U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission file number:
JUNE 30, 1999 0-26614
___________
SOCRATES TECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified In Its Charter)
Delaware 54-1707718
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9301 Peppercorn Place, Largo, MD 20774
(Address of principal executive offices) (Zip code)
(301) 925-2200
(Company's telephone number, including area code)
___________
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 | |
As of June 30, 1999, 14,739,204 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 19
SIGNATURES 20
<PAGE>
PART I. FINANCIAL INFORMATION
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Item 1: Financial Statements
- -----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- -----------------------------------------------------------------------------
Contents
=============================================================================
Interim Consolidated Financial Statements
Interim Consolidated Balance Sheets 4
Interim Consolidated Statements of Operations 5
Interim Consolidated Statements of Cash Flows 7
Notes to Interim Consolidated Financial Statements 8
<PAGE>
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Socrates Technologies Corporation and Subsidiaries
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<TABLE>
Interim Consolidated Balance Sheets
============================================================================
<CAPTION>
June 30, December 31,
1999 1998
- ----------------------------------------------------------------------------
Assets (Unaudited) (Audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 783,823 $ 2,114,664
Investments 1,617,171 1,787,399
Accounts receivable, net of allowance
for doubtful accounts 5,183,838 10,437,346
Inventory 159,139 1,072,661
Tax credits and other receivables 427,842 216,985
Prepaid expenses 299,572 778,727
Net assets of discontinued operations
held for sale 170,126 162,338
----------- ------------
Total Current Assets 8,641,511 16,570,120
Property and Equipment, net 862,446 1,018,738
Capitalized Software Costs, net - 67,500
Goodwill 3,509,904 3,944,183
Deferred Tax Asset, net of
valuation allowance 1,200,000 1,200,000
Other Assets 84,170 104,005
----------- -----------
$14,298,031 $22,904,546
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Line of credit and financing arrangements $ 622,259 $ 4,491,022
Accounts payable and accrued liabilities 3,986,834 4,076,687
Shareholder loans and interest 1,197,204 1,154,742
----------- -----------
Total Current Liabilities 5,806,297 9,722,451
Stockholders' Equity
Common stock, $.01 par value, 50,000,000
shares authorized, 17,740,620 shares
issued and 14,739,204 outstanding,
respectively 177,406 177,406
Stock subscription receivable (150,000) (150,000)
Additional paid-in capital 49,342,292 49,342,292
Treasury stock, at cost, 3,001,416
shares, respectively (17,554,241) (17,554,241)
Accumulated deficit (19,434,223) (14,984,623)
Accumulated other comprehensive
income (losses)
Unrealized loss on investments
available for sale (3,683,253) (3,513,025)
Cumulative translation adjustment (206,247) (135,714)
----------- -----------
Total Stockholders' Equity 8,491,734 13,182,095
----------- -----------
$14,298,031 $22,904,546
=========== ===========
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
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Socrates Technologies Corporation and Subsidiaries
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<TABLE>
Interim Consolidated Statements of Operations
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<CAPTION>
Three Months ended June 30, 1999 1998
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $ 5,949,552 $16,330,346
Cost of Sales 4,949,044 13,967,920
----------- -----------
Gross Profit 1,000,508 2,362,426
Expenses
Selling 960,587 613,120
Administrative 1,655,146 1,255,723
Depreciation and amortization 227,862 246,814
Restructuring Charges 1,203,943 -
----------- ----------
4,047,538 2,115,657
----------- ----------
Earnings (Loss) from Continuing
Operations (3,047,030) 246,769
Investment and Interest Income 9,557 1,806,029
Interest Expense and Financing Charges (43,780) (50,470)
----------- ----------
Earnings (Loss) from Continuing
Operations before Income Taxes (3,081,253) 2,002,328
Income Tax Provision
Current - -
Deferred - -
----------- ----------
- -
----------- ----------
Net Earnings (Loss) from
Continuing Operations $(3,081,253) $ 2,002,328
Discontinued Operations:
Loss from discontinued operations, net
of tax effect - -
Loss on disposal of discontinued
operations, net of tax effect - (114,296)
----------- -----------
Net loss from discontinued operations - (114,296)
----------- -----------
Net Earnings (Loss) $(3,081,253) $ 1,888,032
Basic earnings (loss) per share,
continuing operations $ (0.21) $ 0.13
Basic earnings (loss) per share,
discontinued operations - (0.01)
------------ -----------
Basic earnings (loss) per share $ (0.21) $ 0.12
============ ===========
Weighted average shares outstanding, basic 14,739,204 15,774,944
