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:
SEPTEMBER 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.)
8133 Leesburg Pike, Suite 760, Vienna, VA 22182
(Address of principal executive offices) (Zip code)
(703) 356-5353
(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 September 30, 1999, 16,739,204 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. 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 20
SIGNATURES 21
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------------------------------------------------------
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 9
<PAGE>
- ----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- ----------------------------------------------------------------------------
<TABLE>
Interim Consolidated Balance Sheets
============================================================================
<CAPTION>
September 30, December 31,
1999 1998
- ----------------------------------------------------------------------------
Assets (Unaudited) (Audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $1,109,261 $ 2,114,664
Investments 1,787,399
Accounts receivable, net of allowance
for doubtful accounts 3,915,954 10,437,346
Inventory 188,245 1,072,661
Tax credits and other receivables 341,394 216,985
Prepaid expenses 241,901 778,727
Net assets of discontinued operations
held for sale - 162,338
----------- ------------
Total Current Assets 5,796,755 16,570,120
Property and Equipment, net 646,609 1,018,738
Capitalized Software Costs, net - 67,500
Goodwill 5,962,765 3,944,183
Deferred Tax Asset, net of
valuation allowance 1,200,000 1,200,000
Other Assets 71,768 104,005
----------- -----------
$13,677,897 $22,904,546
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Line of credit and financing arrangements $ 52,580 $ 4,491,022
Accounts payable and accrued liabilities 4,066,907 4,076,687
Shareholder loans and interest 1,518,435 1,154,742
----------- -----------
Total Current Liabilities 5,637,922 9,722,451
Stockholders' Equity
Common stock, $.01 par value, 50,000,000
shares authorized, 19,740,620 shares
issued and 16,739,204 outstanding,
respectively 177,406 177,406
Stock subscription receivable (150,000) (150,000)
Additional paid-in capital 50,597,292 49,342,292
Treasury stock, at cost, 3,001,416
shares (17,554,241) (17,554,241)
Accumulated deficit (24,844,235) (14,984,623)
Accumulated other comprehensive (losses) (206,247) (3,648,739)
----------- -----------
Total Stockholders' Equity 8,039,975 13,182,095
----------- -----------
$13,677,897 $22,904,546
=========== ===========
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
- -----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- -----------------------------------------------------------------------------
<TABLE>
Interim Consolidated Statements of Operations
- -----------------------------------------------------------------------------
<CAPTION>
Three Months ended September 30, 1999 1998
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $3,954,036 $18,140,823
Cost of Sales 3,675,372 14,902,901
---------- ----------
Gross Profit 328,664 3,237,922
Expenses
Selling, General & Administrative 1,724,954 3,190,932
Depreciation and amortization 206,171 269,209
Restructuring Charges 528,224 -
---------- ----------
2,459,349 3,460,141
---------- ----------
Loss from Continuing Operations (2,130,685) (222,219)
Loss on Sale of Investment (3,952,501) -
Financial Expenses (37,477) (156,767)
Other Income (Loss) 710,652 (89,511)
---------- ----------
Loss from Operations
before Income Taxes (5,410,011) (468,497)
Income Tax Provision - (375,373)
Loss from Continuing Operations $(5,410,011) $ (193,124)
Discontinued Operations:
Loss from discontinued operations, net of
tax effect - (375,373)
Loss on disposal of discontinued operations,
net of tax effect - (137,518)
---------- ----------
Net loss from discontinued operations - (137,518)
---------- ----------
Net Loss $(5,410,011) $ (330,642)
========== ==========
Basic and diluted loss per share,
continuing operations (0.34) (0.01)
Basic and diluted loss per share,
discontinued operations - (0.01)
------------ -----------
Basic earnings (loss) per share $ (0.34) $ (0.02)
============ ===========
Weighted average shares outstanding,
basic and diluted 15,739,204 14,739,204
============ ============
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
- -----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- -----------------------------------------------------------------------------
<TABLE>
Interim Consolidated Statements of Operations
- -----------------------------------------------------------------------------
<CAPTION>
Nine Months ended September 30, 1999 1998
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $17,754,919 $48,330,716
Cost of Sales 15,065,399 41,490,578
---------- ----------
Gross Profit 2,689,520 6,840,138
Expenses
Selling, general and administrative 6,432,726 6,610,607
Depreciation and amortization 646,718 632,212
Restructuring Charges 2,076,282 -
----------- ----------
9,155,726 7,242,929
----------- ----------
Loss from Operations (6,466,206) (402,781)
Investment Income (Loss) (3,952,501) 2,053,984
