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:
March 31, 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 March 31, 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. 18
SIGNATURES 19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
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Socrates Technologies Corporation and Subsidiaries
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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>
March 31, December 31,
1999 1998
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<S> <C> <C>
Assets (Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 437,122 $ 2,114,664
Investments 1,276,714 1,787,399
Accounts receivable, net of allowance
for doubtful accounts 8,927,140 10,437,346
Inventory 415,635 1,072,661
Tax credits and other receivables 478,327 216,985
Prepaid expenses 628,860 778,727
Net assets of discontinued operations
held for sale 162,338 162,338
----------- ------------
Total Current Assets 12,326,136 16,570,120
Property and Equipment, net 983,294 1,018,738
Capitalized Software Costs, net 33,750 67,500
Goodwill 3,627,044 3,944,183
Deferred Tax Asset, net of
valuation allowance 1,200,000 1,200,000
Other Assets 103,256 104,005
------------ ------------
$ 18,273,480 $ 22,904,546
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Line of credit and financing arrangements $ 900,191 $ 4,491,022
Accounts payable and accrued liabilities 4,894,253 4,076,687
Shareholder loans and interest 1,175,973 1,154,742
----------- ------------
Total Current Liabilities 6,970,417 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 (16,352,970) (14,984,623)
Accumulated other
comprehensive income (losses)
Unrealized loss on investments
available for sale (4,023,710) (3,513,025)
Cumulative translation adjustment (135,714) (135,714)
------------ -------------
Total Stockholders' Equity 11,303,063 13,182,095
------------ -------------
$ 18,273,480 $ 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
============================================================================
<CAPTION>
Three Months ended March 31, 1999 1998
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<S> <C> <C>
(Unaudited) (Unaudited)
Sales $ 7,851,331 $ 14,823,275
Cost of Sales 6,490,982 13,425,976
----------- ------------
Gross Profit 1,360,349 1,397,299
Expenses
Selling 781,894 653,317
Administrative 1,310,144 1,200,350
Depreciation and amortization 212,685 227,200
Restructuring Charges 344,115 -
----------- ------------
2,648,838 2,080,867
----------- ------------
Loss from Continuing Operations (1,288,489) (683,568)
Investment and Interest Income 5,665 339,442
Interest Expense and Financing Charges (85,523) (15,168)
----------- ------------
Loss from Continuing Operations
before Income Taxes (1,368,347) (359,294)
Income Tax Provision
Current - -
Deferred - -
----------- ------------
- -
----------- ------------
Net Loss from
Continuing Operations $ (1,368,347) $ (359,294)
Discontinued Operations:
Loss from discontinued operations,
net of tax effect of $0.00 and $0.00,
respectively - (748,495)
Loss on disposal of discontinued
operations, net oftax effect of $0.00
and $1,223,900, respectively - (4,479,822)
----------- -------------
Net loss from
discontinued operations - (5,228,317)
----------- -------------
Net Loss $ (1,368,347) $(5,587,611)
=========== =============
Basic loss per share, continuing operations $ (0.09) $ (0.02)
Basic loss per share, discontinued
operations - (0.33)
----------- ------------
Basic loss per share $ (0.09) $ (0.35)
=========== ============
Weighted average shares outstanding, basic 14,739,204 15,924,611
Diluted loss per share, continuing
operations $ (0.09) $ (0.02)
Diluted loss per share, discontinued
operations - (0.33)
----------- ------------
Diluted loss per share $ (0.09) $ (0.35)
============ ============
Weighted average shares outstanding, diluted 14,739,204 15,924,611
<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
============================================================================
<CAPTION>
[RESTATED]
Three Months ended March 31, 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
(Unaudited) (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net income (loss) from continuing
operations $ (1,368,347) $ 2,024,666
Net income (loss) from discontinued
operations
------------ -------------
Net income (loss) $ (1,368,347
Adjustments to reconcile net income to
net cash from operating activities:
Deferred income taxes - (157,512)
Depreciation and amortization 694,676 237,536
