<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ended: Commission file number:
December 31, 1998 0-26614
-----------
SOCRATES TECHNOLOGIES CORPORATION
(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 $35,005,610, of which
$27,133,727 was held by non-affiliates of the registrant, based upon the closing
price of the common stock on March 31, 1999, as quoted by the Nasdaq National
Market System.
The number of outstanding shares of the registrant's common stock on March
31, 1999 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 June 1, 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 3-9
Item 2. Properties 9-10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10-11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11-18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19-41
Item 8. Financial Statements 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 42
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 42
</TABLE>
<PAGE>
ITEM 1. BUSINESS.
OVERVIEW
Socrates Technologies Corporation ("Socrates" or the "Company"), a
Delaware Corporation, 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
third party 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 federal and state
governments; 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 governments 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, ("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. As of March 31, 1999, the Company has two interested
buyers for all or a portion of the business. The principal terms of the two
offers for MVS are: (1) a written offer from an English machine vision
company to acquire substantially all of the MVS assets required to produce
MVS' welding seam tracker and inspection systems (the "MVS welding products")
for $175,000 in cash at the closing plus a contingent sales price based on
revenues generated by the acquired MVS assets during the next two years and
the amount of inventory used by the prospective purchaser during the next
year in the production of MVS welding products; and (2) an unsolicited oral
offer from a Canadian machine vision company to pay $650,000 in cash at
closing for the outstanding stock of MVS, which purchase would transfer
substantially all of MVS assets (except certain cash on hand) and
substantially all of MVS liabilities to the prospective purchaser. The
Company is evaluating both offers, but is actively engaged in negotiations
with the English machine vision company to ascertain whether a definitive
asset purchase agreement can be reached. The oral offer from the Canadian
machine vision company is subject to obtaining bank financing. As of the date
of this report, the Company has not received any substantiation that the
Canadian machine vision company has the financial wherewithal to fund its
current offer for MVS. While management is confident of its ability to sell
or liquidate the assets in the near future, 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 remaining investment.
Socrates Technologies 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."
Effective January 1, 1999, the Company has changed it fiscal year end from
September 30 to December 31. References to fiscal years herein are to the fiscal
years of the Company ended September 30 of the respective years. References to
the transition period are the three month period ended December 31, 1998.
<PAGE>
The Company provides financial information for segment reporting purposes
for two lines of business representing its continuing operations. 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.
Financial information relating to the Company's industry segments for
continuing operations for the transition period representing the three month
period ended December 31, 1998 and the comparable period ended December 31, 1997
and the years ended September 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1998
COMPUTER
SYSTEM SALES,
INTEGRATION SOFTWARE GENERAL
AND TRAINING DEVELOPMENT CORPORATE TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 10,919,927 $ 1,730,284 $ - $ 12,650,211
Operating profit (loss) (3,081,954) 75,749 (259,146) (3,265,351)
Net income (loss) (3,349,424) 22,083 (565,089) (3,892,430)
Identifiable Assets 16,042,228 4,179,854 2,382,227 22,604,309
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1997
COMPUTER
SYSTEM SALES,
INTEGRATION SOFTWARE GENERAL
AND TRAINING DEVELOPMENT CORPORATE TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 11,821,038 $ 892,487 $ - $ 12,713,525
Operating profit (loss) 13,855 121,711 (248,742) (113,176)
Net income (loss) (52,753) 118,297 (127,549) (62,005)
Identifiable Assets 13,694,998 3,397,957 19,030,664 36,123,619
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30, 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 3,995,072 2,012,433 27,711,589
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30, 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>
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 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 1999. The Company makes no assurances that
Socrates Technologies will be able to successfully penetrate this market or to
attain the anticipated significant growth.
<PAGE>
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 three month transition period ended December 31, 1998 and the years
ended September 30, 1998 and 1997, sales to one customer of this segment
accounted for 24%, 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.
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.
<PAGE>
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 that 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.
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.
MVS is based in a single facility of approximately 14,000 square feet in
Montreal, Quebec, Canada.
As of March 31, 1999, the Company is evaluating two offers from interested
buyers for the MVS business as previously discussed. While management is
confident of its ability to reach a definitive agreement to sell a portion of
the MVS assets in the near future, 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.
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 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 December 31, 1998, the Company's backlog was approximately $1
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 December 31, 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.
On April 5, 1999, the Company was made a third party claim respondent by
one of the respondents in certain, ongoing New York Stock Exchange
arbitration proceedings against Securities brokerage firm and certain of its
employees. The claimants allege that Securities brokerage firm and certain
employees engaged in unauthorized trading and other impermissable activities
with respect to the claimants accounts at Securities brokerage firm.
Securities brokerage firm has denied the claimants' allegations. The Company
believes that the third party claim against the Company is without merit. The
Company intends to vigorously defend against the third-party claim and is
evaluating potential claims by the Company against the respondent who filed
the third party claim. This respondent is seeking dismissal of all claims
against it and unspecified damages for alleged breach of contract and alleged
tortious interference with contract by the claimants, counterclaim
respondents and third-party respondents. The amount of the damages sought
from the Company cannot be estimated at this time.
On March 31, 1999 or thereabouts, the Company was served with a
complaint filed by Technospin, Inc., a Canadian vendor to MVS Modular Vision
Systems, Inc. (MVS), in the United States District Court for Maryland. The
complaint alleges that the Company is obligated to pay $750,000 to
Technospin, Inc. as the corporate guarantor of MVS' obligations under a June
30, 1997 agreement between MVS and Technospin for the manufacture of certain
scanner products. The Company believes that Technospin, Inc.'s claim is
without merit and intends to vigorously defend against the complaint. The
Company intends to file a counterclaim against Technospin, Inc. seeking
damages (the amount of such damages being undetermined at this time) for
breach of contract and tortious interference in contract.
