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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2000
Commission file number 33-26798-D
VARTECH SYSTEMS INC.
(exact name of registrant as specified in its' charter)
Colorado
(State or other jurisdiction of incorporation or organization)
84-1104385
(I.R.S. Employer Identification No.)
11301 Industriplex Boulevard - Suite 4
Baton Rouge, Louisiana 70809
(Address of principal executive offices)
Registrant's telephone number, including area code: (225) 298-0300
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
None None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.[X]
Indicate by check mark whether the Registrant (1)has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of the Registrant's common stock held by
nonaffiliates of the Registrant as of September 29, 2000 was $460,879. On
such date, the average of the bid and asked prices of the common stock was
$1.25 per share. The registrant had 1,950,000 shares of common stock, $.001
par value, outstanding as of September 29, 2000.
PART I
ITEM 1. BUSINESS
Introduction and History
VarTech Systems Inc., formerly known as Richmond Capital Corporation,
(the "Company") was incorporated under the laws of the State of Colorado
in 1988 for the purpose of raising capital and to seek out business
opportunities in which to acquire controlling interest. In October 1989,
the Company completed its initial public offering of its common stock
by issuing 305,750 common shares and related warrants of $.10 per
share for aggregate proceeds of $30,575. In connection therewith, deferred
offering costs of $16,298 were charged to paid-in capital. Each unit
consisted of one share of common stock, one Class A warrant and one Class B
warrant. Each Class A warrant entitled the holder to purchase one share of
the company's common stock at $.30 per share, and each Class B warrant entitled
the holder to purchase one share of the Company's common stock at $.50 per
share. Each Class A warrant was exercisable commencing six months from the
date of the final prospectus for a period of 12 months thereafter. Each
Class B warrant was exercisable commencing six months from the date of the
final prospectus for a period of 18 months thereafter. The Company has the
right to redeem the warrants upon 20 days written notice at $.001 per
warrant. The common stock and warrants were separately transferrable
immediately after the closing of the offering. In June 1990, the Company
redeemed all Class A and B warrants.
Halter Capital Corporation, a Texas corporation (HCC), acquired control of the
Company as of September 5, 1990 through the purchase of a majority of the
Company's common stock. HCC, in two separate transactions, acquired 935,250
shares of the Company's common stock, representing 71.6% of the then-
currently issued and outstanding voting securities of the Company.
PTR Capital Corporation, a Delaware corporation (PTR), acquired control of the
Company as of January 15, 1991 through the purchase of a majority of the
Company's common stock, representing 70.8% of the then-currently issued and
outstanding voting securities of the Company.
The Company remained a development-stage enterprise from inception through July
31, 1990, as it identified and evaluated acquisition opportunities. No
acquisition was made by the Company prior to July 16, 1991.
All Systems Go, Inc. (ASG), a subsidiary of Richmond Capital Corporation, was
incorporated in 1989 under the laws of Georgia to engage in the business of
selling various types of computers and computer-related equipment and the
repair and rebuilding of computer disk drives. ASG was inactive until April
of 1991 when it actually began operations.
On July 16, 1991, the Company acquired all of the issued and outstanding shares
of common stock of ASG. At the closing of this acquisition, Jordan S.
Davies, the sole shareholder of ASG, was elected President and Chairman of
the Board of Directors of the Company.
The Company decided during fiscal year ended July 31, 1992 not to pursue the
repair and remanufacturing of computer disk drives. This decision was based on
the additional capital requirements, shrinking window of opportunity for
sales, and accelerated competition. As a result, the Company president and
Chairman of the Board of Directors resigned and negotiated for the purchase
of ASG, the wholly-owned subsidiary of Richmond Capital Corporation. The
Company retained the telemarketing activities and began the telemarketing
operations under Richmond Capital Corporation. On May 28, 1992 the sale was
finalized whereby the Company sold all of its issued and outstanding shares
of common stock of ASG (2000 shares) to Jordan S. Davies. As consideration
for the sale, Richmond Capital Corporation received a note receivable for
$82,000, furniture and equipment valued at $20,000 and the cancellation of
Jordan S. Davies 1,000,000 shares of Richmond Capital Corporation common stock,
representing 43.4% of the then-currently issued and outstanding voting
securities of the Company. Mr. Davies filed for protection under the U.S.
Bankruptcy laws. The $82,000 note and accrued interest were written off as
bad debt in the year ended July 31, 1993.
On July 1, 1997, the Company acquired all of the issued and outstanding shares
of common stock of 21st Century Professionals, Inc("21st"). At the closing
of this acquisition, Kim D'Albor, the former major shareholder of 21st, was
elected President of 21st Century Professionals and Director of the Company.
In addition, Brent J. Hedges, a former shareholder of 21st was elected
Vice-president and Secretary of 21st Century Professionals and Director of
the Company.
21st Century Professionals was incorporated in the state of Louisiana in 1993
and derived substantially all of its revenue from computer hardware and
software sales and computer related consulting services.
On May 4, 1999, the Company sold the stock of this subsidiary for $500 plus the
assumption of all the subsidiary's liabilities to a related party. At the time
of sale, liabilities exceeded assets by $129,739. As a result of the nature of
this transaction, the Company has reflected the gain as an increase to capital
in excess of par value.
Description of Business
VarTech Systems Inc. is an authorized reseller of computers and software. The
Company operates in three areas: i) Display segment - the repair and
refurbishment of industrial grade monitors and the manufacturing and selling
of the VarTech Displays line of industrial monitors; ii) Solution Integration
segment - computer consulting services which includes network design,
installation and software application development; iii) Network segment -
markets online computer training products and other Internet related services
including the development and maintenance of personal interactive webpages
through a network of independent consultants worldwide.
The Company's segments are strategic business units that provide differing
products and/or services along with different distribution methods. They are
managed separately because each business unit requires different employee
skills, product development and marketing strategies. The Company evaluates
the performance based on the profit or loss from operations before income taxes
and in the case of the network, on the size of the consultant base.
Marketing and Customers
The Company utilizes telephone solicitation, personal contact, direct mail, fax
broadcasting, industry specific advertising, the internet, and participates
in regional trade shows and expos to market itself and its services to its
customer base. VarTech's customer base is global and is comprised mainly of
large manufacturing operations in process control, pulp and paper, and food
processing along with utilities and military facilities. Through a network
of independent consultants worldwide, the Company markets online computer
training and the maintenance of personal interactive webpages.
Warranty and Customer Service
The Display unit of the Company provides a repair, replacement or full refund
warranty for one hundred twenty (120) days from the date of sale. There were
no significant warranty claims pending at July 31, 2000.
Employees
As of July 31, 2000, the Company employed forty-five people full-time including
four executive officers. Employee relations are considered good and the Company
has no collective bargaining contracts covering any of its employees.
