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
For the fiscal year ended June 30, 1999
-------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________ to_______________
Commission File No. 0-15113
VERITEC INC.
------------
Exact name of small business issuer in its charter
Nevada 95-3954373
- ------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1430 Orkla Drive, Golden Valley, MN 55427
- ------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (612)545-0224
-------------
Securities registered under Section 12(b) of the Act: None
----
Securities registered under Section 12(g) of the Act: Common stock, no par value
--------------------------
Check whether the issuer filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the Company was required to file such reports), and has been
subject to such filing requirements for the past 90 days. Yes X No.
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation SB is not contained in this form, and no disclosure will be
contained, to the best of Company's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form l0-KSB. [ ]
Revenues for the year ending June 30, 1999 were $116,348 and for the year
ended June 30, 1998, $129,570.
The aggregate market value of the voting stock held by non-affiliates of
the Company, based upon the average bid price of the common stock on September
15, 1999 was approximately $2,250,000. As of September 15, 1999, the Company had
3,598,791 shares of common stock, including 2,746,020 restricted shares per Plan
of Reorganization.
1
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The Company's 10-KSB filing for the year June 30, 1997 included as copy of
the Reorganization Plan approved by the Bankruptcy Court and is hereby included
by reference in this filing.
THIS DOCUMENT CONSISTS OF 43 PAGES, INCLUDING 3 EXHIBIT PAGES.
THE EXHIBIT INDEX IS ON PAGE 40
VERITEC INC.
FORM 10-KSB
For the fiscal year ended June 30, 1999
Table of Contents
-----------------
PART I Page
- ------ ----
Item 1. Description of Business 3
Item 2. Description of Property 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 9
Part II
- -------
Item 5. Market for Common Equity and Related Stockholder Matters 10
Item 6. Management's Discussion and Analysis or Plan of Operations 10
Item 7. Financial Statements 13
Item 8. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure 30
Part III
- --------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act. 31
Item 10. Executive Compensation 35
Item 11. Security Ownership of Certain Beneficial Owners and Management 36
Item 12. Certain Relationships and Related Transactions 37
Item 13. Exhibits and Reports on Form 8-K 38
Signatures 39
Exhibit Index 40
2
<PAGE>
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
-------------------------------
NOTE: VERITEC INC. WAS IN CHAPTER 7 BANKRUPTCY AT JUNE 30, 1999 AND WAS IN
---------------------------------------------------------------------------
CHAPTER 11 BANKRUPTCY AT THE TIME OF ISSUANCE OF THIS 10-KSB. SEE ITEM 3, LEGAL
- --------------------------------------------------------------------------------
PROCEEDINGS FOR AN EXPLANATION OF ACTION BEING TAKEN TO HAVE THE COMPANY EMERGE
- --------------------------------------------------------------------------------
FROM BANKRUPTCY.
- ----------------
Development of the Business
- ---------------------------
Veritec Inc. was incorporated in the State of Nevada on September 8, 1982
for the purpose of developing, marketing and selling a line of
microprocessor-based encoding and decoding system products. The Company was a
development stage enterprise until June 30, 1995 at which time the Company had
product available for sale and therefore was no longer considered in the
development stage.
The Company is in the development, marketing and sale of a line of
microprocessor-based encoding and decoding system products that utilize its
patented VERICODE(r) symbol technology. The Company's VeriSystem(tm) enables a
manufacturer or distributor to attach unique identifiers or coded symbols
containing binary encoded data, referred to by the Company as a "Vericode
Symbol", to a product which enables automatic identification and collection of
data with respect to the marked product.
In addition to the Vericode Symbol technology and VeriSystem, Veritec also
designs and integrates identifications systems that utilize other
two-dimensional and single dimension symbols. Veritec's experience both in
marking and image processing provides the knowledge and experience necessary for
successful implementation of simple to complex automatic identifications
projects and installations.
Early research and development activities
- -----------------------------------------
The Company through fiscal 1995 was primarily engaged in research and
development. The Company continues to upgrade the software with advanced image
capturing and decoding features.
The National Aeronautics and Space Administration ("NASA"), through a
contracting party, has conducted in-depth engineering evaluations on the
Company's VeriSystem. The tests performed by Rockwell International, the
contracting agent for NASA, included testing the performance of the Vericode
Symbol in a variety of hostile environmental operating conditions that the
Vericode Symbol may be expected to encounter. These hostile environmental
conditions included validation of the Vericode Symbol's data accuracy and data
density in such conditions as extreme heat and cold, vibration, readability
under solvents and liquids, rotation and distance on a variety of surfaces
including titanium, inconnel and plastics using a number of marking techniques.
The Vericode Symbol alone was tested and validated under these harsh conditions
and variety of surfaces.
The Company's products
- ----------------------
3
<PAGE>
The Vericode Symbol
- -------------------
The Vericode symbol is a two-dimensional, high data density, machine
readable symbol that can contain 5-100 times more information than a bar code in
a smaller space. The Vericode Symbol is based on a matrix pattern. The matrix is
made up of data cells, which are light and dark contrasting squares. The matrix
is enclosed within a solid border. The code's solid border is surrounded by a
quiet zone. Its simple structure is the basis for its space efficiency.
The size of the Vericode Symbol is variable and can be increased or
decreased depending on the requirements. It can be configured to fit virtually
any space.
The data density is variable. The same size Vericode Symbol can hold more
or less information within the same area. Barcodes get longer as more
information is added. The data density within the Vericode Symbol is variable
and can be increased or decreased without changing the size of the symbol. For
example, a 1/2 inch Vericode Symbol could contain 10, 28, 56, 72, 100+., etc.
characters. The only limitation to the size and density of the Vericode Symbol
is the resolution of the marking and reading devices.
Orientation of the code for reading is not necessary. In fact, the code
itself can be used to determine orientation. The Vericode Symbol can be read up
to a certain point when the surface being read is at an angle in relation to the
reader.
The Vericode Symbol has standard levels of Error Detection and Correction.
This means that the code has the ability to be damaged and still recover the
information in many instances. The code can sustain up to 12.5% or up to 25%
damage, depending on the format, and still recover the original information.
Higher levels can be custom formatted. The code will return either accurate
information or no information, but it will not return wrong information.
The Vericode Symbol offers a high degree of security and the level of this
security can be specified depending on the requirements. For any specific
application or organization, a unique encryption algorithm can be created, so
that only those authorized, can create or read a Vericode Symbol within that
system.
The Vericode Symbol can hold any form of information that can be digitized.
These include: numbers, letters, photos, fingerprints, graphics and biometrics
information. The Vericode Symbol can also be used in conjunction with human
readable information and other one-dimensional and two-dimensional symbologies.
The VeriSystem (F-225 fixed station system)
- -------------------------------------------
The Veritec F-225 reading system is a complete system capable of reading
and decoding a variety of two-dimensional (2-D) codes. It features a choice of
CCD (charged-couple device) cameras interfaced to a rack-mounted, ruggedized
computer system. The modular imaging and decoding software permit the decoding
of various public and private 2-D symbols under various static and dynamic
conditions.
The Veritec F-225 consists of several modular elements. Depending upon the
environment and operating conditions, an appropriate CCD video camera is
selected. This camera is cabled directly to the rack-mounted high performance
computer. The computer is housed in a ruggedized chassis to permit successful
operation in industrial environments. A variety of modular software programs,
4
<PAGE>
customized for the specific application, are installed in the computer. Advanced
gray-scale image processing and image analysis software result in extremely high
reading reliability.
The F-225 Reading System has been engineered for flexibility. By providing
wide choices in cameras, software and computer components, the F-225 guarantees
optimum performance. Since the F-225 Reading System is flexible by nature,
depending on the application (lighting, environmental conditions, marked
materials contrast, etc.), the price of the system is affected by these factors.
In addition to the F-225, Veritec also offers fixed station readers with fully
integrated electronics.
The Metanetics Handheld Reader
- ------------------------------
Until recently, there were no handheld symbology readers that made it
practical to read codes from metal and other similar materials and surfaces.
Veritec's advanced image-processing software, which enabled reading from complex
surfaces, was part of its F-225 fixed station reading system. In late 1997,
Veritec made a special agreement with Metanetics Corporation to combine
Veritec's software with the Metanetics handheld reader. The result of this
combination is a highly advanced handheld reader that has the ability to read
from metal and other similar materials and surfaces. This compact, CCD based
reader can be linked directly to a PC, a laptop computer and to a portable data
terminal, which can download the data by batch or by radio frequency
transmission. The reader has built-in logic, which enables the reader to send
ASCII formatted information to the device to which the reader is connected.
Veritaggant Covert Identification System
- ----------------------------------------
The Company has also developed the Veritaggant Covert Identification
System, which is used to apply covert signatures, known as Veritaggant, to items
for use in later verifying their authenticity. The Veritaggant technology
combines a mixture of minute invisible, non-radioactive trace elements with
manufacturer's plastics, paint, print ribbons, or with the ink used to print
tags, labels, packaging or documents. These chemical compounds can also be
applied in a protective, clear coating directly over items that have already
been printed.
The Company has not actively pursued the Veritaggant business for several
years, however, still has technology and intends to reintroduce it at some
future time.
Manufacturing
- -------------
The Company has limited manufacturing and assembling capabilities other
than assembling the computers used in its F-225 system. The Company believes
that all components necessary to manufacture and assemble its products are
commercially available from more than one source.
Marketing
- ---------
Due to the lack of adequate funding, the Company has been unable to
aggressively market its products. Upon emerging from its current Bankruptcy
situation, the Company expects to engage in direct sales to customers, license
its technology in certain industries or geographic areas and to establish sales
representatives in both the United States and international markets.
The Company is currently receiving Royalties from Mitsubishi Corporation on
5
<PAGE>
a non exclusive license agreement for sales in Korea and Taiwan and on sales to
IBM in conjunction with application of the Vericode Symbol on IBM harddrives
manufactured in several countries. These royalties are paid on a quarterly basis
with increasing amounts being recorded in the last few quarters. The Royalty
amount for the quarter ended June 30, 1999 was approximately $10,000.00.
There can be no assurance that the Company's sales and licensing activities
will be successful or that they will generate significant revenues.
Engineering, Research and Development
- -------------------------------------
The Company incurred $128,942, $210,238, and $149,225 of engineering sales
support, research and development in the fiscal years ending June 30, 1999, 1998
and 1997 respectively. The Company has completed development of its F-225 system
and integrating its software into the Metanetic's handheld reader. Present
engineering efforts continue in application engineering in support of sales, the
development of upgraded and more sophisticated systems, interfacing the
VeriSystem with various marking devices and determining the most advantageous
methods of marking customer's parts.
There can be no assurance that the Company's engineering, research and
development activities will result in marketable products or that, if such
products are developed, they will meet with any degree of market acceptance.
Competition
- -----------
The "symbology" business in which the Company operates is becoming
intensely competitive. The Company is at a disadvantage with other potential
competitors who have larger technical staffs, established market shares and
greater financial and operational resources than the Company. Most of the
company's competitors are larger and have more financial resources than the
Company. There can be no assurance that the Company will be able to successfully
compete in the "symbology" business.
The Company's Vericode Symbol competes with alternative machine readable
symbologies such as conventional bar code systems, including UPC, EAN Code 3 or
9 and Code 49, and alphanumeric systems such as OCR-A and OCR-B. Competitors
offering these alternative symbologies include numerous label and bar code
printer equipment companies who offer various parts of bar code related systems.
Currently, there are a number of companies developing other forms of two
dimensional machine readable symbologies. Cimetrics and other companies have
introduced symbology similar to that of the Company.