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 and the three-month transition period ended
December 31, 1998.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<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
Transition Period ended December 31, 1998 $ 4.00 $1.00
Calendar Year 1999
First fiscal quarter $ 4.69 $1.53
</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.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three months ended
December 31, Year ended September 30,
1998 1997 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
SALES $ 12,650,211 $12,713,525 $62,008 $34,335 $11,421 $--
GROSS PROFIT 1,357,635 1,712,051 8,710 4,362 1,045 --
EARNINGS FROM
CONTINUING OPERATIONS (3,892,430) (62,005) 1,388 817 458 (3,504)
EARNINGS (LOSS) FROM
DISCONTINUED OPERATIONS (1,132,355) (501,556) (5,982) (707) 555 (1,977)
NET EARNINGS (LOSS) (5,024,785) (563,561) (4,594) 110 1,013 (5,481)
EARNINGS (LOSS) PER
SHARE-BASIC (.34) (.04) (.31) .01 .09 (1.10)
EARNINGS (LOSS) PER
SHARE-DILUTED (.34) (.04) (.31) .01 .08 (1.10)
TOTAL ASSETS 22,905 40,939 29,512 25,491 20,160 12,959
STOCKHOLDERS' EQUITY 13,182 35,245 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.
<PAGE>
OVERVIEW
Effective January 1, 1999, the Company has changed it fiscal year end from
September 30 to December 31. References to fiscal years herein are to the fiscal
years of the Company ended September 30 of the respective years. References to
the transition period are the three-month period ended December 31, 1998.
Fiscal year 1998 and the transition period ended December 31, 1998 was a
period 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 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. The principal terms of the two offers for MVS are: (1)
a written offer from an English machine vision company to acquire
substantially all of the MVS assets required to produce MVS' welding seam
tracker and inspection systems (the "MVS welding products") for $175,000 in
cash at the closing plus a contingent sales price based on revenues generated
by the acquired MVS assets during the next two years and the amount of
inventory used by the prospective purchaser during the next year in the
production of MVS welding products; and (2) an unsolicited oral offer from a
Canadian machine vision company to pay $650,000 in cash at closing for the
outstanding stock of MVS, which purchase would transfer substantially all of
MVS assets (except certain cash on hand) and substantially all of MVS
liabilities to the prospective purchaser. The Company is evaluating both
offers, but is actively engaged in negotiations with the English machine
vision company to ascertain whether a definitive asset purchase agreement can
be reached. The oral offer from the Canadian machine vision company is
subject to obtaining bank financing. As of the date of this report, the
Company has not received any substantiation of that the Canadian machine
vision company has the financial wherewithal to fund its current offer for
MVS. As of March 31, 1999, the Company has orally agreed with a buyer to sell
the laser welding portion of the business for approximately $175,000 plus a
contingent amount based upon a percentage of the businesses revenues in the
two years following the sale. The Company intends to liquidate the assets of
the scanner business of MVS and expects associated proceeds to be nominal.
While management is confident of its ability to reach a definitive agreement
to sell a portion of the MVS assets in the near future, 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 remaining investment.
Fiscal year 1998 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 also 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
Transition period ended December 31, 1998 compared to comparable period in 1997
During the quarter ended December 31, 1998, the Company continued the
reorganization of its businesses aimed at concentrating on higher margin
product, service and training sales. The effort is concentrated on
reconfiguring the operating model of its Computer System Sales, Integration
and Training business segment to streamline support infrastructure and
realigning sales force accountability and focus. Associated with this effort
was a significant downsizing of the Company operations in New York, acquired
in 1997 with the acquisition of Expert, Inc. and the folding of the JMR
Distributors business into Socrates Technologies. JMR was involved in the
reselling and distribution of computer memory and associated products. This
reorganization had a significant impact on operating results during the
transition period ended December 31, 1998 due to downward adjustments to the
carrying value of goodwill, inventory and fixed assets associated with
reorganized operations.
<PAGE>
At the same time, the Company continues to be vigorously pursuing growth of its
Software Development business via its Technet Computer Services subsidiary.
The Company reported a decrease in sales of $63,314 to $12,650,211 for the
transition quarter ended December 31, 1998 compared to the comparable quarter
ended December 31, 1997. The decrease was due in part to lower sales
generated by the Company's Computer Systems Sales, Integration and Training
Segment consistent with the reorganization of this business to focus on
higher margin product sales, particularly in its New York operations and with
the planned exit of the low margin memory distribution business. Offsetting
this decrease was an increase in sales generated by the Company's software
development business by $838,000 or 94% to $1,730,000 for the quarter ended
December 31, 1998.
The gross margins as a percentage of sales decreased to 11% from 13%.
Contributing to this decrease was an adjustment during the quarter ended
December 31, 1998 of approximately $480,000 to reduce inventories to net
realizable value. Without this adjustment, gross margins increased to 15%.
For the quarter ended December 31,1998, selling expenses increased by $634,906
or 143% to $1,078,166 due to additional personnel costs associated with the
expansion of the sales force related to the Company's software development
business. Administrative expenses increased $822,276 or 71% to $1,983,581 as a
result of additional reserves for accounts receivable of approximately $400,000
and the increase in expenses associated with growth in the Company's
infrastructure necessary to support future growth.
Depreciation and amortization expenses for the quarter ended December 31, 1998
increased by $50,205 to $270,866 due to an increase in depreciable assets.
