Back to GetFilings.com
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, 1997
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, 1997 was $600,000. On
such date, the average of the bid and asked prices of the common stock was
$2.00 per share. The registrant had 1,937,300 shares of common stock, $.001
par value, outstanding as of September 30, 1997.
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 major 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, Concurrent, 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 as authorized
reseller and distributor for IBM AS/400, IBM RS/6000, IBM PCS, Compaq, Hewlett
Packard, US Robotics, 3COM, CISCO Systems, Gigalabs and BlackBox. 21stalso
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, Concurrent, 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 one hundred
twenty (120) days from date of the sale. There were no warranty claims
pending at July 31, 1996.
Employees
As of July 31, 1997, the Company employed forty five people full-time
including four executive officer. 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 one year lease that
expires in September 1998.
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, 1997.
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, 1997 High(1) Low(1)
1st Quarter $1.00 $1.00
2nd Quarter $1.00 $1.00
3rd Quarter $1.50 $1.00
4th Quarter $2.00 $1.50
(1) The prices set forth in the table above were provided by the National
Quotation Bureau and reflect only the high and low bid prices on the last day
of each quarter (October 31, 1996, January 31, 1997, April 30, 1997, and July
31, 1997) rather than the high and low bid prices over each entire quarter.
During 1997, 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, 1997, the Company had 276 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,
1997 1996 1995 1994 1993
Balance Sheet Data
Total assets $1,924,720 $269,359 $374,777 $621,281 $221,593
Shareholders' equity 372,637 117,908 111,704 435,499 178,751
Income Statement Data
Total revenue 3,001,492 1,466,173 941,948 675,686 729,156
Operating expenses 2,797,325 1,457,267 1,021,630 649,938 814,263
Net income (loss)
from continuing
operations 104,729 6,204 (67,091) 25,748 (85,107)
Net income (loss)
from continuing
operations per
common share $0.06 $0.00 ($.03) $.01 ($.06)
Weighted average number of
common shares
outstanding 1,799,803 1,787,300 1,927,918 1,806,204 1,499,131
Common shares
outstanding 1,937,300 1,787,300 1,787,300 2,087,300 1,787,300
Preferred shares
outstanding - - - - -
During 1988, 1989, and 1990, the Company was in the development stage, as more
fully defined in Financial Accounting Standards Board Statement No. 7.
There were no shares of the Company's sole class of preferred stock, $.01 par
value, outstanding as of July 31, 1996, 1995, 1994 and 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity
The Company has $1,356,073 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.
Capital Resources
The Company's assets increased approximately $1,181,000 primarily from the
acquisition of its wholly-owned subsidiary 21st Century/Vartech Inc.
Results of Operations
From its inception on April 5, 1988, through July 31, 1990, the Company
reported its activity as a development stage company, as more fully defined in
Statement No. 7 of the Financial Accounting Standards Board. On July 16,
1991, the Company completed a merger in which ASG became a wholly owned
subsidiary.
The Company continued its telemarketing activity in ASG through November
1991. In December 1991, telemarketing activity was moved from ASG into
Richmond Capital Corporation and the wholly owned subsidiary (ASG), which had
the assets required for pursuing the repair and remanufacturing of computer
hard disk drives, was sold.
The Company's 1997 sales volume has increased over 1996 by approximately
$1,534,000. The increase of 1996 over 1995 was $600,000. 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
1996. The gross margin in 1996 had increased from the prior year.
Management believes as the new personnel become more familiar with the product
lines, sales will continue to increase and profit margins will improve. In
addition, sales will increase substantially due to the acquisition of 21st
Century/VarTech Inc.
Company Revenue
The sales revenue reported in the financial statements reflects the total
sales of used computers and computer related equipment through July 31, 1997.
These sales through July 31, 1997 are approximately $1,534,000 greater than
the year ended July 31, 1996 and $2,134,000 greater than the year ended July
31, 1995. 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.
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, 1997, 1996 and 1995
totaled 68%, 66% and 85%, respectively. The increase in cost of sales in the
year ended July 31, 1995 was primarily a result of inexperienced new staff in
negotiating the used equipment acquisitions. Management expects the results
for future years to continue to increase once a full crew of completely
trained sales force is established.
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.
Auto expenses and travel and lodging increased from efforts to increase
marketing and sales by traveling to existing and potential customers and
increased attendance at computer trade shows.
Contributions significantly increased in the year end July 31, 1995 as a
result of giving non-saleable inventory to charity.
Salaries and contract labor increased as a result of adding additional sales
force to increase sales.
Professional fees increased substantially over prior years due to costs
associated with due diligence work on potential merger companies where no
acquisitions were consummated.
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.
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 $18,408 in 1997 due to additional accounts
receivable financing. There have been on material amounts of interest income
earned during the current or prior years. Interest income for the year
totaled $800 and was from a loan to an officer of the Company. Dividends on
investments totaled $4,500. 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
used computers and computer equipment 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, 1997, 1996 and 1995 totaling $233,000, $75,000 and
$20,000. 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 1998.
The Company had long-term debt at July 31, 1997 totaling $215,155. The
Company had $874,000 and $72,000 of advances against lines of credit at July
31, 1997 and 1996. 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 1998.
