<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000 0-26614
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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, Vienna, VA 22182
(Address of principal executive offices) (Zip Code)
(703) 288 6500
(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 [] No [X]
As of December 22, 2000, shares of the Registrant's Common Stock, $.01
par value, were 23,297,153 outstanding.
1
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SOCRATES TECHNOLOGIES CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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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
3
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<TABLE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Consolidated balance sheets
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
Assets 2000 1999
-------------------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 261 $ 942
Accounts receivable, net of allowance
for doubtful accounts 2,871 3,769
Inventory 47 54
Advances and other receivables 136 211
Prepaid expenses 91 194
Employee loans and advances - -
-------------------------------
Total current assets 3,406 5,170
Property and equipment, net 268 636
Goodwill, net 300 4,542
Deferred tax asset, net of valuation allowance - 1,200
Other assets 8 72
-------------------------------
Total assets 3,982 11,620
===============================
Liabilities and stockholders' equity
Current liabilities
Line of credit and financing arrangement 128 -
Notes Payable - 134
Accounts payable and accrued liabilities 2,868 4,036
Shareholder loans and interest 163 -
Convertible Debenture 3,559 -
-------------------------------
Total current liabilities 6,718 4,170
-------------------------------
Stockholders' equity
Common stock, $.01 par value,
50,000,000 shares authorized, 25,898,610 and 21,396,196
shares issued; 22,897,194 and 18,263,228 shares outstanding at
September 30, 2000 and December 31, 1999, respectively 259 212
Stock subscription receivable (150) (150)
Additional paid-in capital 57,961 51,924
Treasury stock, at cost, 3,001,416 shares (17,554) (17,554)
Accumulated deficit (43,252) (26,982)
Total stockholders' equity (2,736) 7,450
-------------------------------
Total liabilities and stockholders' equity $ 3,982 $ 11,620
===============================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
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<TABLE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations - unaudited
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------------------------------------------------------
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Products $ 2,417 $ 2,261
Services 1,366 1,693
--------------- ---------------
TOTAL SALES 3,783 3,954
Products 1,909 2,328
Services 1,124 1,297
--------------- ---------------
TOTAL COST OF SALES 3,033 3,625
--------------- ---------------
GROSS PROFIT 750 329
EXPENSES
Selling, general and administrative 1,889 1,725
Depreciation and amortization 327 206
Goodwill Writedown 474
Writedown for impairment of assets 6,104 528
--------------- ---------------
8,794 2,459
--------------- ---------------
LOSS FROM OPERATIONS (8,044) (2,130)
Loss on sale of investment (3,953)
Interest and financing income (expense) (42) (37)
Other income (expense) 5 710
--------------- ---------------
LOSS BEFORE INCOME TAXES (8,081) (5,410)
INCOME TAX (BENEFIT) PROVISION
Current - -
Deferred 2 -
--------------- ---------------
NET LOSS $ (8,083) $ (5,410)
=============== ===============
LOSS PER SHARE
Basic and diluted loss per share (0.36) (0.34)
Weighted average shares outstanding, basic and diluted 22,591 15,739
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
5
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<TABLE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations - unaudited
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------------------------------------------------
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Products $ 8,666 $ 12,169
Services 4,467 5,586
--------------- ---------------
TOTAL SALES 13,133 17,755
Products 6,990 11,515
Services 3,479 3,550
--------------- ---------------
TOTAL COST OF SALES 10,469 15,065
--------------- ---------------
GROSS PROFIT 2,664 2,690
EXPENSES
Selling, general and administrative 6,012 6,433
Depreciation and amortization 1,123 647
Goodwill Writedown 4,243 -
Writedown for impairment of assets 6,104 2,076
--------------- ---------------
17,482 9,156
LOSS FROM OPERATIONS (14,818) (6,466)
Loss on sale of investment (3,953)
Interest and financing income (expense) (304) (167)
Other income (expense) 72 726
--------------- ---------------