During the quarter ended December 31, 1998, the Company recorded charges
totaling $1,290,373 associated with the restructuring of its Computer System
Sales, Integration and Training Segment. The charges consisted of non- cash
write downs of goodwill and inventory associated with certain restructured
operations of $940,000 and the write down of certain fixed assets which have no
continuing value to the Company by $35,000. In addition, the Company recorded a
write down of the value of inventories associated with its New York and memory
distribution operations of $325,000 as a result of reorganizing this business.
Investment income and expense, which includes realized gains and losses on
marketable securities, decreased in the quarter ended December 31, 1998 compared
to the comparable 1997 quarter by $69,108 to $25,469 as a result of lower
investment balances and losses of approximately $184,000 from the sale of shares
of e-Net, Inc. In addition, during the quarter ended December 31, 1998, the
Company recorded a loss of $298,000 associated with an early withdrawal penalty
charged the Company by a financial institution upon withdrawal of funds from an
investment account. The Company is disputing the penalty and currently seeking
recovery of the funds. However, the recovery, if any, will be recorded when
realized.
In March 1998, the Company discontinued its machine vision business and as a
result has reported results of operations and losses associated with the
discontinuance separately from continuing operations. Since the decision to exit
this business was made, the Company has been marketing for sale this business.
The Company currently is considering offers from two third parties, one for a
portion of the business and one for the entire business. Using the lower of
these two offers as an indication of the floor value of the net assets of this
business, the Company recorded a write down of the net assets held for sale
during the quarter ended December 31, 1998 of approximately $1,080,000. In
addition, the Company has provided a reserve of approximately $30,000 for
estimated operating losses to be incurred from January 1, 1999 to the expected
date of sale, which is expected to occur in the second quarter of 1999.
<PAGE>
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.
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.
<PAGE>
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.
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'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 December 31, 1998, the Company had working capital of $6,847,669 and cash,
cash equivalents and investments of $3,902,063. The Company generated cash from
operations during the transition period ended December 31, 1998 of
$2,689,037 principally as result of reducing its accounts receivable by
$1,434,000. This cash was principally used to reduce borrowings during the
quarter.
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 December 31, 1998,
amounted to $2,824,520, and $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 December 31, 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. The
amounts due to the finance company under the agreement at December 31, 1998
amounted to $4,491,022.
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.
<PAGE>
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 $24,486,000. 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 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 340,457 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
December 31, 1998.
As of December 31, 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 December 31, 1998, total $1,154,742.
At December 31, 1998, the Company's backlog was approximately $1 million.
The Company does not believe that its backlog at any specific time is
necessarily indicative of its future business.
<PAGE>
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.
With the discontinuance of the Company's Canadian operation in March
1998, 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.
<PAGE>
YEAR 2000
Many computerized systems and microprocessor that are embedded in a variety
of products either sold or used by the Company have the potential for
operational problems if the lack the ability to handle the transition to the
Year 2000. The problem generally occurs in systems where functions, which are
date sensitive recognize the last two digits in a date field in the year 2000 as
being the year 1900, causing the product or system to potentially malfunction.
After completing an assessment of the Company's information systems 1998 for
possible issues which could arise as a result of those systems not being year
2000 compliant, the Company commenced the procurement and installation of a new
company wide business and management information system which is year 2000
compliant. As of March 1999, the installation of the system is substantially
complete with one subsidiary remaining to be upgraded to the new system. The
upgrade of this subsidiary is expected to be completed by the end of the second
quarter of 1999. Following this installation, the Company plans to conduct a
system test to ensure the vendor's claims of year 2000 compliance are accurate.
Based upon the implementation progress made to date, the Company does not
believe a contingency plan is necessary. However, should the testing of the new
system cause concerns, a contingency plan will be developed.
Expenditures to date and future anticipated expenditures to procure, install,
and test the new system have not been significant.
Substantially all products sold by the Company are manufactured or assembled by
third party vendors who warrant their products against defect, including defects
associated with the year 2000 issue.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Contents
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
ITEM 8: FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 20
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 21-22
Consolidated Statements of Operations 23
Consolidated Statements of Stockholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26-41
</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
December 31, 1998, and 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 and for
the three month period ended December 31, 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 December 31, 1998, and 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 and for the three
month period ended December 31, 1998, in conformity with generally accepted
accounting principles.
The balance sheet as of December 31, 1997, and the statements of operations and
comprehensive income (loss) and cash flows for the three month period ended
December 31, 1997 have been included for comparative purposes only and have not
been audited by us.
