<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: Commission file number:
September 30, 1998 0-26614
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SOCRATES TECHNOLOGIES CORPORATION
(formerly MVSI, INC.)
(Exact name of Registrant as specified in its Charter)
Delaware 54-1707718
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9301 Peppercorn Place, Largo, MD 20774
(Address of principal executive offices) (Zip code)
(301) 925-2200
(Company's telephone number, including area code)
-----------
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
On Which Registered
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Class
Common Stock, $.01 Par Value
-----------
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 past 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 past 90 days. Yes X No
---- ------
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 amendment to this
Form 10-K. /x/
The total market value of the voting stock was $22,993,158, of which
$17,822,574 was held by non-affiliates of the registrant, based upon the closing
price of the common stock on December 22, 1998, as quoted by the Nasdaq National
Market System.
The number of outstanding shares of the registrant's common stock on
December 22, 1998 was 14,739,204.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of the registrant to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities
Exchange Act of 1934 on or prior to January 29, 1999, are incorporated herein by
reference into Part III of this report.
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I
Page
<S> <C> <C>
Item 1. Business. 3
Item 2. Properties. 13
Item 3. Legal Proceedings. 14
Item 4. Submission of Matters to a Vote of Security Holders. 14
</TABLE>
<TABLE>
<CAPTION>
Part II
<S> <C> <C>
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 14
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 15
Item 8. Financial Statements. 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 48
</TABLE>
<TABLE>
<CAPTION>
Part III
<S> <C> <C>
Item 10. Directors and Executive Officers of the Registrant. 48
Item 11. Executive Compensation. 48
Item 12. Security Ownership of Certain Beneficial Owners and Management. 48
Item 13. Certain Relationships and Related Transactions. 48
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 48
</TABLE>
<PAGE>
Item 1. Business.
Overview
Socrates Technologies Corporation ("Socrates" or the "Company") is a
broad-based information technology solutions company whose business is
focused on two primary business lines: (1) Information Technology Solutions
- -specifically, the provision of information technology products, services and
solutions to commercial and government customers, including assembly,
integration and marketing of proprietary and generic computer system products
and services; computer systems integration, telecommunications integration,
Internet connectivity, and wide and local area networking; and providing
training on the use of computer software programs to individuals,
corporations and the government; and (2) Customized Software Development and
Maintenance Services for commercial and government customers, including
development of customized turnkey business and management information
systems; development and sale of proprietary warehouse and inventory control
systems; implementation of third-party enterprise resource (ERP) programs
(especially SAP implementation), and Year 2000 remediation and audit
services. The Company's current strategy is to provide a one-stop source for
information technology and custom software development for large and medium
sized commercial customers and federal , state and local governments.
In March 1998, the Company discontinued its machine vision welding and
scanner business conducted by its wholly-owned subsidiary, MVS Modular Vision
Systems, a Canadian corporation, ("MVS") to focus on what management believes
to be the segments of its business that offer greater potential for growth in
shareholder value. Since March 1998, the Company has attempted to sell the
remaining assets of MVS. While the Company has had discussions with several
prospective buyers since March 1998, the Company has not reached an agreement
for the purchase of MVS assets as of the date of this report. While
management is confident of its ability to sell the assets in the near future
based upon ongoing discussions with potential buyers, no assurances can be
given that these efforts will result in definitive agreements being reached
or that the Company will obtain consideration in any such sale sufficient to
recoup any portion of its investment.
Socrates Technologies Corporation ("Socrates" or the "Company"), a Delaware
corporation, was incorporated in the State of Delaware on November 6, 1998. Upon
the merger of Socrates with MVSI, Inc., a Delaware Corporation incorporated on
April 12, 1994, on December 12, 1998, the name of MVSI, Inc., the surviving
corporation, was changed to Socrates Technologies Corporation. Unless the
context otherwise requires, the "Company" or "Socrates" refers to Socrates
Technologies Corporation, its predecessor and its subsidiaries. Since December
1, 1998, the Company has maintained its executive offices and principal
facilities at 9301 Peppercorn Place, Largo, Maryland 20774. Its telephone number
is (301) 925-2200.
The Company's Common Stock, $.01 par value, ("Common Stock") was quoted on
the Nasdaq SmallCap Market from August 14, 1995 until May 1, 1997. Since May 2,
1997, the Common Stock has been quoted on the Nasdaq National Market System
under the trading symbols "SOCT" or previously, from May 2, 1997 until December
12, 1998, under the trading symbol "MVSI."
Financial information relating to the Company's industry segments for
continuing operations for the years ended September 30, 1998 and 1997, is as
follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
Computer
System Sales,
Integration Software General
and Training Development Corporate Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 57,221,898 $ 4,786,070 $ - $ 62,007,968
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Operating profit (loss) (163,242) 297,785 (906,736) (772,193)
Net income (loss) (569,012) 265,246 1,691,672 1,387,906
Identifiable Assets 21,704,084 3,995,072 2,012,433 7,711,589
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------------
Computer
System Sales,
Integration Software General
And Training Development Corporate Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 33,755,491 $ 579,207 $ - $ 34,334,698
Operating profit (loss) 1,493,644 (91,302) (1,067,585) 334,757
Net income (loss) 1,115,359 (95,953) (202,701) 816,705
Identifiable Assets 12,316,043 2,991,400 3,142,449 18,449,892
</TABLE>
The Company provides financial information for segment reporting purposes
for two lines of business representing its continuing operations in fiscal year
1998 and 1997. Continuing operations are represented by the Company's Computer
Systems Sales, Integration and Training business and its Software Development
business. For the year ended September 30, 1996, the Company's continuing
operations were in a single segment.
The Company's continuing operations do not generate a significant amount of
export of foreign sales. However, prior to its discontinuance, the Company
machine-vision subsidiary had a significant amount of sales to customers outside
North America, principally located in South Korea.
Computer Systems Sales, Integration and Training
The Company conducts its Information Technology Solution business through
Socrates Technologies, Inc. ("Socrates Technologies"), a wholly-owned subsidiary
organized under the laws of the State of Maryland, and conducts its Custom
Software Development and Maintenance business through Technet Computer Services,
Inc. ("Technet"), a wholly-owned subsidiary organized under the laws of the
Commonwealth of Virginia.
Since September 1997, Socrates Technologies has occupied a 35,000 square
foot office, manufacturing and warehouse space in Largo, Maryland, a suburb of
Washington, D.C. This center serves as Socrates' and Socrates Technologies'
principal executive offices, and Socrates Technologies' primary manufacturing
and engineering center, corporate technology training center and primary
warehouse facility. Socrates Technologies has sales offices in Exton,
Pennsylvania, Gaithersburg, Maryland, Vienna and Virginia Beach, Virginia, and
Long Island City, New York. Socrates Technologies also has a computer sales and
service center in Newport News, Virginia, which sells exclusively to Newport
News Shipbuilding, Inc. and its employees.
On November 6, 1997, Socrates Technologies entered into an agreement
with the Washington Sports & Entertainment, Inc. ("WSE") whereby Socrates,
Inc. would provide computer hardware, software and training services to WSE;
the Washington Wizards National Basketball Association Professional
Basketball Team and Washington Capitals National Hockey League Professional
Hockey Team, which WSE owns; and two major sports and entertainment complexes
in the greater Washington, D.C. metropolitan area in which WSE has an
ownership interest: the new MCI Center in Washington, D.C. and US Airways
Arena in Largo, Maryland. The agreement has a three-year term and also
entitles Socrates Technologies to advertise at the MCI Center and US Airways
Arena and in television and cable shows and in print publications sponsored
or produced by WSE or its affiliates.
In September 1997, Socrates Technologies initiated an effort to establish
as a separate business line the training of corporate and government employees
and information technology professionals in the
<PAGE>
greater Washington, D.C. metropolitan area in the use of popular computer
programs and network systems. Socrates Technologies conducted its first training
classes in December 1997. Socrates Technologies intends to continue its efforts
in Fiscal Year 1999 to expand the scope and market of its training business,
which expansion could include establishing training centers in other
metropolitan areas along the East Coast of the United States and expanding the
program of study to qualify individuals to become certified software or network
systems engineers or obtain other software or network systems certifications.
To take advantage of the rapid growth of the Internet and intranets and to
provide its customers with complete Internet connectivity, Socrates Technologies
has created a special in-house networking group. The Company anticipates
significant growth in Socrates Technologies' networking group business and
computer training business in fiscal year 1999. The Company makes no assurances
that Socrates Technologies will be able to successfully penetrate this market or
to attain the anticipated significant growth.
Socrates Technologies also is a contract manufacturer and wholesale
distributor of proprietary and generic memory products for computers, plotters,
laser printers, process controllers and other computer related industry devices;
an assembler and seller of custom computer workstations and servers. Such
products are marketed in North America to computer resellers and dealers and
Internet Service Providers (ISP's).
The Company intends to continue its financial and other support of
Socrates' Technologies expansion of business lines and supporting resources as a
central part of the Company's strategic goal to establish one-stop information
technology capabilities for large corporate and government customers in fiscal
year 1999.
A majority of the Company's hardware and software sales are made pursuant
to customer purchase orders. Training courses are offered for a per-course fee.
For the years ended September 30, 1998 and 1997, sales to one customer of this
segment accounted for 30% and 21%, respectively, of the Company's total sales.
Software Development
Technet provides customized software development, including turnkey system
development and product development, Year 2000 compliance services, and
maintenance services to corporate and government customers.
Technet has software development centers in New Jersey and at its principal
executive offices in Vienna, Virginia. Technet also utilizes the software
development center of an affiliated company in Madras, India.
Technet's core competency and expertise lies in systems design and
development of relational databases, network applications, imaging and
multimedia applications. Technet's custom software development work centers on
developing and maintaining sales, logistics, finance, research and other major
application areas of information management systems.
Technet has also designed, developed and implemented turnkey systems for
market research and analysis, consumer relations, help desk, customer service
and support, and multimedia expert systems for market research and
presentations. Technet's product development has been focused on pre-packaged,
easily customized software solutions for warehouse and supply chain management,
order processing, document management, human resource management and medical
office management. Among its principal products in this area is "Winnie," a
fully integrated real-time software solution to distribution and supply chain
management. Winnie provides customers with a management tool which provides
information for use in key business decisions relating to inventory management,
order fulfillment, delivery performance, and responsiveness, forecasting, and
sales force automation.
<PAGE>
Technet provides Year 2000 conversion solutions, which remedies the
inability of many computer programs and systems to properly recognize the new
millenium as the Year 2000 and the possible malfunctions resulting from that
recognition error.
