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, 1998
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: (504) 298-0300
Securities registered pursuant to Section 12(b) of 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 30, 1998 was $1,200,000. On
such date, the average of the bid and asked prices of the common stock was
$3.00 per share. The registrant had 1,950,000 shares of common stock, $.001
par value, outstanding as of September 30, 1998.
PART I
ITEM 1. BUSINESS
Introduction and History
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, 1994, the Company acquired all of the issued and outstanding shares
of common stock of RCC of Louisiana, Inc. At the closing of this acquisition,
Edward W. Prater, the sole shareholder of RCL, was elected Vice- President
and Director of the Company.
RCC of Louisiana, Inc. (RCL), a subsidiary of Richmond Capital Corporation, was
incorporated in the State of Louisiana on August 10, 1993 to engage in the
acquisition, development, and lease of real estate. Leasing began on July 8,
1994. The acquisition of RCL was accounted for on the purchase method. The
Company issued 300,000 common shares with a fair market value of $230,000 for
all of the outstanding shares of RCL which had a fair market value approximating
$230,000. There were no goodwill, contingent payments, options or
commitments specified in the acquisition agreement.
During the year ended July 31, 1995, the management of the Company decided not
to continue the real estate leasing operations which were included in RCL. This
decision was made because real estate leases were with truck stops with video
poker facilities, revenues were not as expected, and public support of video
poker operations were diminishing. On January 31, 1995, the Company sold all
of its issued and outstanding shares of RCL to the previous sole shareholder of
RCL in exchange for the cancellation of his 300,000 shares of Richmond Capital
Corporation common stock. The transaction represents a cancellation of 14.4% of
the then currently issued and outstanding voting securities of the Company. No
assets or liabilities of RCL were retained by the Company.
On July 1, 1997, the Company acquired all of the issued and outstanding shares
of common stock of 21st Century/VarTech, Inc (21st ). At the closing of this
acquisition, Kim D'Albor, the former major shareholder of 21st , was elected
President of 21st Century/VarTech and Director of the Company. In addition,
Brent J. Hedges, a former shareholder of 21st was elected Vice-president
and Secretary of 21st Century/VarTech and Director of the Company.
21st Century/VarTech was incorporated in the state of Louisiana in 1993 and
derives substantially all of its revenue from computer hardware and software
sales and computer related consulting services. The company sells its
merchandise and services to customers located throughout the United States;
however, its majority of customers are located in Louisiana.
Description of Business
VarTech Systems Inc. and its wholly-owned subsidiary 21st Century/VarTech Inc.
are authorized resellers of computer parts and equipment.
VarTech, formerly Richmond Capital Corporation, has been in the computer
reseller business for over nine years with an emphasis in the power utility,
chemical, natural gas, aerospace, simulation, geophysical, railroad,
engineering and mass transit industries. VarTech is a technological
integrator and value-added reseller of mainframe, mid-range and UNIX based
computer platforms. VarTech buys and sells new, reconditioned and pre-owned
hardware systems and associated peripherals. The following equipment is
supported: Aydin, Harris, IBM and Sun Microsystems. VarTech specializes in
Process Controls, Supervisory Controls and Data Acquisition (SCADA),
Transmission and Distribution, Remote Terminal Units (RTUs), High-end
3DGraphics, Client Server, and Geophysical Analysis based applications.
21st specializes in Consulting Services, Intranet Connectivity, Internet
Connectivity, Systems Integration, Software Design, Data Communications,
Training Services, Maintenance and Field Service. 21st is an authorized
reseller and distributor for IBM, Compaq, Hewlett Packard, US Robotics, 3COM,
CISCO Systems, Gigalabs and BlackBox. 21st also provides certified
networking technicians for Novell and Microsoft.
Marketing and Customers
The Company utilizes telephone solicitation, personal contact, direct mail, fax
broadcasting, industry specific advertising, 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 those entities
which have a computer installed base of Aydin, Harris, IBM and Sun
Microsystems. 21st Century/VarTech's customer base is focused in the
southeast United States and is comprised of entities from small businesses to
large corporations such as banks, municipalities, law-forms, school districts,
manufacturing facilities, doctors and hospitals. Purchased mailing and telephone
lists, the Internet, and involvement in professional and community
organizations are used to derive its potential customer lists. 21st is an IBM
Business Partner.
Warranty and Customer Service
The Company provides a repair, replace or full refund warranty for ninety (90)
days from date of the sale. There were no warranty claims pending at July 31,
1998.
Employees
As of July 31, 1998, the Company employed fifty 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 maintains its office in 15,700 square feet of leased office space in
Baton Rouge, Louisiana under a five year lease which expires in the year 2002.
The Company also leases 1,200 square feet of office space in Lafayette,
Louisiana under a one year lease. The Company maintains a warehouse in 12,500
square feet of space in Baton Rouge, Louisiana under a five year lease.