GRANT THORNTON LLP
Vienna, Virginia
April 12, 1999
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------------
Years ended 1998 1997 1998 1997
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 2,423,204 $ 1,672,315 $ 766,402 1,675,397
Investments 1,478,859 18,828,835 969,507 2,850,706
Accounts receivable, net of allowance
for doubtful accounts 10,437,346 6,001,900 14,142,997 4,910,053
Inventory 1,072,661 2,347,890 2,831,987 1,637,007
Tax credits and income tax receivable 216,985 83,712 370,127 82,085
Prepaid expenses 778,727 101,983 966,173 112,404
Net assets of discontinued operations
held for sale 162,338 4,815,219 1,387,430 5,170,498
--------------------------------------------------------------
Total Current Assets 16,570,120 33,851,854 21,434,623 16,438,150
Property and Equipment, net 1,018,738 571,330 1,121,103 476,511
Capitalized Software Costs, net 67,500 202,500 101,250 236,250
Goodwill, net 3,944,183 5,488,116 5,027,719 5,641,582
Deferred Tax Asset, net of valuation 1,200,000 766,119 1,200,000 766,119
allowance
Other Assets 104,005 58,918 214,325 61,777
--------------------------------------------------------------
Total Assets $ 22,904,546 $ 40,938,837 $ 29,099,020 23,620,389
Liabilities and Stockholders' Equity
Current Liabilities
Line of credit and financing arrangement 4,491,022 383,318 5,417,256 228,760
Accounts payable and accrued
liabilities 4,076,687 4,674,060 4,924,728 4,589,270
Shareholder loans and interest 1,154,742 636,029 1,380,056 737,208
--------------------------------------------------------------
Total Current Liabilities $ 9,722,451 $ 5,693,407 $ 11,722,040 5,555,238
Stockholders' Equity
Common stock, $.01 par value,
50,000,000 shares authorized,
17,740,620, shares issued at December 31, 1998 and 1997
and September 30, 1998 and 11,590,000 shares issued at
September 30, 1997 and 14,739,204 shares outstanding at
December 31, 1998 and September 30, 1998, 16,462,666
shares outstanding at December 31, 1997 and 11,231,010
shares outstanding at September 30, 1997 177,406 177,406 177,406 115,900
Stock subscription receivable (150,000) (150,000) (150,000) (150,000)
Additional paid-in capital 49,342,292 49,360,390 49,342,292 24,599,441
Treasury stock, at cost, 3,001,416 shares at December 31, 1998
and September 30, 1998, 1,277,954 shares at December
31, 1997 and 179,500 shares at September 30, 1997 (17,554,241) (7,625,504) (17,554,241) (572,660)
Accumulated deficit (14,984,623) (5,929,617) (9,959,842) (5,366,059)
Accumulated other comprehensive income and
(losses)
Unrealized loss on investments available
for sale (3,513,025) (169,231) (4,406,200) (205,182)
Cumulative translation adjustment (135,714) (418,014) (72,435) (356,289)
--------------------------------------------------------------
Total Stockholders' Equity 13,182,095 35,245,430 17,376,980 18,065,151
--------------------------------------------------------------
$ 22,904,546 $ 40,938,837 $ 29,099,020 $ 23,620,389
--------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 31, YEARS ENDED SEPTEMBER 30,
1998 1997 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
SALES $ 12,650,211 $ 12,713,525 $ 62,007,968 $ 34,334,698 $ 11,421,295
COST OF SALES 11,292,576 11,001,474 53,298,270 29,972,618 10,376,183
---------------------------------------------------------------------------------------
GROSS PROFIT 1,357,635 1,712,051 8,709,698 4,362,080 1,045,112
EXPENSES
Selling 1,078,166 443,260 2,972,701 862,372 192,397
Administrative 1,983,581 1,161,305 5,545,305 2,650,924 1,430,360
Depreciation and amortization 270,866 220,661 963,885 514,026 117,508
Restructuring Charges 1,290,373 - - - -
---------------------------------------------------------------------------------------
4,622,986 1,825,226 9,481,891 4,027,322 1,740,265
INCOME (LOSS) FROM OPERATIONS (3,265,351) (113,175) (772,193) 334,758 (695,153)
INTEREST AND INVESTMENT INCOME 25,469 94,577 2,150,537 1,029,336 893,899
INTEREST AND FINANCING CHARGES (652,548) (43,407) (265,811) (250,818) (117,506)
---------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (3,892,430) (62,005) 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 (LOSS) FROM CONTINUING OPERATIONS $ (3,892,430) $ (62,005) $ 1,387,906 $ 816,705 $ 457,670
- -----------------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Loss from operations, net of income
tax benefits of $486,350,
and $410,000 IN 1997 AND 1996,
respectively $ (1,132,355) $ (501,556) $ (1,250,052) $ (707,159) $ 555,094
Loss from disposal, including income tax
expense of $1,233,000 in 1998 - - (4,731,636) - -
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
(1,132,355) (501,556) (5,981,688) (707,159) 555,094
---------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ (5,024,785) $ (563,561) $ (4,593,782) $ 109,546 $ 1,012,764
---------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE
Continuing operations--basic $ (0.26) $ 0.00 $ 0.09 $ 0.08 $ 0.04
Discontinued operations--basic (0.08) (0.04) (0.40) (0.07) 0.05
Net earnings (loss)--basic (0.34) (0.04) (0.31) 0.01 0.09
Continuing operations--diluted (0.26) 0.00 0.09 0.06 0.03
Discontinued operations--diluted (0.08) (0.04) (0.40) (0.05) 0.05
Net earnings (loss)--diluted (0.34) (0.04) (0.31) 0.01 0.08
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
THREE MONTHS ENDED DECEMBER 31, 1998 AND THE 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 --
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT -- -- -- -- --
UNREALIZED GAIN (LOSS) FROM INVESTMENTS -- -- -- -- --
COMPREHENSIVE INCOME
WARRANT PURCHASE -- -- -- 180 --
----------- ----------- ---------- ------------ --------------
PRIVATE PLACEMENT TRANSACTIONS 150,000 1,500 -- 598,500 --
----------- ----------- ---------- ------------ --------------
NET EARNINGS -- -- -- -- 1,012,764
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 --
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT -- -- -- -- --
UNREALIZED GAIN (LOSS) FROM INVESTMENTS -- -- -- -- --
COMPREHENSIVE INCOME (LOSS)
WARRANT CONVERSION 15,000 150 -- 59,850 --
ISSUANCE OF COMMON STOCK 135,000 1,350 -- 521,550 --
PURCHASE OF TREASURY STOCK -- -- -- -- --
----------- ----------- ---------- ------------ --------------
NET EARNINGS -- -- -- -- 109,546
BALANCE, SEPTEMBER 30, 1997 11,590,000 115,900 (150,000) 24,599,441 $ (5,366,056)
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT -- -- -- -- --
UNREALIZED GAIN (LOSS) FROM INVESTMENTS -- -- -- -- --
COMPREHENSIVE INCOME (LOSS)
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 --
NET LOSS -- -- -- -- (4,593,782)
----------- ----------- ---------- ------------ --------------