Diluted earnings (loss) per share,
continuing operations $ (0.21) $ 0.12
Diluted earnings (loss) per share,
discontinued operations - -
------------ ------------
Diluted earnings (loss) per share $ (0.21) $ 0.12
============ ============
Weighted average shares outstanding, diluted 14,739,204 16,125,150
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
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Socrates Technologies Corporation and Subsidiaries
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<TABLE>
Interim Consolidated Statements of Operations
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<CAPTION>
Six Months ended June 30, 1999 1998
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $13,800,883 $31,153,621
Cost of Sales 11,440,026 27,393,896
----------- -----------
Gross Profit 2,360,857 3,759,725
Expenses
Selling 1,742,481 1,266,437
Administrative 2,965,290 2,456,073
Depreciation and amortization 440,547 474,014
Restructuring Charges 1,548,058 -
----------- -----------
6,696,376 4,196,524
----------- -----------
Loss from Continuing Operations (4,335,519) (436,799)
Investment and Interest Income 15,222 2,145,471
Interest Expense and Financing Charges (129,303) (65,638)
----------- -----------
Earnings (Loss) from Continuing Operations
before Income Taxes (4,449,600) 1,643,034
Income Tax Provision
Current - -
Deferred - -
----------- ----------
- -
----------- ----------
Net Earnings (Loss) from
Continuing Operations $ (4,449,600) $ 1,643,034
Discontinued Operations:
Loss from discontinued operations, net
of tax effect - (748,495)
Loss on disposal of discontinued operations,
net of tax effect - (4,594,118)
------------ ------------
Net loss from discontinued operations - (5,342,613)
------------ ------------
Net Loss $ (4,449,600) $ (3,699,579)
============ ============
Basic earnings per share,
continuing operations $ (0.30) $ 0.11
Basic earnings (loss) per share,
discontinued operations - (0.34)
------------- -------------
Basic loss per share $ (0.30) $ (0.23)
============= =============
Weighted average shares outstanding, basic 14,739,204 15,845,957
Diluted earnings (loss) per share,
continuing operations $ (0.30) $ 0.10
Diluted earnings (loss) per share,
discontinued operations - (0.33)
------------- ------------
Diluted loss per share $ (0.30) $ (0.23)
============= ============
Weighted average shares outstanding, diluted 14,739,204 16,164,380
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
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Socrates Technologies Corporation and Subsidiaries
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<TABLE>
Interim Consolidated Statements of Cash Flows
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<CAPTION>
Six Months ended June 30, 1999 1998
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
Increase (Decrease) in Cash and
Cash Equivalents
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) $ (4,449,600) $ (3,699,579)
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 440,547 474,014
Loss on discontinued operations - 5,844,170
Unrealized (gain) loss on investments 170,228 (1,630,119)
Changes in operating assets and
liabilities, net of acquisitions and
dispositions:
Decrease (increase) in accounts receivable 5,253,508 (4,227,797)
Decrease in inventory 913,522 1,267,017
(Increase) in tax credits and income
taxes receivable (210,857) (28,198)
Decrease (increase) in prepaid expenses 479,155 (368,460)
Decrease in other assets 19,835 35,967
(Decrease) in accounts payable and
accrued liabilities (89,853) (119,896)
---------- -----------
Net Cash Provided by (Used in)
Operating Activities 2,526,485 (2,452,881)
---------- -----------
Cash Flows from Investing Activities
Borrowings on margin against investments - 5,803,212
Property, plant and equipment purchases (4,997) (252,201)
---------- ----------
Net Cash (Used in) Provided by
Investing Activities (4,997) 5,551,011
---------- ----------
Cash Flows from Financing Activities
Net increase (decrease) in line of credit (3,868,763) 1,182,658
Payment of shareholder loans - (384,489)
Purchase of treasury stock - (4,741,373)
---------- ----------
Net Cash (Used in) Financing Activities (3,868,763) (3,943,204)
---------- ----------
Effect of Exchange Rate Changes on Cash 16,434 -
---------- ----------
Net (Decrease) in Cash (1,330,841) (845,074)
Cash at Beginning of Period 2,114,664 1,766,275
---------- -----------
Cash at End of Period $ 783,823 $ 921,201
========== ===========
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements
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June 30, 1999
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been
included. Effective March 31, 1998, the Company discontinued its Canadian
machine vision operations as described in Note E. The results of continuing
operations for the three months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the financial statements and footnotes included in the
Company's audited financial statements for the year ended December 31, 1998.