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,
1997.
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 31 President-VarTech Systems Inc.
and Director
Daniel S. Gould 34 Vice-President, Secretary and
Director
Michele L. Prater 34 Director
Kim L. D'Albor 34 President-21st Century/VarTech Inc
and Director
Brent J. Hedges 29 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 October 28, 1997, 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 67.44%
11301 Industriplex Blvd. - Suite 4
Baton Rouge, Louisiana 70809
Michele L. Gould Common 12,700 0.66%
11301 Industriplex Blvd. - Suite 4
Baton Rouge, Louisiana 70809
J. Keith Henderson Common 50,000 2.58%
11301 Industriplex Blvd. - Suite 4
Baton Rouge, Louisiana 70809
Daniel S. Gould Common 18,000 0.93%
11301 Industriplex Blvd. - Suite 4
Baton Rouge, Louisiana 70809
Kim L. D'Albor Common 80,000 4.13%
11301 Industriplex Blvd. - Suite 4
Baton Rouge, Louisiana 70809
Brent J. Hedges Common 10,200 .53%
11301 Industriplex Blvd. - Suite 4
Baton Rouge, Louisiana 70809
All Officers and Directors Common 170,900 8.82%
as a Group (5 Persons)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the year ended July 31, 1997, the Company acquired 21st Century/VarTech
Inc, a wholly- owned subsidiary by issuing 100,000 shares of the Company's
common stock in exchange for all of the issued and outstanding shares of 21st
Century. The transaction represents 5.16% of the issued and outstanding
voting securities of the Company with a fair market value approximately of
$100,000 at the date of the transaction.
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, 1997 and 1996
Consolidated Statements of Income (Loss) for the years ended July 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity for the years
ended July 31,1997,1996 and 1995
Consolidated Statements of Cash Flows for the years ended July 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditor's Report on Accompanying Information
Schedule of Other Operating Expenses for the years ended July 31, 1997,
1996 and 1995
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
Form 8-K reports dated February 1, 1997 and July 1, 1997 were filed during
the fiscal year ended July 31, 1997.
(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 Electronically
Wireless One, Inc. related to certain filed herewith
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 it expenses in furnishing such Exhibit.
Independent Auditor's Report
To the Board of Directors and Stockholders
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, 1997 and 1996, and the related
statements of income (loss), changes in stockholders' equity and cash flows
for the years ended July 31, 1997, 1996 and 1995. 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, 1997 and 1996, and the results of operations and
cash flows for the years ended July 31, 1997, 1996 and 1995 in conformity with
generally accepted accounting principles.
/S/ Laney, Boteler & Killinger
Atlanta, Georgia
September 19, 1997
F1
VarTech Systems Inc. and Subsidiaries
Balance Sheets
Assets
July 31,
1997 1996
Current assets
Cash and cash equivalents $ 100,796 $ 18,682
Marketable equity securities 6,500 6,500
Accounts receivable, net of
allowance for doubtful accounts
of $15,000 and $0. 921,338 83,202
Inventory 291,350 49,888
Prepaid expenses 16,667 -
Deferred income taxes 19,422 17,324
---------- --------
Total current assets 1,356,073 175,596
Property and equipment
Furniture and fixtures 176,877 27,576
Equipment 321,296 75,944
Leasehold improvements 31,994 7,896
---------- --------
530,167 111,416
Less: Accumulated depreciation 96,941 38,145
---------- --------
433,226 73,271
Other assets
Goodwill, net of accumulated
amortization of $154 and $0. 10,853 -
Deferred income taxes - 3,090
Deposits 105,706 4,000
Note receivable - stockholder 14,202 13,402
Other 4,660 -
---------- --------
135,421 20,492
---------- --------
$1,924,720 $269,359
========== =========
See notes to financial statements
F2
VarTech Systems Inc. and Subsidiaries
Balance Sheets
Liabilities and Stockholders' Equity
July 31,
1997 1996
Current liabilities
Note payable-individual $ 80,000 $ -
Current maturities of long-term debt 81,030 -
Current maturities of stockholder
loan 3,283 -
Notes payable-credit lines 56,222 72,278
Accounts payable-IBMCC 817,262 -
Accounts payable 167,954 39,872
Accounts payable-related party - 37,155
Income taxes payable 41,842 -
Other accrued expenses 83,575 2,146
---------- --------
Total current liabilities 1,331,168 151,451
Deferred income taxes 5,760 -
Long-term debt, less current
maturities 162,381 -
Stockholder loan, less current
maturities 52,774 -
--------- --------
Total liabilities $1,552,083 $ 151,451
Stockholders' equity
Preferred stock, 1,000,000 shares,
$.01 par authorized, no shares
issued and outstanding at July 31,
1997 and 1996 - -
Common stock, 100,000,000 shares,
$.001 par authorized, 1,937,300
and 1,787,300 shares issued and
outstanding at July 31, 1997
and 1996, respectively. 1,937 1,787
Capital in excess of par value 412,485 262,635
Retained earnings (deficit) (41,785) (146,514)
---------- ---------
