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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, 2002
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 October 1, 2002 was $348,750. On
such date, the average of the bid and asked prices of the common stock was
$.75 per share. The registrant had 1,950,000 shares of common stock, $.001
par value, outstanding as of October 1, 2002.
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.
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.
During the period from 1991 through 1999, the company pursued various
business opportunities and acquisitions including the repair and rebuilding of
computer disk drives, reselling of computer mainframe, network design services,
the marketing of online educational products and other miscellaneous ventures.
Description of Business
VarTech Systems Inc. manufactures and sells it's own line of industrial
monitors and repairs and refurbishes most other industrial grade monitors.
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.
Warranty and Customer Service
The Company provides a repair, replacement or full refund warranty for 6 months
from the date of sale. There were no significant warranty claims pending at
July 31, 2002.
Employees
As of July 31, 2002, the Company employed thirty-five people full-time including
three 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 November 2004,
and a 12,000 square foot service and assembly facility in Philadelphia,
Pennsylvania with a three year lease which expires in August 2005.
ITEM 3. LEGAL PROCEEDINGS
See notes to financial statements - Note 9, Commitments and contingencies-
Legal proceedings.
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, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq bulletin board market,
under the symbol VRTK. 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, 2002 July 31, 2001
High(1) Low(1) High(1) Low(1)
1st Quarter $0.80 $0.45 $1.75 $1.00
2nd Quarter $1.23 $0.51 $1.50 $0.63
3rd Quarter $1.05 $0.45 $1.00 $0.25
4th Quarter $0.75 $0.55 $1.15 $0.45
(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 2002, the price range for the Company's common stock averaged a bid of
$.77 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, 2002, the Company had 269 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,
2002 2001 2000 1999 1998
Balance Sheet Data
Total assets $1,605,300 $1,285,927 $1,178,273 $1,327,455 $2,959,956
Long term debt - - - 47,998 101,056
Stockholders' equity 816,284 652,033 513,276 522,824 433,044
Income Statement Data
Revenues from continuing
operations 6,105,908 5,763,490 4,146,953 2,884,664 2,134,045
Net income from
continuing operations 263,124 182,752 239,409 7,999 236,167
Basic and diluted net
income per common share
-continuing operations .13 .09 .12 - .12
Weighted average number
of common shares
outstanding:
Basic 1,950,000 1,950,000 1,987,808 1,988,750 1,948,942
Diluted 1,950,000 1,950,000 2,018,349 1,988,750 1,948,942
Common shares
outstanding 1,950,000 1,950,000 1,950,000 2,100,000 1,950,000
Preferred shares
outstanding - - - - -
There were no shares of the Company's sole class of preferred stock, $.01 par
value, outstanding as of July 31, 2002, 2001, 2000, 1999 and 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The Company's 2002 sales volume from continuing operations increased over 2001
by $342,418 or 6%. The increase in continuing operation sales was due to the
continued introduction and expansion of the Company's new product line.
The increase in pretax operating income from continuing operations for 2002
of $389,966 as compared to $285,389 for 2001 is directly related to the
focus and concentration on generating increased revenue from displays.
Company Cost of Sales
Continuing operation cost of sales for the years ended July 31, 2002, 2001
and 2000 were 61.4%, 58.5% and 52.2%, respectively. The increase in overall
cost of sales as a percent of revenue is due to the Company's increased focus
on new product sales which carry a lower margin than repairs and refurbishment.
Other Operating Expenses
Continuing operation selling expenses as a percentage of sales for the years
ended July 31, 2002, 2001 and 2000 were 8.4%, 11.5% and 19.2%, respectively.
Continuing operation administrative and general expenses increased by $22,000
from 2001 to 2002; however, as a percentage of sales it remained constant at
approximately 22%. This percentage should begin to decrease as the sales
volume increases.
Continuing operation interest expense decreased from 2001 to 2002 due to a
decrease in outstanding loan balances.
Liquidity and Capital Resources
The Company has $1,497,949 in current assets at July 31, 2002 and $778,670 in
current liabilites. The Company has lines of credit totaling $750,000, of
which $418,069 was available at July 31, 2002.
The Company believes its cash generated from operations, its ability to secure
short term working capital needs, and the prospects of increasing sales 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 improved to 1.92 in 2002 as compared to 1.74 in 2001.
