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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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- ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________ to_______
Commission file number 0-15113
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VERITEC INC.
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(Exact name of registrant as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation or organization)
95-3954373
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(IRS Employer Identification Number)
16461 SHERMAN WAY, #125, VAN NUYS, CA. 91406
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(Address of principal executive offices, zip code)
(818) 782-4500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock as of the latest
practicable date. As of January 31, 1998 the Company had 3,608,791 shares of
common stock.
This document consists of 19 pages, including 4 exhibit pages.
The Exhibit index is on page 14.
1
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PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
VERITEC INC.
BALANCE SHEET
(Unaudited)
March 31,
1999
----
ASSETS
Current Assets:
Cash 153
Inventories 23,936
------
Total current assets 24,089
Furniture and equipment, net. (Note 2) 9,979
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34,068
======
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY):
Current Liabilities:
Notes payable 50,819
Notes payable secured - current portion 156,128
Administrative costs per Plan of Reorganization 42,737
Accounts payable and accrued expenses 79,099
Deferred compensation 233,275
Accrued interest 38,119
Commissions payable 2,500
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Total current liabilities 602,677
Notes payable secured - long term 130,325
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Total liabilities 733,002
Advances on stock purchases 207,735
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Total liabilities and advances 940,737
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Shareholders' equity (deficiency)
Common stock, no par value, 20,000,000 authorized,
3,608,791 shares issued and outstanding 183,164
Additional paid in capital 9,504,498
Accumulated deficit -10,594,331
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Net shareholders' equity (deficiency) -906,669
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34,068
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See Accompanying Notes to the Financial Statements
2
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VERITEC INC.
STATEMENT OF OPERATIONS
(Unaudited)
For the three months ended For the nine months ended
March 31 March 31
1999 1998 1999 1998
---- ---- ---- ----
Revenues 14,103 13,244 65,383 123,217
Cost of Sales 8,000 2,782 28,212 28,025
----- ----- ------ ------
Gross profit 6,103 10,462 37,171 95,192
Commissions - - 5,000 31,000
----- ------ ----- ------
Gross profit after commissions 6,103 10,462 32,171 64,192
----- ------ ------ ------
Expenses:
General and administrative 38,488 63,691 168,668 202,431
Sales and Marketing 1,800 15,108 29,364 70,361
Engineering, research and
development 6,087 59,910 94,405 159,551
----- ------ ------ -------
46,375 138,709 292,437 432,343
------ ------- ------- -------
Gain (Loss) from operations -40,272 -128,247 -260,266 -368,151
Interest expense, net 16,148 6,816 32,678 23,246
------ ----- ------ ------
Net loss -56,420 -135,063 -292,944 -391,397
======= ======== ======== ========
Net loss per common share -0.02 -0.04 -0.09 -0.12
===== ===== ===== =====
Weighted average common shares 3,608,791 3,308,791 3,442,124 3,308,791
outstanding ========= ========= ========= =========
See Accompanying Notes to the Financial Statements
3
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VERITEC INC.
STATEMENTS OF
CASH FLOWS
(Unaudited)
For the nine months ended March 31
1999 1998
---- ----
Cash flow from operating activities:
Net loss -292,944 -391,397
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Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 4,762 4,740
Notes and interest receivable from Officer
(Increase) decrease in assets:
Inventory 8,782 1,865
Accounts receivable - -2,780
Prepaid expenses 8,250 3,300
Increase (decrease) in liabilities:
Accounts payable and accrued expenses -5,475 32,967
Deferred compensation 125,575 147,320
Deferred revenue -8,500 4,250
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Total adjustments 133,944 191,662
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Net cash used by operating activities -159,550 -199,735
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Cash flow from investing activities:
Purchase of equipment - -4,500
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Net cash used for investing activities - -4,500
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Cash flow from financing activities:
Advances for stock purchases -88,514 199,572
Issuance of notes payable 25,819 -
Issuance of common stock for cash - 25,052
Issuance of secured notes - -78,060
Issuance of preferred stock for advances 218,182 -
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Net cash provided by financing activities 155,487 146,564
------- -------
Increase (decrease) in cash position -4,063 -57,671
Cash at beginning of period 4,216 68,552
----- ------
Cash at end of period 153 10,881
=== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest 12,500 9,210
Income taxes - -
See Accompanying Notes to the Financial Statements
4
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VERITEC INC.