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Nature of Operations
The accompanying interim consolidated financial statements include the
accounts of Socrates Technologies Corporation (a Delaware corporation), and
its wholly-owned subsidiaries (collectively referred to as the "Company").
Significant intercompany accounts and transactions have been eliminated
in consolidation.
Socrates Technologies Corporation ("Socrates" or the "Company") is a
broad-based information technology solutions company whose business is
focused on systems engineering and integration, software engineering and
customized software development, including turnkey system development and
product development, and maintenance services, and customized Information
Technology training to corporate and government customers. In March 1998,
the Company discontinued its machine vision welding and scanner business
conducted by its wholly owned subsidiary, MVS Modular Vision Systems, a
Canadian corporation. to focus on what management believes to be the
segments of its business which offer greater potential for growth in
shareholder value.
Socrates was incorporated in the State of Delaware on November 6, 1998.
Upon the merger of Socrates with MVSI, Inc., a Delaware Corporation
incorporated on April 12, 1994, on November 30, 1998, the name of MVSI, Inc.,
the surviving corporation, was changed to Socrates Technologies Corporation.
Unless the context otherwise requires, the "Company" or "Socrates" refers to
Socrates Technologies Corporation, its predecessor and its subsidiaries.
The Company maintains its executive offices and principal facilities in
Maryland with other sales and marketing offices in the Middle Atlantic and
Northeastern United States.
Effective January 1, 1999, the Company changed it fiscal year end from
September 30 to a December 31 calendar year end.
<PAGE>
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements-Continued
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June 30, 1999
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Revenue Recognition
Sales are recognized upon shipment of a finished product when title to the
product transfers to the customer. Typical terms of sale do not provide the
customer with the right of return except for defective products, which are
covered either by the Company's warranty or by the warranty of the original
equipment manufacturer in instances where the Company acts as a distributor.
Revenue from services is generally recognized as the services are rendered
using contractual billing rates. Revenue billed in advance of customer
acceptance is deferred until such time as acceptance occurs. Amounts
received from customers prior to shipment are recorded as deposit]
liabilities.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market accounts.
Investments
Investments consist of the Company's investment in common stock of e-Net,
Inc. ("e-Net"), a publicly-held Germantown, Maryland based manufacturer of
data-telephony equipment, which is accounted for using the cost method. The
market value of the Company's investment in the common stock of e-Net, Inc.
at June 30, 1999 and December 31, 1998 was $1,617,171 and $1,787,399,
respectively. In accordance with Statement of Financial Accounting Standards
No. 115, the Company has classified these investments as available for sale,
and recorded the investments at market value with unrealized gains and losses
reported as an element of stockholders' equity. The unrealized loss from
investments available for sale at June 30, 1999 and December 31, 1998 was
$3,683,253 and $3,513,025, respectively. The unrealized loss relates
principally to a significant decrease in the value of e-Net, Inc. shares
during the fall of 1998. The Company recorded no realized gains or losses
related to this investment during the three months ended June 30, 1999.
During the three months ended June 30, 1998, the Company recognized gains
from the sale of e-Net stock of approximately $1,594,000. The Company's
policy is to determine the cost associated with shares sold on a first-in,
first-out basis (FIFO).
The Company continues to hold 340,457 shares of e-Net stock. Like other
technology stocks, the value of e-Net common stock is highly volatile.
Therefore, the Company can make no assurances that the unrealized losses
suffered can be recovered.
Accounts Receivable
Accounts receivable is stated at the unpaid balances, less allowance on
collectible accounts. Management periodically reviews its outstanding
accounts receivable to assess collectibility of balances based on past
experience and evaluation of current adverse situations which may
affect collectibility of receivables. As of June 30, 1999 and December 31,
1998, management has established an allowance for doubtful accounts of
approximately $1,130,000 and $409,000, respectively.
<PAGE>
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements-Continued
- ----------------------------------------------------------------------------
June 30, 1999
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
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 the lower of cost or market.
