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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended: Commission file number:
December 31, 1999 0-26614
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SOCRATES TECHNOLOGIES CORPORATION
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(Exact name of Registrant as specified in its Charter)
DELAWARE 54-1707718
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8500 Leesburg Pike, Vienna, Va 22183
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(Address of principal executive offices) (Zip code)
(703) 288-6500
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(Company's telephone number, including area code)
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Securities registered under Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
TITLE OF CLASS
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Common Stock, $.01 Par Value
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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 $95,261,810, of which
$71,714,280 was held by non-affiliates of the registrant, based upon the closing
price of the common stock on March 17, 2000, as quoted by the Nasdaq National
Market System.
The number of outstanding shares of the registrant's common stock on March
17, 2000 was 23,093,772.
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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 March 30, 2000, are incorporated herein by
reference into Part III of this report.
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SOCRATES TECHNOLOGIES CORPORATION
Table of Contents
<TABLE>
<S> <C> <C>
PART I PAGE
Item 1. Business 3-8
Item 2. Properties 8-9
Item 3. Legal Proceedings 9-10
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 12-20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 45
PART III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 45
Item 13. Certain Relationships and Related Transactions 45
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
</TABLE>
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ITEM 1. BUSINESS.
Overview
Socrates Technologies Corporation ("Socrates" or "the Company"), was
incorporated in the State of Delaware on April 14, 1994 under the name "MVSI,
Inc.". Upon the merger of Socrates Technologies Corporation, a new-formed
subsidiary of the Company, MVSI, Inc., on December 12, 1998, the name of the
Company was changed from "MVSI, Inc." to "Socrates Technologies Corporation.
Unless the context otherwise requires, the "Company" or "Socrates" refers to
Socrates Technologies Corporation, its predecessor and its subsidiaries. Since
February 1, 2000, the Company has maintained its principal executive offices at
8500 Leesburg Pike, Vienna, Virginia 22183. Its telephone number is (703)
288-6500.
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.
The Company, using stock and cash, acquired all the outstanding stock
of Networkland, Inc., a regional network integrator and hardware reseller,
effective August 16, 1999. The results of operation of Networkland, Inc. are
included in the accompanying financial statements since the date of acquisition.
(See Liquidity and Capital Resources, below and Note L, Notes to Consolidated
Financial Statements.)
Effective March 1, 2000, the Company, through Socrates Solutions
Corporation ("SSC"), acquired using stock and cash, substantially all of the
assets and certain liabilities of Object Application Systems, Inc.("OAS"), a New
York based software development and sales and implementation company, which will
be operated as a division of SSC. OAS develops and implements a family of ERP
software systems for small and mid size enterprises. The Company plans to
convert these systems to web based applications during the year 2000. The
OA/System ERP software "vertical" application products include OA/Manufacturing,
OA/Distribution, and OA/Converting. OA/System products are capable of supporting
virtually every aspect of manufacturing, importing, converting, and
distribution. The applications include customer sales order processing,
purchasing, inventory management, shipping, invoicing, production scheduling,
production planning, general ledger, accounts receivable, financing of
receivables, accounts payable, letter of credit processing, financial reporting
and multi-currency. Additional OA/System products include OA/EDI for Electronic
Data Interchange (EDI) transactions and OA/Data Collection for radio frequency
(RF) warehouse management. (See Liquidity and Capital Resources, below and Note
M, Notes to Consolidated Financial Statements.)
Socrates offers a suite of services that allows customers to leverage
existing Internet, network, hardware and software technology in a cost effective
and consistent manner. These services include:
Connectivity and Communication
Application Service Providing (ASP)
E-commerce and Web-site Development
Customized Software Solutions
Hardware and Network Integration
Software Training
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Strategic Focus
Socrates Technologies Corporation is an information technology ("IT")
solutions company whose business is focused on 1) Application Service Providing
("ASP") (delivery of web-based applications) to small and medium sized
enterprises ("SME"); 2) e-commerce solutions and web design; 3) customized
software solutions 4) network integration and services and 5) reselling of
computer hardware and peripherals. Socrates' plan is to develop its ASP services
to SME's through acquisitions and strategic alliances. Socrates strives to
provide SME's with a complete IT service offering allowing the SME to outsource
its IT requirements and have a clearer understanding and control of its total IT
cost without having the typical cost associated with ownership and management of
IT infrastructure. Socrates believes it can enter into long-term contracts (24
to 36 months) with its customers, delivering and billing services on a per user
monthly basis.
Socrates plans to deliver these services through three wholly owned
subsidiaries; Socrates Solutions, Corp. ("SSC"), Technet Computer Services, Inc.
("Technet") and Networkland, Inc. ("Networkland").
Connectivity and Communication
Socrates, as a member of Qwest Communications, Inc., ("Qwest")(NYSE: Q)
business partnership program (QBPP) and Qwest application service provider
(QASP) program, can offer to its customers a wide range of connectivity and
communication solutions. Socrates' main future focus of delivering applications
to SME's cannot be achieved until adequate high-speed internet access is present
at the customer site. The partnerships with Qwest should allow Socrates to offer
high-speed access including digital service lines (DSL), T-1, T-3, OC12 and OC48
connectivity through Qwest's nationwide and international network. In addition
to high-speed access, Socrates can also offer the customer virtual private
networks (VPN), video broadcasting, video on demand, voice services over
internet protocol, Microsoft Exchange services (e-mail), Microsoft Windows 2000
and Microsoft Office 2000 web based offerings.
Application Service Providing (ASP)
Socrates believes that the ASP market will fuel the Company's future
growth and is developing ASP offerings that are specifically geared toward the
SME market. Socrates believes that acquisition, development or alliance with
providers of mission critical applications will provide an offering that will
differentiate the Company from others within the ASP market. These mission
critical applications include enterprise resource planning ("ERP"), enterprise
asset management ("EAM"), customer relationship management ("CRM"), sales force
automation ("SFA"), accounting and financial reporting, human resource
administration ("HRA"), supply-chain management ("SCM"), and educational and
training applications geared toward the SME market.
Socrates believes that SME's not only want reduced costs of licensing
applications but also reduced costs associated with implementation and
maintenance. Often the larger applications have been designed for larger
enterprises and as such are difficult and expensive to implement costing 5 to 10
times the licensing fee. Socrates acquisition and development strategy is to
deliver applications that have been successfully delivered to existing SME's
through a local area network ("LAN") and begin to deliver them, as "internet
ready" offerings, across the internet and wide area networks ("WAN"). Socrates
believes its advantage will be the reduced cost of licensing as a result of
ownership of the application and a reduced cost of implementation to the
customer due to the applications SME focus. Socrates has developed a SCM
solution that is scheduled to be internet ready by the end of the second quarter
of 2000. Effective March 1, 2000, through the acquisition of OAS, Socrates
acquired the rights to an ERP application which is also scheduled to be internet
ready by the end of the second quarter of 2000.
Socrates also offers other applications through strategic alliances to
complement its own offerings or in areas where cost and competition make it
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prohibitive for internal development or acquisition. In March of 2000, Socrates
completed a strategic alliance with SalesLogix, Inc. (NASDAQ:SLGX) whereby
Socrates can resell SalesLogix CRM and SFA solutions over the Internet. This
alliance helps Socrates to offer a complete suite of services to its customers.
The ASP business of Socrates is a new business line and initiative.
There can be no assurance that Socrates will be able to establish or maintain
the ASP business as a profitable operation. The Compact believes that the ASP
business development is essential to growing the Company's existing operations
and to its overall future financial performance. The Company privately placed
shares of its Common Stock in February 2000 and a 4% Convertible Debenture in
March 2000 in order to raise approximately $4.8 million in capital to fund the
ASP business as well as existing business lines. The Company may need to raise
additional working capital in fiscal year 2000 to fund the ASP business
development. SSC is the principal business vehicle for the ASP business
development.
E-Commerce and Web-site Development
Socrates also plans to offer e-commerce and web-site development
services to the SME market as many SME's do not have an existing Internet
presence or e-commerce offering. Socrates believes that by offering bundled
services such as connectivity with web-site development and e-commerce, SME's
can obtain a web presence without significant upfront costs. Socrates will offer
up to eight modular web-site offerings to choose from and will provide basic
e-commerce solutions (credit card authorizations, cataloging, etc.). These
services will be bundled as part of the long-term contract and will provide
SME's with an instant web presence.
Software Development
Technet provides customized software development, including turnkey
system development and product development and maintenance services to corporate
and government customers.
Technet has software development centers in New Jersey and at its
principal offices in Vienna, Virginia. Technet also utilizes the software
development center of an unaffiliated 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'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.
Customized Software Solutions
Socrates has the capability to develop specialized software solutions
within an enterprise. These solutions include ERP applications, back-end web
integration solutions, and customized integration between existing applications
or legacy systems. This offering allows customers to manage the migration from
existing systems to new web based applications.
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Hardware and Network Integration
Socrates offers its customers a complete set of hardware solutions
including personal computers, laptop computers, servers, and peripheral
equipment. In addition, Socrates offers network installation and integration
services to those customers that do not have existing networks. Finally,
Socrates can also offer on-site consulting services to the SME to handle any IT
services.
Software Training
In September 1997, Socrates initiated an effort to establish a separate
business line for the training of corporate, 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 conducted its first training classes in December 1997. Socrates intends
to continue its efforts in fiscal year 2000 to expand the scope and market of
its training business. There can be no assurance that the training business will
generate sufficient revenues to be sustained throughout fiscal year 2000.
The Company's continuing operations do not generate a significant
amount of foreign sales exports.
Restructured Operations
Two Company subsidiaries, Expert, Inc. and Socrates Technologies, Inc.
("STI"), ceased operations in April 1999 and November 1999, respectively. The
assets of Expert, Inc. were transferred to STI in May 1999. The assets and
personnel of STI were transferred to Networkland Inc. in October 1999. The
discontinuance of Expert, Inc. and STI operations was a result of the adverse
impact of decreasing profit margins in the commercial computer reseller industry
on both companies' financial condition and results of operations in 1998 and
1999 and the Company's transition away from hardware reselling to more service
oriented business lines.
MARKETING AND SALES
The Company relies on an in-house direct sales force to sell its
products. In addition, the Company occasionally 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 2000 to complement its direct sales force.
The Company targets customers who have the following characteristics:
- Companies that are presently using a pre-Windows computer
system/network and want to upgrade to a Windows-based operating
environment;
- Companies that do not have the in-house IT staff required to
manage a networked PC environment or an ERP program in a
cost-effective manner;
- Companies which in the past either could not afford an ERP
program nor did they have the manpower to manage an ERP program;
- Companies that want to contain their IT expenditures by switching
over to a fixed term contract;
- Companies which recognize that in order for them to gain a
competitive advantage in their marketplace they have to expand
their IT capabilities (analysis and decision-making tools), but
do not have the in-house staff to analyze and/or manage the
project;
- Companies in the process of deciding on the installation of an
ERP program which do not have the necessary in-house IT
capabilities to conduct a suitable evaluation of alternative
solutions.
- Companies that wish to concentrate on their core business and
realize that IT management is not a core competence;
- Companies which require quality IT professionals to manage
specific IT operations, but the hours required per week/month for
this operation do not justify hiring such a person full-time; or
- Companies which are unable to hire or retain appropriate IT staff
to manage an existing network.
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COMPETITION
The market for IT services is very competitive because of the large
number of competitors and the rapidly changing Business and Technology
environment. Primary competitors include participants from a wide variety of
market segments, including "Big Five" accounting firms, systems consulting and
implementation firms, service groups of computer equipment companies, facilities
management companies, general management consulting firms and programming
companies. The companies which Socrates believes to be its direct competitors,
in that they have announced or are already delivering ASP service, include
USInternetworking, FutureLink, Corio, Telecomputing USA and Interliant (to be
acquired by Sage Networks). Many competitors of the Company have substantially
greater technical, financial and marketing resources than the Company.
Additionally, the market for Internet-related services is extremely
competitive. Socrates anticipates that competition will continue to intensify as
the use of the Internet grows. In the market for Internet-enabled application
software and network solutions, Socrates competes on the basis of performance,
price, software functionality and overall network design.
Socrates also competes with national, regional, and local commercial
systems integrators. A certain number of these companies bundle their services
with software and hardware providers and perform an IT management outsourcing
role for the customer, including Arthur Anderson and Electronic Data Systems
("EDS"). Arthur Anderson provides an ASP service featuring JD Edwards ERP
financial software and Electronic Data Systems ("EDS") has teamed with SAP
America to bring SAP's ERP applications to small and mid-size businesses.
Socrates indirect competition may also include ISP companies, whose
primary business involves hosting web pages, such as USWeb, Exodus
Communications and Verio Inc.
In the wider realm of general IT outsourcing, Socrates considers its
possible competitors to be local IT services companies in cities the Company
operates in and larger IT companies such as IBM Global Services, EDS, Cap
Gemini, McKinsey & Co., Booz, Allen & Hamilton, Whittman-Hart, Inc. and the "Big
5" consulting firms.
SOURCES OF SUPPLY AND BACKLOG
All materials and components used by the Company are available from
numerous sources of supply. The Company does not foresee any shortage of these
materials.
As of December 31, 1999, the Company's backlog was approximately
$800,000. The Company 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.
PATENT, TRADEMARK, COPYRIGHT AND PROPRIETARY RIGHTS
The Company has a federally registered trademark for "Socrates
Technologies". Otherwise, 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.
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 ensure 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 in protecting the Company, or that the Company will be able to enforce
the provisions of such 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.
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EMPLOYEES
At December 31, 1999 and March 17, 2000, the Company employed
approximately 59 and 72 persons, respectively, all of whom were full-time
employees.
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.
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.
Socrates completed the move of its principal executive offices from
Largo, Maryland to Vienna, Virginia in February 2000. The Company leases
approximately 5,100 square feet of space for its facilities located in Vienna,
Virginia. Base rent for the space is approximately $10,000 per month. The lease
agreement, which expires in 2003, includes rent escalations and requires the
Company to pay certain operating expenses.
Technet leases approximately 6,400 square feet of space for its
software development business, located in Vienna, Virginia. Base rent for the
space is approximately $14,000 per month. The lease agreement, which expires in
2004, includes rent escalations and requires 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 $8,000, which lease expires in 2004.
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Networkland leases approximately 2,900 square feet of space under its
agreement for its facilities located in Arlington, Virginia. Base rent for the
space is approximately $3,900. The lease agreement, which expires in 2002,
includes rent escalations and requires Networkland to pay certain operating
expenses.