BALANCE, SEPTEMBER 30, 1998 17,740,620 177,406 (150,000) 49,342,292 $ (9,959,838)
NET LOSS (5,024,785)
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT
UNREALIZED GAIN (LOSS) FROM INVESTMENTS
COMPREHENSIVE INCOME (LOSS)
----------- ----------- ---------- ------------ --------------
BALANCE, DECEMBER 31, 1998 17,740,620 177,406 (150,000) 49,342,292 (14,984,623)
----------- ----------- ---------- ------------ --------------
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED CUMULATIVE
TREASURY STOCK GAIN (LOSS) ON TRANSLATION
SHARES AMOUNT INVESTMENTS ADJUSTMENT TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <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)
--------------
1,063,123
----------- ----------- ---------- ------------ --------------
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)
--------------
(498,802)
----------- ----------- ---------- ------------ --------------
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)
ISSUANCE'S 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)
--------------
(8,510,947)
----------- ----------- ---------- ------------ --------------
BALANCE, SEPTEMBER 30, 1998 (3,001,416) $(17,554,241) $(4,406,200) $ (72,439) $ 17,376,980
NET LOSS (5,024,785)
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT (63,275.00) (63,275)
UNREALIZED GAIN (LOSS) FROM INVESTMENTS 893,175 893,175
--------------
(4,194,885)
----------- ----------- ---------- ------------ --------------
BALANCE, DECEMBER 31, 1998 (3,001,416) (17,554,241) (3,513,025) (135,714) 13,182,095
----------- ----------- ---------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 31, YEARS ENDED SEPTEMBER 30,
1998 1997 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) from continuing operations $(3,892,428) $ (62,005) $ 1,387,906 $ 816,705 $ 457,670
Net earnings (loss) from discontinuing operations (1,132,355) (501,556) (5,981,688) (707,159) 555,094
---------------------------------------------------------------------
Net earnings (loss) (5,024,783) (563,561) (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 270,865 331,573 963,885 777,263 197,814
Restructuring Charges 1,290,374 - - - -
Realized loss (gain) on sale of investments 439,145 - (1,594,157) - -
(Gain) loss on foreign exchange - - - - (50,359)
Equity in earnings of joint venture - - 239,970 (49,847) -
Non-cash (gains) losses from discontinued operations 1,031,112 - 2,029,833 (465,996) -
Changes in operating assets and liabilities, net of
effects of acquisitions
Decrease (increase) in accounts receivable 4,366,066 (1,182,914) (8,541,868) (487,807) (1,112,781)
Decrease (increase) in inventory 1,434,325 (391,909) (176,307) (95,703) (1,526,431)
(Increase) decrease in tax credits and income
taxes receivable (18,545) 33,373 (336,665) 369,004 (95,952)
Decrease (increase) in prepaid expenses 176,645 88,083 (719,427) 84,355 (115,414)
(Increase) decrease in other assets 148,190 4,537 (126,751) (17,528) (16,964)
Decrease in advance deposits (75,609) 131,666 (150,854)
(Decrease) increase in accounts payable and
accrued liabilities (1,265,393) (137,282) 474,008 (1,106,514) (894,482)
---------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,848,001 (1,818,100) (12,085,555) (1,053,317) (3,539,089)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment purchases (566,762) (18,202,848) (5,542,707) (989,626) -
Proceeds from sales and borrowings on margin against
investments 512,224 2,229,463 4,800,270 4,536,897 2,120,102
Property, plant and equipment purchases (15,666) (131,583) (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 (USED IN) PROVIDED BY INVESTING ACTIVITIES (70,204) (16,104,968) (1,596,989) 2,175,912 703,558
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in vendor financing/line of credit (926,234) 397,565 4,372,955 317,053 609,374
Proceeds from shareholder loans 1,400,967 78,996 -
Payment of shareholder loans (225,314) (105,329) (758,119) - (497,269)
Payment of debt - - - - (19,725)
Proceeds from issuance of common stock - - - 522,900 600,000
Proceeds from exercise of warrants - 24,547,712 24,547,712 60,000 180
Purchase of treasury stock - (7,052,844) (16,981,581) (572,660) -
---------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,151,548) 17,787,104 12,581,934 406,289 692,560
---------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 30,555 (132,882) 191,615 (167,377) 113,825
---------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 1,656,804 (3,082) (908,995) 1,361,507 (2,029,146)
CASH AT BEGINNING OF YEAR 766,402 1,675,397 1,675,397 313,890 2,343,036
---------------------------------------------------------------------
CASH AT END OF YEAR $ 2,423,206 $1,672,315 $ 766,402 $ 1,675,397 $ 313,890
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Income taxes paid $ 26,625 $ - $ 131,527 $ 85,434 $ -
Interest paid $ 153,901 $ 21,466 4 223,353 $ 261,754 $ 80,220
</TABLE>
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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 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.
Effective January 1, 1999, the Company has changed it fiscal year end from
September 30 to December 31. References to fiscal years herein are to the
fiscal years of the Company ended September 30 of the respective years.
References to the transition period are the three-month period ended
December 31, 1998
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
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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 December 31, 1998 was $7,000 and $1,787,000,
respectively and 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 at December 31, 1998 was $3,513,025 and at 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 three months ended December 31,
1998, the Company sold 109,543 shares of e-Net stock for gross proceeds of
$468,054 generating a realized loss of $184,822. 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 340,457 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 December 31, 1998, and September 30,
1998 and 1997, management has established an allowance for doubtful accounts
of approximately $ 409,000, $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
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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 related to computer software acquired in the Technet
acquisition was $33,750, $135,000 and $33,750 for the three month period
ended December 31, 1998, the year ended September 30, 1998 and the three
months (from date of acquisition) ended September 30, 1997.
