
and related amendments. Revenues for the Company are classified into four
separate products; license revenue (Veritec's Multi-Dimensional matrix
symbology), hardware revenue, identification Card revenue and infringement
revenue. Revenues from licenses, hardware and identification Cards are
recognized when the product is shipped and all required payment terms have been
completed. The process typically begins for license and hardware revenue with a
customer purchase order detailing its hardware specifications so the Company can
import its software into the customer's hardware. Once importation is completed,
if the customer only wishes to purchase a license, the Company typically
transmits the software to the customer via the internet. Revenue is recognized
at that point. If the customer requests both license and hardware products, once
the software is imported into the hardware and the process is complete, the
product is shipped and revenue is recognized at time of shipment. Once the
software and/or hardware are either shipped or transmitted, the customers do not
have a right of refusal or return. Under some conditions, the customers remit
payment prior to the Company having completed importation of the software. In
these instances, the Company delays revenue recognition and reflects the
prepayments as customer deposits. The process for identification Cards begins
when a customer requests, via the internet, an identification Card. The Card is
reviewed for design and placement of the data, printed and packaged for
shipment. At the time the identification Cards are shipped and the customer has
met the required payment terms, the revenue is recognized. The Company receives
infringement revenue under an Exclusive License Agreement with VData. The
Exclusive License Agreement with VData provides that all expenses related to the
enforcement and licensing of the
Page 18 of 48
patents is the responsibility of VData. The Company and VData share the net
proceeds arising from enforcement or licensing of the patents. As a result, all
infringement revenue is recognized at the time it is received.
ITEM 7 FINANCIAL STATEMENTS
VERITEC, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007 AND 2006
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................. 20
CONSOLIDATED BALANCE SHEETS.............................................. 21
CONSOLIDATED STATEMENTS OF OPERATIONS.................................... 22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY.......................... 23
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 25
Page 19 of 48
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 sheets of Veritec, Inc.
and Subsidiary (Company) as of June 30, 2007 and 2006, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years 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 audits.
We conducted our audits in accordance with the 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. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide 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
Subsidiary as of June 30, 2007 and 2006, and the results of their operations and
their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
The Company is involved in various litigation matters, which could have a
significant effect on the Company (Note 10 - Contingencies).
/s/ Lurie Besikof Lapidus & Company, LLP
----------------------------------------
Lurie Besikof Lapidus & Company, LLP
Minneapolis, Minnesota
September 28, 2007
Page 20 of 48
VERITEC, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2007 AND 2006
2007 2006
------------ ------------
ASSETS
Current Assets:
Cash $ 790,089 $ 898,424
Accounts receivables, net of allowance of $24,000 and $28,000 11,927 59,173
Notes receivable from RBA, net of allowance of $48,000 78,516 --
Inventories 26,213 7,495
Prepaid expenses 27,325 4,650
------------ ------------
Total Current Assets 934,070 969,742
Property and Equipment, net 88,005 21,088
Other Assets 102,089 --
------------ ------------
Total Assets $ 1,124,164 $ 990,830
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 56,072 $ 37,400
Accrued expenses 405,074 285,372
------------ ------------
Total Current Liabilities 461,146 322,772
Prepayment on Subscription Receivable -- 92,008
------------ ------------
Total Liabilities 461,146 414,780
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Convertible preferred stock, par value $1.00; authorized 10,000,000
shares, 276,000 shares of Series H authorized, 1,000 shares issued 1,000 1,000
Common stock, par value $.01; authorized 20,000,000 shares, 15,096,088
and 15,078,598 shares issued 150,961 150,786
Subscription receivable (193,876) (386,138)
Additional paid-in capital 13,575,926 13,420,192
Accumulated deficit (12,870,993) (12,609,790)
------------ ------------
Total Stockholders' Equity 663,018 576,050
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,124,164 $ 990,830
============ ============
See notes to consolidated financial statements
Page 21 of 48
VERITEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2007 AND 2006
2007 2006
---------- -----------
Revenues:
License $ 383,266 $ 1,531,735
Hardware 30,426 61,482
Identification Card 23,980 --
Infringement 1,767,894 769,267
---------- -----------
Total revenues 2,205,566 2,362,484
Cost of Sales 74,030 37,849
---------- -----------
Gross Profit 2,131,536 2,324,635
---------- -----------
Operating Expenses:
General and administrative 1,805,422 1,361,521
Sales and marketing 238,988 30,132
Research and development 391,984 193,525
---------- -----------
Total Operating Expenses 2,436,394 1,585,178
---------- -----------
Income (Loss) from Operations (304,858) 739,457
---------- -----------
Other Income (Expense):
Settlement with creditors -- 9,356,948
Interest income 44,860 16,566
Other (1,205) --
---------- -----------
Total Other Income 43,655 9,373,514
---------- -----------
Net Income (Loss) $ (261,203) $10,112,971
========== ===========
Income (Loss) Per Common Share -
Basic and Diluted $ (0.02) $ 0.67
========== ===========
See notes to consolidated financial statements
Page 22 of 48
VERITEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2007 AND 2006
Preferred Stock Common Stock Additional Stockholders'
--------------- --------------------- Subscription Paid-in Accumulated Equity
Shares Amount Shares Amount Receivable Capital Deficit (Deficit)
------ ------ ---------- -------- ------------ ----------- ------------ -------------
BALANCE, June 30, 2005 1,000 $1,000 15,078,598 $150,786 $(560,176) $13,372,008 $(22,722,761) $(9,759,143)
Imputed interest on
subscription receivable -- -- -- -- (48,184) 48,184 -- --
Subscription receivable
reduction -- -- -- -- 222,222 -- -- 222,222
Net income -- -- -- -- -- -- 10,112,971 10,112,971
----- ------ ---------- -------- --------- ----------- ------------ -----------
BALANCE, June 30, 2006 1,000 1,000 15,078,598 150,786 (386,138) 13,420,192 (12,609,790) 576,050
Imputed interest on
subscription receivable -- -- -- -- (29,960) 29,960 -- --
Subscription receivable
reduction -- -- -- -- 222,222 -- -- 222,222