Total stockholders' equity 372,637 117,908
---------- ---------
$1,924,720 $ 269,359
========== =========
See notes to financial statements
F3
VarTech Systems Inc. and Subsidiaries
Statements of Income (Loss)
For the Years Ended July 31,
1997 1996 1995
Revenues
Hardware and software $2,926,387 $1,466,173 $ 866,797
Consulting services 75,105 - -
Rental income - - 75,151
---------- ---------- ---------
3,001,492 1,466,173 941,948
Cost of sales
Hardware and software 1,998,759 968,826 734,641
Salaries and related
costs 43,000 - -
---------- ---------- ---------
2,041,759 968,826 734,641
---------- ---------- ---------
Gross profit 959,733 497,347 207,307
Operating expenses
Selling expense 186,553 135,805 70,284
Administrative and
general 569,013 352,636 218,507
---------- ---------- ---------
755,566 488,441 288,791
---------- ---------- ---------
Income(loss)before other
operating income (expense) 204,167 8,906 (81,484)
Other operating income
(expense)
Interest expense (18,408) (5,132) (3,751)
Interest income 800 5,300 800
Loss on disposal of
assets (33,236) - -
---------- ---------- ---------
(50,844) 168 (2,951)
Income (loss) from
continuing operations 153,323 9,074 (84,435)
Loss on sale of subsidiary - - (32,348)
---------- ---------- ---------
Net income (loss) before
income taxes 153,323 9,074 (116,783)
Income tax (provision)
benefit (48,594) (2,870) 23,988
---------- ---------- ---------
Net income (loss) $ 104,729 $ 6,204 $ (92,795)
========== =========== ==========
Net income (loss) per
common share $ .06 $ .00 $ (.05)
Weighted average number of
common shares outstanding 1,799,803 1,787,300 1,927,918
See notes to financial statements
F4
VarTech Systems Inc. and Subsidiaries
Statements of Changes in Stockholders' Equity
for the Years Ended July 31, 1997, 1996 and 1995
Capital in Retained Total
Common stock issued Excess of Earnings Stockholders'
Shares Amount Par Value (Deficit) Equity
------------------- ---------- -------- -----------
Balance, July 31, 1994 2,087,300 $ 2,087 $ 493,335 $ (59,923) $ 435,499
Shares of common stock
canceled in sale of
RCC of Louisiana (300,000) (300) (230,700) - (231,000)
Net loss for the year
ended July 31, 1995 - - - (92,795) (92,795)
------------------- ---------- -------- --------
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
================== ============ ========= ========
See notes to financial statements
F5
VarTech Systems Inc. and Subsidiaries
Statements of Cash Flows
For the Years Ended July 31,
1997 1996 1995
--------------------------------
Cash flows from operating
activities
Adjustments to reconcile
income (loss) to net cash
provided by operating
activities
Net income (loss) $ 104,729 $ 6,204 $(92,795)
Depreciation and
amortization 25,878 16,808 23,505
Legal fees paid in
exchange for stock 25,000 - -
Loss on disposal of assets 33,236 - -
Loss on sale of subsidiary - - 32,348
Deferred income taxes 6,752 - -
Increase in allowance for
doubtful accounts 15,000 - -
Change in operating assets
and liabilities:
Accounts receivable, less
decrease in subsidiary
sold in 1995 (148,165) 161,589 (79,853)
Inventory 102,758 4,334 (26,386)
Other assets 1,129 - -
Accounts payable, less
decrease in subsidiary
sold in 1995 11,104 (186,046) 159,296
Income taxes payable 41,842 - -
Accrued expenses (596) 2,146 (14,105)
--------- -------- --------
Net cash provided by
operating activities 218,667 5,035 2,010
--------- -------- --------
Cash flows from investing
activities
Purchase of furniture and
equipment (233,396) (75,060) (20,535)
Net increase in deposits (100,000) (4,000) -
Net (increase) decrease in
Note receivable-stockholder (800) (800) 11,002
Proceeds from sale of
furniture and equipment 3,040 14,542 -
--------- -------- --------
Net cash used in
investing activities (331,156) (65,318) (9,533)
--------- -------- --------
See notes to financial statements
F6
VarTech Systems Inc. and Subsidiaries
Statements of Cash Flows (continued)
For the Years Ended July 31,
1997 1996 1995
---------------------------------
Cash flows from financing
activities
Net(payments on) proceeds from
lines of credit (56,956) 72,278 -
Net payments on stockholder
loan (287) - -
Proceeds from note payable 226,896 - -
Payments on notes payable (318) - (3,530)
--------- -------- --------
Net cash provided by (used
in)financing activities 169,335 72,278 (3,530)
--------- -------- --------
Net increase (decrease)in cash 56,846 11,995 (11,053)
Cash, beginning of year 43,950 6,687 17,740
--------- -------- --------
Cash, end of year $ 100,796 $ 18,682 $ 6,687
========= ========= ========
SUMMARY OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
On January 31, 1995, the Company sold RCC of Louisiana, Inc. (RCL) by
reacquiring 300,000 common shares in exchange for all of the issued and
outstanding stock of RCL. The fair market value of the 300,000 common shares
was $230,000. No assets or liabilities of the subsidiary were retained by the
Company (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 during the
year. 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, 1997, 1996 and 1995
totaled $17,903, $5,132 and $3,751, respectively.