ITEM 3. LEGAL PROCEEDINGS
The Company has no material pending 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, 1998
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded in the general over-the-counter market and
listed in the "Pink Sheets". The following table sets forth the quarterly high
and low bid prices in the over-the counter market as reported for the period
indicated.
Fiscal Year ended
July 31, 1998 High(1) Low(1)
1st Quarter $3.00 $2.00
2nd Quarter $2.75 $1.75
3rd Quarter $3.50 $2.50
4th Quarter $4.00 $3.00
(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 1998, the price range for the Company's common stock averaged a bid of
$3.00 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, 1998, the Company had 292 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,
1998 1997 1996 1995 1994
Balance Sheet Data
Total assets $2,959,956 $1,924,720 $269,359 $374,777 $621,281
Shareholders' equity 433,044 372,637 117,908 111,704 435,499
Income Statement Data
Total revenue 6,654,986 3,001,492 1,466,173 941,948 675,686
Operating expenses 6,487,496 2,797,325 1,457,267 1,021,630 649,938
Net income (loss)
from continuing
operations 47,707 104,729 6,204 (67,091) 25,748
Net income (loss)
from continuing
operations per
common share $.02 $.06 $0.00 ($.03) $.01
Weighted average number of
common shares
outstanding 1,948,942 1,799,803 1,787,300 1,927,918 1,806,204
Common shares
outstanding 1,950,000 1,937,300 1,787,300 1,787,300 2,087,300
Preferred shares
outstanding - - - - -
There were no shares of the Company's sole class of preferred stock, $.01 par
value, outstanding as of July 31, 1998, 1997, 1996, 1995 and 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity
The Company has $1,272,825 in current assets. The Company has lines of credit
totaling $1,250,000 from two financial institutions. This, along with revenue
generated from sales revenue is deemed sufficient to fund all required
expenditures for the next 12-month period.
Results of Operations
The Company's 1998 sales volume has increased over 1997 by approximately
$3,653,000. The increase of 1997 over 1996 was $1,534,000. This continued
increase was primarily due to the Company's increase in sales staff. The gross
margin on the new sales generated approximated the gross margin in 1997.
Management believes as the new personnel become more familiar with the
product lines, sales will continue to increase and profit margins will improve.
Company Revenue
The sales revenue reported in the financial statements reflects the total sales
of computers, computer related equipment, and consulting services through July
31, 1998. These revenues through July 31, 1998 are approximately $3,653,000
greater than the year ended July 31, 1997 and $5,188,000 greater than the year
ended July 31, 1996. The increase resulted primarily from new sales of a larger
and more experienced sales staff.
Company Cost of Sales
The cost of sales is directly related to the cost of the equipment purchased and
consulting services rendered. Since the revenue is derived from the sale of
used computers and computer equipment, the cost of sales will fluctuate with the
going price of used computer equipment. There are no market price quotations
for the equipment and therefore no industry standards or long term prior
history for comparison. The cost of sales for the year ended July 31, 1998,
1997 and 1996 totaled 71%, 68% and 66%, respectively.
Other Operating Expenses
The other operating expenses are general in nature and are the basic expenses
required to maintain an office and staff for administration and sales related
functions and promote additional sales volume. While some of these expenses
have significantly increased in dollar amount, these expenses as a percentage
of sales have remained relatively constant over the last three years.
Advertising and print costs have increased as a result of targeting new clients
and increasing the advertising to generate new sales leads.
Salaries and contract labor increased as a result of adding additional sales
force to increase sales. Insurance increases have been primarily due to the
increase in sales force needed to increase sales volume.
Telephone costs are directly related to increases in sales since a primary
source of sales is through telemarketing.
Depreciation and Amortization
Depreciation expense reflects the current period utility of the assets based on
their useful lives. Amortization is primarily the current period expense of
the non compete agreement.
Rent
Rent is being expensed on a straight line basis over the terms of the leases for
office and warehouse space.
Interest and Dividend Income/Expense
Interest expense increased to $103,993 in 1998 due to additional accounts
receivable financing. There have been no material amounts of interest income
earned during the current or prior years. Interest expense is for cash advances
on two credit lines.
Liquidity
The Company believes its cash generated from operations, its ability to secure
short term working capital needs, and the prospects of increasing sales of
computers, computer equipment, and consulting services 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.
There were capital expenditures for property and equipment during the fiscal
year ended July 31, 1998, 1997 and 1996 totaling $75,000, $233,000, and $75,000.
In 1997, the Company relocated its offices and the capital expenditures were for
leasehold improvements, new furniture and equipment and computer upgrades. No
major capital expenditures are expected for fiscal 1999.