Stock option expense -- -- -- -- -- 112,198 -- 112,198
Common stock issued to
employee and consultant -- -- 17,500 175 -- 13,576 -- 13,751
Stock returned to the
Company -- -- (10) -- -- -- -- --
Net loss -- -- -- -- -- -- (261,203) (261,203)
----- ------ ---------- -------- --------- ----------- ------------ -----------
BALANCE, June 30, 2007 1,000 $1,000 15,096,088 $150,961 $(193,876) $13,575,926 $(12,870,993) $ 663,018
===== ====== ========== ======== ========= =========== ============ ===========
See notes to consolidated financial statements
Page 23 of 48
VERITEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2007 AND 2006
2007 2006
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(261,203) $10,112,971
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 11,262 7,517
Amortization of software license 16,667 --
Notes receivable from RBA allowance and write-off 248,900 --
Stock issued for compensation 117,198 --
Interest added to notes receivable from RBA (10,357) --
Services applied against notes receivable from RBA 55,858 --
Settlement with creditors -- (9,356,948)
Changes in operating assets and liabilities:
Accounts receivable 47,246 (56,215)
Inventories (18,718) (802)
Prepaid expenses (22,675) 2,058
Accounts payables and accrued expenses 166,228 63,327
Accrued expense - Mitsubishi litigation -- (300,000)
--------- -----------
Net cash provided by operating activities 350,406 471,908
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances on notes receivable from RBA (725,000) --
Collections on notes receivable from RBA 304,083 --
Purchases of equipment (30,179) (6,002)
Purchase of software license (100,000) --
Patent costs (18,756) --
--------- -----------
Net cash used by investing activities (569,852) (6,002)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on subscription receivable 111,111 --
--------- -----------
NET INCREASE (DECREASE) IN CASH (108,335) 465,906
CASH AT BEGINNING OF YEAR 898,424 432,518
--------- -----------
CASH AT END OF YEAR $ 790,089 $ 898,424
========= ===========
See notes to consolidated financial statements
Page 24 of 48
VERITEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The Company refers to Veritec, Inc. (Veritec) and its wholly owned
subsidiary, Vcode Holdings, Inc. (Vcode).
Nature of Business
The Company is primarily engaged in the development, marketing and sales of
a line of microprocessor based encoding and decoding systems that utilize
Matrix Symbology technology, a two-dimensional barcode technology
originally invented by the founders of Veritec under United States patents
4,924,078, 5,331,176, 5,612,524 and 7,159,780. As more fully described
below, three of these patents are the property of Vcode. The Company's
encoding and decoding systems allow a manufacturer, distributor, reseller
or user of products, to create and apply unique identifiers to the products
in the form of a coded symbol. The coded symbol containing the binary
encoded data applied to the product enables automated manufacturing
control, together with identification, tracking, and collection of data
through cameras, readers and scanners also marketed by the Company. The
collected data is then available for contemporaneous verification or other
user definable purposes. The Company has also developed a Secured
Identification System based upon its proprietary VSCode(TM) and VeriCode(R)
Symbology. The Company's Secured Identification System enables the storage
of images, biometric information and data for contemporaneous verification
of an individual's unique identity. In addition to United States patents,
Veritec holds patents in Europe (German patent No. 69033621.7; French
patent No. 0438841; and, Great Britain patent No. 0438841) and has
applications pending with the United States Patent and Trademark Office for
novel uses of its Multi-Dimensional Matrix Symbology.
The Company's core business is the sale of its Multi-Dimensional Matrix
Symbology together with its proprietary software products for the writing
and reading thereof.
Vcode: In November 2003, Veritec formed Vcode to which it assigned United
States patents 4,924,078, 5,331,176 and 5,612,524, together with all
corresponding patent applications, foreign patents, foreign patent
applications, and all continuations, continuations in part, divisions,
extensions, renewals, reissues and re-examinations. Vcode in turn entered
into an Exclusive License Agreement with VData LLC (VData), a Illinois
limited liability company unrelated to Veritec. The purpose of the
Exclusive Licensing Agreement is to allow VData to pursue enforcement and
licensing of the patents against parties who wrongfully exploit the
technology of such patents. VData is the wholly owned subsidiary of Acacia
Research Corporation (NASDAQ: ACTG) (collectively Acacia).
The Exclusive License Agreement with VData provides that all expenses
related to the enforcement and licensing of the patents is the
responsibility of VData. The Company and VData share the net proceeds
arising from the enforcement or licensing of the patents. Proceeds from
this arrangement were recorded as infringement revenue in the quarter the
money was received. None of the infringement revenue is refundable to any
party once received.
Page 25 of 48
Bankruptcy Considerations
In February 2005, an adverse ruling was made against Veritec in favor of
Mitsubishi Corporation (Mitsubishi), resulting in a monetary award of
$8,174,518 to Mitsubishi and enjoining Veritec and by extension Veritec's
customers from the future use or sale of Mitsubishi's Error Detection and
Correction Technology. This ruling compelled Veritec to file a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court (Bankruptcy Court) for the District
of Minnesota on February 28, 2005.
After reaching an agreement with Mitsubishi and other creditors, in April
2006, Veritec's Third Amended Plan of Reorganization was confirmed by the
Bankruptcy Court. On August 8, 2006, the Bankruptcy Court entered an Order
and Final Decree closing the Chapter 11 case in its entirety. As a result
of the Chapter 11 bankruptcy, Veritec settled $9,356,948 of debts including
$7,874,518 owed to Mitsubishi. In connection with the settlement with
Mitsubishi, we obtained a license to certain Mitsubishi EDAC technology and
granted Mitsubishi a license to VeriCode(R).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Veritec and Vcode. All inter-company transactions and balances were
eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that may 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 cash in a financial institution which, at times, 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.
Accounts 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.
Page 26 of 48
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated
useful lives of 3 to 7 years. When assets are retired or otherwise
disposed, the cost and related accumulated depreciation are removed from
the accounts and the resulting gain or loss is recognized. Maintenance and
repairs are expensed as incurred; significant renewals and betterments are
capitalized.