Property and Equipment
Property and equipment are carried at cost, net of an allowance for
accumulated depreciation and amortization. Depreciation is computed on
equipment and furniture, principally using the double-declining balance
method over estimated lives ranging from five to seven years. 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 acquired certain computer software in connection with the
Technet acquisition which is being amortized over a two year period, the
expected remaining economic life of the related products. Amortization
expense related to computer software acquired in the Technet acquisition
was $33,750 and $33,750 for the three months ended June 30, 1999 and
June 30, 1998 respectively.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired in business combinations accounted for as purchases. Goodwill is
being amortized on the straight-line method over ten years. Amortization
expense charged to operations for the three months ended June 30, 1999 and
1998, was $117,139 and $153,466, respectively. Management regularly reviews
the carrying value of goodwill against anticipated cash flows of each
business in order to evaluate recoverability. It is reasonably possible
that estimates of anticipated future gross profits of the acquired
businesses will be reduced significantly in the near term. As a result,
the carrying amount of goodwill may be reduced materially in the near term.
Income Taxes
Deferred taxes are recognized, subject to 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>
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements-Continued
- ----------------------------------------------------------------------------
June 30, 1999
NOTE B-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.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate the value:
The carrying amount approximates fair value for cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, line of credit and
other accrued liabilities. Investment securities classified as current assets
are based on quoted market price.
Translation of Foreign Currency and Concentration of Credit Risk
The Company's customers are not generally concentrated with any one customer
or in any specific geographic region. As a matter of policy, the Company
reviews a customer's credit history before extending credit and in some
instances may require advance deposits.
Stock Options
As permitted by generally accepted accounting standards, the Company accounts
for the value of stock options granted in accordance with Accounting
Principles Board Opinion No.25 (APB 25), whereby if stock options' exercise
prices are set at fair market value or above at the measurement date,
usually the date of grant, no compensation expense is recognized at that date.
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.
<PAGE>
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements-Continued
- ----------------------------------------------------------------------------
June 30, 1999
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
presentation.
NOTE C-RESTRUCTURING OF OPERATIONS
During the three months ended June 30, 1999, the Company continued the
reorganization of its businesses aimed at concentrating on higher margin
product and service sales. The effort is concentrated on reconfiguring the
operating model of its Computer System Sales, Integration and Training
business segment to streamline support infrastructure and realigning sales
force accountability and focus. Associated with this effort (begun during
the prior fiscal year) was the closing of the Company's operations in New
York, acquired in 1997 with the acquisition of Expert, Inc. During the
quarter ended June 30, 1999, the Company recorded charges totaling $1,203,943
associated with the restructuring of its Computer System Sales, Integration
and Training Segment. The charges consisted of non-cash write-downs of
inventory, receivables and certain prepaid expenses and the recording of
certain personnel costs associated with restructuring the operations.
NOTE D-SEGMENT INFORMATION
The Company provides financial information for segment reporting purposes
for two lines of business representing its continuing operations during the
six months ended June 30, 1999 and 1998, respectively. Continuing
operations are represented by the Company's Computer Systems Sales,
Integration and Training business and its Software Development business.
For the three-month period ended June 30, 1999, the Company had two
customers that accounted for approximately 17 percent and 13 percent of the
Company's total revenue, respectively. For the three months ended
June 30, 1998, the Company had one customer that accounted for approximately
28 percent of its total revenue. The Company had no material export sales
during the three months ended June 30, 1999 and 1998.
Financial information relating to the Company's industry segments for
continuing operations for the three months ended June 30, 1999 and 1998,
is as follows:
<PAGE>
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements-Continued
- ----------------------------------------------------------------------------
June 30, 1999
NOTE D-SEGMENT INFORMATION-Continued
<TABLE>
<CAPTION>
Three months ended June 30, 1999
- ----------------------------------------------------------------------------
Computer
System Sales,
Integration Software General
and Training Development Corporate Total
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 3,986,950 $ 1,962,602 $ - $ 5,949,552
Operating profit (loss) (2,725,411) 200,184 (522,103) (3,047,030)
Net income (loss) (2,853,189) 166,992 (395,056) (3,081,253)
Identifiable Assets 6,431,501 4,976,815 2,581,690 13,990,006
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1998
- ----------------------------------------------------------------------------
Computer
System Sales,
Integration Software General
And Training Development Corporate Total
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 15,146,219 $ 1,184,127 $ - $ 16,330,346
Operating profit (loss) 345,892 145,286 (244,409) 246,769
Net income (loss) 249,806 133,337 1,619,185 2,002,328
Identifiable Assets 16,949,377 4,041,360 13,952,494 34,943,231
NOTE E-DISCONTINUED OPERATIONS
In March 1998, the Company discontinued its machine vision welding and
scanner business conducted from its wholly owned subsidiary, MVS Modular
Vision Systems, a Canadian corporation, to allow the Company to focus on
what management believes to be the segments of its business which offer
greater potential for growth in shareholder value. MVS designs, develops,
manufactures and markets state-of-the-art, proprietary vision-based robotic
and sensor products and systems for productivity improvement and quality
control applications in the manufacturing workplace.