The Company had long-term debt at July 31, 1998 totaling $101,056. The Company
had $937,000 and $874,000 of advances against lines of credit at July 31, 1998
and 1997. These funds were used to fund the purchase of products for sale,
property and equipment. The Company does not anticipate the need for long-term
borrowing for fiscal year 1999.
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 appear at pages F2 through F20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There was no change in nor disagreements with the independent accountants on any
matters of accounting principles or practices, financial statement disclosure or
auditing scope or procedure for the fiscal year ended July 31, 1998.
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
J. Keith Henderson 32 President-VarTech Systems Inc.
and Director
Daniel S. Gould 35 Vice-President, Secretary and Director
Michele L. Prater 35 Director
Kim L. D'Albor 35 President-21st Century/VarTech Inc
and Director
Brent J. Hedges 30 Vice-President, Treasurer and Director
Information concerning the business experience of each of the directors and
executive officers of the Company is as follows:
J. Keith Henderson is President and a Director of the Company. Since 1990,
Mr. Henderson has been active in the day to day operations of computer sales
within specialized niche markets.
Daniel S. Gould is Vice-President, Secretary and a Director of the Company.
Mr. Gould was associated with the law firm of McFarland, Gould, Lyons and
Sullivan, P.A. for five (5) years.
Michele L. Prater 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.
Kim L. D'Albor is President of 21st Century/VarTech Inc. and a Director of
the Company. Mr. D'Albor founded 21st Century in 1993 and has served as its
Chief Executive Officer since that date. Prior to 1993, he was Data Service
Director of Iberville Parish School District in Louisiana.
Brent J. Hedges is Vice-President, Treasurer and a Director of the Company.
Mr. Hedges is a CPA and has acted as Chief Financial Officer for 21st
Century/VarTech Inc. since 1994. Prior to joining 21st Century, he was
associated with the accounting firm of Ernst & Young.
ITEM 11. EXECUTIVE COMPENSATION
None of the Officers or Directors have received cash compensation, bonuses, or
deferred compensation which exceeded $100,000. The Company has no stock option,
profit-sharing, bonus or similar remuneration plans or programs.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of September 28, 1998, 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
PTR Capital Corporation Common 1,306,550 67.00%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
Michele L. Gould Common 12,700 0.65%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
J. Keith Henderson Common 50,000 2.56%
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
Kim L. D'Albor Common 87,000 4.46%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
Brent J. Hedges Common 12,200 .63%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
All Officers and Directors Common 179,900 9.22%
as a Group (5 Persons)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
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 Auditor's Report
Consolidated Balance Sheets - July 31, 1998 and 1997
Consolidated Statements of Income (Loss) for the years ended July 31, 1998,
1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity for the years
ended July 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended July 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditor's Report on Accompanying Information
Schedule of Other Operating Expenses for the years ended July 31, 1998, 1997
and 1996
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 *
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 Auditor's 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, 1998 and 1997, and the related statements
of income, changes in stockholders' equity and cash flows for the years ended
July 31, 1998, 1997 and 1996. 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, 1998 and 1997, and the results of operations and
cash flows for the years ended July 31, 1998, 1997 and 1996 in conformity with
generally accepted accounting principles.
/s/ Laney, Boteler & Killinger
Atlanta, Georgia
September 24, 1998
F1
VarTech Systems Inc. and Subsidiaries
Balance Sheets
Assets
July 31,
1998 1997
Current assets
Cash and cash equivalents $ 51,559 $ 100,796
Marketable equity securities 6,500 6,500
Accounts receivable, net of allowance for
doubtful accounts of $0 and $15,000 814,016 921,338
Accounts receivable - other 20,000 -
Inventory 369,129 291,350
Prepaid expenses 2,480 16,667
Deferred income taxes 9,141 19,422
--------- ---------
Total current assets 1,272,825 1,356,073
Property and equipment
Furniture and fixtures 186,581 176,877
Equipment 357,685 321,296
Leasehold improvements 7,896 31,994
--------- ---------
552,162 530,167
Less: Accumulated depreciation 167,671 96,941
--------- ---------
384,491 433,226
Other assets
Goodwill, net of accumulated
amortization of $908 and $154 10,119 10,853
Non-compete agreements, net of accumulated
amortization of $102,904 and $0 1,180,000 -
Deposits 112,521 105,706
Note receivable - stockholder - 14,202
Other - 4,660
--------- ---------
1,302,640 135,421
--------- ---------
$2,959,956 $1,924,720
========== ==========
See notes to consolidated financial statements
F2
VarTech Systems Inc. and Subsidiaries
Balance Sheets
Liabilities and Stockholders' Equity
July 31,
1998 1997
Current liabilities
Note payable-individual $ - $ 80,000