Software License
The software license from RBA International, Inc. is capitalized at cost
and amortized using the straight-line method over an estimated useful life
of three years.
Financial Instruments
The fair value of cash, 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 subscription receivable approximates fair value as a result of the 10%
interest rate used for imputing interest. No quoted market value is
available for this instrument.
Revenue Recognition
The Company accounts for revenue recognition in accordance with SEC Staff
Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial
Statements" and related amendments. Revenues for the Company are classified
into four separate products; license revenue (Veritec's Multi-Dimensional
matrix symbology), hardware revenue, identification Card revenue and
infringement revenue. Revenues from licenses, hardware and identification
Cards are recognized when the product is shipped and all required payment
terms have been completed. The process typically begins for license and
hardware revenue with a customer purchase order detailing its hardware
specifications so the Company can import its software into the customer's
hardware. Once importation is completed, if the customer only wishes to
purchase a license, the Company typically transmits the software to the
customer via the internet. Revenue is recognized at that point. If the
customer requests both license and hardware products, once the software is
imported into the hardware and the process is complete, the product is
shipped and revenue is recognized at time of shipment. Once the software
and/or hardware are either shipped or transmitted, the customers do not
have a right of refusal or return. Under some conditions, the customers
remit payment prior to the Company having completed importation of the
software. In these instances, the Company delays revenue recognition and
reflects the prepayments as customer deposits.
The process for identification Cards begins when a customer requests, via
the internet, an identification Card. The Card is reviewed for design and
placement of the data, printed and packaged for shipment. At the time the
identification Cards are shipped and the customer has met the required
payment terms, the revenue is recognized.
The Company receives infringement revenue under an Exclusive License
Agreement with VData. The Exclusive License Agreement with VData provides
that all expenses related to the enforcement and licensing of the patents
is the responsibility of VData. The Company and VData share the net
proceeds arising from enforcement or licensing of the patents. As a result,
all infringement revenue is recognized at the time it is received. None of
the infringement revenue is refundable to any party once received.
Page 27 of 48
Shipping and Handling Fees and Cost
For the year ended June 30, 2007, shipping and handling fees billed to
customers were offset against shipping and handling costs and the net
amount was included in operating expenses. For the year ended June 30,
2006, shipping and handling fees billed to customers were included in
revenues and shipping and handling costs were included in cost of sales. No
reclassification was made to the 2006 consolidated statement of operations
since the amount was not material.
Research and Development
Research and development costs were expensed as incurred.
Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing the income
(loss) available to common stockholders by the weighted-average number of
common shares outstanding for the year. Diluted net income (loss) per
common share, in addition to the weighted-average number of common shares
outstanding determined for basic net income (loss) per common share,
includes potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. Potentially dilutive instruments include stock options, preferred
stock and stock bonus/compensation (Note 7). For the year ended June 30,
2007, stock options (156,666 common shares), preferred stock (10,000 common
shares) and unpaid stock bonus/compensation were antidutive and, therefore,
were not included in the computation of diluted net loss per common share.
The weighted average shares outstanding at June 30, 2007 was 15,079,845.
Diluted net income per common share for the year ended June 30, 2006, was
computed as follows:
Net income for per share computation $10,112,971
===========
Weighted average shares outstanding 15,078,598
Incremental shares from assumed exercise
or conversion of dilutive instruments:
Options 18,750
Preferred stock 10,000
-----------
Shares outstanding - diluted 15,107,348
===========
Stock-Based Compensation
The Company accounts for stock-based compensation under Statement of
Financial Accounting Standards (SFAS) No. 123(R), "Share-Based Payment",
using the modified prospective application method. SFAS No. 123(R) requires
the cost of employee compensation paid with equity instruments to be
measured based on grant-date fair values and recognized over the vesting
period.
Page 28 of 48
Recently Issued Accounting Standards
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes -
an Interpretation of FASB Statement No. 109". FIN 48 prescribes a
recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to
be taken in a tax return. For those benefits to be recognized, a tax
position must be more likely than not to be sustained on its merits if
audited and challenged. The amount recognized is measured as the largest
amount of benefit that is greater than 50% likely to be realized upon
ultimate settlement. FIN 48 will be applicable for the Company beginning
fiscal 2008. The Company will be required to apply the provisions of this
Interpretation to all tax positions upon initial adoption with any
cumulative effect to be recognized as an adjustment to accumulated deficit.
Management is currently assessing the impact of FIN No. 48 on the
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements
(as amended)", which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and
expands disclosure about fair value measurements. SFAS 157 applies whenever
other standards require (or permit) assets or liabilities to be measured at
fair value, and therefore, does not expand the use of fair value in any new
circumstances. SFAS 157 will be effective for the Company beginning fiscal
2009. Management is currently evaluating the impact SFAS 157 will have on
the consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities SFAS 159 (as amended), Including
an Amendment of FASB Statement No. 115," which permits entities to measure
eligible financial assets, financial liabilities and firm commitments at
fair value, on an instrument-by-instrument basis, that are otherwise not
permitted to be accounted for at fair value under other generally accepted
accounting principles. The fair value measurement election is irrevocable
and subsequent changes in fair value must be recorded in earnings. SFAS 159
will be effective for the Company beginning fiscal 2009. Management is
currently evaluating if it will elect the fair value option for any of the
Company's eligible financial instruments.
Reclassifications
Certain reclassifications were made to the 2006 consolidated financial
statements to make them comparable with the 2007 presentation. The
reclassifications had no impact on net income or net cash flow.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has
relied on The Matthews Group for funding. Through August 2007, The Matthews
Group has funded $1,796,296, including prepayments, of the original of
$2,000,000 stock subscription receivable.
Page 29 of 48
In February 2005, Veritec filed for bankruptcy protection under Chapter 11
and emerged from bankruptcy in August 2006. As reflected in these
consolidated financial statements, Veritec settled $9,356,948 of debts
including $7,874,518 owed to Mitsubishi.