Technet's principal customers include several major international cosmetics
and fragrance companies, a major U.S. insurance company, an international
computer systems manufacturer and a domestic long-distance telephone carrier.
Substantially all of Technet's consulting sales are generated pursuant to time
and materials contracts whereby Technet invoices the customer using agreed upon
hourly rates multiplied by the hours of service rendered or under turnkey
contracts which stipulate a fixed price for the system or solution developed.
MVS Modular Vision Systems, Inc. ("MVS")
In March 1998, the Company discontinued its machine vision welding and
scanner business conducted from its wholly-owned subsidiary, MVS Modular
Vision Systems, a Canadian corporation, ("MVS") to allow the Company to focus
on what management believes to be the segments of its business which offer
greater potential for growth in shareholder value. MVS designs, develops,
manufactures and markets state-of-the-art, proprietary vision-based robotic
and sensor products and systems for productivity improvement and quality
control applications in the manufacturing workplace. MVS is based in a single
facility of approximately 14,000 square feet in Montreal, Quebec, Canada. As
of December 1998, the Company continues to market for sale the MVS business.
While management is confident of its ability to sell the MVS assets in the
near future based upon ongoing discussions with potential buyers, no
assurances can be given that these efforts will result in definitive
agreements being reached or that the Company will obtain consideration in any
such sale sufficient to recoup any portion of its investment.
The primary component of MVS' products and systems is its three-dimensional
camera and laser vision inspection technology. This technology utilizes
specialized cameras, lasers, optics and custom-designed high-speed processing
hardware and software for inspection, measurement and motion control in
industrial or manufacturing applications. MVS currently markets and sells one
principal computer chip inspection scanner product and system: the MVS
LaserVision QFP Lead Scanner (the "QFP Scanner"), and also markets and sells one
principal sensor product and system: the MVS LaserVision Welding Sensor ("MVS
Welding System"), which is used for weld inspection or ensuring that the welding
device properly tracks the weld joint or seam.
Marketing and Sales
The Company's Computer Systems Sales, Integration and Training business
relies heavily on an in-house direct sales force to sell their products. In
addition, from time to time the Company uses print, radio and television
advertising campaigns, principally focused on the Middle Atlantic region of the
United States. Socrates intends to continue to expand its market presence
through the use of various forms of print and electronic advertising in Fiscal
Year 1999 to complement its direct sales force.
Technet relies heavily on the sales efforts of its key personnel to market
and sell its services, which efforts have been supported by the addition of a
professional sales staff in fiscal year 1998.
Sources of Supply and Backlog
All materials and components used by the Company's Computer Systems Sales,
Integration and Training business are available from numerous sources of supply.
The Company does not foresee any shortage of these materials.
As of September 30, 1998, the Company's backlog was approximately $2
million. The Company's Computer Systems Sales, Integration and Training business
has historically operated with limited backlog as products are typically shipped
shortly after orders are received. The Company does not believe that its backlog
at any specific time is necessarily indicative of its future business.
<PAGE>
Customer Service and Support
The Company warranties certain products and systems for 12 months and
provides technical personnel on-site, if required, during the warranty period.
The Company, however, endeavors to complete warranty service repairs at its own
facilities in order to minimize costs. To date, warranty costs, which are
accrued by the Company at the time of sale, have not been material.
Patent, Trademark, Copyright and Proprietary Rights
None of the Company's continuing operations have filed any patents or
possess any technologies or other intellectual property that they believe
require or qualify for patent protection. The Company's discontinued machine
vision business holds a number of patents or has patents pending in the United
States, Canada and others internationally, some of which the Company expects to
sell with other assets of this business in the near future. MVS has not
maintained certain patents for its inspection scanner because of the
discontinuation of that product or the lack of market demand in a particular
nation.
Except as may be required by the filing of patent, trademark and copyright
applications, the Company will attempt to keep all other proprietary information
secret and to take such actions as may be necessary to insure the results of its
development activities are not disclosed and are protected under the common law
concerning trade secrets. Such steps will include the execution of nondisclosure
agreements by key Company personnel and may also include the imposition of
restrictive agreements on purchasers of the Company's products and systems.
There is no assurance that the execution of such agreements will be effective to
protect the Company, that the Company will be able to enforce the provisions of
such nondisclosure agreements or that technology and other information acquired
by the Company pursuant to its development activities will be deemed to
constitute trade secrets by any court of competent jurisdiction.
Competition
The Company believes that there are other companies, some of which are
substantially larger and have substantially greater assets and resources than
the Company, engaged in the development of technology and products that may be
highly competitive with those of the Company, within each industry the Company
competes in. Almost all of the companies with which the Company intends to
compete are substantially larger and have substantially greater resources than
the Company. It is also likely that other competitors will emerge in the future.
Since the Company will compete with companies that have greater market
recognition and broader capabilities than the Company, there can be no assurance
that the Company or its operating subsidiaries will be able to successfully
compete in the marketplace or will be able to achieve success in any of the
business endeavors described herein.
Employees
At the year ended September 30, 1998, the Company employed approximately
130 persons, all of whom were full-time employees. Of these full-time employees,
approximately 20 were engaged in management, administration and finance, 60 in
operations and 50 in marketing, training and sales.
The Company believes that its future success will depend in large part upon
its continued ability to recruit and retain highly qualified technical
personnel. Competition for highly qualified technical personnel is significant,
particularly in the geographic area in which the Company's operations are
located. The Company has never experienced a work stoppage and none of its
employees is represented by a labor organization. Management of the Company
considers its relationship with its employees to be good.
<PAGE>
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, as amended, the Company is hereby
identifying important factors, among others, that could cause actual results to
differ materially from those contained in any forward-looking statement made by
or on behalf of the Company; any such statement is qualified by reference to the
following cautionary statements.
The Company's operating results could be affected by a number of factors.
They include the availability and cost of components, an unexpected inability to
manage expenses relative to sales growth, and an inability to anticipate
downward price pressures by customers using our products and services. Also,
there is the potential problem of competing with companies having significantly
greater financial, technical, and market resources than the Company.
A significant percentage of the Company's sales to major customers
historically has occurred in the last month of a quarter. Changes in purchasing
patterns by one or more of the Company's major customers, and the inability of
the Company to anticipate in advance the mix of customer orders and its ability
to ship the necessary quantities of product near the end of a fiscal quarter,
could result in material fluctuations in quarterly operating results.
The Company participates in competitive industries marked by changing
technology, which could result in volatility of the Company's common stock
price. Additionally, any shortfall in revenue or earnings from the levels
expected by securities analysts could have an immediate and significant effect
on the trading price of the Company's common stock in any given period.
Moreover, it is possible the Company may not learn of such shortfalls until late
in the fiscal quarter, which could result in an even more immediate and adverse
effect on the trading price of the Company's stock.
Item 2. Description of Properties.
In December 1998, the Company completed the move of its principal executive
offices from Vienna, Virginia to the Socrates Technologies headquarters in
Largo, Maryland.
Socrates leases approximately 35,000 square feet of space for its computer
integration, distribution and training facilities located in Largo, Maryland.
Base rent for the space is approximately $11,600 per month. The lease agreement,
which expires in 2002, includes rent escalations and requires Socrates to pay
certain operating expenses. In addition, Socrates also leases approximately
16,000 square feet in the aggregate of space for its facilities in Gaithersburg,
Maryland; Exton, Pennsylvania; Vienna, Virginia and its locations in Virginia
Beach and Newport News, Virginia under leases that expire through 2003. Base
rent for these facilities is approximately $22,500 per month in the aggregate
and requires the Company to pay certain operating expenses.
Socrates also leases approximately 15,000 square feet of space for its
computer integration, service and distribution facilities located in Long Island
City, New York. Base rent for the space is approximately $11,600 per month. The
five-year lease agreement includes annual rent escalations and requires the
Company to pay certain operating expenses.
Technet leases approximately 5,000 square feet of space under two lease
agreements, for its software development business, located in Vienna, Virginia.
Base rent for the aggregate space is approximately $8,400 per month. The lease
agreements, which expire in 1999, include rent escalations and require Technet
to pay certain operating expenses. Technet also leases approximately 3,500
square feet of space in Edison, New Jersey, with a base rent of $6,125, which
lease expires in August 1999.
<PAGE>
MVS leases approximately 14,000 square feet for its MVS Canadian
development and manufacturing facilities located in Montreal, Quebec, Canada,
under a lease that extends through May 1999. The Company operates at
approximately 50 percent of capacity. Base rental for the premises is
approximately $5,500 per month. The lease requires the Company to pay certain
property taxes and certain operating expenses.
The Company believes that its current and anticipated facilities are
suitable and adequate for its operations.
Item 3. Legal Proceedings.
In the ordinary course of conducting business, the Company is subject, from
time to time, to certain legal proceedings concerning the Company's business.
Management does not believe that any current legal proceedings will have a
material impact on the Company's business or its financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Market for Common Equity and Related Stockholder Matters.
The Common Stock and Class A Warrants were listed on the Nasdaq SmallCap
Market System from August 15, 1995 until May 1, 1997, under the symbols "MVSI "
and "MVSIW", respectively. From May 2, 1997 through December 11, 1998, the
Company's Common Stock traded on the Nasdaq National Market System under the
symbol "MVSI" and ceased-to-be traded on the Nasdaq SmallCap Market. Effective
December 14, 1998, the Company's Common Stock has traded on the Nasdaq National
Market Exchange under the symbol "SOCT." The Class A Warrants were traded on the
Nasdaq National Market System under the symbol "MVSIW" until 4:00 p.m., local
New York City time, on December 15, 1997, the redemption date of the Class A
Warrants. The Class B Warrants, which were not publicly traded, were also
redeemed, effective December 15, 1997. There are approximately 3,000
shareholders of the Company's Common Stock, as last reported. The following
table sets forth the range of high and low trading prices for the Common Stock,
as reported by The Nasdaq Stock Market, for the fiscal periods indicated through
September 30, 1998.