Current maturities of long-term debt 48,508 81,030
Current maturities of stockholder loan - 3,283
Notes payable-credit lines 419,842 56,222
Accounts payable-IBMCC 517,707 817,262
Accounts payable 115,392 167,954
Income taxes payable 16,302 41,842
Current portion of non-compete obligation 135,000 -
Other accrued expenses 86,129 83,575
---------- -----------
Total current liabilities 1,338,880 1,331,168
Deferred income taxes 20,701 5,760
Deferred lease expense 21,275 -
Non-compete obligation, less current portion 1,045,000 -
Long-term debt, less current maturities 101,056 162,381
Stockholder loan, less current maturities - 52,774
---------- -----------
Total liabilities 2,526,912 1,552,083
Stockholders' equity
Common stock, 100,000,000 shares,
$.001 par authorized, 1,950,000
and 1,937,300 shares issued and
outstanding at July 31, 1998
and 1997, respectively 1,950 1,937
Capital in excess of par value 425,172 412,485
Retained earnings (deficit) 5,922 (41,785)
----------- ----------
Total stockholders' equity 433,044 372,637
----------- ----------
$ 2,959,956 $1,924,720
=========== ==========
See notes to consolidated financial statements
F3
VarTech Systems Inc. and Subsidiaries
Statements of Income
For the Years Ended July 31,
1998 1997 1996
Revenues
Hardware and software $5,158,639 $2,926,387 $1,466,173
Consulting services 1,496,347 75,105 -
---------- ---------- ----------
6,654,986 3,001,492 1,466,173
Cost of sales
Hardware and software 3,849,849 1,998,759 968,826
Salaries and related
costs - consulting 906,173 43,000 -
---------- ---------- ----------
4,756,022 2,041,759 968,826
Gross profit 1,898,964 959,733 497,347
Operating expenses
Selling expense 434,850 186,553 135,805
Administrative and general 1,296,624 569,013 352,636
---------- ---------- ----------
1,731,474 755,566 488,441
Income before other
operating income (expense) 167,490 204,167 8,906
Other operating income (expense)
Interest expense (103,993) (18,408) (5,132)
Interest income - 800 5,300
Gain(loss) on disposal of assets 25,734 (33,236) -
---------- ---------- ----------
(78,259) (50,844) 168
Income (loss) from continuing operations
before income tax provision 89,231 153,323 9,074
Income tax provision (41,524) (48,594) (2,870)
Net income $ 47,707 $ 104,729 $ 6,204
Basic and diluted net income
per common share $ .02 $ .06 $ .00
Weighted average number of
common shares outstanding 1,948,942 1,799,803 1,787,300
See notes to consolidated financial statements
F4
VarTech Systems Inc. and Subsidiaries
Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1998, 1997 and 1996
Capital in Retained Total
Common stock issued Excess of Earnings Stockholders'
Shares Amount Par Value (Deficit) Equity
Balance,July 31,1995 1,787,300 $1,787 $ 262,635 $(152,718) $ 111,704
Net income for the year
ended July 31, 1996 - - - 6,204 6,204
--------- ------ ---------- --------- ---------
Balance, July 31, 1996 1,787,300 1,787 262,635 (146,514) 117,908
Shares of common stock
issued in acquisition
of 21St Century 100,000 100 99,900 - 100,000
Shares of common stock
issued in exchange for
legal services 50,000 50 49,950 - 50,000
Net income for the year
ended July 31, 1997 - - - 104,729 104,729
--------- ------ ----------- -------- ---------
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
========= ====== ========== ======== ==========
See notes to consolidated financial statements
F5
VarTech Systems Inc. and Subsidiaries
Statements of Cash Flows
For the Years Ended July 31,
1998 1997 1996
Cash flows from operating activities
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities
Net income $ 47,707 $ 104,729 $ 6,204
Depreciation and amortization 185,039 25,878 16,808
Services received in exchange for stock 12,700 25,000 -
(Gain) loss on disposal of assets (25,734) 33,236 -
Deferred income taxes 25,222 6,752 -
(Decrease) increase in allowance for
doubtful accounts (15,000) 15,000 -
Change in operating assets and liabilities:
Accounts receivable 102,323 (148,165) 161,589
Inventory (77,781) 102,758 4,334
Other assets 14,187 1,129 -
Accounts payable (352,119) 11,104 (186,046)
Income taxes payable (25,540) 41,842 -
Accrued expenses 2,555 (596) 2,146
Non-compete obligation (102,904) - -
Deferred lease expense 21,275 - -
--------- -------- --------
Net cash (used in) provided by
operating activities (188,070) 218,667 5,035
Cash flows from investing activities
Purchase of property and equipment (75,183) (233,396) (75,060)
Net increase in deposits (2,155) (100,000) (4,000)
Net decrease (increase) in
note receivable-stockholder 14,202 (800) (800)
Proceeds from sale of
furniture and equipment 68,251 3,040 14,542
--------- -------- --------
Net cash provided by (used in)
investing activities 5,115 (331,156) (65,318)
Notes to consolidated financial statements
F6
VarTech Systems Inc. and Subsidiaries
Statements of Cash Flows (continued)
for the Years Ended July 31,
1998 1997 1996
Cash flows from financing activities
Net (payments on) proceeds from
lines of credit $ 363,621 $ (56,956) $72,278
Payments on stockholder loan (56,057) (287) -
Proceeds from note payable - 226,896 -
Payments on notes payable (173,846) (318) -
--------- --------- --------
Net cash provided by financing
activities 133,718 169,335 72,278
Net increase (decrease) in cash
and cash equivalents (49,237) 56,846 11,995
Cash and cash equivalents,beginning of year 100,796 43,950 6,687
Cash and cash equivalents,end of year $ 51,559 $100,796 $18,682
SUMMARY OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
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).