Financial Expenses (166,780) (197,710)
Other Income 725,875 -
----------- ----------
Earnings (Loss) from Continuing
Operations before Income Taxes (9,859,612) 1,676,094
Income Tax Provision - (275,373)
----------- ----------
Earnings (Loss) from
Continuing Operations $ (9,859,612) $ 1,951,467
Discontinued Operations:
Loss from discontinued operations, net
of tax effect - (1,250,052)
Loss on disposal of discontinued
operations, net of tax effect - (4,731,636)
----------- -----------
Net loss from discontinued operations - (5,981,688)
----------- -----------
Net Loss $ (9,859,612) $(4,030,221)
========== ==========
Basic and diluted earnings (loss) per share,
continuing operations $ (0.65) $ 0.13
Basic and diluted loss per share,
discontinued operations - (0.40)
----------- ----------
Basic and diluted loss per share $ (0.65) $ (0.27)
=========== ==========
Weighted average shares outstanding,
basic and diluted 15,072,537 15,143,170
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
- -----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- -----------------------------------------------------------------------------
<TABLE>
Interim Consolidated Statements of Cash Flows
- -----------------------------------------------------------------------------
<CAPTION>
Nine Months ended September 30, 1999 1998
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
Increase (Decrease) in Cash and
Cash Equivalents
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $(9,859,612) $(4,030,221)
Adjustments to reconcile net income
to net cash from operating activities:
Deferred Income Taxes - 371,315
Depreciation and amortization 646,718 632,312
Realized (gain) loss on investments 3,952,501 (1,630,108)
Equity in Earnings of Joint Venture - 239,970
Loss on disposal of long term assets 1,520,589
Changes in operating assets and liabilities,
net of acquisitions and dispositions:
Decrease (increase) in accounts receivable 7,085,328 (7,358,954)
Decrease in inventory 1,075,297 215,602
(Increase) in tax credits and
income taxes receivable (69,196) (370,038)
Decrease (increase) in prepaid expenses 536,826 (807,510)
Decrease (increase) in other assets 37,490 (95,096)
(Increase) in goodwill (550,000) -
(Decrease) increase in accounts payable
and accrued liabilities (874,799) 501,493
---------- ---------
Net Cash Provided by (Used in)
Operating Activities 1,980,553 (10,810,646)
---------- ----------
Cash Flows from Investing Activities
Cash received from purchase of subsidiary 420,762 -
Cash received from sale of
discontinued operations 157,088 -
Cash received from sale of investments 1,347,923 -
Cash payment for purchase of subsidiary (700,000) -
Net Investment purchases - 12,660,141
Borrowings on margin against investments - 2,570,807
Property, plant and equipment purchases (2,754) (722,969)
---------- ---------
Net Cash Provided by Investing Activities 1,223,019 14,507,979
---------- ---------
Cash Flows from Financing Activities
Net increase (decrease) in line of credit (4,438,442) 3,975,390
Proceeds from shareholder loans 300,000 1,400,967
Payment of shareholder loans - (652,790)
Purchase of treasury stock - (9,928,737)
---------- ---------
Net Cash (Used in) Financing Activities (4,138,442) (5,205,170)
---------- ---------
Effect of Exchange Rate Changes on Cash (70,533) 573,483
---------- ---------
Net Decrease in Cash (1,005,403) (934,354)
Cash at Beginning of Period 2,114,664 1,766,275
---------- ---------
Cash at End of Period $ 1,109,261 $ 831,921
========== =========
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
- -----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- -----------------------------------------------------------------------------
<TABLE>
Supplemental Disclosure of Noncash Investing Activities
- -----------------------------------------------------------------------------
<CAPTION>
In conjunction with the acquisition of Networkland, Inc. the following
assets and liabilities were received:
- -----------------------------------------------------------------------------
<S> <C>
Cash Paid $ 700,000
Value of Stock Issued 1,275,000
Deferred Purchase Price 450,000
Assets and Liabilities Received at Fair Value
Accounts Receivable (563,936)
Inventory (56,881)
Property and Equipment (2,917)
Other Receivables (55,213)
Goodwill (1,820,000)
Accounts Payable and Accrued Liabilities 494,709
---------
Cash Received in Purchase $ 420,762
=========
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
- ----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- ----------------------------------------------------------------------------
Notes to Interim Consolidated Financial Statements
- ----------------------------------------------------------------------------
September 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. For further information, refer to the financial statements
and footnotes included in the Company's audited financial statements for the
year ended September 30, 1998 and the period 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.
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 changed it fiscal year end from
September 30 to a December 31 calendar year end.