LOSS BEFORE INCOME TAXES (15,050) (9,860)
INCOME TAX (BENEFIT) PROVISION
Current 15 0
Deferred 1,204
--------------- ---------------
NET LOSS $ (16,269) $ (9,860)
=============== ===============
LOSS PER SHARE
Basic and diluted loss per share (0.78) (0.65)
Weighted average shares outstanding, basic and diluted 20,768 15,073
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
6
<PAGE>
<TABLE>
SOCRATES TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
----------------------------------------------------------------------------------------------------------------
<CAPTION>
Nine Month Nine Month
Period Ended Period Ended
Sept 30, Sept 30,
2000 1999
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) from operations $ (16,269) $ (9,860)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Deferred Income Taxes 1,200 -
Depreciation and amortization 1,123 647
Write down of goodwill 4,243 -
Write down of impaired assets 6,104 -
Loss on lease abandonment 59 -
Realized (gain) loss on investments - 3,953
Changes in operating assets and liabilities, net of
effects of acquisitions and dispositions:
Decrease in accounts receivable 228 7,085
Decrease in inventory 8 1,075
(Increase) advances and other receivables (844) (69)
(Increase) decrease in prepaid expenses (580) 537
Decrease in other assets - 37
(Increase) in goodwill - (550)
(Decrease) in accounts payable and accrued liabilities (1,227) (875)
--------------- ---------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (5,955) 1,980
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received from purchase of subsidiary - 421
Cash received from sale of discontinued operations - 157
Cash received from sale of investments - 1,348
Cash payment for purchase of subsidiary (420) (700)
Property, Plant and equipment purchases (319) (3)
--------------- ---------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (739) 1,223
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in line of credit 128 (4,438)
Proceeds from shareholder loans 163 300
Payment of notes payable (134) -
Proceeds from issuance of convertible debentures 3,559 -
Proceeds from conversion of options 517 -
Proceeds from issuance of common stock 1,780 -
--------------- ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 6,013 (4,138)
--------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - (71)
--------------- ---------------
NET (DECREASE) IN CASH (681) (1,006)
CASH AT BEGINNING OF YEAR 942 2,115
--------------- ---------------
CASH AT END OF YEAR $ 261 $ 1,109
=============== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2000
================================================================================
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim 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. For further information, refer to the
financial statements and footnotes included in the Company's audited financial
statements for the year ended December 31, 1999.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. The results of continuing operations for the
three and nine months ended September 30, 2000 are not necessarily indicative of
the results to be expected for the full year.
Former management of the Company focused on growing the Company by developing a
new business line, the Flexible Service Provider or "FSP", through the Socrates
Solutions Corp. subsidiary ("SSC") and through the acquisition of the assets of
Object Application Systems, Inc. ("OAS"), a New York corporation. The FSP
business line was a Application Systems or Services Provider or "ASP" business
in which SSC offered the Enterprise Resources Program system or "ERP" of SSC and
a menu of Web-based or Internet-based services and products (such as Web
hosting, customized e-mail, Internet-based sales systems). The FSP effort has
failed to date to produce any revenues or profits. Rather than continue to
invest in the FSP business line, the Company started in the fourth fiscal
quarter to reduce its operations to its core businesses (that is, Technet
Computer Services, Inc. and Networkland Inc.) and refocused the Company to
achieve profitability as soon as practicable in those core businesses. In the
meantime, the Company will explore a number of possible corporate actions to
enhance shareholder value, including, without limitation, the expansion of the
Company's strategic and subcontracting relationships to leverage the resources
of third parties, the restricting services and products to those services and
products that the Company can provide with existing resources or with the
resources of its partners, the acquisition of the Company by a larger
enterprise, or making the Company a captive vendor of a larger enterprise.