On July 1, 1997, the Company issued 100,000 shares of common stock in exchange
for all of the issued and outstanding stock of 21St Century Professionals, Inc.
The fair market value of the 100,000 common shares was $100,000 (Note 2).
During the year ended July 31, 1997, the Company issued 50,000 shares of common
stock in exchange for legal services provided to the company. The fair market
value of the 50,000 common shares was $50,000.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest during the years ended July 31, 1998, 1997 and 1996
totaled $106,343, $17,903, and $5,132, respectively.
Income taxes paid during the years ended July 31, 1998, 1997 and 1996 totaled
$41,842, $0 and $0, respectively.
See notes to consolidated financial statements
F7
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of significant accounting policies
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.
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, 1998 or 1997.
Investments
In accordance with the Financial Accounting Standards Board's Statement No. 115,
marketable securities are classified as held-to-maturity, available-for-sale or
trading based on the intentions and ability of the Company to hold the
investment. All investments are classified as "available for sale" for
accounting purposes and, therefore, are carried at fair value at the balance
sheet dates. The original cost of the securities totaled $6,500 at July 31, 1998
and 1997. There were no significant unrealized gains or losses at July 31,
1998, 1997 or 1996.
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.
Inventories
Inventories, which are composed of finished goods, 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.
Property, equipment and depreciation
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided using straight-line methods over the estimated useful
lives of the assets. Useful lives range from five
F8
Vartech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
to ten years for the furniture, fixtures and equipment and thirty-five to
thirty-nine 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 is amortized on a straight-line basis over a
fifteen year period. The carrying value of goodwill is reviewed if the facts
and circumstances suggest that it may be impaired. Any permanent impairment
would be recognized by a charge against earnings. The deferred cost of the
non-compete agreements is 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 bases and the tax bases 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 and the
change during the period in deferred tax assets and liabilities.
Net income per share
Net income per share is computed on the basis of net income applicable to common
stock and 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, if any, are included in the computation using the
treasury stock method if they would have a dilutive effect in years where
there are earnings. Common share equivalents are not considered in calculations
of per share date when their inclusion would be anti-dilutive. For purposes of
determining diluted income per share, the Company had no exercisable options or
warrants and therefore, no common stock equivalents at July 31, 1998, 1997 or
1996.
Use of estimates
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.
F9
Vartech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Advertising and promotion
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising and promotion expense totaled $18,566,
$10,327 and $13,080 for the years ended July 31, 1998, 1997 and 1996,
respectively.
Revenue recognition policy
The Company derives its income from the sale of new and used computers,
computer-related equipment and computer-related consulting services. Income is
earned and recognized when the goods are delivered, services are performed,
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 - Organization and description of the business and business acquisitions
VarTech Systems Inc., formerly known as Richmond Capital Corporation (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
$.01 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 primary business is the acquisition and remarketing of used
computers and computer related equipment, including the repair and refurbishment
of monitors and computer consulting. Credit is granted to customers in the
normal course of business.
VarTech Systems Inc. formerly operated under the name of Richmond Capital
Corporation. During the year ended July 31, 1997, the corporate name was
changed to VarTech Systems Inc.
21St Century/VarTech Inc.
On June 30, 1997, the Company entered into an agreement with 21St
Century/VarTech Inc., formerly known as 21St Century Professionals, Inc. (21St
Century), to exchange 100,000 shares of the Company's common stock valued at $1
per share for all the issued and outstanding shares of 21St Century.
F10
Vartech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 of $11,007 was allocated to goodwill. The financial
statements include the operating activity and accounts of 21St Century for
the year ended July 31, 1998 and the one month ended July 31, 1997. The former
stockholders of 21St Century have also been 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 termination of one of the three former
shareholders during the current year. The remaining options can be exercised in
variable increments based on certain performance criteria of 21StCentury over
the three fiscal years beginning August 1, 1997. The performance criteria was
not met for the year ending July 31, 1998. Under the separate employment
agreements mentioned below, all key former stockholders of 21St Century have
remained as active participants in the management and operation of the Company's
subsidiary.