<PAGE>
- ----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- ----------------------------------------------------------------------------
Notes to Interim Consolidated Financial Statements-Continued
- ----------------------------------------------------------------------------
September 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 consisted 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. In
the third quarter of 1999, the Company sold all of its holdings of e-Net
stock having a cost basis of $5,300,424 and received net proceeds of
$1,347,923. Relating to this sale, the Company recorded a loss of $3,952,501.
Accounts Receivable
Accounts receivable is stated at the unpaid balances, less allowance on
collectible accounts. Management periodically reviews its outstanding
accounts receivable to assess collectibility of balances based on past
experience and evaluation of current adverse situations which may
affect collectibility of receivables. As of September 30, 1999 and
December 31,1998, management has established an allowance for doubtful
accounts of approximately $1,014,000 and $409,000, respectively.
<PAGE>
- ----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- ----------------------------------------------------------------------------
Notes to Interim Consolidated Financial Statements-Continued
- ----------------------------------------------------------------------------
September 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.
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 September 30, 1999
and 1998, was $117,139 and $153,415, respectively. Management regularly
reviews the carrying value of goodwill against anticipated cash flows of
each business in order to evaluate recoverability.
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>
- ----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- ----------------------------------------------------------------------------
Notes to Interim Consolidated Financial Statements-Continued
- ----------------------------------------------------------------------------
September 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. Potentially dilutive securities
have not been reflected in the diluted earnings per share calculation as
they are anti-dilutive.
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>
- ----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- ----------------------------------------------------------------------------
Notes to Interim Consolidated Financial Statements-Continued
- ----------------------------------------------------------------------------
September 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-ACQUISITION OF NETWORKLAND, INC.
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 $1,275,000 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 $1,820,000. 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.
NOTE D-RESTRUCTURING OF OPERATIONS
During the three months ended September 30, 1999, the Company continued the
reorganization of its businesses aimed at concentrating on higher margin
product and service sales. With the acquisition of Networkland, Inc.
the Company began the transfer of certain staff and resources from the
Company's Largo, Maryland facility to the Networkland, Inc. facility in
Rossyln, Virginia. The Company intends to sublease all of the Largo
facility except the classrooms utilized for the Company's IT training
programs. During the nine months ended September 30, 1999, the Company
recorded charges totaling $2,076,282 associated with the restructuring of its
Computer System Sales, Integration and Training Segment, of which $528,224
is reflected in the three months ended September 30, 1999. The charges
recorded in the three and nine month periods consisted of write-downs of
inventory, receivables and fixed assets, the recording of certain personnel
costs associated with restructuring the operations, and the establishment of
reserves for anticipated losses on subleases.
NOTE E-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 September 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 September 30, 1999, the Company had no
significant customers that accounted for more than 10% of revenues. For the
three months ended September 30, 1998, the Company had one customer
that accounted for approximately 45 percent of its total revenue. The Company
had no material export sales during the three months ended
September 30, 1999 and 1998.
Financial information relating to the Company's industry segments for
continuing operations for the three months ended September, 1999 and 1998,
is as follows:
<PAGE>
- ----------------------------------------------------------------------------
Socrates Technologies Corporation and Subsidiaries
- ----------------------------------------------------------------------------
Notes to Interim Consolidated Financial Statements-Continued
- ----------------------------------------------------------------------------
September 30, 1999
NOTE E-SEGMENT INFORMATION-Continued
<TABLE>
<CAPTION>
Three months ended September 30, 1999
- ----------------------------------------------------------------------------
Computer
System Sales,
Integration Software General
and Training Development Corporate Total
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $2,261,220 $1,692,816 $ - $5,949,552
Operating profit (loss) (1,579,990) 44,451 (595,146) (2,130,685)
Net income (loss) (1,649,914) 121,484 3,881,581) (5,410,011)
Identifiable Assets 8,156,193 4,369,753 1,151,951 13,677,897
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, 1998
- ----------------------------------------------------------------------------
Computer
System Sales,
Integration Software General
And Training Development Corporate Total
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $16,413,715 $1,727,108 $ - $18,140,823
Operating profit (loss) (87,597) 10,969 (145,591) 222,219
Net income (loss) (462,022) 12,233 (18,718) (468,497)
Identifiable Assets 21,705,009 3,994,147 2,013,433 27,711,589
</TABLE>
NOTE F-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.
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. No gain or
loss was realized as a result of the 1999 sale.
The Company intends to liquidate the assets of the scanner business of MVS
and expects associated proceeds to be nominal.
NOTE G-LINE OF CREDIT
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.
Amounts due to the finance company under the agreement at September 30, 1999
and December 31, 1998, amounted to $52,580, and $4,491,022, 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.