Income taxes paid during the years ended July 31, 1997, 1996 and 1995 totaled
$0, $0 and $10,267, respectively.
See notes to 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, 1997 or
1996.
Marketable Equity Securities
Investments in marketable equity securities consist of securities traded on
national stock exchanges. 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 $13,105 at
July 31, 1997 and 1996. There were no significant unrealized gains or losses
at July 31, 1997, 1996 or 1995.
Allowance for uncollectible 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 possible uncollectible accounts.
Inventories
Inventories, which are composed of goods ready for sale, are stated at the
lower of cost or market, with cost being determined by using the first-in,
first-out method of accounting for inventory.
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 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.
F8
VarTech Systems Inc and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Taxes on income
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 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 outstanding
during each year.
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.
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.
Advertising and promotion
The Company expenses the production costs of advertising the first time the
advertising takes place. Advertising and promotion expense totaled $10,327,
$13,080 and $5,630 for the years ended July 31, 1997, 1996 and 1995,
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 or services are
performed, collection is reasonably assured and no further obligation of the
Company exists. During 1995, the Company, through its wholly-owned subsidiary
(RCL), also derived income from the lease of real estate holdings.
F9
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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. 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.
RCC of Louisiana, Inc.
The Company evaluated, structured and completed a merger of a target company,
RCC of Louisiana, Inc.(RCL), in July 1994, by issuing 300,000 shares of its
common stock to the sole shareholder in exchange for all of the issued and
outstanding shares of RCL. At the time of the merger, the transaction
represented 14.4% of the issued and outstanding voting securities of the
Company after the issuance of the new shares.
RCL was incorporated in the State of Louisiana on August 10, 1993 to engage
primarily in the acquisition, development and lease of real estate. Leasing
began on July 8, 1994. The acquisition of RCL was accounted for by 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.
During the year ended July 31, 1995, the management of the Company decided not
to continue the real estate leasing operations which was included in RCL.
This decision was made because the real estate leases involved truck stops with
video poker facilities, revenues were not as expected, and public support of
video poker operations was diminishing.
F10
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 VarTech's common stock. The transaction
represented a cancellation of 14.4% of the then currently issued and
outstanding voting securities of the Company. In connection with this sale,
the company recorded a loss on the sale of subsidiary in the amount of
$32,348. This loss represents a net loss of approximately $.01 per common
share. The financial statements for the year ended July 31, 1995, includes
the operating activity and accounts of RCL through the date of the sale.
21St Century/VarTech, Inc.
On June 30, 1997, the Company entered into an agreement with
21StCentury/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. 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 and is
being amortized over 15 years. The financial statements for the year ended
July 31, 1997 include the operating activity and accounts of 21St Century
beginning July 1, 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. The options can be exercised in variable
increments based on certain performance criteria of 21St Century over the
next three fiscal years beginning August 1, 1997. Under the separate
employment agreements mentioned below, all former stockholders of 21StCentury
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. The agreements establish base
salaries during this period for the three employees at a total of $176,000 per
year.
Under the agreements, the employees have agreed to be bound by certain
non-compete covenants. The agreements are scheduled to expire for two former
stockholders on June 30, 2002, and June 30, 2007 for the other stockholder.
In exchange for acceptance of the non-compete conditions, the employees will
receive total compensation of $1,334,280, paid out over the life of the
agreements.
F11
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements (consolidated)
21St Century/VarTech, Inc. was incorporated in the state of Louisiana in
1993. Substantially all revenue is derived from computer hardware & software
sales and computer related consulting services. The Company sells its
merchandise and services to customers located throughout the United States;
however, its major customers are located in Louisiana.
The following table presents unaudited pro forma results of operations data at
July 31, 1996 and 1995 as if the acquisition of 21St Century, as described
above, had occurred on August 1, 1995.
1996 1995
------------- -------------
Revenue $ 7,614,566 $5,231,211
Net income (loss) 111,407 (13,690)
Net income (loss) per share $0.06 $(0.01)
The pro forma information includes adjustments for additional amortization of
goodwill together with the related income tax effects of consolidation. The
pro forma financial information is not necessarily indicative of the results
of operations as they would have been had the transactions been effected on
the assumed dates.
Note 3 - Note receivable-stockholder
The Company had a note receivable due from a stockholder of the Company which
totaled $10,000 plus accrued interest of $4,202 and $3,402 at July 31, 1997
and 1996, respectively. The terms of the note have recently been modified to
reflect an interest rate of 8% and a maturity of all principal and interest
due on July 31, 1999.
Note 4 - Deposits
During the year ending July 31, 1997, the Company placed a deposit in the
amount of $100,000 with a potential underwriter in connection with a
contemplated secondary offering of the Company's securities. The deposit is
being held as an advance for future expenses relating to the offering.
Note 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.
F12
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note 6 - Accounts payable-IBMCC
Prior to the acquisition, 21St Century entered into a financing agreement with
IBM Credit Corporation (IBMCC). IBMCC grants 21StCentury credit ($1,000,000
maximum at July 31, 1997), 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%
(11.25% at July 31, 1997). 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, 1997 totaled $817,262.