Employees
- ---------
Since the Company first went into bankruptcy in October 1995, it has not
had any employees. Four consultants have worked in various categories in the
Company in an attempt to keep it functional during this Bankruptcy period.
PATENTS
- -------
The Company has received two patents on its symbology (Numbers 4,924,078
issued in 1990 and number 5,612,524 issued in March 1997) in the United States.
It has application pending on its filing in Europe and has recently provided
information to upgrade that application in conformance with the U S patent
issued in 1997. Patent number 5,612,524 allows 13 additional claims on the
Company's patent number 4,924,078
6
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
-------------------------------
The Registrant has moved its headquarters to 1430 Orkla Drive, Golden
Valley, MN 55427 and is leasing approximately 1,000 square feet of office space
for $1,000 per month on a month to month basis. The Registrant has a Western
Regional Office at 7100 Hayvenhurst Ave., Van Nuys, CA 91406 also on a month to
month lease of 1,000 square feet of office space for $1,000 per month.
ITEM 3. LEGAL PROCEEDINGS.
--------------------------
On May 3, 1999 the Registrant was converted to Chapter 7 Bankruptcy. At a
court hearing, STIPULATION RE PLAN PAYMENTS, ORDER THEREON, held November 30,
1998, Howard Behling, then Acting President and CEO of Veritec, agreed to an
order providing that Veritec would pay a secured creditor, the Gant Group,
$100,000 by December 30, 1998. By agreement, if the payment was not made by the
date due and a declaration of such was provided the court by the Gant Group,
then the case would be automatically converted to a Chapter 7 Proceeding.
Veritec did not have the funds to make the promised payment and since the
payment was not made, the case was converted to Chapter 7.
Since it is the intention of the Company to emerge from bankruptcy as an
operating company, a request had been made by the Chapter 7 Trustee to the
Court, to allow the Company to continue operations under the direction of the
Chapter 7 Trustee and the Company continued limited operations under his
direction through September 1, 1999. At a Court hearing on September 1, 1999 the
Court approved converting the Bankruptcy from a Chapter 7 back to a Chapter 11
proceeding under the original Confirmed Plan of Reorganization. (See Exhibits
attached to and made a part of this filing)
Veritec Inc. is a debtor in a Chapter 11 bankruptcy case. On October 16,
1995, Thomas R. O'Malley, The Amy Howard Trust, and the Kandy Limited
Partnership commenced a bankruptcy case by filing an involuntary Chapter 7
petition. That Chapter 7 petition was subsequently converted to a Chapter 11
petition under the United States Bankruptcy Code ("Code") , 11 U. S. C. 101 et
seq. The Registrants Reorganization Plan was approved as indicated in the
"FINDINGS OF FACT; CONCLUSIONS OF LAW AND ORDER CONFIRMING THE DEBTOR'S SECOND
REVISED THIRD AMENDED CHAPTER 11 PLAN OF REORGANIZATION", a copy of which was
attached as an exhibit in the June 30, 1997 10-KSB filing and included herein by
reference for this section of the report.
As noted above, The Reorganization Plan was confirmed on April 23, 1997
with the Bankruptcy Judge signing the order on May 2, 1997. The Plan was
expected to be effective by August 6, 1997. Due to a variety of difficulties in
arranging the asset investment of $2,000,000, and financing ongoing operations
of the Registrant, the Plan was not fully effected.
The Reorganization Plan includes the following major items:
1. Transfer of a majority of the Registrants debt to equity, approximately
$4,500,000.
2. Investment of $2,000,000 in assets or asset equivalents into the
Registrant in exchange for 275,000 shares of a new Series H Preferred
Shares class of stock.
3. Changes in Directors and Management.
4. A one for ten reverse stock split for both common and preferred
shareholders. All preferred stock and formerly restricted common stock
changed to free trading common stock. This reverse split action reduced
7
<PAGE>
the old common stock of 2,085,660 and old preferred stock of 441,840
shares to a combined 252,749 free trading shares.
5. Issuance of 300,000 shares of common stock as guaranty to certain
noteholders that are to be paid in cash and notes. HOMETREND, as
guarantor of these Notes, is to receive these shares upon satisfaction
of the payment of $60,000 as an initial payment per Plan of
Reorganization..
Consolidated Industries, a party who first proposed a Plan of
Reorganization for the Registrant under terms and conditions similar to that
which was finally adopted by the Registrant, was either unable or unwilling to
continue with their proposal. After providing $28,000 of a promised $100,000 for
working capital, Mr. Jung of Consolidated proposed major changes in the
proposal. These proposed changes would have resulted in the Creditors of the
Registrant receiving considerably less in the number of shares and dollar value
than amounts received in the Confirmed Plan. Consolidated Industries, Inc. had
filed a NOTICE OF MOTION AND MOTION TO CONVERT TO CHAPTER 7 OR DISMISS and also
a NOTICE OF MOTION AND MOTION FOR EXAMINATION UNDER BANKRUPTCY RULE 2004 with
the United States Bankruptcy Court. The Court has rejected all claims of
Consolidated Industries, except for the $28,000 invested and included as part of
the Plan of Reorganization. Also, Consolidated has been ordered by the court to
take action to remove any claim Consolidated Industries has on assets of the
Company.
Based on assets and representations provided by HOMETREND and Associates,
it was supposed that the Plan of Reorganization requirements had been
substantially met at June 30, 1998. However, the assets provided, including an
office building in Elkhart, Indiana and a promissory note, payable to Veritec
Inc., providing monthly payment amounts, did not prove of value and have since
been considered as inadequate to complete the Plan. Series H Stock that was
exchanged for the property in Elkhart, Indiana has been returned to the company
in exchange for a return of the deed on the property. The Promissory Note was
signed by Health Kinetics. Payments in the amount of $94,117 were received from
HOMETREND over a period of a few months and then no additional money was paid on
the notes. The Promissory Note was to be secured with various properties owned
by Health Kinetics and Associates and paid from revenues incident to their
business. These properties were never recorded to the benefit of the Company and
therefore, the note was considered to have no value.
In December 1998 the Registrant was contacted by "The Matthews Group" who
indicated an interest in providing the funding for the Registrant as required in
the Confirmed Plan of Reorganization. A preliminary Agreement was signed by the
Company and the Matthews Group on January 6, 1999. The Company's Board of
Directors approved the following items at a meeting on January 13, 1999:
1. That the Matthews Group be allowed to have three (3) seats on the Board
of Directors.
2. That the Matthews Group, upon being provided adequate collateral, shall
make available $100,000 or interim funding, with approval of any
expenditures approved by the Matthews Group.
3. That The Company agrees that Larry Matthews act as Interim President
and CEO of the Company.
4. That the Board shall obtain a pledge of 200,000 shares of Veritec
Stock, or other sufficient collateral to the Matthews Group for
providing the $100,000 interim funding.
5. That Veritec shall obtain satisfactory verification that the Matthews
Group has $100,000 cash available for interim funding and the ability
to infuse $2,000,000 into Veritec.
8
<PAGE>
6. That the Matthews Group shall be allowed to conduct a 90 day good faith
investigation of Veritec's finances and prospects for future business.
7. It being acknowledged that the Matthews Group pledged to resign their
Director seats at the end of the 90 day investigation period should the
Matthews Group decide they do not want to go forward with an infusion
of $2,000,000 of assets into Veritec Inc.
Due to various issues with the "Gant Group" and issues with them pertaining
to payment on their notes, there has been a number of delays in the Matthews
Group proceeding with their investment into the Registrant.
The Registrant was delinquent on a number of quarterly payments to the Gant
Group on the note obligation included in the Confirmed Plan. The note obligation
to the Gant Group included an initial payment of $60,000 and then quarterly
payments on principal and interest over a four year period. The Registrant made
just one payment on the note and was delinquent on all subsequent payments due.
The Matthews Group paid the Gant Group $182,345.87 at the Court hearing on
September 1, 1999 to bring the note obligation to the Gant Group up to date. The
Matthews Group is providing this money to the Gant Group outside of Veritec and
has agreed to pay the final eight quarterly payments due the Gant Group. The
Registrant owes the Matthews Group the amounts paid by the Matthews Group to the
Gant Group.
SEC reporting obligations
- -------------------------
The Registrant is subject to the continuing reporting obligations of the
Securities Exchange Act of 1934 (the "1934 Act") which, among other things,
requires the filing of annual and quarterly reports and proxy materials with the
Securities and Exchange Commission (the "SEC"). The Company filed a 10 KSB in
1998 covering the years through June 30, 1997. The Company did not comply with
the filings of 10 QSB's for the periods September 30, 1995, December 31, 1995,
March 31, 1996, September 30, 1996, December 31, 1996, March 31,1997, September
30, 1997, December 31, 1997, March 31, 1998 September 30, 1998, December 31,
1998 and March 31, 1999, on a timely basis as required under the 1934 Act. These
10-QSB filings were made in September 1999. To the Company's knowledge, there is
no current inquiry or investigation pending or threatened by the SEC in
connection with these reporting violations. However, there can be no assurance
that the Company will not be subject to such inquiry or investigation in the
future. As a result of any potential or pending inquiry by the SEC or other
regulatory agency, the Company may be subject to penalties, including among
other things, suspension of trading in the Company's securities, court actions,
administrative proceedings, preclusion from using certain registration forms
under the 1933 Act, injunctive relief to prevent future violations and/or
criminal prosecution.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------------------------------------------------------------
During the fiscal years ended June 30, 1997, 1998 and 1999 there were no
matters submitted to a vote of security holders through the solicitation of
proxies or otherwise. The Company's last meeting of shareholders was on January
25, 1995. A shareholders meeting will be scheduled upon the Company's release
from bankruptcy.
PART II
-------
9
<PAGE>
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
-----------------------------------------------------------------
Market information
- ------------------
The principal U.S. market in which the Company's common stock (all of which
are of one class, and with no par value per share) is tradable in the
over-the-counter market. The common shares are not traded or quoted on any
automated quotation system. The OTC Bulletin Board Symbol for the Company's
common stock is "VRTC." The following table sets forth the range of high and low
bid quotes of the Company's common stock per quarter as provided by the National
Quotation Bureau (which reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions).
All quoted prices are adjusted for the one for ten reverse stock split per Plan
of Reorganization.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Common Stock Fiscal 1999 Fiscal 1998 Fiscal 1997
------------ ----------- ----------- -----------
High Low High Low High Low
Quarter ended: ---- --- ---- --- ---- ---
September 30 1.68 .62 3.00 2.12 .93 .62
December 31 1.68 .38 2.75 .75 .94 .70
March 31 .81 .38 1.12 .59 1.90 .80
June 30 .95 .25 .87 .56 2.80 1.90
</TABLE>
Shareholders
- ------------
As of June 15, 1999 there were approximately 900 shareholders of record,
inclusive of those brokerage firms and/or clearing houses holding the Company's
common shares for their clientele (with each such brokerage house and clearing
house being considered as one holder).