Socrates also leases approximately 35,000 square feet of space for its
facilities located in Largo, Maryland. Base rent for the space is approximately
$12,000 per month. The lease agreement, which expires in 2002, includes rent
escalations and requires the Company to pay certain operating expenses. The
Company utilizes approximately 10,000 square feet of this facility for training
facilities, and is actively seeking to sublease the balance of the space.
The Company's lease for facilities located in Long Island City, New
York, of approximately 15,000 square feet of space has been sublet. Both the
lease and sublease will expire in 2003. The base rent for these facilities is
approximately $12,000 and under the sublease agreement the company receives a
rent payment of approximately $9,800, resulting in loss of approximately $2,200
per month. This loss has been accounted for and accrued as a liability in the
Company's financial statements.
The Socrates lease for facilities located in Exton, Pennsylvania, of
approximately 3,000 square feet of space was sublet in July 1999. Both the lease
and sublease will expire in 2001. The base rent for these facilities is
approximately $3,900 and is offset by the same amount in the sublease agreement.
The Company also leases space for facilities of approximately 3,800
square feet located in Virginia Beach, Virginia. This space is now under a
sublease agreement. The sublease will expire in March 2000. The lease expires in
August, 2002. The Company is currently negotiating with the sublessee to extend
the sublease. The base rent for these facilities was approximately $3,800 and
was offset by about the same amount in the sublease agreement. The Socrates
leases for the facilities located in Gaithersburg, Maryland and in Montreal,
Quebec, Canada both expired in 1999 and were not renewed.
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. A summary of significant legal matters follows.
The Company is pursuing a $5.6 million claim against a national
broker-dealer in an arbitration case before the National Association of
Securities Dealers, Inc. The Company alleges that the defendant broker-dealer
mismanaged and engaged in authorized actions with respect to the Company assets
and accounts. The matter has not been set for a hearing as of the date of March
27, 2000. The Company believes that its claims have merit and intends to
aggressively pursue its claims in the arbitration. There can be no assurance
that the Company will prevail on any of its claims or that the Company will
recover any damages sought in this action.
Socrates Technologies, Inc. ("STI") filed a lawsuit in January 2000 in
the Superior Court of the District of Columbia against National Public Radio and
AAA Networks alleging breach of contract by National Public Radio and tortious
interference in contract against AAA Networks. On March 2000, the Superior Court
denied without a hearing the motion of National Public Radio to dismiss the
case. The Company is seeking $300,000 in compensatory damages and unspecified
amounts in punitive damages. The Company believes that STI's claims have merit
and STI intends to aggressively pursue its claims in the case. A trial date has
not been set for this case as of March 27, 2000.
In January 2000, Hirata Corporation and Hirata Corporation USA amended
their complaint in a civil action in the U.S. District Court for the Southern
District of Indiana (Hirata Corporation and Hirata Corporation USA v. Daniel
Porush, Jordan Belfort, et al., Case ) to add as defendants to the case the
following corporations
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and person: the Company; its former Chairman, Chief Executive Officer and
President, Edward Ratkovich; and two other corporations that are not affiliated
with the Company or Mr. Ratkovich. With respect to the Company and Mr.
Ratkovich, the amended complaint alleges that Mr. Ratkovich, as an officer of
the Company, conspired with the two defendants who were officers of the
underwriter to manipulate the public market for the Company's common stock and
that said manipulation harmed the plaintiffs in an unspecified amount of
damages. The Company believes that the amended complaint is frivolous, without
basis in law or in fact on its face, was not timely filed and was prompted by
the plaintiffs lack of success to date against the original defendants. The law
firm of Jones Day Reavis & Pogue in Washington, D.C. has been retained to
represent the Company and Mr. Ratkovich in this case. The Company intends to
aggressively pursue the dismissal of the case and to defend itself against all
allegations in the amended complaint.
Washington Sports & Entertainment, Inc. filed a lawsuit in the Superior
Court of the District of Columbia in March 2000 against STI for alleged breach
of contract to supply computer hardware and to license a box suite at the MCI
Center in Washington, D.C. The Company has denied the claims of the plaintiff. A
trial date has not been set as of March 2000 in this case. The Company is
currently negotiating a settlement to the lawsuit and the Company believes that
this lawsuit will be settled before the trial date and that such settlement
shall not have an adverse material affect on the Company's financial condition
or results of operations.
As previously reported, the Company was sued by Technospin, Inc. for
alleged breach of a corporate guarantee under a manufacturing agreement between
Technospin, Inc. and MVS. The Company has counter claimed against Technospin,
Inc. for breach of contract under the manufacturing agreement. The matter has
not been set for trial as of March 27, 2000. The Company has provided for a
reserve against any liability in this case in its 1999 financial statements. The
Company intends to aggressively pursue its claims against Technospin, Inc. and
to aggressively defend itself against Technospin, Inc.'s claims. The Company
cannot at this time predict with any certainty the results or impact of this
case on the Company and its financial condition or results of operations.
The Company is subject to certain other legal proceedings and claims
that have arisen in the ordinary course of business and have not been fully
adjudicated. The results of these legal proceedings cannot be predicted with
certainty; however, in the opinion of management, the Company does not have a
potential liability related to any legal proceedings and claims that would have
a material adverse effect on its financial condition or results of operations.
Most of these legal proceedings concern accounts payable allegedly owed by the
Company's discontinued operations, especially Expert and STI.
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 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 3,400 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 December 31, 1999 as well as the three-month
transition period ended December 31, 1998.
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High Low
---- ---
Fiscal year ended September 30, 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 ended September 30, 1998
First fiscal quarter $ 9.06 $ 5.00
Second fiscal quarter $ 8.25 $ 4.25
Third fiscal quarter $ 7.13 $ 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 $ 4.25 $ 1.63
Second fiscal quarter $ 2.96 $ 1.00
Third fiscal quarter $ 1.13 $ 0.50
Fourth fiscal quarter $ 2.19 $ 0.50
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 -----------------Years ended--------------------
December 31, September 30,
------------------------------ December 31, --------------------------------
1999 1998 1999 1998 1997
------------------------------ -------------- --------------------------------
(Unaudited) (Thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Sales $ 5,484 $ 12,650 | $ 23,239 | $ 62,008 $ 34,335
Gross profit 735 1,358 | 3,424 | 8,710 4,362
Earnings (loss) from | |
continuing operations (2,137) (3,893) | (11,997) | 1,388 817
| |
Earnings (loss) from | |
discontinued operations - (1,132) | - | (5,982) (707)
| |
Net earnings (loss) (2,137) (5,025) | (11,997) | (4,594) 110
| |
Earnings (loss) per | |
share, basic (0.14) (0.34) | (0.77) | (0.31) 0.01
| |
Earnings (loss) per | |
share, fully diluted (0.14) (0.34) | (0.77) | (0.31) 0.01
| |
Total assets 11,622 22,905 | 11,622 | 29,099 23,620
Stockholders' equity 7,454 13,182 | 7,454 | 17,377 18,065
</TABLE>
Page 11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the Company's historical
results of operations and of its liquidity and capital resources should be read
in conjunction with the Company's consolidated financial statements and
accompanying notes.
Moreover, this Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements
concerning the Company's business and operations. Such statements involve risks
and uncertainties that could cause actual results to differ due to a variety of
risk factors set forth herein and from time to time in the Company's filings
with the Securities and Exchange Commission and other public announcements.
OVERVIEW
Effective January 1, 1999, the Company 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 December 31, 1999 and September 30, 1998 and 1997,
respectively. 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
began a period of evolution, change and restructuring for the Company that
continued throughout 1999. Since the Company's initial public offering in 1995,
it had grown significantly through the acquisition of four separate technology
companies involved in computer system sales, integration, training and software
development. During 1999, the Company decided to shut down two of the companies
and consolidated the remaining operations of Socrates Technologies, Inc. into
the newly acquired Networkland subsidiary.
As previously disclosed, in March 1998, the Company elected to
discontinue its machine vision business and focus greater attention on its
information technology businesses. On August 11, 1999, the Company sold the
assets of the welding division of MVS to Meta Technology Ltd. for approximately
$157,000 plus a contingent amount based on certain performance criteria. A loss
of approximately $5,000 was realized as a result of the 1999 sale.
All results of operations have been restated to reflect the
discontinuance of the Company's machine vision business in March 1998. As a
result, prior year comparisons of results from continuing operations exclude
this segment.
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the
periods presented expressed in thousands of dollars and as a percentage of
revenues.
Page 12
<PAGE>
<TABLE>
<CAPTION>
Three months ended
December 31,
-----------------------------------------------------
1999 % 1998 %
------------ ------------ ------------ ----------
(unaudited)
<S> <C> <C> <C> <C>
Sales $ 5,484 100.0 $ 12,650 100.0
Cost of Sales 4,749 86.6 11,292 89.3
------- ----- -------- -----
Gross Profit 735 13.4 1,358 10.7
Expenses
Selling, general and administrative 1,035 18.9 3,063 24.2
Depreciation and amortization 312 5.7 271 2.1
Restructuring Charges 1,551 28.3 1,290 10.2
------- ----- -------- -----
2,898 52.8 4,624 36.5
------- ----- -------- -----
Income (loss) from Operations (2,163) (39.4) (3,266) (25.8)
Gain (loss) on sale of investment - - (184) (1.5)
Interest and financing income (expense) 15 .3 (443) (3.5)
Other income (expense) 11 .2 - -
------- ----- -------- -----
Earnings Before Income Taxes (2,137) (39.0) (3,893) (30.8)
Income Tax (Benefit) Provision
Current - - - -
Deferred - - - -
------- ----- -------- -----
Earnings (loss) from Continuing Operations (2,137) (39.0) (3,893) (30.8)
------- ----- -------- -----
Discontinued Operations
Loss from operations, net of income
tax benefits of $486 in 1997 - - (1,132) (8.9)
Loss from disposal, including income tax
expense of $1,233 in 1998 - - - -
------- ----- -------- -----
- - (1,132) (8.9)
------- ----- -------- -----
Net Earnings (Loss) $(2,137) (39.0) $ (5,025) (39.7)
======= ===== ======== =====
<CAPTION>
Fiscal years ended
December 31, September 30,
------------------------ --------------------------------------------------
1999 % 1998 % 1997 %
------------ ---------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 23,239 100.0 $ 62,008 100.0 $ 34,335 100.0
Cost of Sales 19,815 85.3 53,299 86.0 29,973 87.3
-------- ----- -------- ----- -------- -----
Gross Profit 3,424 14.7 8,709 14.0 4,362 12.7
Expenses
Selling, general and administrative 7,467 32.1 8,518 13.7 3,513 10.2
Depreciation and amortization 959 4.1 964 1.6 514 1.5
Restructuring Charges 3,627 15.6 - - -
-------- ----- -------- ----- -------- -----
12,053 51.9 9,482 15.3 4,027 11.7
-------- ----- -------- ----- -------- -----
Income (loss) from Operations (8,629) (37.1) (773) (1.2) 335 1.0
Gain (loss) on sale of investment (3,953) (17.0) 1,594 2.6 - -
Interest and financing income (expense) (127) (.5) 292 .5 778 2.3
Other income (expense) 712 3.1 - - - -
-------- ----- -------- ----- -------- -----
Earnings Before Income Taxes (11,997) (51.6) 1,113 1.8 1,113 3.2
Income Tax (Benefit) Provision
Current - - 31 0.0 82 0.2
Deferred - - (306) (0.5) 214 0.6
-------- ----- -------- ----- -------- -----
Earnings (loss) from Continuing Operations (11,997) (51.6) 1,388 2.2 817 2.4
-------- ----- -------- ----- -------- -----
Discontinued Operations
Loss from operations, net of income
tax benefits of $486 in 1998 - - (1,250) (2.0) (707) (2.1)
Loss from disposal, including income tax
expense of $1,233 in 1998 - - (4,732) (7.6) - -
-------- ----- -------- ----- -------- -----
- - (5,982) (9.6) (707) (2.1)
-------- ----- -------- ----- -------- -----
Net Earnings (Loss) $(11,997) (51.6) $ (4,594) (7.4) $ 110 0.3
======== ===== ======== ===== ======== =====
</TABLE>
Three-month period ended December 31, 1999 compared to the transition period
ended December 31, 1998.
During the quarter ended December 31, 1999, the Company continued and
concluded the reorganization and restructuring previously disclosed, and
concentrated on refocusing its business in the higher margin software and
application service provider markets, while consolidating its hardware reseller
and networking business into Networkland.
The Company reported a decrease in sales of approximately $7.2 million
to $5.5 million for the quarter ended December 31, 1999 compared to the same
period last year, related to the consolidation and restructuring of its hardware
reseller business and the decrease in revenues due to the shutdown of its
component supply and build to order business. For the current quarter,
Networkland reported revenue of approximately $3.6 million compared to Socrates
Technologies Incorporated revenue of approximately $10.9 million for the same
period last year, while Technet reported revenue of approximately $1.8 million
for the current quarter compared to approximately $1.7 million for the same
period last year.
Cost of sales decreased approximately $6.5 million reflecting the
decrease in sales.
Gross Profit for the period decreased from $1.4 million to $735,000,
reflecting the decrease in sales from period to period. Gross profit did,
however, increase as a percentage of sales to 13.4% from 10.7%. This improvement
is due to the concentration on higher margin opportunities in software
development and networking services.
Page 13
<PAGE>
Selling, general and administrative expenses decreased $2.0 million, or
64%, compared to the same period in 1998, reflecting the restructuring and
downsizing of operations, as well as the Company's continuing efforts in
reducing administrative costs. Included in the current period is a reserve
against accounts receivable of $300,000.
Management's decision to write down the value associated with goodwill
acquired in the 1997 acquisition of Socrates Technologies, Inc. ("STI") was due
to the fact that the Company is no longer targeting Socrates' customers, the
"build to order" operations wherein the Company assembled custom computers and
peripherals have been ceased, and substantially all of the Socrates employee
base is no longer with the Company. In addition, goodwill was written down to
zero because the training operations within Socrates that continue were
commenced after the acquisition and management believes any value associated
with the Socrates name can not be estimated.
Depreciation and amortization decreased by approximately $23,000.
Restructing charges for the fourth quarter of 1999 amounted to
approximately $1.6 million versus $1.3 million for the same period last year. In
the current period, the charge was for a one-time write down of goodwill related
to Socrates Technologies, Inc., whose reseller operations have been consolidated
with those of Networkland.