Using the lower of two offers as an indication of the floor value of the net
assets of this business, the Company previously recorded a write down of the
net assets held for sale. On August 11, 1999, the Company announced that it
had finalized the sale of the assets of the welding division of MVS to Meta
Technology Ltd. for approximately $175,000 plus a contingent amount based
on certain performance criteria.
The Company intends to liquidate the assets of the scanner business of MVS
and expects associated proceeds to be nominal.
<PAGE>
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PART I. FINANCIAL INFORMATION
- ----------------------------------------------------------------------------
Item 2. 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 a December 31 calendar year end.
The three months ended June 30, 1999 continued to be a period change and
restructuring for the Company as it transitions from a hardware reseller
into a technology solutions company, aimed at concentrating on higher margin
product and service sales. The effort is further 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
(begun during the prior fiscal year) was the closing of the Company's
operations in New York, acquired in 1997 with the acquisition of Expert, Inc.
During the quarter ended June 30, 1999, the Company recorded charges totaling
$1,203,943 associated with the restructuring of its Computer System Sales,
Integration and Training Segment. The charges consisted of non-cash
write-downs of inventory, receivables and certain prepaid expenses and the
recording of certain personnel costs associated with restructuring the
operations.
During the remainder of 1999, the Company plans to continue its focus on
its custom software products coupled with its Information Technology and
training capabilities in its effort to transform the Company from a hardware
reseller into a technology solutions provider for corporate and government
clients. The Company anticipates that it will continue to show losses from
operations during this transition period. While no assurances can be given
as to the success of the reorganization, management believes that by better
coordinating sales and marketing efforts and leveraging a single centralized
administrative support organization, operating profits will improve. At the
same time, the Company continues to be vigorously pursuing growth of its
software development business via its Technet Computer Services subsidiary.
<PAGE>
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Results of Operations
- ----------------------------------------------------------------------------
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
- ----------------------------------------------------------------------------
The Company reported sales from continuing operations of $5,949,552 for
the three-month period ended June 30, 1999, as compared to $16,330,346 for
the same period in 1998. The decrease in sales of $10,380,794 or 64% is
attributable to lower sales generated by the Company's Computer Systems
Sales, Integration and Training Segment consistent with the reorganization
of this business to focus on higher margin solution sales and the loss of
sales from a non-recurring significant contract which occurred in the
June 30, 1998 quarter. The decrease was in part offset by an increase in
sales generated by the Company's Software Development business of $778,475
or 66% to $1,962,602 for the quarter ended June 30, 1999, as compared to
the quarter ended June 30, 1998.
The Company's gross margin from continuing operations remained at 17% for
the three months ended June 30, 1999, as compared to 14% for the three-month
period ended June 30, 1998. The increase in margins as a percentage of
sales was due principally to an improved product mix resulting from the
Company's continued focus on higher gross profit margin areas.
For the three months ended June 30, 1999, selling expenses related to
continuing operations increased by $347,467 (57%). The increase in selling
expenses, over those of the prior year, are primarily a result of the
Company incurring additional personnel costs associated with the expansion
of the Company's software development business, offset by a decrease in
selling expenses associated with the downsized, restructured operations in
the Company's Computer Systems Sales, Integration and Training Segment.
Administrative expenses increased $399,423 (32%) to $1,655,146 for the three
months ended June 30, 1999, primarily attributable to increased reserves
recorded by the Company during this period.
Investment income and expense decreased in the quarter ended June 30, 1999
compared to the comparable 1998 quarter by $1,789,782 as a result of lower
investment balances and a non-recurring gain on sale of investments of
approximately $1,594,000 during the three months ended June 30, 1998.