Dividend information
- --------------------
The Company has not paid or declared any dividends upon its common stock
since its inception and, by reason of its present financial status and its
contemplated financial requirements, does not anticipate paying any dividends in
the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Selected Financial Data
- -----------------------
Financial Data Schedule for the Fiscal Years ended June 30,
1999 1998
---- ----
Cash $ 3,664 $ 4,216
Prepaid expenses - 8,250
Accounts receivable 23,000 -
Inventories 14,463 32,718
Total current assets 41,127 45,184
10
<PAGE>
Property and equipment 102,478 113,147
Allowance for depreciation - property and equipment 95,232 98,406
Total assets 48,373 59,925
Current liabilities 785,373 409,659
Common stock 35,998 33,088
Additional paid in capital 9,644,401 9,436,392
Total liabilities and equity 48,373 59,925
Sales 93,943 112,075
Total revenues 116,348 129,570
Cost of sales 39,298 29,125
Total costs 45,488 60,125
Other expenses 464,761 496,339
Interest expense 57,321 34,651
Income - pre-tax (Loss) (451,222) (461,545)
Income tax - -
Net income (loss) (451,222) (461,545)
Earnings per share - primary (.13) (.14)
Earnings per share - diluted (.13) (.14)
Liquidity and capital resources - June 30, 1999 compared to June 30, 1998.
- ---------------------------------
During the fiscal year ended June 30, 1999, the Company received cash from
revenues of $116,348. These revenues were derived from sale of product,
engineering services and royalties from the license agreement with Mitsubishi
Corporation. The Company received $94,117 from the HOMETREND/Health Kinetics
investment and $45,081 from the Matthews Group during the year ended June 30,
1999. HOMETREND was the original guarantor of the Plan of Reorganization and the
Matthews Group is proposing to take the place of HOMETREND in the Plan, due to
HOMETREND'S inability to complete the financing of the Plan. The Plan calls for
an investment of $2,000,000 in assets in exchange for 275,000 shares of new
Series H Preferred Stock.
The Company is depending on the investment by the Matthews Group in order
for the Company to emerge from Bankruptcy. Without the investment by the
Matthews Group, it is unlikely that the Company will be able to obtain a final
decree from the Court permitting it to continue in operations.
There were increases in short term debt during the fiscal year ended June
30, 1999 as shown in the following schedule:
1999 1998
---- ----
Secured notes (Gant Group) $ 198,704 $ 100,529
Notes payable 45,000 25,000
Accounts payable and accrued expenses 134,764 66,751
Administrative costs per Plan of Reorganization 42,737 70,737
Accrued interest 60,262 25,442
Deferred compensation 301,406 107,700
Commissions payable 2,500 5,000
Deferred revenue - 8,500
------- -----
Total 785,373 409,659
======= =======
During the fiscal year ended June 30, 1999, the Company had continuing
losses from operations. The Company's liquidity is reflected in the table below
which shows comparative working capital deficits as of June 30, 1999 and June
30, 1998. Working capital is an important measure of the company's ability to
meet its short-term obligations.
11
<PAGE>
June 30, 1999 June 30, 1998
------------- -------------
Working capital (deficit) $ 744,246 $ 364,475
- -------------------------
The Plan of Reorganization called for assets of $2,000,000 to be invested
into the Company by August 6, 1997. During the period of delay in the Company
receiving this investment, it has had a deteriorating working capital balance
and at June 30, 1999 has only $3,664 in cash in the bank. The Company is
depending on the Matthews Group to invest assets into the company in order for
the Company to continue in operations. Without an investment from the Matthews
Group or other party within a very short period of time, the Company has little
chance of emerging from Bankruptcy.
The Reorganization under Chapter 11 has had a significant affect on the
debt position of the Registrant. Approximately $4,500,000 of debt was
transferred to equity under the Reorganization Plan. With this transfer from
debt to equity it was expected that, except for the note to the Gant Group, the
company would be debt free as it continued operations under the Confirmed Plan.
Since the funding has not been invested into the Company as specified in the
Plan, the Company is again in a difficult debt position.
Management Discussion and Analysis
- ----------------------------------
Registrant was incorporated in the state of Nevada on September 8, 1982 and
has been primarily in a development stage through June, 1995. The market for
2-dimensional symbology has been in the formative stage and only in 1996 and
1997 has there been a market of several million dollars in that industry. The
Registrant has lacked the finances to market its products. See Subsequent Events
for information on products and market at the time of filing of this report.
Results of Operations - June 30, 1999 compared to June 30, 1998.
- ---------------------
The Company had revenues of $116,348 during the year ended June 30, 1999.
Of this amount, $51,745 was for product sales, $42,198 from engineering services
and $22,405 from royalties from Mitsubishi Corporation.. In the fiscal year
ended June 30, 1998 the Company had revenues of $129, 570 with $98,818 from
product sales, $13,257 from Engineering services and $17,495 from royalties.
Since the inception of Bankruptcy in October 1995, the Company has had very
little promotion or marketing of products due to financial limitations.
Development of product and particularly software associated with reading devices
has been the prime effort during this period. The Registrant has expanded its
marketing and engineering approach to include products in the conventional bar
code industry and other 2-dimensional symbols in addition to the Vericode
Symbol.
Operating expenses in fiscal 1999 versus 1998 were as follows:
June 30, 1999 June 30, 1998
------------- -------------
General and administrative expenses $ 299,298 $ 202,685
Sales and Marketing 36,521 83,416
Engineering Services and R & D 128,942 210,238
General and Administrative Expenses included corporate legal, primarily
relating to continuing bankruptcy filings and defenses, patent protection,
office facilities and other costs associated with the general business of the
Registrant. A reduction in Sales expenses in fiscal 1999 versus fiscal 1998 was
due to reduced staff and limited travel and no involvement with industry trade
shows.
12
<PAGE>
The decrease in Engineering Services and R& D was due to a reduction in
staff and reduced travel expenses.
Strategic Restructuring and Operations Plan
- -------------------------------------------
Upon receipt of the $2,000,000 investment into the Registrant in
conjunction with the Reorganization Plan, the Registrants expects to have
adequate financing to enable it to make a major effort in the marketing and
sales of its products. The Registrant now has both fixed station and hand held
portable non-contact readers that can read off many surfaces including metal.
Also, the Registrant has expanded its business to include conventional bar code
customers and users of 2-dimensional codes other than just the Vericode symbol.
Although management believes it is making progress in maintaining itself in
face of its severe financial problems, there is no assurance that the Company
will be successful in holding off aggressive collection action or litigation.
Further, the Company may incur additional unexpected costs to defend itself
against any such claims or allegations that may be filed against it.
Capital Expenditures and Commitments
- ------------------------------------
During the fiscal quarter ended June 30, 1999, the Registrant did not make
any capital purchases.. Other than necessary computer and office equipment
needed for its expanding businesses, the Company has no current commitments for
material capital expenditures in the next 12 months. The Company believes its
need for additional capital equipment will continue because of the need to
develop and expand its business. The amount of such additional capital required
is uncertain and may be beyond that generated from operations.
Factors that may effect future results
- --------------------------------------
A number of uncertainties exist that may effect the Company's future
operating results. These uncertainties include the uncertain general economic
conditions, market acceptance of the Company's products, the Company's ability
to manage expense growth, the success of the implementation of the Plan of
Reorganization..
ITEM 7. FINANCIAL STATEMENTS
- ------------------------------
The following financial statements have been prepared in accordance with
the requirements of Item 310(a) of Regulation SB:
Page
----
Independent Auditors' Report 14
Balance Sheets at June 30, 1999, 1998 and 1997. 15
Statements of Operations for the fiscal years ended
June 30, 1999, 1998 and 1997. 16
Statements of Shareholders' Deficiency for the fiscal years
ended June 30, 1999, 1998 and 1997. 17
Statements of Cash Flows for the fiscal years ended
June 30, 1999, 1998 and 1997. 18
Notes to Financial Statements. 19
13
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Board of Directors
Veritec Inc.
Golden Valley, Minnesota
We have audited the accompanying balance sheets of Veritec Inc., A
DEBTOR-IN-POSSESSION, as of June 30, 1999,1998 and 1997 and the related
statements of operations, shareholders' deficiency and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits of the financial statements provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Veritec Inc., as of June 30,
1999, 1998 and 1997 and the results of its operations and its cash flows for the
three years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As described in Note 2, at June 30,
1999 the Company was in Chapter 7 of the Federal Bankruptcy Code and was under
the control of a trustee appointed by the Bankruptcy Court. On September 1, 1999
the Company was reconverted to reorganization under Chapter 11 of the Federal
Bankruptcy Code and was authorized to resume managing and operating the business
as a debtor in possession subject to the control and supervision of the
Bankruptcy Court. Those conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this matter.
As more fully described in Note 10 to the financial statements, the Company
is subject to possible unasserted claims and assessments. The ultimate outcome
of these claims, if asserted, cannot presently be determined. Accordingly, the
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
/s/ Callahan, Johnston & Associates, LLC
___________________________________________
Callahan, Johnston & Associates, LLC
CALLAHAN, JOHNSTON & ASSOCIATES, LLC
Minneapolis, Minnesota
September 22, 1999
14
<PAGE>
VERITEC INC.
A DEBTOR-IN-POSSESSION
BALANCE SHEETS
JUNE 30,
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
ASSETS
Current Assets:
Cash 3,664 4,216 68,552
Accounts receivable 23,000 - -
Prepaids - 8,250 11,550
Inventories 14,463 32,718 24,663
------ ------ ------
Total current assets 41,127 45,184 104,765
Intangible asset - - -
Furniture and equipment, net 7,246 14,741 16,569
----- ------ ------
48,373 59,925 121,334
====== ====== =======
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY):
Current Liabilities:
Notes payable 45,000 25,000 -
Notes payable (secured) 198,704 100,529 60,000
Accounts payable and accrued expenses 134,764 66,751 26,148
Administrative costs per Plan of Reorganiz. 42,737 70,737 71,737
Accrued interest 60,262 25,442 -
Deferred compensation 301,406 107,700 24,830
Commissions payable 2,500 5,000 -
Deferred revenue - 8,500 -
------- ----- ------
Total current liabilities 785,373 409,659 182,715
Commitments, contingencies and subsequent
events (notes 9, 10 and 11) - - -
Long term notes secured by lien on patent(Note 3) 87,749 185,924 304,513
------ ------- -------
Total liabilities 873,122 595,583 487,228
------- ------- -------
Prepayment on stock (Note 5) 240,198 296,249 29,520
------- ------- ------
Shareholders' equity (deficiency) (Note 6)
Preferred stock, par value $1.00, authorized 10,000,000
shares, 275,000 shares of Series H Preferred - - -
authorized, 1,000 shares issued and outstanding 7,273
Common stock, par value $.01, authorized 20,000,000
shares, issued and outstanding, 3,598,791,
3,308,791 and 3,298,770 shares at June 30,
1999, 1998 and 1997 respectively 35,988 33,088 32,988
Additional paid in capital 9,644,401 9,436,392 9,411,440
Accumulated deficit -10,752,609 -10,301,387 -9,839,842
----------- ----------- ----------
Net shareholders' equity (deficiency) -1,064,947 -831,907 -395,414
---------- -------- --------
48,373 59,925 121,334
====== ====== =======
</TABLE>
See Accompanying Notes to the Financial Statements
15
<PAGE>
VERITEC INC.
A DEBTOR-IN-POSSESSION
STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED
JUNE 30,
1999 1998 1997
---- ---- ----
Revenues:
Product sales 51,745 98,818 48,959
Engineering services 42,198 13,257 43,750
Licenses and royalties 22,405 17,495 199,795
------ ------ -------
Total revenues 116,348 129,570 292,504
Cost of sales 39,298 29,125 53,655
------ ------ ------
Gross profit 77,050 100,445 238,849
Sales commissions 6,190 31,000 -
----- ------ -------
Gross profit - after
commissions 70,860 69,445 238,849
------ ------ -------
Administration 299,298 202,685 186,997
Sales and marketing 36,521 83,416 58,574
Engineering and R & D 128,942 210,238 149,225
------- ------- -------
Total expenses 464,761 496,339 394,796
------- ------- -------
Profit (loss) from operations -393,901 -426,894 -155,947
Bankruptcy related costs - - 130,792
Interest expenses - net 57,321 34,651 14,513
------ ------ ------
Net profit (Loss) -451,222 -461,545 -301,252
======== ======== ========
Net loss per common share -0.13 -0.14 -0.42
===== ===== =====
Weighted average common shares outstanding 3,525,695 3,305,112 716,540
========= ========= =======
See Accompanying Notes to the Financial Statements
16
<PAGE>
VERITEC INC.