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.
Additionally, the Company is currently soliciting credit facilities from
another finance company to ensure that the Company maintains its
ability to satisfy its working capital needs.
NOTE H-COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income beginning with the Company's transition period
ended December 31, 1998. SFAS 130 separates comprehensive income into two
components, net income and other comprehensive income. Other comprehensive
income refers to revenues, expenses, gains and losses that under generally
accepted accounting principles are recorded as an element of stockholders'
equity and are excluded from net income. The Company's other comprehensive
income is comprised primarily of unrealized holding gains and losses on
available-for-sale securities and foreign currency translation adjustments from
international subsidiaries. The components of comprehensive income are listed
below:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net loss $(5,410,011) $(330,642) $(9,859,612) $(4,030,221)
Other comprehehensive
income (loss):
Change in unrealized
gain(loss) on
investments, net of
reclassifications 3,683,253 (5,831,117) 3,513,025 (2,527,969)
Change in accumulated
translation adjustments - 78,017 (70,533) 345,579)
---------- --------- --------- ---------
Comprehensive loss $(1,726,758)$(6,083,762) $(6,417,179) $(6,212,611)
</TABLE>
<PAGE>
- ----------------------------------------------------------------------------
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 September 30, 1999 continued to be a period of
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.
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. In August 1999, the Company acquired
Networkland, Inc., and began the transfer of certain staff and resources
from its Largo, Maryland facility to Networkland's Rossyln, Virginia
location. During the quarter ended September 30, 1999, the Company
recorded charges totaling $528,224 associated with the restructuring
of its Computer System Sales, Integration and Training Segment. The charges
consisted of write-downs of inventory, receivables and fixed assets, the
recording of certain personnel costs associated with restructuring the
operations and the establishment of reserves for anticipated losses on
subleased facilities.
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.
For the fourth quarter of 1999, the Company believes that operations will
approximately break even 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>
- ----------------------------------------------------------------------------
Results of Operations
- ----------------------------------------------------------------------------
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
- ----------------------------------------------------------------------------
The Company reported sales of $3,954,036 for the three-month period ended
September 30, 1999, as compared to $18,140,823 for the same period in 1998.
Of those amounts, Computer System Sales, Integration and Training sales
amounted to $2,261,220 and $16,413,715 for the three month periods ended
September 30, 1999 and 1998, respectively, and Software Development sales in
the same periods amounted to $1,692,816 and $1,727,198, respectively. The
decrease in sales of $14,186,787 or 78% is attributable to lower sales
generated by the Company's Computer Systems Sales, Integration and Training
Segment consistent with the reorganization of this business and the loss of
sales from a non-recurring significant contract which occurred in 1998.
The Company's gross margin fell to 8% for the three months ended
September 30, 1999, as compared to 18% for the three-month period ended
September 30, 1998. The decrease in margins as a percentage of sales was
due principally to inventory write-downs.
For the three months ended September 30, 1999, selling, general and
administrative expenses decreased by $1,465,978 (46%). The decrease in
selling expenses, over those of the prior year, are primarily a result of the
Company downsizing and restructuring operations in the Computer Systems Sales,
Integration and Training Segment.
During the three months ended September 30, 1999, the Company continued the
reorganization of its businesses aimed at concentrating on higher margin
product and service sales. With the acquisition of Networkland, Inc. the
Company began the transfer of certain staff and resources from the Company's
Largo, Maryland facility to the Networkland, Inc. facility in Rossyln,
Virginia. The Company intends to sublease all of the Largo facility except
the classrooms utilized for the Company's IT training programs. During the
three months ended September 30, 1999, the Company recorded charges totaling
$528,224 associated with the restructuring of its Computer System Sales,
Integration and Training Segment. The charges recorded in the three month
period consisted of write-downs of inventory, receivables and fixed assets,
the recording of certain personnel costs associated with restructuring the
operations, and the establishment of reserves for anticipated losses on
subleases.
In the 1999 third quarter, the Company sold its entire holdings of e-Net
stock having a cost basis of $5,300,424 and received net proceeds of
$1,347,923. Relating to this sale, the Company recorded the loss of
$3,952,501. Financial expenses declined by $119,290 (76%) during the
1999 third quarter due to substantially lower borrowings on its accounts
receivable credit facility.
Other income for the three months ended September 30, 1999 consists
primarily of $690,000 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.
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.
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. No gain or
loss was realized as a result of the 1999 sale.
The Company intends to liquidate the assets of the scanner business of MVS
and expects associated proceeds to be nominal.
