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, 1999
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 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
<PAGE>
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, 1999 was $737,406. On
such date, the average of the bid and asked prices of the common stock was
$2.00 per share. The registrant had 2,100,000 shares of common stock, $.001
par value, outstanding as of September 30, 1999.
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction and History
VarTech Systems Inc., formerly known as Richmond Capital Corporation,
(the "Company") was incorporated under the laws of the State of Colorado
in 1988 for the purpose of raising capital and to seek out business
opportunities in which to acquire controlling interest. In October 1989,
the Company completed its initial public offering of its common stock
by issuing 305,750 common shares and related warrants of $.10 per
share for aggregate proceeds of $30,575. In connection therewith, deferred
offering costs of $16,298 were charged to paid-in capital. Each unit
consisted of one share of common stock, one Class A warrant and one Class B
warrant. Each Class A warrant entitled the holder to purchase one share of
the company's common stock at $.30 per share, and each Class B warrant entitled
the holder to purchase one share of the Company's common stock at $.50 per
share. Each Class A warrant was exercisable commencing six months from the
date of the final prospectus for a period of 12 months thereafter. Each
Class B warrant was exercisable commencing six months from the date of the
final prospectus for a period of 18 months thereafter. The Company has the
right to redeem the warrants upon 20 days written notice at $.001 per
warrant. The common stock and warrants were separately transferrable
immediately after the closing of the offering. In June 1990, the Company
redeemed all Class A and B warrants.
Halter Capital Corporation, a Texas corporation (HCC), acquired control of the
Company as of September 5, 1990 through the purchase of a majority of the
Company's common stock. HCC, in two separate transactions, acquired 935,250
shares of the Company's common stock, representing 71.6% of the then-
currently issued and outstanding voting securities of the Company.
PTR Capital Corporation, a Delaware corporation (PTR), acquired control of the
Company as of January 15, 1991 through the purchase of a majority of the
Company's common stock, representing 70.8% of the then-currently issued and
outstanding voting securities of the Company.
The Company remained a development-stage enterprise from inception through July
31, 1990, as it identified and evaluated acquisition opportunities. No
acquisition was made by the Company prior to July 16, 1991.
All Systems Go, Inc. (ASG), a subsidiary of Richmond Capital Corporation, was
incorporated in 1989 under the laws of Georgia to engage in the business of
selling various types of computers and computer-related equipment and the
repair and rebuilding of computer disk drives. ASG was inactive until April
of 1991 when it actually began operations.
On July 16, 1991, the Company acquired all of the issued and outstanding shares
of common stock of ASG. At the closing of this acquisition, Jordan S.
Davies, the sole shareholder of ASG, was elected President and Chairman of
the Board of Directors of the Company.
The Company decided during fiscal year ended July 31, 1992 not to pursue the
repair and remanufacturing of computer disk drives. This decision was based on
the additional capital requirements, shrinking window of opportunity for
sales, and accelerated competition. As a result, the Company president and
Chairman of the Board of Directors resigned and negotiated for the purchase
of ASG, the wholly-owned subsidiary of Richmond Capital Corporation. The
Company retained the telemarketing activities and began the telemarketing
operations under Richmond Capital Corporation. On May 28, 1992 the sale was
finalized whereby the Company sold all of its issued and outstanding shares
of common stock of ASG (2000 shares) to Jordan S. Davies. As consideration
for the sale, Richmond Capital Corporation received a note receivable for
$82,000, furniture and equipment valued at $20,000 and the cancellation of
Jordan S. Davies 1,000,000 shares of Richmond Capital Corporation common stock,
representing 43.4% of the then-currently issued and outstanding voting
securities of the Company. Mr. Davies filed for protection under the U.S.
Bankruptcy laws. The $82,000 note and accrued interest were written off as
bad debt in the year ended July 31, 1993.
On July 1, 1997, the Company acquired all of the issued and outstanding shares
of common stock of 21st Century Professionals, Inc("21st"). At the closing
of this acquisition, Kim D'Albor, the former major shareholder of 21st, was
elected President of 21st Century Professionals and Director of the Company.
In addition, Brent J. Hedges, a former shareholder of 21st was elected
Vice-president and Secretary of 21st Century Professionals and Director of
the Company.
21st Century Professionals was incorporated in the state of Louisiana in 1993
and derived substantially all of its revenue from computer hardware and
software sales and computer related consulting services.
On May 4, 1999, the Company sold the stock of this subsidiary for $500 plus the
assumption of all the subsidiary's liabilities to a related party. At the time
of sale, liabilities exceeded assets by $129,739. As a result of the nature of
this transaction, the Company has reflected the gain as an increase to capital
in excess of par value.
Description of Business
VarTech Systems Inc. is an authorized reseller of computers and software. The
Company operates in three areas: i) Display segment - acquisition and
remarketing of used computers and computer related equipment, including the
repair and refurbishment of industrial grade monitors; ii) Solution Integration
segment - computer consulting services which includes network design,
installation and software application development; iii) Network segment -
markets online computer training products, "the Learning University", and other
Internet related services including the development and maintenance of personal
interactive webpages through a network of independent consultants worldwide.
The Company's segments are strategic business units that provide differing
products and/or services along with different distribution methods. They are
managed separately because each business unit requires different employee
skills, product development and marketing strategies. The Company evaluates
the performance based on the profit or loss from operations before income taxes
and in the case of the network, on the size of the consultant base.
Marketing and Customers
The Company utilizes telephone solicitation, personal contact, direct mail, fax
broadcasting, industry specific advertising, the internet, and participates
in regional trade shows and expos to market itself and its services to its
customer base. VarTech's customer base is global and is comprised mainly of
those entities which have a computer installed base of Aydin, Harris, IBM and
Sun Microsystems. Through a network of independent consultants worldwide, the
Company markets online computer training and the maintenance of personal
interactive webpages.