There were capital expenditures for property and equipment during the fiscal
years ended July 31, 2002, 2001 and 2000 totaling $2,500, $1,500 and $48,000.
No major capital expenditures are expected for fiscal 2002.
The Company had no long-term debt at July 31, 2002. The Company had $331,931
and $289,154 of advances against lines of credit at July 31, 2002 and 2001.
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 2003.
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
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
All directors serve for a one-year period or 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 61 President, Chief Executive Officer
and Director
J. Keith Henderson 36 Vice-President, Chief Operating Officer
and Director
Daniel S. Gould 39 Vice-President, Secretary and Director
Michele L. Gould 39 Director
Lucy M. Prater 58 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, Chief Operating Officer and a
Director 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.
Michele L. Gould is a Director of the Company. Ms. Gould 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.
Lucy M. Prater is the wife of C. Wayne Prater and is a Vice President and
director of PTR Capital Corporation.
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 Options Granted
Position Year Salary Compensation (# Shares)
C. Wayne Prater 2002 $150,000 $ 9,000 -
President and
Chief Executive 2001 $147,500 $100,000 -
Officer
2000 $ 77,500 $150,000 100,000
J.Keith Henderson 2002 $120,000 $ 9,000 -
Vice-President,
Chief Operating 2001 $114,000 - -
Officer and
Director 2000 - - -
(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 July 31, 2002, 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
Lucy M. Prater Common 1,353,297(2) 69.40%
All Officers and Directors Common 1,484,597 76%
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.
(2) Mrs. Prater owns 36,250 shares directly; 1,206,550 shares are owned
indirectly which are held by PTR Capital Corporation; and 110,497 which
are held by her husband C. Wayne 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
ended July 31, 2000 at an exercise price of $1.25. If unexercised, this group
of 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.
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
Balance Sheets
Statements of Income
Statements of Changes in Stockholders' Equity
Statements of Cash Flows
Notes to 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 quarter
ended July 31, 2002.
(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 balance sheets of VarTech Systems Inc. as
of July 31, 2002 and 2001, and the related statements of income,
changes in stockholders' equity and cash flows for the years ended July 31,
2002, 2001 and 2000. 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 auditing standards generally
accepted in the United States of America. 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. as of
July 31, 2002 and 2001, and the results of it's operations and cash flows for
the years ended July 31, 2002, 2001 and 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Laney, Boteler & Killinger
Atlanta, Georgia
September 6, 2002
VarTech Systems Inc.
Balance Sheets
Assets
July 31,
-------------------------
2002 2001
---------- -----------
Current assets
Cash and cash equivalents $ 33,531 $ 78,806
Accounts receivable - trade 667,554 569,063
Accounts receivable - other - 2,755
Inventory 796,864 395,464
--------- ---------
Total current assets 1,497,949 1,046,088
--------- ---------
Property and equipment
Furniture and fixtures 177,945 179,177
Equipment 226,288 345,758
Leasehold improvements 12,145 12,145
--------- ---------
416,378 537,080
Less: Accumulated depreciation 316,027 311,611
--------- ---------
100,351 225,469
Other assets --------- --------
Deposits 7,000 14,370
--------- ---------
7,000 14,370
--------- ---------
$1,605,300 $1,285,927
========== ==========
See notes to financial statements
F2
VarTech Systems Inc.
Balance Sheets
Liabilities and Stockholders' Equity
July 31,
---------------------------
2002 2001
---------- ---------
Current liabilities
Notes payable - credit lines $ 331,931 $ 289,154
Accounts payable 276,693 159,053
Income taxes payable 65,759 29,012
Other accrued expenses 104,287 122,637
---------- -----------
Total current liabilities 778,670 599,856
Deferred income taxes 10,346 34,038
---------- -----------
Total liabilities 789,016 633,894
---------- -----------
Stockholders' equity
Preferred stock, 1,000,000 shares,
$.01 par authorized, no shares issued - -
Common stock, 100,000,000 shares,
$.001 par authorized; 2,100,000
shares issued; 1,950,000 outstanding 2,100 2,100
Capital in excess of par value 704,761 704,761
Treasury stock; 150,000 shares at cost (150,000) (150,000)
Retained earnings 259,423 95,172
----------- ----------
Total stockholders' equity 816,284 652,033
----------- ----------
$ 1,605,300 $ 1,285,927
=========== ==========
See notes to financial statements
F3
VarTech Systems Inc.