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% (Note 15).
Note 8 - Notes payable-credit lines
Notes payable credit lines consisted of the following at July 31, 1997 and
1996 (Note 15):
1997 1996
----------- -----------
Draws against a $50,000 credit line
payable in monthly installments at
a minimum of 3% of the outstanding
balance with interest at prime rate
plus 2.0%(10.50% at July 31, 1997).
Balance due on March 19, 1998. The
loan is secured by a shareholder
guarantee. $ 36,115 $ 47,554
Draws against a $25,000 unsecured
credit line payable 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, 1997. - 24,724
Draws against a $25,000 unsecured
credit line payable in monthly
installments at a minimum of 2%
of the outstanding balance with
interest at a variable rate (15.40%
at July 31, 1997). Scheduled to
mature in 1998. 20,107 -
F13
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1997 1996
---------- ----------
Draws against a $90,000 credit line
with interest adjusted to a fixed
rate each renewal period based on the
lender's indexed rate (9.15% at July
31, 1997). Interest is payable monthly
and any outstanding principal will
be due at the next scheduled maturity
date of May 30, 1998. Advances from this
credit line are secured by a guarantee
and personal assets of a stockholder. - -
-------- --------
$ 56,222 $ 72,278
======== ========
Note 9 - Long-term debt and stockholder loans
Long-term debt and stockholder loans at July 31, 1997 and 1996 consisted of
the following:
1997 1996
---------- ----------
Unsecured note payable to
sub-lessor(Note 11) payable
in monthly installments of $5,000
including imputed interest at 9%,
through May 1, 2001. $226,896 -
Note payable to a bank, payable
in monthly installments of $184,
including interest at 7.75%,
through November 5, 1999.
Secured by an automobile. 4,687 -
Note payable to a commercial
lender payable in monthly
installments of $303, including
interest at 13.67%, through
November 20, 2001. Secured by
a telephone system. 11,828 -
-------- --------
243,411 -
Less: Current portion 81,030 -
-------- --------
Long-term $162,381 $ -
======== ========
F14
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1997 1996
---------- ----------
Unsecured note payable to a
stockholder, payable in monthly
installments of $662, including
interest at 8.0%, through
December 15, 2007. $ 56,057 $ -
-------- ----------
56,057 -
Less: Current portion 3,283 -
-------- ----------
Long-term $ 52,774 $ -
======== ==========
Future maturities of long-term debt and the stockholder loan at July 31, 1997
consisted of the following:
Stock- Long-
holder term
loan debt Total
-----------------------------
1998 $ 3,283 $ 81,030 $ 84,313
1999 3,867 52,985 56,852
2000 4,187 56,743 60,930
2001 4,535 51,189 55,724
2002 4,911 1,464 6,375
Thereafter 35,274 - 35,274
-----------------------------
Total $ 56,057 $243,411 $299,468
=============================
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.
F15
VarTech Systems Inc and Subsidiaries
Notes to Consolidated Financial Statements (consolidated)
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 are rent free.
Base rent begins at approximately $9,500 with two scheduled increases of 6%
and 3% during the lease term. In connection with this new lease, the Company
purchased the existing furniture and equipment at the new office location from
the sub-lessor for approximately $227,000.
Prior to this lease, 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. There was no rent paid or accrued to the stockholder
during July 1997. 21StCentury leases one other office suite located in
central Louisiana from an unrelated party. Rent is determined on an annual
basis. Monthly lease payments total $650.
The Company had previously leased its office and warehouse space in Baton
Rouge from an unrelated party. Monthly rental payments under this lease
totaled $4,000. The lease term expired August 31, 1997.
Rent paid or accrued under these leases at July 31, 1997 and 1996 and a
previous office and warehouse lease in 1995 totaled $48,650, $57,261 and
$42,653, 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, 1997:
Year Amount
---- ---------
1998 $ 90,209
1999 117,898
2000 122,031
2001 123,672
2002 125,632
Thereafter 10,497
--------
Total $589,939
========
F16
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note 12 - Warranties
During the fiscal year ended July 31, 1997, the company established a warranty
program that provides for repair, replacement or full refund for a period of
one hundred-twenty (120) days from the date of sale. No warranty claims were
filed during the year; and, at July 31, 1997 and 1996, no warranty claims were
pending.