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 in the three month period ended December 31,
1998 was $153,466 and 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. As a result of the review of the
recoverability of the recorded goodwill at December 31, 1998, management
recorded an increase in amortization of goodwill associated with its
purchase of Expert, Inc. and JMR Distributors, Inc. of approximately
$940,000 to reduce the net carrying value of this goodwill to its net
realizable value as a result of management's decision to restructure these
operations. 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
statement of operations 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
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
The computations of basic and fully diluted earnings (loss) per share are
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
1998 1997 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Numerator
Earnings (loss) from continuing
operations $(3,892,430) $ (62,005) $ 1,387,906 $ 816,705 $ 457,670
-------------------------------------------------------------------------------
Denominator
Denominator for basic earnings
per share--weighted average
shares 14,739,204 12,926,606 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 14,739,204 12,926,606 15,143,170 12,810,215 13,280,736
-------------------------------------------------------------------------------
Basic earnings (loss) per share from
continuing operations $ (.26) $ - $ 0.09 $ 0.08 $ 0.04
-------------------------------------------------------------------------------
Diluted earnings (loss) per share from
continuing operations $ (.26) $ - $ 0.09 $ 0.06 $ 0.03
-------------------------------------------------------------------------------
</TABLE>
For additional information regarding stock options, see Note H. 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
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
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 December 31, 1998, approximately 53 percent of accounts receivable or
$5.8 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.
- --------------------------------------------------------------------------------
NOTE B--RESTRUCTURING OF OPERATIONS
During the quarter ended December 31, 1998, the Company continued the
reorganization of its businesses aimed at concentrating on higher margin product
and service sales. The effort is concentrated on reconfiguring the operating
model of its Computer System Sales, Integration and Training business segment to
streamline support infrastructure and realigning sales force accountability and
focus. Associated with this effort was a significant downsizing of the Company
operations in New York, acquired in 1997 with the acquisition of Expert, Inc.
and the folding of the JMR Distributors business into Socrates Technologies. JMR
was involved in the reselling and distribution of computer memory and associated
products. This
<PAGE>
reorganization had a significant impact on operating results during the
transition period ended December 31, 1998 due to downward adjustments to the
carrying value of goodwill, inventory and fixed assets associated with
reorganized operations.
During the quarter ended December 31, 1998, the Company recorded charges
totaling $1,290,373 associated with the restructuring of its Computer System
Sales, Integration and Training Segment. The charges consisted of non- cash
write downs of goodwill associated with certain restructured operations of
$940,000 and the write down of certain fixed assets which have no continuing
value to the Company by $35,000. In addition, the Company recorded a write
down of the value of inventories associated with its New York and memory
distribution operations of $325,000 as a result of reorganizing this business.
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE C--INVENTORY
Inventory consists of the following at--
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------
1998 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials $ 314,361 $ 1,048,535 $ 560,080
Finished goods 758,300 1,783,452 1,076,927
------------------------------------------------
$ 1,072,661 $ 2,831,987 $ 1,637,007
------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE D--PROPERTY AND EQUIPMENT
Property, plant and equipment consist of the following at--
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------
1998 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Autos and trucks $ 126,941 $ 142,405 $ 124,384
Furniture and office equipment 1,122,162 1,155,078 552,741
Purchased software 309,739 325,585 87,781
Leasehold improvements 33,734 33,734 44,244
---------------------------------------------
1,592,576 1,656,802 890,150
Less accumulated
depreciation (573,838) (535,699) (332,639)
---------------------------------------------
$ 1,018,738 $ 1,121,103 $ 476,511
---------------------------------------------
</TABLE>
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE E--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
December 31, 1998, and September 30, 1998 and 1997, amounted to $ 2,824,520,
$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 December 31,
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. The amounts due to the finance company under the
agreement at December 31, 1998 amounted to $4,491,022.
- --------------------------------------------------------------------------------
NOTE F--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at--
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ ----------------------------
1998 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Vendor trade payables $ 3,220,388 $ 3,942,096 $ 2,752,234
Salaries and commissions payable 756,030 909,175 1,179,454
Other accrued liabilities 100,269 73,457 657,582
----------------------------------------------
$ 4,076,687 $ 4,924,728 $ 4,589,270
----------------------------------------------
</TABLE>
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE G--INCOME TAXES
The income tax (benefit) provision consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------- -----------
1996 1997 1998 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal
Current $ - $ - $ - $
Deferred 67,202 342,091 (2,347,617) (945,256)
----------------------------------------------------------
67,202 342,091 (2,347,617) (945,256)
State
Current - 82,648 30,600
Deferred 9,883 50,307 (345,238) (139,008)
----------------------------------------------------------
9,883 132,955 (314,638) (139,008)
Increase (decrease) in valuation
Allowance (453,515) (178,476) 2,386,882 1,084,264
----------------------------------------------------------
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:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------------------- -------------
1996 1997 1998 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax (benefit) at U.S. Federal statutory
rates $ 27,622 $ 378,514 $ 377,946 $ (1,323,427)
Increase (decrease) resulting from
State income taxes - 90,061 55,580 (194,622)
Goodwill amortization 110,582 164,916 292,229 435,742
Change in valuation allowance against
deferral tax asset (453,515) (178,476) 2,386,882 1,084,264
Tax benefit associated with write off
of loans to foreign subsidiary - - (3,523,948) (19,500)
Other permanent differences (61,119) (158,445) 135,938 17,543
--------------------------------------------------------
Income tax provision $ (376,430) $ 296,570 $ (275,373) $ -
</TABLE>
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE G--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--
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998 1997
--------------- ---------------------------
<S> <C> <C> <C>
Net operating losses $ 4,157,971 $ 3,201,183 $ 220,031
Accrued compensation 269,685 347,685 658,905
Accounts receivable and
inventory reserves 224,872 63,259 26,416
Other 18,618 (25,245) (139,234)
Valuation allowance (3,471,146) (2,386,882)
----------------------------------------------
Net deferred tax
asset--continuing
operations $ 1,200,000 $ 1,200,000 $ 766,118
----------------------------------------------
</TABLE>
The above table does not reflect the tax effect of unrealized losses on
available for sale securities classified in stockholders' equity as of
December 31, 1998, amounting to approximately $1,700,000. This tax effect
has been fully reserved by establishing an additional $1,700,000 valuation
allowance at December 31, 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 each balance
sheet date, 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 December 31, 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, writedowns 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 $11,000,000 at December 31, 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.