<TABLE>
<CAPTION>
High Low
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<S> <C> <C>
Fiscal Year 1996
First fiscal quarter $8.38 $3.88
Second fiscal quarter $7.38 $4.00
Third fiscal quarter $9.75 $6.88
Fourth fiscal quarter $15.63 $8.00
Fiscal Year 1997
First fiscal quarter $10.88 $2.75
Second fiscal quarter $6.06 $2.75
Third fiscal quarter $6.13 $2.66
Fourth fiscal quarter $7.69 $4.06
Fiscal Year 1998
First fiscal quarter $9.06 $5.00
Second fiscal quarter $8.25 $4.25
Third fiscal quarter $8.13 $6.00
Fourth fiscal quarter $7.75 $1.50
</TABLE>
<PAGE>
Holders of the Company's Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company does not anticipate the declaration or payment of any
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance the development and expansion of its business. Future dividend
policy will be subject to the discretion of the Board of Directors and will be
contingent upon future earnings, if any, the Company's financial condition,
capital requirements, general business conditions and other factors. Therefore,
there can be no assurance that any dividends of any kind will ever be paid by
the Company.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year ended September 30,
1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Sales $ 62,008 $ 34,335 $ 11,421 $ --
Gross Profit 8,710 4,362 1,045 --
Earnings from continuing operations 1,388 817 458 (3,504)
Income (Loss) from discontinued operations (5,982) (707) 555 (1,977)
Net Income (loss) (4,594) 110 1,013 (5,481)
Earnings (Loss) per share-Basic (.31) .01 .09 (1.10)
Earnings (Loss) per share-Diluted (.31) .01 .08 (1.10)
Total Assets 29,512 25,491 20,160 12,959
Stockholders' Equity 17,377 18,065 15,106 10,605
</TABLE>
Note: Operating data for the fiscal year ended September 30, 1995 relates to the
Company's machine vision operations discontinued in 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis of the Company's historical results
of operations and of its liquidity and capital resources should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes.
Moreover, this Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements
concerning the Company's business and operations. Such statements involve risks
and uncertainties that could cause actual results to differ due to a variety of
risk factors set forth herein and from time to time in the Company's filings
with the Securities and Exchange Commission and other public announcements.
Overview
Fiscal year 1998 was a year of evolution and change for the Company. Since
the Company's initial public offering in 1995, the Company has grown
significantly through the acquisition of four separate technology companies
involved in computer system sales, integration, training and software
development. To date, each of these organizations has been operated
independently of one another.
To focus greater attention on its information technology businesses, the
Company elected to discontinue its machine vision business in March 1998. This
business was the core business of the Company at its inception and management
believed it possessed superior technology in the machine vision industry.
However, uncertainty caused by instability in overseas financial markets
(principally Asia), and geographically segregated management in Canada resulted
in management concluding that the greatest potential for growth in shareholder
value would rest with the Company's information technology businesses. As of
December 1998, the Company continues to market for sale the assets of MVS.
While management is confident of its ability to sell the MVS assets in the near
future based upon ongoing discussions with potential buyers, no assurances can
be given that these efforts will result in definitive agreements being reached
or that the Company will obtain consideration in any such sale sufficient to
recoup any portion of its investment.
<PAGE>
The past year marked the first full year of operations conducted from the
Company's 35,000 square foot Socrates Technology Center, a full service
information technology facility from which the Company conducts training
services, integrates and manufactures computer systems and houses its executive
offices. Fiscal 1998 was the first full year of operations of its Software
Development business operated from its Technet Computer Services subsidiary. The
Company's continuing operations, while showing significant growth, generated an
operating loss due to significantly higher amortization associated with goodwill
arising from acquisitions, downward pressure on margins from hardware sales, and
losses from certain operating divisions with the computer hardware distribution
businesses. These losses led management to reorganize all hardware distribution
businesses late in the year under the Socrates name and management. While no
assurances can be given as to the success of the reorganization, management
believes that by better coordinating sales and marketing efforts and leveraging
a single centralized administrative support organization, operating profits will
improve.
All results of operations have been restated to reflect the discontinuance
of the Company's machine vision segment in March 1998. As a result, current year
to prior year comparisons of results from continuing operations exclude this
segment except when noted.
Results of Operations
Year ended September 30, 1998 Compared to Year ended September 30, 1997
The Company reported an increase in sales of $27,673,270 or 81% to
$62,007,968 for the year ended September 30, 1998 as compared to the same period
in fiscal 1997. The increase in sales is attributable to the continued growth in
sales generated by the Company's Computer System Sales, Integration and Training
business which rose by $23,466,407 or 70% to $57,221,898 and a full year's sales
from its Software Development business which rose by $4,206,863 or 726% to
$4,786,070 due to the inclusion of a full year's sales for this business as it
was acquired in the fourth quarter of the prior fiscal year.
The gross margins of the Company increased slightly to 14% from 13%, for
the year ended September 30, 1998, principally as a result of generally higher
margins experienced by the software development business, offset by the
relatively lower gross profit margins in the Company's Computer Sales,
Integration and Training business.
For the year ended September 30, 1998, selling expenses increased by
$2,110,329 or 245% to $2,972,701, primarily as a result of additional sales
staff hired and from including a full year's selling and marketing expenses for
its Software Development Business, which was acquired in the fourth quarter of
fiscal 1997. Administrative expenses increased $2,894,381 or 109% to $5,545,305
for the fiscal year 1998, as a result of increased salary expenses associated
with the acquisition late in the prior fiscal year as well as an increase from
investments in administrative infrastructure necessary to support growth in
operations.
Depreciation and amortization expenses for the year ended September 30,
1998, increased by $449,869 to $963,895 as a direct result of an increase in
depreciable assets from the Company's businesses and from the resulting goodwill
amortization recorded subsequent to the acquisitions. For acquisitions completed
to date, future annual goodwill amortization will be approximately $610,000.
Investment income, which includes realized gains or losses on marketable
securities and interest income, net of interest expense and financing charges,
increased by $1,106,208 or 142% to $1,884,726 for the year ended September 30,
1998. The increase was attributable to a gain recognized from the sale of shares
of e-Net, Inc. in June 1998 which resulted in a gain of approximately $1,594,000
and interest income from the Company's short-term U.S. Treasury interest bearing
investments, offset by realized losses from the liquidation of short-term U.S
Treasury securities. Both periods reflect interest on line of credit borrowings,
and shareholder loans.
<PAGE>
Management regularly reviews for recoverability deferred tax assets and
adjusts, if necessary, a valuation allowance against such assets. In determining
the amount of the valuation allowance recorded at September 30, 1998, management
considered historical taxable income generated by continuing operations,
adjusted for non-recurring gains and losses and known charges which are not
deductible such as goodwill amortization, and for the anticipated impact of
management's operating plans. The recovery of the deferred tax asset at
September 30, 1998 is dependent upon the Company generating taxable income in
the future sufficient to realize the associated tax benefits. In the event
taxable income is not generated at sufficient levels, write downs of the
deferred tax asset may be necessary.
The Company has net operating loss carry forwards available to offset U.S.
taxable income of approximately $8,000,000 at September 30, 1998, expiring in
2018. While the future use of these net operating loss carryforwards has not
been significantly affected by the Company's past acquisitions, in the event a
change in control occurs in the future, use of all or a portion of the U.S.
carryforwards could be affected. In addition, the Company has net operating loss
and research expenditure carryforwards available to offset future taxable income
generated in Canada. However, with the discontinuance of the Company's business
in Canada in the past year, use of such Canadian tax benefits is dependent upon
the Company conducting certain lines of business in Canada in the future which
management believes is doubtful at the present time.
Earnings from continuing operations for the year ended September 30, 1998
were $1,387,906 or $0.09 per share (basic and diluted EPS), as compared to
earnings from continuing operations of $816,705 or $0.08 per share (basic EPS)
and $0.06 per share (diluted EPS) for the year ended September 30, 1997.
In March 1998, the Company discontinued its machine vision business and as
result has reported results of operations and losses associated with the
discontinuance separately from continuing operations. For the year ended
September 30, 1998, this discontinued business incurred an operating loss of
$1,250,052 compared to an operating loss of $707,159 in the prior year. In
addition, upon making the decision to discontinue the machine vision business,
the Company incurred a loss of $4,731,636 associated with write-downs of
inventories, capitalized software costs, and deferred tax assets to net
realizable value.
Year ended September 30, 1997 Compared to Year ended September 30, 1996
The Company reported an increase in sales of $22,913,403 or 201% to
$34,334,698 for the year ended September 30, 1997 as compared to the same period
in fiscal 1996. The increase in sales is attributable to the Company's current
year acquisitions of Expert, Inc. (Computer Sales, Integration and Training) and
Technet (Software Development), as well as the inclusion of a full year of sales
for Socrates, which was acquired in the fourth quarter of fiscal 1996. Despite
the increase in sales, the Company was impacted in the fourth quarter of Fiscal
Year 1997 by the lack of MVS machine vision scanner sales and the temporary
reduction in sales and increase in expenses due to Socrates' move to its new
35,000 square foot facility in Largo, Maryland.
The gross margins of the Company increased to 13% from 9%, for the year
ended September 30, 1997, principally as a result of generally higher margins
experienced by the software development business acquired in the fourth quarter
of 1997, offset by the relatively lower gross profit margins in the Company's
Computer Sales, Integration and Training business.
For the year ended September 30, 1997, selling expenses increased by
$669,975 (348%) to $862,372, primarily as a result of additional sales staff
hired at MVS and the Company's current year acquisitions of Expert (Computer
Sales, Integration and Training) and Technet (Software Development), as well as
the inclusion of a full year of selling expenses for Socrates, which was
acquired in the fourth quarter of fiscal 1996. Administrative expenses increased
$1,220,564 (85%) to $2,650,924 for the fiscal year 1997, as a result of
increased salary expenses associated with the Company's year acquisitions, as
well as an increase in the Company's overall level of operations.
<PAGE>
Depreciation and amortization expenses for the year ended September 30,
1997, increased by $396,518 to $514,026 as a direct result of an increase in
depreciable assets from the Company's acquisitions of Expert and Socrates and
the resulting goodwill amortization recorded subsequent to the acquisitions. For
acquisitions completed to date, future annual goodwill amortization will be
approximately $610,000.
Interest income, net of interest expense and financing charges,
increased by $2,125 from $776,393 to $778,518 for the year ended September
30, 1997. Both periods reflect interest on line of credit borrowings, and
shareholder loans.
The Company has net operating loss and research expenditure carryforwards
available to offset future taxable income generated in Canada totaling
approximately $8,000,000 at September 30, 1997, expiring in 2010 and investment
tax credits of $1,350,000 available as a direct offset to taxes payable in the
future. In addition, the Company has net operating loss carry forwards available
to offset U.S. taxable income of approximately $600,000 at September 30, 1997,
expiring in 2011. Future use of these net operating loss carryforwards was not
affected by the Company's acquisitions during fiscal years 1996 and 1997.
However, in the event a change in control occurs in the future, use of all or a
portion of the U.S. carryforwards could be affected. The Company does not
believe that the December 1997 warrant redemption will materially affect the
ability to use U.S. carryforwards in the future.