NOTES TO THE FINANCIAL STATEMENTS
March 31, 1999
(unaudited)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
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Veritec Inc. (the Company) was incorporated in Nevada on September 7, 1982,
The Company is primarily engaged in development, marketing and sale of a line of
microprocessors-based encoding and decoding system products that utilize its
patented VERICODE(r) Symbol technology. The Company's VeriSystem(tm) enables a
manufacturer or distributor to use unique identifiers or coded symbols
containing binary encoded data with a product. The VeriSystem enables automatic
identification and collection of a greater amount of data than conventional bar
codes.
Chapter 11 Bankruptcy
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A Court hearing on the Gant Groups motion to convert the case from Chapter
11 back to Chapter 7 was scheduled for November 30, 1998. Moments before the
hearing, Howard Behling, Acting President and Chief Executive Officer of the
Company, agreed to a stipulation proposed by the Company's attorney and agreed
to by the Gant Group in order to have court action delayed on the Gants motion
of conversion. This Stipulated Agreement included the following:
1. The Gant Group was to be paid $100,000 no later than December 30, 1998.
2. All subsequent payments on the Notes to be paid as set forth in the
Plan.
3. If payments are not made as scheduled in items 1 and/or 2 above, the
Gant Group can submit a declaration to the court so stating.
4. If such a declaration to the effect that payment had not been received
by the Gant Group, then THIS CASE WILL AUTOMATICALLY BE CONVERTED TO
CHAPTER 7 PROCEEDING.
As of April 30, 1999, the $100,000 had not been paid to the Gant Group. See
Note 4, Management Discussion for information on a new investor interested in
funding the Plan.
A brief history of the Bankruptcy is as follows:
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. sec. 101
et seq. The Registrants Reorganization Plan was approved as indicated in the
"FINDINGS OF FACT; CONCLUSIONS OF LAW AND ORDER CONFIRMING THE DEBTOR'S SECOND
REVISED THIRD AMENDED CHAPTER 11 PLAN OF REORGANIZATION", included as an Exhibit
in the Company's 10-KSB for the period June 30, 1997 and included by reference
in this report.
The Reorganization Plan was confirmed on April 23, 1997 with the Bankruptcy
Judge signing the order on May 2, 1997. The Plan was expected to be effective by
August 6, 1997. Due to a variety of difficulties in arranging the asset
investment of $2,000,000, and financing ongoing operations of the Company, the
Plan has not been fully effected at December 31, 1998.
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See Note 4 Management Discussion for additional comments on the Bankruptcy
and financing problems of the Company due to failure by HOMETREND and its
Affiliated Companies in being able to effect the Plan of Reorganization in a
timely manner.
The Reorganization Plan includes the following major items:
1. Transfer of a majority of the Registrants debt to equity, approximately
$4,500,000.
2. Investment of $2,000,000 in assets or asset equivalents into the
Registrant in exchange for 275,000 shares of a new Series H Preferred
Shares class of stock.
3. Changes in Directors and Management.
4. A one for ten reverse stock split for both common and preferred
shareholders. All preferred stock and formerly restricted common stock
changed to free trading common stock. This reverse split action reduced
the old common stock of 2,085,660 and old preferred stock of 441,840
shares to a combined 252,749 free trading shares.
5. Issuance of 300,000 shares of common stock as guaranty to certain
noteholders that are to be paid in cash and notes. HOMETREND, as
guarantor of these Notes, is to receive these shares upon satisfaction
of the payment of $60,000 as an initial payment per Plan of
Reorganization..