Warranty and Customer Service
The Display unit of the Company provides a repair, replace or full refund
warranty for ninety (90) days from date of the sale. There were no warranty
claims pending at July 31, 1999.
Employees
As of July 31, 1999, the Company employed fifty people full-time including
four executive officers. Employee relations are considered good and the Company
has no collective bargaining contracts covering any of its employees.
Competition
The Company is involved in a market where many different companies provide the
same basic services. There is no dominant company engaged in providing the same
basic services as that of the Company.
ITEM 2. PROPERTIES
The Company is headquartered in 15,746 square feet of leased office space in
Baton Rouge, Louisiana under a five year lease which expires in the year 2002.
The Company's Display unit maintains a warehouse in 12,500 square feet of
space in Baton Rouge, Louisiana under a five year lease and a 12,000 square
foot service and assembly facility in Philadelphia, Pennsylvania with a three
year lease which expires in August 2002.
ITEM 3. LEGAL PROCEEDINGS
Kim L. D'Albor, a former employee and past president of
21st Century Professionals (and also a current stockholder of the Company),
filed a lawsuit against 21st Century Professionals, the Company and one its
stockholders C. Wayne Prater. The suit was filed on April 19, 1999 in the
19th Judicial District Court of the Parish of East Baton Rouge in Louisiana.
The past employee asserts that he is entitled to enforce the payments due to
him under a non-competition agreement contained in his agreement of
employment. Although no dollar amount has been specified, the past employee
seeks damages estimated by management and legal counsel at $1,150,000 stemming
from the non-payment of a portion of his salary and the remaining scheduled
non-compete payments. The suit is currently in preliminary discovery, and
legal counsel for the Company has estimated, in their opinion at this stage of
the lawsuit, the probable outcome to be that the Company will have no liability
under the lawsuit. Accordingly, no accrual has been made in the financial
statements at July 31, 1999.
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, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq bulletin board market.
The following table sets forth the quarterly high and low bid prices as
reported for the periods indicated.
Fiscal Year ended Fiscal Year ended
July 31, 1999 July 31, 1998
High(1) Low(1) High(1) Low(1)
1st Quarter $4.00 $2.00 $3.00 $2.00
2nd Quarter $3.00 $1.00 $2.75 $1.75
3rd Quarter $5.00 $1.50 $3.50 $2.50
4th Quarter $3.00 $1.88 $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 1999, the price range for the Company's common stock averaged a bid of
$2.00 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, 1999, the Company had 268 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,
1999 1998 1997 1996 1995
Balance Sheet Data
Total assets $1,327,455 $2,959,956 $1,924,720 $269,359 $374,777
Long term debt 47,998 101,056 162,381 - -
Shareholders' equity 522,824 433,044 372,637 117,908 111,704
Income Statement Data
Total revenue 5,723,376 6,654,986 3,001,492 1,466,173 941,948
Operating expenses 5,869,151 6,487,496 2,797,325 1,457,267 1,023,432
Net income (loss) (189,959) 47,707 104,729 6,204 (92,795)
Basic and diluted
net income (loss)
per common share ($.09) $.02 $.06 $0.00 ($.05)
Weighted average number
of common shares
outstanding 1,988,750 1,948,942 1,799,803 1,787,300 1,927,918
Common shares
outstanding 2,100,000 1,950,000 1,937,300 1,787,300 1,787,300
Preferred shares
outstanding - - - - -
There were no shares of the Company's sole class of preferred stock, $.01 par
value, outstanding as of July 31, 1999, 1998, 1997, 1996 and 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Managements' discussion and analysis of financial condition and results of
operations includes statements covering all segments of the Company. Those
business units are the Display segment which focuses on the acquisition and
remarketing of used computers and computer related equipment, including the
repair and refurbishment of industrial grade monitors; the Solution Integration
segment which provides computer consulting services that includes network
design, installation and software application development; and the Network
segment which markets online computer training products, "the Learning
University", and other Internet related services including the development
and maintenance of personal interactive webpages.
Results of Operations
The Company's 1999 sales volume decreased over 1998 by approximately
$931,000 or 14%. The increase of 1998 over 1997 was $3,653,000 or 122%.
The decrease in overall sales for 1999 was a direct result of the reduced focus
on the sale of low margin personal computers and related consulting services.
Despite this overall sales decrease from 1998 to 1999, the Display and the
Network units both increased in sales volume due to new product lines and
increased sales staff.
The loss from continuing operations for 1999 is directly related to the
deemphasizing of personal computer sales and the refocusing and increased
staffing to generate more consulting income through the Solution Integration
unit.
Company Cost of Sales
The cost of sales for the years ended July 31, 1999, 1998 and 1997 were 63%,
71% and 68%, respectively. From 1998 and 1999, there were significant
differences in each category. Hardware and software costs decreased due to the
reduced focus on personal computer sales. Even though revenue was lower,
consulting costs remained constant due to increased staffing in this area for
future growth. The network costs increased because the Company focused more
resources on increasing its sales volume. The increase in overall cost of
sales between 1997 and 1998 was due to the acquisition of 21st Century
Professionals.
Other Operating Expenses
Selling expenses increased substantially in 1999 over 1998 due to increased
staffing in the consulting area and commissions paid on network sales. The
increase from 1997 to 1998 was directly related to the acquisition of 21st
Century Professionals.
Administrative and general expenses remained constant from 1998 to 1999 on a
dollar basis; however, as a percentage of sales it increased from 19.5% to
22.3% due to an overall decrease in sales volume. This percentage should
begin to decrease as the sales volume increases. The increase from 1997 to
1998 was directly related to the acquisition of 21st Century Professionals.