As of September 30, 1997, the Company has recorded net deferred tax assets
totaling approximately $1,655,000 consisting of $889,000 relating to tax
benefits derived from the Company's operations based in Canada and $766,000
relating to tax benefit derived from the Company's operation in the United
States. Recoverability of this asset is dependent upon the Company generated
future taxable income in both Canada and the United States. Critical to
recovering the Canadian portion of the deferred tax benefits is the successful
implementation of a plan aimed at returning the Canadian operations to
profitability. Key elements of this plan center on reducing indirect staff
levels, successfully outsourcing certain manufacturing operations, and redirect
sales and marketing efforts toward more profitable product lines. In the event
this plan is unsuccessful in generating future taxable income, a write down of
this asset may be necessary. The Company will review the valuation allowance
quarterly to determine the future realizability of these deferred tax assets.
The Company's fourth quarter 1997 operations reflect certain adjustments to
revise prior estimates associated with cost of sales of the Company's computer
integration and distribution businesses of approximately $200,000, and to revise
the provision for income taxes estimated for each interim period, the result
being an increase in income tax expense by approximately $300,000. In addition,
the Company recorded changes of approximately $300,000 to adjust inventories of
its machine vision business to net realizable value. The effect of these items
was to reduce net income for the fourth quarter by $800,000 or $.07 per share.
Earnings from continuing operations for the year ended September 30, 1997
were $816,705 or $0.08 per share, as compared to earnings of $457,670 or $0.04
per share (basic EPS) and $0.03 per share (diluted EPS) for the year ended
September 30, 1996.
Year ended September 30, 1996 Compared to Year ended September 30, 1995
As a result of the Company's discontinuance of its machine vision business,
there are no continuing operations for fiscal year 1995 for which to make valid
comparisons to fiscal year 1996. Thus, no year-to-year comparisons are provided.
<PAGE>
Capital Resources, Liquidity and Backlog
As of September 30, 1998, the Company had working capital of $9,458,207
compared to $7,657,175 as of September 30, 1997. As of September 30, 1998, the
Company has cash, cash equivalents and investments of $1,801,428. While the
Company generated $24,547,712 of proceeds from a conversion of its warrants
during the year, $16,981,581 of such proceeds were used to repurchase shares of
the company's common stock in the open pursuant to a publicized stock redemption
program. The Company also experienced a significant increase in accounts
receivable in fiscal 1998. Management believes a portion of the increase relates
to temporary delays in the processing of one customer's invoices which was
rectified in November 1998 when the Company collected approximately $5,000,000
on these accounts receivable. The increase in accounts receivable, coupled with
the repurchase of shares of e-Net, Inc. common stock in the fourth quarter as
described below, caused the Company to liquidate certain investment securities
in the fourth quarter of fiscal 1998.
The Company maintains a wholesale financing agreement with a finance
company for inventory financing for one of its subsidiaries. The agreement
provides the Company with the ability to pay for certain scheduled inventory
purchases on terms similar to those that would be provided by third party
vendors. Amounts due to the finance company under the agreement at September 30,
1998 and 1997, amounted to $5,403,768 and $208,082, respectively. The agreement
is subject to annual renewal and is collateralized by all present and future
accounts receivable and inventory of the Company's subsidiary. In addition, the
Company must comply with certain financial and reporting covenants. As of
September 30, 1998, the Company was in compliance with all of these covenants.
On October 21, 1998, the Company entered into an accounts receivable credit
facility with the same financing company to provide funding for the short-term
financing needs of the Company. The maximum amount available under this
agreement is $6,000,000. The Company has pledged all of its inventory,
receivables, equipment, fixtures and all its intangible assets to secure the
facility. Interest is payable monthly at the prime rate as published by the
Chase Manhattan Bank. The facility contains certain covenants, the most
restrictive of which requires the Company to maintain a tangible net worth
including subordinated debt of $1,000,000; a ratio of debt minus subordinated
debt not to exceed 5 to 1; and to provide the financing company with weekly
borrowing base certificates in order to access the unused portion of the credit
facility. The Company has renegotiated its existing wholesale financing
agreement in connection with the establishment of this credit facility. The
maximum amount available under the combined agreements is $10,000,000.
Management believes that the working capital and liquidity position of
the Company, together with funds available under the Company's new line of
credit, are adequate to meet the Company's working capital requirements based
upon its current level of operations. However, significant internal growth or
additional acquisitions could create a need for additional working capital.
The Company's ability to raise additional funds through secondary offerings
of equity or debt securities will be subject to conditions in capital
markets, as well as restrictions under its existing credit facilities.
By notice of redemption, dated November 14, 1997, the Company called all of
its outstanding Class A Warrants and Class B Warrants for redemption for cash,
on December 15, 1997 (the "Redemption Date'), at a redemption price of $.05 per
Class A Warrant and $.05 per Class B Warrant (the "Redemption Price"). After
December 15, 1997, on the Redemption Date, the only right of any holders of a
Class A Warrant or Class B Warrant who did not timely exercise, or, in the case
of the Class A Warrant holder, timely trade the warrant, was to receive the
Redemption Price for each warrant properly tendered to American Stock Transfer &
Trust Company, the Warrant Agent for the warrants. Pursuant to the redemption,
the Company generated proceeds to the Company of $24,547,712. Of these proceeds,
$16,981,581 were used during the fiscal year ended September 30, 1998 for the
purchase of Company stock in the open market.
The Company entered fiscal 1998 with an investment of 250,000 shares of
common stock of e-Net, Inc. ("e-Net"), a publicly held Germantown, Maryland
based manufacturer of data-telephony equipment, valued at approximately
$1,600,000. During the third fiscal quarter of 1998, the Company sold 130,000
shares for proceeds of $2,368,000, or $18.22 per share, resulting in a realized
gain of $1,594,000. In addition, the Company purchased an additional 160,000
shares of e-Net common stock for prices ranging from $13.13 to $14.88 per share.
During the fourth quarter of fiscal
<PAGE>
1998, the Company purchased 170,000 shares of e-Net stock at prices ranging
from $17.06 to $18.63 per share, or aggregate consideration of $3,077,500.
Later in the fourth quarter, the value of e-Net shares decreased
significantly, falling to $3.43 per share at September 30, 1998, causing the
Company to suffer unrealized losses of approximately $5,800,000 in the fourth
quarter of fiscal 1998. At the present time, the Company continues to hold
450,000 shares of e-Net stock. Because e-Net common stock is highly volatile,
the Company can make no assurances that the unrealized losses suffered can be
recovered.
The Company has no significant long-term debt outstanding as of September
30, 1998.
As of September 30, 1998, the Company had borrowed, under two separate loan
agreements, monies from a principal stockholder/officer (Edward Ratkovich) to
enable the Company to meet its on-going cash flow requirements. These loans bear
interest at 9% and 8%, respectively, and are due on demand. Total loans and
accrued interest outstanding at September 30, 1998, total $1,380,056. Subsequent
to September 30, 1998, the Company has repaid $250,000 of the total outstanding
loans.
At September 30, 1998, the Company's backlog was approximately $2 million.
The Company does not believe that its backlog at any specific time is
necessarily indicative of its future business.
Impact of Inflation and Foreign Currency Exchange Rates
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in supplies
or other operating costs may adversely affect the Company's operations; however,
the Company believes it may increase prices of its products and systems to
offset increases in costs of goods sold or other operating costs.
A portion of the Company's operations through its Canadian subsidiary is
transacted in Canadian dollars. The Company, however, reports its financial
position, results of operations and cash flows in U.S. dollars. As a result, the
Company believes that its exposure to foreign currency fluctuations or
deterioration is limited.
Seasonality
Based on its experience to date, the Company believes that its future
operating results may be subject to quarterly variations based on a variety of
factors, including seasonal changes in the weather, especially in its Canadian
operations. Such effects may not be apparent in the Company's operating results
during a period of expansion. However, the Company can make no assurances that
its business can be significantly expanded under any circumstances.
Year 2000
Certain of the financial information systems used at the Company's
subsidiaries are currently not Year 2000 compliant. The Company is in the
process of addressing these issues as part of a Company-wide management
information system implementation which is expected to be substantially complete
in early 1999. Management believes the Company's operations do not pose complex
systems needs and its financial information system requirements can be satisfied
with "off-the-shelf" software which will not require significant customization.
The costs related to the system implementation have not been significant.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
<PAGE>
<TABLE>
<CAPTION>
Socrates Technologies Corporation and Subsidiaries
Contents
- -------------------------------------------------------------------------------
<S> <C>
Item 8: Financial Statements
Report of Independent Certified Public Accountants 23
Consolidated Financial Statements
Consolidated Balance Sheets 24
Consolidated Statements of Operations 25
Consolidated Statements of Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28-47
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Socrates Technologies Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Socrates
Technologies Corporation (a Delaware Corporation) and Subsidiaries as of
September 30, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Socrates
Technologies Corporation and Subsidiaries as of September 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in period ended September 30, 1998, in conformity with generally accepted
accounting principles.