In March 1998, the Company discontinued its machine vision welding and
scanner business conducted from its wholly owned subsidiary, MVS Modular
Vision Systems, a Canadian corporation, to allow the Company to focus on
what management believes to be the segments of its business which offer
greater potential for growth in shareholder value. MVS designs, develops,
manufactures and markets state-of-the-art, proprietary vision-based robotic
and sensor products and systems for productivity improvement and quality
control applications in the manufacturing workplace.
Using the lower of two offers as an indication of the floor value of the net
assets of this business, the Company previously recorded a write down of the
net assets held for sale. On August 11, 1999, the Company announced that it
had finalized the sale of the assets of the welding division of MVS to Meta
Technology Ltd. for approximately $175,000 plus a contingent amount based
on certain performance criteria.
The Company intends to liquidate the assets of the scanner business of MVS
and expects associated proceeds to be nominal.
<PAGE>
- ----------------------------------------------------------------------------
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
- ----------------------------------------------------------------------------
The Company reported sales from continuing operations of $13,800,883 for
the six-month period ended June 30, 1999, as compared to $31,153,621 for the
same period in 1998. The decrease in sales of $17,352,738 or 56% is
attributable to lower sales generated by the Company's Computer Systems
Sales, Integration and Training Segment consistent with the reorganization
of this business to focus on higher margin solution sales and the loss of
sales from a non-recurring significant contract which occurred in the
June 30, 1998 quarter. The decrease was in part offset by an increase in
sales generated by the Company's Software Development business of $1,726,907
or 80% to $3,893.382 for the six months ended June 30, 1999 as compared to
the six months ended June 30, 1998.
The Company's gross margin from continuing operations remained at 17% for
the six months ended June 30, 1999, as compared to 12% for the six-month
period ended June 30, 1998. The increase in margins as a percentage of
sales was due principally to an improved product mix resulting from the
Company's continued focus on higher gross profit margin areas.
For the six months ended June 30, 1999, selling expenses related to
continuing operations increased by $476,044 (38%). The increase in selling
expenses, over those of the prior year, are primarily a result of the
Company incurring additional personnel costs associated with the expansion
of the Company's software development business, offset by a decrease in selling
expenses associated with the downsized, restructured operations in the
Company's Computer Systems Sales, Integration and Training Segment.
Administrative expenses increased $509,217 (21%) to $2,965,290 for the six
months ended June 30, 1999, primarily attributable to increased reserves
recorded by the Company during this period.
Investment income and expense decreased in the six-month period ended
June 30, 1999 compared to the comparable 1998 period by $2,193,914 as a
result of lower investment balances and a non-recurring gain on sale of
investments of approximately $1,594,000 during the six months ended
June 30, 1998.
- ----------------------------------------------------------------------------
Capital Resources, Liquidity and Backlog
- ----------------------------------------------------------------------------
As of June 30, 1999, the Company had working capital of $2,835,214,
including cash and cash equivalents and investments of $2,400,994.
The Company maintains a wholesale financing agreement with a finance
company for inventory financing for one of its subsidiaries. The agreement
provides the Company with the ability to pay for certain scheduled inventory
purchases on terms similar to those that would be provided by third party
vendors. Amounts due to the finance company under the agreement at
June 30, 1999 and 1998, amounted to $844,604, and $2,928,381, respectively.
The agreement is collateralized by all present and future accounts
receivable and inventory of the Company's subsidiary. In addition, the
Company must comply with certain financial and reporting covenants.
On October 21, 1998, the Company entered into an accounts receivable
credit facility (business finance agreement) with the same financing company
to provide funding for the short-term financing needs of the Company. The
maximum amount available under this agreement was $6,000,000. The Company
has pledged all of its inventory, receivables, equipment, fixtures and all
its intangible assets to secure the facility. Interest is payable monthly
at the prime rate as published by the Chase Manhattan Bank. The facility
contains certain financial and reporting covenants, including providing the
financing company with weekly borrowing base certificates in order to access
the unused portion of the credit facility. The Company renegotiated its
existing wholesale financing agreement in connection with the establishment
of this credit facility. The maximum amount available under the combined
agreements was $10,000,000. The amount due to the finance company under the
agreement at June 30, 1999 amounted to $614,164.
At June 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 is working
with the finance company to resolve the non-compliance status. Additionally,
the Company is currently soliciting credit facilities from another finance
company and bank to ensure that the Company maintains its ability to satisfy
its working capital needs.