As of June 30, 2007 and 2006, the Company has recognized licensing revenue
of $1,767,894 and $769,267, respectively, through its relationship with
VData. The Company has not received additional licensing revenue from VData
since the third quarter of fiscal 2007. This license revenue should not be
viewed as unlimited and is likely to decline or cease in the near future
considering the potential adverse determination in regard to the Patent
Reexaminations or the Declaratory Judgment being sought by Cognex of Patent
Nos. 4,924,078 and 5,612,524 (Note 10 - Contingencies).
At June 30, 2007, the Company has $790,089 and $472,924 of cash and working
capital, respectively. The Company believes its cash and forecasted cash
flow from operations will be sufficient to continue operations through
fiscal 2008. The Company may require additional funds to continue to
develop its existing and future projects; there can be no assurance that
the Company would be successful in raising such funds.
NOTE 3 - NOTES RECEIVABLE
In December 2006, the Company loaned $100,000 to RBA International, Inc.
(RBA). RBA is a software company that specializes in the financial services
industry. The unsecured note bore interest at 10% and was due January 31,
2007. In January 2007, the Company extended the note to March 1, 2007, and
applied all charges incurred by the Company for services performed and/or
software purchases from RBA against the note and will accrue interest until
such time that the note is paid in full. As of June 30, 2007, the note
receivable had a balance of $570.
In January 2007, the Company loaned $300,000 to RBA and related owners of
RBA. The note bore interest at 10%, was due on or before March 1, 2007 and
was collateralized by certain assets of RBA. On March 1, 2007, the note and
accrued interest were paid.
In April 2007, the Company loaned $200,000 (two $100,000 notes) to RBA. The
notes bore interest at 8% and were due on or before May 16, 2007 and were
collateralized by certain assets of RBA. These two notes including accrued
interest of $900 were consolidated into one $200,900 noninterest bearing
note due on or before May 16, 2007. In addition, the Company received two
software licenses to RBA's products. On May 16, 2007, RBA failed to make
payment on this note. The Company demanded and received the banking
software and related documentation that RBA used as collateral to guarantee
the note. The Company does not believe the collateral is easily marketable
and, therefore, wrote-off the entire amount of the note receivable
defaulted on by RBA and has not assigned any value to the collateral
received.
In June 2007, the Company provided a $125,000 line of credit bearing
interest at 10% to RBA. As of June 30, 2007, RBA has borrowed the maximum
$125,000. Due to the default by RBA on the $200,900 note receivable, the
Company reserved $48,000 on this note. The reserve is based on estimated
services RBA will perform for the Company's benefit through December 2007.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Page 30 of 48
June 30,
------------------
2007 2006
-------- -------
Furniture and equipment $140,338 $62,159
Vehicles 35,301 35,301
-------- -------
175,639 97,460
Less accumulated depreciation 87,634 76,372
-------- -------
$ 88,005 $21,088
======== =======
All property and equipment is located in the United States.
NOTE 5 - OTHER ASSETS
Software License
The software license of $83,333 was net of accumulated amortization of
$16,667 at June 30, 2007. Amortization expense for software license was
$16,667 for fiscal year 2007. Future amortization expense is estimated to
be $33,333 in each fiscal years 2008 and 2009, and 16,667 in fiscal year
2010.
Patents Costs
The patent application costs of $18,756 of the PhoneCode(C) technology,
when approved, will be amortized over its estimated useful life. If not
approved, or if considered impaired, these costs will be written off.
NOTE 6 - PREPAYMENTS ON SUBSCRIPTION RECEIVABLE
The Matthews Group, in the past, has made prepayments against the Company's
subscription receivable (Note 7). These prepayments were unsecured and
noninterest bearing. The prepayment on the subscription receivable were
applied against the subscription receivable during fiscal 2007.
NOTE 7 - STOCKHOLDERS' EQUITY
Preferred Stock
The articles of incorporation of Veritec authorize 10,000,000 shares of
preferred stock with a par value of $1.00 per share. The Board of Directors
is authorized to determine any number of series into which shares of
preferred stock may be divided and to determine the rights, preferences,
privileges and restrictions granted to any series of the preferred stock.
As part of the bankruptcy 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 $2,000,000 of assets 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 $2,000,000 promissory note.
The Matthews Group exercised the conversion privilege and converted 200,000
preferred shares to 2,000,000 shares of common stock.
Page 31 of 48
In December 2004, The Matthews Group exercised the conversion privilege of
their remaining balance of Series H convertible preferred stock and
converted 75,000 preferred shares into 750,000 shares of common stock. The
remaining 1,000 shares of Series H convertible preferred stock issued and
outstanding is owned by an unrelated party.
Stock Bonus/Compensation
The Company has an agreement with an employee to issue 5,000 shares of the
Company's common stock beginning August 2006 and 2,000 shares of the
Company's common stock annually each May thereafter for five years.
Compensation expense related to this agreement was $8,700 for the year
ended June 30, 2007. The 2,000 shares granted in May 2007 are expected to
be issued in fiscal 2008.
The Company entered into an agreement with a consultant to issue 15,000
shares of the Company's common stock as of January 2, 2007. Compensation
expense related to this agreement was $26,250 for the year ended June 30,
2007. The issuance of the stock is expected in fiscal 2008.
On February 6, 2007, the Company authorized a $300,000 bonus to Van Tran, a
director and the chief executive officer of the Company (CEO). The bonus is
payable in either cash or stock equivalents to be determined at the sole
discretion of the CEO. If the CEO elects to receive such bonus in the form
of restricted stock, the stock price to be used to calculate the number of
shares of restricted stock will be the closing market price on February 6,
2007 of $1.15 per share. The timing of the bonus payment, either as partial
payment or payment in full and the form of the bonus is at the sole
discretion of the CEO. The liability for the bonus is recorded based on the
greater of $300,000 or the value of the shares the CEO is entitled to
receive based on the closing balance sheet date stock price. As of June 30,
2007, $41,000 of the bonus was paid to the CEO. The remaining accrued bonus
was $259,000.
In June 2007, the Company issued 10,000 shares of the Company's common
stock to a consultant for $5,000 of services.