<PAGE>
- ----------------------------------------------------------------------------
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
- ----------------------------------------------------------------------------
The Company reported sales from continuing operations of $17,754,919 for the
nine-month period ended September 30, 1999, as compared to $48,330,716 for the
same period in 1998. Of those amounts, Computer System Sales, Integration and
Training sales amounted to $12,557,625 and $45,400,860 for the nine month
periods ended September 30, 1999 and 1998, respectively, and Software
Development sales for the same periods amounted to $5,586,198 and $3,893,583,
respectively. The decrease in sales of $30,575,797 or 63% is attributable to
lower sales generated by the Company's Computer Systems Sales, Integration and
Training Segment consistent with the reorganization of this business and the
loss of sales from a non-recurring significant contract which occurred in the
June 30, 1999 quarter.
The Company's gross margin from continuing operations was 15% for the nine
months ended September 30, 1999, as compared to 14% for the nine-month period
ended September 30, 1998.
For the nine months ended September 30, 1999, selling, general and
administrative expenses decreased by $177,822 (3%). The decreased expenses
were associated with the downsizing and restructuring of operations in the
Company's Computer Systems Sales, Integration and Training Segment.
During the nine months ended September 30, 1999, the Company continued the
reorganization of its businesses aimed at concentrating on higher margin
product and service sales. With the acquisition of Networkland, Inc. the
Company began the transfer of certain staff and resources from the
Company's Largo, Maryland facility to Networkland, Inc. Rossyln, Virginia
location. The Company intends to sublease all of the Largo facility except
the classrooms utilized for the Company's IT training programs. During the
nine months ended September 30, 1999, the Company recorded charges totaling
$2,076,282 associated with the restructuring of its Computer System Sales,
Integration and Training Segment. The charges recorded in the three and nine
month periods consisted of write-downs of inventory, receivables and fixed
assets, the recording of certain personnel costs associated with
restructuring the operations, and the establishment of reserves for
anticipated losses on subleases.
In the nine months ended September 30, 1999, the Company sold its entire
holdings of e-Net stock having a cost basis of $5,300,424, and received net
proceeds of $1,347,923. Relating to this sale, the Company recorded a loss
of $3,952,501. In the nine months ended September 30, 1998, the Company
earned $2,053,984 in investment income which included a recognized gain of
$1,594,000 on sales of e-Net stock in June 1999.
Other income for the nine months ended September 30, 1999 consists
primarily of $690,000 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.
- ----------------------------------------------------------------------------
Capital Resources, Liquidity and Backlog
- ----------------------------------------------------------------------------
As of September 30, 1999, the Company had working capital of $158,833,
including cash and cash equivalents of $1,109,261.
During the nine months ended September 30, 1999 the Company generated
$1,980,553 from operations, primarily from decreases to accounts receivable
and inventory; the Company generated $1,223,019 from investing activities,
primarily from sales of investments; and the Company used $4,138,442 for
financing activities, primarily for repayment of the line of credit.
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. Amounts due to the finance company under the agreement at
September 30, 1999 and December 31, 1998, amounted to $52,580 and
$4,491,022, 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.
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.
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.
The Company has no significant long-term debt outstanding as of
September 30, 1999.
The Company has borrowed, under two separate loan agreements, monies from
a former officer and current stockholder 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. In August 1999, the Company
borrowed $300,000 from another shareholder and director. Total loans and
accrued interest outstanding at September 30, 1999, was $1,518,435.
At September 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.
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 September 1999, the installation of the system
was complete. Based upon the implementation progress made to date, the
Company does not believe a contingency plan is necessary.
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
September 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
November 12, 1999 By: CABOT R. CASKIE
-------------------
Cabot R. Caskie
Vice President and
Chief Financial Officer
<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 September 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000937603
<NAME> Socrates Technologies Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 1,109,261
<SECURITIES> 0
<RECEIVABLES> 4,930,425
<ALLOWANCES> 1,014,471
<INVENTORY> 188,245
<CURRENT-ASSETS> 5,796,755
<PP&E> 1,628,320
<DEPRECIATION> 831,711
<TOTAL-ASSETS> 13,677,897
<CURRENT-LIABILITIES> 5,637,922
<BONDS> 0
0
0
<COMMON> 197,406
<OTHER-SE> 7,842,569
<TOTAL-LIABILITY-AND-EQUITY> 13,677,897
<SALES> 3,954,036
<TOTAL-REVENUES> 3,954,036
<CGS> 3,625,372
<TOTAL-COSTS> 3,625,372
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,675
<INCOME-PRETAX> (5,410,011)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,410,011)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,410,011)
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