Note 13 - Income taxes
The components of the income tax provision or benefit consisted of the
following:
Year ended July 31,
1997 1996 1995
--------------------------------
Current:
Federal $ 30,014 $ - $ -
State 11,828 - -
--------------------------------
41,842 - -
Deferred:
Federal 8,715 2,266 (19,345)
State (1,963) 604 (4,643)
---------------------------------
6,752 2,870 (23,988)
---------------------------------
Total income tax provision
(benefit) $ 48,594 2,870 $(23,988)
=================================
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, 1997 and 1996:
1997 1996
----------------------
Deferred tax asset (liability)
Net operating loss carry forwards 7,523 6,218
Charity deduction carryforward 5,899 11,106
Provision for losses on accounts
receivable 6,000 -
Property and equipment (5,760) 3,090
----------------------
13,662 20,414
F17
VarTech Systems Inc. and Subsidiaries
Notes to Consolidated Financial Statements (consolidated)
1997 1996
-----------------------
Less: current deferred tax asset
or (liability) 19,422 17,324
---------------------
Long-term deferred tax asset or
(liability) $ (5,760) $ 3,090
=====================
The provision for income taxes for the year ended July 31, 1997 varies from
the amount determined by applying the Federal statutory rate of 34% to pretax
income as a result of the following:
Income tax expense at Federal statutory rate of 34% $ 52,130
Effect of graduated rates on Federal income tax (20,251)
Net operating losses used to offset taxable income 7,187
State income taxes 11,828
Other (2,300)
---------
Actual income tax provision $ 48,594
=========
The effective income tax rate of approximately 32% for the years ended July
31, 1997 and 1996 is lower than the standard Federal tax rate of 34% primarily
due to the combined effects of the graduated tax rates, utilization of net
operating losses and amounts accrued for state income taxes.
The Company has a net operating loss carryforward totaling $125,393 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 - Accrued expenses
Accrued expenses consisted of the following as of July 31:
1997 1996
----------------------
Sales tax payable $ 49,940 $ -
Salary and commissions payable 22,454 -
Accrued interest payable 6,512 -
Other 4,669 2,146
---------------------
$ 83,575 $ 2,146
=====================
Note 15 - Subsequent events
On August 6, 1997, the Company opened a $250,000 line of credit with a bank,
with interest initially at 9.00%. Draws against the line of credit are
secured by accounts receivable and other assets of the Company and a
guarantee by a stockholder. Amounts owed under this line of credit at
September 19, 1997 totaled approximately $150,000.
On August 18, 1997, the note payable to an individual in the amount of $80,000
was paid.
F18
Independent Auditor's Report
on Accompanying Information
The Board of Directors and Stockholders
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 19, 1997
F19
VarTech Systems Inc. and Subsidiaries
Schedule of Other Operating Expenses
For the Years Ended July 31,
1997 1996 1995
------------------------------
Selling expense
Advertising and promotion $ 10,327 $ 13,080 $ 5,630
Salaries, commissions and
contract labor 175,041 122,725 64,654
Other 1,185 - -
------------------------------
$186,553 $135,805 $ 70,284
==============================
Administrative and general
Auto expense $ 17,440 $ 13,268 $ 3,989
Bad debts 19,358 - 1,802
Contributions - - 29,280
Depreciation and amortization 25,878 16,808 23,505
Insurance 18,215 10,256 3,964
Office supplies and expense 26,687 33,393 18,571
Outside services 16,666 6,671 -
Other 1,682 1,944 4,105
Professional fees 136,584 19,090 22,466
Rent 48,650 57,261 42,653
Repairs and maintenance 2,226 6,135 2,076
Salaries and wages 134,235 79,499 20,778
Seminars and training 3,345 200 -
Taxes and licenses 27,226 14,109 4,967
Telephone 43,095 34,788 23,741
Travel 35,597 45,339 10,107
Utilities 12,129 13,875 6,503
------------------------------
$569,013 $352,636 $218,507
==============================
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 29th day of
October 1997.
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 29th day of October, 1997.
Signature Title
signed J. Keith Henderson
J. Keith Henderson President and Director
signed Daniel S. Gould Vice-President, Secretary and
Daniel S. Gould Director
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
Brent J. Hedges Director
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------- -----------------------------
10.15 Commercial Sublease Agreement with
Wireless One, Inc. related to certain
Premises leased in Baton Rouge, LA. Filed herewith electronically
Exhibit 10.15 Commercial Sublease Agreement
CONSENT TO SUBLEASE
BR/NO L.A. Properties, LLC ("Landlord") under that certain lease
"(Original Lease") dated December 17, 1995 and amended by that certain
Modification and Ratification of Lease dated April 24, 1996 (collectively the
"Lease") , made by and between the Landlord and Wireless One, Inc. ("Original
Tenant"), hereby grants its consent to the Sublease "(Sublease") dated July
18, 1997, made by and between the Original Tenant, and Sublandlord, and 21st
Century/Var Tech Inc. ("Subtenant"), as Subtenant under the Sublease, a copy
of which is attached hereto, covering certain premises ("Premises") described
int he Sublease located int he building at 11301 Industriplex Boulevard, Suite
4 and 5, Baton Route, Louisiana 70809.
It is understood and agreed as follows:
1. This consent to Sublease shall in no way release the Original Tenant
from any of its covenants, agreements, liabilities and duties under the
Original Lease. It is further agreed that the Original Tenant shall be
responsible for the collection of all rent due it from the subtenant, and that
the Landlord shall look only to the Original Tenant as its tenant.
2. The Sublease is, in all respects, subject to and subordinate to the
Original Lease and to all the terms and provisions contained in the Original
Lease.