Competition
The Company is involved in a market where many different companies provide the
same basic services. There is no dominant company engaged in providing the same
basic services as that of the Company.
ITEM 2. PROPERTIES
The Company is headquartered in 15,746 square feet of leased office space in
Baton Rouge, Louisiana under a five year lease which expires in the year 2004.
The Company's Display unit maintains a warehouse in 12,500 square feet of
space in Baton Rouge, Louisiana under a five year lease and a 12,000 square
foot service and assembly facility in Philadelphia, Pennsylvania with a three
year lease which expires in August 2002.
ITEM 3. LEGAL PROCEEDINGS
Kim L. D'Albor, a former employee and past president of
21st Century Professionals (and also a current stockholder of the Company),
filed a lawsuit against 21st Century Professionals, the Company and one its
stockholders C. Wayne Prater. The suit was filed on April 19, 1999 in the
19th Judicial District Court of the Parish of East Baton Rouge in Louisiana.
The past employee asserts that he is entitled to enforce the payments due to
him under a non-competition agreement contained in his agreement of
employment. Although no dollar amount has been specified, the past employee
seeks damages estimated by management and legal counsel at $1,150,000 stemming
from the non-payment of a portion of his salary and the remaining scheduled
non-compete payments. The suit is currently in preliminary discovery, and
legal counsel for the Company has estimated, in their opinion at this stage of
the lawsuit, the probable outcome to be that the Company will have no liability
under the lawsuit. Accordingly, no accrual has been made in the financial
statements at July 31, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of fiscal year ending July 31, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq bulletin board market.
The following table sets forth the quarterly high and low bid prices as
reported for the periods indicated:
Fiscal Year ended Fiscal Year ended
July 31, 2000 July 31, 1999
High(1) Low(1) High(1) Low(1)
1st Quarter $2.00 $1.00 $4.00 $2.00
2nd Quarter $1.50 $0.63 $3.00 $1.00
3rd Quarter $2.00 $0.75 $5.00 $1.50
4th Quarter $2.00 $1.00 $3.00 $1.88
(1) The prices set forth in the table above were provided by the National
Quotation Bureau and reflect the high and low bid prices over each quarter.
During 2000, the price range for the Company's common stock averaged a bid of
$1.25 per share.
These prices may represent inter-dealer quotations without retail markups,
markdowns, or commissions and may not necessarily represent actual transactions.
As of July 31, 2000, the Company had 270 holders of record of its common shares.
The Company has never paid cash dividends on its common stock and has no plans
to pay cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
July 31,
2000 1999 1998 1997 1996
Balance Sheet Data
Total assets $1,178,273 $1,327,455 $2,959,956 $1,924,720 $269,359
Long term debt - 47,998 101,056 162,381 -
Shareholders' equity 513,276 522,824 433,044 372,637 117,908
Income Statement Data
Total revenue 6,594,139 5,723,376 6,654,986 3,001,492 1,466,173
Operating expenses 6,477,258 5,869,151 6,487,496 2,797,325 1,457,267
Net income (loss) 140,452 (189,959) 47,707 104,729 6,204
Basic and diluted
net income (loss)
per common share $0.07 ($.09) $.02 $.06 $0.00
Weighted average number
of common shares
outstanding:
Basic 1,987,808 1,988,750 1,948,942 1,799,803 1,787,300
Diluted 2,018,349 1,988,750 1,948,942 1,799,803 1,787,300
Common shares
outstanding 1,950,000 2,100,000 1,950,000 1,937,300 1,787,300
Preferred shares
outstanding - - - - -
There were no shares of the Company's sole class of preferred stock, $.01 par
value, outstanding as of July 31, 2000, 1999, 1998, 1997 and 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Managements' discussion and analysis of financial condition and results of
operations includes statements covering all segments of the Company. Those
business units are the Display segment which focuses on the repair and
refurbishment of industrial grade monitors and the manufacturing and selling
of the VarTech Displays line of industrial monitors; the Solution Integration
segment which provides computer consulting services that includes network
design, installation and software application development; and the Network
segment which markets online computer training products and other Internet
related services including the development and maintenance of personal
interactive webpages.
Results of Operations
The Company's 2000 sales volume increased over 1999 by approximately $870,000
or 15%. The increase in sales for 2000 was a result of the greater focus
on the sale of Display units, and the sale of online training in the Network
segment. The Display segment's increase in sales was due to the continued
introduction and expansion of the Company's new product line. The Network
unit's sales increase was a direct result of the increased number of sales
consultants.
The income from continuing operations for 2000 is directly related to the
deemphasizing of personal computer sales, and the focus and concentration
on generating increased revenue from displays and online training, both of
which enjoy greater margins than personal computer sales.
Company Cost of Sales
The cost of sales for the years ended July 31, 2000, 1999 and 1998 were 51%,
63% and 71%, respectively. Hardware and software costs decreased due to the
reduced focus on personal computer sales. The network costs increased because
of the increased number of employees and wages associated with the network
operations. The decrease in overall cost of sales was due to the Company's
increased focus on higher profit margin items, offset by increases in network
costs.
Other Operating Expenses
Selling expenses as a percentage of sales for the years ended July 31, 2000,
1999 and 1998 were 24%, 16% and 7%, respectively. The increase in 2000 over
1999 is due to increased staffing in the displays area and commissions paid
to consultants for subscription sales of online training. The increase from
1998 to 1999 was due to the same reasons as 1999 to 2000.
Administrative and general expenses increased by $221,000 from 1999 to 2000;
however, as a percentage of sales it remained constant at approximately 23%.
This percentage should begin to decrease as the sales volume increases. Even
though administrative and general expenses remained constant from 1998 to 1999
on a dollar basis, as a percentage of sales it increased from 19% to 23%
due to an overall decrease in sales volume.
Interest expense decreased from 1999 to 2000 due to a decrease in outstanding
loan balances and a release of approximately $100,000 of short and long term
debt related to the purchase of certain furniture and equipment in 1997. The
decrease from 1998 to 1999 was due to a reduction in borrowing to finance
inventory and receivables resulting from the decrease in personal computer
sales.
Liquidity and Capital Resources
The Company has $751,102 in current assets at July 31, 2000. The Company has
lines of credit totaling $450,000, of which $105,926 is available at
July 31, 2000. This, along with revenue generated from sales, is deemed
sufficient to fund all required expenditures for the next 12-month period.
The Company believes its cash generated from operations, its ability to secure
short term working capital needs, and the prospects of increasing sales of
displays and online training will provide sufficient cash to meet current
working capital needs. Capital is typically provided primarily through cash
from operations and credit received from trade creditors and advances from
the established lines of credit. The working capital ratio remained constant
at 1.19 in 2000 as compared to 1.20 in 1999.