Interest expense decreased from 1998 to 1999 due to a decrease in borrowing to
finance inventory and receivables which resulted from lower personal computer
sales. The increase from 1997 to 1998 was caused by an increase in borrowing
for inventory and receivables resulting from the acquisition of 21st Century
Professionals.
Liquidity and Capital Resources
The Company has $861,260 in current assets. The Company has lines of credit
totaling $450,000, of which $105,582 is available. This, along with revenue
generated from sales, is deemed sufficient to fund all required expenditures
for the next 12-month period.
The Company believes its cash generated from operations, its ability to secure
short term working capital needs, and the prospects of increasing sales of
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. The working capital ratio
improved from .95 to 1.21 as a result of the elimination of the non-compete
obligation.
There were capital expenditures for property and equipment during the fiscal
year ended July 31, 1999, 1998 and 1997 totaling $54,000, $75,000 and $233,000.
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 2000.
The Company had long-term debt at July 31, 1999 totaling $47,998. The Company
had $344,418 and $937,000 of advances against lines of credit at July 31, 1999
and 1998. 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 2000.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report appears at page F1 and the Financial
Statements and Notes to the Financial Statements are set forth herein
beginning on page F2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
All directors serve for a one-year period and until their respective successors
are elected and qualified. Officers serve at the discretion of the Board of
Directors.
Positions(s)
Name Age with the Company
J. Keith Henderson 33 President and Director
Daniel S. Gould 36 Vice-President, Secretary and Director
Brent J. Hedges 31 Vice-President, Treasurer and Director
Michele L. Gould 36 Director
Kim L. D'Albor 36 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 1991,
Mr. Henderson has been active in the day to day operation of computer sales
within specialized niche markets.
Daniel S. Gould is Vice-President, Secretary and a Director of the Company.
Prior to joining the Company in 1995, Mr. Gould was associated with the law firm
of McFarland, Gould, Lyons and Sullivan, P.A. for five (5) years.
Brent J. Hedges is Vice-President, Treasurer and a Director of the Company.
Mr. Hedges is a CPA and has served as Chief Financial Officer for VarTech
Systems since 1997. From 1994 to May 1999, he also served as Chief Financial
Officer of 21st Century Professionals, Inc.
Michele L. Gould is a Director of the Company. Ms. Prater held several
positions with the University of Tampa prior to 1995. She is a Director and
Vice-President of PTR Capital Corporation, a private investment company which is
a majority shareholder of the Company.
Kim L. D'Albor is a Director of the Company. Mr. D'Albor founded
21st Century Professionals, Inc. in 1993 and served as its President until his
resignation in January 1999. See Item 3 discussion.
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.
The Company has no stock option, profit-sharing, bonus or similar remuneration
plans or programs.
Name and
Principal Non-compete
Position Year Salary Bonus Payments
Kim L. D'Albor 1999 $27,700 - $80,000
Director and
Past President- 1998 $76,280 - $80,000
21st Century
Professionals, Inc.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of September 28, 1999, 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 1,206,550 57.45%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
Michele L. Gould Common 12,700 0.60%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
J. Keith Henderson Common 100,600 4.79%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
C. Wayne Prater Common 1,503,297(1) 71.59%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
Daniel S. Gould Common 18,000 0.85%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
Kim L. D'Albor Common 80,000 3.80%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
Brent J. Hedges Common 16,700 0.79%
11301 Industriplex Blvd.-Suite 4
Baton Rouge, Louisiana 70809
All Officers and Directors Common 228,000 10.86%
as a Group (5 Persons)
(1) Mr. Prater owns 260,497 shares directly; 1,206,550 shares held by PTR
Capital Corporation, which he owns indirectly; and 36,250 shares which are
held by his wife Lucy M. Prater.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended July 31, 1999, as consideration for financial and
consulting services provided to VarTech, the Company granted options to
purchase 150,000 shares of the Company stock to C. Wayne Prater at an exercise
price of $1.00. These options were exercised during the year ended
July 31, 1999.
The stock options described above were issued with an exercise price 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 grant date.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as parts of this Report starting on
page F1:
1. Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets - July 31, 1999 and 1998
Consolidated Statements of Income (Loss) for the years ended July 31, 1999,
1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the years
ended July 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended July 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report on Accompanying Information
Schedule of Other Operating Expenses for the years ended July 31, 1999, 1998
and 1997
2. Schedules
NONE
3. The exhibits are listed in the Index of Exhibits required by Item 601 of
Regulation S-K at Item (c) below.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the fiscal
year.
(c) Exhibits
Exhibits marked with an asterisk (*) have heretofore been filed with the
Commission and are incorporated herein by reference
Exhibit Consecutive
Number Exhibits Page No.
1.0 Underwriting Agreement *
1.2 Participating Dealer Agreement *
2.1 Contract for Sale and Purchase of Stock *
2.2 Contract for Exchange of Stock *
3.0 Registrant's Articles of Incorporation *
3.1 Bylaws *
4.0 Warrant Agreement *
4.2 A Warrant and B Warrant *
5.0 Opinion of R. Michael Sentel, Esquire, regarding
the legality of the securities being registered *
10.0 Escrow of Proceeds Agreement with TecNational
Bank, Denver, Colorado *
10.2 Commercial Lease Agreement, between Prime
Investments, Inc. and Richmond Capital
Corporation relating to certain premises
leased to Richmond Capital Corporation located
in Woodstock, Georgia *
10.3 Lease Rental Agreement between Home Management
Associates, Ancient Richmond Capital Corporation
relating to certain premises leased to Richmond
Capital Corporation located in Woodstock, Georgia *
10.4 Agreement of Lease between RCC of Louisiana, Inc
and Bubaco Enterprises, Inc. relating to certain
premises leased from RCC of Louisiana, Inc. for
a truck stop operation *
10.5 Lease of Commercial Property between RCC of
Louisiana, Inc. and Computer Technologies, Inc.