The accompanying interim consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets, and the
satisfaction of liabilities in the normal course of business. The Company has
experienced significant net losses, currently has a significant working capital
deficit, and is in need of additional investment capital to sustain and grow its
business. The Company has streamlined its operations to two operating
subsidiaries, Networkland and Technet, and has eliminated or is eliminating all
unprofitable operations. The Company is also reducing overhead costs. The
Company believes that it can sustain Technet and Networkland with little or no
additional investment capital and continued availability of vendor financing for
Networkland. The loss or reduction of vendor financing for Networkland would
have a significant and adverse impact on Networkland's ability to operate.
Although the Company expects operating results to improve and believes that the
streamlined operations can be sustained without additional investment capital,
there can be no assurances that the Company will not experience adverse results
of operations in the future, that it will be able to satisfy its current
obligations in the normal course of business, or obtain additional investment
capital and therefore may not be able to continue operating. These factors among
others may indicate that the Company will be unable to continue as a going
concern.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
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 was incorporated in the State of Delaware on April 12, 1994 under the
name "MVSI, Inc.". MVSI, Inc. changed its name to "Socrates Technologies
Corporation" in December 1998 by MVSI, Inc. merging with a newly-formed
subsidiary, which was formed for the sole purpose of effecting the name change.
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 in Virginia and has facilities in
Virginia, and New Jersey.
8
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2000
================================================================================
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
Socrates Technologies Corporation ("Socrates" or the "Company") is a holding
company with operating subsidiaries engaged in the following businesses: (1)
through its Technet Computer Services, Inc. ("Technet") subsidiary, providing
software programming, support and consulting services and (2) through its
Networkland Inc. subsidiary ("Networkland") computer and information technology
services and products, both subsidiaries selling to corporate and government
customers.
Revenue Recognition
Product sales are recognized upon shipment or delivery when no significant
obligations exist at the time. Typical terms of sale do not provide the customer
with the right of return except for defective products, which are covered either
by the Company's warranty or by the warranty of the original equipment
manufacturer in instances where the Company acts as a distributor. Revenue from
services is generally recognized as the services are rendered using contractual
billing rates. Revenue billed in advance of customer acceptance is deferred
until such time as acceptance occurs. For fixed-price contracts, the Company
follows the percentage of completion method for revenue recognition. Amounts
received from customers prior to shipment are recorded as deposit liabilities.
The Company's SSC subsidiary licenses software under license agreements and
provides services including training, consulting and maintenance consisting of
product support services and periodic updates. License fee revenues are
generally recognized when a non-cancelable license agreement has been signed,
the product has been shipped, there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable, and collection is considered
probable. For customer license agreements which meet these recognition criteria,
the portion of the fees related to the software license are generally recognized
in the current period, while the portion of the fees related to services is
recognized as the services are performed. When SSC enters into a license
agreement with a customer requiring significant customization of the software
products, SSC recognizes revenue related to the license agreement using contract
accounting. Revenues from fixed-price contracts, post-contract support services,
installation and maintenance agreements are recognized ratably over the
appropriate period. Payments received in advance of when revenue is recognized
are recorded as deferred revenue.
Due to the resignation of key personnel of SSC in November, 2000 and the
inability of SSC to generate sufficient revenues, the Company's management has
closed the New York City operations of SSC. The Company intends to pursue its
licensing of SSC's software acquired from OAS under the asset purchase agreement
between the Company and OAS in the event that a rescission of the asset purchase
agreement is not effected. However, no assurance can be given that the Company
will be successful in its efforts to do so.
Cash and Cash Equivalents
Cash and cash equivalents include cash and money market accounts.
9
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2000
================================================================================
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
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, 2000 and December 31, 1999, management has
established an allowance for doubtful accounts of approximately $40,281 and $1.4
million, respectively.
Property and Equipment
Property and equipment are carried at cost, net of an allowance for accumulated
depreciation and amortization. Depreciation is computed on equipment and
furniture, principally using the straight-line method over estimated lives
ranging from five to seven years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated useful lives
of the related assets.