Statements of Income (Loss)
For the Years Ended July 31,
---------------------------------------
2002 2001 2000
---------- ---------- ----------
Revenues $6,105,908 $5,763,490 $4,146,953
Cost of sales 3,746,669 3,370,087 2,164,751
---------- ---------- ----------
Gross profit 2,359,239 2,393,403 1,982,202
---------- ---------- ---------
Operating expenses
Selling expense 514,183 666,243 797,361
Administrative and general 1,349,250 1,327,605 823,362
---------- ---------- ----------
1,863,433 1,993,848 1,620,723
---------- ---------- ----------
Income before other
operating expenses 495,806 399,555 361,479
---------- ---------- ----------
Other operating expenses (income)
Interest expense 14,281 42,580 33,547
Depreciation and amortization 91,559 71,586 70,305
Gain from release of debt - - (105,267)
---------- ---------- ----------
105,840 114,166 (1,415)
---------- ---------- ----------
Income from continuing
operations before income tax
provision 389,966 285,389 362,894
Income tax provision (126,842) (102,637) (123,485)
---------- ---------- ----------
Net income before loss from
discontinued operations 263,124 182,752 239,409
Loss from discontinued operations,
net of income tax benefit of
$54,373, $25,802 and
$75,336, respectively (98,873) (43,995) (98,957)
---------- -------- ---------
Net income $ 164,251 $138,757 $ 140,452
========== ======== =========
Basic and diluted net income
per common share - continuing
operations $ .13 $ .09 $ .12
========== ======== ==========
Basic and diluted net loss per
common share-discontinued
operations $ (.05) $ (.02) $ (.05)
========== ======== ===========
Basic and diluted net income
per common share $ .08 $ .07 $ .07
========== ======== ===========
Weighted average number of
common shares outstanding:
Basic 1,950,000 1,950,000 1,987,808
========= ========= =========
Diluted 1,950,000 1,950,000 2,018,349
========= ========= =========
See notes to financial statements
F4
VarTech Systems Inc.
Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 2002, 2001 and 2000
Common Stock Issued Capital in Retained Total
------------------- Excess of Earnings Treasury Stockholders'
Shares Amount Par Value (Deficit) Stock Equity
-------- ------- --------- -------- -------- ----------
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
Net income for
the year ended
July 31, 2001 138,757 138,757
--------- ------ --------- -------- --------- --------
Balance,
July 31, 2001 2,100,000 2,100 704,761 95,172 (150,000) 652,033
Net income for
the year ended
July 31, 2002 164,251 164,251
--------- ------ --------- -------- --------- -------
Balance,
July 31, 2002 2,100,000 $2,100 $ 704,761 $259,423 $(150,000) $ 816,284
========= ====== ========= ======== ========= =========
See notes to financial statements
F5
VarTech Systems Inc.
Statements of Cash Flows
For the Years Ended July 31,
---------------------------------
2002 2001 2000
--------- -------- -----------
Cash flows from operating activities
Net income $ 164,251 $138,757 $ 140,452
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 127,629 88,204 86,554
Gain from release of debt - - (105,267)
Deferred income taxes (23,692) 11,533 47,440
Changes in operating assets and liabilities:
Decrease (increase) in assets
Accounts receivable (95,736) (68,541) 58,632
Inventory (401,400) (193,779) 18,550
Other operating assets 7,370 100,618 5,560
Increase (decrease) in liabilities
Accounts payable 117,640 (40,563) (15,399)
Income taxes payable 36,747 29,012 -
Accrued expenses (18,350) 32,337 (9,838)
Deferred lease expense - - (20,632)
--------- -------- ---------
Net cash (used in) provided by
operating activities (85,541) 97,578 206,052
--------- -------- --------
Cash flows from investing activities
Purchase of property and equipment (2,511) (1,490) (47,530)
Net decrease (increase) in account
and note receivable-stockholder - 22,500 (22,500)
--------- --------- --------
Net cash (used in) provided by
investing activities (2,511) 21,010 (70,030)
--------- --------- ---------
Cash flows from financing activities
Net proceeds from (payments on)
credit lines 42,777 (54,920) (344)
Purchase of treasury stock - - (150,000)
--------- --------- ---------
Net cash (used in) provided by
financing activities 42,777 (54,920) (150,344)
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (45,275) 63,668 (14,322)
Cash and cash equivalents,
beginning of year 78,806 15,138 29,460
--------- --------- ---------
Cash and cash equivalents, end of year $ 33,531 $ 78,806 $ 15,138
========= ========= =========
See notes to financial statements
F6
VarTech Systems Inc.