On June 30, 1997, the Company entered into employment agreements with the three
former stockholders of 21St Century. These agreements establish base salaries
as well as other provisions of employment. The employment provisions are
scheduled to expire on June 30, 2002. One of the former three 21St Century
stockholders resigned during the year. The remaining agreements establish base
salaries during this period for the two employees at a total of $138,000 per
year. Under the agreements, the employees have agreed to be bound by certain
non-compete covenants. The agreements are scheduled to expire on various dates
in the fiscal years 2003 and 2008. In exchange for acceptance of the
non-compete conditions, the employees will receive payments totaling $1,282,904
paid out over the life of the agreements. Amortization of the deferred costs
and payments under these non-compete obligations totaled $102,904 for the year
ended July 31, 1998.
21St Century/VarTech Inc. was incorporated in the state of Louisiana in 1993.
Substantially all revenue is derived from computer hardware sales, computer
related consulting services and long-term service and system implementation
contracts. The Company sells its merchandise and services to customers located
throughout the United States; however, its major customers are located in
Louisiana.
Note 3 - Note receivable-stockholder
The Company had a note receivable with interest at 8% totaling $10,000 plus
accrued interest of $4,202 due from a stockholder of the Company at July 31,
1997. The note was paid during the year ending July 31, 1998.
Note 4 - Deposits
Included in deposits at July 31, 1998 and 1997 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.
F11
Vartech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 - Accounts payable-related parties
At July 31, 1996, the Company owed $37,155 for advances from an entity that is
related through management affiliation. This amount was paid during the year
ended July 31, 1997.
Note 6 - Accounts payable-IBMCC
Prior to the acquisition, 21St Century entered into a financing agreement with
IBM Credit Corporation (IBMCC). IBMCC grants 21St Century credit ($775,000
maximum at July 31, 1998), which allows 21St Century to finance its inventory
and accounts receivable. Under the terms of the agreement, 21St Century is
given a thirty-day interest free period on IBMCC financed purchases. After 30
days, interest accrues on outstanding purchases at a rate of prime plus 3.25%
(11.75% at July 31, 1998). Purchases which are financed in excess of 30 days
are also charged a one time fee of .25% of the purchase price. All purchases
financed by IBMCC are due on or before the 90th day. Advances from IBMCC are
secured by a first security interest in substantially all assets of 21St
Century. Principal amounts owed under this financing agreement with IBMCC at
July 31, 1998 and 1997 totaled $517,707 and $817,262, respectively.
Note 7 - Note payable-individual
At July 31, 1997, the Company had an $80,000 unsecured note payable to an
individual payable on demand with monthly interest at 10%. This note was paid
on August 18, 1997.
Note 8 - Notes payable-credit lines
Notes payable credit lines consisted of the following at July 31, 1998 and 1997:
1998 1997
--------- ---------
Draws against a $50,000 credit line payable
to a bank on March 19, 1999 with interest
at prime rate +2.0% (10.50% at July 31, 1998).
The loan is secured by a guarantee from
a stockholder. $ 39,925 $ 36,115
Draws against a $25,000 unsecured credit
line payable to a bank in monthly
installments with interest at the lender's
prime rate plus 6.75%. This credit line was paid
and closed during the year ended July 31, 1998. - 20,107
F12
Vartech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Draws against a $90,000 credit line payable
to a bank with interest adjusted to a fixed
rate each renewal period based on the lender's
indexed rate (9.15% at July 31, 1998). Interest
is payable monthly and outstanding principal is
due May 30, 1999. Advances from this credit
line are secured by a guarantee and personal
assets of a stockholder. 90,000 -
Draws against a $250,000 credit line payable to
a bank with interest at 9%. The balance is due
on demand or August 3, 1999. This credit line
is secured by the Company's cash accounts with
the bank and the personal guarantee of a
stockholder. 200,000 -
Draws against two separate $50,000 unsecured
credit lines payable on demand with monthly
interest payments at 8.50%. 89,917 -
--------- ----------
$ 419,842 $ 56,222
Note 9 - Long-term debt and stockholder loans
Long-term debt and stockholder loans at July 31, 1998 and 1997 consisted of the
following:
1998 1997
--------- ---------
Unsecured note payable to sub-lessor (Note 11)
payable in monthly installments of $5,000
including imputed interest at 9%, through
May 1, 2001. $ 149,564 $226,896
Note payable to a bank, payable in monthly
installments of $184, including interest at 7.75%,
assumed by a stockholder during the year ended
July 31, 1998. - 4,687
Note payable to a commercial lender payable in monthly
installments of $303, including interest at 13.67%,
assumed by a stockholder during the year ended
July 31, 1998. - 11,828
-------- --------
149,564 243,411
Less: Current portion 48,508 81,030
-------- --------
Long-term $101,056 $162,381
F13
Varech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1998 1997
-------- --------
Unsecured note payable to a stockholder,
payable in monthly installments of $662,
including interest at 8.0%, paid during
the year ended July 31, 1998. - $ 56,057
Less: Current portion - 3,283
-------- --------
Long-term - $ 52,774
Future maturities of long-term debt at July 31, 1998, are as follows:
Amount
1999 $ 48,508
2000 53,058
2001 47,997
Total $149,563
Note 10 - Pension plan
During 1994, 21St Century adopted a simplified employee pension plan, which was
amended on January 1, 1996. Under the amended plan, all employees of 21St
Century who are at least twenty years of age and have provided services within
one of the last five years are eligible to participate. Under this plan, 21St
Century is not required to make contributions, but may do so at its discretion.