There were capital expenditures for property and equipment during the fiscal
year ended July 31, 2000, 1999 and 1998 totaling $48,000, $54,000 and $75,000.
No major capital expenditures are expected for fiscal 2001.
The Company had no long-term debt at July 31, 2000. The Company had $344,074
and $344,418 of advances against lines of credit at July 31, 2000 and 1999.
These funds were used to fund the purchase of products for sale and to finance
receivables. The Company does not anticipate the need for long-term
borrowing for fiscal year 2000.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report appears at page F1 and the Financial
Statements and Notes to the Financial Statements are set forth herein
beginning on page F2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
All directors serve for a one-year period and until their respective successors
are elected and qualified. Officers serve at the discretion of the Board of
Directors.
Positions(s)
Name Age with the Company
C. Wayne Prater 59 President, Chief Executive Officer
and Director
J. Keith Henderson 34 Vice-President, President-Displays Division
and Director
Daniel S. Gould 37 Vice-President, Secretary and Director
Brent J. Hedges 32 Vice-President, Treasurer and Director
Michele L. Gould 37 Director
Information concerning the business experience of each of the directors and
executive officers of the Company is as follows:
C. Wayne Prater is President, Chief Executive Officer and a Director of
the Company. Prior to being elected President of the Company on
November 1, 1999, Mr. Prater had served as a consultant to the Company since
1992. Since 1991, he has been a Director and President of PTR Capital
Corporation, a private investment company which is a majority shareholder of
the Company.
J. Keith Henderson is Vice-President and a Director of the Company. He
also serves as President of the Displays Unit of the Company. Since 1991,
Mr. Henderson has been active in the day to day operations of the Company.
Daniel S. Gould is Vice-President, Secretary and a Director of the Company.
Prior to joining the Company in 1995, Mr. Gould was associated with the law firm
of McFarland, Gould, Lyons and Sullivan, P.A. for five (5) years.
Brent J. Hedges is Vice-President, Treasurer and a Director of the Company.
Mr. Hedges is a CPA and has served as Chief Financial Officer for VarTech
Systems since 1997. From 1994 to May 1999, he also served as Chief Financial
Officer of 21st Century Professionals, Inc.
Michele L. Gould is a Director of the Company. Ms. Prater held several
positions with the University of Tampa prior to 1995. She is a Director and
Vice-President of PTR Capital Corporation, a private investment company which is
a majority shareholder of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The following schedule lists those Officers or Directors who have received
cash compensation, bonuses, or deferred compensation in excess of $100,000.
Name and Common Stock
Principal Other Non-compete Options Granted
Position Year Salary Compensation Payments (# Shares)
C. Wayne Prater 2000 $77,500 $150,000(1) - 100,000
President and
Chief Executive 1999 - - - -
Officer
1998 - - - -
Kim L. D'Albor 2000 - - - -
Former Director and
Past President- 1999 $27,700 - $80,000 -
21st Century
Professionals, Inc. 1998 $76,280 - $80,000 -
(1) See Item 13, "Certain Relationships and Related Transactions".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of September 29, 2000, the shares of the
Company beneficially owned by each person known to management to be the
beneficial owner of more than five percent (5%) of the outstanding shares, by
each officer and director, and by all officers and directors of the Company as
a group:
Amount and
Nature of Percent
Name and address of Title of Beneficial of
Beneficial Owner Class Ownership Class
Michele L. Gould Common 12,700 0.65%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
J. Keith Henderson Common 100,600 5.16%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
C. Wayne Prater Common 1,353,297(1) 69.40%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
Daniel S. Gould Common 18,000 0.92%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
Brent J. Hedges Common 16,700 0.86%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
All Officers and Directors Common 1,501,297 76.99%
as a Group (5 Persons)
(1) Mr. Prater owns 110,497 shares directly; 1,206,550 shares owned indirectly
which are held by PTR Capital Corporation; and 36,250 shares which are
held by his wife Lucy M. Prater.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended July 31, 1999, as consideration for financial and
consulting services provided to VarTech, the Company granted options to
purchase 150,000 shares of the Company stock to C. Wayne Prater at an exercise
price of $1.00. These options were exercised during the year ended
July 31, 1999. During the year ended July 31, 2000, the Company repurchased
the 150,000 shares from the CEO and majority shareholder for $1.00 per share.
These shares are held by the Company as treasury stock.
On November 1, 1999, the Board of Directors approved a Stock Option and Purchase
Plan which authorized the Company's CEO and majority shareholder to grant
options to employees of the Company to purchase shares of the Company's common
stock. These options are granted in recognition of services performed and
as an incentive for future performance and are limited to 200,000 shares per
employee per year. Accordingly, options to purchase 245,000 shares of the
Company's common stock were granted to five key employees (including 100,000
share options granted to the CEO and majority shareholder) during the year,
at an exercise price of $1.25. If unexercised, the options are scheduled to
expire on October 31, 2004.
The stock options described above were issued with exercise prices determined
by the Company's Board of Directors to be equal to, or greater than, the fair
value of the Company's common stock on the respective grant dates.
During the year ended July 31, 2000, the Company made advances to the CEO and
majority shareholder totaling $22,500. These advances have been recorded as
accounts receivable at July 31, 2000. Additionally, this shareholder was paid
a consulting fee during the year ended July 31, 2000, totaling $150,000 for
services performed relating to the Company's network division.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as parts of this Report starting on
page F1:
1. Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets - July 31, 2000 and 1999
Consolidated Statements of Income (Loss) for the years ended July 31, 2000,
1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the years
ended July 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended July 31, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
2. Schedules
NONE
3. The exhibits are listed in the Index of Exhibits required by Item 601 of
Regulation S-K at Item (c) below.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the fiscal
year.
(c) Exhibits
Exhibits marked with an asterisk (*) have heretofore been filed with the
Commission and are incorporated herein by reference
Exhibit Consecutive
Number Exhibits Page No.