Restructuring Charges 5,844,170 (501,984)
Realized (gain) loss on investments (1,630,119) 355,980
(Gain) loss on foreign exchange - (743)
Non-cash losses from discontinued
operations
Changes in operating assets and
liabilities, net of acquisitions
and dispositions:
(Increase) decrease in accounts receivable (6,118,897) 878,196
(Increase) in inventory (146,285) (384,807)
(Increase) in tax credits and income
taxes receivable (88,305) -
(Increase) decrease in prepaid expenses (371,085) 107,833
(Increase) in other assets (46,661) (5,855)
Increase (decrease) in accounts payable
and accrued liabilities 766,320 (2,053,718)
----------- ------------
Net Cash (Used in) Operating Activities (5,359,326) (499,592)
Cash Flows from Investing Activities
Investment purchases (10,383,097) (915,000)
Proceeds from sales and borrowings
on margin against investments 540,934 3,676,023
Property, plant and equipment purchases (564,767) (260,917)
------------ ------------
Net Cash (Used in) Provided by
Investing Activities (10,406,930) 2,500,106
Cash Flows from Financing Activities
Net increase (decrease) in line of credit 2,714,906 (274,156)
Proceeds from shareholder loans - 201,920
Payment of shareholder loans (485,668) -
Purchase of treasury stock (11,794,217) (572,660)
Proceeds from issuance of common stock - 150
Proceeds from conversion of warrants 24,547,712 59,850
------------ ------------
Net Cash Provided by (Used in)
Financing Activities 14,982,733 (584,896)
------------ ------------
Effect of Exchange Rate Changes on Cash - (6,158)
------------ ------------
Net Increase (Decrease) in Cash (783,523) 1,409,460
Cash at Beginning of Period 1,704,724 313,890
------------ ------------
Cash at End of Period $ 921,201 $ 1,723,350
============ ============
<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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March 31, 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 March 31, 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 the assembly, integration and marketing of built to order or
proprietary computer systems, and training on the use of computer software
programs to individuals, corporations and the government. In addition, the
Company also provides customized software development, including turnkey
system development and product development, and maintenance services to
corporate and government customers. In March 1998, the Company discontinued
its machine vision welding and scanner business conducted by its wholly
owned subsidiary, MVS Modular Vision Systems, a Canadian corporation, to
focus on what management believes to be the segments of its business which
offer greater potential for growth in shareholder value.
Socrates was incorporated in the State of Delaware on November 6, 1998.
Upon the merger of Socrates with MVSI, Inc., a Delaware Corporation
incorporated on April 12, 1994, on November 30, 1998, the name of MVSI, Inc.,
the surviving corporation, was changed to Socrates Technologies Corporation.
Unless the context otherwise requires, the "Company" or "Socrates" refers to
Socrates Technologies Corporation, its predecessor and its subsidiaries.
The Company maintains its executive offices and principal facilities in
Maryland with other sales and marketing offices in the Middle Atlantic and
Northeastern United States.
Effective January 1, 1999, the Company changed it fiscal year end from
September 30 to a December 31 calendar year end. References to the
transition period are the three-month period ended December 31, 1998.
<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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March 31, 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 March 31, 1999 and December 31, 1998 was $1,276,714 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 March 31, 1999 and December 31,
1998 was $4,023,710 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 March 31,
1999. 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 March 31, 1999 and December 31,
1998, management has established an allowance for doubtful accounts of
approximately $409,000.
<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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March 31, 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. In prior years,
certain software development costs not reimbursed by the Canadian government
incurred by the Company's discontinued machine vision business were
capitalized. In connection with the discontinuance of the machine vision
business in fiscal 1998, all such capitalized costs were written off.