Items of Reorganization Plan Accomplished
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Of the items noted above, the following were accomplished by March 31,
1999:
1. Transfer of debt to equity. Creditors were provided 2,740,020 shares of
Restricted Common Stock in exchange for debt.
2. Changes in Management and Directors were made according to the Plan.
3. Issuance of 300,000 shares of free trading stock as collateral on the
Gant Note guaranteeing the payment of $60,000 per Plan. Upon payment of the
$60,000 to the Gant Group, the stock was transferred to HOMETREND for
distribution.
4. A one new share of common stock and one warrant unit in exchange for 10
shares of old common or preferred stock. (A one for ten reverse split)
The only item that had not been accomplished at April 30, 1999 was the
receipt of the $2,000,000 per Plan.
A full explanation of actions pertaining to the Plan are included in the
10-KSB filed for the fiscal year ended June 30, 1997 and included by reference
in this report.
The Company has made only one payment on the note and is delinquent on 6
payments. As explained in Note 3 of this report, the Gant Group has filed with
the Court to have the Chapter 11 Case reverted to Chapter 7. The Gant Group has
not pressed the court for a hearing on this issue during the quarter ended March
31, 1999 due to the involvement of the Matthews Group in proposing to fund the
Plan. In the event the Matthews Group is unable to make an agreement with the
Gant Group on amounts due the Gant Group, then the Company will be in a very
negative position and possibly have the case reverted to Chapter 7 by the Court.
Basis of Presentation
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6
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The unaudited financial statements presented herein have been prepared by
the Company, without audit, pursuant to the rules and regulations for interim
financial information and the instructions to Form 10-QSB and Regulation S-B.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principals have been omitted. These unaudited consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Report on Form 10-KSB for the fiscal year ended June
30, 1997. In the opinion of management, the unaudited consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals
only) which are necessary to present fairly the consolidated financial position,
results of operations, and changes in cash flow of the company. Operating
results for interim periods are not necessarily indicative of the results for
interim periods are not necessarily indicative of the results which may be
expected for the entire year.
Per Share Computations
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Loss per share is based upon the weighted average number of shares of
common stock outstanding during the respective periods.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment on March 31, 1999 is comprised of the following:
Equipment $ 57,343
Furniture and fixtures 50,157
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107,500
Less accumulated depreciation and amortization 97,521
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$ 9,979
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NOTE 3 - COMMITMENTS AND CONTINGENCIES
Contingencies
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All major contingencies of the Company are included in the Confirmed Plan
of Reorganization. In the event the Company is unable to comply with the
requirements of the Plan, then the Company could be placed back into Chapter 7
Bankruptcy and its assets liquidated.
Pending Litigation
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As stated in Note 1, the Company is currently in Chapter 11 Bankruptcy,
therefore, all pending litigation or threats of litigation up to the date of
Confirmation of the Plan will be addressed in conjunction with regular
bankruptcy proceedings. Since Confirmation of the Plan, Consolidated Industries
filed action against the company as stated below.
Consolidated Industries lawsuit.
- --------------------------------
Consolidated Industries, a party who first proposed a Plan of
Reorganization for the Company under terms and conditions similar to that which
was finally adopted by the Company, 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 Company receiving
considerably less in the number of shares and dollar value than amounts received
in the confirmed Plan. Consolidated Industries, Inc. has filed a NOTICE OF
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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.
At a Court hearing on April 27, 1999 the Bankruptcy Court Judge ruled in
favor of the Company and the $28,000 paid to Consolidated Industries was payment
in full of the amount owed them. Also, Consolidated Industries was ordered by
the Court to file a UCC-2 document negating their interest in the assets of the
Company.
Notes payable to a group of secured creditors - "The Gant Group"
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As discussed in the 1994 Form 10-KSB, the Company has outstanding an
aggregate of $265,400 of notes payable with three common stock purchase warrants
attached for each $10.00 loaned. These "Notes Payable with Warrants" bear
interest at 7% per annum payable annually and mature on various dates from June
1995 to June 1997. The noteholders filed a collateral security interest with the
US Patent Office. At the end of the prior quarter, these notes were in default
due to non-payment of accrued interest which was originally due June 30, 1994.