Investment income and expense for the current period amounted to
$15,000 compared to $25,000 for the comparable period last year. The current
quarter was effected by lack of available funds to invest. In the same quarter
last year, the Company recorded 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 did not record any tax benefit associated with losses
incurred in 1999 due to the fact that the Company's ability to generate taxable
income sufficient to absorb such losses is uncertain. However, the Company has
not adjusted the previously recorded net deferred tax asset of $1.2 million
based on its estimate of future taxable income expected to be generated from its
continuing operations. A key aspect of this analysis was that the Company's
operations, exclusive of restructuring charges, have generated taxable income
since the third quarter of 1999.
While the above analysis is prepared for consistency with prior
reports, the Company does not believe that the presentation is indicative of its
current operations. The Company bases this belief upon the acquisition of
Networkland, as well as the restructuring concluded in the fourth quarter of
1999. For the quarter ended December 31, 1999, the two operating subsidiaries of
the Company, Technet and Networkland were profitable from operations on a
combined basis. The table below segregates the operations of Technet and
Networkland for the fourth quarter of 1999.
<TABLE>
<CAPTION>
Quarter ended December 31, 1999
Networkland Technet All Other(1) Total
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $ 3,597 $ 1,825 $ 62 $ 5,484
Gross profit on sales 615 192 (70) 737
Expenses 456 218 2,225 2,899
------- ------- ------- -------
Earnings (loss) from operations $ 159 $ (26) $(2,296) $(2,163)
======= ======= ======= =======
</TABLE>
- ----------
(1) Includes goodwill write down of $1.6 million and $300,000 reserve against
accounts receivable of restructured operations.
Page 14
<PAGE>
Year ended December 31, 1999 compared to the year ended September 30, 1998.
The Company reported a decrease in sales of $38.8 million or 62% to
$23.2 million during 1999, compared to the fiscal year ended September 30, 1998.
This decrease is directly related to the consolidation and restructuring of its
hardware reseller business and the decrease in revenues due to the shutdown of
its component supply and build to order businesses.
STI and Networkland combined for revenues of $15.0 million in the 1999
calendar year, versus STI revenues of $38.8 million for the fiscal year ended
September 30, 1998, resulting in a decrease of 61%. For the same periods Technet
reported revenues of $7.4 million and $4.8 million, respectively, which results
in an increase of 54.2%.
Cost of sales decreased to $19.8 million from $53.3 million related to
the decrease in sales.
Gross profit decreased $5.3 million to $3.4 million, related to the
decrease is sales. Gross profit percentage increased slightly from 15% from 14%.
Selling, general and administrative expenses decreased from $8.5
million to $7.5 million, or 11.6%. This decrease reflects the restructuring and
downsizing of operations, as well the Company's continuing efforts in reducing
administrative costs. The benefits from these actions were not apparent until
late in 1999.
Restructuring charges were incurred in 1999 that amounted to $3.6
million. The restructuring charges include a write down of goodwill amounting to
$1.8 million, as well as write downs of inventory, receivables and fixed assets,
the recording of certain personnel costs, including severance, associated with
restructuring the operations, and the establishment of reserves for anticipated
losses on subleases.
Investment income and expense decreased $5.5 million to $(3.9) million
from $1.6 million. In 1999, the Company sold its entire holdings of e-Net stock
having a cost basis of $5.3 million and received net proceeds of $1.3 million.
Relating to this sale, the Company recorded the loss of $3.9 million.
Also included is income of $691,000 associated with a former officer
and current shareholder agreeing to forego salary which had been accrued but not
paid from 1996 to 1998 to resolve certain matters between the Company and the
individual. The income associated with the reversal of this accrual has been
treated as a change in estimate and is classified in other income to reflect its
non-recurring nature and to not distort results of operations.
The Company did not record any tax benefit associated with losses
incurred in 1999 due to the fact that the Company's ability to generate taxable
income sufficient to absorb such losses is uncertain. However, the Company has
not adjusted the previously recorded net deferred tax asset of $1.2 million
based its estimate of future taxable income expected to be generated from its
continuing operations. A key aspect of this analysis was that the Company's
operations, exclusive of restructuring charges, have generated taxable income
since completing the restructuring of its operations in the third quarter of
1999.
Earnings (loss) from continuing operations for the year ended December 31,
1999 were $(12) million or $(.77) per share (basic and diluted EPS), as
compared to earnings (loss) continuing operations for the year ended September
30, 1998 $1.4 million or $0.09 per share (basic and diluted EPS).
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 hardware and software sales 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
Page 15
<PAGE>
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.
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 hardware and software sales 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
hardware and software sales 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
Page 16
<PAGE>
from January 1, 1999 to the expected date of sale, which is expected to occur in
the second quarter of 1999.
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 hardware and software sales 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 hardware and
software sales 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 carry forwards 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.
carry-forwards could be affected. In addition, the Company has net operating
loss and research expenditure carry forwards 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 17
<PAGE>
Earnings from continuing operations for the year ended September 30,
1998 were $1,387,906 or $0.09 per share (basic and diluted EPS), as compared to
earnings from continuing operations of $816,705 or $0.08 per share (basic EPS)
and $0.06 per share (diluted EPS) for the year ended September 30, 1997.
In March 1998, the Company discontinued its machine vision business and
as result has reported results of operations and losses associated with the
discontinuance separately from continuing operations. For the year ended
September 30, 1998, this discontinued business incurred an operating loss of
$1,250,052 compared to an operating loss of $707,159 in the prior year. In
addition, upon making the decision to discontinue the machine vision business,
the Company incurred a loss of $4,731,636 associated with write-downs of
inventories, capitalized software costs, and deferred tax assets to net
realizable value.
Liquidity and capital resources
As of December 31, 1999, the Company had working capital of $1.0
million and cash, cash equivalents and investments of $942,000. The Company
generated cash from operations during the year ended December 31, 1999 of
approximately $2.5 million principally as result of reductions to other current
assets due to the restructuring and increases to current liabilities. This cash
was principally used to reduce the lines of credit referred to below.
The Company had entered 1999 with two financing agreements with a
financing company, a floor inventory line and coupled with a revolving line of
credit, that provided inventory and accounts receivable financing. The maximum
amount available under the combined lines was $10 million. Both lines were
terminated by the lender in 1999 due to a decrease in purchasing and inventory
levels below contractual floor levels. All amounts due to the financing company
have been repaid at December 31, 1999.
In 1999, the Company sold its entire holdings of e-Net stock having a
cost basis of $5.3 million and received net proceeds of $1.3 million. Relating
to this sale, the Company recorded a realized loss of $(3.9) million.
During 1999, the Company paid $750,000 to the former owner of its
Technet subsidiary and accrued $250,000 in satisfaction of an earn-out provision
associated with the acquisition of the Technet in 1997. This payment and accrual
were charged to goodwill.
The Company acquired all the outstanding stock of Networkland, Inc.
effective August 16, 1999. The Company paid $700,000 in cash and 2,000,000
shares of common stock valued at $1.3 million at closing. The merger agreement
also specified that an additional $450,000 in cash would be paid over a three
year period following the merger. The acquisition of Networkland, Inc. was
accounted for as a purchase. The cost exceeded the fair value of net assets
resulting in goodwill of $2.0 million. Goodwill will be amortized using an
estimated life of ten years. The results of operation of Networkland, Inc. are
included in the accompanying financial statements since the date of acquisition.
During the fourth quarter of 1999, the Company entered into two short
term accounts receivable financing agreements with a finance company, which
provided for advances against accounts receivable in the amounts of $85,000 and
$100,000, respectively. Of these amounts, at December 31, 1999 the Company owed
approximately $129,000, which was repaid in January of 2000.
In February 2000, the Company entered in to a new agreement with a
financing company to provide up to $1 million of financing by factoring specific
accounts receivable. To date the Company has financed approximately $47,000
under this agreement.
During December 1999, the Company converted loans payables to
stockholders to equity. Loans to such stockholders had been loaned under three
separate loan agreements bearing interest at 9 percent, 8 percent, and 16
percent respectively. The total amount of loan payable converted to equity
included principle amount of approximately $1.3 million and interest of
approximately $290,000.
In January 2000, the Company entered into certain agreements with
individual accredited investors for a private placement of shares of the
Company's common stock, which resulted in an increase in equity, cash and
tangible assets of approximately $865,000.
Page 18
<PAGE>
Effective March 1, 2000, the Company acquired substantially all of the
assets and certain liabilities of Object Applications Systems, Inc. for total
consideration of approximately $4.7 million, payable in cash, note payable and
common stock of the Company. The Company will record the transaction as an asset
purchase, allocating the total purchase price to the various assets purchased,
with any excess of purchase price over fair market vale of assets purchased to
goodwill. The principal asset purchased in the agreement is software,
independently valued approximately $3.7 million.
OAS develops and implements a family of ERP software systems for small
and mid size enterprises. The Company plans to convert these systems to web
based applications during the year 2000. The OA/System ERP software "vertical"
application products include OA/Manufacturing, OA/Distribution, and
OA/Converting. OA/System products are capable of supporting virtually every
aspect of manufacturing, importing, converting, and distribution. The
applications include customer sales order processing, purchasing, inventory
management, shipping, invoicing, production scheduling, production planning,
general ledger, accounts receivable, financing of receivables, accounts payable,
letter of credit processing, financial reporting and multi-currency. Additional
OA/System products include OA/EDI for Electronic Data Interchange (EDI)
transactions and OA/Data Collection for radio frequency (RF) warehouse
management. (See Note M, Notes to Consolidated Financial Statements.)
In August 1999, the Company received notification from The Nasdaq Stock
Market, Inc. that the company was not in compliance with the criteria for
continued listing on the Nasdaq National Market System ("NMS"). This listing
deficiency was the Company's stock market price falling below $1.00. In November
1999, Nasdaq informed the Company that it was not incompliance with an
additional criterion, that of maintaining at least $4 million in tangible net
assets. In the first quarter of 2000, the Company was notified by NASDAQ that it
had met the requirements for continued listing on NMS, provided that it Make a
public filing, on or before March 15, 2000, evidencing, with pro forma
statements that it had tangible net assets of at least $5 million, taking into
account transactions between January 31 and March 15, 2000. The notice further
provided that the Company must hold an annual meeting of shareholders in April
2000 and that it maintain compliance with all other aspects of the listing
criteria. With the equity transactions described above and the acquisition of
substantially all of the assets of Object Application Systems, Inc. (described
below and more fully in Note M, Notes to Financial Statements), the Company
filed Form 8K on March 15, which showed that the Company had, on March 15, 2000,
well in excess of $5 million in tangible net assets. The Company has scheduled a
shareholders' meeting for April 21, 2000 and believes that it has, with the
conduct of the April 21, 2000 shareholders' meeting, met all criteria for
continued listing on NMS.
On March 20, 2000, the Company sold a series of debentures, convertible
under certain circumstances into shares common stock of the Company, for an
aggregate price of $4.5 million. The debentures bear interest at the rate of 4%,
which, at the option of the holder, may be paid in shares of common stock. The
shares of stock underlying the debentures will be included in a registration
statement to be filed by the Company with the SEC by May 15, 2000. The Company
receives $3.5 million at the closing, with another $1 million to be received
after the registration of the underlying shares becomes effective. The
debentures generally are convertible either after 120 days or after the
registration becomes effective, whichever event occurs first. There are certain
penalties included in the agreements for failure to register the underlying
stock. The debentures are convertible into common stock at the lower of $3.38 or
the lowest closing price of the Company's common stock during the 30 trading
days immediately preceding conversion. Each debenture has attached to it a
warrant granting the holder the right to purchase .5 shares at $6.77 per share
and .1 shares at $12.00 per share. The Company expects to record related
expenses of approximately $470,000, for commissions and legal expenses related
to the sale of the debentures. The foregoing is qualified in its entirety by
reference to the Debenture, Warrant and Securities Purchase Agreements, all of
which are exhibits to this report.
Management believes that the working capital and liquidity position of
the Company, together with funds available under the Company's debentures
outlined above, 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.
The Company has no significant long-term debt outstanding as of
December 31, 1999.
Page 19
<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. Such effects may not be apparent in the Company's operating results
during a period of expansion. However, the Company can make no assurances that
its business can be significantly expanded under any circumstances.