related to certain premises leased from RCC of
Louisiana, Inc. for a truck stop operation *
10.6 Commercial Lease Agreement between Bobbie B.
Crump, Sr. and Richmond Capital Corporation
relating to certain premises leased to Richmond
Capital Corporation located in Baton Rouge,
Louisiana *
10.7 Promissory Note from Company to Betrand O.
Baetz, Jr. *
10.8 Promissory Note from Company to Frank G.
Jarzombek *
10.9 Promissory Note from Company to Eugene V.
Larsen *
10.10 Promissory Note from Company to Scott E.
Gruendler *
10.11 Stock Option Agreement *
10.12 Agreement of Employment-Kim D'Albor *
10.13 Agreement of Employment-Brent Hedges *
10.14 Agreement of Employment- Dalbert Varnell, Jr. *
10.15 Commercial Sublease Agreement with Wireless One, Inc.
related to certain premises leased in Baton Rouge,
Louisiana *
10.16 Stock Option Agreement
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.
<PAGE>
Independent Auditors' Report
To the Board of Directors
of VarTech Systems Inc.
Baton Rouge, Louisiana
We have audited the accompanying consolidated balance sheets of VarTech Systems
Inc. and subsidiaries as of July 31, 1999 and 1998, and the related statements
of income (loss), changes in stockholders' equity and cash flows for the years
ended July 31, 1999, 1998 and 1997. 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, 1999 and 1998, and the results of their operations
and cash flows for the years ended July 31, 1999, 1998 and 1997, in conformity
with generally accepted accounting principles.
/s/ Laney, Boteler & Killinger
Atlanta, Georgia
October 1, 1999
F1
<PAGE>
VarTech Systems Inc. and Subsidiaries
Balance Sheets
Assets
July 31,
1999 1998
Current assets
Cash and cash equivalents $ 29,460 $ 51,559
Marketable equity securities - 6,500
Accounts receivable - trade 487,448 814,016
Accounts receivable - other 74,461 20,000
Inventory 220,235 369,129
Prepaid expenses 5,560 2,480
Deferred income taxes 44,096 9,141
--------- ---------
Total current assets 861,260 1,272,825
Property and equipment
Furniture and fixtures 178,082 186,581
Equipment 299,672 357,685
Leasehold improvements 10,306 7,896
--------- ---------
488,060 552,162
Less: Accumulated depreciation 136,853 167,671
--------- ---------
351,207 384,491
Other assets
Goodwill, net of accumulated
amortization of $908 in 1998 - 10,119
Non-compete agreements, net of accumulated
amortization of $102,904 in 1998 - 1,180,000
Deposits 114,988 112,521
--------- ---------
114,988 1,302,640
--------- ---------
$1,327,455 $2,959,956
========== ==========
See notes to consolidated financial statements
F2
<PAGE>
VarTech Systems Inc. and Subsidiaries
Balance Sheets
Liabilities and Stockholders' Equity
July 31,
1999 1998
Current liabilities
Current maturities of long-term debt $ 57,269 $ 48,508
Notes payable - credit lines 344,418 419,842
Accounts payable 215,015 115,392
Other accrued expenses 100,138 86,129
Accounts payable - IBMCC - 517,707
Income taxes payable - 16,302
Current portion of non-compete obligation - 135,000
---------- -----------
Total current liabilities 716,840 1,338,880
Deferred income taxes 19,161 20,701
Deferred lease expense 20,632 21,275
Long-term debt, less current maturities 47,998 101,056
Non-compete obligation, less current portion - 1,045,000
---------- -----------
Total liabilities 804,631 2,526,912
Stockholders' equity
Common stock, 100,000,000 shares,
$.001 par authorized; 2,100,000 and
1,950,000 issued and outstanding 2,100 1,950
Capital in excess of par value 704,761 425,172
Retained (deficit) earnings (184,037) 5,922
----------- ----------
Total stockholders' equity 522,824 433,044
----------- ----------
$ 1,327,455 $2,959,956
=========== ==========
See notes to consolidated financial statements
F3
<PAGE>
VarTech Systems Inc. and Subsidiaries
Statements of Income (Loss)
For the Years Ended July 31,
1999 1998 1997
Revenues
Hardware and software $4,143,551 $5,158,639 $2,926,387
Consulting services 908,298 1,373,936 75,105
Network 671,527 122,411 -
---------- ---------- ----------
5,723,376 6,654,986 3,001,492
Cost of sales
Hardware and software 2,533,098 3,849,849 1,998,759
Salaries and related
costs - Consulting 833,722 834,113 43,000
Salaries and related
costs - Network 257,829 42,707 -
---------- ---------- ----------
3,624,649 4,726,669 2,041,759
Gross profit 2,098,727 1,928,317 959,733
Operating expenses
Selling expense 909,263 464,203 186,553
Administrative and general 1,335,239 1,296,624 569,013
---------- ---------- ----------
2,244,502 1,760,827 755,566
Income before other
operating income (expense) (145,775) 167,490 204,167
Other operating income (expense)
Interest expense (74,647) (103,993) (18,408)
Interest income - - 800
Gain(loss) on disposal of assets (6,500) 25,734 (33,236)
---------- ---------- ----------
(81,147) (78,259) (50,844)
(Loss)income from continuing
operations before income tax
benefit (provision) (226,922) 89,231 153,323
Income tax benefit (provision) 36,963 (41,524) (48,594)
Net (loss) income $ (189,959) $ 47,707 $ 104,729
Basic and diluted net (loss)
income per common share $ (.09) $ .02 $ .06
Weighted average number of
common shares outstanding 1,988,750 1,948,942 1,799,803
See notes to consolidated financial statements
F4
<PAGE>
VarTech Systems Inc. and Subsidiaries
Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1999, 1998 and 1997
Capital in Retained Total
Common Stock Issued Excess of Earnings Stockholders'
Shares Amount Par Value (Deficit) Equity
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
Shares of common stock
issued from options
exercised 150,000 150 149,850 - 150,000
Net income for the year
ended July 31, 1999 - - - (189,959) (189,959)
Gain on disposition
of subsidiary - - 129,739 - 129,739
--------- ------ --------- ---------- ---------
Balance, July 31, 1999 2,100,000 $2,100 $ 704,761 $(184,037) $ 522,824
========= ====== ========= ========== =========
See notes to consolidated financial statements
F5
<PAGE>
VarTech Systems Inc. and Subsidiaries
Statements of Cash Flows
For the Years Ended July 31,
1999 1998 1997
Cash flows from operating activities
Net (loss) income $(189,959) $ 47,707 $ 104,729
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation and amortization 177,789 185,039 25,878
Services received in exchange for stock - 12,700 25,000