In December 1994, the noteholders brought action against the Company in the
Superior Court of California for the County of Riverside (case no. 257856) (the
"Action") to foreclose on its alleged security and to sell the patents at public
sale for payment of the amounts due under the Notes Payable with Warrants.
On January 20, 1995, the Company entered into an agreement with the
noteholders wherein the noteholders caused the Action to be dismissed without
prejudice. As consideration for this dismissal, the Company admitted the amount
and validity of the debt and the Security Agreement, and that it has no
affirmative defenses, offsets or counterclaims to the noteholders claims. If the
Note obligation, as defined in the Agreement, is not paid in full on or before
October 1, 1995, the noteholders may cause the Action to be filed against the
Company. However, on October 1, 1995, as an alternative, the Company may at its
election and by paying the accrued interest and one-half of the principal
obligation of the notes, extend the payment to April 21, 1996.
On or about October 10, 1995, the Gant Group filed a Complaint for default
under the Security Agreement for a judicial foreclosure of the Patents. The
complaint was captioned, Richard A. Gant Agent, v. Veritec, Inc., et al., Case
No. 272019 in the Superior Court of the State of California, County of
Riverside. However, on October 1, 1995, as an alternative, the Company had been
given an election to pay the accrued interest and one-half of the principal
obligation of the notes and could then extend the balance of payment to April
21, 1996.
Since the Company is under the direction of a Chapter 11 Bankruptcy Court,
the case filed by the "Gant Group" against the Company was remanded from the
Superior Court to the Bankruptcy Court.
In July 1996, the Gant Group filed a motion in the Bankruptcy Court for
Relief from the automatic Stay. This Relief from automatic stay was to allow the
"Gant Group" to file the Stipulation of Judgment to Foreclose the Security
Interest in the Company's Patents. On July 25, 1996 the Bankruptcy Court Judge
denied the motion for Relief of Stay. Several other creditors and creditor
groups opposed the granting of this automatic stay.
As noted in the Company's 10-KSB for the period June 30, 1997, the Gant
Group has received the $60,000 payment required in the Plan. Quarterly payments
for a four year period are due, starting on October 1, 1997. The October 1, 1997
payment was not made on the date due, however, the payment was made in December
1997 with penalty and interest. In September 1998 the Company paid $12,500
8
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towards interest and attorney fees to the Gant Group and promised to bring the
account current from moneys expected from and promised by HOMETREND within 30
days. At April 30, 1999, no payments had been made on the January 1, 1998, the
April 1, 1998, July 1, 1998, October 1, 1998 , the January 1, 1999 nor the April
1, 1999 payments due of $23,325.38 each, plus accumulated penalties and interest
on past due amounts.
On July 28, 1998 the Gant Group filed a motion with the Court seeking
dismissal of the Case, reverting the Case back to Chapter 7, on the grounds that
the Company had not effectuated substantial consummation of the Confirmed Plan
and the Company was in material default of the confirmed Plan. See comments in
Note 1 regarding current activities with the Gant Group regarding payments and
commitments to them.
NOTE 4 - GOING CONCERN AND MANAGEMENT'S PLANS
At December 31,1998 "The Matthews Group" had indicated an interest in being
the investor into Veritec in conjunction with the Plan. 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. 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.