Notes to Financial Statements
July 31, 2002 amd 2001
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. In October 1989, the Company
completed a public offering of its common stock. 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. PTR Capital
is wholly owned by the CEO of the Company.
The Company's business is the repair and refurbishment of industrial grade
monitors and the value added reselling of the VarTech Displays line of
industrial monitors.
Prior to May 2002, the Company also operated two additional
business segments. The Company provided computer consulting services which
included network design, installation and software application development
and the Company also marketed online computer training products and other
internet related services. These segments, referred to as the consulting and
network business segments, were discontinued in May 2002 (Note 2).
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, 2002 or
2001.
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, 2002 and 2001, all accounts
receivable were considered collectible and no allowance is considered
necessary.
Inventories
Inventories of merchandise held for sale 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 were stated at the lower of cost or market, with cost being
determined by using the specific identification method of accounting for
inventory.
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
an asset, the cost and accumulated depreciation are removed and any gain
or loss on the disposition is included in income.
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
The preparation of financial statements in conformity with generally accepted
accounting principals United States 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
expense for its options granted during the periods presented. 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 for continuing
operations totaled $81,106, $19,920 and $6,350 for the years ended July 31,
2002, 2001 and 2000, respectively.
Revenue recognition policy
Income is earned and recognized when the goods are delivered, services are
performed or licenses are sold and collection is reasonably assured and no
further obligation of the Company exists.
Note 2 - Discontinued Operations
In recent years, the Company had operated and presented financial results in
three separate business segments described as follows:
Display segment - repair and refurbishment of industrial grade monitors
and value added reselling of the VarTech Displays line of industrial monitors.
Consulting segment - computer consulting services which included network
design, installation and software application development.
Network segment - marketed online computer training products and other
internet related services.
In May 2002, the Company abandoned operations of the Consulting and Network
segments. In accordance with applicable accounting standards, the results of
operations of these discontinued business segments are presented as a component
of discontinued operations in the statement of income. Operating results for
these discontinued segments previously reported for the years ended July 31,
2001 and 2000, have been reclassified in the statement of income and included
with discontinued operations.
Summarized results of operations for the Consulting and Network segments
are as follows:
For the years ended July 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
Revenue $ 387,452 $1,071,519 $2,447,186
Cost of goods 286,490 571,062 1,195,063
---------- ---------- ----------
Gross profit 100,962 500,457 1,252,123
---------- ---------- ----------
Selling expenses 75,926 300,250 763,810
Administrative and general 142,212 253,386 646,357
Depreciation 36,070 16,618 16,249
--------- ---------- ---------
254,208 570,254 1,426,416
--------- ---------- ---------
Loss before income tax
benefit (153,246) (69,797) (174,293)
Income tax benefit 54,373 25,802 75,336
--------- ---------- ----------
Loss from discontinued
operations $ (98,873) $ (43,995) $ (98,957)
========== ========== ==========
Note 3 - Stock options
On November 1, 1999, the Board of Directors approved a Stock Options and
Purchase Plan which authorizes the Company's CEO and majority shareholder to
grant options to employees of the Company to purchase shares of the Company's
common stock. The plan allows for options to be 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 ended July 31, 2000, at an exercise price of $1.25. If
unexercised, this option group is scheduled to expire on October 31, 2004.
The following summarizes information about stock options outstanding and
exercisable for the years ended July 31, 2000, 2001 and 2002.
Weighted
Options Options Average
Outstanding Exercisable Price
------------ ------------- --------
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
Canceled/Expired - - -
------- ------- ----
Balances at July 31, 2001 245,000 245,000 1.25
Canceled/Expired (35,000) (35,000) 1.25
------- ------- ----
Balances at July 31, 2002 210,000 210,000 $ 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 was recognized under the reporting requirements
of SFAS No. 123 and there was no effect on pro forma net income, as computed
under this statement, for the periods presented.
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:
Weighted Per
Net Average Share
Income 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 -
-------- --------- -----
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, 2002 or 2001.