A DEBTOR-IN-POSSESSION
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
FISCAL YEARS ENDED JUNE 30, 1999, 1998, AND 19997
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Additional
Preferred Stock Common Stock Paid in Accumulated Shareholders
Shares Amount Shares Amount Capital Deficit Deficiency
------- ------ ------- ------- --------- ----------- ------------
Balance at June 30, 1996 441,836 441,836 2,085,600 183,164 4,104,721 -9,538,590 -4,808,869
------- ------- --------- ------- --------- ---------- ----------
1 for ten Reverse Split per Plan -397,652 -1,877,040
Additional shares due to rounding split 6
Trade old preferred for new common -44,184 44,184
Debt to equity and adjustments per Plan -441,836 2,746,020 -153,176 5,158,739 4,563,727
Issuance of new common stock for guaranty
of Gant note and Plan of Reorganization 300,000 3,000 -3,000
Payment of Plan Administrative costs
by HOMETREND 150,980 150,980
Loss from operations -301,252 -301,252
-------- -------- --------- -------- ---------- -------- --------
Balance at June 30, 1997 - - 3,298,770 32,988 9,411,440 -9,839,842 -395,414
Exercise of 10,020 warrants at $2.50 10,021 100 24,952 25,052
Loss from operations -461,545 -461,545
--------- ------- --------- -------- --------
Balance at June 30, 1998 3,308,791 33,088 9,436,392 -10,301,387 -831,907
Issuance of Series H Preferred for cash 30,000 218,182 218,182
Conversion of Series H preferred to common -29,000 -210,909 290,000 2,900 208,009
------- -------- ------- ----- -------
Loss from operations -451,222 -451,222
-------- --------
Balance at June 30, 1999 1,000 7,273 3,598,791 35,988 9,644,401 -10,752,609 -1,064,947
----- ----- --------- ------ --------- ----------- ----------
</TABLE>
See Accompanying Notes to the Financial Statements
17
<PAGE>
VERITEC INC.
A DEBTOR-IN-POSSESSION
STATEMENTS OF CASH FLOW
FISCAL YEARS ENDED
JUNE 30,
1999 1998 1997
---- ---- ----
Cash flow from operating activities:
Net loss -451,222 -461,545 -301,252
-------- -------- --------
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 6,350 6,328 28,252
Write off of obsolete equipment 1,145 - 11,076
(Increase) decrease in assets:
Inventory 18,255 -8,055 -4,091
Prepaid expenses 8,250 3,300 -11,550
Accounts receivable -23,000 - -
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 40,013 39,603 74,950
Deferred compensation 193,706 82,870 24,830
Deferred revenue -8,500 8,500 -
Accrued commissions -2,500 5,000 -
Accrued interest 34,820 25,442 -
------ ------ ------
Net cash used by operating activities -182,683 -298,557 -177,785
-------- -------- --------
Cash flow from investing activities:
Purchase of equipment - -4,500 -14,549
------ -------
Net cash used for investing activities - -4,500 -14,549
-------- ------ -------
Cash flow from financing activities:
Issuance of secured notes payable with warrants - - 43,174
Issuance of notes payable 20,000 25,000 -
Proceeds from stock issuance 218,182 25,052 150,980
Payments on secured notes payable - -78,060 -
Issuance of subordinated convertible notes - - 35,787
Prepayment on stock -56,051 266,729 29,520
------- ------- ------
Net cash provided by financing activities 182,131 238,721 259,461
------- ------- -------
Increase (decrease) in cash position -552 -64,336 67,127
Cash at beginning of year 4,216 68,552 1,425
----- ------ -----
Cash at end of year 3,664 4,216 68,552
===== ===== ======
See Accompanying Notes to the Financial Statements
18
<PAGE>
Supplemental Cash Flow Information -
- -------------------------------------
1999 1998 1997
---- ---- ----
Cash paid for:
Interest $22,500 $7,613 $60,000
Income taxes - - -
Summary of non cash activity:
In fiscal year 1997 the Company converted debt to equity as part of its
confirmed Plan of Reorganization as described in Note 2.
VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
- --------
Veritec Inc. (the "Company") was incorporated in Nevada on September 8,
1982. The Company is primarily engaged in development, marketing and sales of a
line of microprocessor-based encoding and decoding system products that utilize
its patented Vericode Symbol technology. The Company's VeriSystem enables a
manufacturer or distributor to attach unique identifiers or coded symbols
containing binary encoded data to a product which enables automatic
identification and collection of data. The Company has also developed its
Veritaggant Covert Identification System, which enables the application of a
label or tag to a product for subsequent verification of its authenticity. The
Veritaggant Covert Identification System is not currently being marketed by the
Company.
Inventories
- -----------
Inventories are valued at the lower of cost (first in, first out) or
market.
Furniture and equipment
- -----------------------
Furniture and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets,
ranging from three years for computer related assets and five years for
remaining assets. When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and the resulting
gain or loss is recognized in income for the period. The cost of maintenance and
repairs is expenses as incurred; significant renewals and betterments are
capitalized. Deduction is made for retirements resulting from renewals and
betterments.
Revenue Recognition
- -------------------
Revenues from products sales and engineering are recognized when products
are shipped or services are performed. License fee is recognized upon completion
of all required terms under the agreement.
19
<PAGE>
Royalties are recognized as received. To date these royalties have been
earned in a foreign currency. The Company records these revenues in U. S.
dollars at the exchange rate in effect at the date of remittance. Accordingly,
the company has historically not been susceptible to translations gains or
losses.
Computer software costs
- -----------------------
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," issued by the Financial Accounting Standards Board, the Company is to
capitalize certain software development and production costs once technological
feasibility has been achieved. Software development costs incurred prior to
achieving technological feasibility were expensed as incurred.
Management determined that technological feasibility occurred at the time
the Company's software was available for general release to customers.
Accordingly, no computer software development costs have been capitalized in the
accompanying financial statements. In accordance with SFAS No. 86, costs of
software maintenance and customer support since the software became available
for general release have been charged to expense as incurred. Amounts expensed
for ongoing software maintenance in the accompanying financial statements are as
follows:
1997 $75,000
1998 60,000
1999 40,000
Earnings (Loss) per Share
- -------------------------
The Company has implemented SFAS 128: Earnings Per Share. SFASB 128
replaces the presentation of primary EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted-average number of common shares
outstanding for the year. Diluted EPS reflects the potential dilution from
conversion of Series H preferred stock or the exercise of options and/or
warrants, and is computed using the treasury stock method. Under the treasury
stock method stock options are assumed to have been exercised at the beginning
of the period if the exercise price exceeds the average market price during the
period. The computation of diluted EPS does not assume conversion, exercise or
contingent issuance of securities that would have an antidilutive effect on the
calculation of earnings per share.
Shares Days Weighted
Dates Outstanding Outstanding Outstanding Average Shares
- ----------------- ----------- ----------- --------------
7/1/96 to 6/30/97 208,560 365 208,560
5/2/97 to 6/30/97 3,090,210 (1) 60 507,980
--------
Fiscal year 1997 716,540
(1) Shares issued under Plan of Reorganization. --------
7/1/97 to 6/30/98 3,298,770 365 3,298,770
11/12/97 to 6/30/98 10,021 231 6,342
----------
Fiscal year 1998 3,305,112
----------
20
<PAGE>
7/1/98 to 6/30/99 3,308,791 365 3,308,791
10/1/98 to 6/30/99 290,000 273 216,904
----------
Fiscal year 1999 3,525,695
----------
NOTE 2 - PLAN OF REORGANIZATION
For the fiscal year ended June 30, 1997, a Plan of Reorganization was
approved by the Court on April 23, 1997 and signed by the Bankruptcy Judge on
May 2, 1997. In the Plan there was a one share for ten share reverse split of
both the Common and Preferred stock. In exchange for ten shares of old stock,
the shareholder received one share unit that consisted of one share of new
common stock and warrants, as explained in the Confirmed Plan documents filed
with the June 30, 1997 10-KSB and made a part of this filing by reference. The
major thrust of this Plan was to exchange equity for debt as shown in the above
cash flow statement. The following schedule shows the resultant transfer of debt
to equity:
Dollars No. Shares
------- ----------
Creditor Category
-----------------
Convertible subordinated notes $ 556,479 278,240
Notes payable 113,801 56,901
Accounts payable 561,686 280,843
Deferred compensation 791,915 395,958
Jr. subordinated notes $1,889,108
Less-receivable from
Officer 280,004 1,609,104 804,552
Bridge Group ---------- 929,503 929,503
-------
Rounding up dollars to shares 23
-------
Total 4,562,488 2,746,020
--------- ---------
Tie in to Statement of Shareholders' Deficiency
schedule
Amount per above 4,562,488
Accounts payable adjustment 1,239
Preferred stock on books at $1 per share 441,836
-------
Total 5,005,563
---------
The "Gant Group", claiming a priority position on the patents of the
Registrant, was approved to receive a cash and note settlement, with $60,000
required to be paid in cash and a four year note with quarterly payments on the
balance of approximately $300,000. According to the Plan, the Gant Group was to
receive 300,000 shares of common stock as a collateral guarantee on the $60,000
cash payment. Upon being paid the $60,000, HOMETREND was designated as the
distributor of this 300,000 shares.
HOMETREND and Associates were responsible for paying the Administrative
Costs of the Plan. From the amounts invested into the Company by HOMETREND,
$150,980 was applied for payment of these Administrative costs and was
considered as additional paid in capital in the Registrant's books.
21
<PAGE>
For the fiscal year ended June 30, 1998, 10,021 Series A Warrants were
exercised at $2.50 per share.
For the fiscal year ended June 30, 1999, 30,000 shares of Series H
Preferred shares were issued to HOMETREND on September 17, 1998, in
consideration of $218,182 that had been invested into the Registrant in June
1997. 29,000 of these 30,000 shares of Series H Preferred stock were converted
to 290,000 shares of free trading common stock on November 30, 1998. The Plan
called for the issuance of 275,000 shares of restricted Series H Preferred stock
in exchange for the $2,000,000 in assets to be invested into the Company.
NOTE 3 - CURRENT LIABILITIES
Notes payable
- -------------
Notes payable are due to two parties who loaned the company money on 90 day
notes in order for the Company to retain its engineering consultant during a
period when HOMETREND, the guarantor of the Plan, was unable to provide finances
to the Registrant. These parties have agreed to take restricted common stock for
the amounts of principal and interest due them at the time the Registrant
emerges from bankruptcy.
Notes payable secured
- ----------------------
The holders of these notes are collectively called "The Gant Group" in the
Plan of Reorganization. At June 30, 1995 the principal amount of these notes was
$265,400. Interest on these notes at that date amounted to $18,783. During 1995
additional interest accrued and the balance at June 30, 1996, including both
principal and interest amounted to $321,339. The holders of these notes had
secured a lien on the patents of the Registrant with filings with the U. S.