At June 30, 1998, HOMETREND and Associates had introduced assets to the
Company purporting that the assets were adequate to meet the infusion of
$2,000,000 required in the Plan. These assets were comprised of an office
building in Elkhart, Indiana valued at $450,000 and a Promissory Note in the
amount of $1,155,006. Cash, a license agreement and certain accrued liabilities
amounting to $394,994 which have come into the Company from HOMETREND and
Associates or owed by the Company since Confirmation of the Plan made up the
difference for a total of $2,000,000. The Promissory Note was to be
collateralized with free and clear real property valued in excess of the amount
of the note. The Promissory Note called for monthly payments to the Company with
the first payment of $40,000 due on October 1, 1998, the next four monthly
payments of $60,000 and then payments of $80,000 per month until the note was
paid in full. The Company had received $82,805 from HOMETREND and Associates
during the months of July, August and September 1998 and this amount was applied
against the Note. At October 31, 1998 no collateral on the Promissory Note had
been obtained and the Elkhart property was under major repair and no appraisal
had been received on this property. Since there was no supporting collateral for
the Promissory Note, and since payments on the note have not been made as
scheduled, it is the position of the Company that neither the physical asset nor
the Note has the value necessary to complete the Plan. Therefore, it is
anticipated that the property will be returned to the investor in exchange for
9
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return of the stock issued for the amount of $450,000 and the money that has
come into the Company that was applied against the note will be either returned
to sender or satisfied with an issuance of Company stock.
As stated in Note 1, the Company is in Chapter 11 Bankruptcy. The Plan was
to be Effective on August 8, 1997. Due to the inability of HOMETREND and its
Affiliates to provide the assets guaranteed in the Plan, the company is in a
difficult financial position. Administrative, Engineering and Sales personnel
were hired by the Company in anticipation of the funding being in place.
Operating activities were increased to position the Company for increased sales.
There is no assurance that the funding per Plan will be forthcoming and if not,
then the Company is facing the prospect of being put into Chapter 7. Since all
of the debt to equity stock issuances have been made and some finances have come
in to the Company to pay for continuing operations and payment of the $60,000 to
the Gant Group, there has been some effecting of the Plan. However, as stated in
Note 3 above, the payments to the Gant Group have not been made in a timely
manner and they have filed to put the company back into Chapter 7. Since The
Matthews Group has indicated an interest in being the investors per the Plan,
the Gant Group is in discussions with them pertaining to the amounts due the
Gant Group. HOMETREND continues to assure the company that assets per Plan will
be invested and that requirements of the Plan will be satisfied.
The Company is relying on the asset infusion required in the Plan.
HOMETREND and Affiliates still have the responsibility for this infusion of the
$2,000,000. The Matthews Group claims to have an interest and the means to step
into the HOMETREND position on the infusion of the assets. HOMETREND and
Affiliates provided just $3,500 during the quarter ended December 31, 1998 and
no and no investment during the quarter ended March 31, 1999. The Matthews Group
provided operating money in the amount of $24,618 in March 1999. Since operating
costs and interest expense amounted to $62,523 and gross profits just $6,103
during the quarter ended March 31, 1999 there was a significant shortfall in
cash available to cover the costs and expenses of operations.
The Company is again in the position of being late on payment of accounts
payable and having to defer payments to personnel working for the Company.
Unless HOMETREND and Affiliates or The Matthews Group is able to infuse the
assets required in the Plan of Reorganization, the Company will have to
discontinue operations, or at a minimum, severely cut costs and expenses of
operations.
The Company did not make filings of 10-KSBs for the fiscal years ending
June 30, 1995 and 1996. For the fiscal year ending June 30, 1994, the
independent auditor's report included an explanatory paragraph calling attention
to a going concern issue. The 10-KSB filed at June 30, 1997 was filed without
certified audit, however, was prepared assuming that the Company would be able
to continue operations. The accompanying quarterly unaudited financial
statements have also been prepared contemplating continuation of the Company as
a going concern.
NOTE 5 - SUBSEQUENT EVENTS
As stated in Note 1, the Plan of Reorganization was not effected at March
31, 1999. Post Confirmation debts continue to increase each quarter and
HOMETREND and Affiliates have not invested adequate funds to pay for current
operating and interest costs. The commitment of the Matthews Group is for
limited funding until such time as they determine to go forward with an infusion
of assets.