Amortization expense related to computer software acquired in the Technet
acquisition was $33,750 and $33,750 for the three months ended March 31,
1999 and three-month transition period ended December 31, 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 March 31, 1999 and
1998, was $123,021 and $153,466, respectively. Management regularly reviews
the carrying value of goodwill against anticipated cash flows of each
business in order to evaluate recoverability. As a result of the review of
the recoverability of the recorded goodwill at March 31, 1999, management
recorded an increase in amortization of goodwill associated with its
purchase of Expert, Inc. of approximately $200,000 to entirely write-off the
net carrying value of this goodwill as a result of management's decision to
restructure these operations. It is reasonably possible that estimates of
anticipated future gross profits of the acquired businesses will be reduced
significantly in the near term. As a result, the carrying amount of
goodwill may be reduced materially in the near term.
<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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March 31, 1999
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
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.
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
A portion of the Company's operations are transacted in Canadian dollars.
The balance sheet of Canadian operations is translated into U.S. dollars at
the year-end rate of exchange, and all statement of operations items are
translated at the weighted-average exchange rates for the year. The
resulting translation adjustments are made directly to a separate component
of stockholders' equity.
As of March 31, 1999, approximately 45 percent of accounts receivable or
$4.1 million was due from a single customer, of which $2.5 million has been
collected by the Company subsequent to March 31, 1999. Otherwise, the
Company's customers are not generally concentrated with any one customer or
in any specific geographic region. As a matter of policy, the Company
reviews a customer's credit history before extending credit and in some
instances may require advance deposits.
<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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March 31, 1999
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
presentation.
NOTE C-RESTRUCTURING OF OPERATIONS
During the quarter ended March 31, 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 a significant downsizing of the Company's
operations in New York, acquired in 1997 with the acquisition of
Expert, Inc. and the folding of the JMR Distributors business into Socrates
Technologies. JMR was involved in the reselling and distribution of
computer memory and associated products. During the quarter ended March 31,
1999, the Company recorded charges totaling $344,115 associated with the
restructuring of its Computer System Sales, Integration and Training Segment.
The charges consisted of non-cash write-downs of goodwill 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
three months ended March 31, 1999 and 1998, respectively. Continuing
operations are represented by the Company's Computer Systems Sales,
Integration and Training business and its Software Development business.
<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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March 31, 1999
NOTE D-SEGMENT INFORMATION-Continued
For the three-month period ended March 31, 1999, the Company had one
customer that accounted for approximately 15 percent of the Company's total
revenue. For the three months ended March 31, 1998, the Company had two
customers that accounted for approximately 14 percent and 11 percent of its
total revenue, respectively. The Company had no material export sales
during the three months ended March 31, 1999 and 1998.
Financial information relating to the Company's industry segments for
continuing operations for the three months ended March 31, 1999 and
1998, is as follows:
<TABLE>
<CAPTION>
Three months ended March 31, 1999
--------------------------------------------------------------------
Computer
System Sales,
Integration Software General
and Training Development Corporate Total
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 5,920,551 $ 1,930,780 $ - $ 7,851,331
Operating profit (loss) (1,238,418) 136,452 (186,523) (1,288,489)
Net income (loss) (1,418,614) 106,938 (56,671) (1,368,347)
Identifiable Assets 11,169,987 4,526,365 2,276,890 17,973,242
</TABLE>
<TABLE>
<CAPTION>
Three months ended March 31, 1998
--------------------------------------------------------------------
Computer
System Sales,
Integration Software General
And Training Development Corporate Total
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $13,840,927 $ 982,348 $ - $14,823,275
Operating profit (loss) (435,393) 19,419 (267,994) (683,568)
Net income (loss) (517,079) 16,641 141,144 (359,294)
Identifiable Assets 16,604,279 3,878,388 12,859,744 33,342,411
</TABLE>
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. On May 13, 1999
the Company signed a letter of intent to sell the operating assets of the
welding inspection and seam tracking business to Oxford, England based Meta
Technology Ltd.
<PAGE>
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements-Continued
- -----------------------------------------------------------------------------
March 31, 1999
NOTE E-DISCONTINUED OPERATIONS-Continued
Using the anticipated floor value, derived from market offers received by
the Company, of the net assets of this business, the Company recorded a
write down of the net assets held for sale during the transition period
ended December 31, 1998 of approximately $1,080,000. While management is
confident of its ability to reach a definitive agreement with Meta Technology
Ltd. to sell the operating assets of MVS, no assurances can be given that
these efforts will result in a definitive agreement being reached or that the
Company will obtain consideration in any such sale sufficient to recoup
any portion of its remaining investment.