Patent Office and therefore claimed title to all patents of the Registrant. Due
to the Registrant being delinquent in payment of interest on the notes, the Gant
Group brought action against the Registrant for payment of both principal and
interest . The suit was transferred to the Bankruptcy Court and settlement with
the Gant Group was a part of the Plan of Reorganization. The total amount of
settlement due the Gant Group and approved in this Plan of Reorganization,
including principal, interest and legal fees amounted to $364,513. $60,000 of
this amount was to be paid in cash with the balance due in quarterly payments
over a four year period. The $60,000 was paid in July 1997 and the first
installment payment for the October 1, 1997 period has been made. No payments on
principal have been made since then. The Company is delinquent on payments as
stated in PART 1, Item 3.
The current amount of $198,704 represents the amount of principal due by
June 30, 2000. The total amount due on both the short term and long term
principal amounts is $286,453. See Subsequent section for additional information
on payment of the amounts due.
The Gant Group has been issued an interest bearing ten percent per annum
note, secured by the assets of the Registrant and with UCC1 filings. The future
maturities on the note are $198,704 in the year 2000 and $87,749 in the year
2001.
Accounts Payable and Accrued Expenses
- -------------------------------------
When the Plan of Reorganization was confirmed on May 2, 1997, the
22
<PAGE>
Registrant had very little debt as all of the debt, except for the Gant Group,
was converted to equity in conjunction with the Plan. At June 30, 1997 there
were debts to various creditors for expenses incurred from May 2 to June 30,
1997. Since the Registrant had limited funds made available by the guarantors of
the Plan, the debts increased to $66,751 at June 30, 1998 and to $134,764 at
June 30, 1999. The amounts due various creditors will be addressed in connection
with the Registrants motions to emerge from bankruptcy. If the Registrant does
not receive the funding from the Matthews Group, then it has no current
alternative measure to pay these creditors and will have a difficult time
emerging from bankruptcy.
Administrative costs per Plan of Reorganization
- -----------------------------------------------
The amount of Administrative Costs approved and confirmed in the Plan
amounted to $71,737 to the following parties:
Consolidated Industries $ 28,000
Larry Smith, Attorney 17,000
Personal Property Taxes 3,802
Convenience class creditors 22,935
------
Total $ 71,737
--------
Consolidated Industries filed a motion with the Court for additional
consideration, including interest, attorney fees and additional expenses.
Consolidated had also filed a UCC-1 filing on the assets of the Company. The
Court gave judgment that Consolidated Industries was only entitled to the
$28,000 included in the Plan and was ordered to immediately withdraw their claim
on the assets of the Registrant. The $28,000 was paid to Consolidate during the
year ended June 30, 1999.
Larry Smith, attorney, has been paid more than the amount included in this
debt category, however, has performed additional legal services for the
Registrant. Attorney Smith has billed the Company for approximately $42,000 as
an amount owed him at June 30, 1999. The Registrant has accrued $25,000 in the
Accounts Payable and Accrued Liabilities account in addition to the $17,000,
included in the accrued Administrative costs.
The Convenience Class Creditors were owed $22,935 in accordance to the
Plan. $1,000 was paid in Fiscal year ended June 30, 1998 and a balance of
$21,935 is owed at June 30, 1999. Mr. Starosolsky, a Director of the company and
his associates have placed $22,000 into Attorney Smiths Client Trust Account
with instructions to release the money for payment to the Convenience Class
Creditors upon a Final Decree being approved and the Registrant emerging from
bankruptcy. The Registrant paid the Convenience Class Creditors in September
1999 and has requested Attorney Larry Smith to return the money in his attorney
trust account to the Company.
The amount due on Personal Property Taxes will be paid upon the County of
Los Angeles correction of double billing the Company.
Accrued Interest
- ----------------
Accrued interest at June 30, 1998 was on the Gant Note and at June 30, 1999
was as follows:
23
<PAGE>
Interest on notes payable to the Gant Group $ 56,047
Interest on the $45,000 loans from others 4,215
--------
Total $ 60,262
Deferred Compensation
- ---------------------
Due to lack of financing according to the Plan, payments to parties working
for the Registrant have not been paid on a consistent basis in either fiscal
years ending June 30, 1999 nor 1998. On many occasions HOMETREND assured these
parties that the Plan would be completed and that payments would be made. The
Matthews Group has requested that the parties included in the Deferred
Compensation category accept restricted common stock at 80 cents a share in
payment for their services. The majority of parties affected have agreed to this
request, and upon approval by the Bankruptcy Court, will accept stock in place
of cash payment.
Deferred Revenue
The $8,500 shown as deferred revenues at June 30, 1998 was for an advance
on a bar code system in order to purchase equipment prior to engineering and
installation.
NOTE 4 - LONG TERM LIABILITIES
See Notes Payable -Secured in Note 4 and PART 3 Legal Proceedings of this
report for additional information on the Gant Group. The long term liabilities
represents the amount due to the Gant Group on their note for the period over
one year.
NOTE 5 - PREPAYMENT ON STOCK
The following parties have invested money into the Registrant in
anticipation of receiving stock for their investments. All of these parties,
except for the Matthews Group, invested in an effort to support HOMETREND in
providing finances to complete the Plan requirements:
Wolodymyr Starosolsky, a Director of the Registrant $ 96,000.
Glen Verner 5,000
HOMETREND/HEALTH KINETICS 94,117
The Matthews Group 45,081
-----------
Total $ 240,198
-----------
There is a dispute between HOMETREND and Health Kinetics as to who is to
receive stock for the $94,117 invested during the period that Health Kinetics
had a promissory note payable to the Registrant. HOMETREND provided the money to
the Registrant, however, Health Kinetics claims that the money was provided by
them to HOMETREND and therefore, they have claim on the investment. The
Registrant expects to hold payment or consideration on the amount due until the
matter is resolved between the two parties.
NOTE 6 - SHAREHOLDERS' DEFICIENCY
Reverse stock split
- -------------------
24
<PAGE>
Effective May 9, 1994, the Board of Directors approved and the Company
effected a one-for-ten "reverse" stock split of its outstanding common stock,
reducing its outstanding common shares to 1,970,255 from approximately
19,702,550, subject to fractional share rounding. The common shares outstanding
and per common share data in the financial statements and the accompanying notes
have been adjusted to reflect this reverse stock split.
Effective May 2, 1997 all Preferred Shares were converted to Common Shares
and the Registrant effected an additional one-for-ten "reverse" split per Plan
of Reorganization. All financial information included in this report reflects
the "reverse" stock splits noted above.
Preferred stock
- ---------------
The Articles of Incorporation of the Company authorize 10,000,000 shares of
preferred stock with a par value of $1.00 per share. The Board of Directors is
authorized to determine any number of series into which shares of preferred
stock may be divided and to determine the rights, preferences, privileges and
restrictions granted to any series of the preferred stock.
As part of the confirmed Plan of Reorganization, the series B, D, E and Z
preferred stock was converted to common stock on a share for share basis
effective May 2, 1997. 441,836 shares were reduced to 44,184 shares in the one
for ten reverse split and these 44,184 shares were converted to 44,184 shares of
free trading common stock with one warrant unit for each share of new stock. See
comments on Warrants below.
As part of the Plan of Reorganization, a new Series H Convertible Preferred
Stock was authorized. The Plan calls for the Registrant to issue 275,000 shares
of new restricted Series H Convertible Preferred Stock in exchange for assets of
$2,000,000 being invested into the Company. This Series H Stock is convertible
into 2,750,000 shares of common stock at the option of the holder.
On September 17, 1998 HOMETREND received 30,000 shares of Series H
Convertible Preferred stock for an investment of $218,182. The number of shares
and the dollar amounts are proportional to the 275,000 shares for $2,000,000 in
the Plan.
On November 30, 1998, HOMETREND exercised the conversion privilege and
converted the 29,000 preferred shares to 290,000 shares of common stock. Since
HOMETREND invested the $218,182 into the Registrant in May and June, 1997, the
restriction has been lifted on these new common shares.
Common stock
- ------------
Fiscal year ended June 30, 1997
Issuance of 441,836 shares for conversion from preferred stock
Reduction in common stock due to one-for-ten "reverse" split -
(2,274,687) shares.
Issuance of common stock to creditors per Plan of
Reorganization - 2,746,687 (after split)
Issuance of common stock as consideration for guaranty of payment
on secured note per Plan of Reorganization - 300,000 shares.
In the fiscal year ended June 30, 1998, 10,021 warrants were exercised at
$2.50 per share.
25
<PAGE>
In the fiscal year ended June 30, 1999, 29,000 shares of Series H
Convertible Preferred Shares were converted to 290,000 shares of common stock.
Common stock purchase warrants
- ------------------------------
The confirmed Reorganization Plan has several explanations of the stock
transactions and warrant issues affecting the holders of both preferred and
common stock prior to the Plan. The 10-KSB filing at June 30, 1997 included a
copy of the Plan of Reorganization and both explanations and exhibits are hereby
referenced into this section of this filing.. See the Plan of Reorganization for
details on the various Warrants and Agreements. A summary of the various
Warrants is as follows:
Under the Plan of Reorganization the Preferred Stock was converted to
Common Stock on a share for share basis and then the common stock was effected
by a one-for-ten "reverse" split. Each of the resulting, after split, shares
received warrant units consisting of:
3 "A" warrants;
3 "B" warrants; and
3 "C" warrants.
Each "A" warrant authorizes the holder to purchase 1 share of
non-restricted new common stock of the Registrant at $2.50 per share, which is
exercisable to May 5, 2000, in exchange for one "A" warrant. This date per Plan
was originally August 5, 1998, however was extended by the Board of Directors
and may be extended by the Board of Directors before this new due date.
If the "A" warrant is not exercised, then the "A" warrant expires, and the
"B" and "C" warrants of the Warrant Unit terminates.
The "B" warrant authorizes the purchase of non-restricted new common stock
of the Registrant at $5.00 per share and is exercisable for one year after the
termination date of the "A" warrant.
The "C" warrant authorizes the purchase of non-restricted new common stock
of the Registrant at $7.00 per share and is exercisable one year after the
termination date of the "B" warrants.
NOTE 7 - RELATED PARTIES
Mr. Starosolsky, a Director, has invested $96,000 into the Registrant as
stated in Note 5 of this report. Mr. Jack Dahl, the Acting Chief Financial
Officer of the Registrant has deferred salary of $121,050 and Mr. Mark Pinson, a
former Director and Vice President-Engineering, is owed 95,500. Mr. Starosolsky,
Mr. Dahl and Mr. Pinson have agreed to take stock in exchange for amounts due
them.
NOTE 8 - INCOME TAXES
26
<PAGE>
Income taxes consisted of the following at June 30,
1999 1998 1997
---- ---- ----
Current:
Federal $ - $ - $ -
State - - -
State minimum fee $ (800) $ (800) $ (800)
Deferred:
Federal - - -
State - - -
Income tax benefit (expense) $ (800) $ (800) $ (800)
The Company has implemented FASB 109: Accounting for Income Taxes. The tax
effects of net operating loss carryforwards gives rise to a significant deferred
tax asset. FASB 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
1999 1998 1997
---- ---- ----
Gross deferred tax asset relating to net
operating loss carryforwards $ 3,339,000 $ 3,224,000 $ 3,159,000
Valuation allowance $(3,339,000) $(3,224,000) $(3,159,000)
Net deferred tax asset - - -
Deferred tax liability - - -
-------- --------- --------
Net deferred tax asset (liability - - -
-------- --------- --------
At June 30, 1999, the Company has net operating loss carryforwards
available to offset future taxable income as follows:
Year Federal State
- ---- ------- -----
2000 9,000 1,227,000
2001 13,000 457,000
2002 314,000 301,000
2003 913,000 480,000
2004 829,000 451,000
2005 643,000 -
2006 452,000 -
2007 657,000 -
2008 979,000 -
2009 1,410,000 -
2010 1,227,000 -
2011 457,000 -
2012 301,000 -
2013 480,000 -
2014 451,000 -
------- ---------
$ 9,135,000 $ 2,916,000
----------- -----------
27
<PAGE>
NOTE 9 - INVESTMENT GROUPS
During its bankruptcy the Company has sought an investment group to assist
it in funding the $2,000,000 called for under the Plan of Reorganization
approved by the Bankruptcy Court on May 2, 1997. In the intervening years the
various investment groups have attempted to help the company fund this required
investment. Through June 30, 1999 no group has been successful in assisting the
company in funding this commitment and the Company remains under the direction
of the Bankruptcy Court. Partial fundings received from these investment groups
have been settled through stock issuances by the Company or are recorded as
stock advances that the Company intends to settle through the issuance of stock.