Stock Options
The Board of Directors authorized the CEO to issue up to 1,000,000 shares
of the Company's common stock in the form of options or stock bonuses to
employees and consultants. At June 30, 2007, stock and stock options
totaling 489,166 have been committed under this authorization.
The Company has agreements with certain employees that provide for five
years of annual grants of options, on each employment anniversary date, to
purchase shares of the Company's common stock. The option price is 15%
below the market price on the date of grant, the options vest one year from
the date of grant, and the options expire five years after vesting. The
Company granted 116,666 and 30,000 options under this arrangement in 2007
and 2006, respectively. The Company has commitments under these agreements
to grant options to acquire 80,000 shares of the Company's common stock
each year for 2008 through 2010, and 50,000 shares in fiscal 2011.
In addition to the options granted above, the Company granted options to
purchase 40,000 shares of the Company's common stock to certain employees
during the year ended June 30, 2007. The option price is $0.25 per share,
the options are vested and the options expire five years from the grant
date.
Page 32 of 48
A summary of stock options is as follows:
Number of Weighted - Average
Shares Exercise Price
--------- ------------------
Outstanding at June 30, 2005 15,000 $0.80
Expired (15,000) $0.80
Granted 30,000 $2.04
-------
Outstanding at June 30, 2006 30,000 $2.04
Granted 156,666 $0.92
Expired (30,000) $1.47
-------
Outstanding at June 30, 2007 156,666 $1.03
=======
The weighted-average remaining contractual life of stock options
outstanding at June 30, 2007 is 5.0 years.
70,000 shares with a weighted-average exercise price of $1.02 are
exercisable at June 30, 2007 with 4.4 years remaining contractual life.
The weighted-average grant date fair value for options granted in fiscal
2007 and 2006 was $0.72 and $0.87, respectively.
A summary of nonvested stock options is as follows:
Weighted-
Average
Number of Grant Date
Shares Fair Value
--------- ----------
Outstanding at June 30, 2006 30,000 $0.87
Granted 156,666 $0.72
Vested (70,000) $1.16
Expired (30,000) $0.62
-------
Outstanding at June 30, 2007 86,666 $0.76
=======
The weighted-average fair value of options granted was estimated at grant
date using the Black-Scholes-Merton option pricing model with the following
weighted-average assumptions:
Years Ended
June 30,
-----------------
2007 2006
------- -------
Risk-free interest rates 4.84% 4.96%
Dividend yields 0% 0%
Volatility (1) 34.61% 7.39%
Weighted average expected life (2) 3 years 3 years
Page 33 of 48
(1) Volatility was based on the historical volatility of certain competitor
companies for periods the Company was in bankruptcy, and the volatility of
the Company's common stock for periods post bankruptcy.
(2) The Company estimated the expected life of options based on historical
experience and other averaging methods.
Stock-based compensation expense was $112,198 and $0 during the years ended
June 30, 2007 and 2006, respectively. As of June 30, 2007, there was
$10,362 of unrecognized compensation costs related to stock options. These
costs are expected to be recognized over the next three quarters.
Subscription Receivable
In September 1999, the Company accepted a commitment from The Matthews
Group to fund the $2,000,000 required under the bankruptcy Plan of
Reorganization. This funding is a promissory note that requires monthly
payments to the Company of $18,519 through fiscal 2008. These payments are
noninterest 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
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.
NOTE 8 - CONCENTRATIONS
Major Customers:
Customers in excess of 10% of total revenues were as follows:
Years Ended
June 30,
-----------
2007 2006
---- ----
Customer A 80% 33%
Customer B -- 27%
Customer C -- 14%
--- ---
80% 74%
=== ===
Major Suppliers:
The Company has in the past depended on one major supplier for its source
of scanners. In 2007, the Company successfully ported their software into
several scanners produced by various manufacturers alleviating any risk the
Company may have had in the marketplace.
Foreign Revenues:
Foreign revenues accounted for 19% of the Company's total revenues in
fiscal 2007 and 65% in fiscal 2006. (4% Taiwan, 5% Korea, 6% Japan, 3%
Germany and 1% others in fiscal 2007 and 6% Japan, 36% Korea, 18% Taiwan
and 5% others in fiscal 2006.)
Page 34 of 48
NOTE 9 - INCOME TAXES
Deferred income taxes are provided on the liability method whereby deferred
tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Veritec and Vcode file a consolidated income tax return in the United
States.
A reconciliation between the expected federal income tax rate and the
actual tax rate is as follows:
Years Ended June 30,
------------------------------------------
2007 2006
------------------ ---------------------
Amount Percent Amount Percent
-------- ------- ----------- -------
Expected federal tax (benefit) $(88,800) (34.0)% $ 3,438,400 34.0%
State income tax, net of
federal tax (benefit) (16,900) (6.5) 654,100 6.5
Other 5,500 2.1 (10,700) (0.1)
Valuation and utilization of
deferred tax assets 100,200 38.4 (4,081,800) (40.4)
-------- ----- ----------- -----
Income tax expense (benefit) $ -- --% $ -- --%
======== ===== =========== =====
Deferred income tax assets have been reduced by a valuation allowance as it
is more likely than not that they will not be realized. The valuation
allowance increased by $100,200 for the year ended June 30, 2007 and
decreased by $4,081,800 for the year ended June 30, 2006.
The Company used $1,808,000 Federal and Minnesota net operating loss carry
forwards to reduce its 2006 taxable income. The following is a summary of
the deferred tax assets (separate disclosure of state deferred taxes has
not been presented as such disclosure is not considered to be material):
June 30,
-------------------------
2007 2006
----------- -----------
Allowance for doubtful accounts $ 28,800 $ 11,300
Intangible assets 39,100 45,000
Accrued expenses 39,700 5,400
Net operating loss carryforwards 2,771,800 2,717,500
----------- -----------
Deferred tax asset 2,879,400 2,779,200
Valuation allowance (2,879,400) (2,779,200)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
Veritec has net operating loss carryforwards available to offset future
taxable income that expire as follows (year ending June 30):
Page 35 of 48
Year Federal Minnesota
---- ---------- --------
2008 $ 280,000 $ --
2009 1,410,000 --
2010 1,227,000 --
2011 457,000 --
2012 301,000 --
2018 480,000 --
2019 451,000 --
2020 330,000 731,000
2021 654,000 --
2022 105,000 --
2023 794,000 --
2025 1,498,000 138,000
---------- --------
$7,987,000 $869,000
========== ========
The ability to utilize the net operating loss carry forwards could be
limited by Section 382 of the Internal Revenue Code which limits their use
if there is a change in control (generally a greater than 50% change in
ownership).