10
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<PAGE>
expected that the royalty amounts will continue to be less than $20,000 per
quarter for several more quarters.. Since there are inadequate funds to pay
personnel who have been working for the Company, there are no sales or
engineering personnel currently working and only one person in Administration.
Unless the Company receives the asset infusion required in the Plan, there are
no prospects of additional sales at March 31, 1999.
At March 31, 1999 and continuing through the date of the filing of this
report, the Company continued to have an extremely serious insolvency problem.
Although management believes it is making progress in maintaining itself in the
face of its severe financial problems, there is no assurance that the Company
will be able to emerge from Bankruptcy.
Results of Operations - The quarter and nine months ended March 31, 1999
----------------------
compared to the quarter and nine months ended March 31, 1998.
The Company had revenues of $14,103 during the quarter and $65,383 for the
nine months ended March 31, 1999, as compared to $13,244 and $123,217 during the
quarter and nine months ended March 31, 1998. The revenues in the 1999 period
were primarily from the sale of products and engineering services provided by a
consultant. The revenues for the 1998 period included a royalty payment from
Mitsubishi Corporation of $6,476 with the balance of revenues from the sale of
products. The Company is in discussions with several potential customers for
systems sales but cannot project future revenues, if any, at this time. The
Company is also in the discussion stage of potential licensing or partnering for
product or industry segment opportunities with several companies. Because of its
cash flow and liquidity problems, there are no assurances that the Company can
ever generate revenues.
Operating expenses for the company showed a decrease in each category of
expense as shown below:
<TABLE>
<S> <C> <C> <C>
For the nine months ended
Expense category Mar. 31, 1999 Mar. 31, 1998 Incr./(Decr.)
---------------- ---------------- -----------------
General and administrative $ 168,668 $ 202,431 $ (33,763)
Sales and marketing 29,364 70,361 (40,997)
Engineering, research and development 94,405 159,551 (65,146)
================ ================ =================
$ 292,437 $ 432,343 $ (139,906)
================ ================ =================
</TABLE>
The decrease in General and Administrative expenses was due the termination
of the President of the Company in October 1998 , partially offset by increased
patent attorney fees.. Other costs and expenses remained about the same as those
in the prior year nine month period.
The decrease in Sales and Marketing expense was due to the resignation of
the Company's Vice President of Sales and Marketing and other sales personnel
due to the Company having insufficient funds to pay salary.
The decrease in Engineering and research was due to the resignation of the
Company's Vice President Engineering and other personnel during the period, due
to lack of funding to pay personnel working for the Company.
Capital Expenditures and Commitments
- ------------------------------------
12
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There were no Capital expenditures during the nine months ended March 31,
1999. Other than for nominal computer and office equipment needed to expand its
businesses, the Company has no current commitments for material capital
expenditures in the next 12 months. The Company believes its need for additional
capital will continue because of the need to develop and expand its business.
The amount of such additional capital required is uncertain and may be beyond
that generated from operations. There can be no assurance that the Company will
be able to obtain any such capital on satisfactory terms.
Factors that may effect future results
- --------------------------------------
The major factor effecting future results is the current bankruptcy
situation in the company including the current delinquency in payment of notes
and interest payable to the Gant Group. At April 30, 1999 the Company is in
jeopardy of having its Chapter 11 standing reverted to Chapter 7 procedures due
to not paying the Gant Group the $100,000 stipulated and agreed to by December
30, 1998. Since future operations of the Company are dependent on the Company
emerging from bankruptcy, there is no assurance that the Company will receive
the $2,000,000 in assets required in the Plan of Reorganization.. With interest
being shown by the Matthews Group to fund according to the Plan, the Gant Group
has been willing to delay filing final action against the Company for reversion
back to Chapter 7. Since the Gant Group has a signed Judges order, they can file
at any time of their choosing. If the assets are infused into the Company, then
the Company will have operating capital and a possible means of raising
additional capital for future operations of the Company. If the assets are not
brought into the Company, either from the Matthews Group or HOMETREND and
Affiliates, then the Company will probably not emerge from Bankruptcy.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Notes payable to a group of secured creditors - "The Gant Group"
- ----------------------------------------------------------------
In the Confirmed Plan of Reorganization, the Gant Group, a secured creditor
under the Plan, was to receive $60,000 in cash and quarterly payments over a
four year period. The Gant Group received the $60,000, and has received the
first quarterly payment that was due on October 1, 1997. This payment to the
Gant Group was paid in December 1997 with penalty and interest. The payments
scheduled for January 1, 1998, April 1, 1998, July 1, 1998 and October 1, 1998
have not been paid by October 31 1998. The Gant Group filed a motion with the
court to put the Company back in to Chapter 7 for liquidation. See Note 1 of
this 10-QSB report for comments on the current situation with the Gant Group.