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
NOTE H--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 percent
stockholder with a required exercise price of 110 percent 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.
In November 1998, the Company adopted Non-Qualified Employee Stock Option
Plan with similar terms to the 1997 plan.
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 net earnings and net earnings per share would have changed to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
1998 1998 1997
-------------- --------------------------
<S> <C> <C> <C>
Earnings (loss) from continuing operations:
As reported $ (3,892,430) $ 1,387,906 $ 816,705
Pro Forma $ (4,071,626) $ 604,342 $ 580,278
Earnings (loss) Per Share, from continuing operations:
As reported $ (.26) $ 0.09 $ 0.06
Pro Forma $ (.28) $ 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 during the period ended December 31,
1998, fiscal year ended September 30, 1998 and fiscal year ended September
30, 1997, respectively: expected volatility of 114 percent, 84 percent and
74 percent, risk-free interest rates of 4.38 percent, 5.36 percent and
5.89 percent. The weighted - average expected lives for options granted
during the period ended December 31, 1998 was two years and 2.6 years for
the fiscal years ended 1998 and 1997.
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
NOTE H--STOCKHOLDERS' EQUITY--CONTINUED
<TABLE>
<CAPTION>
Following is a summary of stock option transactions:
<S> <C> <C>
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
-----------
Granted during the period (at prices ranging from
$1.50 to $1.75 per share) 155,000
Forfeited during the period (24,250)
Exercised during the period -
Outstanding, December 31, 1998 889,150
-----------
Eligible, end of year for exercise
currently (at prices ranging from
$2.94 to $6.69 per share) 349,575
-----------
Weighted average stock option price $ 3.74
-----------
Weighted average fair value of options
granted during fiscal: 1997 $ 3.16
1998 $ 1.34
three months ended Dec. 31, 1998 .97
-----------
</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 percent of the fair market value
of the common stock on each purchase date. As of December 31, 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
- -------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
NOTE I--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 December 31, 1998, are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
--------------------------------------
<S> <C>
1999 $ 745,232
2000 600,284
2001 478,402
2002 422,754
2003 87,650
-----------
$ 2,334,322
-----------
</TABLE>
Rent expense was $240,000, $663,000, $490,000 and $252,000 for the three
month period ended December 31, 1998, and the years ended September 30,
1998, 1997 and 1996, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into separate employment agreements with certain 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.
On April 5, 1999, the Company was made a third party claim respondent by
one of the respondents in certain, ongoing New York Stock Exchange
arbitration proceedings against Securities brokerage firm and certain of
its employees. The claimants allege that Securities brokerage firm and
certain employees engaged in unauthorized trading and other impermissable
activities with respect to the claimants accounts at Securities brokerage
firm has denied the claimants' allegations. The Company believes that the
third party claim against the Company is without merit. The Company intends
to vigorously defend against the third-party claim and is evaluating
potential claims by the Company against the respondent who filed the third
party claim. This respondent is seeking dismissal of all claims against it
and unspecified damages for alleged breach of contract and alleged
tortious interference with contract by the claimants, counterclaim
respondents and third-party respondents. The amount of the damages sought
from the Company cannot be estimated at this time.
On March 31, 1999 or thereabouts, the Company was served with a
complaint filed by Technospin, Inc., a Canadian vendor to MVS Modular
Vision Systems, Inc. (MVS), in the United States District Court for
Maryland. The complaint alleges that the Company is obligated to pay
$750,000 to Technospin, Inc. as the corporate guarantor of MVS' obligations
under a June 30, 1997 agreement between MVS and Technospin for the
manufacture of certain scanner products. The Company believes that
Technospin, Inc.'s claim is without merit and intends to vigorously
defend against the complaint. The Company intends to file a counterclaim
against Technospin, Inc. seeking damages (the amount of such damages being
undetermined at this time) for breach of contract and tortious interference
in contract.
TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES
The Company has loans payable to an officer/stockholder outstanding as of
December 31, 1998. Loans to one such officer/stockholder have been loaned
under two separate loan agreements bearing interest at 9 percent and 8
percent, respectively, and are due on demand and carry a balance, including
accrued interest at December 31, 1998 of $1,154,742.
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 $70,000,
$262,000 and $87,125 during the three months ended December 31, 1998 and the
years ended September 30, 1998 and 1997, respectively.
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
NOTE J--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 its Software
Development business. For the year ended September 30, 1996, the Company's
continuing operations were in a single segment.