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its U.S. office facilities from its CEO, under a lease
expiring June 30, 2012 and requiring monthly payments of $3,150 plus common
area costs. The Company leased a single-family residence in Plymouth,
Minnesota on a month-to-month basis from a principal of The Matthews Group
for purposes of housing customers, guests and consultants. This lease
expired on September 1, 2007. In January 2007, the Company began leasing on
a month-to-month basis, a single-family residence in Golden Valley,
Minnesota owned by the CEO. Rent expense, included in operating cost, to
related parties was $64,300 and $55,800 in 2007 and 2006, respectively.
Future annual minimum lease payments total $37,800 in each fiscal year 2008
thru 2012, totaling $189,000.
Design Agreement
In November 2006, the Company entered into an agreement with a
manufacturing company to design and develop a line of readers to overcome
the Company's dependence on outside suppliers. In Phase One of the project,
a proto-type cell phone reader designed by the manufacturing company was
evaluated and accepted. Phase Two of the project requires the manufacturing
company to design and manufacture four individual proto-type models of
readers that work with Matrix Symbologies. The agreement required a deposit
of $30,000 and payments of $30,000 for each of the four defined milestones
with the total project cost not to exceed $150,000. The project is
continuing to progress but at this time no estimate as to the completion
date has been determined. To date the Company has made the required deposit
of $30,000 and a $20,000 advance. Payments under this agreement are
recorded as research and development expense as the service is provided.
Contingencies
On June 30, 2000, we were served as a defendant in the matter of Starsolsky
vs. Veritec, Inc., et al., in the United Stated District Court for the
Central District of California. The suit was later
Page 36 of 48
transferred to Minnesota. This suit was brought by a shareholder and former
director of the Company against Veritec 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 United States
Bankruptcy Code in the United States Bankruptcy Court in the 1990's. The
complaint sought equitable relief to set aside the issuance of Series H
preferred stock (now converted into common stock) issued to The Matthews
Group that was authorized by the previously approved bankruptcy
reorganization plan in 1999, to prevent The Matthews Group from voting its
stock at any meetings of stockholders and to remove certain of the
individual defendants as directors of the Company. No damages were sought.
In September 2007, judgment was entered in favor of the Company and the
other defendants dismissing with prejudice the Federal claims and
dismissing without prejudice the remaining State claims. The plaintiff has
30 days from the date of entry of the judge to appeal.
Vcode joined with VData as Plaintiffs in patent enforcement litigation
filed on October 4, 2005, against Brother Industries, Ltd., Sato
Corporation, Toshiba Corporation and US Bank National Association in the
United States District Court for the District of Minnesota alleging
violations of the Company's patents. US Bank National Association has
entered into a licensing agreement with the Company and the case as to that
defendant was dismissed. The remaining defendants, Brother Industries,
Ltd., Sato Corporation, and Toshiba Corporation, did not settle but were
dismissed from the case without prejudice. VData and the Company must wait
for resolution of the patent reexaminations, described below, before
re-asserting claims against the remaining defendants.
On March 13, 2006, in response to notices of infringement sent to its
customers by VData, Cognex Corporation filed a preemptive action seeking a
Declaratory Judgment against VData and the Company in the United States
District Court for the District of Minnesota. Amongst other remedies the
action seeks a ruling from the court that Vcode's United States Patent No.
5,612,524 is not enforceable against Cognex Corporation and its customers,
that the Company has defamed Cognex and that the Company has engaged in
unfair and deceptive business practices in violation of Minnesota law. On
December 27, 2006, an answer and affirmative defense was filed to contest
the plaintiff's allegations and claims for damages, injunctive relief,
attorney's fees, and costs. A counterclaim was also filed for infringement
of United States Patent No. 5,612,524. A claim construction hearing in this
case is scheduled for September 7, 2007. This case is currently scheduled
for trial on January 14, 2008.
On April 6, 2006, the U.S. Patent and Trademark Office granted a Third
Party Request for an Ex Parte Reexamination of Vcode's United States Patent
No. 5,612,524. A response on behalf of the Company rebutting the
allegations in the Request for Reexamination has been filed with the U.S.
Patent and Trademark Office. The Company is awaiting a determination by the
U.S. Patent and Trademark Office on whether to proceed with the
reexamination process or dismiss the request for lack of merit. The Company
has been advised by legal counsel that a preemptive filing of such a
request for Ex Parte Reexaminations is commonplace in the enforcement areas
of patent law and practice. Because, not all claims of the patent have been
challenged, the Company believes that a determination adverse to the patent
would not be detrimental to the Company's ability to market its products,
but could be detrimental to the collection of licensing fees based upon
this patent.
On May 23, 2006, Vcode joined with VData as a Plaintiff in a pending patent
enforcement litigation filed against Aetna, Inc., PNY Technologies, Inc.,
Merchants' Credit Guide Co., The Allstate Corporation, and American
Heritage Life Insurance Company in the United States District Court for the
District of Minnesota alleging violations of the Company's patents. The
Allstate Corporation and American Heritage Life Insurance Company have
entered into a licensing agreement with the Company and the case as to
those defendants has been dismissed. Aetna, Inc., and Merchants' Credit
Guide Co., have filed responsive pleadings in the action. PNY Technologies,
Inc. has counterclaimed with allegations of non-infringement, invalidity,
and
Page 37 of 48
inequitable conduct and is seeking attorney's fees and costs. Defendant
Aetna, Inc. filed a Motion to Dismiss and a Motion for Rule 11 Sanctions.