Possible unasserted claims
- --------------------------
In February, 1997, the Company received an invoice from a Mr. Henry Weiss
in the amount of $39,291.50 for Consulting Services. It is the position of the
Company that Mr. Weiss was never hired by the Company as a Consultant and,
therefore, is not entitled to any amount of fee from the Company. In July 1997
Mr. Weiss came to Veritec representing Roy Salisbury, a member of the Company's
Board of Directors, and SAHC, a company controlled by Mr. Salisbury, the
guarantors of the Plan of Reorganization. It was understood by the Company that
Mr. Weiss was doing due diligence work for Mr. Salisbury. During subsequent
months, when Mr. Salisbury and SAHC were part of the intended funders of the
Company, it was proposed by Mr. Salisbury that Mr. Weiss become a senior officer
in the Company. Since Mr. Salisbury and SAHC did not provide the assets required
in the Plan of Reorganization, Mr. Weiss was never put into a position in the
Company. Mr. Weiss did not provide any services for Veritec during his period of
due diligence work for Mr. Salisbury. He may have provided services to Mr.
Salisbury who was an intended funder of the Company, but those efforts did not
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bring any known benefits to the Company. It is the Company's position that Mr.
Weiss is not entitled to any type of reward for his time spent at the Company's
office doing the due diligence work for Mr. Salisbury.
SEC reporting obligations
- -------------------------
The Company is subject to the continuing reporting obligations of the
Securities Exchange Act of 1934 (the "1934 Act") which, among other things,
requires the filing of annual and quarterly reports and proxy materials with the
Securities and Exchange Commission ("the SEC"). The Company has not complied
with timely filing of 10-KSB and 10-QSB reports and therefore is in violation
with its obligations under the 1934 Act. To the Company's knowledge, there is no
current inquiry or investigation pending or threatened by the SEC in regards to
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 1994 Act, injunctive
relief to prevent future violations and/or criminal prosecution.
ITEM 2. CHANGES IN SECURITIES.
During the nine months ended March 31, 1999, there were 30,000 shares of
Series H Preferred Stock issued to HOMETREND in exchange for $218,182. HOMETREND
had this 30,000 shares of Series H Preferred Stock converted to 300,000 shares
of Common Stock as allowed in the Plan of Reorganization.. This action increased
the number of common shares from 3,308,791 to 3,608,791 at March 31, 1999.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
There were no matters submitted to a vote of Security-Holders during the
nine months ended December 31, 1998.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
1. Agreement between Veritec Inc. and the Matthews Group.
(b) Reports on Form 8-K: None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERITEC INC.
------------
(Registrant)
Date: August 15, 1999
---------------
By: ____________________________________
Jack E. Dahl
Chief Financial Officer and Chief
Accounting Officer
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AGREEMENT BETWEEN VERITEC, INC.