It is possible that these investment groups will assert claims against the
Company regarding: the levels of their funding; the Company's termination of
their funding commitments; or for expenses incurred while they were assisting
the Company. Management believes it has appropriately reflected the activity
with these investment groups in the accompanying financial statements. Due to
uncertainties, however, it is at least reasonably possible that claims will be
asserted. The ultimate outcome of these claims, if asserted, cannot presently be
determined.
NOTE 10 - GOING CONCERN, REORGANIZATION AND MANAGEMENT'S PLANS
In the June 30, 1997 Form 10-KSB filing the Company reported that the
$2,000,000 of funding required under the Plan of Reorganization had been met.
The Company subsequently determined that the value of the assets to be
contributed to the Company could not be verified to the Company's satisfaction.
Accordingly, the company terminated investment discussions with HOMETREND and
began the search for an alternate investment group. As discussed in Note 11 -
Subsequent Events, an alternate investment group, The Matthews Group, LLC has
submitted a plan to the Company to fund the $2,000,000 required under the Plan
of Reorganization.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate the continuance of
the Company as a going concern. The Company's ability to continue in existence
is dependent upon funding its Plan of Reorganization. Failure to fund the Plan
of Reorganization could result in reconversion of the Company to Chapter 7 of
the Federal Bankruptcy Code and the ultimate liquidation of the Company. The
financial statements do not include any adjustments relating to the
recoverability or recorded asset amounts or the amounts of liabilities that
might be necessary should the Company be unable to continue as a going concern.
NOTE 11 - SUBSEQUENT EVENTS
A Court hearing was held on September 1, 1999 for purposes of acting on the
Registrants motion to have its case reconverted to Chapter 11 from Chapter 7.
The Bankruptcy Judge approved the motion and the Registrant was allowed to
proceed in Chapter 11 and under the original Confirmed Plan of Reorganization.
The Matthews Group paid the Gant Group $182,345.87 to bring the note
between the Gant Group and the Registrant up to date on both principal and
interest. The Matthews Group has also committed to the Gant Group that it will
make the remaining payments on the note. The Registrant owes the Matthews Group
the amounts paid to the Gant Group and will owe any additional amounts paid by
the Matthews Group on the notes. The Matthews Group, LLC has taken a secondary
position to the Gant Group in the Company's patents which are the collateral for
the note to the Gant Group. Upon payment in full to the Gant Group, the Matthews
Group will have a first position in this collateral until this obligation is
repaid to the Matthews Group.
28
<PAGE>
In September 1999 the Company accepted a commitment from The Matthews
Group, LLC to fund the $2,000,000 required under the Plan of Reorganization.
This funding is in the form of a promissory note that calls for 108 monthly
payments to the Company of $18,518.52. These payments are non interest bearing
and are secured by a pledge of properties controlled by a principal of The
Matthews Group. The Company has not perfected a security interest in the pledged
properties and accordingly, this note is unsecured.
Filings of both Federal and State tax forms for the fiscal years ended June
30, 1995, 1996, 1997, 1998 and 1999 were filed on September 29, 1999. No Federal
tax was owed due to losses in each of these years. State taxes of $800 per year
plus certain penalties were paid on the State returns.
The Registrant has filed a motion with the Court for a Final Decree. A
Court hearing date has been set for October 13, 1999 for the Court to act on
this motion. Creditors have until September 30, 1999 to file a protest or
objection to the motion.
The Registrant has moved its headquarters offices to 1430 Orkla Drive,
Golden Valley, MN 55427 and has established a Western Regional Office at 7100
Hayvenhurst Ave., Suite P-E, Van Nuys, CA 91406.
The Registrant had receipts of $68,852 on collection of receivables and
product sales in July and August 1999 while under the Chapter 7 proceedings. A
letter of credit in the amount of $97,000 is currently in hand for shipment of
products to a customer in a foreign country. The Registrant has also received a
request for additional quotes for its products and is actively pursuing other
possible sales leads.
Working Capital
- ---------------
The Registrant has had limited working capital since the Confirmation of
the Plan of Reorganization due to HOMETREND'S inability to provide funding
according to the Plan. Debts have increased to approximately $500,000 during the
period from May 3, 1997 to June 30, 1999, in addition to the note obligation to
the Gant Group. The Matthews Group has funded limited operations since their
first involvement in December 1998, however, and have provided adequate finances
to keep the Registrant in operations during this period of time. Revenues from
the sale of Company products and services have been inadequate to pay for
ongoing operations in each of the fiscal years ended June 30, 1999, 1998 and
1997.
Under the Matthews Group plan of investment, the collateral backing their
asset investment is comprised of income producing properties adequate to keep
the Company in operation. Additional funds are expected to be available for an
increase in sales and engineering activities as the Registrants customer base
increases.
With the Matthews Group funding the Gant notes and most of the post
Confirmation creditors accepting stock for their debts, invested money will be
used for engineering, sales and marketing activities, supported by an increasing
application and software engineering staff.
NOTE 12 - CONCENTRATIONS, RISKS AND UNCERTAINTIES -
Use of Estimates
- ----------------
29
<PAGE>
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates
Accounts Receivable
- -------------------
The Company sells to domestic and foreign companies. The Company grants
uncollateralized credit to customers, but requires deposits on unique orders.
Management deemed all accounts receivable collectible and did not provide for an
allowance for doubtful accounts. The accounts receivable at June 30, 1999 was
from one customer. This receivable was collected subsequent to year end.
Major Customers
- ---------------
Four major customers accounted for 75% of revenues in fiscal year 1999.
Three major customers accounted for 82% of revenues in the fiscal year 1998. Two
major customers accounted for 79% of revenues in fiscal year 1997.
Two major customers accounted for 62% of revenues during the combined
period of fiscal years 1999, 1998 and 1997.
Inventories
- -----------
Management believes that all inventory will be realized during the normal
course of operations and accordingly, has not recorded any inventory valuation
allowance in the accompanying financial statements. Due to uncertainties,
however, it is at least reasonably possible that management's estimate will
change during the next year. That amount cannot be estimated.
Key Personnel
- -------------
The majority of the Company's revenues from engineering services and
product sales are generated by a key contractor/employee of the Company.
Unasserted Claims
- -----------------
The Company is subject to possible unasserted claims and assessments as
described in Note 9. Management is of the opinion that these unasserted claims
are without merit and that settlement, if any, will not have a material effect
on the Company's financial position. Nevertheless, it is at least reasonably
possible that claims will be asserted. The ultimate outcome of these claims, if
asserted, cannot presently be determined.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ---------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
There have been no changes in or disagreements with accountants with
respect to accounting and/or financial disclosures.
PART III
--------
30
<PAGE>
ITEM 9 - DIRECTORS EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
---------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------
The Reorganization Plan under Chapter 11 proceedings included a change in
both Management and Directors of the Company. These changes were effected at a
Board of Directors Meeting on April 24, 1997.
Director changes included:
Old Board of Directors New Board of Directors Age
---------------------- ---------------------- ---
Robert S. Anselmo Howard L. Behling, Chairman 52
Jack E. Dahl Roy Y. Salisbury 43
Wolodymyr M Starosolsky, Chairman Wolodymyr M. Starosolsky 61
Roger W. Bailey Roger W. Bailey 52
Alexander LaChance (resigned from the
Board on April 10, 1996)
Officer changes included:
Old Officers New Officers
------------ ------------
Jack E. Dahl, President & CEO Howard L. Behling, Acting President
Robert S. Anselmo, Secretary Jack E. Dahl, Acting Chief Financial
Alexander R. LaChance, Officer, Secretary and Treasurer
Vice President - Engineering Mark Pinson, Vice President-Engineering
(Resigned on April 10, 1996)
Directors, Executive Officers, Promoters and Control Persons
- ------------------------------------------------------------
The current directors and executive officers of the Company and their
positions held in the Company are listed below. 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. Officers
are appointed by the board of directors. There are no family relationships
between any director or officer. The executive officers and directors of the
Company are as follows
Officer title
Name Age Director since (N/A indicates not an officer)
---- --- -------------- -----------------------------
Larry Matthews 71 1/28/99 President and CEO
Dr. Van Thuy Tran 54 1/28/99 N/A
Howard W. Behling 52 5/2/97 N/A
Wolodymyr M. Starosolsky 61 3/31/94 N/A
Roger W. Bailey 52 6/18/94 N/A
Dr. Helen L Laib 51 8/11/99 N/A
Steven Holtze 48 N/A
Jack E. Dahl 66 - Acting Chief Financial
Officer, Secretary
and Treasurer
31
<PAGE>
Mr. David Copley was appointed to the Board of Directors on April 24, 1997,
and was removed from the Board on January 7, 1998. It was determined by the
Board that his appointment was improper since he was affiliated with S.A.H.C.
and his being on the Board gave S.A.H.C and HOMETREND a majority of Directors.
The Reorganization Plan states that S.A.H.C. and HOMETREND cannot have a
majority of members on the Board.
Mark Pinson was appointed a Director at a Board of Directors Meeting on
January 7, 1997 and resigned on January 11, 1999.
Roy Y. Salisbury served on the Board of Directors from May 2, 1997 until
his resignation on June 16, 1999.
Robert Junghans served on the Board of Directors from January 28, 1999 to
April 21, 1999.
James Clarke was appointed Acting President and Chief Executive Officer and
a Director of the Registrant on February 20, 1998 based on a commitment to fund
the Company. When his funding did not materialize as expected, he was removed
from office on March 9, 1998.
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 the Registrant out of Bankruptcy.
Mr. Matthews has been a consultant for Vendtronics LLC (was formerly
Chairman/Co-owner, sold to FEC) from 1994 to the present time. From 1984 to 1993
he was Co-founder, Director and Vice President-Engineering of ZYTEC Corporation.
In prior years he was Vice-President Operations at Control Data, Design Engineer
at UNIVAC and Design Engineer at Mpls/Moline/Case. Mr. Matthews currently is on
the Board of Directors of Artesyn Technologies (merger of Computer
Products/ZYTEC), Pioneer Software Development, Solar Attic and Third Wave
Systems companies.
Ms. Van Thuy Tran, has been President of Asia Consulting and Trading
Company, a company dealing with trade in the Pacific Rim countries, since 1994.
She is the co-founder of Circle of Love, providing mission works in Vietnam. She
is also the founder of Equal Partners, Inc., a construction and building company
in Minnesota. Ms. Van Tran has a Medical Degree in Hematology and worked in the
medical field for over 17 years. For the last twenty years, she has been an
entrepreneur involved in building businesses, providing opportunity for the
minority and creating solutions for distressed situations.