1.0 Underwriting Agreement *
1.2 Participating Dealer Agreement *
2.1 Contract for Sale and Purchase of Stock *
2.2 Contract for Exchange of Stock *
3.0 Registrant's Articles of Incorporation *
3.1 Bylaws *
4.0 Warrant Agreement *
4.2 A Warrant and B Warrant *
5.0 Opinion of R. Michael Sentel, Esquire, regarding
the legality of the securities being registered *
10.0 Escrow of Proceeds Agreement with TecNational
Bank, Denver, Colorado *
10.2 Commercial Lease Agreement, between Prime
Investments, Inc. and Richmond Capital
Corporation relating to certain premises
leased to Richmond Capital Corporation located
in Woodstock, Georgia *
10.3 Lease Rental Agreement between Home Management
Associates, Ancient Richmond Capital Corporation
relating to certain premises leased to Richmond
Capital Corporation located in Woodstock, Georgia *
10.4 Agreement of Lease between RCC of Louisiana, Inc
and Bubaco Enterprises, Inc. relating to certain
premises leased from RCC of Louisiana, Inc. for
a truck stop operation *
10.5 Lease of Commercial Property between RCC of
Louisiana, Inc. and Computer Technologies, Inc.
related to certain premises leased from RCC of
Louisiana, Inc. for a truck stop operation *
10.6 Commercial Lease Agreement between Bobbie B.
Crump, Sr. and Richmond Capital Corporation
relating to certain premises leased to Richmond
Capital Corporation located in Baton Rouge,
Louisiana *
10.7 Promissory Note from Company to Betrand O.
Baetz, Jr. *
10.8 Promissory Note from Company to Frank G.
Jarzombek *
10.9 Promissory Note from Company to Eugene V.
Larsen *
10.10 Promissory Note from Company to Scott E.
Gruendler *
10.11 Stock Option Agreement *
10.12 Agreement of Employment-Kim D'Albor *
10.13 Agreement of Employment-Brent Hedges *
10.14 Agreement of Employment- Dalbert Varnell, Jr. *
10.15 Commercial Sublease Agreement with Wireless One, Inc.
related to certain premises leased in Baton Rouge,
Louisiana *
10.16 Stock Option Agreement *
10.17 Commercial Lease Agreement with First
Industrial, L.P. related to certain premises
leased in Baton Rouge, Louisiana
10.18 Board of Directors Minutes on
Authorization of Stock Options
10.19 Sample Stock Option Grant Letter
16.0 Letter from Samson, Robbins & Associates
regarding change in certifying accountants *
24.1 Consent of R. Michael Sentel, Esquire (included
in Exhibit 5) *
24.2 Consent of Brenner & Ianne *
As to any security holder requesting a copy of this Form 10-K, the Company will
furnish any Exhibit indicated in the above list as filed with this Form 10-K
upon payment to it of its expenses in furnishing such Exhibit.
Independent Auditors' Report
To the Board of Directors
of VarTech Systems Inc.
Baton Rouge, Louisiana
We have audited the accompanying consolidated balance sheets of VarTech Systems
Inc. and subsidiaries as of July 31, 2000 and 1999, and the related statements
of income (loss), changes in stockholders' equity and cash flows for the years
ended July 31, 2000, 1999 and 1998. 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 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 VarTech Systems Inc. and
subsidiaries as of July 31, 2000 and 1999, and the results of their operations
and cash flows for the years ended July 31, 2000, 1999 and 1998, in conformity
with generally accepted accounting principles.
/s/ Laney, Boteler & Killinger
Atlanta, Georgia
September 1, 2000
F1
VarTech Systems Inc. and Subsidiaries
Balance Sheets
Assets
July 31,
2000 1999
Current assets
Cash and cash equivalents $ 15,138 $ 29,460
Accounts receivable - trade 500,918 487,448
Accounts receivable - other 2,359 74,461
Accounts receivable - shareholder 22,500
Inventory 201,685 220,235
Prepaid expenses 5,560
Deferred income taxes 8,502 44,096
--------- ---------
Total current assets 751,102 861,260
Property and equipment
Furniture and fixtures 179,177 178,082
Equipment 344,268 299,672
Leasehold improvements 12,145 10,306
--------- ---------
535,590 488,060
Less: Accumulated depreciation 223,407 136,853
--------- ---------
312,183 351,207
Other assets
Deposits 114,988 114,988
--------- ---------
114,988 114,988
--------- ---------
$1,178,273 $1,327,455
========== ==========
See notes to consolidated financial statements
F2
VarTech Systems Inc. and Subsidiaries
Balance Sheets
Liabilities and Stockholders' Equity
July 31,
2000 1999
Current liabilities
Current maturities of long-term debt $ - $ 57,269
Notes payable - credit lines 344,074 344,418
Accounts payable 199,616 215,015
Other accrued expenses 90,300 100,138
---------- -----------
Total current liabilities 633,990 716,840
Deferred income taxes 31,007 19,161
Deferred lease expense 20,632
Long-term debt, less current maturities 47,998
---------- -----------
Total liabilities 664,997 804,631
Stockholders' equity
Common stock, 100,000,000 shares,
$.001 par authorized; 2,100,000
shares issued; 1,950,000 and
2,100,000 outstanding, respectively 2,100 2,100
Capital in excess of par value 704,761 704,761
Treasury stock; 150,000 common stock shares (150,000)
Retained deficit (43,585) (184,037)
----------- ----------
Total stockholders' equity 513,276 522,824
----------- ----------
$ 1,178,273 $ 1,327,455
=========== ==========
See notes to consolidated financial statements
F3
VarTech Systems Inc. and Subsidiaries
Statements of Income (Loss)
For the Years Ended July 31,
2000 1999 1998
Revenues
Hardware and software $4,472,086 $4,143,551 $5,158,639
Consulting services 401,640 908,298 1,373,936
Network 1,720,413 671,527 122,411
---------- ---------- ----------
6,594,139 5,723,376 6,654,986
Cost of sales
Hardware and software 2,063,275 2,533,098 3,849,849
Salaries and related
costs - Consulting 792,629 833,722 834,113
Salaries and related
costs - Network 503,910 257,829 42,707
---------- ---------- ----------
3,359,814 3,624,649 4,726,669
Gross profit 3,234,325 2,098,727 1,928,317
Operating expenses
Selling expense 1,561,171 909,263 464,203
Administrative and general 1,556,273 1,335,239 1,296,624
---------- ---------- ----------
3,117,444 2,244,502 1,760,827
Income before other
operating income (expense) 116,881 (145,775) 167,490
Other operating income (expense)
Interest expense (33,547) (74,647) (103,993)
Gain(loss) on disposal of assets (6,500) 25,734
---------- ---------- ----------
(33,547) (81,147) (78,259)
Income (loss) from continuing
operations before income tax
(provision) benefit and gain
from release of debt 83,334 (226,922) 89,231
Gain from release of debt 105,267 - -
---------- ---------- ----------
Net income before income taxes 188,601 (226,922) 89,231
Income tax (provision) benefit (48,149) 36,963 (41,524)
---------- ---------- ----------
Net income (loss) $ 140,452 $ (189,959) $ 47,707
Basic and diluted net income
(loss) per common share $ .07 $ (.09) $ .02
Weighted average number of
common shares outstanding:
Basic 1,987,808 1,988,750 1,948,942
Diluted 2,018,349 1,988,750 1,948,942
See notes to consolidated financial statements
F4
VarTech Systems Inc. and Subsidiaries
Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 2000, 1999 and 1998
Capital in Retained Total
Common Stock Issued Excess of Earnings Treasury Stockholders'
Shares Amount Par Value (Deficit) Stock Equity