Capitalized Software Costs
The Company acquired certain computer software, effective March 1, 2000, in
connection with the acquisition of substantially all of the assets and the
assumption of certain liabilities of Object Application Systems, Inc. ("OAS"),
which is more fully described herein. The cost allocated to software in that
acquisition, $3.68 million, was being amortized over a six-year period. As
stated above, the Company is currently trying to rescind the asset purchase
agreement with OAS. The Company is uncertain about the likelihood of such a
rescission or the impact and consequences of a complete or partial rescission,
except that the Company stands to reduce its assets by the remaining recorded
value of the OAS software and other acquired assets and the Company would avoid
at least $400,000 of OAS liabilities. However, due to the uncertainty of the
legal outcome of the Company's rescission efforts and plans to file Chapter 11
proceedings for its SSC subsidiary, the remaining value of the unamortized
software of approximately $3.6 million has been written off as of September 30,
2000.
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 nine months ended September 30, 2000 and 1999, was
approximately $425,227 and $351,418, respectively. Management regularly reviews
the carrying value of goodwill against anticipated cash flows of each business
in order to evaluate recoverability. As a result, during the three-month period
ended September 30, 2000, management recognized a write down of approximately
$3.8 million to reflect the impairment of goodwill associated with the
acquisitions of Technet and Networkland, Inc. (Networkland) subsidiaries.
During the third quarter of 2000, due the matters discussed above related to
OAS, the Company wrote off the $400,000 of remaining goodwill associated with
the OAS acquisition due to impairment.
10
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2000
================================================================================
NOTE B - 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.
Management regularly reviews for recoverability of deferred tax assets and
adjusts, if necessary, a valuation allowance against such assets. In determining
the amount of the valuation allowance recorded at each balance sheet date,
management has considered historical taxable income generated by continuing
operations, adjusted for non-recurring gains and losses and known charges which
are not deductible, such as goodwill amortization, and for the anticipated
impact of management's operating plans. The Company fully reserved against tax
benefits associated with losses incurred in 1999 due to the fact that the
Company's ability to generate taxable income sufficient to absorb such losses
was uncertain. However, the Company did not adjust the previously recorded net
deferred tax asset of $1.2 million based on its estimate of future taxable
income expected to be generated from its continuing operations at the time.
Based upon the continued losses incurred, management determined that a writedown
of the previously recorded net deferred tax asset of $1.2 million was necessary
during the second quarter.
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. Certain prior year amounts have been reclassified to
conform to the current presentation.
NOTE C - NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." In 2000, the required implementation date of SAB 101 was delayed to
the fourth quarter of fiscal years beginning after December 15,1999. SAB 101
provides guidance related to revenue recognition, income statement presentation
and financial disclosures. The adoption of SAB 101 is not expected to have a
significant effect on the Company's results of operations or its financial
position. The Company plans to continue to evaluate the potential impact of SAB
101 and to adopt the pronouncement for the fiscal quarter ended December 31,
2000.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting for
Certain Transactions Involving Stock Compensation: an interpretation of APB
Opinion No. 25". FIN 44 provides guidance on how to account for stock-based
compensation, including stock option grants. FIN 44 is effective July 1. 2000.
11
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2000
================================================================================
NOTE C - NEW ACCOUNTING PRONOUNCEMENTS - Continued
The Company adopted FIN 44 during the quarter ended September 30, 2000. The
adoption of the Interpretation did not have a significant impact on the
Company's results of operations or its financial position.
NOTE D - OPERATIONS
The Company's Board of Directors is and will be reviewing from time to time the
current business and strategic plans for attaining profitability as soon as
practicable. The focus of current senior management is to achieve profitability
with existing resources at Networkland and Technet, to eliminate all
unprofitable business operations and to continue to reduce overhead. The
Company's Board of Directors appointed Fred Sajedi in late November 2000 to
manage Technet as well as Networkland. This appointment places all operations
under the direction of a single executive and is intended to bring Technet to
profitability as soon as practicable. Technet has not attained profitability in
the prior fiscal quarters because of its inability to attain industry standard
profit margins and decreased sales on a quarterly basis.