3. If, at any time prior to the expiration of the term of the Sublease,
the Original Lease shall terminate to be terminated for any reason, Subtenant
agrees, at the election and upon written demand of Landlord, to attorn to the
Landlord upon the then executory terms and conditions set forth in the
Sublease for the remainder of the term of the Sublease. The foregoing
provisions of this paragraph shall apply notwithstanding that as a matter of
law, the Sublease may otherwise terminate upon the termination of the Original
Lease, and shall be self-operative upon such written demand of the Landlord,
Subtenant agrees, however, to execute, from time to time, document(s) in
confirmation of the foregoing provisions of this paragraph satisfactory to the
Landlord, in which Subtenant shall acknowledge such attornment and shall set
forth the terms and conditions of its tenancy. Nothing contained in this
paragraph shall be construed to impair or modify any right otherwise
exercisable by the Landlord, whether under the Original Lease or any other
agreement.
4. The Landlord shall not be responsible for any delays incurred by the
Original Tenant in delivering possession of the Premises to Subtenant as a
result of any matter whatsoever.
5.Nothing herein contained shall be deemed a waiver of any of the
Landlord's rights under the Original Lease, including, without limitation, the
Landlord's right to rental and other monetary consideration payable under the
Sublease in excess of the Rent payable by Original Tenant under the Original
lease.
6. Neither the Subtenant nor the Original Tenant shall make any
additions, alterations or structural changes in or to the Premises, or any
portion thereof, without both the Original Tenant and the Subtenant first
obtaining the Landlord's prior written consent thereto in each instance. In
addition, no amendment, modification or revision of the Sublease shall
hereafter be made without the prior written consent of Landlord.
7. The Original Tenant hereby authorizes Subtenant, as agent for Original
Tenant, to obtain services and materials for or related to the premises, and
Original Tenant agrees to pay for such services and materials as additional
rent under the Original Lease upon written demand from Landlord, However, as a
accommodation to the Original Tenant, Landlord may bill Subtenant for such
services and materials, or any portion thereof, in which event Subtenant
agrees to pay for the services and materials so billed, but such billing shall
not relieve Original Tenant from its primary obligation to pay for such
services and materials. The authority herein given by Original Tenant to
Subtenant shall be continuing and the Original Tenant shall not revoke it.
8. Original Tenant and Subtenant hereby represent to Landlord that the
Sublease attached hereto as Exhibit "A" (a) is a correct and complete copy of
the document it purports to be, and (b) contains the entire agreement and
understanding between Original Tenant and Subtenant with regard to the subject
matter contained thereof, specifically including without limitation, all
agreement concerning rent and other considerations payable by Subtenant to
original Tenant for the Premises.
9. Original Tenant and subtenant hereby jointly and severally agree to
indemnify, defend (if requested by Landlord) and hold harmless Landlord, the
managing agent of the building and the respective officers, directors,
employees, agents and beneficiaries from and against any and all liabilities
and claims for brokerage commissions and fees arising out of or in connection
with the Sublease of the Premises.
10. This Agreement shall be binding and inure to the benefit of Landlord,
Original Tenant, Subtenant and their respective successors and permitted
assigns.
11. The Consent to Sublease shall be deemed limited solely to this
Sublease and shall not relieve Original Tenant or Subtenant from the
obligation to obtain the consent of Landlord to (1) any further Sublease or
Sub-sublease of the Premises, or any part thereof or any other area covered by
the Original Lease or (ii) any assignment of the interest of Original Tenant
under the Original Lease or (iii) any assignment of the interest under the
Sublease.
12. The consent hereto by Landlord shall not serve as an admission or
assumption of any liability by Landlord to Subtenant or as a representation,
warranty or surety as to any representation or undertakings of the Sublandlord
under the Sublease.
Dated as of the day of July, 1997.
LANDLORD WITNESSES
BR/NO L.A. Properties, LLC
By: SPM Industrial, LLC ______________________
Its: Administrative Member ______________________
Mark P.Sealy
Member
ORIGINAL TENANT
Wireless One, Inc.
By: _______________________ ______________________
Its:_______________________
______________________
SUBTENANT
21st Century/Var Tech Inc.
By:__________________________ ________________________
Its:_________________________ ________________________
"SUB-LEASE AGREEMENT"
THIS SUB-LEASE is made this day of July, 1997 by Wireless One, Inc.
(hereinafter referred to as "Sub-lessor"), and 21st Century/VarTech Inc.
(hereinafter referred to as the "Sub Lessee").
WITNESSETH
Sub-Lessor and Sub-Lessee hereby confirms and ratify, except as modified
below, all of the terms and conditions and covenants in that certain written
"Original" Lease Agreement date December 17, 1995, and by and between BR/NO LA
Properties, LLC and Wireless One Inc., (lease attached).
Approximately 15,746 square feet of office/warehouse space, (the "Leased
Premises") located at 11301 Industriplex Blvd., Ste. 4 & 5, Baton Rouge, LA
70809.
Sub-Lessee warrants that the Sub-Lessee has inspected the Leased Premises
and that the Sub-Lessee accepts the Leased Premises in its present "as is"
condition. However, Sub-Lessor will have suite ready for occupancy on or
before September 1, 1997.
Sub-Lessee agrees to all points in "Original" Lease (attached) except the
following:
Sub-Lessee shall commence on or before September 1, 1997. At execution of
Sub-Lease and occupancy of space, which ever occurs first, Sub-Lessee will
have proper content and liability insurance in place naming the appropriate
parties as additional insured.