Vienna, Virginia
December 15, 1998
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Years ended September 30, 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 831,921 $ 1,704,724
Investments 969,507 2,833,931
Accounts receivable, net of allowance for doubtful accounts 14,533,443 6,399,507
Inventory 3,625,823 3,619,030
Tax credits and income tax receivable 613,191 306,283
Prepaid expenses 1,019,604 219,382
------------- -------------
Total Current Assets 21,593,489 15,082,857
Property and Equipment, net 1,375,477 984,290
Capitalized Software Costs, net 101,250 1,723,138
Goodwill, net 5,027,719 5,641,582
Deferred Tax Asset, net of valuation allowance 1,200,000 1,655,471
Other Assets 214,327 403,495
------------- -------------
$ 29,512,262 $ 25,490,833
------------- -------------
------------- -------------
Liabilities and Stockholders' Equity
Current Liabilities
Vendor financing arrangement $ 5,417,256 $ 1,397,943
Accounts payable and accrued liabilities 5,337,970 5,290,531
Shareholder loans and interest 1,380,056 737,208
------------- -------------
Total Current Liabilities 12,135,282 7,425,682
Stockholders' Equity
Common stock, $.01 par value, 50,000,000 shares authorized,
17,740,620 and 11,590,000 shares issued and 14,739,204 and
11,410,510 shares outstanding at September 30, 1998,
and 1997, respectively 177,406 115,900
Stock subscription receivable (150,000) (150,000)
Additional paid-in capital 49,342,292 24,599,441
Treasury stock, at cost, 3,001,416 and 179,500 shares, respectively (17,554,241) (572,660)
Accumulated deficit (9,959,838) (5,366,056)
Unrealized loss on investments available for sale (4,406,200) (205,182)
Cumulative translation adjustment (72,439) (356,292)
------------- -------------
Total Stockholders' Equity 17,376,980 18,065,151
------------- -------------
$ 29,512,262 $ 25,490,833
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Years ended September 30, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
(as restated, see Note J)
<S> <C> <C> <C>
Sales $ 62,007,968 $ 34,334,698 $ 11,421,295
Cost of Sales 53,298,270 29,972,618 10,376,183
------------ ------------ ------------
Gross Profit 8,709,698 4,362,080 1,045,112
Expenses
Selling 2,972,701 862,372 192,397
Administrative 5,545,305 2,650,924 1,430,360
Depreciation and amortization 963,885 514,026 117,508
------------ ------------ ------------
9,481,891 4,027,322 1,740,265
Income (Loss) from Operations (772,193) 334,758 (695,153)
Interest and Investment Income 2,150,537 1,029,336 893,899
Interest and Financing Charges (265,811) (250,818) (117,506)
------------ ------------ ------------
Earnings Before Income Taxes 1,112,533 1,113,276 81,240
Income Tax (Benefit) Provision
Current 30,600 82,649 --
Deferred (305,973) 213,922 (376,430)
------------ ------------ ------------
Earnings from Continuing Operations $ 1,387,906 $ 816,705 $ 457,670
------------ ------------ ------------
------------ ------------ ------------
Discontinued Operations
Loss from operations, net of income
tax benefits of $0, $486,350
and $410,000, respectively (1,250,052) (707,159) 555,094
Loss from disposal, including of income
tax expense of $1,233,000 in 1998 (4,731,636) --
(5,981,688) (707,159) 555,094
------------ ------------ ------------
Net Earnings (Loss) (4,593,782) 109,546 1,012,764
------------ ------------ ------------
------------ ------------ ------------
Earnings (Loss) per Share
Continuing operations--basic $ 0.09 $ 0.08 $ 0.04
Discontinued operations--basic (0.40) (0.07) 0.05
Net earnings (loss)--basic (0.31) 0.01 0.09
Continuing operations--diluted 0.09 0.06 0.03
Discontinued operations--diluted (0.40) (0.05) 0.05
Net earnings (loss)--diluted (0.31) 0.01 0.08
------------ ----------- -----------
</TABLE>
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended September 30, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Years ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net earnings (loss) from operations $ (4,593,782) $ 109,546 $ 1,012,764
------------ -------------- --------------
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Deferred income taxes 371,315 (272,429) (786,430)
Depreciation and amortization 929,697 777,263 197,814
Realized (Gain) on sale of investments (1,594,157) -- --
(Gain) loss on foreign exchange -- -- (50,359)
Equity in earnings of joint venture 239,970 (49,847) --
Loss on disposal of long term assets 1,486,401 -- --
Changes in operating assets and liabilities, net of effects of
acquisitions:
(Increase) in accounts receivable (8,541,868) (487,807) (1,112,781)
(Increase) in inventory (176,307) (95,703) (1,526,431)
Decrease (increase) in tax credits
and income taxes receivable (336,665) 369,004 (95,952)
Decrease (increase) in prepaid expenses (719,427) 84,355 (115,414)
(Increase) in other assets (90,559) (17,528) (16,964)
(Decrease) in advance deposits (75,609) 131,666 (150,854)
(Decrease) in accounts payable and
accrued liabilities 474,008 (1,106,514) (894,482)
------------ -------------- --------------
Net Cash (Used in) Operating Activities (12,592,795) (557,994) (3,539,087)
------------ -------------- --------------
------------ -------------- --------------
Cash Flows from Investing Activities
Investment purchases (5,542,707) (989,626)
Proceeds from, sales and borrowings on margin
against investments 4,800,270 4,536,897 2,120,102
Property, plant and equipment purchases (854,552) (605,976) (223,857)
Capitalized software costs -- (548,987) (892,687)
Loan to acquired company and other -- -- (300,000)
Investment in joint venture -- (216,396) --
------------ -------------- --------------
Net Cash Provided by (used in) Investing Activities (1,596,989) 2,030,518 763,345
------------ -------------- --------------
Cash Flows from Financing Activities
Net increase in vendor financing/line of credit 4,372,955 317,053 609,374
Proceeds from shareholder loans 1,400,967 78,996 --
Payment of shareholder loans (758,119) -- (497,269)
Payment of debt -- -- (19,275)
Proceeds from issuance of common stock -- 522,900 600,000
Proceeds from exercise of warrants 24,547,712 60,000 180
Purchase of treasury stock (16,981,581) (572,660) --
------------ -------------- --------------
Net Cash Provided by Financing Activities 12,581,934 406,289 693,010
------------ -------------- --------------
------------ -------------- --------------
Effect of Exchange Rate Changes on Cash 735,047 (487,977) 54,039
------------ -------------- --------------
Net Increase (Decrease) in Cash (872,803) 1,390,834 (2,029,146)
Cash (Cash Overdraft) at Beginning of Year 1,704,724 313,890 2,343,036
------------ -------------- --------------
Cash at End of Year $ 831,921 $ 1,704,724 $ 313,890
------------ -------------- --------------
------------ -------------- --------------
Supplemental Disclosures:
Income Taxes Paid $ 131,527 $ 85,434 $ --
Interest Paid $ 223,353 $ 261,754 $ 80,220
------------ -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MVSI, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Stock Additional
Common Stock Subscription Paid-In Accumulated
Shares Amount Receivable Capital (Deficit)
---------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1995 ................... 10,140,000 $ 101,400 $ (150,000) $ 17,085,475 $ (6,488,366)
Acquisition--JMR Distributors, Inc. ........ 100,000 1,000 -- 508,161 --
Acquisition--Socrates, Inc. ................ 350,000 3,500 -- 2,385,250 --
Net Earnings ............................... -- -- -- -- 1,012,764
Warrant Purchase ........................... -- -- -- 180 --
Private Placement Transactions ............. 150,000 1,500 -- 598,500 --
Change in Cumulative Translation Adjustment -- -- -- -- --
Unrealized Gain (Loss) from Investments .... -- -- -- -- --
---------- ------------- -------------- ------------ --------------
Balance, September 30, 1996 ................ 10,740,000 107,400 (150,000) 20,577,566 (5,475,602)
Acquisition--Expert, Inc. .................. 300,000 3,000 -- 1,064,475 --
Acquisition--Technet Computer Services, Inc. 400,000 4,000 -- 2,376,000 --
Net Earnings ............................... -- -- -- -- 109,546
Warrant Conversion ......................... 15,000 150 -- 59,850 --
Issuance of Common Stock ................... 135,000 1,350 -- 521,550 --
Purchase of Treasury Stock ................. -- -- -- -- --
Change in Cumulative Translation Adjustment -- -- -- -- --
Unrealized Gain (Loss) from Investments .... -- -- -- -- --
---------- ------------- -------------- ------------ --------------
Balance, September 30, 1997 ................ 11,590,000 $ 115,900 $ (150,000) $ 24,599,441 $ (5,366,056)
Net Loss ................................... -- -- -- -- (4,593,782)
Warrant Redemption & Exercise .............. 6,086,928 60,869 -- 24,447,586 --
Issuance of Common Stock ................... 63,692 637 -- 313,363 --
Purchase of Treasury Stock ................. -- -- -- -- --
Issuances of Treasury Stock ................ -- -- -- (146,008) --
Tax Benefit From Option Exercises .......... -- -- -- 127,910 --
Change in Cumulative Translation Adjustment -- -- -- -- --
Unrealized Gain (Loss) from Investments .... -- -- -- -- --
---------- ------------- -------------- ------------ --------------
Balance, September 30, 1998 ................ 17,740,620 $ 177,406 $ (150,000) $ 49,342,292 $ (9,958,838)
---------- ------------- -------------- ------------ --------------
---------- ------------- -------------- ------------ --------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized Cummulative
Treasury Stock Gain (Loss) on Translation
Shares Amount Investments Adjustment Total
------------ ------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1995 ................... -- $ -- $ -- $ 56,301 $ 10,604,810
Acquisition--JMR Distributors, Inc. ........ -- -- -- -- 509,161
Acquisition--Socrates, Inc. ................ -- -- -- -- 2,388,750
Net Earnings ............................... -- -- -- -- 1,012,764
Warrant Purchase ........................... -- -- -- -- 180
Private Placement Transactions ............. -- -- -- -- 600,000
Change in Cumulative Translation Adjustment -- -- -- 50,359 50,359
Unrealized Gain (Loss) from Investments .... -- -- (59,786) -- (59,786)
---------- ------------- -------------- ------------ --------------
Balance, September 30, 1996 ................ -- -- (59,786) $ 106,660 15,106,238
Acquisition--Expert, Inc. .................. -- -- -- -- 1,067,475
Acquisition--Technet Computer Services, Inc. -- -- -- -- 2,380,000
Net Earnings ............................... -- -- -- -- 109,546
Warrant Conversion ......................... -- -- -- -- 60,000
Issuance of Common Stock ................... -- -- -- -- 522,900
Purchase of Treasury Stock ................. (179,500) (572,660) -- -- (572,660)
Change in Cumulative Translation Adjustment -- -- -- (462,952) (462,952)
Unrealized Gain (Loss) from Investments .... -- -- (145,396) -- (145,396)
---------- ------------- -------------- ------------ --------------
Balance, September 30, 1997 ................ (179,500) $ (572,660) $ (205,182) $ (356,292) $ 18,065,151
Net Loss ................................... -- -- -- -- (4,593,782)
Warrant Redemption & Exercise .............. (683,674) (4,333,437) -- -- 20,175,018
Issuance of Common Stock ................... -- -- -- -- 314,000
Purchase of Treasury Stock ................. (2,258,792) (13,045,072) -- -- (13,045,072)
Issuances of Treasury Stock ................ 120,550 396,928 -- -- 250,920
Tax Benefit From Option Exercises .......... -- -- -- -- 127,910
Change in Cumulative Translation Adjustment -- -- -- 283,853 283,853
Unrealized Gain (Loss) from Investments .... -- -- (4,201,018) -- (4,201,018)
---------- ------------- -------------- ------------ --------------
Balance, September 30, 1998 ................ (3,001,416) $(17,554,241) $(4,406,200) $ (72,439) $ 17,376,980
---------- ------------- -------------- ------------ --------------
---------- ------------- -------------- ------------ --------------
</TABLE>
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- ------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Nature of Operations
The accompanying consolidated financial statements include the accounts of
Socrates Technologies Corporation (a Delaware corporation), and its
wholly-owned subsidiaries (collectively referred to as the "Company").