Balance,
July 31, 1997 1,937,300 $1,937 $ 412,485 $(41,785) - $ 372,637
Shares of common
stock issued as
compensation
for services 12,700 13 12,687 12,700
Net income for
the year ended
July 31, 1998 47,707 47,707
--------- ------ --------- -------- --------- ---------
Balance,
July 31, 1998 1,950,000 1,950 425,172 5,922 - 433,044
Shares of common
stock issued due
to exercise of
options 150,000 150 149,850 150,000
Net loss for
the year ended
July 31, 1999 (189,959) (189,959)
Gain on disposition
of subsidiary 129,739 129,739
--------- ------ --------- -------- --------- ---------
Balance,
July 31, 1999 2,100,000 2,100 704,761 (184,037) - 522,824
Purchase of
treasury stock (150,000) (150,000)
Net income for
the year ended
July 31, 2000 140,452 140,452
--------- ------ --------- -------- --------- ---------
Balance,
July 31, 2000 2,100,000 $2,100 $ 704,761 $(43,585) $(150,000) $ 513,276
========= ====== ========= ======== ========= =========
See notes to consolidated financial statements
F5
VarTech Systems Inc. and Subsidiaries
Statements of Cash Flows
For the Years Ended July 31,
2000 1999 1998
Cash flows from operating activities
Net income (loss) $ 140,452 $(189,959) $ 47,707
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 86,554 177,789 185,039
Services received in exchange for stock 12,700
(Gain) loss on disposal of assets 6,500 (25,734)
Gain from release of debt (105,267)
Deferred income taxes 47,440 (36,495) 25,222
(Decrease) increase in allowance for
doubtful accounts (15,000)
Changes in operating assets and liabilities
net of effects from business combinations
and dispositions:
Decrease (increase) in assets
Accounts receivable 58,632 237,080 102,323
Inventory 18,550 126,621 (77,781)
Other assets 5,560 (3,080) 14,187
Increase (decrease) in liabilities
Accounts payable (15,399) (311,219) (352,119)
Income taxes payable (16,302) (25,540)
Accrued expenses (9,838) 14,009 2,555
Non-compete obligation (90,000) (102,904)
Deferred lease expense (20,632) (643) 21,275
--------- --------- ---------
Net cash provided by (used in)
operating activities 206,052 (85,699) (188,070)
--------- --------- ---------
Cash flows from investing activities
Purchase of property and equipment (47,530) (54,062) (75,183)
Net increase in deposits (3,117) (2,155)
Net decrease (increase) in account
& note receivable-stockholder (22,500) 14,202
Proceeds from sale of
furniture and equipment 68,251
Proceeds from sale of
subsidiary stock 500
--------- --------- ---------
Net cash (used in) provided by
investing activities (70,030) (56,679) 5,115
--------- --------- ---------
See notes to consolidated financial statements
F6
VarTech Systems Inc. and Subsidiaries
Statements of Cash Flows (continued)
For the Years Ended July 31,
2000 1999 1998
Cash flows from financing activities
Net (payments on) proceeds from
lines of credit (344) 14,576 363,621
Payments on stockholder loan (56,057)
Payments on notes payable (44,297) (173,846)
Purchase of treasury stock (150,000)
Proceeds from issuance of common stock 150,000
--------- --------- ---------
Net cash (used in) provided by
financing activities (150,344) 120,279 133,718
--------- --------- ---------
Net decrease in cash and
cash equivalents (14,322) (22,099) (49,237)
Cash and cash equivalents, beginning of year 29,460 51,559 100,796
--------- --------- ---------
Cash and cash equivalents, end of year $ 15,138 $ 29,460 $ 51,559
========= ========= =========
See notes to consolidated financial statements
F7
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
Note 1 - Summary of significant accounting policies
Organization and description of business
VarTech Systems Inc. (the "Company" or "VarTech"), was incorporated under the
laws of the State of Colorado on April 5, 1988, with the issuance of 1,000,000
shares of stock at $.001 per share. In October 1989, the Company completed a
public offering of its common stock by issuing 305,750 common shares and related
warrants at $.10 per unit for aggregate proceeds of $30,575. In June 1990, the
Company called in all Class A and B warrants for redemption. PTR Capital
Corporation, a Delaware corporation, acquired control of the Company as of
January 15, 1991, through the purchase of a majority of the Company's common
stock.
The Company's business is the repair and refurbishment of industrial grade
monitors and the manufacturing and selling of the VarTech Displays line of
industrial monitors. The Company also provides computer consulting services
which includes network design, installation and software application
development. The Company, through a distribution agreement, markets online
computer training products and other Internet related services including the
development and maintenance of personal interactive webpages.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
VarTech Systems Inc. and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. The Company held no cash equivalents at July 31, 2000 or
1999.
Allowance for doubtful accounts
The Company uses the allowance method to account for uncollectible accounts
receivable. The allowance for doubtful accounts is based on management's
estimate of uncollectible accounts. At July 31, 2000 and 1999, all accounts
receivable were considered collectible and no allowance has been recorded.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined by using the first-in, first-out method of accounting for
inventory. Inventories of the Company's educational product licenses are
stated at the lower of cost or market, with cost being determined by using
the specific identification method of accounting for inventory.
F8
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
Property, equipment and depreciation
Property and equipment are recorded at cost. Depreciation is provided using
straight-line methods over the estimated useful lives of the assets. Useful
lives range from five to ten years for the furniture, fixtures and equipment
and ten years for the leasehold improvements. Maintenance and repairs are
charged to expense as incurred. Upon sale, retirement or other disposition of
these assets, the cost and accumulated depreciation are removed and any gain
or loss on the disposition is included in income.
Goodwill and non-compete agreements
Goodwill arises in connection with business combinations accounted for as
purchases where the purchase price exceeds the fair value of the net assets of
the acquired businesses. Goodwill was amortized on a straight-line basis over
a fifteen year period. The carrying value of goodwill paid in connection to a
past subsidiary acquisition was written down to $0 during 1999 upon the sale
of the Company's subsidiary (Note 2). The deferred cost of the non-compete
agreements was being amortized on a straight-line basis over the life of the
respective agreement.
Income taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Valuation allowances are established when
considered necessary to reduce deferred tax assets to the amount expected to
be realized. Income tax expense is the tax payable for the period plus or
minus the change during the period in deferred tax assets and liabilities.