(Gain) loss on disposal of assets 6,500 (25,734) 33,236
Deferred income taxes (36,495) 25,222 6,752
(Decrease) increase in allowance for
doubtful accounts - (15,000) 15,000
Change in operating assets and liabilities
net of effects from business combinations
and dispositions:
Decrease (increase) in assets
Accounts receivable - trade 237,080 102,323 (148,165)
Inventory 126,621 (77,781) 102,758
Other assets (3,080) 14,187 1,129
Increase (decrease) in liabilities
Accounts payable (311,219) (352,119) 11,104
Income taxes payable (16,302) (25,540) 41,842
Accrued expenses 14,009 2,555 (596)
Non-compete obligation (90,000) (102,904) -
Deferred lease expense (643) 21,275 -
--------- -------- --------
Net cash (used in) provided by
operating activities (85,699) (188,070) 218,667
--------- -------- --------
Cash flows from investing activities
Purchase of property and equipment (54,062) (75,183) (233,396)
Net increase in deposits (3,117) (2,155) (100,000)
Net decrease (increase) in
note receivable-stockholder - 14,202 (800)
Proceeds from sale of
furniture and equipment - 68,251 3,040
Proceeds from sale of
subsidiary stock 500 - -
--------- -------- --------
Net cash (used in) provided by
investing activities (56,679) 5,115 (331,156)
--------- -------- --------
See notes to consolidated financial statements
F6
<PAGE>
VarTech Systems Inc. and Subsidiaries
Statements of Cash Flows (continued)
For the Years Ended July 31,
1999 1998 1997
Cash flows from financing activities
Net (payments on) proceeds from
lines of credit 14,576 363,621 (56,956)
Payments on stockholder loan - (56,057) (287)
Proceeds from note payable - - 226,896
Payments on notes payable (44,297) (173,846) (318)
Proceeds from issuance of common stock 150,000 - -
--------- --------- --------
Net cash provided by financing
activities 120,279 133,718 169,335
--------- --------- --------
Net decrease (increase) in cash
and cash equivalents (22,099) (49,237) 56,846
Cash and cash equivalents,beginning of year 51,559 100,796 43,950
--------- --------- --------
Cash and cash equivalents,end of year $ 29,460 $ 51,559 $100,796
========= ========= ========
See notes to consolidated financial statements
F7
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
Note 1 - Summary of significant accounting policies
Organization and description of business
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
$.001 per share. In October 1989, the Company completed a public offering of
its common stock by issuing 305,750 common shares and related warrants at $.10
per unit for aggregate proceeds of $30,575. In June 1990, the Company called
in all Class A and B warrants for redemption. PTR Capital Corporation, a
Delaware corporation, acquired control of the Company as of January 15, 1991,
through the purchase of a majority of the Company's common stock.
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.
The Company's business is the acquisition and remarketing of used computers and
computer related equipment, including the repair and refurbishment of industrial
grade monitors. The Company also provides computer consulting services which
includes network design, installation and software application development.
The Company, through a distribution agreement, markets online computer
training products, "the Learning University", and other Internet related
services including the development and maintenance of personal interactive
webpages.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
VarTech Systems Inc. and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. The Company held no cash equivalents at July 31, 1999 or
1998.
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
F8
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
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. The securities were determined to have a permanent decline
in value and were written down to $0 as of July 31, 1999.
Allowance for doubtful accounts
The Company uses the allowance method to account for uncollectible accounts
receivable. The allowance for doubtful accounts is based on management's
estimate of uncollectible accounts. At July 31, 1999 and 1998, all accounts
receivable were considered collectible and no allowance has been recorded.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined by using the first-in, first-out method of accounting for
inventory. Inventories of the Company's educational product licenses are
stated at the lower of cost or market, with cost being determined by using
the specific identification method of accounting for inventory.
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 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 was amortized on a straight-line basis over
a fifteen year period. The carrying value of goodwill, $10,119 at
July 31, 1998, was written down to $0 upon the sale of the Company's subsidiary
(Note 2). The deferred cost of the non-compete agreements was being amortized
on a straight-line basis over the life of the respective agreement.
F9
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
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.
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. For purposes of
determining diluted earnings per share, there were no common stock equivalents
at July 31, 1999, 1998 or 1997.
Use of estimates - general
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Advertising and promotion
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising and promotion expense totaled $9,231,
$18,566 and $10,327 for the years ended July 31, 1999, 1998 and 1997,
respectively.
Revenue recognition policy
Income is earned and recognized when the goods are delivered, services are
performed, licenses are sold, or webpages are developed and collection is
reasonably assured and no further obligation of the Company exists. The
company uses the percentage-of-performance method for recognizing revenue on
its long-term service and system implementation contracts. Under this method,
F10
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
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.
Reclassifications
Certain 1998 and 1997 amounts have been reclassified to conform with the 1999
presentation. These reclassifications did not have any effect on total assets,
shareholder equity or net (loss) income.