Significant intercompany accounts and transactions have been eliminated in
consolidation.
Socrates Technologies Corporation ("Socrates" or the "Company") is a
broad-based information technology solutions company whose business is
focused on the assembly, integration and marketing of built to order or
proprietary computer systems, and training on the use of computer software
programs to individuals, corporations and the government. In addition, the
Company also provides customized software development, including turnkey
system development and product development, and maintenance services to
corporate and government customers. In March 1998, the Company discontinued
its machine vision welding and scanner business conducted by its wholly
owned subsidiary, MVS Modular Vision Systems, a Canadian corporation. to
focus on what management believes to be the segments of its business which
offer greater potential for growth in shareholder value.
Socrates, a Delaware corporation, was incorporated in the State of Delaware
on November 6, 1998. Upon the merger of Socrates with MVSI, Inc., a
Delaware Corporation incorporated on April 12, 1994, on November 30, 1998,
the name of MVSI, Inc., the surviving corporation, was changed to Socrates
Technologies Corporation. Unless the context otherwise requires, the
"Company" or "Socrates" refers to Socrates Technologies Corporation, its
predecessor and its subsidiaries. The Company maintains its executive
offices and principal facilities in Maryland with other sales and
marketing offices in the Middle Atlantic and Northeastern United States.
Revenue Recognition
Product sales are recognized upon shipment. Typical terms of sale do not
provide the customer with the right of return except for defective
products, which are covered either by the Company's warranty or by the
warranty of the original equipment manufacturer in instances where the
Company acts as a distributor. Revenue from services is generally
recognized as the services are rendered using contractual billing rates.
Revenue billed in advance of customer acceptance is deferred until such
time as acceptance occurs. Amounts received from customers prior to
shipment are recorded as deposit liabilities.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market accounts.
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- ------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- ------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Investments
Investments consist of a short-term U.S. treasury mutual fund, and the
Company's investment in common stock of e-Net, Inc. ("e-Net"), a
publicly-held Germantown, Maryland based manufacturer of data-telephony
equipment, which is accounted for using the cost method. The market value
of the short-term U.S. treasury mutual fund and the Company's investment in
the common stock of e-Net, Inc. at September 30, 1998, was $304,000 and
$1,547,000, respectively. In accordance with Statement of Financial
Accounting Standards No. 115, the Company has classified these investments
as available for sale, and recorded the investments at market value, net of
margin loans, at September 30, 1998 and 1997 and unrealized gains and
losses are reported as an element of stockholders' equity. The unrealized
loss from investments available for sale for the years ended September 30,
1998 and 1997 was $4,406,200 and $205,182. The unrealized loss as of
September 30, 1998 relates principally to a significant decrease in the
value of e-Net, Inc. shares late in fiscal 1998. During the year ended
September 30, 1998, the Company sold 130,000 shares of e-Net, Inc. stock
for gross proceeds of $2,368,000, generating a realized gain of $1,594,000.
The Company's policy is to determine the cost associated with shares sold
on a first-in, first-out basis (FIFO).
The Company continues to hold 450,000 shares of e-Net stock. Like other
technology stocks, the value of e-Net common stock is highly volatile.
Therefore, the Company can make no assurances that the unrealized losses
suffered can be recovered.
Accounts Receivable
Accounts receivable is stated at the unpaid balances, less allowance on
collectible accounts. Management periodically reviews its outstanding
accounts receivable to assess collectibility of balances based on past
experience and evaluation of current adverse situations which may affect
collectibility of receivables. As of September 30, 1998 and 1997,
management has established an allowance for doubtful accounts of
approximately $204,000 and $71,000, respectively.
Inventory Valuation
Inventory is valued at the lower of cost and market. Cost is determined on
a first-in, first-out (FIFO) basis. Management evaluates obsolete and
slow-moving inventory at each reporting date and either excludes such
inventory from the valuation or provides for a necessary reserve to record
inventory at lower of cost or market.
Property and Equipment
Property and equipment are carried at cost, net of an allowance for
accumulated depreciation and amortization. Depreciation is computed on
equipment and furniture, principally using the double-declining balance
method over estimated lives ranging from five to seven years. Demonstration
and research equipment is depreciated on a straight-line basis over a
four-year period. Leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or estimated useful lives of the
related assets.
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Capitalized Software Costs
The Company acquired certain computer software in connection with the
Technet acquisition which is being amortized over a two year period, the
expected remaining economic life of the related products. In prior years,
certain software development costs not reimbursed by the Canadian
government incurred by the Company's discontinued machine vision business
were capitalized. In connection with the discontinuance of the machine
vision business in fiscal 1998, all such capitalized costs were written
off. Amortization expense associated with discontinued operations for the
years ended September 30, 1997 and 1996, was $209,213 and $-0-,
respectively. Amortization expense related to computer software acquired in
the Technet acquisition was $135,000 and $33,750 for the years ended
September 30, 1998 and 1997, respectively.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired in business combinations accounted for as purchases. Goodwill is
being amortized on the straight-line method over ten years. Amortization
expense charged to operations for the fiscal years 1998, 1997 and 1996 was
$614,304, $382,511 and $107,889, respectively. Management regularly reviews
the carrying value of goodwill against anticipated cash flows of each
business in order to evaluate recoverability. It is reasonably possible
that estimates of anticipated future gross profits of the acquired
businesses will be reduced significantly in the near term. As a result, the
carrying amount of goodwill may be reduced materially in the near term.
Income Taxes
Deferred taxes are recognized, subject to a valuation allowance, for
temporary differences in the timing of recognition of certain income and
expenses for financial statement and income tax purposes using the
liability method.
Earnings Per Share
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share,"
effective for periods ending after December 15, 1997. This Statement
establishes standards for computing and presenting earnings per share
(EPS). It requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
The computations of basic and fully diluted earnings (loss) per share are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator
Earnings from continuing operations $ 1,387,906 $ 816,705 $ 457,670
----------- ------------- ------------
Denominator
Denominator for basic earnings per
share--weighted average shares 14,883,572 10,799,832 10,249,307
----------- ------------- ------------
Effect of diluted securities
employee stock options and warrants 259,598 2,010,383 3,031,429
----------- ------------- ------------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions 15,143,170 12,810,215 13,280,736
----------- ------------- ------------
Basic earnings per share from
continuing operations $ 0.09 $ 0.08 $ 0.04
----------- ------------- ------------
Diluted earnings per share from
continuing operations $ 0.09 $ 0.06 $ 0.03
----------- ---------- ------------
</TABLE>
For additional information regarding stock options, see Note G. Certain options
outstanding in each period were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the underlying common stock for the year and, therefore,
the effect would be antidilutive.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate the
value:
The carrying amount approximates fair value for cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, line of credit and
other accrued liabilities.
Investment securities classified as current assets are based on quoted market
price.
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Translation of Foreign Currency and Concentration of Credit Risk
A portion of the Company's operations are transacted in Canadian dollars.
The balance sheet of Canadian operations is translated into U.S. dollars at
the year-end rate of exchange, and all statement of operations items are
translated at the weighted-average exchange rates for the year. The
resulting translation adjustments are made directly to a separate component
of stockholders' equity.
As of September 30, 1998, approximately 54% of accounts receivable or $7.9
million was due from a single customer. Otherwise, the Company's customers
are not generally concentrated with any one customer or in any specific
geographic region. As a matter of policy, the Company requires its larger
customers to furnish letters of credit (and in some instances, advance
deposits) to minimize credit risk to the Company after shipment of the
products. For other customers, the Company reviews a customer's credit
history before extending credit.
Stock Options
As permitted by generally accepted accounting standards, the Company
accounts for the value of stock options granted to employees in accordance
with Accounting Principles Board Opinion 25 (APB 25), whereby if stock
options exercise prices are set at fair market value or above at the date
of grant, no compensation expense is recognized at that date. While the
Company continues to apply the provisions Opinion 25, pro forma disclosures
of net income, and earnings per share, as if the fair value based method of
accounting defined in SFAS 123 have been presented in these footnotes.
Using Estimates in Preparing Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- ------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- ------------------------------------------------------------------------------
NOTE B--INVENTORY
Inventory consists of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 1,396,106 $ 1,464,965
Work in progress 213,561 407,476
Finished goods 2,016,156 1,746,589
------------- ------------
$ 3,625,823 $ 3,619,030
------------- ------------
</TABLE>
- -------------------------------------------------------------------------------
NOTE C--PROPERTY AND EQUIPMENT
Property, plant and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Autos and trucks $ 142,405 $ 124,384
Furniture and office equipment 1,374,418 863,058
Manufacturing equipment 11,463 11,027
Research and development equipment 272,373 319,272
Purchased software 386,148 152,640
Leasehold improvements 72,190 81,595
----------- -----------
2,258,997 1,551,976
Less accumulated depreciation (883,520) (567,686)
----------- -----------
$ 1,375,477 $ 984,290
----------- -----------
</TABLE>
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE D--VENDOR FINANCING ARRANGEMENT
The Company maintains a wholesale financing agreement with a finance
company for inventory financing for one of its subsidiaries. The agreement
provides the Company with the ability to pay for certain scheduled
inventory purchases on terms similar to those that would be provided by
third party vendors. The amounts due to the finance company under the
agreement at September 30, 1998 and 1997, amounted to $5,403,768 and
$208,082, respectively. The agreement is subject to annual renewal and is
collateralized by all present and future accounts receivable and inventory
of the Company's subsidiary. In addition, the Company must comply with
certain financial and reporting covenants. As of September 30, 1998, the
Company was in compliance with all of these covenants.
On October 21, 1998, the Company entered into an accounts receivable credit
facility with the same financing company to provide funding for the
short-term financing needs of the Company. The maximum amount available
under this agreement is $6,000,000. The Company has pledged all of its
inventory, receivables, equipment, fixtures and all its intangible assets
to secure the facility. Interest is payable monthly at the prime rate as
published by the Chase Manhattan Bank. The facility contains certain
covenants, the most restrictive of which requires the Company to maintain a
tangible net worth including subordinated debt of $1,000,000; a ratio of
debt minus subordinated debt not to exceed 5 to 1; and to provide the
financing company with weekly borrowing base certificates in order to
access the unused portion of the credit facility. The Company has
renegotiated its existing wholesale financing agreement in connection with
the establishment of this credit facility. The maximum amount available
under the combined agreements is $10,000,000.