As part of the Company's efforts to reduce overhead, the senior management of
the Company has been restructured and reduced. Current senior management of the
Company is: Ashok Rattehalli, Chairman of the Board; Fred Sajedi serves as chief
operating executive for Networkland and Technet; Paul Richter handles general
counsel and secretary functions for the Company and each subsidiary and serves
as president of Technet; and Andreas Keller, Treasurer and Vice President (as of
December 18, 2000). The Company's new Board of Directors consists of Ashok
Rattehalli, Chairman; Clark Easter, outside director; Michael Shoemaker, outside
director; Richard Prins, outside director; and Andreas Keller.
In June 2000, the Company's former senior management eliminated all accounting
positions at the Company's Virginia headquarters and transferred all corporate
accounting and finance functions and records to SSC's New York City facility.
The former CEO and other employees at SSC assumed oversight of those functions
from June 2000 through September 2000. The accounting and finance functions and
records of the Company were transferred back to the Company's Vienna, Virginia
headquarters in October 2000. Further, the employees responsible for maintaining
the financial records and accounting systems resigned without allowing a
suitable period for transitioning their functions to other employees of the
Company or SSC. The Company had difficulty locating and preparing the financial
records necessary to complete the Form 10-Q Report for the quarter ended
September 30, 2000, which effort could not be completed before the filing
deadline of November 15, 2000. Subsequently, the Company completed its
reconciliation and reconstruction of the accounting records underlying the
accompanying financial statements and believes they portray fairly the financial
affairs of the Company.
In November 2000, the former Chief Executive Officer and President, Mr. Keenan
was charged by the U.S. Department of Justice with embezzlement of approximately
$321,000 in funds from August 1997 into September 1999 from a customer of his
former employer. Mr. Keenan resigned from all positions held at the Company on
November 10, 2000. The Company or its directors were not aware of the U.S.
Department of Justice proceedings against Mr. Keenan until December 1, 2000,
when news reports surfaced about the charges. Mr. Keenan joined the Company as
its President in late September 1999. From September 1999 into early January
2000, Mr. Keenan's duties as President of the
12
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2000
================================================================================
Company did not include any participation in the Company's financial affairs or
functions or any oversight or management of corporate resources. The Company,
under the direction of the Board of Directors, conducted an investigation of Mr.
Keenan's background through a nationally-known investigative firm in connection
with the proposed expansion of Mr. Keenan's authority from president of the
Company with a limited scope of authority and functions to the position of Chief
Executive Officer and President of the Company with traditional duties and
authority, appointment to the Company's Board of Directors (in March 2000) and
appointment as the Chief Executive Officer and director of SSC. The
investigation took place from February 4, 2000 through February 29, 2000 and
produced no facts or information to warrant any suspicions about Mr. Keenan.
Mr. Keenan was removed from participation in any financial affairs or functions
of the Company in August 2000.
After receipt of news reports about the charges against Mr. Keenan in New York,
the Company commenced an internal investigation in December 2000 of Mr. Keenan's
actions as an officer of the Company from September 1999 through November 2000.
The investigation will take approximately 60 days to complete and is being
conducted to ensure that there was no malfeasance or misconduct in his conduct
as an officer or director of the Company. The investigation will include the
March 2000 acquisition of the assets of Object Application Systems, Inc.
("OAS"), a New York corporation, by SSC, which transaction was brought to the
Company and advocated for approval by Mr. Keenan. The Company will publicly
announce the results of its investigation in February 2001.
SSC ceased operations from its New York City facility on or about November 8,
2000 due to continuing operating losses, the resignation of the key personnel of
SSC in October and November 2000, business and legal disputes between SSC and
OAS and its principals and the failure of SSC to sustain sales in its core
business: the leasing of a software system for enterprise resources planning or
programming, or "ERP", for small and medium sized textile companies.