YEAR 2000
The Company has experienced no significant problems related to the Year
2000 with its internal systems nor with any equipment or systems sold to its
customers.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
Page 20
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Contents
- --------------------------------------------------------------------------------
ITEM 8: FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 22
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 23
Consolidated statements of operations 24
Consolidated statements of stockholders' equity (deficit) and other
comprehensive income and losses 25
Consolidated statements of cash flows 26
Notes to Consolidated Financial Statements 27-44
Page 21
<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, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and other comprehensive income and
losses and cash flows for the year ended December 31, 1999, the three-month
period ended December 31, 1998 and the years ended September 30, 1998 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1999 and 1998 and
the results of operations and their cash flows for the year ended December 31,
1999, the three-month period ended December 31, 1998 and the years ended
September 30, 1998 and 1997, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Vienna, Virginia
March 3, 2000,
(except for
Note M, for which the
date is March 27, 2000)
Page 22
<PAGE>
<TABLE>
Socrates Technologies Corporation and Subsidiaries
Consolidated balance sheets
(thousands of dollars, except share data)
- -----------------------------------------------------------------------------------------------------
<CAPTION>
December 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 942 $ 2,423
Investments - 1,479
Accounts receivable, net of allowance
for doubtful accounts 3,769 10,437
Inventory 54 1,073
Advances and other receivables 211 217
Prepaid expenses 194 779
Net assets of discontinued operations held for sale - 162
------------ ------------
Total current assets 5,170 16,570
Property and equipment, net 636 1,019
Capitalized software costs, net - 68
Goodwill, net 4,542 3,944
Deferred tax asset, net of valuation allowance 1,200 1,200
Other assets 72 104
------------ ------------
Total assets $ 11,620 $ 22,905
============ ============
Liabilities and stockholders' equity
Current liabilities
Line of credit and financing arrangement $ - $ 4,491
Notes payable 134 0
Accounts payable and accrued liabilities 4,036 4,077
Shareholder loans and interest - 1,155
------------ ------------
Total current liabilities 4,170 9,723
Stockholders' equity
Common stock, $.01 par value,
50,000,000 shares authorized, 21,264,644 and 17,740,620 shares
issued; 18,263,228 and 14,739,204 shares outstanding at
December 31, 1999 and 1998, respectively 212 177
Stock subscription receivable (150) (150)
Additional paid-in capital 51,924 49,342
Treasury stock, at cost, 3,001,416 shares (17,554) (17,554)
Accumulated deficit (26,982) (14,985)
Accumulated other comprehensive income and (losses) - (3,649)
------------ ------------
Total stockholders' equity 7,450 13,182
------------ ------------
Total liabilities and stockholders' equity $ 11,620 $ 22,905
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
Page 23
<PAGE>
<TABLE>
Socrates Technologies Corporation and Subsidiaries
Consolidated Statements of Operations
(thousands of dollars, except per share amounts)
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months
Year Ended Ended Fiscal years ended
December 31, December 31, September 30,
---------------------------- ----------------------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Products $15,828 $10,920 $57,222 $33,756
Services 7,411 1,730 4,786 579
------------ ------------- ------------- -------------
Total Sales 23,239 12,650 62,008 34,335
Products 14,632 10,251 50,696 29,522
Services 5,183 1,041 2,603 451
------------ ------------- ------------- -------------
Total Cost of Sales 19,815 11,292 53,299 29,973
Gross Profit 3,424 1,358 8,709 4,362
Expenses
Selling, general and administrative 7,467 3,063 8,518 3,513
Depreciation and amortization 959 271 964 514
Restructuring Charges 3,627 1,290 - -
------------ ------------- ------------- -------------
12,053 4,624 9,482 4,027
------------ ------------- ------------- -------------
Income (Loss) from Operations (8,629) (3,266) (773) 335
Gain (Loss) on Sale of Investment (3,953) (184) 1,594 -
Interest and financing income (expense) (128) (443) 292 778
Other income 712 - - -
------------ ------------- ------------- -------------
Earnings (loss) Before Income Taxes (11,997) (3,893) 1,113 1,113
Income Tax (Benefit) Provision
Current - - 31 82
Deferred - - (306) 214
------------ ------------- ------------- -------------
Earnings (loss) from Continuing Operations (11,997) (3,893) 1,388 817
------------ ------------- ------------- -------------
Discontinued Operations
Loss from operations, net of income
tax benefits of $486 in 1997 - (1,132) (1,250) (707)
Loss from disposal, including income tax
expense of $1,233 in 1998 - - (4,732) -
------------ ------------- ------------- -------------
- (1,132) (5,982) (707)
------------ ------------- ------------- -------------
Net Earnings (Loss) (11,997) (5,025) (4,594) $110
============ ============= ============= =============
Earnings (Loss) Per Share
Continuing operations--basic (0.77) (0.26) 0.09 0.08
Discontinued operations--basic - (0.08) (0.40) (0.07)
Net earnings (loss)--basic (0.77) (0.34) (0.31) 0.01
Continuing operations--diluted (0.77) (0.26) 0.09 0.06
Discontinued operations--diluted - (0.08) (0.40) (0.05)
Net earnings (loss)--diluted (0.77) (0.34) (0.31) 0.01
</TABLE>
The accompanying notes are an integral part of these statements.
Page 24
<PAGE>
Socrates Technologies Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit) and Other
Comprehensive Income and Losses
(In thousands)
- -------------------------------------------------------------------------------
Year Ended December 31, 1999, Three Month Transition Period Ended December 31,
1998 and the Years ended September 30, 1998, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Stock Additional
-------------------- Subscription Paid-In Accumulated
Shares Amount Receivable Capital (Deficit)
------ ------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1996 10,740 $ 107 $ (150) $ 20,578 $ (5,476)
Acquisition--Expert, Inc. 300 3 - 1,064 -
Acquisition--Technet Computer Services, Inc. 400 4 - 2,376 -
Net Earnings - - - - 110
Warrant Conversion 15 - - 60 -
Issuance of Common Stock 135 1 - 522 -
Purchase of Treasury Stock - - - - -
Change in Cumulative Translation Adjustment - - - - -
Unrealized Gain (Loss) from Investments - - - - -
Total Comprehensive Loss
- -------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 11,590 115 (150) 24,600 (5,366)
Net Loss - - - - (4,594)
Warrant Redemption & Exercise 6,087 61 - 24,448 -
Issuance of Common Stock 64 1 - 313 -
Purchase of Treasury Stock - - - - -
Issuance's of Treasury Stock - - - (146) -
Tax Benefit From Option Exercises - - - 128 -
Change in Cumulative Translation Adjustment - - - - -
Unrealized Gain (Loss) from Investments - - - - -
Total Comprehensive Loss
- -------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 17,741 177 (150) 49,343 (9,960)
Net Loss - - - - (5,025)
Change in Cumulative Translation Adjustment - - - - -
Unrealized Gain (Loss) from Investments - - - - -
Total Comprehensive Loss
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 17,741 177 (150) 49,343 (14,985)
Acquisition--Networkland 2,000 20 - 1,255 -
Conversion of shareholders' loans 1,524 15 - 1,532 -
Net Loss - - - - (11,997)
Change in Cumulative Translation Adjustment - - - (206) -
Unrealized Gain (Loss) from Investments - - - - -
Total Comprehensive Loss
- -------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 21,265 $ 212 $ (150) $ 51,924 $(26,982)
====== ===== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Treasury Stock Comprehensive
Shares Amount Income(Losses) Total
------ ------ -------------- -----
<S> <C> <C> <C> <C>
Balance, October 1, 1996 - $ - $ 47 $ 15,106
Acquisition--Expert, Inc. - - - 1,067
Acquisition--Technet Computer Services, Inc. - - - 2,380
Net Earnings - - - 110
Warrant Conversion - 60 - 60
Issuance of Common Stock - - - 523
Purchase of Treasury Stock (180) (573) - (573)
Change in Cumulative Translation Adjustment - - (463) (463)
Unrealized Gain (Loss) from Investments - - (145) (145)
--------
Total Comprehensive Loss (499)
- --------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 (180) (573) (561) 18,065
Net Loss - - - (4,594)
Warrant Redemption & Exercise (684) (4,333) - 20,176
Issuance of Common Stock - - - 314
Purchase of Treasury Stock (2,259) (13,045) - (13,045)
Issuance's of Treasury Stock 121 397 - 251
Tax Benefit From Option Exercises - - - 128
Change in Cumulative Translation Adjustment - - 284 284
Unrealized Gain (Loss) from Investments - - (4,201) (4,201)
--------
Total Comprehensive Loss (8,511)
- --------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 (3,002) (17,554) $ (4,478) 17,378
Net Loss - - - (5,025)
Change in Cumulative Translation Adjustment - - (63) (63)
Unrealized Gain (Loss) from Investments - - 893 893
--------
Total Comprehensive Loss (4,195)
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 (3,002) (17,554) (3,648) 13,183
Acquisition--Networkland - - - 1,275
Conversion of shareholders' loans - - - 1,547
Net Loss - - - (11,997)
Change in Cumulative Translation Adjustment - - 135 (71)
Unrealized Gain (Loss) from Investments - - 3,513 3,513
--------
Total Comprehensive Loss (8,554)
- --------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 (3,002) $ (17,554) $ - $ 7,450
====== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 25
<PAGE>
<TABLE>
Socrates Technologies Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Thousands of dollars)
- --------------------------------------------------------------------------------------------
<CAPTION>
Three Month
Year Ended Period Ended Years Ended September 30,
December 31, December 31, -------------------------------
1999 1998 1998 1997
------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net earnings (loss) from operations $ (11,997) $ (5,025) $ (4,594) $ 110
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Deferred income taxes - - 371 (272)
Depreciation and amortization 959 272 964 777
Restructuring charges 2,803 1,290 - -
Realized (gain) loss on investments 3,953 439 (1,594) -
Equity in Earnings of Joint Venture - - 240 (50)
Non-cash (gains) losses from discontinued operations - 1,031 2,030 (466)
Loss on disposal of long term assets 5 - - -
Changes in operating assets and liabilities,
net of effects of acquisitions and dispositions:
Decrease (increase) in accounts receivable 7,137 4,366 (8,542) (488)
Decrease (increase) in inventory 754 1,434 (176) (96)
Decrease (increase) in tax credits and income taxes
receivable 61 (19) (337) 369
Decrease (increase) in prepaid expenses 98 178 (719) 84
Decrease (increase) in other assets 32 148 (127) (18)
Decrease (increase) in advance deposits - - (76) 132
(Decrease) increase in accounts payable and accrued
liabilities (1,299) (1,265) 474 (1,135)
------------------------------------------------------------------
Net Cash (Used in) Provided by Operating Activities 2,506 2,848 (12,086) (1,053)
Cash Flows from Investing Activities
Cash received from purchase of subsidiary 421 - - -
Cash received from sale of discontinued operations 157 - - -
Cash received from sale of investments 1,348 - - -
Cash payment for purchase of subsidiary (700) - - -
Cash payment for earnout of acquired subsidiary (750) - - -
Investment purchases - (567) (5,543) (990)
Borrowings (payments) on margin against investments (309) 512 4,800 4,537
Property, Plant and equipment purchases (24) (15) (854) (606)
Capitalized Software Costs - - - (549)
Investment in Joint Venture - - - (216)
------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities 143 (70) (1,597) 2,176
Cash Flows from Financing Activities
Net (decrease) increase in line of credit (4,491) (926) 4,243 318
Proceeds from issuance of notes payable 197 - - -
Payment of notes payable (65) - - -
Proceeds from shareholder loans 300 - 1,401 79
Payment of shareholder loans - (226) (758) -
Proceeds from issuance of common stock - - 314 522
Purchase of treasury stock - - (17,378) (573)
Proceeds from exercise of warrants - - 24,509 60
Issuance of treasury stock - - 251 -
------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (4,059) (1,152) 12,582 406
------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (71) 31 192 (168)
------------------------------------------------------------------
Net Increase (Decrease) in Cash (1,481) 1,657 (909) 1,361
Cash at Beginning of Year 2,423 766 1,675 314
------------------------------------------------------------------
Cash at End of Year $ 942 $ 2,423 $ 766 $ 1,675
Supplemental Disclosure of Cash Flow Information
Income Taxes Paid $ 10 $ - $ 132 $ 85
Interest Paid $ 105 $ 21 $ 223 $ 262
==================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 26
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, 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 an
information technology solutions company whose business is focused on
systems engineering and integration, software engineering and customized
software development, including turnkey system development and product
development, and maintenance services and customized information technology
to corporate and government customers.
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 Virginia.
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 December 31, 1999 and September 30, 1998
and 1997, respectively. 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. For fixed price contracts, the Company follows
the percentage of completion method for revenue recognition. Amounts
received from customers prior to shipment are recorded as deposit
liabilities.
Page 27
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
CASH AND CASH EQUIVALENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Cash and cash equivalents include cash and money market accounts.
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, 1999, and 1998 management
has established an allowance for doubtful accounts of approximately $1.4
million and $409,000, respectively.
The following table depicts the activity in the allowance for doubtful
accounts:
<TABLE>
<CAPTION>
Balance Beginning Balance End
of Period Additions Deletions of Period
<S> <C> <C> <C> <C>
Fiscal year ended September 30, 1997 140 (69) 71
Fiscal year ended September 30, 1998 71 133 204
Three months ended December 31, 1998 204 272 (67) 409
Year ended December 31, 1999 409 991 1,400
</TABLE>
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 straight-line method over
estimated lives ranging from five to seven years. Leasehold improvements
are amortized on a straight-line basis over the shorter of the lease term
or estimated useful lives of the related assets.
CAPITALIZED SOFTWARE COSTS
The Company had acquired certain computer software in connection with the
Technet acquisition which was being amortized over a two year period, the
expected remaining economic life of the related products. Amortization
expense related to computer software acquired in the Technet acquisition
was $68,000, $34,000, and $135,000 for year ending December 31, 1999, the
three month period ended December 31, 1998, and the year ended September
30, 1998. At December 31, 1999 the capitalized software costs are fully
depreciated.
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.
During 1999, the Company paid $750,000 to the former owner of its Technet
subsidiary and accrued $250,000 in satisfaction of an earn-out provision
associated with the acquisition of the Technet in 1997. This payment and
accrual were charged to goodwill.
Amortization expense charged to operations in the during the fiscal year
ended December 31, 1999 was $569,000 and for the three month period ended
December 31, 1998 was $153,000 and for the fiscal years September 30, 1998
and 1997 was $614,000 and $382,000, 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
reviews of the recoverability of the recorded goodwill at December 31,
1999, approximately $1.8 million of goodwill was written off to
restructuring
Page 28
<PAGE>
charges, of which $1.6 million was written off in the fourth quarter. It is
possible that estimates of anticipated future gross profits of 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.
Page 29
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
EARNINGS PER SHARE
The Financial Accounting Standards Board 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.
The computations of basic and fully diluted earnings (loss) per share are
as follows:
<TABLE>
<CAPTION>
Year ended 3 months ended Year ended Year ended
(Thousands, except per share amounts) December 31, 1999 December 31, 1998 September 30, 1998 September 30, 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator
Earnings (loss) from continuing operations $(11,997) $ (3,893) $ 1,388 $ 817
-----------------------------------------------------------------------------
Denominator
Denominator for basic earnings (loss) per
share-weighted average shares 15,547 11,448 14,884 10,800
-----------------------------------------------------------------------------
Effect of diluted securities
employee stock options and warrants 0.00 0.00 260 2,010
-----------------------------------------------------------------------------
Denominator for diluted earnings (loss) per
share-adjusted weighted average
shares and assumed conversions 15,547 11,448 15,144 12,810
-----------------------------------------------------------------------------
Basic earnings (loss) per share from
continuing operations $ (0.77) $ (0.34) $ 0.09 $ 0.08
-----------------------------------------------------------------------------
Diluted earnings (loss) per share from
continuing operations $ (0.77) $ (0.34) $ 0.09 $ 0.06
-----------------------------------------------------------------------------
</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.
Page 30
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Investment securities classified as current assets are based on quoted
market price.
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 year ended December 31, 1999, the Company continued and
concluded the reorganization and restructuring 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 and Socrates Technologies
Computer System Sales, Integration and Training Segment business. With the
acquisition of Networkland, Inc., the Company transfered certain staff and
resources from the Company's Largo facility to Networkland, Inc. facility
in Rossyln, Virginia. The Company intends to sublease the Largo facility
except the classrooms utilized for the Company's IT training programs. This
reorganization had a significant impact on operating results during the
year ended December 31, 1999 due to downward adjustments to the carrying
value of goodwill, inventory and fixed assets associated with reorganized
operations.