The Court denied both of Aetna's motions. Defendant Merchant's Credit Guide
Co. filed a Motion to Stay Alternative Motion for Sanctions. The Court
recently granted Merchants' Motion to Stay and the case is currently stayed
pending reexamination of the patents. This case has yet been set for trial.
On October 26, 2006, a Third Party Request for an Ex Parte Reexamination of
Vcode's United States Patent No. 4,924,078 was made. The Company was
awaiting a determination from the U.S. Patent and Trademark Office as to
whether a grant of the request for reexamination was merited. On January
17, 2007, the reexamination for United States Patent No. 4,924,078 was
ordered. The Company has been advised by legal counsel that a preemptive
filing of such a request for Ex Parte Reexaminations is commonplace in the
enforcement areas of patent law and practice. The Company believes that a
determination adverse to the patent would not be detrimental to the
Company's ability to market its products, but could be detrimental to the
collection of licensing fees based upon this patent.
During 2007, VCode and VData filed and approved several infringement
complaints against alleged infringers of the 5,331,176 patent.
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
Summary of Noncash Activity:
In fiscal 2007, the Company reduced subscriptions receivable by $111,111
through a reduction of the prepayment on subscription receivable of $92,008
and accrued expense of $19,103. In fiscal year 2006, the Company reduced
subscriptions receivable by $222,222 through a reduction of the prepayment
on subscription receivable.
In fiscal 2007, the Company purchased property and equipment from RBA
totaling $48,000 by reducing the note receivable from RBA.
In fiscal 2007, the Company purchased $55,858 of services from RBA by
reducing the note receivable from RBA.
In fiscal 2007, the Company issued 7,500 shares of its common stock for
accrued expenses of $8,751 and 10,000 shares of its common stock for $5,000
of consulting services.
In fiscal 2006, $9,356,948 of accounts payable and accrued expense was
relieved as a bankruptcy settlement with creditors.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
ITEM 8A CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, have 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
Page 38 of 48
period covered by this report. It was 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 year to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, have 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. It was concluded that, as of the end of such period, our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. Additionally, our disclosure controls and procedures were also
effective in ensuring that information required to be disclosed in our Exchange
Act reports is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer to allow timely decisions
regarding required disclosures.
ITEM 8B OTHER INFORMATION
None
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND
CORPORATE GOVERNANCE; 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 79 1999
Mr. Dean Westberg Director 74 2003
Ms. Van Thuy Tran Director, CEO, Treasurer, Secretary 63 1999
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.
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 has been
retired for more than five years. 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. Mr. Westberg has been retired for more than five years. At
3M he did factory scale-up of introductory
Page 39 of 48
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 has been the CEO of the Company since 1999. Ms. Tran was
President of Asia Consulting and Trading Company from 1979 to 1999, a company
dealing with trade in the Pacific Rim countries. She is the co-founder of Circle
of Love, providing mission work 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.
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 2007 and Form 5 and amendments thereto
furnished to us with respect to fiscal 2007, 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
Five meetings of our Board of Directors were held in fiscal 2007, and all board
members attended all meetings. We had no standing audit, nominating or
compensation committees of our Board or committees performing similar functions
during fiscal 2007. 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 to attract a board
member who would qualify as a financial expert given our current financial
position.
Code of Ethics
We have adopted a code of ethics.
Directors Compensation
Non-employee directors receive director's fees of $150 for each meeting
attended. These directors' fees totaled $862 in fiscal 2007 and $150 in fiscal
2006. Directors have waived fees in the past.
Page 40 of 48
ITEM 10 EXECUTIVE COMPENSATION
The following table indicates the compensation paid in each of the past three
fiscal years to our Chief Executive Officer and each of the next most highly
compensated executives whose total annual salary and bonus for Fiscal 2007
exceeded $100,000 ("Named Executives"):
Annual Compensation
-----------------------------
Name and Fiscal Years Ended Other Restricted Securities
Principal --------------------------------- Annual Stock Underlying
Position June 30 Salary Bonus Compensation (1) Award Option
--------- ------- ------------ -------- ---------------- ---------- ----------
Van Thuy Tran (2) 2007 $150,000 $300,000(3) $22,300(4) $ -- --
CEO 2006 150,000 90,000(5) -- -- --
2005 150,000 -- -- -- --
Gerald D. Fors (9) 2007 85,000 -- -- 1,200(8) 30,000
CFO 2006 10,625(6) -- -- 7,500(7) 30,000
(1) The total dollar value of all perquisites and other personal benefits was
less than 10% of the total annual and bonus reported for each named
executive officer in each of the past fiscal years.
(2) Ms. Tran joined the Company as CEO in 1999.
(3) The bonus is payable in stock or cash at the election of Ms. Tran. During
the fiscal year ended June 30, 2007 $41,000 was paid to Ms. Tran.
(4) Reimbursement of personal expenditures.
(5) Ms. Tran was awarded a bonus by the Board for her accomplishments in
Veritec's emergence from Bankruptcy.
(6) From employment date of May 16, 2006.
(7) Mr. Fors received an aggregate of 5,000 shares of restricted stock which
are 100% vested.
(8) Mr. Fors received an aggregate of 2,000 shares of restricted stock which
are 100% vested.
(9) In 2006, the Company entered into an employment agreement with its Chief
Financial Officer that provides for five years of annual grants of 30,000
options to purchase shares of the Company's common stock. The option price
is 15% below the market price on the date of grant, the options vest one
year from the date of grant, and the options expire five years after
vesting.