The Company's Socrates Technologies, Inc. ("STI") subsidiary, which has ceased
all business operations as of October 31, 2000, will file a petition under
Chapter XI of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court in
Greenbelt, Maryland on or before, January 4, 2000. The Company does not believe
that the bankruptcy proceedings of STI and SSC will adversely impact on the
Company's other operations. The Company believes that the bankruptcy proceedings
for STI and SSC are important to protect the other operations of the Company
from unfounded or groundless creditor claims.
NOTE E - FINANCING ARRANGEMENTS
After unsuccessfully seeking financing from financial institutions,
institutional investors and other third-party financing sources in the past six
months, the Company asked Fred Sajedi, Networkland's chief executive officer and
president, to enter into a one-time factoring agreement whereby Mr. Sajedi
provided $100,000 for working capital for the parent company and its
subsidiaries. The aggregate face amount of factored accounts receivable was
approximately $217,000. The Board of Directors of the Company approved these
financing terms in light of the need of the Company for financing and believes
that the terms of the financing are reasonable in light of the condition of the
Company and the absence of alternative financing. Further, Mr. Sajedi
transferred 160,000 shares to an accredited investor in order to satisfy an
existing Company obligation. The $100,000 was generated by the sale of 640,000
shares of Mr. Sajedi's common stock to an accredited investor.
NOTE F - CONVERTIBLE DEBENTURE
The Company is continuing its negotiations with the representative of the
holders of the 4% Convertible Subordinated Debentures due on March 20, 2005
("Debentures"). The Company has made no payments to date on the debt. The
representative of the holders of the Debentures has indicated to the Company in
December 2000 that it is willing to consider a final resolution of the
13
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2000
================================================================================
NOTE F - CONVERTIBLE DEBENTURE - Continued
pending issues and to do so in a manner that is beneficial to both the Company
and its Debenture holders. Management feels confident at this time that a
reasonable resolution of all remaining issues can be reached, especially in
light of recent discussions with the Debenture holders' representative and the
forbearance shown by the Debenture holders for the past 8 months. Due to the
pending negotiations and attempts to refinance the debenture, the Company has
not yet obtained a valuation of the detachable warrants. If the valuation had
been obtained, the proceeds from the issuance of the debentures would have been
allocated between the debentures and the warrants based upon the relative fair
values of the two securities at the time of issuance with the remaining discount
on the debt to be accounted for as original issue discount to be amortized over
the term of the debentures. The fair value attributable to the warrants would
have been allocated to equity. The Company believes that the financial statement
impact of not recording the discount on the debentures is immaterial to the
consolidated results of operations for the six months ended September 30, 2000.
The amount due under the convertible debenture as of September 30, 2000 has been
classified as a current liability pending the outcome of the above negotiations
and attempts to refinance this obligation.
NOTE G - ACQUISITION OF OBJECT APPLICATION SYSTEMS, INC.
As a result of the current arbitration and legal proceedings between SSC and the
Company, on the one hand, and OAS and its principals, on the other hand, and the
closing of SSC operations from the New York City facility on November 8, 2000,
the Company has decided to write down all the remaining book value of SSC assets
which was approximately $ 4.2 million during the quarter ended September 30,
2000. Approximately $3.6 million was attributable to write down of capitalized
software. The assumed liabilities under the asset purchase agreement and other
contingency costs will not be removed pending the resolution of the Company's
intended rescission efforts and Chapter 11 proceedings.
NOTE H - 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 September 30, 2000 and 1999, respectively. Continuing operations
are represented by the Company's Computer Systems Sales, Integration and
Training business and its Software Development business.
For the three months ended September 30, 2000, the Company had no one customer
that accounted for 10 percent of the Company's total revenue. For the three
months ended September 30, 1999, the Company had one customer that accounted for
approximately 15 percent of its total revenue respectively. The Company had no
material export sales during the three months ended September 30, 2000 and 1999.