During the year ended December 31, 1999, the Company recorded charges
totaling $3.6 million 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 $1.8 million. Additional charges consisted of write-downs of
inventory, receivables and fixes assets, the recording of certain personnel
costs associated with restructuring the operations, and the establishment
of reserves for anticipated losses on subleases. At December 31, 1999, the
Company has remaining accrued liabilities of associated with the
restructuring approximately $568,000, all of which are expected to be
utilized in 2000.
Page 31
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
Management's decision to write down the value associated with goodwill
acquired in the 1997 acquisition of Socrates Technologies, Inc. ("STI") was
due to the fact that the Company is no longer targeting Socrates customers,
the "build to order" operations where in the Company assembled custom
computers and peripherals have been ceased, and substantially all of the
Socrates employee base is no longer with the Company. In addition, goodwill
was written down to zero because the training operations within Socrates
that continue were commenced after the acquisition and management believes
any value associated with the Socrates name can not be estimated.
NOTE C---INVENTORY
Inventory consists of the following:
(thousands of dollars)
December 31,
-----------------------
1999 1998
---- ----
Raw materials $ - $ 314
Finaished goods 54 759
---- ------
$ 54 $1,073
==== ======
NOTE D--PROPERTY AND EQUIPMENT
Property, plant and equipment consist of the following:
(thousands of dollars)
December 31,
-----------------------
1999 1998
---- ----
Autos and trucks $ 127 $ 127
Furniture and office equipment 879 996
Purchased software 307 310
Leasehold improvements 160 160
------- -------
1,473 1,593
Less: Accumulated depreciation (837) (574)
------- -------
$ 636 $ 1,019
======= =======
NOTE E--VENDOR FINANCING ARRANGEMENT
The Company maintained a wholesale financing agreement and an accounts
receivable credit facility with a finance company for the financing for one
of its subsidiaries. The agreement provided 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 and to borrow against
accounts receivable.
Page 32
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
The agreement was collateralized by all present and future accounts
receivable and inventory of Company's subsidiary. In addition, the Company
must comply with certain financial and reporting covenants. At September
30, 1999 the Company was not in compliance with certain covenants,
including the Tangible Net Worth and Subordinated Debt covenants, contained
in the wholesale and business finance agreements. The Company paid off all
its obligations under the financing arrangement in October 1999 and the
agreement was terminated. Amounts due to finance company under the
agreement at December 31, 1999 and 1998 was $0 and $4.5 million,
respectively.
During the fourth quarter of 1999, the Company entered into two short term
accounts receivable financing agreements with a finance company, which
provided for advances against accounts receivable in the amounts of $85,000
and $100,000, respectively. Of these amounts, at December 31, 1999 the
Company owed approximately $129,000, which was repaid in January of 2000.
NOTE F--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
(thousands of dollars)
December 31,
-----------------------
1999 1998
---- ----
Vendor trade payables $ 2,392 $ 3,220
Salaries and commissions payable 306 757
Other accrued liabilities 1,338 100
------- -------
$ 4,036 $ 4,077
======= =======
Page 33
<PAGE>
NOTE G--INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal years ended
Year Ended September 30,
December 31, 3 months --------------------------
1999 ended 12/31/98 1998 1998
---- -------------- ---- ----
<S> <C> <C> <C> <C>
Federal
Current - - - -
Deferred $(3,291) $ (945) $(2,348) $ 342
------- ------ ------- ------
Total Federal (3,291) (945) (2,348) 342
------- ------ ------- ------
State
Current - - 31 83
Deferred (484) (139) (345) 50
------- ------ ------- ------
Total State (484) (139) (314) 133
------- ------ ------- ------
Increase (Decrease in valuation allowance) 3,775 1,084 2,387 (178)
------- ------ ------- ------
Net provision $ - $ - $ (275) $ 297
======= ====== ======= ======
</TABLE>
Reconciliation of the income tax provision at the federal
statutory rate to the income tax at the effective rate:
<TABLE>
<CAPTION>
Fiscal years ended
Year Ended September 30,
December 31, 3 months --------------------------
1999 ended 12/31/98 1998 1997
---- -------------- ---- ----
<S> <C> <C> <C> <C>
Tax (benefit) at U.S. Federal statutory rates $(4,079) $(1,323) $ 378 $ 378
Increase (decrease) resulting from:
State tax (benefit) (600) (195) 56 90
Goodwill amortization 916 436 292 165
Change in valuation allowance against deferred tax asset 3,776 1,084 2,387 (178)
Other permanent differences (13) 18 136 (158)
Tax benefit associated with loan forgivenes
to foreign subsidiary - (20) (3,524) -
------- ------- ------- -------
Income tax provision (benefit) $ - $ - $ (275) $ 297
======= ======= ======= =======
</TABLE>
Tax effect of temporary differences between financial statement amounts and
tax bases and liabilities which give rise to a deferred tax asset are as
follows:
<TABLE>
<CAPTION>
Fiscal years ended
Year Ended September 30,
December 31, 3 months --------------------------
1999 ended 12/31/98 1998 1997
---- -------------- ---- ----
<S> <C> <C> <C> <C>
Net Operating Losses $ 6,000 $ 4,158 $ 3,201 $ 220
Accrued Compensation 119 270 348 659
A/R and Inventory Reserves 622 225 63 26
Depreciation and Other 92 18 (25) (139)
Excess of Capital losses over capital gains 1,613 - - -
Valuation Allowances (7,246) (3,471) (2,387) -
------- ------- ------- ------
Net deferred Tax Asset $ 1,200 $ 1,200 $ 1,200 $ 766
======= ======= ======= ======
</TABLE>
Following is a table depicting the activity the Company's valuation
allowance against deferred income tax assets:
<TABLE>
<CAPTION>
Balance Beginning Balance End
of Period Additions Deletions of Period
<S> <C> <C> <C> <C>
Fiscal year ended September 30, 1997 3,471 3,775 - 7,246
Fiscal year ended September 30, 1998 2,387 1,084 - 3,471
Three months ended December 31, 1998 - 2,387 - 2,387
Year ended December 31, 1999 178 - (178) -
</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 $1.7 million. This tax effect
has been fully reserved by establishing an additional $1.7 million
valuation allowance at December 31, 1998. In addition, the table excludes
tax benefits available in Canada as discussed below.
Page 34
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
NOTE G--INCOME TAXES--Continued
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, 1999 is dependent upon the Company
generating taxable income in the future sufficient to realize the
associated tax benefits.
The Company fully reserved against tax benefits associated with losses
incurred in 1999 due to the fact that the Company's ability to generate
taxable income sufficient to absorb such losses is uncertain. However, the
Company has not adjusted the previously recorded net deferred tax asset of
$1.2 million based its estimate of future taxable income expected to be
generated from its continuing operations. A key aspect of this analysis was
that the Company's operations, exclusive of restructuring charges, have
generated taxable income since completing the restructuring of its
operations in the third quarter of 1999. 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 $15.0 million at December 31, 1999,
expiring through 2019. 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.
NOTE H--STOCKHOLDERS' EQUITY
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.
Page 35
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
NOTE H--STOCKHOLDERS' EQUITY--CONTINUED
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
YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------------
1999 1998 1998 1997
------------ ------------- ---- ----
<S> <C> <C> <C> <C>
Earnings (loss) from continuing operations:
As reported $ (11,997) $ (3,893) $ 1,388 $ 817
Pro forma $ (12,602) $ (4,072) $ 604 $ 580
Earnings (loss) per share, from continuing operations:
As reported $ (0.77) $ (.26) $ 0.09 $ 0.06
Pro forma $ (6.79) $ (.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 year ended December 31,
1999, the three month period ended December 31, 1998 and years ended
September 30, 1998 and 1997, respectively: expected volatility of 106
percent, 114 percent, 84 percent and 74 percent, risk free interest rates
of 5.45 percent, 4.38 percent, 5.36 percent and 5.89 percent; expected
lives for options granted during the periods were 2.3 years for the year
ended December 31, 1999, 2.0 years for the three month period ended
December 31, 1998, and 2.6 years for the years ended September 30, 1998 and
1997.
Page 36
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
NOTE H--STOCKHOLDERS' EQUITY--CONTINUED
Following is a summary of stock option transactions:
Outstanding, October 1, 1996 $ -
Granted during the year (at prices
ranging from $2.94 to $7.00 per shre) 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
-----------
Granted during the year (at prices ranging from
$.50 to $1.38 per share) 1,280,000
Forfeited during the year (277,150)
Exercised during the year -
Outstanding, December 31, 1999 1,942,000
-----------
Exercisable at end of year
(at prices ranging from
$1.38 to $6.56 per share) 832,750
-----------
Weighted average stock option price $ 1.91
-----------
Weighted average fair value of options
granted during fiscal: 1997 $ 3.16
1998 1.34
three months ended Dec. 31, 1998 .97
1999 .53
===========
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.
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, 1999, are approximately as follows:
Page 37
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIE
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
NOTE I--COMMITMENTS AND CONTINGENT LIABILITIES--CONTINUED
(thousands of dollars)
Years ending
December 31,
------------
2000 $ 850
2001 812
2002 744
2003 335
-------
$ 2,741
=======
Rent expense was $652,000, $240,000, $663,000, and $490,000 for year ended
December 31, 1999, for the three month period ended December 31, 1998, and
the years ended September 30, 1998, and 1997, 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. A summary of significant legal matters follows.
The Company is pursuing a $5.6 million claim against a national
broker-dealer in an arbitration case before the National Association of
Securities Dealers, Inc. The Company alleges that the defendant
broker-dealer mismanaged and engaged in authorized actions with respect to
the Company assets and accounts. The matter has not been set for a hearing.
The Company believes that its claims have merit and intends to aggressively
pursue its claims in the arbitration. There can be no assurance that the
Company will prevail on any of its claims or that the Company will recover
any damages sought in this suit.
The Company filed a lawsuit in January 2000 in the Superior Court of the
District of Columbia against National Public Radio and AAA Networks
alleging breach of contract by National Public Radio and tortuous
interference in contract against AAA Networks. On March 2000, the Superior
Court denied without a hearing the motion of National Public Radio to
dismiss the case. The Company is seeking $300,000 in compensatory damages
and unspecified amount in punitive damages. The Company believes that its
claims have merit and STI intends aggressively pursue its claims in the
case. A trial date has not been set for this case.
Page 38
<PAGE>
In January 2000, Hirata Corporation and Hirata Corporation USA amended
their complaint in an civil action in the U.S. District Court for the
Southern District of Indiana (Hirata Corporation and Hirata Corporation USA
v. Daniel Porush, Jordan Belfort, et al., Case ) to add as defendants to
the case the following corporations and person: the Company; its former
Chairman, Chief Executive Officer and President, Edward Ratkovich; and two
other corporations that are not affiliated with the Company or Mr.
Ratkovich. With respect to the Company and Mr. Ratkovich, the amended
complaint alleges that Mr. Ratkovich, as an officer of the Company,
conspired with the two defendants who were officers of the underwriter to
manipulate the public market for the Company's common stock and that said
manipulation harmed the plaintiffs in an unspecified amount of damages. The
Company believes that the amended complaint is frivolous, without basis in
law or in fact on its face, was not timely filed and was prompted by the
plaintiffs lack of success to date against the original defendants. The law
firm of Jones Day Reavis & Pogue in Washington, D.C. has been retained to
represent the Company and Mr. Ratkovich in this case. The Company intends
to aggressively pursue the dismissal of the case and to defend itself
against all allegations in the amended complaint.
Washington Sports & Entertainment, Inc. filed a lawsuit in the Superior
Court of the District of Columbia in March 2000 against the Company for
alleged breach of contract to supply computer hardware and to license a box
suite at the MCI Center in Washington, D.C. The Company has denied the
claims of the plaintiff. A trial date has not been set in this case. The
Company is currently negotiating a settlement to the lawsuit and the
Company believes that this lawsuit will be settled before the trial date
and that such settlement shall not have an adverse material affect on the
Company's financial condition or results of operations.
As previously reported, the Company was sued by Technospin, Inc. for
alleged breach of a corporate guarantee under a manufacturing agreement
between Technospin, Inc. and MVS. The Company has counter claimed against
Technospin, Inc. for breach of contract under the manufacturing agreement.
The matter has not been set for trial. The Company has provided for a
reserve against any liability in this case in its 1999 financial
statements. The Company intends to aggressively pursue its claims against
Technospin, Inc. and to aggressively defend itself against Technospin,
Inc.'s claims. The Company cannot at this time predict with any certainty
the results or impact of this case on the Company and its financial
condition or results of operations.
The Company is subject to certain other legal proceedings and claims that
have arisen in the ordinary course of business and have not been fully
adjudicated. The results of these legal proceedings cannot be predicted
with certainty; however, in the opinion of management, the Company does not
have a potential liability related to any legal proceedings and claims that
would have a material adverse effect on its financial condition or results
of operations. Most of these legal proceedings concern accounts payable
allegedly owed by the Company's discontinued operations, especially Expert
and Socrates Technologies, Inc.
TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES
During December 1999, the Company converted loans payables to stockholders
to equity. Loans to such stockholders had been loaned under three separate
loan agreements bearing interest at 9 percent, 8 percent, and 16 percent
respectively. The total amount of loan payable converted to equity included
principle amount of approximately $1.3 million and interest of
approximately $290,000.
During 1999, accrued salary of approximately $691,000 due to the former
Chairman of the Board of Directors was forgiven in order to resolve certain
matters between the Company and the individual. The forgiveness of salary
was recorded as other income in the Company's results of operations.
Page 39
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
NOTE I--COMMITMENTS AND CONTINGENT LIABILITIES--CONTINUED
During October 1999, the President of one of the subsidiaries resigned.
Subsequent to the resignation, the President formed another software
company which performed consulting services to the subsidiary of
approximately $62,000.
The Company also subcontracted certain software development services to an
affiliated software development company in India, which is owned by the
former President and CEO of the subsidiary of $315,000, $70,000, $262,000
and $87,000 during the year ended December 31, 1999 and the three months
period ended December 31, 1998 and the years ended September 30, 1998 and
1997, respectively.
During the current year the Company performed consulting services for a
company owned by the former Chairman and CEO of the Company. Total revenue
generated for consulting was approximately $39,000 for year ended December
31, 1999.
NOTE J--SEGMENT INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in the fiscal year ended September 30,
1998. SFAS No. 131 supersedes SFAS No. 14, Financial Reporting for Segments
of a Business Enterprise and establishes standards for reporting
information about operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker, or group, in deciding how to allocate resources and in assessing
performance.