Note 2 - Business combinations, acquisitions and dispositions
On June 30, 1997, the Company purchased 21St Century Professsionals, Inc., by
exchange of stock valued at $100,000. The transaction, effective July 1, 1997,
was accounted for under the purchase method of accounting. The excess of the
purchase price, plus expenses associated with the acquisition, over the fair
value of identifiable tangible and intangible assets totaling $11,007, was
allocated to goodwill.
On June 30, 1997, 21St Century entered into employment agreements with its
three former stockholders. Each agreement established separate base salaries
as well as other provisions of employment and included certain non-compete
covenants. The employment provisions were scheduled to expire on June 30, 2002.
One of these former 21St Century stockholders resigned during the year ended
July 31, 1998, effectively terminating his agreement. Another of the former
21St Century stockholders renegotiated his employment agreement during the year
ended July 31, 1999, terminating the original agreement. Payments under the
third agreement, with established monthly payments of $10,000, were suspended
in April 1999 following the filing of a lawsuit by the employee against the
Subsidiary and the Company as more fully described in Note 9. Amortization of
the deferred costs and payments under these non-compete obligations totaled
$90,000 and $102,904 for the years ended July 31, 1999 and 1998, respectively.
On May 4, 1999, the Company sold the stock of this subsidiary for $500 plus the
assumption of all the subsidiary's liabilities to a related party. At the time
of sale, liabilities exceeded assets by $129,739. As a result of the nature of
this transaction, the Company has reflected the gain as an increase to capital
in excess of par value.
Note 3 - Deposits
Included in deposits at July 31, 1999 and 1998, 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
<PAGE>
Vartech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
Note 4 - Accounts payable-IBMCC
Prior to its acquisition, 21St Century entered into a financing agreement with
IBM Credit Corporation (IBMCC). IBMCC granted 21St Century credit, which
allowed the Subsidiary to finance its inventory and accounts receivable.
Under the terms of the agreement, 21St Century was given a thirty-day interest
free period on IBMCC financed purchases. After 30 days, interest accrued on
outstanding purchases at a rate of prime plus 3.25%. Purchases financed in
excess of 30 days were also charged a one time fee of .25% of the purchase
price. All purchases financed by IBMCC were due on or before the 90th day.
Advances from IBMCC were 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, totaled $517,707. At the date
21St Century was disposed of, the balance due IBMCC was $48,010. In connection
with a collateral guarantee agreement, this amount was paid by the Company.
Note 5 - Stock options
The former stockholders of 21St Century were granted options to purchase 400,000
shares of VarTech common stock at an option price of $2.50 per share. Of these
options, 40,000 expired upon the resignation of one of the three former
stockholders (Note 2) during the year ended July 31, 1998. The remaining
options, exercisable only if certain performance criteria of 21St Century were
met, were effectively canceled upon the disposition of the Subsidiary during
the year. The performance criteria was not met during any of the years under
the agreement.
During the year ended July 31, 1999, as consideration for financial and
consulting services provided to VarTech, the Company granted options to
purchase 150,000 shares of the Company stock to an individual at an exercise
price of $1.00. These options were exercised during the year ended
July 31, 1999.
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.
F12
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
Note 6 - Notes payable-credit lines
Notes payable credit lines consisted of the following at July 31, 1999 and 1998:
1999 1998
--------- ---------
Draws against a $50,000 credit line payable
to a bank on March 19, 1996, with interest
at prime rate +2.0% (10.75% at July 31, 1999).
The credit line is renewable annually and has
a current maturity of March 19, 2000. The loan
is secured by a guarantee from a stockholder. $ 45,401 $ 39,925
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). This
note was owed by 21St Century. See Note 2
describing the sale of this subsidiary.
Advances from this credit line were 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 prime plus .5% (8.75% at
July 31, 1999). The balance due on August 3, 1999,
was extended until August 2, 2000, by a renewal of
the credit line for an additional year. This credit
line is secured by the Company's cash accounts with
the bank and the personal guarantee of a
stockholder. 250,000 200,000
Draws against two separate $50,000 unsecured
credit lines payable on demand with monthly
interest payments at 8.50%.
Credit line 1 49,017 48,256
Credit line 2 - 41,661
--------- ---------
$ 344,418 $ 419,842
Note 7 - Long-term debt
Long-term debt at July 31, 1999 and 1998 consisted of
the following:
1999 1998
--------- ---------
Unsecured note payable to sub-lessor (Note 9)
payable in monthly installments of $5,000,
including imputed interest at 9%, through
May 1, 2001. $ 105,267 $ 149,564
Less: Current maturities 57,269 48,508
--------- ---------
Long-term $ 47,998 $ 101,056
F13
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
Future maturities of long-term debt at July 31, 1999, are as follows:
Amount
--------
2000 $ 57,269
2001 47,998
--------
Total $105,267
Note 8 - Pension plans
21St Century adopted a simplified employee pension plan. Under the plan, all
employees who were at least twenty years of age and had provided services
within one of the last five years were eligible to participate. Under this
plan, 21St Century could make discretionary matching contributions to the plan.
21St Century made no matching contributions to the plan for the month ended
July 31, 1997, the year ended July 31, 1998 or through the date 21St Century
was sold (Note 2).
Effective April 1, 1999, the Company adopted a 401(k) retirement plan for its
employees. Under the current plan, employees may participate upon obtaining
the age of 21 and completing one year of service with the Company. The Company
can make discretionary matching contributions to the plan. The Company made
no matching contributions to the plan for the year ended July 31, 1999.