At December 31, 1998, management accrued $30,000 as an estimate of losses to
be incurred through the estimated sale date of May 1999.
<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. References to the
transition period are the three-month period ended December 31, 1998.
The three months ended March 31, 1999 continued to be a period of
evolution and change for the Company as it transitions from a hardware
reseller into a technology solutions company. Since the Company's initial
public offering in 1995, the Company has grown significantly through the
acquisition of four separate technology companies involved in computer
system sales, integration, training and software development. Until late
1998, each of these organizations had been operated independently of one
another.
To focus greater attention on its information technology businesses, the
Company elected to discontinue its machine vision business in March 1998.
This business was the core business of the Company at its inception and
management believed it possessed superior technology in the machine vision
industry. However, uncertainty caused by instability in overseas financial
markets (principally Asia), and geographically segregated management in
Canada resulted in management concluding that the greatest potential for
growth in shareholder value would rest with the Company's information
technology businesses. On May 13, 1999, the Company signed a letter of
intent with Meta Technology Ltd. to sell the laser-welding portion of the
business for approximately $175,000 plus a contingent amount based upon a
percentage of the businesses revenues in the two years following the sale.
The Company intends to liquidate the assets of the scanner business of MVS
and expects associated proceeds to be nominal. While management is confident
of its ability to reach a definitive agreement with Meta Technology Ltd. to
sell the welding portion of the MVS assets, no assurances can be given that
these efforts will result in definitive agreements being reached or that the
Company will obtain consideration in any such sale sufficient to recoup any
portion of its remaining investment.
The Company's continuing operations, while showing significant growth
during 1998, generated operating losses due to significantly higher
amortization associated with goodwill arising from acquisitions, downward
pressure on margins from hardware sales, and losses from certain operating
divisions within the computer systems sales and hardware distribution
businesses. These losses led management to reorganize all hardware
distribution businesses late in the year under the Socrates name and
management.
<PAGE>
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. 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.
Results of Operations
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998
The Company reported sales from continuing operations of $7,851,331 for
the three-month period ended March 31, 1999, as compared to $14,823,275 for
the same period in 1998. The decrease in sales of $6,971,944 or 47% 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 reduced
shipments to one major customer by approximately $1,000,000. The decrease
was in part offset by an increase in sales generated by the Company's
Software Development business of $948,432 or 97% to $1,930,780 for the
quarter ended March 31, 1999.
The Company's gross margin from continuing operations increased to 17% for
the three months ended March 31, 1999, as compared to 9% for the three-month
period ended March 31, 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 March 31, 1999, selling expenses related to
continuing operations increased by $128,577 (20%). 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 $109,794 (9%) to $1,310,144 for the three
months ended March 31, 1999.
Investment income and expense decreased in the quarter ended March 31,
1999 compared to the comparable 1998 quarter by $404,132 as a result of
lower investment balances.
From time to time, the Company engages in discussions with third parties
regarding possible strategic transactions, including mergers and
acquisitions. As of the date hereof, the Company has not entered into any
definitive agreements with any such third parties.
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. On May 13,
1999 the Company signed a letter of intent to sell the operating assets
of the welding and seam tracking business to Meta Technology Ltd.
Using anticipated floor values, derived from market offers received by
the Company, of the net assets of this business, the Company recorded a
write down of the net assets held for sale during the transition period
ended December 31, 1998 of approximately $1,080,000. While management is
confident of its ability to reach a definitive agreement with Meta Technology
Ltd. to sell the operating assets of MVS, no assurances can be given that
these efforts will result in a definitive agreement being reached or that
the Company will obtain consideration in any such sale sufficient to recoup
any portion of its remaining investment.
At December 31, 1998, management accrued $30,000 as an estimate of losses
to be incurred through the estimated sale date of May 1999.