Howard L. Behling, served as Chairman and Acting President of the
Registrant from May 2, 1997 to February 2, 1998 and from June 9, 1998 to
December 9, 1998. He has served as the Chairman of HOMETREND, INC., since 1989.
HOMETREND was one of the first publicly traded franchise companies in America.
Mr. Behling has been active in the securities market for over 20 years while
acting in the capacity of Vice President while at Merrill Lynch, Prudential
Securities, and E. F. Hutton & Company.
Wolodymyr M. Starosolsky, was the Chairman of the Board from April 1994 to
April 24, 1998. Mr. Starosolsky is currently a licensed and practicing attorney
with his own firm in New York City since 1972, specializing in civil, criminal
and commercial litigation in state and U. S. Federal courts and in international
law and handling matters for U. S. and other clients in Eastern Europe. Mr.
Starosolsky also currently sits on the board of C.U.A.N.D.O. Community Center in
New York City.
32
<PAGE>
Roger W. Bailey, has been a Director of the Registrant since June 1994. Mr.
Bailey has been Vice President of MCI SYSTEMHOUSE/EDS since November 1998 and
from July 1998 to November 1998 was Managing Director of two of that Company's
Divisions. From September 1997 to April 1998, Mr. Bailey was Vice President and
General Manager, Enterprise Network Solutions for Accugraph Corporation, Dallas,
Texas. From September 1996 to June 1997 he was Strategic Alliance Vice President
at AT &T Solutions, Florham Park, New Jersey, where he was responsible for
identifying alliance partners, structuring alliances and developing and
implementing a procurement process and supplier management system. From June
1995 to August 1996 Mr. Bailey was Customer Engagement Vice President for AT&T
Solutions. From July 1993 to June 1995, he was Securities Counsel and Director
of Government Affairs for Dell Computer Corporation, Austin, Texas. From 1992 to
June 1995, Mr. Bailey was an Independent Business Counsel as advisor to
entrepreneurial and high-technology businesses. Prior to 1992 he was General
Counsel for Perot Systems Corporation, Reston, Virginia and Electronic Data
Systems Corporation in Dallas, Texas. Mr. Bailey was an Air Force Officer from
1969 to 1978. Mr. Bailey has his law degree from the University of Puget Sound,
M.B.A. degree from the California State University, M.S. degree in Aeronautical
and Astronautical Engineering from Stanford University and a B.S. degree in
Aeronautical Engineering, Engineering Sciences and Mathematics from the U.S.Air
Force Academy.
Helen L. Laib, M. D., has been involved in the practice of medicine at the
Rockford Memorial Hospital in Rockford, Illinois and the Cook County Hospital in
Chicago Illinois from 1997 to present. From 1988 to present, she has performed
trauma surgery, from 1986 to 1988 she was in private practice and was an
Emergency Room Physician at the Rockford Memorial Hospital. From 1982 to 1986,
Dr. Laib was Clinical Chief of Surgery, Adult Emergency Services, Cook County
Hospital, and from 1977 to 1982 was a Research Fellow and then Attending Surgeon
at Cook County Hospital. Dr. Laib is Board Certified with the American Board of
Surgery and is licensed in both Texas (took medical training at Baylor College
of Medicine in Houston, Texas) and Illinois. She is a member of several medical
societies, including, Fellow American College of Surgeons, Christian Medical &
Dental Society and American Medical Association.
Steven Holtze, is currently and has been an officer for a major Minneapolis
bank for fifteen years. Mr. Holtze has specialized in financing, financial
planning and workout and has considerable experience in marketing and sales
negotiations. He also has specialized in creating viable solutions for
distressed real estate transactions. Having frequently attended legal seminars,
he has a good working knowledge of the legal system and has been a financial and
business consultant to various companies.
Committee and Board Meetings
- ----------------------------
The Registrant had no standing audit, nominating or compensation committees
of its Board or committees performing similar functions during fiscal 1999. The
Directors have regularly communicated to discuss the Company's affairs and also
have held formal periodic board meetings to transact and approve appropriate
business. Directors have received no compensation or expenses for attending
Board Meetings. During the period June 30, 1997 through September 1, 1999, the
Board met 23 times. The following are the dates of the Board meetings and
attendance of the Directors:
Date Attendees Absent
- ---- --------- ------
8/18/97 Behling, Starosolsky, Salisbury, Copley Bailey
33
<PAGE>
8/26/97 Behling, Starosolsky, Salisbury, Copley, Bailey None
1/7/98 Behling, Starosolsky, Salisbury, Bailey None
1/21/98 Behling, Starosolsky, Salisbury, Bailey, Pinson None
2/20/98 Behling, Starosolsky, Salisbury, Bailey, Pinson None
3/9/98 Behling, Starosolsky, Salisbury, Bailey, Pinson None
6/9/98 Behling, Starosolsky, Salisbury, Bailey, Pinson None
8/1/98 Behling, Starosolsky, Salisbury, Bailey, Pinson None
10/12/98 Behling, Starosolsky, Salisbury, Pinson Bailey
11/11/98 Behling, Starosolsky, Salisbury, Pinson Bailey
11/18/98 Behling, Starosolsky, Salisbury, Bailey, Pinson None
11/23/98 Behling, Starosolsky, Salisbury, Bailey, Pinson None
11/25/98 Behling, Starosolsky, Salisbury, Bailey, Pinson None
11/27/98 Behling, Starosolsky, Salisbury, Pinson Bailey
12/9/98 Behling, Starosolsky, Salisbury, Pinson, Bailey None
1/11/99 Behling, Starosolsky, Salisbury, Pinson, Bailey None
1/13/99 Behling, Starosolsky, Salisbury, Bailey None
1/28/99 Matthews, Tran, Junghans, Salisbury, Starosolsky, Bailey
Behling None
3/19/99 Matthews, Tran, Junghans, Salisbury, Starosolsky, Bailey
Behling None
4/2/99 Matthews, Tran, Junghans, Salisbury, Starosolsky, Bailey
Behling None
4/26/99 Matthews, Tran, Salisbury, Starosolsky, Bailey, Behling None
6/14/99 Tran, Salisbury, Starosolsky, Bailey, Behling Matthews
8/11/99 Matthews, Tran, Salisbury, Starosolsky, Bailey, Behling
9/3/99 Matthews, Tran, Starosolsky, Bailey, Behling, Laib, Holtze None
9/24/99 Matthews, Tran, Starosolsky, Bailey, Behling, Laib, Holtze None
Directors did not receive any director's fees for the above meetings.
Executive Officers
- ------------------
The current operating officers are listed in the following table. There are
no family relationships between any officers of the Company.
34
<PAGE>
Name Age Officer Title
---- --- -------------
Larry Matthews 71 President, Chairman and Chief Executive Officer
Jack E. Dahl 66 Acting Chief Financial officer, Secretary and
Treasurer
The antecedents of Larry Matthews is included in the Director section
above.
Jack E. Dahl - In the Confirmed Plan of Reorganization, Mr. Dahl was
appointed Acting Chief financial Officer and Secretary of the Company. From
December 9, 1998 to January 29, 1999, Mr. Dahl was appointed Acting President.
After the Registrant was petitioned into bankruptcy in October, 1995, Mr. Dahl
was elected to the office of President and Chief Executive Officer. From 1991
until appointed President, Mr. Dahl was the Chief Financial Officer of the
Company. From June 1984 to December 1989, Mr. Dahl was President and CEO of U S
Pump & Turbine Company. From 1980 to 1984, he was President of Elixir
Industries, Inc. Prior to 1980 Mr. Dahl was President of Fleetwood Enterprises,
Guerdon Industries, Inc., both Manufactured housing and recreational vehicle
manufacturers, Chairman of Alma Plastics Company, a seven plant plastic products
manufacturing company, President of Lichter Duo Rest, a furniture manufacturing
company and R. C. Allen, a cash register and small aircraft electronic parts
manufacturing company.
ITEM 10. EXECUTIVE COMPENSATION
-------------------------------
No executive officer received cash compensation of $60,000 during the
fiscal year ended June 30, 1999.
The total compensation to all executive officers as a group was $19,800.
Bonuses - No cash bonuses were paid by the Registrant to any executive
-------
officer during the year ended June 30, 1999.
Deferred compensation - The Company has not had the finances to pay
----------------------
personnel working for the Company on a consistent basis and deferred
compensation amounts have increased each year from 1997 through 1998 as shown in
the following table.
1999 1998 1997
---- ---- ----
Deferred compensation at June 30, $ 301,406 $107,700 $24,830
Personnel owed the majority of the deferred compensation at June 30, 1999
have agreed to take restricted common stock at 80 cents per share in exchange
for amounts owed them.
Compensation pursuant to plans including pension, stock option, and stock
---------------------------------------------------------------------------
appreciation rights plans. As of June 30, 1999, the Registrant does not have any
- -------------------------
stock appreciation rights plans, phantom stock plans, or any other incentive or
compensation plan or arrangement pursuant to which benefits, remuneration,
value, or compensation was or is to be granted, awarded, entered, set aside, or
accrued for the benefit of any executive officer of the Company.
35
<PAGE>
Termination of Employment and change of control arrangement - During the
--------------------------------------------------------------
year ended June 30, 1999, no officer, director, or principal shareholder of the
Registrant either received or is to receive any remuneration as a result of
either: (I) the termination of such person's employment whether by resignation,
termination of such person's employment, whether by resignation, retirement, or
otherwise; (ii) a change of control of the Registrant or a change in such
individual's responsibilities following a change in control of the Company.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
The following tables sets forth, as of September 15, 1999 certain
information with respect to all shareholders known by the Registrant to be
beneficial owners of more than 5% of its outstanding Common Stock, all
directors, and all officers and directors of the Registrant as a group:
Number of Shares
Name and Address Common Percent of Class
- ---------------- ---------- ----------------
Larry Matthews none N/A
7601 5th Ave.
Richfield, MN 55423
Van Thuy Tran none N/A
1430 Orkla Dr.
Golden Valley, MN 55427
Howard Behling [Note (a) ]
24512 Via Del Oro
Laguna Niguel, Ca 92677 none N/A
Wolodymyr Starosolsky [ Note (b) ]
50 Broadway, Suite 806 449,965 13.64%
New York, NY 10004
Roger Bailey
18 Gap View Road
Short Hills, NJ 07078 14,500 .44%
Dr. Helen L. Laib
1430 Orkla Dr. none N/A
Golden Valley, MN 55427
Steven Holtze
1430 Orkla Dr.
Golden Valley, MN 55427 none N/A
Jack E. Dahl 220,019 6.67%
19801 Marilla St.
Chatsworth, CA 91311
Directors and Executive Officers
as a Group 684,484 19.01%
Note (a) - Howard Behling is the Chairman of HOMETREND. HOMETREND has 1,000
shares of Series H Preferred stock at June 30, 1999.
36
<PAGE>
Note (b) - 81,198 of these shares are in the name of Wolodymyr M.
Starosolsky, Trustee, Defined Benefit Pension Plan of Wolodymyr M. Starosolsky,
P.C.
ITEM 12. CERTAIN TRANSACTIONS
-----------------------------
The Registrant has adopted a policy that any transactions with Directors,
officers or entities of which they are also officers or directors or in which
they have a financial interest, will only be on terms consistent with industry
standards and approved by a majority of the disinterested directors of the
Company's Board and based upon a determination that these transactions are on
terms no less favorable to the Company than those which could be obtained by
unaffiliated third parties. This policy could be terminated in the future. The
Articles of Incorporation of the Company provides that no such transactions by
the Registrant shall be either void or voidable solely because of such
relationship or interest of directors or officers or solely because such
directors are present at the meeting of the Board or a committee thereof which
approves such transaction or solely because their votes are counted for such
purpose. In addition, interested Directors may be counted in determining the
presence of a quorum at a meeting of the Board or a committee thereof which
approves such a transaction.