14
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2000
================================================================================
NOTE H - SEGMENT INFORMATION - Continued
Financial information relating to the Company's industry segments for continuing
operations for the three months ended September 30, 2000 and 1999, is as
follows:
<TABLE>
<CAPTION>
Three months ended September 30,2000
Computer
Systems Sales,
Integration, Software General
Training Development Corporate Total
-------- ----------- --------- -----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 2,423 $ 1,360 $ - $ 3,783
Operating profit (loss) (851) (340) (6,853) (8,044)
Net income (loss) (859) (370) (6,854) (8,083)
Identifiable Assets $ 1,035 $ 1,657 $ 144 $ 2,836
Three months ended September 30,1999
Computer
Systems Sales,
Integration, Software General
Training Development Corporate Total
-------- ----------- --------- -----
Sales to unaffiliated customers $ 2,261 $ 1,693 $ - $ 3,954
Operating profit (loss) (1,580) $ 45 (595) (2,130)
Net income (loss) (1,650) 122 (3,882) (5,410)
Identifiable Assets $ 8,156 $ 4,370 $ 1,152 $ 13,678
</TABLE>
The Company provides financial information for segment reporting purposes for
two lines of business representing its continuing operations during the nine
months ended September 30, 2000 and 1999, respectively. Continuing operations
are represented by the Company's Computer Systems Sales, Integration and
Training business and its Software Development business.
For the nine months ended September 30, 2000, the Company had no one customer
that accounted for 10 percent of the Company's total revenue. For the nine
months ended September 30, 1999, the Company had one customer that accounted for
approximately 15 percent of its total revenue respectively. The Company had no
material export sales during the nine months ended September 30, 2000 and 1999.
Financial information relating to the Company's industry segments for continuing
operations for the nine months ended September 30, 2000 and 1999, is as follows:
15
<PAGE>
SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
September 30, 2000
================================================================================
NOTE H - SEGMENT INFORMATION - Continued
<TABLE>
<CAPTION>
Nine months ended September 30,2000
Computer
Systems Sales,
Integration, Software General
Training Development Corporate Total
-------- ----------- --------- -----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 8,771 $ 4,362 $ - $ 13,133
Operating profit (loss) (2,008) (3,692) (9,119) (14,819)
Net income (loss) (1,971) (3,989) (10,310) (16,270)
Identifiable Assets $ 1,035 $ 1,657 $ 144 $ 2,836
Nine months ended September 30,1999
Computer
Systems Sales,
Integration, Software General
Training Development Corporate Total
-------- ----------- --------- -----
Sales to unaffiliated customers $ 11,510 $ 6,245 $ - $ 17,755
Operating profit (loss) (5,457) 329 (1,338) (6,466)
Net income (loss) (5,769) 361 (4,452) (9,860)
Identifiable Assets $ 8,156 $ 4,370 $ 1,152 $ 13,678
</TABLE>
NOTE I - SUBSEQUENT EVENTS
Note D to these financial statements contains information concerning SSC and
arbitration and legal proceedings concerning SSC.
On December 6, 2000, STI surrendered the premises to the landlord pursuant to a
court order. The landlord intends to lease the space to a third party. In light
of STI's intention to file a petition under Chapter 11 of the U.S. Bankruptcy
Code, the Company is uncertain about the impact on the Company of STI's lease
obligations for the Largo space.
STI was released from the lease for 8500 Leesburg Pike, Suite 406, Vienna,
Virginia 22182, on or about November 29, 2000. The Company estimates that the
release will save the Company approximately $225,000 over the next 24 months in
lease and additional rent payments. The space was leased by the landlord to a
third party, effective December 1, 2000. STI paid approximately $2,400 to obtain
the lease release.
16
<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
The Company has streamlined operations by eliminating non-operating
subsidiaries, reducing overhead costs, centralizing executive management under a
single management team and focusing on stabilizing and making profitable the two
core businesses: Technet's software programming, maintenance and consulting
business and Networkland's computer and information technology products and
services business. As a result of these efforts, the Company has written off the
assets and liabilities or written down the value of certain assets used by
non-operating or unprofitable operations. The Company believes that it is
important to take such write offs and write downs in order that the financial
statements reflect the true nature of the ongoing operations.