21St Century made no contributions to the plan for the month ended July 31, 1997
or year ended July 31, 1998.
Note 11 - Commitments and contingencies
On July 18, 1997, the Company entered into a sub-lease for office space at a new
location in Baton Rouge with an unrelated party. The lease term is for a period
of five years beginning September 1, 1997 with 2 renewal periods of
approximately 5 years each. The first two months of the lease were rent free.
Base rent begins at approximately $9,500 with two scheduled increases of 6% and
3% during the lease term. The Company purchased the existing furniture and
equipment at this office location from the sub-lessor for approximately
$227,000.
During the year ended July 31, 1998, the Company continued to lease its previous
office and warehouse space located in Baton Rouge. Monthly rental payments
under this lease totaled $4,000. The lease term for this lease expired August
31, 1998 and was not renewed.
On November 13, 1997, the Company entered into a new five year lease with an
unrelated party beginning May 1, 1998 for additional warehouse space in Baton
Rouge, Louisiana. Rent for this warehouse space is approximately $4,690 per
month with one renewal period of five years and no scheduled rent increases.
F14
Vartech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Rent paid or accrued under these leases and other short-term office space leases
at July 31, 1998, 1997 and 1996 totaled $188,106, $48,650, and $57,261,
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 lease.
This straight-line rent adjustment resulted in additional rent expense of
$21,275, $0 and $0 for the years ended July 31, 1998, 1997 and 1996,
respectively.
Preceding the acquisition and through August 1997, 21St Century leased its
warehouse and office space on a month-to-month basis from a stockholder of the
Company, with rent determined on a monthly basis. Rent totaling $4,500 and $0
was paid to the stockholder during the year ending July 31, 1998 and one month
period ended July 31, 1997, 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, 1998:
Year Amount
1999 $ 174,178
2000 178,311
2001 179,951
2002 181,911
2003 66,777
Thereafter 42,210
Total $ 823,338
Note 12 - Warranties
During the fiscal year ended July 31, 1996, the company established a warranty
program that 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 filed during these years, and, at July 31, 1998
and 1997, no significant warranty claims were pending.
Note 13 - Income taxes
The components of the income tax provision or benefit consisted of the
following:
F15
Vartech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Year ended July 31,
1998 1997 1996
Current:
Federal $12,983 $30,014 $ -
State 3,319 11,828 -
------- ------- -------
16,302 41,842 -
1998 1997 1996
Deferred:
Federal 20,338 8,715 2,266
State 4,884 (1,963) 604
------- ------- -------
25,222 6,752 2,870
Total income tax provision $41,524 $48,594 $2,870
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, 1998 and 1997:
1998 1997
Deferred tax asset (liability) -------- -------
Net operating loss carry forwards $ 6,453 $ 7,523
Charity deduction carryforward 2,688 5,899
Provision for losses on accounts receivable - 6,000
Property and equipment (20,701) (5,760)
-------- --------
(11,560) 13,662
Less: current deferred tax assets 9,141 19,422
-------- --------
Long-term deferred tax liability $(20,701) $ (5,760)
The provision for income taxes for the years ended July 31, 1998 and 1997 varies
from the amount determined by applying the Federal statutory rate of 34% to
pretax income as a result of the following:
1998 1997 1996
------ ------ ------
Income tax expense at Federal statutory rate of 34% $30,339 $52,130 $ 3,085
Effect of graduated rates on Federal income tax (11,749)(20,251) (1,361)
Net operating losses used to offset taxable income 1,070 7,187 -
Property and equipment 11,093 (1,146) -
State income taxes 3,319 11,828 -
Straight-line rent adjustment 4,433 - -
Provision for losses on accounts receivable 2,874 (3,118) -
Other 145 1,964 1,146
------- ------- -------
Actual income tax provision $41,524 $48,594 $ 2,870
F16
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of July 31, 1998, the Company has a net operating loss carryforward totaling
$107,559 that may be offset against future income taxable by the state of
Louisiana. If not used, the net operating loss carryforward will expire on July
31, 2012.