Note 9 - Commitments and contingencies
Legal proceedings
As mentioned in Note 2, a former employee and past president of 21St Century
(and also a current stockholder of the Company) filed a lawsuit against
21St Century, the Company and the majority stockholder of the Company. The
past employee asserts that he is entitled to enforce the payments due to him
under the non-competition agreement contained in the agreement of employment
as outlined in Note 2. Although no dollar amount has been specified, the past
employee seeks damages estimated by management and legal counsel at $1,150,000
stemming from the non-payment of a portion of his salary and the remaining
scheduled non-compete payments. The suit is currently in preliminary discovery
and legal counsel for the Company has estimated, in their opinion at this stage
of the lawsuit, the probable outcome to be that the Company will have no
liability under the lawsuit. Accordingly, no accrual has been made in the
financial statements at July 31, 1999.
F14
<PAGE>
Vartech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
Operating leases
The following summarizes the Company's obligations under long-term leases for
office and warehouse space at July 31, 1999:
Date of lease 7/18/97 11/13/97 7/29/98 7/9/99
Lease term begins 9/1/97 5/1/98 8/16/98 8/16/98
Lease term ends 8/31/02 4/30/03 8/31/99 8/30/02
Renewal option 2@5 years 1@5 years None None
Initial rent $9,579 $4,690 $1,875 $5,000
Escalation: 3/1/99-$10,169 No No No
3/1/01-$10,497
Contingent rents No No No No
C.A.M. charge Yes Yes No No
Common area maintenance charges (CAM) totaled $18,602 for 1999. Rent paid or
accrued under these leases and other short-term office space leases during the
years ended July 31, 1999, 1998 and 1997 totaled $236,315, $188,106, and
$48,650, respectively.
In accordance with Financial Accounting Standard Board's Statement # 13
regarding operating leases having initial or remaining non-cancelable lease
terms in excess of one year, the accompanying financial statements reflect
rental expense on a straight-line basis over the term of the respective leases.
This straight-line rent adjustment resulted in additions to (reductions of)
rent expense of $(643), $21,275, and $0 for the years ended July 31, 1999,
1998 and 1997, 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, 1999:
Year Ending July 31, Amount
2000 $ 233,311
2001 239,952
2002 241,912
2003 71,777
2004 42,210
Total $ 829,162
F15
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
Note 10 - 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, 1999
and 1998, no significant warranty claims were pending.
Note 11 - Supplemental disclosure of cash flow information
During the year ended July 31, 1998, the Company issued 12,700 shares of common
stock in exchange for services provided to the Company. The fair market value
of the 12,700 common shares was $12,700.
During the year ended July 31, 1998, the Company recorded deferred costs and
an obligation totaling $1,282,904 relating to non-compete agreements of certain
employees (Note 2).
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.
Cash paid for interest during the years ended July 31, 1999, 1998 and 1997
totaled $36,520, $106,343, and $17,903, respectively.
Income taxes paid during the years ended July 31, 1999, 1998 and 1997 totaled
$13,066, $41,842, and $0, respectively.
Note 12 - 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 superceded in the previous year 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
F16
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
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 13 - Income taxes
The components of the income tax (benefit) or provision consisted of the
following:
Year ended July 31,
1999 1998 1997
Current:
Federal $ - $12,983 $30,014
State - 3,319 11,828
-------- ------- -------
- 16,302 41,842
Deferred:
Federal (35,238) 20,338 8,715
State (1,725) 4,884 (1,963)
-------- ------- -------
(36,963) 25,222 6,752
Total income tax (benefit) provision $(36,963) $41,524 $48,594
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, 1999 and 1998:
1999 1998
Deferred tax asset/(liability) -------- --------
Net operating loss carry forwards $ 41,408 $ 6,453
Charitable contribution deduction carryforward 2,688 2,688
-------- --------
Total - deferred tax asset 44,096 9,141
Property and equipment (19,161) (20,701)
-------- --------
Total - deferred tax liability (19,161) (20,701)
Net - deferred tax asset/(liability) $ 24,935 $(11,560)
The provision (benefit) for income taxes for the years ended July 31, 1999
and 1998, varies from the amount determined by applying the Federal statutory
rate of 34% to pretax income as a result of the following:
F17
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
1999 1998 1997
-------- ------- -------
Income tax expense at Federal statutory rate of 34% $ - $30,339 $52,130
Effect of graduated rates on Federal income tax - (11,749) (20,251)
Benefit of net operating losses (34,954) 1,070 7,187
Property and equipment (1,540) 11,093 (1,146)
Other (469) 10,771 10,674
-------- ------- -------
Actual income tax provision (benefit) $(36,963) $41,524 $48,594
At July 31, 1999, the Company has net operating loss carry forwards of
approximately $129,000 that are available to offset future taxable income.
If not used, the loss carry forwards expire July 31, 2014.
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 stockholders equity.
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, 1999 and 1998, are as follows:
Carrying Fair
Amount Value
July 31, 1999
Financial assets:
Cash and cash equivalents $ 29,640 $ 29,640
Financial liabilities:
Short-term debt $ 401,687 $ 401,687
Long-term debt $ 47,998 $ 47,998
F18
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
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 - Segment Information
The Company has three reportable segments: i) Display segment - acquisition and
remarketing of used computers and computer related equipment, including the
repair and refurbishment of industrial grade monitors; ii) Solution integration
segment - computer consulting services which includes network design,
installation and software application development; iii) Network segment -
markets online computer training products, "the Learning University", and other
Internet related services including the development and maintenance of personal
interactive webpages.
The accounting policies of the individual segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates the performance based on the profit or loss from operations before
income taxes and in the case of the network, on the size of the distributor
base.
The Company's reportable segments are strategic business units that provide
differing products and/or services along with different distribution methods.
They are managed separately because each business unit requires different
employee skills, product development and marketing strategies.