Segment income is the measure of profit and loss that our CODM uses to
assess performance and make decisions. Segment income represents the sales
less the cost of sales and direct expenses incurred within the operating
segments. Corporate level operating expenses are not allocated to operating
segments. Business units do not sell to each other, and accordingly, there
are no intersegment sales. At December 31, 1999, the Company's continuing
operations are represented by two identifiable segments: Computer Systems
Sales, Integration and Training and Software Development.
For the year ended December 31, 1999, the Company did not have a single
customer that accounted for more than 10 percent of the total consolidate
revenue. 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. In addition, approximately, 15 percent of the
Company's sales in fiscal years 1997, were to customers outside North
America. The Company had no material export sales in fiscal years 1999 and
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 three months ended December 31, 1999,
transition period representing the three month period ended 1998 and the
fiscal year ended December 31, 1999 and fiscal years ended September 30,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
(Thousands of dollars) THREE MONTHS ENDED DECEMBER 31, 1999
(unaudited) -------------------------------------------------------
COMPUTER
SYSTEM SALES,
INTEGRATION SOFTWARE GENERAL
AND TRAINING DEVELOPMENT CORPORATE TOTAL
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
Customers $ 3,659 $ 1,825 $ - $ 5,484
Operating profit (loss) (1,790) (26) (347) (2,163)
Net income (loss) (1,630) (29) (478) (2,137)
Total assets 4,097 5,168 2,355 11,620
-----------------------------------------------------------------------------------
</TABLE>
Page 40
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
NOTE J--SEGMENT INFORMATION--CONTINUED
<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 $ 10,920 $ 1,730 $ - $ 12,650
Operating profit (loss) (3,083) 76 (259) (3,266)
Net income (loss) (3,349) 22 (566) (3,893)
Total Assets 16,343 4,180 2,382 22,905
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------
COMPUTER
SYSTEM SALES,
INTEGRATION SOFTWARE GENERAL
AND TRAINING DEVELOPMENT CORPORATE TOTAL
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 15,828 $ 7,411 $ - $ 23,239
Operating profit (loss) (7,333) 355 (1,651) (8,629)
Net income (loss) (7,487) 358 (4,769) (11,997)
Total Assets 4,097 5,168 2,355 11,620
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
-------------------------------------------------------
COMPUTER
SYSTEM SALES,
INTEGRATION SOFTWARE GENERAL
AND TRAINING DEVELOPMENT CORPORATE TOTAL
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 57,223 $ 4,786 $ - $ 62,008
Operating profit (loss) (163) 298 (908) (773)
Net income (loss) (569) 265 1,692) 1,388
Total Assets 21,704 3,995 2,013 27,712
</TABLE>
<TABLE>
<CAPTION>
YEAR 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 $ 579 $ - $ 34,335
Operating profit (loss) 1,494 (91) (1,068) 335
Net income (loss) 1,115 (96) (202) 817
Total Assets 12,316 2,991 3,142 18,449
</TABLE>
Page 41
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
NOTE K--DISCONTINUED OPERATIONS
During the year ended December 31, 1999, the Company completed the sale of
the assets of 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.
NOTE L--QUARTERLY INFORMATION (UNAUDITED)
Quarterly information for the last three fiscal years is as follows (all
amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
December 31, 1999 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 7,851 $ 5,950 $ 3,954 $ 5,484 $ 23,239
Income (loss) from
operations (1,288) (3,047) (2,131) (2,163) (8,629)
--------------------------------------------------------------------------------
Net earnings (loss) $ (1,368) $ (3,081) $ (5,411) $ (2,137) $ (11,997)
--------------------------------------------------------------------------------
</TABLE>
<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
Income (loss) from
operations (113) (684) 247 (223) (773)
Income (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>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
SEPTEMBER 30, 1998 1996 1997 1997 1997 TOTAL
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 6,759 $ 8,162 $ 9,972 $ 9,442 $ 34,335
Income (loss) from
operations 344 377 206 (592) 335
Income (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 42
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
DECEMBER 31, 1999 AND 1998, AND SEPTEMBER 30, 1998 AND 1997
NOTE L--Acquisition of Networkland
The Company acquired all the outstanding stock of Networkland, Inc.
effective August 16, 1999. The Company paid $700,000 in cash and 2,000,000
shares of common stock valued at $1.3 million at closing. The merger
agreement also specified that an additional $450,000 in cash would be paid
over a three year period following the merger. The acquisition of
Networkland, Inc. was accounted for as a purchase. The cost exceeded the
fair value of net assets resulting in goodwill of $2.0 million. Goodwill
will be amortized using an estimated life of ten years. The results of
operations of Networkland, Inc. are included in the accompanying financial
statements since the date of acquisition.
Pro forma financial information should be read in conjunction with the
related historical information, and is not necessarily indicative of the
results that would have been attained had the transaction actually taken
place.
The unaudited proforma results of operations of the combined entities are
summarized below:
Years ended
December 31, September 30,
(Thousands of dollars) 1999 1998
----------- -------------
Revenue
Socrates $18,745 $62,008
Networkland, Inc. (unaudited) 8,943 5,058
------- -------
Combined revenue $27,688 $67,066
======= =======
Net income (loss)
Socrates $ (12,298) $ (4,594)
Networkland, Inc. (unaudited) 697 4
------- -------
Combined net income (loss) $ (11,601) $ (4,590)
========= ========
Note M--SUBSEQUENT EVENTS
In January of 2000, the Company entered into certain agreements with
individual accredited investors for a private placement of shares of the
Company's common stock, which resulted in an increase in equity, cash and
tangible assets of approximately $865,000.
Effective March 1, 2000, the Company acquired substantially all of the
assets and certain liabilities of Object Applications Systems, Inc. for
total consideration of approximately $4.7 million, payable in cash, note
payable and common stock of the Company. The Company will record the
transaction as an asset purchase, allocating the total purchase price to
the various assets purchased, with any excess of purchase price over fair
market vale of assets purchased to goodwill. The principal asset purchased
in the agreement is software, independently valued at no less than $3.68
million. The estimated purchase price allocation, is as follows
(unaudited):
Cash and note payable $ 420
Capital Stock 3,786
Liabilities assumed 487
Deferred revenue, maintenance contracts 37
------
Total purchase price $4,730
======
Allocation of purchase price
Accounts receivable $ 272
Loans and exchanges 354
Fixed assets, net 6
Security deposits 16
Internally developed software 3,680
Goodwill 402
------
Total allocation of purchase price $4,730
======
Page 43
<PAGE>
Pro forma financial information should be read in conjunction with the
related historical information, and is not necessarily indicative of the
results that would have been attained had the transaction actually taken
place.
The proforma balance sheet of Socrates Technologies Corporation at December
31, 1999 giving effect to the transaction as if it had occurred at December
31, 1999 is summarized below:
<TABLE>
<CAPTION>
Pro forma
Unaudited
Assets 31-Dec-99 OAS 31-Dec-99
------ --------- --- ---------
<S> <C> <C> <C>
Current Assets $ 5,170 272 $ 5,442
Property and Equipment, net 636 6 642
Capitalized Software Costs, net - 3,680 3,680
Goodwill, net 4,542 402 4,944
Deferred Tax Asset, net of valuation
allowance $ 1,200 $ - $ 1,200
Other Assets 72 370 442
------- ------ -------
Total Assets $11,620 $4,730 $16,350
======= ====== =======
Liabilities and Stockholders' Equity
Current Liabilities
Line of credit and financing arrangement $ 134 $ - $ 134
Accounts payable and accrued
liabilities 4,036 944 4,980
Shareholder loans and interest - - -
------- ------ -------
Total Current Liabilities 4,170 944 5,114
Stockholders' Equity 7,450 3,786 11,236
------- ------ -------
Total Liabilities and Stockholders' Equity $11,620 $4,730 $16,350
======= ====== =======
</TABLE>
The pro forma results of operations as if the acquisition occurred on
January 1, 1999 are summarized below:
Pro forma revenue and income
(Thousands of dollars) 1999
Revenue ------
Socrates $ 23,239
OAS, Inc. (unaudited) 1,695
--------
Combined revenue $ 24,934
========
Net loss
Socrates $(11,997)
OAS, Inc. (unaudited) (219)
--------
Combined net loss $(12,216)
========
On March 20, 2000, the Company sold a series of debentures, convertible
under certain circumstances into shares common stock of the Company, for an
aggregate price of $4.5 million. The debentures bear interest at the rate
of 4%, which, at the option of the holder, may be paid in shares of common
stock. The shares of stock underlying the debentures will be included in a
registration statement to be filed by the Company with the SEC by May 15,
2000. The Company receives $3.5 million at the closing, with another $1
million to be received after the registration of the underlying shares
becomes effective. The debentures generally are convertible either after
120 days or after the registration becomes effective, whichever event
occurs first. There are certain penalties included in the agreements for
failure to register the underlying stock. The debentures are convertible
into common stock at the lower of $3.38 or the lowest closing price of the
Company's common stock during the 30 trading days immediately preceding
conversion. Each debenture has attached to it a warrant granting the holder
the right to purchase .5 shares at $6.77 per share and .1 shares at $12.00
per share. The Company expects to record related expenses of approximately
$470,000 for commissions and legal expenses related to the sale of the
debentures.
Page 44
<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.
2.1 Asset Purchase Agreement, dated March 10, 2000, between
Socrates Solutions Corporation and Object Application Systems,
Inc. (1)
2.2 Acquisition Agreement, dated August 17, 1999, by and among
Socrates Technologies Corporation, Networkland, Inc. and
Farshad Sajedi (1)
3.2 By-laws, as amended, dated February 7, 1998
10.1 Securities Purchase Agreement, dated March 20, 2000, by and
among Socrates Technologies Corporation and Certain
Purchasers (1)
10.2 4% Debenture, dated March 20, 2000, due March 2005 (1)
10.3 Warrant Agreement, dated March 20, 2000 (1)
10.4 Loan Conversion Agreement, dated December 31, 1999, between E.
Paul Roberts and Socrates Technologies Corporation (2)
10.5 Loan Conversion Agreement, dated December 15, 1999, between
Edward Ratkovich and Socrates Technologies Corporation
10.6 Employment Agreement, dated March 20, 2000, by and between
Timothy Keenan and Socrates Technologies Corporation (1)
10.7 Employment Agreement, dated November 15, 2000, by and between
Stephen J. Fogarty and Socrates Technologies Corporation (1)
10.8 Form of Indemnification Agreement
10.9 1997 Stock Option Plan of Socrates Technologies Corporation
(3)
10.10 1998 Non-Qualified Stock Option Plan of Socrates Technologies
Corporation (4)
10.11 1999 Non-Employee Directors Stock Option Plan
10.12 Amendment Number 3 to the Employment Agreement between Paul
Richter and Socrates Technologies Corporation (1)
21 List of Subsidiaries.
23 Consent of Independent Auditors, Grant Thornton, LLP, dated
March 27, 2000.
- -------------
(1) To be filed by amendment
(2) Incorporated by reference to Form 8-K, filed with the Commission on
February 2, 2000
(3) Incorporated by reference to Exhibit One to the Proxy Statement, filed
with the Commission on March 11, 1997
(4) Incorporated by reference to Exhibit 4.1 to the Form S-8 Registration
Statement (Commission File Number 333-96155), filed with the Commission
on February 4, 2000
Page 45
<PAGE>
A. Reports on Form 8-K
The Company filed the following Form 8-K Reports during the fourth
quarter of fiscal year 1999: Form 8-K, filed with the Commission on
October 12, 1999 and Form 8-K, filed with the Commission on December
13, 1999.
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
March 22, 2000
By: Andreas A. Keller
-----------------------------
Andreas A. Keller
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.
SIGNATURE TITLE
DATE
Andreas A. Keller Chairman of the Board
March 22, 2000
- -----------------------------
Andreas A. Keller
Timothy J. Keenan President, Director
March 22, 2000
- ---------------------------
Timothy J. Keenan [Principal Executive Officer]
PAUL W. RICHTER Director, General Counsel,
March 22, 2000
- --------------------------- Secretary
Paul W. Richter
Stephen J. Fogarty Chief Financial Officer,
March 22, 2000
- ---------------------------
Stephen J. Fogarty [Principal Financial Officer]
Farshad Sajedi Director
March 22, 2000
- ---------------------------
Farshad Sajedi Director
Mariellen Lowry Director
March 22, 2000
- ---------------------------
Mariellen Lowry
Richard W. Prins Director
March 22, 2000
- ---------------------------
Richard W. Prins
Page 46
Exhibit 3.2
Amended
BY- LAWS
of
Socrates Technologies Corporation,
Delaware corporation
ARTICLE I
OFFICES
Section 1. The registered office of Socrates Technologies Corporation
(the "Corporation") shall be in the City of Wilmington, County of New Castle,
State of Delaware.
Section 2. The Corporation may also have offices at such other places
both within and without the State of Delaware as the board of directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held at such place either within or without the State of
Delaware as shall be designated from time to time by the board of directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at such date
and time as shall be designated from time to time by the board of directors and
stated in the notice of the meeting, at which they shall elect by a plurality
vote a board of directors and transact such other business as may properly be
brought before the meeting; provided, however, that, commencing in Year 2001,
the annual meeting of the stockholders shall be held on or before May 31st of
each year.
1
<PAGE>
Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than ten nor more than sixty days before the date of the
meeting.
Section 4. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the chairman or the president and shall be
called by the president or secretary at the request in writing of (a) a majority
of the board of directors or (b) stockholders owning a majority in amount of the
entire capital stock of the corporation issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of the proposed meeting.
Section 5. Written notice of a special meeting stating the place, date
and hour of the meeting and the purpose of purposes for which the meeting is
called shall be given not less than ten nor more than sixty days before the date
of the meeting, to each stockholder entitled to vote at such meeting.
Section 6. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 7. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 8. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other
2
<PAGE>
than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required in which case
express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the certificate of
incorporation, any action required to be taken at any annual or special meeting
of stockholders of the corporation, or any action which may not be taken at any
annual or special meeting of such stockholders, may not be taken without a
meeting and without prior notice and without a vote.
Section 12. Shareholder proposals must be received in writing by the
Corporation's Secretary at least 45 days before the anniversary of the record
date of the preceding year's annual meeting of shareholders in order to be
considered for inclusion in the current year's proxy statement or proxy
solicitation materials of the Corporation.
ARTICLE III
DIRECTORS
Section 1. The business of the Corporation shall be managed by or under
the direction of its board of directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these by-laws directed or required to
be exercised or done by the stockholders.