- -------------------------------------------------------------------------------
NOTE E--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
September 30:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Vendor trade payables $3,859,853 $3,054,734
Salaries and commissions payable 913,524 1,189,211
Other accrued liabilities 564,593 1,046,586
---------- ----------
$5,337,970 $5,290,531
---------- ----------
</TABLE>
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE F--INCOME TAXES
The income tax (benefit) provision consists of the following at September
30:
<TABLE>
<CAPTION>
1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $ -- $ -- $ --
Deferred 67,202 342,091 (2,347,617)
----------- ---------- --------------
67,202 342,091 (2,347,617)
State
Current -- 82,648 30,600
Deferred 9,883 50,307 (345,238)
----------- ---------- --------------
9,883 132,955 (314,638
Increase (decrease) in valuation
Allowance (453,515) (178,476) 2,386,882
----------- ---------- --------------
Net Provision $ (376,430) $ 296,570 $ (275,373)
----------- ---------- --------------
</TABLE>
A reconciliation of the income tax provision at the federal statutory rate
to the income tax provision at the effective rate is as follows as of September
30:
<TABLE>
<CAPTION>
1996 1997 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax (benefit) at U.S. Federal statutory
rates $ 27,622 $ 378,514 $ 377,946
Increase (decrease) resulting from
State income taxes -- 90,061 55,580
Goodwill amortization 110,582 164,916 292,229
Change in valuation allowance against
deferral tax asset (453,515) (178,476) 2,386,882
Tax benefit associated with write off
of loans to foreign subsidiary -- -- (3,523,948)
Other permanent differences (61,119) (158,445) 135,938
------------ ----------- ------------
Income tax provision $ (376,430) $ 296,570 $ (275,373)
------------ ----------- ------------
</TABLE>
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE F--INCOME TAXES--Continued
The tax effect of temporary differences between the financial statement
amounts and tax bases of assets and liabilities that give rise to a
deferred tax asset are as follows at September 30:
<TABLE>
<CAPTION>
1997 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Net operating losses $ 220,031 $ 3,201,183
Accrued compensation 658,905 347,685
Accounts receivable and inventory reserves 26,416 63,259
Other (139,234) (25,245)
Valuation allowance -- (2,386,882)
----------- -----------
Net deferred tax asset - continuing operations $ 766,118 $ 1,200,000
----------- -----------
</TABLE>
The above table does not reflect the tax effect of unrealized losses on
available for sale securities classified in stockholders' equity as of
September 30, 1998, amounting to approximately $1,700,000. This tax effect
has been fully reserved by establishing an additional $1,700,000 valuation
allowance at September 30, 1998. In addition, the table excludes tax
benefits available in Canada as discussed below.
Management regularly reviews for recoverability deferred tax assets and
adjusts, if necessary, a valuation allowance against such assets. In
determining the amount of the valuation allowance recorded at September 30,
1998, management considered historical taxable income generated by
continuing operations, adjusted for non-recurring gains and losses and
known charges which are not deductible such as goodwill amortization, and
for the anticipated impact of management's operating plans. The recovery of
the deferred tax asset at September 30, 1998 is dependent upon the Company
generating taxable income in the future sufficient to realize the
associated tax benefits. In the event taxable income is not generated at
sufficient levels, write downs of the deferred tax asset may be necessary.
The Company has net operating loss carry forwards available to offset U.S.
taxable income of approximately $8,000,000 at September 30, 1998, expiring
in 2018. While the future use of these net operating loss carryforwards has
not been a significantly affected by the Company's past acquisitions, in
the event a change in control occurs in the future, use of all or a portion
of the U.S. carryforwards could be affected. In addition, the Company has
net operating loss and research expenditure carryforwards available to
offset future taxable income generated in Canada. However, with the
discontinuance of the Company's business in Canada in the past year, use of
such Canadian tax benefits is dependent upon the Company conducting certain
lines of business in Canada in the future which management believes is
doubtful at the present time.
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE G--STOCKHOLDERS' EQUITY
Warrants
In December 1997, the Company completed a redemption of the above warrants
wherein certain Class A warrant holders exercised their warrants into
5,086,928 shares of common stock and the Class B warrant holder exercised
its warrant into 1,000,000 shares of common stock, resulting in net
proceeds to the Company of approximately $24.5 million. In connection with
the redemption, the Company purchased and exercised, prior to the deadline,
683,654 warrants for approximately $4.3 million in cash, resulting in net
proceeds to the Company of approximately $20.2 million.
Stock Option Plan
In April 1997, the Company adopted and the stockholders ratified the 1997
Stock Option Plan (the "Stock Option Plan"), under which options to
purchase shares of the Company's common stock have been granted at exercise
prices equal to the market price of the stock at the date of grants, with
the exception of certain stock options granted to a greater than 10%
stockholder with a required exercise price of 110% of fair market value of
the stock at the date of grant.
The plan authorizes the Company to grant options to eligible persons to
purchase up to 1,000,000 shares of common stock. Options vest over a
two-year period from the date of grant. The maximum term of the options is
ten years from the grant date.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plan. Accordingly, no
compensation expense has been recognized related to the granting of such
options. Had the Company recognized compensation expense based upon the
fair value of the options at the grant dates consistent with SFAS 123, the
Company's earnings and earnings per share would have changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Earnings from continuing operations:
As reported $ 1,387,906 $ 816,705
Pro Forma $ 604,342 $ 580,278
Earnings Per Share, from continuing operations:
As reported $ 0.09 $ 0.06
Pro Forma $ 0.04 $ 0.05
</TABLE>
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 1998 and 1997, respectively:
expected volatility 84% and 74%, risk free interest rate 5.36% and 5.89%,
and expected life of options of 2.6 years.
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- ------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- ------------------------------------------------------------------------------
NOTE G--STOCKHOLDERS' EQUITY--Continued
<TABLE>
<CAPTION>
<S> <C>
Following is a summary of stock option transactions:
Outstanding, October 1, 1996 $ --
Granted during the year (at prices
ranging from $2.94 to $7.00 per share) 924,000
Forfeited during the year --
Exercised during the year --
Outstanding, September 30, 1997 924,000
---------
Granted during the year (at prices ranging from
$1.75 to $6.06 per share) 100,000
Forfeited during the year (180,000)
Exercised during the year (85,600)
Outstanding, September 30, 1998 758,400
---------
Eligible, end of year for exercise
currently (at prices ranging from
$2.94 to $7.00 per share) 336,650
---------
Weighted average stock option price $ 4.17
---------
Weighted average fair value of options
granted during fiscal: 1997 $ 3.16
1998 $ 1.34
</TABLE>
Stock Purchase Plan
In April 1997, the Company adopted and the stockholders ratified the 1997
Employee Stock Purchase Plan (the "Employee Purchase Plan"), which
authorizes eligible employees of the Company to purchase up to 250,000
shares of the Company's common stock for 85% of the fair market value of
the common stock on each purchase date. As of September 30, 1998, no shares
of common stock had been purchased by employees under this plan.
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE H--COMMITMENTS AND CONTINGENT LIABILITIES
Leases
The minimum rental payments payable under a long-term lease for premises,
exclusive of certain operating costs determined annually, and for the lease
of equipment at September 30, 1998, are approximately as follows:
<TABLE>
<CAPTION>
Year ending September 30,
- -------------------------------------------------------------------------------
<S> <C>
1999 $ 834,634
2000 612,180
2001 509,693
2002 457,727
2003 162,326
----------------
$ 2,576,560
----------------
</TABLE>
Rent expense was $663,000, $490,000 and $252,000 for the years ended
September 30, 1998, 1997, and 1996, respectively.
Employment Agreements
The Company has entered into separate employment agreements with five of
its officers, which are subject to certain termination rights by both the
Company and the officers. In addition to salary commitments by the Company,
these officers are eligible to receive all employee benefits which may from
time to time be awarded or be made available. Certain of these agreements
also provide for bonuses to be computed and paid based upon the performance
of the operations under their management or based upon amounts determined
at the discretion of the Board of Directors.
Legal Matters
In the ordinary course of conducting business, the Company is subject, from
time to time, to certain legal proceedings concerning the Company's
business. Management does not believe that any current legal proceedings
will have a material impact on the Company's business or its financial
statements.
Transactions with Stockholders and Affiliates
The Company has loans payable to two officer/stockholders outstanding as of
September 30, 1998. Loans to one such officer/stockholder have been loaned
under two separate loan agreements bearing interest at 9% and 8%,
respectively, and are due on demand and carry a balance, including accrued
interest at September 30, 1998 of $1,380,056. In 1998, the Company also
advanced funds to another officer/stockholder. The outstanding loan amount,
which is payable on demand and bears interest at 6.5%, was $150,000 at
September 30, 1998.
The Company subcontracted certain software development services to an
affiliated development company in India, which is partially owned by the
former owner and current President and CEO of the subsidiary of $262,000
and $87,125 during the years ended September 30, 1998 and 1997,
respectively.
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE I--SEGMENT INFORMATION
The Company provides financial information for segment reporting purposes
for two lines of business representing its continuing operations in fiscal
1998 and 1997. Continuing operations are represented by the Company's
Computer Systems Sales, Integration and Training business and it's Software
Development business. For the year ended September 30, 1996, the Company
continuing operations were in a single segment.
For the years ended September 30, 1998 and 1997, the Company had one
customer that accounted for approximately 30% and 21% of its total revenue.
For the year ended September 30, 1996, the Company had one customer that
accounted for approximately 10 percent of its total revenue. In addition,
approximately, 15% and 19% of the Company's sales in fiscal years 1997 and
1996, respectively, were to customers outside North America. The Company
had no material export sales in fiscal 1998. In addition, while a portion
the Company's sales in the past have been from customers in Asia, the
Company's continuing operations are conducted in the United States.
Financial information relating to the Company's industry segments for
continuing operations for the years ended September 30, 1998 and 1997, is
as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------------
Computer
System Sales,
Integration Software General
and Training Development Corporate Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 57,221,898 $ 4,786,070 $ - $ 62,007,968
Operating profit (loss) (163,242) 297,785 (906,736) (772,193)
Net income (loss) (569,012) 265,246 1,691,672 1,387,906
Identifiable Assets 21,704,084 3,994,147 2,012,433 27,711,589
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------------------------
Computer
System Sales,
Integration Software General
And Training Development Corporate Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 33,755,491 $ 579,207 $ - $ 34,334,698
Operating profit (loss) 1,493,644 (91,302) (1,067,585) 334,757
Net income (loss) 1,115,359 (95,953) (202,701) 816,705
Identifiable Assets 12,316,043 2,991,400 3,142,449 18,449,892
</TABLE>
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE J--DISCONTINUED OPERATIONS
In March 1998, the Company discontinued its machine vision welding and
scanner business conducted from its wholly owned subsidiary, MVS Modular
Vision Systems, a Canadian corporation, to allow the Company to focus on
what management believes to be the segments of its business which offer
greater potential for growth in shareholder value. MVS designs, develops,
manufactures and markets state-of-the-art, proprietary vision-based robotic
and sensor products and systems for productivity improvement and quality
control applications in the manufacturing workplace. As of December 1998,
the Company continues to market for sale the MVS assets. While management
is confident of its ability to sell this business in the near future based
upon ongoing discussions with potential buyers, no assurances can be given
that these efforts will result in definitive agreements being reached or
that the Company will obtain consideration in any such sale sufficient to
recoup any portion of its investment.