Use of estimates - general
The preparation of financial statements in conformity with generally accepted
accounting principals 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
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Treasury stock
The Company uses the cost method of accounting for the aquisition or disposition
of the Company's own stock.
Stock options and compensation
The Company accounts for stock options in accordance with the provisions of APB
Opinion No. 25, "Accounting for stock issued to employees", and related
pronouncements. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. Accordingly, the Company has not recognized compensation
F9
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
expense for its options granted in 1998, 1999 and 2000. The Company has adopted
the disclosure provisions of FASB Statement No. 123, "Accounting for stock-based
compensation". These disclosure provisions allow entities to continue to apply
the provisions of APB Opinion No. 25 if accompanied by disclosure of pro forma
earnings and earnings per share calculations for employee stock option grants as
if the fair-value-based method defined in FASB Statement No. 123 had been
applied.
Advertising and promotion
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising and promotion expense totaled $12,767,
$9,231 and $18,566 for the years ended July 31, 2000, 1999 and 1998,
respectively.
Revenue recognition policy
Income is earned and recognized when the goods are delivered, services are
performed, licenses are sold, or webpages are developed and collection is
reasonably assured and no further obligation of the Company exists. The
company uses the percentage-of-performance method for recognizing revenue on
its long-term service and system implementation contracts. Under this method,
revenue that is recognized on a particular contract is proportional to the
ratio of costs incurred to date on a project to the estimated total cost
of the project.
Note 2 - Business combinations, acquisitions and dispositions
On June 30, 1997, the Company purchased 21St Century Professsionals, Inc., by
exchange of stock valued at $100,000. The transaction, effective July 1, 1997,
was accounted for under the purchase method of accounting. The excess of the
purchase price, plus expenses associated with the acquisition, over the fair
value of identifiable tangible and intangible assets was allocated to goodwill.
On June 30, 1997, 21St Century entered into employment agreements with its
three former stockholders. Each agreement established separate base salaries
as well as other provisions of employment and included certain non-compete
covenants. The employment provisions were scheduled to expire on June 30, 2002.
One of these former 21St Century stockholders resigned during the year ended
July 31, 1998, effectively terminating his agreement. Another of the former
21St Century stockholders renegotiated his employment agreement during the year
ended July 31, 1999, terminating the original agreement. Payments under the
third agreement, with established monthly payments of $10,000, were suspended
in April 1999 following the filing of a lawsuit by the employee against the
Subsidiary and the Company as more fully described in Note 10. Amortization of
the deferred costs and payments under these non-compete obligations totaled
$90,000 and $102,904 for the years ended July 31, 1999 and 1998, respectively.
F10
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
On May 4, 1999, the Company sold the stock of this subsidiary for $500 plus the
assumption of all the subsidiary's liabilities to a related party. At the time
of sale, liabilities exceeded assets by $129,739. As a result of the nature of
this transaction, the Company has reflected the gain as an increase to capital
in excess of par value for the year ended July 31, 1999.
Note 3 - Deposits
Included in deposits at July 31, 2000 and 1999, is $100,000 held by an
underwriter in connection with a contemplated secondary offering of the
Company's securities. The deposit is being held as an advance for future
expenses relating to the offering.
Note 4 - Net income per share
Basic earnings per common share are computed using the weighted average number
of common shares and common equivalent shares outstanding during each year.
Common share equivalents represent shares issuable upon the assumed exercise of
stock options and warrants. The stock options and warrants are included in the
computation using the treasury stock method if they would have a dilutive
effect. Common share equivalents are not considered in calculations of per
share data when their inclusion would be anti-dilutive. The composition of
basic and diluted net income per common share is summarized as follows:
Net Weighted Per
Income Average Share
(Loss) Shares Amount
July 31, 2000 - Net income per
common share - basic $140,452 1,987,808 $ .07
Effect of dilutive securities:
Stock Options - 30,541 -
-------- --------- ------
July 31, 2000 - Net income per
common share - diluted $140,452 2,018,349 $ .07
For purposes of determining diluted earnings per share, there were no common
stock equivalents at July 31, 1999 or 1998.
Note 5 - Stock options
The former stockholders of 21St Century were granted options to purchase 400,000
shares of VarTech common stock at an option price of $2.50 per share. Of these
options, 40,000 expired upon the resignation of one of the three former
stockholders (Note 2) during the year ended July 31, 1998. The remaining
options, exercisable only if certain performance criteria of 21St Century were
F11
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
met, were effectively canceled upon the disposition of the Subsidiary during
the year ended July 31, 1999. The performance criteria was not met during any
of the years under the agreement.
During the year ended July 31, 1999, as consideration for financial and
consulting services provided to VarTech, the Company granted options to
purchase 150,000 shares of the Company stock to the CEO and majority
shareholder at an exercise price of $1.00. These options were exercised
during the year ended July 31, 1999.
On November 1, 1999, the Board of Directors approved a Stock Option and Purchase
Plan which authorized the Company's CEO and majority shareholder to grant
options to employees of the Company to purchase shares of the Company's common
stock. These options are granted in recognition of services performed and
as an incentive for future performance and are limited to 200,000 shares per
employee per year. Accordingly, options to purchase 245,000 shares of the
Company's common stock were granted to 5 key employees (including 100,000 share
options granted to the CEO and majority shareholder) during the year, at an
exercise price of $1.25. If unexercised, the options are scheduled to expire on
October 31, 2004.
The following summarizes information about stock options outstanding and
exercisable for the years ended July 31, 1998, 1999 and 2000:
Weighted
Options Options Average
Outstanding Exercisable Price
Balances at July 31, 1997 400,000 - $ -
Canceled/Expired 40,000 - -
----------- ----------- --------
Balances at July 31, 1998 360,000 - -
Granted in 1999 150,000 150,000 1.00
Exercised (150,000) (150,000) 1.00
Canceled/Expired (360,000) - -
----------- ----------- --------
Balances at July 31, 1999 - - -
Granted in 2000 245,000 245,000 1.25
----------- ----------- --------
Balances at July 31, 2000 245,000 245,000 1.25
The stock options described above were issued with exercise prices determined
by the Company's Board of Directors to be equal to, or greater than, the fair
value of the Company's common stock on the respective grant dates. Accordingly,
no compensation expense would have been recognized under the reporting
requirements of SFAS No. 123 and there would have been no effect on pro forma
net income, as computed under this statement, for the periods presented.
F12
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
Note 6 - Treasury stock
During the year ended July 31, 2000, the Company repurchased 150,000 shares of
common stock from the CEO and majority shareholder for $1.00 per share.