AND THE MATTHEWS GROUP
This Agreement is entered into this 6th day of January, 1999, based upon
the following terms and conditions:
RECITALS
--------
Whereas Veritec, Inc. ("Veritec") is in need of an entity to provide
funding to complete its Chapter 11 Plan of Reorganization; and
Whereas a group of potential investors (collectively referred to as the
"Matthews Group" hereafter) has an interest in providing funding to Veritec; and
Whereas the Matthews Group needs time to perform a due dilligence
investigation into the affairs of Veritec prior to making an investment into
Veritec; it is
AGREED
------
1. It is acknowledged that Veritec is involved in a Chapter 11 bankruptcy
proceeding filed as case number SV95-17978-AG, and that Veritec is currently
under a Plan of Reorganization in that Chapter 11 proceeding. The Matthews Group
has been provided with a copy of the Plan of Reorganization for Veritec.
2. It is recognized that the Gant Group, as that term is defined in
Veritec's Plan of Reorganization, has a security interest in Veritec's patents.
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3. It is agreed between Veritec and the Matthews Group that the Matthews
Group shall place the sum of $25,000 into the client trust account of Smith &
Stark, the attorneys of record in Veritec's Chapter 11 proceeding on January 6,
1999 (the "$25,000 Deposit" hereafter). The $25,000 Deposit shall be held in
trust pending the due dilligence evaluation of the Matthews Group into the
financial affairs of Veritec, which shall be conducted on February 26, 1999 (the
"Evaluation Period"). If the Matthews group has concluded at the end of the
Evaluation Period that they have an interest in providing funding to Veritec,
the appropriate contracts will then be executed specifying the terms and
conditions of the funding by the Matthews Group, and the Matthews Group shall
authorize the release of the $25,000 Deposit to the Gant Group. That agreement
shall contain provisions that the Matthews Group shall be entitled to pay the
Gant Group in its entirety and to assume the position of the Gant Group, among
other things.
4. If, at the conclusion of the Evaluation period, the Matthews Group has
concluded that an investment in Veritec does not represent a viable financial
investment, a matter to be decided at the sole discretion of the Matthews Group,
then the $25,000 Deposit shall be returned to the Matthews Group within three
(3) business days of the Matthews Group's notification to Smith & Stark of the
fact that the Matthews Group has no interest in making a financial investment in
Veritec.
5. Alternatively, if at the end of the Evaluation Period, the Matthews
Group has not concluded its due diligence of an investment in Veritec, then the
Matthews Group may request a 45-day extension of the Evaluation Period in order
to conclude their evaluation (the "Extended Evaluation Period"). At the
conclusion of the Extended Evaluation Period, the Matthews Group shall have all
rights as set forth earlier in this Agreement to the return of the $25,000
Deposit if the Matthews Group has concluded that an investment into Veritec does
not represent a viable
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investment, as well as the preparation of a contract on terms satisfactory to
the Matthews Group outlining the terms and conditions of such an investment.
6. It is further agreed that Veritec and its management will fully
cooperate with the Matthews Group in disclosing to the Matthews Group all of the
financial and other information in the possession of Veritec which may be needed
by the Matthews Group in making its due diligence evaluation.
7. Veritec further warrants that Veritec shall not transfer or encumber
assets during the Evaluation period and that during the Evaluation Period,
Veritec will only conduct business in the ordinary course of business.
8. Veritec further warrants that Veritec will suspend any further
contractual negotiations with other parties to fund Veritec during the
Evaluation Period.
9. Veritec warrants that Mr. Jack Dahl has the authority to enter into this
Agreement on behalf of Veritec.
10. Due to the urgency of these negotiations, a facsimile copy of this
executed Agreement shall have the same force and effect as an original.
VERITEC, INC.
Dated:______________ By:__________________________________
Jack Dahl, Chief Financial Officer
THE MATTHEWS GROUP
Dated:_______________ By:__________________________________
VERITEC\MGROUP.AGR
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Dated: 1/6/99 By: (Jack E. Dahl - Signature)
------ ----------------------------------
Jack Dahl, Chief Financial Officer
THE MATTHEWS GROUP
Dated: 1/6/99 Signature By: (Van Ilassy? Tran - Signature)
------ -------------------------------
Van T. Tran
Managing Partner of Matthews Group
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