Outstanding Equity Awards at Fiscal Year-End
Stock Awards
------------------------------------------------------------
Equity
Incentive
Equity Plan
Option Awards Incentive Awards:
---------------------------------------------------- Plan Market or
Equity Awards: Payout
Incentive Plan Number of Value of
Number of Number of Awards: Number Market Unearned Unearned
Securities Securities of Securities Number of Value of Shares, Shares,
Underlying Underlying Underlying Shares or Shares or Units or Units or
Unexercised Unexercised Unexercised Option Units of Units of Other Other
Options Options Unearned Exercise Option Stock That Stock That Rights That Rights That
(#) (#) Options Price Expiration Have Not Have Not Have Not Have Not
Name Exercisable Unexercisable (#) ($) Date Vested (#) Vested ($) Vested (#) Vested ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
---- ----------- ------------- -------------- -------- ---------- ---------- ---------- ----------- -----------
Jerry Fors 30,000 30,000 (1) 90,000 (1) $2.04 2012 10,000 $8,000
(1) In 2006, the Company entered into an employment agreement with its Chief
Financial Officer that provides for five years of annual grants of 30,000
options to purchase shares of the Company's common stock. The option price
is 15% below the market price on the date of grant,
Page 41 of 48
the options vest one year from the date of grant, and the options expire
five years after vesting. As of June 30, 2007, there were 30,000 options
for shares of common stock that have been granted and are exercisable and
30,000 options for shares of common stock that have been granted but are
not exercisable. There remains 90,000 options for shares of common stock
that have not been granted based on continued employment.
Director Compensation
Nonqualified
Fees Earned or Deferred
Paid-in Cash Stock Awards Option Awards Non-Equity Inventive Compensation Earnings All Other Total
Name ($) ($) ($) Plan Compensation ($) ($) Compensation ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h)
---- -------------- ------------ ------------- --------------------- --------------------- ---------------- -----
Dean Westberg $750 $112 $862
See the table on page 16 for summary of outstanding options issued or authorized
for issuance under equity compensation plans.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of June 30, 2007 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.
Number of Shares
Beneficially Owned Percent of
Common Shares
Name & Address (see note 1 below) Common
-------------- ------------------ ----------
Larry Matthews 50,000 0.3%
7601-5th Avenue So., Richfield, MN 55423
Gerald Fors 5,000 0.0%
7321-15th Avenue So., Richfield, MN 55423
Dean Westberg 55,000 0.4%
4124 Jay Lane, White Bear Lake, MN 55110
J Technologies, LLC 1,328,004 8.8%
1430 Orkla Drive, Golden Valley, MN 55427
Van Thuy Tran (see note 1) 4,320,859 28.6%
1430 Orkla Drive, Golden Valley, MN 55427
The Matthews Group 8,483,218 56.2%
1430 Orkla Drive, Golden Valley, MN 55427
Larry Johanns (see note 1) 4,559,541 30.2%
518 North 12 Street, Osage, IA 50461
All Officers, Directors and 5% Owners as a
group (6 persons) 10,318,404 68.4%
(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.
Page 42 of 48
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Subscription Receivable
In September 1999, we accepted a commitment from The Matthews Group to fund the
$2,000,000 required under our bankruptcy Plan of Reorganization. This funding is
in the form of a promissory note that calls for 108 monthly payments to us of
$18,519. These payments are non-interest bearing and are secured by a pledge of
properties controlled by the principals of The Matthews Group. The note is
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
$203,704.
In the past, the Matthews Group has made prepayments against its Subscription
Payable to us. These prepayments were unsecured and non-interest bearing. At
June 30, 2006, the prepayment of subscription receivable had a balance of
$92,008, which was ultimately applied against the subscription receivable during
2007. As of June 30, 2007, the prepayment of subscription receivable had a
balance of $0. In addition, during the fiscal year ended June 30, 2007 The
Matthews Group paid $130,214 on the note.
Other Related Party Transactions
We lease our U.S. office facilities from Van Tran, a director and chief
executive officer of the Company, under a lease expiring June 30, 2012 and
requiring monthly payments of $3,150 plus common area costs. The Company leased
a single-family residence in Plymouth, Minnesota on a month-to-month basis from
a principal of The Matthews Group for purposes of housing customers, guests and
consultants. This lease expired on September 1, 2007. In January 2007, the
Company began leasing on a month-to-month basis, a single-family residence
located in Golden Valley, Minnesota owned by Van Tran. Rent expense, included in
operating cost, to related parties was $64,300 and $55,800 in 2007 and 2006,
respectively. Future annual minimum lease payments total $37,800 in each fiscal
year 2008 through 2012.
ITEM 13 EXHIBITS
*3(i) Restated Articles of Incorporation of Veritec, Inc. (filed as exhibit
3(i) to Veritec's Quarterly Report on Form 10QSB for the quarter ended
March 31, 2007, and incorporated herein by reference).
*3(ii) Bylaws of Veritec, Inc. (filed as exhibit 3(ii) to Veritec's Quarterly
Report on Form 10QSB for the quarter ended December 31, 2006, and
incorporated herein by reference).
*13(a) Form 10-KSB for the period ended June 30, 1999, filed on October 13,
1999, and is incorporated herein by this reference.
*14. Code of Ethics of Veritec, Inc. (as an exhibit hereto).
31. CEO/CFO Certification required by Rule 13a14(a)/15d14(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).
* As Previously Filed
With respect to the documents incorporated by reference to this Form 10-KSB,
Veritec's Commission File Number is 0-15113.
Page 43 of 48
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, including reviews of the interim consolidated financial
statements, for fiscal year ended June 30, 2007 were $37,800 to date. The
aggregate fees billed by Lurie Besikof Lapidus & Company, LLP for professional
services rendered for the audit of our annual consolidated financial statements,
including reviews of the interim consolidated financial statements, for fiscal
year ended June 30, 2006 were $126,100 to date.
Audit-Related Fees
Callahan, Johnson and Associates, LLC was paid $1,140 and Lurie Besikof Lapidus
& Company, LLP was paid $1,200 for preparation of income tax return for fiscal
year ended June 30, 2006. Callahan, Johnson and Associates, LLC was paid $1,939
for preparation of income tax return for fiscal year ended June 30, 2005 and
2004.
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 September 28, 2007
----------------------------------
Van Thuy Tran
Director, Chief Executive
By /s/ Gerald Fors September 28, 2007
----------------------------------
Gerald Fors
Chief 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 September 28, 2007
-------------------------------------
Dean Westberg
/s/ Larry Matthews Director September 28, 2007
-------------------------------------
Larry Matthews
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