Note 5 - 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 6 - Notes payable-credit lines and other credit facilities
Notes payable credit lines consisted of the following at July 31, 2002 and 2001:
2002 2001
--------- ---------
Draws against a $50,000 credit line payable
to Hibernia National bank with interest at variable
rates (6.75% at July 31, 2002). The credit line is
renewable annually and has a current maturity
of March 19, 2003. The loan is secured by a
guarantee from the CEO. $ 30,502 $ 39,177
Draws against a $600,000 demand credit line
payable to Hibernia National Bank with interest
at the WSJ prime rate (4.75% at July 31, 2002).
The maturity date of the credit line is August 24,
2003. Maximum draws against this credit line at
any time are limited to the lesser of $600,000 or
80% of trade receivables plus 35% of inventory.
This credit line is secured by the Company's cash
accounts with the bank, accounts receivable,
inventory and a guarantee from the CEO.
301,429 249,977
------- -------
$ 331,931 $ 289,154
======= =======
The Company also has access to two additional $50,000 credit lines with
different banks. As of July 31, 2002 and 2001 no advances had been made from
these credit facilities.
Note 7 - Gain from release of debt
Upon execution of the sub-lease agreement specified in Note 9, 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.
Note 8 - 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, recorded as accounts
receivable at July 31, 2000, were paid by the shareholder during the year ended
July 31, 2001. Additionally, this shareholder was paid salary and consulting
fees during the years ended July 31, 2002, 2001 and 2000, totaling $150,000,
$247,500 and $150,000 respectively, for services performed.
Note 9 - Commitments and contingencies
Legal proceedings
a former employee and current stockholder of the Company filed a lawsuit against
a past subsidiary of the Company, the Company and the CEO of
the Company During the year ended July 31, 1999. The plaintiff asserts that
he is entitled to enforce the payments due to him under the non-competition
agreement contained in the 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 has failed to move past the discovery stage and legal counsel for the
Company has estimated, in their opinion at this stage, the probable outcome
to be that the Company will have no liability under the lawsuit. Accordingly,
no loss accrual has been made in the financial statements at July 31, 2002
or 2001.
Operating leases
Beginning September 1997, the Company leased its office and warehouse under a
sub-lease scheduled to expire August 2002 (Note 7). 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 time 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, 2002:
Location Baton Rouge Pennsylvania
Activity Office & Warehouse Office & Shop
------------------ ---------------
Date of lease 10/7/99 7/9/99
Lease term begins 12/1/99 8/16/99
Lease term ends 11/30/04 8/30/05
Renewal option None None
Contingent rents No No
Initial rent $10,169 $5,000
Escalation 5/01 - 10,497 9/02-5,788
9/02 - 10,694
The Company also leased additional warehouse space in Baton Rouge under
a long-term lease scheduled to expire April 30, 2003, with monthly rent
payments of $4,690. This lease was cancelled during February 2002 and the
company paid $25,000 as an early termination fee. Rent paid or accrued under
these and other short-term office and warehouse leases, including common
maintenance charges associated with each lease during the years ended July 31,
2002, 2001 and 2000, totaled $303,172, $300,198 and $255,950, respectively.
Future minimum payments, by year and in the aggregate, under noncancellable
operating leases with initial or remaining terms of one year or more consisted
of the following at July 31, 2002:
Year Ending July 31, Amount
------------------- ---------
2003 $ 196,801
2004 197,786
2005 112,233
2006 5,788
---------
Total $ 512,608
=========
Note 10 - Pension plans
Effective April 1, 1999, the Company adopted a 401(k) retirement plan for its
employees. Under the current plan, employees may participate upon attaining 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, 2002,
2001, or 2000.
Note 11 - Warranties
The company established a warranty program that generally provides for repair,
replacement or full refund on all equipment sales for a period of six months
from the date of sale. No significant warranty claims were filed during
these years and, at July 31, 2002 and 2001, no significant warranty claims
were pending.
Note 12 - Supplemental disclosure of cash flow information
Cash paid for interest during the years ended July 31, 2002, 2001 and 2000,
totaled $14,281, $41,128 and $38,779, respectively.
Income taxes paid during the years ended July 31, 2002, 2001 and 2000, totaled
$62,786, $38,056, and $0, respectively.