3
<PAGE>
Section 2. The number of directors, which shall constitute the whole
board, shall be not less than one or more than nine. Within the limits above
specified, the number of directors shall be fixed from time to time by
resolution of the board of directors or by the stockholders at the annual
meeting. The directors shall be elected at the annual meeting of the
stockholders, except as provided in Section 3 of this Article, and each director
elected shall hold office until his successor is elected and qualified.
Directors need not be stockholders.
Section 3. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the time of
filing any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 4. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. The first meeting of each newly elected board of directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
board of directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
4
<PAGE>
Section 6. Regular meetings of the board of directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the chairman
or the chief executive officer or by two or more directors on two days' notice
to each director, either personally or by mail or by telegram; special meetings
shall be called in like manner and on like notice on the written request of two
directors, unless the board consists of only one director in which case special
meetings shall be called in like manner and on like notice on the written
request of the sole director.
Section 8. At all meetings of the board, a majority of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the board of directors, the
directors present thereat may adjourn the meeting from time to time, without
other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation or these by-laws, any action required or permitted to be taken at
any meeting of the board of directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these by-laws, member of the board of directors, or any
committee designated by the board of directors, may participate in a meeting of
the board of directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 11. Committees of the Board. The board of directors may, by
resolution passed by a majority of the whole board, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee.
5
<PAGE>
In the absence or disqualification of a member of a committee, the
member of members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the board of directors to act the meeting in the place of any
such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
board of directors, shall have any may exercise all the powers and authority of
the board of directors in the management of the business affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may required it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation (except that
a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation, or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the corporation), adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
or amending the by-laws of the corporation; and, unless the resolution or the
certificate of incorporation expressly so provides, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock or to adopt a certificate of ownership and merger. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the board of directors.
Section 12. Each committee shall keep regular written minutes of its
meetings and report the same to the board of directors when required. Minutes
for every committee meeting shall be submitted to the Secretary of the
Corporation.
Section 13. The Corporation shall have at all times an Audit Committee,
which shall be responsible for oversight of the financial controls, systems and
practices of the Corporation, recommendation of outside auditors and
investigating and correcting any improper, illegal or negligent acts or
practices of the financial and accounting staff of the Corporation. The Audit
Committee shall have at least three (3) and not more than seven (7) members,
each member being a non-employee, outside or independent director. All members
of the Audit Committee must be able to read and
6
<PAGE>
understand fundamental financial statements, including the Corporation's balance
sheet, income statements, and cash flow statements. At least one member of the
Audit Committee must have past employment experience in finance or accounting or
other comparable experience or background, including a current or past position
as a chief executive officer or financial officer or other senior officer with
financial oversight responsibilities.
Section 14. The Corporation shall have at all times a Conflicts
Committee, which committee shall be responsible for reviewing, investigating and
making determinations about the existence of any self-dealing, bad faith or
other breach of fiduciary duties in any agreements, transactions, dealings,
activities or relationships between the Corporation and its partners officers,
directors, employees, agents, business associates and shareholders. The
Conflicts Committee shall have at least one (1) but not more than three (3)
members, each member being a non-employee, outside or independent director. The
Conflicts Committee shall be advised by the general counsel of the Corporation
and/or any outside professional advisors that the Conflicts Committee deems
necessary to properly perform its duties. The Conflicts Committee shall also
conduct an annual review of the management and corporate governance practices,
polices, controls and systems of the Corporation and report its findings and
recommendations to the board.
Section 15. The full board shall perform the duties of a nominating
committee, which committee shall nominate persons for stand for election or
appointment to the board.
COMPENSATION OF DIRECTORS
Section 16. Compensation of Directors. Unless otherwise restricted by
the certificate of incorporation or these by-laws, the board of directors shall
have the authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the board of
directors and may be paid a fixed sum for attendance at each meeting of the
board of directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
Section 17. Removal of Directors. Unless otherwise restricted by the
certificate of incorporation or by law, any director or the entire board of
directors may be removed, with or without cause,
7
<PAGE>
by the holders of a majority of shares entitled to vote at an election of
directors, or, with cause, by a majority of the directors entitled to vote
thereon. For purposes of these by-laws, "cause" shall mean any act that
constitutes a felony violation of federal or state laws, any intentional breach
of the director's duty of loyalty to the Corporation and its shareholders
(including intentional self-dealing), embezzlement or theft or misappropriation
of Corporation assets, or falsifying any report tendered to the board or
intentionally making a false statement to the board if such report or statement
is used by the board in making any decision affecting the Corporation or its
shareholders, or is used in any filing with a regulatory agency or court, or is
used in any public announcement.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the Corporation shall be chosen by the board
of directors and shall consist of a chairman of the board, chief executive
officer and/or president, chief financial officer, general counsel and a
secretary. The directors may also choose a chief operating officer, one or more
vice-presidents, a treasurer, a controller, one or more assistant treasurers or
controllers, and one or more assistant secretaries. Any number of offices may be
held by the same person, unless the certificate of incorporation or these
by-laws otherwise provide; provided, however, that the same person may not serve
concurrently as chairman, chief executive
8
<PAGE>
officer and president. The Corporation shall not be obligated to appoint a chief
executive officer or a president or a chief operating officer if any of these
offices are or become vacant; provided, however, that one these offices must be
held by a full-time employee. In the event that the position of chief executive
officer, president and chief operating officer are vacant, the chairman of the
board shall exercise the authority of the chief executive officer, the president
and chief operating officer until such time as such positions are appointed by a
majority of the directors of the board.
Section 2. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 3. The board of directors at its first meeting after each
annual meeting of stockholders shall choose the officers of the corporation who
shall hold their offices until their successors are chosen and qualified, or
until their resignation or removal. If any officers are not chosen at an annual
meeting, n at any subsequent regular or special meeting.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the board of directors.
Section 5. The officers of the Corporation shall hold office until
their successors are chosen and qualified. Any officer elected or appointed by
the board of directors may be removed at any time by the affirmative vote of a
majority of the board of directors. Any vacancy occurring in any office of the
Corporation shall be filled by the board of directors.
THE CHAIRMAN
Section 6. The chairman shall preside at all stockholders' meetings and
all meetings of the board of directors at which he is present and shall have
such other duties as may be assigned to him by the board of directors. The
chairman shall perform the duties of the chief executive officer, president and
chief operating officer in the event of their absence or inability or refusal to
act or perform the duties of their respective offices.
THE CHIEF EXECUTIVE OFFICER
Section 7. The chief executive officer shall have general and active
management of the business of the Corporation and shall see that all orders and
resolutions of the board of directors are carried into effect. In the absence of
the chairman or in the event of his inability or refusal to act, the
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chief executive officer shall also perform the duties of the chairman and, when
so acting shall have all the powers of and be subject to all the restrictions
upon the chairman.
Section 8. The chief executive officer shall execute bonds, mortgages
and other contracts requiring a seal, under the seal of the corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the board of directors to some other officer or agent of the corporation. The
chief executive officer shall perform such other duties and have such other
powers as the board of directors may from time to time prescribe.
THE PRESIDENT
Section 9. The president shall perform such management and other duties
as may be assigned to him or her by the chairman, the board or the chief
executive officer. The president shall see that all orders and resolutions of
the board of directors are carried into effect. In the absence of the chief
executive officer, or president or in the event of his inability or refusal to
act, then the president shall perform all the duties and enjoy all of the
authority of the chief executive officer.
Section 10. The president shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation, in the absence of
the chief executive officer or in the event of his inability or refusal to act,
except where required or permitted by law to be otherwise signed and executed
and except where the signing and execution thereof shall be expressly delegated
by the board of directors to some other officer or agent of the Corporation. The
president shall perform such other duties and have such other powers as the
board of directors may from time to time prescribe.
CHIEF OPERATING OFFICER
Section 11. The chief operating officer shall perform the duties
assigned to him from time to time by the chief executive officer and the
president, which duties shall be consistent with the day-to-day managerial
functions customarily performed by a chief operating officer. The Corporation
shall not be obligated to employ a chief operating officer if it has a full-time
chief executive officer or president, or the chairman is fulfilling the duties
of those offices. The chief operating officer shall perform such other duties
and have such other powers as the board of directors may from time to time
prescribe.
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THE VICE-PRESIDENTS
Section 12. In the absence of the president or in the event of his
inability or refusal to act, the vice-president (or in the event there be more
than one vice-president, the vice-presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president and, when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 13. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings of
the meetings of the Corporation and of the board of directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the board of directors, and
shall perform such other duties as may be prescribed by the board of directors
or president, under whose supervision he shall be. The secretary shall have
custody of the corporate seal of the Corporation and the secretary, or an
assistant secretary, shall be authority to affix the same to any instrument
requiring it and, when so affixed, it may be attested by the secretary's
signature or by the signature of such assistant secretary. The board of
directors may give general authority to any other officer to affix the seal of
the corporation and to attest the affixing by that officer's signature.
Section 14. The assistant secretary or, if there be more than one, the
assistant secretaries in the order determined by the board of directors (or, if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
CHIEF FINANCIAL OFFICER
Section 15 The chief financial officer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
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deposit all moneys and other valuable efforts in the name and to the credit of
the corporation in such depositories as may be designated by the board of
directors. The chief financial officer shall perform the duties of the treasurer
in the event that the position of the treasurer is not filled or becomes vacant.
Section 16. The chief financial officer shall execute bonds, mortgages
and other contracts requiring a seal, under the seal of the corporation, in the
absence of the chief executive officer and the president, except where required
or permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the board of
directors to some other officer or agent of the corporation. The chief executive
officer shall perform such other duties and have such other powers as the board
of directors may from time to time prescribe.
Section 17. The chief financial officer shall disburse the funds of the
Corporation as may be ordered by the board of directors, taking proper vouchers
for such disbursements, and shall render to the chairman, the chief executive
officer, president and the board of directors, at its regular meetings, or when
the board of directors, so requires, an account of all his transactions as chief
financial officer and of the financial condition of the Corporation. The chief
financial officer shall report to and be supervised by the chairman and board of
directors.
Section 18. If required by the board of directors, the chief financial
officer shall give the Corporation a bond (which shall be renewed every six
years) in such sum and with such surety or sureties as shall be satisfactory to
the board of directors for the faithful performance of the duties of the chief
financial advisor's office and for the restoration to the corporation to the
corporation, in case of the chief financial officer's death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in the treasurer's possession or under the chief
financial officer's control belonging to the Corporation.
TREASURER
Section 19. The treasurer shall perform such financial accounting,
management and administrative duties as he may be assigned to him by the chief
financial officer or by the board of directors.
CONTROLLER
Section 20. The controller shall perform such financial, accounting,
administrative and management duties as may be assigned to him by the
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chief financial officer or the board of directors. In the absence of the chief
financial officer and the treasurer, if any, or in the event of their inability
or refusal to act, the controller shall perform the duties and exercise the
powers of the chief financial officer and the treasurer and shall perform such
other duties and have such other powers as the board of directors may determine
may from time to time prescribe.
ASSISTANT TREASURERS AND ASSISTANT CONTROLLERS
Section 22. The Corporation may appoint as many assistant treasurers
and/or assistant controllers as the Corporation deems appropriate and necessary
to the efficient operation of the Corporation's businesses. The assistant
treasurers and/or assistant controllers shall have such duties and powers as the
chief financial officer or the board of directors may determine to assign to
them from time to time.
GENERAL COUNSEL
Section 21. The general counsel shall serve as legal counsel to the
Corporation, shall supervise any and all outside law firms performing services
for the Corporation, shall be responsible for ensuring corporate compliance with
applicable federal, state and local regulatory and corporate governance laws,
regulations, ordinances and principles, and shall assist the Corporation's
senior management in the evaluation of mergers and acquisitions candidates,
drafting and negotiating business, financial and other contractual transactions
and agreements. The general counsel shall also be responsible for conducting any
internal investigations concerning employee grievances or any third party
investigations, assisting any and serving as a member of any special committee
of the board empowered to investigate internal policies, practices, systems,
controls, transactions, activities or other matters. The general counsel shall,
where qualified, serve as the Corporation's registered agent for service of
process, shall draft all regulatory filings and reports, and shall, where
licensed and appropriate in the opinion of the general counsel and the board,
appear on behalf of the Corporation as its attorney-in-fact. The general counsel
shall report directly to and shall be supervised by the chairman of the board
and the board of directors.
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LOANS
Section 23. The Corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the
Corporation whenever, in the judgment of the Board, such assistance may
reasonably be expected to benefit the Corporation.
ARTICLE VI
CERTIFICATES FOR SHARES
Section 1. The shares of the Corporation shall be represented by a
certificate or shall be uncertificated. Certificates shall be signed by, or in
the name of the corporation by, (a) the chairman or the chief executive officer,
the president or a vice-president of the Corporation and (b) the treasurer or an
assistant treasurer or the secretary or an assistant secretary of the
Corporation.
Section 2. Within a reasonable time after the issuance or transfer of
uncertificated stock, the corporation shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to Section 151, 156, 202(a) or 218(a) of the General
Corporation Law of Delaware or a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. All of the signatures on a
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The board of directors may direct a new certificate or
certificates or uncertificated shares to be issued in place of any certificate
or certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates or uncertificated
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shares, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or his legal representative, to advertise
the same in such manner as it shall require and/or to give the corporation a
bond in such sum as it may direct as indemnity against any claim that may be
made against the corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent of
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the certificate and record the transaction upon its books. Upon
receipt of proper transfer instructions from the registered owner of
uncertificated shares, such uncertificated shares shall be cancelled and
issuance of new equivalent uncertificated shares or certificated shares the
person entitled thereto and the transaction shall be recorded upon the books of
the corporation.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provide,
however, that the board of directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
Section 6. The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall
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have express or other notice thereof, except as otherwise provided by the laws
of Delaware.
ARTICLE VII
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject
to the provisions of the certificate of incorporation, if any, may be declared
by the board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside of
any funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meeting contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for such other
purpose as the director shall think conductive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ARTICLE VIII
ANNUAL STATEMENT
Section 1. The board of directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
Corporation.
ARTICLE IX
CHECKS
Section 1. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
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ARTICLE X
INDEMNIFICATION
Section 1. As used in this Article X, any word or words that are
defined in the General Corporation Law of Delaware, as amended from time to
time, (the "Indemnification Provisions") shall have the same meaning as provided
in the Indemnification Provisions.
Section 2. The Corporation shall indemnify and advance expenses to a
director or officer of the Corporation to the fullest extent allowed by the
Indemnification Provisions. The Corporation may also provide for indemnification
of its officers and directors that exceeds the indemnification specifically
allowed under the Indemnification Provisions for officers and directors, which
indemnification may include, without limitation, indemnification agreements and
insurance coverage.