Sub-Lease term will be for Five (5) years beginning September 1, 1997 and
expiring August 31, 2002.
Base Rent - September & October will be rent free. Base Rent period
covering November 1, 1997 thru February 28, 1999 will be $9,578.82 per month.
Base Rent period covering March 1, 1999 thru February 28, 2001 will be
$10,169.29 per month. Base Rent period covering March 1, 2001 thru August 31,
2002 will be $10,497.33.
Rent payments will be paid directly to Wireless One, Inc. or assignee, 5551
Corporate Blvd., Suite 2A, Baton Rouge, LA unless otherwise designated by
Sub-Lessor in writing.
Sub-Lessor will work in good faith with Lessor to have Lessor bill
Sub-Lessee direct for common area and maintenance charges.
Sub-Lessor agrees to pay Latter & Blum, Inc. Realtors, represented by
Edward L. Rotenberg a commission at execution of this Sub-Lease per separate
listing agreement.
In addition, Sub-Lessee agrees to purchase, via installment payments, the
office equipment itemized in Attachment "B". It is understood that the
installment payment for the office equipment will be $10,000 upon execution of
the final Sub-Lease agreement, and an additional $40,000 payable on or before
September 1, 1997, plus $5,000 per month payable over forty-three months
beginning November 1, 1997.
In witness whereof the parties hereto have executed the Sub-Lease
Agreement.
WITNESS: SUB-LESSOR
______________________________ ________________________________
Henry G. Schopfer, Executive
Vice-President and Chief Financial
Officer
Wireless One, Inc.
WITNESSES: SUB-LESSEE
______________________________ ________________________________
Kim D'Albor, President
21st Century/VarTech Inc.
Attachment B
ITEMS FOR SALE
DESCRIPTION
Honeywell Access Control & Burglar Alarm (monitoring runs $123/mo.)
1 - 8112 Control w/enclosure
2 - Keypad
4 -Card Readers
40 - Wiegand Cards
4 - Single Door Contacts
5 - Infrared Motion Detectors
2 - Overhead Door Contacts, Rear Northeast Area
2 - Glass Break Detectors, Rear Southeast Area
4 - Magnetic Door Locks
2 - Outside Siren Strobes
4 - Electric Strikes on Doors
2 - Outside Siren Strobes
4 - Electric Strikes on Doors
Speedrack Pallet Rack System (located in Warehouse)
26 - Frames 42" X 168", 18,600# Capacity
60 - Beams 3" X 108", 3,340# Capacity
8 - Beams 3" X 60", 6,010# Capacity
16 - Beams 3" X 54", 6,680# Capacity
26 - Frames 42" X 168", 28, 150# Capacity
Wire Decking 42D X 52W, 2X4X4 GA, 4 channels for 1-5/8 step
Dock Leveler
1 - Dock leveler without bumpers
2 - bumpers with rubber
Forklift
1 - Caterpillar forklift, EP15T 3,000 lb., three wheel Electric, w/three
stage mast
1 - Bulldog Battery
1 - Battery Charger
1 - Side Shifter
Generator
1 - SG050-45KW LPG Vapor Generator, single-phase, 120/240 voltage 60 hertz,
4.0L engine, 1800 RPM, with weatherproof enclosure, Generac "C" control
panel
Storage Shelves (10 available @ $169 each)
ALLSTEEL Modular Furniture (see attached inventory list and copy of floor
plan)
ALLSTEEL File Cabinets (several available at $213 each)
Telephone System
1 - Intertel AXXESS Digital Key Service Unit - 4.0 Software
120 - Digital Ports
48 - Analog Ports (modems, cordless)
16 - Loop Start Trunks (local lines)
6 - Combo Analog/D.I.D. Ports
2 - T-1 Cards
6 - Analog D.I.D./Modem Trunks
12 - Voice Mail (Axxessory Talk) Ports
3 - Stack Battery Backup
1 - External Paging System with Speaker
1 - Outdoor Weatherproof Jack
1 - 100 Unit PAL for added features
Initial wiring of building for telephones, computer network, faxes, modems,
etc.
Additional wiring of call center stations and administrative areas
Telephones
18 - Basic (8 button) telephone @ $255 each
31 - Standard (12 button) telephone @ $293 each
33 - Standard (12 button) telephone with LCD @ $329 each
5 - Executive telephones with LCD @ $332 each
2 - Attendant Consoles @ $425 each
2 - Conference telephones @ $995 each
1 - Cordless telephone @ $453, battery $60
1 - Cordless Telephone @ $722, battery $58
Appliances
2 - Kenmore Refrigerators, 20.6 cubic ft. Top Mount w/icemaker
2 - Microwaves, one Kenmore, one General Electric
1 - Kenmore Dishwasher
Board Room Furniture
1 - Jofco conference table
1 - conference board
14 - chairs
Conference Room Furniture
1 - ABO conference table
1 - conference board
10 - Globe swivel executive chairs
Break Room Furniture
3 - 42" round table tops with 30" cast iron base
12 - Padded chairs
Training Room Furniture
8 - 24" X 72" Folding Tables
40 - Padded chairs
27. Financial Data Schedule Filed herewith
electronically