Note 13 - Income taxes
The components of the income tax provision or consist of the following:
Year ended July 31,
2002 2001 2000
------- ------- -------
Current:
Federal $ 85,163 $ 58,976 $ 709
State 10,998 6,326 -
-------- ------- -----
96,161 65,302 709
Deferred:
Federal (19,410) 3,815 43,723
State (4,282) 7,718 3,717
-------- ------- -------
(23,692) 11,533 47,440
-------- ------- -------
Total income tax
provision $72,469 $76,835 $48,149
Income tax benefit allocated
to discontinued operations 54,373 25,802 75,336
------- ------- -------
Income tax provision allocated
to continuing operations $126,842 $102,637 $123,485
======== ======== ========
Deferred income taxes are provided to reflect temporary differences between
financial and income tax reporting. Deferred tax liabilities totaling
$10,346 and $34,038 for the years ended July 31, 2002 and 2001, respectively
relate to difference between financial and income tax deprectiation methods.
The provision for income taxes for the years ended July 31, 2002, 2001 and
2000, varies from the amount determined by applying the Federal statutory
rate of 34% to pretax income as a result of the following:
2002 2001 2000
------- ------- --------
Income tax expense at Federal
statutory rate of 34% $80,484 $72,537 $64,124
Effect of graduated rates on Federal income tax (7,562) (6,951) (897)
Benefit of net operating losses - (3,251) (14,377)
Property and equipment (8,700) 4,923 -
State income taxes 6,716 9,826 -
Other 1,531 (249) (701)
-------- -------- --------
Actual income tax provision $72,469 $76,835 $48,149
======== ======== ========
As of July 31, 2002, the company has used all Federal and State loss carry
forwards.
Note 14 - 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 due to the short
maturity of these instruments.
Current-term debt - The carrying amount reported in the balance sheet for
current-term debt approximates fair value due to the short maturity
of these instruments.
The cost and estimated fair values of the Company's financial instruments at
July 31, 2002 and 2001, are as follows:
Carrying Fair
Amount Value
--------- -------
July 31, 2002
---------------------
Financial assets:
Cash and cash equivalents $ 33,531 $ 33,531
========= ========
Financial liabilities:
Current-term debt $ 331,931 $ 331,931
========= =========
July 31, 2001
Financial assets:
Cash and cash equivalents $ 78,806 $ 78,806
========= ========
Financial liabilities:
Current-term debt $ 289,154 $ 289,154
========= =========
Note 15 - Accrued expenses
Accrued expenses consisted of the following at July 31, 2002 and 2001:
2002 2001
-------- --------
Salary and commissions payable $ 95,013 $ 97,842
Rent - 11,942
Payroll taxes 6,021 5,606
Other accrued expenses 3,253 7,247
-------- --------
$ 104,287 $122,637
========= ========
Note 16 - Summarized Quarterly Data (Unaudited)
The following financial information reflects all normal recurring adjustments
that are, in the opinion of management, necessary for a fair statement of the
results of the interim periods. Summarized quarterly data for the years
ended July 31, 2002 and 2001, follows:
Quarter Ended
------------------------------------------------
October 31, January 31, April 30, July 31,
2001 2002 2002 2002
---------- ---------- ---------- ----------
Revenue $1,563,981 $1,504,940 $1,684,030 $1,740,409
Expenses 1,474,614 1,404,767 1,664,034 1,713,225
Income before
income tax 89,367 100,173 19,996 27,184
Net income 53,002 58,770 14,463 38,016
Basic EPS .03 .03 .01 .02
Diluted EPS .03 .03 .01 .02
October 31, January 31, April 30, July 31,
2000 2001 2001 2001
----------- ---------- ---------- ----------
Revenue $1,667,223 $1,577,822 $1,831,948 $1,758,016
Expenses 1,566,713 1,473,154 1,835,120 1,744,430
Income (loss) before
income taxes 100,510 104,668 (3,172) 13,586
Net income (loss) 64,482 69,447 (6,428) 11,256
Basic EPS .03 .04 .00 .00
Diluted EPS .03 .04 .00 .00
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 29th day of
October 2002.
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 29th day of October 2002.
Signature Title
signed C. Wayne Prater President, Chief Executive Officer
C. Wayne Prater and Director
signed J. Keith Henderson Vice-President, Chief Operating Officer
J. Keith Henderson and Director
signed Daniel S. Gould Vice-President, Secretary and Director
Daniel S. Gould
signed Michele L. Gould Director
Michele L. Gould
signed Lucy M. Prater Director
Lucy M. Prater