The following provides information with respect to the performance of each of
the Company's operating segments:
Display Solutions Network Total
July 31, 1999:
Hardware and software $2,884,664 $1,258,887 $ - $4,143,551
Consulting services - 908,298 - 908,298
Network - - 671,527 671,527
---------- ---------- -------- ----------
Total revenues $2,884,664 $2,167,185 $671,527 $5,723,376
Segment income $ 626,263 $ 353,722 $ 92,246 $1,072,231
Segment assets $ 892,685 $ 61,073 $229,600 $1,183,359
F19
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
Display Solutions Network Total
July 31, 1998:
Hardware and software $2,134,045 $3,024,594 $ - $5,158,639
Consulting services - 1,373,936 - 1,373,936
Network - - 122,411 122,411
---------- ---------- -------- ----------
Total revenues $2,134,045 $4,398,530 $122,411 $6,654,986
Segment income $ 665,269 $ 670,179 $ 50,407 $1,385,855
Segment assets $ 753,734 $ 852,700 $ 47,762 $1,654,196
The following schedule reconciles amounts shown above for the segments to the
consolidated amounts presented in the Company's financial statements:
1999 1998
Revenues:
Total revenues for reportable segments $5,723,376 $6,654,986
Unallocated amounts:
Eliminations and other - -
---------- ----------
Total consolidated revenues $5,723,376 $6,654,986
Loss before income taxes:
Total profit from reportable segments $1,072,231 $1,385,855
Unallocated amounts:
Administrative and general expenses (1,335,239) (1,296,624)
Eliminations and other 36,086 -
---------- ----------
Total consolidated loss before income taxes $ (226,922) $ 89,231
Assets:
Total assets for reportable segments $1,183,359 $1,660,696
Unallocated amounts:
Underwriter deposit 100,000 100,000
Non-compete deferred cost - 1,180,000
Deferred taxes and goodwill 44,096 19,260
---------- ----------
Total consolidated assets $1,327,455 $2,959,956
F20
<PAGE>
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1999 and 1998
Note 16 - Accrued expenses
Accrued expenses consisted of the following at July 31, 1999 and 1998:
1999 1998
-------- --------
Sales tax payable $ - $ 6,790
Accrued salary and commissions payable 62,470 67,076
Accrued interest payable 5,214 4,161
Accrued rent 9,579 -
Other accrued expenses 22,875 8,102
-------- --------
$100,138 $ 86,129
F21
<PAGE>
Independent Auditors' Report
on Accompanying Information
The Board of Directors and Stockholders
of VarTech Systems Inc.
Baton Rouge, Louisiana
Our report on our audits of the basic financial statements of
VarTech Systems Inc. for the years ending July 31, 1999, 1998 and 1997, appears
on page 1. Those audits were conducted 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
October 1, 1999
F22
<PAGE>
VarTech Systems Inc. and Subsidiaries
Schedule of Other Operating Expenses
For the Years Ended July 31,
1999 1998 1997
----------------------------------
Selling expense
Advertising and promotion $ 9,231 $ 18,566 $ 10,327
Salaries and other
contract labor 526,534 402,609 175,041
Network commissions 318,913 29,353 -
Other selling expenses 54,585 13,675 1,185
---------- ---------- --------
$ 909,263 $ 464,203 $186,553
Administrative and general
Auto expense $ 18,941 $ 14,957 $ 17,440
Bad debts - 4,292 19,358
Depreciation and amortization 87,789 82,135 25,878
Insurance 49,296 57,724 18,215
Non-compete expense 90,000 102,904 -
Office supplies and expense 92,428 78,409 26,687
Outside services 79,877 21,042 16,666
Other 37,556 6,544 1,682
Professional fees 35,468 74,687 136,584
Rent 236,315 188,106 48,650
Repairs and maintenance 22,641 19,517 2,226
Salaries and wages 330,550 394,564 134,235
Seminars and training 7,688 1,421 3,345
Taxes and licenses 42,620 76,132 27,226
Telephone 106,071 121,454 43,095
Travel 57,436 20,490 35,597
Utilities 40,563 32,246 12,129
---------- ---------- --------
$1,335,239 $1,296,624 $569,013
F23
<PAGE>
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 28th day of
October 1999.
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 28th day of October 1999.
Signature Title
signed J. Keith Henderson President and Director
J. Keith Henderson
signed Daniel S. Gould Vice-President, Secretary and Director
Daniel S. Gould
signed Brent J. Hedges Vice-President, Treasurer and Director
Brent J. Hedges
signed Michele L. Gould Director
Michele L. Gould
<PAGE>
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------------ -----------------------------
10.16 Stock Option Agreement Filed herewith electronically
27. Financial Data Schedule Filed herewith electronically
December 15, 1998
Mr. C. Wayne Prater
2702 Windrush Way
Baton Rouge, LA 70809
Re: Stock Options, VarTech Systems Inc.
and C. Wayne Prater
Dear Mr. Prater:
This will confirm that as consideration for your financial assistance and
consulting services for the years 1992 through 1997 for VarTech Systems Inc.,
or its subsidiaries or affiliates, you are hereby granted the option to
purchase up to 150,000 shares of the authorized, but unissued common stock of
VarTech Systems Inc. upon the terms and conditions as set forth herein.
The purchase price for shares of stock purchased pursuant to this option shall
be $1.00 per share. You may exercise these options commencing with the date
of this letter for a period of 5 years from the date of this letter.
To exercise the options provided herein, you shall be required to give written
notice of such exercise to the company. The notice of exercise shall state the
number of shares to be purchased. The notice shall be accompanied by payment
of the option price for each option so exercised. The company shall then cause
a timely issuance of certificates representing the shares so exercised through
its transfer agent for delivery to you.
The company looks forward to a long and mutually profitable relationship
concerning your involvement.
Sincerely yours,
J. Keith Henderson
President
<PAGE>
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<ARTICLE> 5
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This schedule contains summary financial information extracted from the balance
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qualified in its entirety by reference to such financial statements.
</LEGEND>
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<NAME> VARTECH SYSTEMS INC.
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<NET-INCOME> (189959)
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