Note 7 - Notes payable-credit lines
Notes payable credit lines consisted of the following at July 31, 2000 and 1999:
2000 1999
--------- ---------
Draws against a $50,000 credit line payable
to a bank with interest at prime rate +2.0%
(11.50% at July 31, 2000). The credit line is
renewable annually and has a current maturity
of March 19, 2001. The loan is secured by a
guarantee from a stockholder. $ 48,957 $ 45,401
Draws against a $250,000 demand credit line payable to
a bank with interest at prime plus .5% (10.00% at
July 31, 2000). The maturity date of August 3, 2000,
has subsequently been extended until August 3, 2001,
by a renewal of the credit line for an additional year.
This credit line is secured by the Company's cash
accounts with the bank and the personal guarantee of a
stockholder. 250,000 250,000
Draws against a $50,000 unsecured credit
line payable on demand with monthly
interest payments at 12.00%. 45,117 49,017
--------- ---------
$ 344,074 $ 344,418
Note 8 - Long-term debt and gain on release of debt
Upon execution of the sub-lease agreement specified in Note 10, the Company
agreed, in addition to the monthly rent, to make payments to the sub-lessor
in connection with the purchase of furniture and equipment at the Company's
office and warehouse space located in Baton Rouge, Louisiana. The unsecured
obligation was payable in monthly installments of $5,000, including imputed
interest at 9%, through May 1, 2001. The balance of this obligation totaled
$105,267 at July 31, 1999. During the year ended July 31, 2000, the sub-lessor
filed for bankruptcy and negotiated a lease cancellation agreement with the
landlord effectively terminating the payment arrangement between the Company
and sub-lessor. As a result, the Company recognized a gain from the release
of this debt in the amount of $105,267.
F13
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
Note 9 - Other related party transactions
During the year ended July 31, 2000, the Company made advances to the CEO and
majority shareholder totaling $22,500. These advances have been recorded as
accounts receivable at July 31, 2000. Additionally, this shareholder was paid
a consulting fee during the year ended July 31, 2000, totaling $150,000 for
services performed relating to the Company's network division.
Note 10 - Commitments and contingencies
Legal proceedings
As mentioned in Note 2, a former employee and past president of 21St Century
(and also a current stockholder of the Company) filed a lawsuit against
21St Century, the Company and the majority stockholder of the Company during
the year ended July 31, 1999. The past employee asserts that he is entitled
to enforce the payments due to him under the non-competition agreement contained
in the agreement of employment as outlined in Note 2. Although no dollar
amount has been specified, the past employee seeks damages estimated by
management and legal counsel at $1,150,000 stemming from the non-payment of a
portion of his salary and the remaining scheduled non-compete payments. The
suit is currently in preliminary discovery and legal counsel for the Company
has estimated, in their opinion at this stage of the lawsuit, the probable
outcome to be that the Company will have no liability under the lawsuit.
Accordingly, no accrual has been made in the financial statements at
July 31, 2000 or 1999.
Operating leases
Beginning September 1997, the Company leased its office and warehouse under a
sub-lease scheduled to expire August 2002 (Note 8). Due to the declining
financial position of the sub-lessor, the Company suspended all lease payments
due under the sub-lease from the period beginning August 1999 through November
1999, at which approximate date, the Company was released from obligation under
this lease. The Company negotiated a new lease directly with the landlord. The
following summarizes the Company's current obligations under long-term leases
at July 31, 2000:
Baton Rouge Baton Rouge Pennsylvania
Office & Shop Warehouse Office & Shop
Date of lease 10/7/99 11/13/97 7/9/99
Lease term begins 12/1/99 5/1/98 8/16/99
Lease term ends 11/30/04 4/30/03 8/30/02
Renewal option None 1@5 years None
Contingent rents No No No
Initial rent $10,169 $4,690 $5,000
Escalation: 5/01 - 10,497 No No
9/02 - 10,694
F14
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
Rent paid or accrued under these leases, the former sub-lease and other
short-term office space leases including common maintenance charges associated
with each lease during the years ended July 31, 2000, 1999 and 1998 totaled
$255,950, $236,958 and $166,831, respectively.
In accordance with Financial Accounting Standard Board's Statement # 13
regarding operating leases having initial or remaining non-cancelable lease
terms in excess of one year, the accompanying financial statements reflect
rental expense on a straight-line basis over the term of the respective leases.
This straight-line rent adjustment resulted in additions or (reductions) to
rent expense of $(20,632), $(643), and $21,275 for the years ended
July 31, 2000, 1999 and 1998, respectively.
Future minimum payments, by year and in the aggregate, under noncancellable
operating leases with initial or remaining terms of one year or more consist of
the following at July 31, 2000:
Year Ending July 31, Amount
2001 $ 239,295
2002 242,247
2003 189,413
2004 170,539
2005 42,777
---------
Total $ 884,271
Note 11 - Pension plans
21St Century adopted a simplified employee pension plan. Under the plan, all
employees who were at least twenty years of age and had provided services within
one of the last five years were eligible to participate. Under this plan, 21ST
Century could make discretionary matching contributions to the plan. 21St
Century made no matching contributions to the plan for the year ended
July 31, 1998 or through the date 21St Century was sold (Note 2).
Effective April 1, 1999, the Company adopted a 401(k) retirement plan for its
employess. Under the current plan, employees may participate upon obtaining
the age of 21 and completing one year of service with the Company. The Company
can make discretionary matching contributions to the plan. The Company made
no matching contributions to the plan for the years ended July 31, 2000 or
1999.
Note 12 - Warranties
The company established a warranty program that generally provides for repair,
replacement or full refund on all equipment sales for a period of one hundred-
twenty (120) days from the date of sale. No significant warranty claims were
F15
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
filed during these years and, at July 31, 2000 and 1999, no significant
warranty claims were pending.
Note 13 - Supplemental disclosure of cash flow information
During the year ended July 31, 1998, the Company issued 12,700 shares of common
stock in exchange for services provided to the Company. The fair market value
of the 12,700 common shares was $12,700.
During the year ended July 31, 1998, the Company recorded deferred costs and
an obligation totaling $1,282,904 relating to non-compete agreements of certain
employees (Note 2).
Cash paid for interest during the years ended July 31, 2000, 1999 and 1998
totaled $38,779, $36,520 and $106,343, respectively.
Income taxes paid during the years ended July 31, 2000, 1999 and 1998 totaled
$0, $13,066 and $41,842, respectively.