Section 3. With respect to an employee or agent, other than a director
or officer of the Corporation, the Corporation may, as determined by the board
of directors, indemnify and advance expenses to such employee or agent to the
fullest extent permitted by the Indemnification Provisions.
Section 4. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise against any liability
asserted against such person and incurred by such person in any such capacity or
arising out of such person's official capacity and as to action in another
capacity while holding such office.
Section 5. Personal Liability of a Director. To the extent allowed
under the laws of the State of Delaware, a director of the Corporation shall not
be personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Corporation and its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law of Delaware, as the same exists or hereafter may be
amended, or (iv) for any transaction from which the director derived an improper
personal benefit.
Section 6. If the General Corporation Law of Delaware hereafter is
amended to authorize the further elimination or limitation of the liability of
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directors, then the liability of a director of the Corporation, in addition to
the limitation on personal liability provided herein, shall be limited to the
fullest extent permitted by the amended General Corporation Law of Delaware at
that time in force. Any repeal or modification of this paragraph by the
stockholders shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
ARTICLE XI
FISCAL YEAR
Section 1. The fiscal year of the Corporation shall be fixed by
resolution of the board of directors.
ARTICLE XII
CORPORATE SEAL
The seal of the Corporation shall contain the name of the Corporation,
the year of its organization and the words "Corporate Seal, Delaware." The seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
ARTICLES XIII
AMENDMENTS
Section 1. These by-laws may be altered, amended or repealed or new
by-laws may be adopted by the stockholders or by the board of directors, when
such power is conferred upon the board of directors by the certificate of
incorporation at any regular meeting of the stockholders or of the board of
directors or at any special meeting of the stockholders or of the board of
directors if notice of such alteration, amendment, repeal or adoption of new
by-laws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal by-laws is conferred upon the board of directors by the
certificate of incorporation, it shall not divest or limit the power of the
stockholders to adopt, amend or repeal by-laws.
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ARTICLE XIV
REIMBURSEMENTS
Section 1. Any payments made to an officer or other employees of the
Corporation, such as salary, commission, interest or rent, or entertainment
expenses incurred by him, which payment shall be disallowed in whole or in part
as a deductible expense by the U.S. Internal Revenue Service, shall be
reimbursed to such officer or other employee of the Corporation to the full
extent of such disallowance. It shall be the duty of the directors, as a board,
to enforce payment of each such amount disallowed. In lieu of payment by the
officer or other employee, subject to the determination of the directors,
proportionate amounts may be withheld from his future compensation payments
until the amounts owe to the Corporation have been recovered.
19
Exhibit 10.11
Socrates Technologies Corporation
STOCK OPTION PLAN FOR
NON-EMPLOYEE DIRECTORS
1. Purpose of the Plan. The purpose of the Plan is to promote the
interests of the Company and its shareholders by attracting and retaining
highly-qualified Outside Directors (as defined herein) with an investment
interest in the future success of the Company.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the Common Stock of the Company.
(d) "Company" means Socrates Technologies Corporation, a Delaware
corporation.
(e) "Director" means a member of the Board.
(f) "Employee" means any person, including officers and Directors,
employed by the Company or any Subsidiary of the Company. The payment of a
Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(h) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last
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market trading day prior to the time of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the date immediately preceding the date of
determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable, or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(i) "Inside Director" means a Director who is an Employee.
(j) "Option" means a stock option granted pursuant to the Plan.
(k) "Optioned Stock" means the Common Stock subject to an Option.
(l) "Optionee" means a Director who holds an Option.
(m) "Outside Director" means a Director who is not an Employee.
(n) "Plan" means this Stock Option Plan for Non-Employee Directors.
(o) "Prior Option" means an Option that is outstanding on September
30, 1999, but excluding Option grants that are effective as of that date.
(p) "Retirement" means termination of an Optionee's status as a
Director at or after age seventy (70) other than upon the Optionee's death or
total and permanent disability (as defined in Section 22(e)(3) of the Code).
(q) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(r) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
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3. Stock Subject to the Plan. Subject to the provisions of Section 10
of the Plan, the maximum aggregate number of Shares, which may be optioned and
sold under the Plan is 500,000 Shares of Common Stock (the "Pool"). The Shares
may be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
(a) Procedure for Grants. The provisions set forth in this Section
4(a) shall not be amended more than once every six months, other than to comport
with changes in the Code, the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder. All grants of Options to Outside Directors
under this Plan shall be automatic and non-discretionary and shall be made
strictly in accordance with the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each person who first becomes an Outside Director on or
after September 1, 1999 shall be automatically granted an option to purchase
25,000 Shares, as adjusted in accordance with Section 10 (the "Initial Option"),
on the date such person first becomes an Outside Director, whether through
election by the shareholders of the Company or appointment by the Board to fill
a vacancy; provided, however, that an Inside Director who ceases to be an Inside
Director but who remains a Director shall not receive an Initial Option.
(iii) Subject to shareholder ratification of the Plan and
effective January 4, 2000 and on each anniversary thereof on which the person is
an Outside Director, each Outside Director shall be automatically granted an
Option to purchase 25,000 Shares (an "Annual Option") provided he or she is then
an Outside Director; provided, however, that (A) no Annual Option shall be
granted to an Outside Director who received an Initial Option in the preceding
nine months; and (B) an Outside Director with a Prior Option to purchase 25,000
Shares shall be ineligible to receive an Annual Option pursuant to this
subsection (iii) unless such Prior Option was granted at least 360 days prior to
the applicable Annual Option grant date.
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(iv) Notwithstanding the foregoing, the Option grants described
in subsections (ii) and (iii) hereof shall be subject to and conditioned upon
shareholder approval of the Plan at a shareholders' meeting to be held prior to
December 31, 2000.
(v) The terms of an Initial Option granted hereunder shall be as
follows:
(A) the term of the Initial Option shall be ten (10) years.
(B) the Initial Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall equal the Fair Market
Value per Share determined as of the date of grant of the Initial Option.
(D) subject to Sections 8(d) and 10 hereof, the Initial Option
shall become exercisable as to fifty percent (50%) of the Shares subject to the
Initial Option on each anniversary of its date of grant, provided that the
Optionee continues to serve as a Director on such dates.
(vi) The terms of the Annual Option granted hereunder shall be as
follows:
(A) the term of the Annual Option shall be ten (10) years.
(B) the Annual Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall equal the Fair Market
Value per Share determined as of the date of grant of the Annual Option.
(D) subject to Sections 8(d) and 10 hereof, the Annual Option
shall become exercisable as to fifty percent (50%) of the Shares subject to the
Annual Option on each anniversary of its date of grant, provided that the
Optionee continues to serve as a Director on such dates.
(vii) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the remaining
Shares available for Option grant shall be granted under
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Options to the Outside Directors on a pro rata basis. No further grants shall be
made until such time, if any, as additional Shares become available for grant
under the Plan through action of the Board or the shareholders to increase the
number of Shares which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.
(b) Prior Options. Notwithstanding the foregoing, subject
to Section 10 hereof, Prior Options shall become exercisable in two (2) equal
installments of a whole number of Shares on the first and second anniversaries
of the date of grant of such Prior Options, provided that the Optionee continues
to serve as a Director on such dates.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect
to continuation of service as a Director or nomination to serve as a Director,
nor shall it interfere in any way with any rights which the Director or the
Company may have terminate the Director's relationship with the Company at any
time.
6. Term of Plan. The term of the Plan shall be ten (10) years. Either
party may terminate this Agreement upon 30 days' prior written notice to the
other party and may do so without liability whatsoever to the other party.
7. Form of Consideration. The consideration to be paid for the Shares
to be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) delivery of a properly
executed exercise notice together with such other documentation as the Company
and the broker, if applicable, shall require to effect an exercise of the Option
and delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (v) any combination of the foregoing methods of payment.
8. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4 hereof.
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An Option may not be exercised for a fraction of a Share. An Option
shall be deemed to be exercised when written notice of such exercise has been
given to the Company in accordance with the terms of the Option by the person
entitled to exercise the Option and full payment for the Shares with respect to
which the Option is exercised has been received by the Company. Full payment may
consist of any consideration and method of payment allowable under Section 7 of
the Plan. Until the issuance (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company) of the
stock certificate evidencing such Shares, no right to vote or receive dividends
or any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. A share certificate for the
number of Shares so acquired shall be issued to the Optionee as soon as
practicable after exercise of the Option. No adjustment shall be made for a
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 10 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Rule 16b-3. Options granted to Outside Directors must comply
with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act
or any successor thereto and shall contain such additional conditions or
restrictions as may be required thereunder to qualify Plan transactions, and
other transactions by Outside Directors that otherwise could be matched with
Plan transactions, for the maximum exemption from Section 16 of the Exchange
Act.
(c) Termination of Continuous Status as a Director. Subject to
Section 10 hereof, in the event an Optionee's status as a Director terminates
(other than upon the Optionee's Retirement as provided in Section 8(d) below or
upon the Optionee's death or total and permanent disability (as defined in
Section 22(e)(3) of the Code)), the Optionee may exercise his or her Option, but
only within six (6) months (thirty (30) days in the case of a Prior Option)
following the date of such termination, and only to the extent that the Optionee
was entitled to exercise it on the date of such termination (but in no event
later than the expiration of its ten-(10) year term). To the extent that the
Optionee was not entitled to exercise an Option on the date of such termination,
and to the extent that the Optionee does not exercise such Option (to the extent
otherwise so entitled) within the time specified herein, the Option shall
terminate.
(d) Retirement of Optionee. In the Optionee's status as a Director
terminates as a result of Retirement, the Optionee's Options (excluding any
Prior
6
<PAGE>
Options) shall become fully exercisable, including as to Shares for which the
Options would not otherwise be exercisable. Such Options shall remain
exercisable for a period of twelve (12) months following the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee does not exercise any such Option within
the time specified herein, the Option shall terminate.
(e) Disability of Optionee. In the event Optionee's status as a
Director terminates as a result of total and permanent disability (as defined in
Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but
only within twelve (12) months (ninety (90) days in the case of a Prior Option)
following the date of such termination, and only to the extent that the Optionee
was entitled to exercise it on the date of such termination (but in no event
later than the expiration of its ten-(10) year term). To the extent that the
Optionee was not entitled to exercise an Option on the date of termination, or
if he or she does not exercise such Option (to the extent otherwise so entitled)
within the time specified herein, the Option shall terminate.
(f) Death of Optionee. In the event of an Optionee's death, the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months (ninety (90) days in the case of a Prior Option) following the date of
death, and only to the extent that the Optionee was entitled to exercise it on
the date of death (but in no event later than the expiration of its ten (10)
year term). To the extent that the Optionee was not entitled to exercise an
Option on the date of death, and to the extent that the Optionee's estate or a
person who acquired the right to exercise such Option does not exercise such
Option (to the extent otherwise so entitled) within the time specified herein,
the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of
7
<PAGE>
Section 4 hereof shall be proportionately adjusted for any increase or decrease
in the number of issued Shares resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of the Common Stock, or
any other increase or decrease in the number of issued Shares effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an Option.
(b) Changes in Control. In the event of a change in control
(hereinafter defined) of the Company, an Optionee's Options will become
exercisable in full if, within one year of such change in control, such Optionee
ceases for any reason to be a Director. A change in control will be deemed to
have occurred if (i) there is consummated (X) any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation or
pursuant to which Shares are converted into cash, securities or other property,
other than a merger of the Company in which the holders of Shares immediately
prior to the merger have the same proportionate ownership of Common Stock of the
surviving corporation immediately after the merger, or (Y) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company; or
(ii) the shareholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company; or (iii) any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the
"1934 Act")) becomes the beneficial owner (within the meaning of Rule 13d-3
under the 1934 Act) of, or commences a tender offer for, 40% or more of the
outstanding Shares. Any exercise of an Option permitted in the event of a change
of control must be made within thirty (30) days of the related Optionee's
termination as a Director.
(c) Company Reorganizations. In the event that the Company is to be
dissolved or liquidated, or the Company is a party to a merger or consolidation
with another corporation in which the Company will not be the surviving entity
or in which the outstanding Shares will be converted into cash, securities or
other property, or in the event that the Company is a party to a reorganization,
then upon exercise of the Options, the holder thereof shall be entitled only to
receive for the exercise price per share thereof the amount of cash, securities
or other property into or for which one Share was converted or exchanged
multiplied by the number of Shares subject to such Option.
11. Amendment and Termination of the Plan.
(a) Amendment and Termination. Except as set forth in
8
<PAGE>
Section 4, the Board may at any time amend, alter, suspend, or discontinue the
Plan, but no amendment, alteration, suspension, or discontinuation shall be made
which would impair the rights of any Optionee under any grant theretofore made,
without his or her consent. In addition, to the extent necessary and desirable
to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or
regulation), the Company shall obtain shareholder approval of any Plan amendment
in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
9
<PAGE>
16. Shareholder Approval. The Plan was originally adopted by the Board
on August 3, 1999, and shall be submitted for shareholder approval in year 2000.
IF THE SHAREHOLDERS FAIL TO RATIFY THE PLAN IN THE YEAR 2000, THEN ALL
OPTIONS SHALL BE IMMEDIATELY NULL AND VOID, WITHOUT EFFECT OF FORCE.
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN OR IN ANY STOCK OPTION
AGREEMENT UNDER THE PLAN, THE DATE ON WHICH VESTING OCCURS UNDER AN OPTION
SHALL BE EXTENDED IN THE EVENT THAT, AND UNTIL, THE SHAREHODERS
HAVE RATIFIED THE PLAN.
10
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.
Name State/Country of Incorporation
- ----------------------------------- --------------------------------------
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
6. Networkland Incorporated Virginia
Page 47
Exhibit 23
Socrates Technologies Corporation and Subsidiaries
Consent of Independent Certified Public Accountants
We have issued our report dated March 3, 2000 (except for Note M, for which the
date is March 27, 2000), accompanying the consolidated financial statements
incorporated herein by reference or included in the Annual Report of Socrates
Technologies Corporation, on Form 10-K, for the year ended December 31, 1999. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of Socrates Technologies Corporation, on Form S-8 (File
No. 333-96155) filed with the Commission on February 4, 2000.
/S/ GRANT THORNTON LLP
----------------------
GRANT THORNTON LLP
Vienna, Virginia
March 27, 2000
Page 48
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> Socrates Technologies Corporation
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