Management believes that, based on current working capital and liquidity
position of the Company, it will be important to secure additional financing
to meet the Company's working capital requirements based upon its current
and expected future levels of operations. Moreover, significant internal
growth or additional acquisitions could create a need for additional working
capital. The Company's ability to raise additional funds through secondary
offerings of equity or debt securities will be subject to conditions in
capital markets, as well as restrictions under its existing credit
facilities.
At June 30, 1999, the Company continues to hold 340,457 shares of e-Net
stock. Like other technology stocks, the value of e-Net common stock is
highly volatile. Therefore, the Company can make no assurances that the
unrealized losses suffered can be recovered.
The Company has no significant long-term debt outstanding as of June 30,
1999.
As of June 30, 1999, the Company had borrowed, under two separate loan
agreements, monies from a principal stockholder/officer (Edward Ratkovich)
to enable the Company to meet its on-going cash flow requirements. These
loans bear interest at 9% and 8%, respectively, and are due on demand.
Total loans and accrued interest outstanding at June 30, 1999, total
$1,197,204.
At June 30, 1999, the Company's backlog was approximately $1 million. The
Company does not believe that its backlog at any specific time is
necessarily indicative of its future business.
Impact of Inflation and Foreign Currency Exchange Rates
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in
supplies or other operating costs may adversely affect the Company's
operations; however, the Company believes it may increase prices of its
products and systems to offset increases in costs of goods sold or other
operating costs.
A portion of the Company's discontinued operations through its Canadian
subsidiary is transacted in Canadian dollars. The Company, however, reports
its financial position, results of operations and cash flows in U.S. dollars.
As a result, the Company believes that its exposure to foreign currency
fluctuations or deterioration is limited.
<PAGE>
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
Many computerized systems and microprocessor that are embedded in a
variety of products either sold or used by the Company have the potential
for operational problems if the lack the ability to handle the transition to
the Year 2000. The problem generally occurs in systems where functions,
which are date sensitive recognize the last two digits in a date field in
the year 2000 as being the year 1900, causing the product or system to
potentially malfunction.
After completing an assessment of the Company's information systems 1998
for possible issues which could arise as a result of those systems not being
year 2000 compliant, the Company commenced the procurement and installation
of a new company wide business and management information system which is
year 2000 compliant. As of June 1999, the installation of the system is
substantially complete with one subsidiary remaining to be upgraded to the
new system. The upgrade of this subsidiary is expected to be completed by
the end of the third quarter of 1999. Following this installation, the
Company plans to conduct a system test to ensure the vendor's claims of year
2000 compliance are accurate. Based upon the implementation progress made
to date, the Company does not believe a contingency plan is necessary.
However, should the testing of the new system cause concerns, a contingency
plan will be developed.
Expenditures to date and future anticipated expenditures to procure,
install, and test the new system have not been significant.
Substantially all products sold by the Company are manufactured or
assembled by third party vendors who warrant their products against defect,
including defects associated with the year 2000 issue.
<PAGE>
- ----------------------------------------------------------------------------
PART II. OTHER INFORMATION
- ----------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
Exhibit 27, Article 5 - Financial Data Schedule
b. Reports on Form 8-K.
No Reports on Form 8-K were filed during the quarter ended
June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SOCRATES TECHNOLOGIES
CORPORATION
August 13, 1999 By: MARK J. MCKNIGHT
-------------------
Mark J. McKnight
VP, Corp. Controller
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF OPERATIONS FROM THE COMPANY'S FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 783,823
<SECURITIES> 1,617,171
<RECEIVABLES> 6,312,932
<ALLOWANCES> 1,129,094
<INVENTORY> 159,139
<CURRENT-ASSETS> 8,641,511
<PP&E> 1,597,574
<DEPRECIATION> 735,128
<TOTAL-ASSETS> 14,298,031
<CURRENT-LIABILITIES> 5,806,297
<BONDS> 0
0
0
<COMMON> 177,406
<OTHER-SE> 8,314,328
<TOTAL-LIABILITY-AND-EQUITY> 14,298,031
<SALES> 5,949,552
<TOTAL-REVENUES> 5,949,552
<CGS> 4,789,044
<TOTAL-COSTS> 4,789,044
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,223
<INCOME-PRETAX> (3,081,253)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,081,253)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,081,253)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