In connection with the decision to discontinue the machine vision business,
the Company recorded a loss on the discontinuance of approximately
$3,400,000, including tax expense associated with writing off deferred tax
assets of $1,233,000, reflecting write-downs of inventories, capitalized
software costs, and other assets to estimated net realizable value.
In addition, in March 1998, the Company accrued $365,000 as an estimate of
operating losses to be incurred after the decision was made to dispose of
the machine vision business up to the date of disposal. In the third and
fourth quarters of fiscal 1998, the Company added approximately $250,000 to
this provision for operating losses. As of September 30, 1998, all loss
accruals have been utilized. Management does not anticipate incurring any
additional losses after September 30, 1998.
As a result of the discontinuance, the accompanying financial statements
have been restated to reflect these operations as discontinued. The
condensed balance sheet as of September 30, 1998, and the statement of
operations of the machine vision business for the last three fiscal years
is as follows:
<TABLE>
<CAPTION>
September 30
Condensed Balance Sheet 1998
- -------------------------------------------------------------------------------
<S> <C>
Cash $ 65,519
Accounts receivable, net 390,445
Inventories, net 793,836
Other assets 296,498
Property and equipment, net 254,375
----------
Total assets 1,800,673
Accounts payable and accrued
liabilities 413,243
----------
Net assets $1,387,430
----------
</TABLE>
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE J--DISCONTINUED OPERATIONS - Continued
<TABLE>
<CAPTION>
Condensed income statements:
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 1,708,000 $ 5,551,000 $ 4,566,000
Costs and expenses 2,946,000 6,744,000 4,421,000
Income (loss) before income taxes (1,238,000) (1,193,000) 145,000
Income tax provision (12,000) 486,000 410,000
----------- ----------- -----------
Net income (loss) $ (1,250,052) $ (707,000) $ 555,000
</TABLE>
NOTE K--ACCOUNTING STANDARDS
Reporting Comprehensive Income
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full
set of general-purpose financial statements. This Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
SFAS 130 does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. The
Statement requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company will
comply with the disclosure requirements of SFAS 130 in fiscal year 1999.
Disclosures about Segments of an Enterprise and Related Information
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information," effective for periods beginning after
December 15, 1997. This Statement establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. This Statement requires that a public business
enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how
to allocate resources and in assessing performance. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company will comply with the disclosure
requirements of SFAS 131 in fiscal year 1999.
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- -------------------------------------------------------------------------------
NOTE L--ACQUISITIONS
The Company acquired all the outstanding stock of Expert, Inc. (Expert),
effective April 1, 1997. The Company exchanged 300,000 restricted shares of
common stock valued at $1,070,000 for all outstanding shares of Expert. The
acquisition of Expert was accounted for as a purchase. The cost exceeded
the fair value of net assets and liabilities resulting in goodwill of
approximately $995,000. Goodwill will be amortized using an estimated life
of ten years. The results of operations of Expert are included in the
accompanying financial statements since the date of acquisition.
The Company acquired Technet Computer Services, Inc. (Technet), effective
July 1, 1997. The Company exchanged 400,000 restricted shares of common
stock valued at $2,380,000 for all the outstanding shares of Technet. The
acquisition of Technet was accounted for as a purchase. The cost exceeded
the fair value of net tangible assets and liabilities acquired resulting in
$270,000 and $2,300,000 being allocated to computer software and goodwill,
respectively. The value allocated to computer software and goodwill will be
amortized using estimated lives of two and ten years. The results of
operations of Technet are included in the accompanying financial statements
since the date of acquisition.
- -------------------------------------------------------------------------------
NOTE M--QUARTERLY INFORMATION (UNAUDITED)
Quarterly information for the last two fiscal years is as follows (all
amounts in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, March 31, June 30, September 30,
September 30, 1998 1997 1998 1998 1998 Total
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 12,714 $ 14,823 $ 16,330 $ 18,141 $ 62,008
Earnings (loss) from
operations (113) (684) 247 (222) (772)
Earnings (loss) from
continuing
operations (61) (360) 2,002 (193) 1,388
Loss from
discontinued
operations including
loss on disposal (502) (5,228) (114) (138) (5,982)
-------- -------- -------- -------- --------
Net loss (earnings) $ (563) $ (5,588) $ 1,888 $ (331) $ (4,594)
-------- -------- -------- -------- --------
</TABLE>
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Notes to Consolidated Financial Statements--Continued
- ------------------------------------------------------------------------------
September 30, 1998, 1997 and 1996
- ------------------------------------------------------------------------------
NOTE M--QUARTERLY INFORMATION (UNAUDITED)-Continued
<TABLE>
<CAPTION>
Year Ended December 31, March 31, June 30, September 30,
September 30, 1997 1996 1997 1997 1997 Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 6,759 $ 8,162 $ 9,972 $ 9,442 $ 34,355
Earnings (loss) from
operations 344 377 206 (592) 355
Earnings (loss) from
continuing
operations 431 504 588 (706) 817
Loss from
discontinued
operations 169 104 229 (1,209) (707)
-------- -------- -------- -------- --------
Net loss (earnings) $ 600 $ 608 $ 817 $ (1,915) $ 110
-------- -------- -------- -------- --------
</TABLE>
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with 16(a) of the Exchange Act.
Item 9 is hereby incorporated by reference to the registrant's Proxy
Statement to be filed with the Commission on or prior to January 29, 1999.
Item 10. Executive Compensation.
Item 10 is hereby incorporated by reference to the registrant's Proxy
Statement to be filed with the Commission on or prior to January 29, 1999.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Item 11 is hereby incorporated by reference to the registrant's Proxy
Statement to be filed with the Commission on or prior to January 29, 1999.
Item 12. Certain Relationships and Related Transactions.
Item 12 is hereby incorporated by reference to the registrant's Proxy
Statement to be filed with the Commission on or prior to January 29, 1999.
Item 13. Exhibits, List and Reports on Form 8-K.
A. Exhibits.
3.0 Certificate of Incorporation, filed April 12, 1994. (Incorporated by
reference to Exhibit 3.0 to Registration Statement on Form SB-2 (File No.
33-89194), filed with the Commission on February 9, 1995)
3.1 By-laws, as amended. (Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form SB-2 (File No. 33-89194), filed with the
Commission on February 9, 1995)
4.0 Specimen Copy of Common Stock Certificate. (Incorporated by reference to
Exhibit 4.0 to Registration Statement on Form SB-2 (File No. 33-89194),
filed with the Commission on February 9, 1995)
<PAGE>
21.0 List of Subsidiaries, filed herewith.
23.0 Consent of Independent Auditors, Grant Thornton LLP, dated December 15,
1998, filed herewith.
<PAGE>
B. Reports on Form 8-K.
The Company filed no reports on Form 8-K with the Commission during the
quarter ended September 30, 1998.
<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, thereunto duly authorized.
SOCRATES TECHNOLOGIES CORPORATION
December 28, 1998
By: EDWARD RATKOVICH
-------------------------------------
Edward Ratkovich
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ------
<S> <C> <C>
ABBAS FATHI Director, Chief Executive Officer, December 28, 1998
- -------------------------
Abbas Fathi and President
[Principal Executive Officer]
MARK J. MCKNIGHT Chief Financial Officer, Controller, December 28, 1998
- -------------------------
Mark J. McKnight Assistant Secretary
[Principal Financial Officer]
EDWARD RATKOVICH Chairman of the Board December 28, 1998
- -------------------------
Edward Ratkovich
GEORGE COWAN Director, Executive Vice December 28, 1998
- -------------------------
George Cowan President
EDWARD P. ROBERTS Director December 28, 1998
- -------------------------
Edward P. Roberts
CLIVE G. WHITTENBURY, PH.D. Director December 28, 1998
- -------------------------
Clive G. Whittenbury, Ph.D.
PAUL W. RICHTER Director, General Counsel, December 28, 1998
- -------------------------
Paul W. Richter Secretary
</TABLE>
<PAGE>
Exhibit 21
Socrates Technologies Corporation and Subsidiaries
SUBSIDIARIES OF THE REGISTRANT
The following lists all subsidiaries of Socrates Technologies Corporation as
required by Exhibit 21.
<TABLE>
<CAPTION>
Name State/Country of Incorporation
- ----------------------------- -----------------------------------
<S> <C>
1. MVS Modular Vision Systems, Inc. Quebec, Canada
2. JMR Distributors, Inc. Virginia
3. Socrates Technologies, Inc. Maryland
4. Expert, Inc. New York
5. Technet Computer Services, Inc. Virginia
</TABLE>
<PAGE>
Exhibit 23
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Consent of Independent Certified Public Accountants [LOGO]
We have issued our report dated December 15, 1998, accompanying the
consolidated financial statements incorporated herein by reference or
included in the Annual Report of Socrates Technologies Corporation, on Form
10-K, for the year ended September 30, 1998. We hereby consent to the
incorporation by reference of said reports in the Registration Statement of
Socrates Technologies Corporation, on Form S-8 (File No. 333-32395, effective
July 30, 1997).
GRANT THORNTON
Vienna, Virginia
December 15, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FROM THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 831,921
<SECURITIES> 969,507
<RECEIVABLES> 14,737,092
<ALLOWANCES> 203,649
<INVENTORY> 3,625,823
<CURRENT-ASSETS> 21,593,489
<PP&E> 2,258,997
<DEPRECIATION> 883,520
<TOTAL-ASSETS> 29,512,262
<CURRENT-LIABILITIES> 12,135,282
<BONDS> 0
0
0
<COMMON> 177,406
<OTHER-SE> 17,199,574
<TOTAL-LIABILITY-AND-EQUITY> 29,512,262
<SALES> 62,007,968
<TOTAL-REVENUES> 62,007,968
<CGS> 53,298,270
<TOTAL-COSTS> 53,298,270
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,884,726)
<INCOME-PRETAX> 1,112,533
<INCOME-TAX> (275,373)
<INCOME-CONTINUING> 1,387,906
<DISCONTINUED> (5,981,688)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,593,782)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