<PAGE>
Capital Resources, Liquidity and Backlog
As of March 31, 1999, the Company had working capital of $5,355,719,
including cash and cash equivalents and investments of $1,713,836. Cash
on hand and cash generated during the quarter was used principally to
reduce borrowings.
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
March 31, 1999 and 1998, amounted to $542,794, and $4,087,784, respectively.
The agreement is subject to annual renewal and is collateralized by all
present and future accounts receivable and inventory of the Company's
subsidiary. In addition, the Company must comply with certain financial
and reporting covenants.
On October 21, 1998, the Company entered into an accounts receivable
credit facility with the same financing company to provide funding for the
short-term financing needs of the Company. The maximum amount available
under this agreement is $6,000,000. The Company has pledged all of its
inventory, receivables, equipment, fixtures and all its intangible assets to
secure the facility. Interest is payable monthly at the prime rate as
published by the Chase Manhattan Bank. The facility contains certain
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 is $10,000,000. The amount due to the finance company under
the agreement at March 31, 1999 amounted to $890,298.
Management believes that the working capital and liquidity position of
the Company, together with funds available under the Company's new line of
credit, are adequate to meet the Company's working capital requirements
based upon its current level of operations. However, significant internal
growth or additional acquisitions could create a need for additional
working capital. The Company's ability to raise additional funds through
secondary offerings of equity or debt securities will be subject to
conditions in capital markets, as well as restrictions under its existing
credit facilities.
At March 31, 1999, the Company continued 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 March 31,
1999.
As of March 31, 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 March 31, 1999, total
$1,175,973.
At March 31, 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.
<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.
A portion of the Company's operations through its Canadian subsidiary
is transacted in Canadian dollars. The Company, however, reports its
financial position, results of operations and cash flows in U.S. dollars.
As a result, the Company believes that its exposure to foreign
currency fluctuations or deterioration is limited.
Seasonality
Based on its experience to date, the Company believes that its future
operating results may be subject to quarterly variations based on a variety
of factors, including seasonal changes in the weather, especially in its
Canadian operations. Such effects may not be apparent in the Company's
operating results during a period of expansion. However, the Company can
make no assurances that its business can be significantly expanded under
any circumstances.
Year 2000
Many computerized systems and microprocessors that are embedded in a
variety of products either sold or used by the Company have the potential
for operational problems if the lack the ability to handle the transition
to the Year 2000. The problem generally occurs in systems where functions,
which are date sensitive recognize the last two digits in a date field in
the year 2000 as being the year 1900, causing the product or system to
potentially malfunction.
After completing an assessment of the Company's information systems 1998
for possible issues which could arise as a result of those systems not being
year 2000 compliant, the Company commenced the procurement and installation
of a new company wide business and management information system which is
year 2000 compliant. As of March 1999, the installation of the system is
substantially complete with one subsidiary remaining to be upgraded
to the new system. The upgrade of this subsidiary is expected to be
completed by the end of the second quarter of 1999. Following this
installation, the Company plans to conduct of 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.
Form 8-K/A, filed February 19, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SOCRATES TECHNOLOGIES
CORPORATION
May 14, 1999
By: MARK J. MCKNIGHT
--------------------
Mark J. McKnight
Chief Financial Officer
<PAGE>
<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 MARCH 31, 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> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 434,147
<SECURITIES> 1,279,689
<RECEIVABLES> 9,336,234
<ALLOWANCES> 409,094
<INVENTORY> 415,635
<CURRENT-ASSETS> 12,326,136
<PP&E> 1,612,297
<DEPRECIATION> 629,003
<TOTAL-ASSETS> 18,273,480
<CURRENT-LIABILITIES> 6,970,417
<BONDS> 0
0
0
<COMMON> 177,406
<OTHER-SE> 11,125,657
<TOTAL-LIABILITY-AND-EQUITY> 18,273,480
<SALES> 7,851,331
<TOTAL-REVENUES> 7,851,331
<CGS> 6,490,982
<TOTAL-COSTS> 6,490,982
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,858
<INCOME-PRETAX> (1,368,347)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,368,347)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,368,347)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