The following are transactions considered by the Registrant to be
significant of disclosure pursuant to Regulation 228.404 of Regulation S-B:
Related party transactions -
- ----------------------------
Included in the Reorganization Plan is a conversion of notes and deferred
compensation to equity of officers and former officers of the Registrant. In
this regard, all notes payable, accounts payable and deferred compensation
amounts were treated equally in the conversion of debt to equity, except in the
case of the "Bridge Group". Since the Bridge Group had security claim on assets
of the Registrant, they received twice the conversion rate of other creditors.
Wolodymyr Starosolsky, a Director and Jack E. Dahl, Acting Chief Financial
Officer, were included in the Bridge Group.
Mark Pinson, formerly a Vice President-Engineering and a Director, had
developed certain software technology during periods when he was neither an
employee nor consultant to the Registrant. The Registrant intends to purchase
that software in exchange for $50,000 in cash and 187,500 shares of the
Registrant's restricted common stock. This exchange of software for cash and
stock is expected to be transacted in October 1999.
S.A.H.C. - Roy Salisbury, a former Director of the Registrant, as President
of S.A.H.C., the guarantor of assets of $2,000,000 as investment into the
Registrant per Plan of Reorganization, did not provide such assets to effect the
Plan when scheduled for completion. Several proposals were made in conjunction
with S.A.H.C. fulfilling their obligation, however, each proposal included
provisions that were not sanctioned in the Plan. S.A.H.C. did provide funding of
$210,500 for the Registrant through their affiliate HOMETREND.
Howard Behling, Acting President of the Registrant for the period May 2,
1997 through February 20, 1998 and the period June 9, 1998 through December 9,
1998 is also the Chairman of HOMETREND. As Principal Officer in both of these
Companies, there could be a conflict of interest in his activities involving
both the Registrant and HOMETREND. Mr. Behling was authorized a salary of $6,500
per month by the Directors during the period of his Presidency and has drawn
37
<PAGE>
funds from the Registrant of approximately this amount due him based on the
approved salary amount. The majority of this money was drawn from the
Registrants bank accounts soon after the first money was invested by HOMETREND
into the Company. Therefore, Mr. Behling received cash compensation during a
period when other parties working for the Company were having their payments
deferred and other administrative costs of the Plan and other creditors were not
being paid.
Some of the creditors called the "Gant Group" in the Plan of Reorganization
are to receive payment in cash and notes for the approximately $350,000 owed to
them as a secured notes payable. The Plan called for an initial payment of
$60,000 and quarterly payments thereafter over a four year period. The
Registrant paid the $60,000 and the first payment that was due October 1, 1997.
The Matthews Group has paid $182,345.87 to bring the Gant Note payments up to
date and pledged to pay the final 8 quarterly payments on the note.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
------------------------------------------
Exhibits
Page No.
--------
Reference is made to the Exhibit Index contained in this
Annual Report on Form 10-KSB 40
A copy of any of the exhibits listed or referred to above will be furnished
at a reasonable cost to any person who was a shareholder of the Company on July
1, 1998, upon receipt from any such person of a written request for any such
exhibit. Such request should be sent to the Company with the attention directed
to the Corporate Secretary.
Reports of Form 8-K
- -------------------
The Company has filed the following Reports of Form 8-K during the year
ended June 30, 1999 and subsequently through the date of this report:
None.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(D) of the Exchange Act,
the Company has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VERITEC INC.
/s/ Larry Matthews_________________________________
Larry Matthews, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Larry Matthews Chairman of the Board of Directors 10/8/99
- --------------------
Larry Matthews
/s/ Van Thuy Tran Director 10/8/99
- ------------------
Ms. Van Thuy Tran
Director 10/8/99
- ----------------------
Howard L. Behling
/s/Wolodymyr M. Starosolsky Director 10/9/99
- -----------------------------
Wolodymyr M. Starosolsky
/s/ Roger W. Bailey Director 10/8/99
- ----------------------
Roger W. Bailey
/s/ Helen L. Laib, MD Director 10/8/99
- -------------------------
Dr. Helen L. Laib
/s/ Steve Holtze Director 10/8/99
- -------------------
Steven Holtze
39
<PAGE>
VERITEC INC.
EXHIBIT INDEX
June 30, 1994
Exhibits
- --------
Page No.
Item No. Description of Document (footnote)
-------- ----------------------- ---------
1. Notice of Entry of Judgment or order and Certificate 7
of Mailing
2. Order authorizing debtor to incur secured debt 7
and for order reconverting case to Chapter 11
There were no 8-K filings during the fiscal years ended June 30, 1999,
1998, 1997.
40
<PAGE>
NOTE TO USERS OF THIS FORM:
Physically attach this form as the last page of the proposed order or Judgement.
Do not file this form as a separate document.
_______________________________________________________________________________
| In re | CHAPTER 7 |
| VERITEC, INC. | ------- |
| | CASE NUMBER |
| Debtor | SV 95-17978-AG |
- --------------------------------------------------------------------------------
NOTICE OF ENTRY OF JUDGMENT OR ORDER
AND CERTIFICATE OF MAILING
TO ALL PARTIES IN INTEREST ON THE ATTACHED SERVICE LIST:
1. You are hereby notified, pursuant to Local Bankruptcy Rule 9021-1(1)(a)(v),
that a judgment or order entitled (specity):
ORDER AUTHORIZING DEBTOR TO INCUR SECURED DEBT AND FOR ORDER RECONVERTING
CASE TO CHAPTER 11
was entered on (specify date): SEP 01 1999
2. I hereby certify that I mailed a copy of this notice and a true copy of the
order or judgment to the persons and entitles on the attached service list
on (specify date): SEP 01 1999
Dated: SEP 01 1999 JON D. CERETTO
Clerk of the Bankruptcy Court
By: (signature)
------------------------
Deputy Clerk
______________________________________________________________________________
Rev 5/98 This form is optional. It has been approved for use by the F9021-1.1
United States Bankruptcy Court for the Central District of California
41
<PAGE>
|| COPY |
1||18160.11 -------------------------------- |
||BYRON Z.MOLDO (State Bar No. 109652) | FILED | |
2||JOON M. KHANG (State bar No. 188722) | |--------------------------| | |
||2029 Century Park East, Suite 3800 | | AUG 31 1999 | | |
3||Los Angeles, CA 90067-3024 | |--------------------------| | |
||Telephone: (310) 788-5000 | CLERK, U.S.BANKRUPTCY COURT | |
4||Facsimile: (310) 788-5100 |CENTRAL DISTRICT OF CALIFORNIA| |
|| | BY COUNTY CLERK| |
5|| Attorney for Veritec, Inc., Debtor |------------------------------| |
|| -------------------------------- |
6|| | ENTERED | |
|| | |--------------------------| | |
7|| | | SEP -1 1999 | | |
|| | |--------------------------| | |
8|| |CLERK, U.S.BANKRUPTCY COURT | |
|| |CENTRAL DISTRICT OF CALIFORNIA| |
9|| |BY COUNTY CLERK| |
|| |------------------------------| |
10|| UNITED STATES BANKRUPTCY COURT |
|| |
11|| CENTRAL DISTRICT OF CALIFORNIA |
|| |
12|| In Re: ) CASE NO. SV95-17978-AG |
|| ) CHAPTER 7 |
13|| VERITEC, INC., ) |
|| ) ORDER AUTHORIZING DEBTOR TO |
14|| ) INCUR SECURED DEBT AND FOR |
|| Debtor. ) ORDER RECONVERTING CASE TO |
15|| ) CHAPTER 11 |
|| ) |
16|| ) Date: September 1, 1999 |
|| ) Time: 9:00 a.m. |
17|| ) Ctrm: "302" |
|| ) 21041 Burbank Blvd. |
18||__________________________) Woodland Hills, CA 91367 |
|| |
19|| A hearing was held on September 1, 1999 at 9:00 a.m., in courtroom "302"|
|| |
20||of the United States Bankruptcy Court, located at 21041 Burbank Blvd., |
|| |
21||Woodland Hills, CA 91367 on the debtor, Veritec, Inc.'s ("Debtor") Motion |
|| |
22||For Order Authorizing Debtor To Incur Secured Debt And For Order |
|| |
23||Reconverting Case to Chapter 11 ("the Motion"). No opposition to the |
|| |
24||Motion was filed, however, a response (the "Response") to the Motion was |
|| |
25||filed by secured creditor, The Gant Group ("TGG"), and the Debtor filed |
|| |
26||its reply (the "Reply") in support of TGG's response. Additionally, the |
|| |
26||Office of the United States Trustee filed its non-opposition to the |
|| |
27||Motion ("UST's Non-opposition"). Appearances were mad as set forth in the |
|| |
28||Court's record. 1 |
---------------------------------------------------------------
ORDER AUTHORIZING SECURED DEBT AND ORDER RECONVERTING CASE TO CHAPTER 11
42
<PAGE>
1|| The Court having considered the Motion, the Response, the Reply and |
|| |
2|| the UST's Non-opposition, and oral argument presented by counself for the|
|| |
3|| parties at the hearing, |
|| |
4|| IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the Motion is granted and|
|| |
5|| that: |
|| |
6|| 1.The Debtor is authorized to incur secured debt pursuant to 11 U.S.C.# |
|| 364(c)(3); |
7|| 2.This case is reconverted to Chapter 11 pursuant to 11 U.S.C. #706(b) |
|| |
8||and the Debtor is authorized to continue operating its business under its |
|| |
9|| confirmed Chapter 11 plan (the "Plan") as debtor in possession; |
|| |
10|| 3.The Debtor shall make all delinquent payments owed to The Gant Group |
|| |
11||as a condition to the reconversion, which is the sum of $182,345.87 as of |
|| |
12||September 1, 1999, and make future quarterly payments as they come due |
|| pursuant to the Plan; |
13|| 4.The Debtor is authorized to issue restricted common stock equivalent |
|| |
14||to the number of shares that would have been issued in exchange for |
|| |
15||$94,117 that was provided to the Debtor by Hometrend and/or Health |
|| |
16||Kinetics, and that said shares of restricted common stock are to be held |
|| |
17||by the Debtor until such time as the dispute between Hometrend and Health |
|| |
18||Kinetics has been definitively resolved.Thereafter, the Debtor is |
|| |
19||authorized to issue said stock to the appropriate party or parties; |
|| |
20|| 5.the Debtor is authorized to pay post confirmation creditors with |
|| |
21||restricted common stock of the Debtor at $.80 cents per share, as agreed |
|| |
22||to by said creditors, for amounts due as of April 30, 1999, in the |
|| |
23||approximate sum of $630,000; |
|| |
24|| 6.The Debtor is authorized to pay David Seror, the chapter 7 trustee for|
|| |
25||this case (the "Trustee") in full, his fees and costs for his |
|| |
26|| administration of the chapter 7 case, in the amount of $12,226.92; |
|| 7. The Trustee is authorized to return all remaining funds in his |
27||possession to Debtor. |
|| ARTHUR GREENWALD (STAMP) |
28|| ------------------------- |
|| DATED: AUG 31 1999 HONORABLE ARTHUR GREENWALD |
|| 2 U.S. BANKRUPTCY JUDGE |
---------------------------------------------------------------
ORDER AUTHORIZING SECURED DEBT AND ORDER RECONVERTING CASE TO CHAPTER 11
43