Note 14 - Income taxes
The components of the income tax provision or (benefit) consisted of the
following:
Year ended July 31,
2000 1999 1998
Current:
Federal $ 709 $ - $12,983
State - - 3,319
-------- ------- -------
709 - 16,302
Deferred:
Federal 43,723 (35,238) 20,338
State 3,717 (1,725) 4,884
-------- ------- -------
47,440 (36,963) 25,222
Total income tax provision (benefit) $48,149 $(36,963) $41,524
Deferred income taxes are provided to reflect temporary differences between
financial and income tax reporting. Deferred assets and liabilities resulting
from these temporary taxable or deductible differences are summarized by
related tax effect as follows at July 31, 2000 and 1999:
F16
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
2000 1999
Deferred tax asset/(liability)
Net operating loss carry forwards $ 5,814 $ 41,408
Charitable contribution deduction carryforward 2,688 2,688
-------- --------
Total - deferred tax asset 8,502 44,096
Property and equipment (31,007) (19,161)
-------- --------
Total - deferred tax liability (31,007) (19,161)
Net - deferred tax asset/(liability) $(22,505) $ 24,935
The provision (benefit) for income taxes for the years ended July 31, 2000, 1999
and 1998, varies from the amount determined by applying the Federal statutory
rate of 34% to pretax income as a result of the following:
2000 1999 1998
Income tax expense at Federal statutory rate of 34% $64,124 $ - $30,339
Effect of graduated rates on Federal income tax (897) - (11,749)
Benefit of net operating losses (14,377) (34,954) 1,070
Property and equipment - (1,540) 11,093
Other (701) (469) 10,771
------- -------- -------
Actual income tax provision (benefit) $48,149 $(36,963) $41,524
At July 31, 2000, the Company has a net State operating loss carry forward of
approximately $96,908 which is available to offset future income taxed by the
State of Louisiana. If not used, the loss carry forward expires July 31, 2020.
Note 15 - Fair values of financial instruments
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments.
Cash and cash equivalents - The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value because of the short
maturity of these instruments.
Short and long-term debt - The fair value of all debt has been estimated based
on the present value of expected cash flows relating to existing borrowings
discounted at rates currently available to the Company for debt with similar
terms and remaining maturities.
F17
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
The cost and estimated fair values of the Company's financial instruments at
July 31, 2000 and 1999, are as follows:
Carrying Fair
Amount Value
July 31, 2000
Financial assets:
Cash and cash equivalents $ 15,138 $ 15,138
Financial liabilities:
Short-term debt $ 344,074 $ 344,074
July 31, 1999
Financial assets:
Cash and cash equivalents $ 29,640 $ 29,640
Financial liabilities:
Short-term debt $ 401,687 $ 401,687
Long-term debt $ 47,998 $ 47,998
Note 16 - Segment Information
The Company has adopted the disclosure requirements of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
establishes standards for additional disclosure about operating segments for
annual financial statements. This standard requires financial and descriptive
information be disclosed for segments whose operating results are reviewed by
the chief executve officer for decisions on resource allocation. As such,
the Company has three reportable segments: i) Display segment - repair and
refurbishment of industrial grade monitors and manufacturing and selling of
the VarTech Displays line of industrial monitors; ii) Solution integration
segment - computer consulting services which includes network design,
installation and software application development; iii) Network segment -
markets online computer training products and other Internet related services
including the development and maintenance of personal interactive webpages.
The accounting policies of the individual segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates the performance based on the profit or loss from operations before
income taxes and in the case of the network, on the size of the consultant
base.
The Company's reportable segments are strategic business units that provide
differing products and/or services along with different distribution methods.
They are managed separately because each business unit requires different
employee skills, product development and marketing strategies.
F18
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
The following provides information with respect to the performance of each of
the Company's operating segments:
Display Solutions Network Total
July 31, 2000:
Hardware and software $4,146,953 $ 325,133 $ - $4,472,086
Consulting services - 401,640 - 401,640
Network - - 1,720,413 1,720,413
---------- ---------- ---------- ----------
Total revenues 4,146,953 726,773 1,720,413 6,594,139
Segment income (loss) $1,184,841 $ (26,947) $ 515,259 $1,673,153
Segment assets $ 949,291 $ 16,063 $ 79,558 $1,044,912
July 31, 1999:
Hardware and software $2,884,664 $1,258,887 $ - $4,143,551
Consulting services - 908,298 - 908,298
Network - - 671,527 671,527
---------- ---------- -------- ----------
Total revenues $2,884,664 $2,167,185 $ 671,527 $5,723,376
Segment income $ 626,263 $ 353,722 $ 92,246 $1,072,231
Segment assets $ 892,685 $ 61,073 $229,600 $1,183,359
The following schedule reconciles amounts shown above for the segments to the
consolidated amounts presented in the Company's financial statements:
2000 1999
Revenues:
Total revenues for reportable segments $6,594,139 $5,723,376
Unallocated amounts:
Eliminations and other - -
---------- ----------
Total consolidated revenues $6,594,139 $5,723,376
Income (loss) before income taxes:
Total profit from reportable segments $1,673,153 $1,072,231
Unallocated amounts:
Gain from release of debt 105,267 -
Administrative and general expenses (1,556,273) (1,335,239)
Income tax (provision) benefit (48,149) 36,963
Eliminations and other (33,546) 36,086
---------- ----------
Net income (loss) $ 140,452 $ (189,959)
F19
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 2000 and 1999
2000 1999
Assets:
Total assets for reportable segments $1,044,912 $1,183,359
Unallocated amounts:
Accounts receivable - other 2,359 -
Accounts receivable - shareholder 22,500 -
Underwriter deposit 100,000 100,000
Deferred taxes 8,502 44,096
---------- ----------
Total consolidated assets $1,178,273 $1,327,455
Note 17 - Accrued expenses
Accrued expenses consisted of the following at July 31, 2000 and 1999:
2000 1999
Accrued salary and commissions payable $ 75,109 $ 62,470
Accrued interest payable - 5,214
Accrued rent - 9,579
Income taxes payable 709 -
Other accrued expenses 14,482 22,875
-------- --------
$ 90,300 $100,138
F20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized on the 27th day of
October 2000.
VARTECH SYSTEMS INC.
(Registrant)
By: /s/ C. Wayne Prater
_____________________________________
C. Wayne Prater, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 27th day of October 2000.
Signature Title
signed C. Wayne Prater President, Chief Executive Officer
C. Wayne Prater and Director
signed J. Keith Henderson Vice-President, President-Displays Division
J. Keith Henderson and Director
signed Daniel S. Gould Vice-President, Secretary and Director
Daniel S. Gould
signed Brent J. Hedges Vice-President, Treasurer and Director
Brent J. Hedges
signed Michele L. Gould Director
Michele L. Gould
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------------ -----------------------------
10.17 Commercial Lease Agreement
with First Industrial, L.P. Filed herewith electronically
10.18 Board of Directors Minutes
on Authorization of Stock
Options Filed herewith electronically
10.19 Sample Stock Option
Grant Letter Filed herewith electronically
27. Financial Data Schedule Filed herewith electronically