For the three month period ended December 31, 1998 and the years ended
September 30, 1998 and 1997, the Company had one customer that accounted for
approximately 24 percent , 30 percent and 21 percent of its total revenue,
respectively. 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 percent and 19 percent 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 or during
the three month period ended December 31, 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 transition period representing the three month
period ended December 31, 1998 and the comparable period ended December 31,
1997 and the years ended September 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1998
COMPUTER
SYSTEM SALES,
INTEGRATION SOFTWARE GENERAL
AND TRAINING DEVELOPMENT CORPORATE TOTAL
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 10,919,927 $ 1,730,284 $ $ 12,650,211
Operating profit (loss) (3,081,954) 75,749 (259,146) (3,265,351)
Net income (loss) (3,349,424) 22,083 (565,089) (3,892,430)
Identifiable Assets 16,042,228 4,179,854 2,382,227 22,604,309
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1997
COMPUTER
SYSTEM SALES,
INTEGRATION SOFTWARE GENERAL
AND TRAINING DEVELOPMENT CORPORATE TOTAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 11,821,038 $ 892,487 $ $ 12,713,525
Operating profit (loss) 13,855 121,711 (248,742) (113,176)
Net income (loss) (52,753) 118,297 (127,549) (62,005)
Identifiable Assets 13,694,998 3,397,957 19,030,664 36,123,619
</TABLE>
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
NOTE J--SEGMENT INFORMATION--CONTINUED
<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 3,995,072 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>
- ------------------------------------------------------
NOTE K--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 enhancing 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. The Company currently
is considering offers from two third parties, one for a portion of the
business and one for the entire business. Using the lower of these
two offers as an indication of the floor value of the net assets of this
business, the Company recorded a write down of the net assets held for sale
during the quarter ended December 31, 1998 of approximately $1,080,000.
While management is confident of its ability to reach a definitive
agreement to sell a portion of the MVS assets in the near future, 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 remaining
investment.
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
NOTE K--DISCONTINUED OPERATIONS--CONTINUED
In fiscal 1998, the Company recorded a loss on the discontinuance in fiscal
1998 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, the original
loss accrual had been utilized. At December 31, 1998, management accrued
$30,000 as an estimate of losses to be incurred through the estimated date
of sale (second quarter of 1999).
- -------------------------------------------------------------------------------
NOTE L--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 earnings (loss) $ (563) $ (5,588) $ 1,888 $ (331) $ (4,594)
----------------------------------------------------------------------------------
</TABLE>
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- -------------------------------------------------------------------------------
DECEMBER 31, 1998 AND 1997, AND SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
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
Earnings (loss) from
discontinued
operations 169 104 229 (1,209) (707)
-----------------------------------------------------------------------
Net earnings (loss) $ 600 $ 608 $ 817 $ (1,915) $ 110
-----------------------------------------------------------------------
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16(A) OF THE EXCHANGE ACT.
Item 10 is hereby incorporated by reference to the registrant's Proxy
Statement to be filed with the Commission on or prior to June 1,1999.
ITEM 11. EXECUTIVE COMPENSATION.
Item 11 is hereby incorporated by reference to the registrant's Proxy
Statement to be filed with the Commission on or prior to June 1, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Item 12 is hereby incorporated by reference to the registrant's Proxy
Statement to be filed with the Commission on or prior to June 1, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Item 13 is hereby incorporated by reference to the registrant's Proxy
Statement to be filed with the Commission on or prior to June 1, 1999.
ITEM 14. 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)
21.0 List of Subsidiaries, filed herewith.
23.0 Consent of Independent Auditors, Grant Thornton LLP, dated April 12,
1999, filed herewith.
B. Reports on Form 8-K.
The Company filed a report on Form 8-K dated December 16, 1998, with the
Commission during the quarter ended December 31, 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
April 13, 1999
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, April 13, 1999
- --------------------------- and President
Abbas Fathi [Principal Executive Officer]
MARK J. MCKNIGHT Chief Financial Officer, Controller, April 13, 1999
- --------------------------- Assistant Secretary
Mark J. McKnight [Principal Financial Officer]
EDWARD RATKOVICH Chairman of the Board April 13, 1999
- ---------------------------
Edward Ratkovich
GEORGE COWAN Director, Executive Vice April 13, 1999
- --------------------------- President
George Cowan
JAMES MILLER Director April 13, 1999
- ---------------------------
James Miller
EDWARD P. ROBERTS Director April 13, 1999
- ---------------------------
Edward P. Roberts
JEAN SISCO Director April 13, 1999
- ---------------------------
Jean Sisco
CLIVE G. WHITTENBURY, PH.D. Director April 13, 1999
- ---------------------------
Clive G. Whittenbury, Ph.D.
PAUL W. RICHTER Director, General Counsel, April 13, 1999
- --------------------------- Secretary
Paul W. Richter
</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 April 12, 1999, 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
transition period ended December 31, 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 LLP
Vienna, Virginia
April 12, 1999
<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 TEH
COMPANY'S FORM 10-K FOR THE THREE MONTH TRANSITION PERIOD ENDED
DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,423,204
<SECURITIES> 1,476,859
<RECEIVABLES> 10,846,346
<ALLOWANCES> 409,000
<INVENTORY> 1,072,661
<CURRENT-ASSETS> 16,570,120
<PP&E> 1,592,577
<DEPRECIATION> 573,839
<TOTAL-ASSETS> 22,904,546
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 177,406
<OTHER-SE> 13,004,689
<TOTAL-LIABILITY-AND-EQUITY> 22,904,546
<SALES> 12,650,211
<TOTAL-REVENUES> 12,650,211
<CGS> 11,292,576
<TOTAL-COSTS> 11,292,576
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 627,079
<INCOME-PRETAX> (3,892,430)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,892,430)
<DISCONTINUED> (1,132,355)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,024,785)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