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 because of the short
maturity of these instruments.
Marketable equity securities - The carrying amount reported in the balance sheet
for marketable equity securities approximates fair value. All marketable equity
securities are classified as "available for sale" for accounting purposes and
therefore, are carried at fair value with unrealized gains and losses, if any,
recorded directly in equity.
Note receivable - The carrying amount approximates fair value for the note based
on the amount of cash received.
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.
The cost and estimated fair values of the Company's financial instruments at
July 31, 1998 and 1997, are as follows:
Carrying Fair
Amount Value
July 31, 1997
Financial assets:
Cash and cash equivalents $ 100,796 100,796
Marketable equity securities 6,500 6,500
Note receivable 14,202 14,202
Financial liabilities:
Short-term debt 1,037,797 1,037,297
Long-term debt 215,155 215,155
F17
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1998
Financial assets:
Cash and cash equivalents $ 51,559 $ 51,559
Marketable equity securities 6,500 6,500
Financial liabilities:
Short-term debt 1,121,057 1,121,057
Long-term debt 1,146,056 1,146,056
Note 15 - Year 2000 disclosure
The Company is currently reviewing all of its computer applications with respect
to the date change from 1999 to the year 2000, as discussed in the SEC's Staff
Legal Bulletin No. 5 which was superseded recently by the SEC's release entitled
Statement of the Commission Regarding Disclosure of Year 2000 Issues and
Consequences by Public Companies (the "Year 2000 issue"). To date, the Company
has not incurred any significant costs in undertaking this evaluation and
believes that most of its applications are substantially in compliance with the
Year 2000 Issue and that any additional costs will not be material to the
Company. The Company is currently unable to determine with any certainty the
effect of compliance with the Year 2000 Issue by its customers and suppliers.
At the current stage of evaluation, it expects the impact, if any, to be
insignificant to the operations of the Company.
Note 16 - Accrued expenses
Accrued expenses consisted of the following at July 31, 1998 and 1997:
1998 1997
-------- --------
Sales tax payable $ 6,790 $49,940
Accrued salary and commissions payable 67,076 22,454
Accrued interest payable 4,161 6,512
Other accrued expenses 8,102 4,669
------- -------
$86,129 $83,575
F18
Independent Auditor's Report
on Accompanying Information
The Board of Directors
of VarTech Systems Inc. and Subsidiaries
Baton Rouge, Louisiana
Our audits were made for the purpose of forming an opinion on the financial
statements taken as a whole. The information on the accompanying page is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
financial statements taken as a whole.
/s/Laney, Boteler & Killinger
Atlanta, Georgia
September 24, 1998
F19
VarTech Systems Inc. and Subsidiaries
Schedule of Other Operating Expenses
For the Years Ended July 31,
1998 1997 1996
--------------------------------
Selling expense
Advertising and promotion $ 18,566 $ 10,327 $ 13,080
Salaries, commissions and
contract labor 402,609 175,041 122,725
Other 13,675 1,185 -
-------- -------- --------
$434,850 $186,553 $135,805
Administrative and general
Auto expense $ 14,957 $ 17,440 $ 13,268
Bad debts 4,292 19,358 -
Depreciation and amortization 185,039 25,878 16,808
Insurance 57,724 18,215 10,256
Office supplies and expense 78,409 26,687 33,393
Outside services 21,042 16,666 6,671
Other 6,544 1,682 1,944
Professional fees 74,687 136,584 19,090
Rent 188,106 48,650 57,261
Repairs and maintenance 19,517 2,226 6,135
Salaries and wages 394,564 134,235 79,499
Seminars and training 1,421 3,345 200
Taxes and licenses 76,132 27,226 14,109
Telephone 121,454 43,095 34,788
Travel 20,490 35,597 45,339
Utilities 32,246 12,129 13,875
---------- ---------- ---------
$1,296,624 $569,013 $352,636
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 30th day of
October 1998.
VARTECH SYSTEMS INC.
(Registrant)
By: /s/ J. Keith Henderson
_____________________________________
J. Keith Henderson, President
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 30th day of October 1998.
Signature Title
signed J. Keith Henderson
J. Keith Henderson President and Director
signed Daniel S. Gould Vice-President, Secretary and Director
Daniel S. Gould
signed Michele L. Prater Director
Michele L. Prater
signed Kim L. D'Albor President, 21st Century/VarTech Inc.
Kim L. D'Albor and Director
signed Brent J. Hedges Vice-President, Treasurer and Director
Brent J. Hedges
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
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27. Financial Data Schedule Filed herewith electronically