The Company's focus is on achieving profitability at its core
businesses, Networkland and Technet, and eliminating all unprofitable operations
and unnecessary overhead.
The Company has experienced significant net losses, currently has a
significant working capital deficit, and is in need of additional investment
capital. Although the Company expects operating results to improve, there can be
no assurances that the Company will not experience adverse results of operations
in the future, that it will be able to satisfy its current obligations in the
normal course of business, or obtain additional investment capital. The Company
believes that without additional investment capital it will not have sufficient
cash to fund its activities in the near future, and may not be able to continue
operating. As such, the Company's continuation as a going concern is dependent
upon its ability to raise additional financing and to successfully develop and
introduce new products to market. These factors among others may indicate that
the Company will be unable to continue as a going concern. The Company is
actively pursuing additional equity financing to provide the necessary funds for
working capital and for planned acquisitions and strategic partnerships.
The three months ended September 30, 2000 was a period of change for
the Company. During this quarter the efforts of SSC to promote the new ASP and
FSP business lines failed, despite the investment of approximately $2 million
into the these new business initiatives. The ASP and FSP business initiatives
were managed by Timothy J. Keenan, Chief Executive Officer and a director of SSC
and Mitchell Jerine, President and a director of SSC. Mr. Keenan was also Chief
Executive Officer, President and a director of the Company and Mr. Jerine was
also the Chairman of the Board and Chief Operating Officer of the Company during
the third fiscal quarter. The Company believes that the marketing and sales
approach pursued by SSC during the second and third fiscal quarter was
insufficient in scope and implementation to produce any meaningful market
penetration by SSC.
17
<PAGE>
The Company has restructured management in order to place all
operations under the executive management of one person, Fred Sajedi, the chief
executive officer and president of Networkland and Technet, and to eliminate the
disparate management of each subsidiary operation. This centralization of
management was implemented in November 2000 with a reduction in the senior
management of the Company and its subsidiaries.
Results of Operations
Quarter Ended September 30, 2000 Compared to Quarter Ended September
30, 1999
The Company reported sales from continuing operations of approximately
$3.8 million for the three-month period ended September 30, 2000, as compared to
$4.0 million for the same period in 1999. The decrease in sales of approximately
$200,000 or 4% is attributable to the consolidation and restructuring of its
hardware reseller business and the decrease in revenues due to the shutdown of
its component supply and build to order business, which generated sales in 1999.
For the current quarter, Networkland reported revenues of approximately $2.4
million compared to Socrates Technologies Incorporated revenue of approximately
$2.3 million for the period last year, while Technet reported revenue of
approximately $1.4 million for the current quarter compared to $1.7 million in
the same period last year. Socrates Solutions Corporation reported no revenue
for the current quarter.
Gross Profit for the period increased from $329,000 to $750,000 and
Gross profit increased as a percentage of sales to 19.8 from 8.3%. This
improvement is due to the concentration on higher margin opportunities in
software development and networking services.
Selling, general and administrative expenses increased $172,000, or
10%, compared to the same period in 1999, reflecting on going charges associated
with the closing of operations of SSC during the quarter ended September 30,
2000 and charges associated with the closing of STI which included consolidating
management staff to other offices, and additional bad debts expense to allow for
uncollectible accounts receivable for the prior year quarter.
Depreciation and amortization increased by approximately $120,000 due
to the acceleration of depreciation and amortization of certain assets relating
to the closed facilities.
In addition, during the three-month period ended September 30, 2000,
management recognized a writedown of approximately $ 6.1 million which consisted
primarily of the impairment of assets which the Company acquired in the asset
purchase agreement with OAS for total consideration of approximately $4.7
million, payable in cash, note payable and common stock of the Company. The
Company recorded the transaction as an asset purchase, allocating the total
purchase price to the various assets purchased, with any excess of purchase
price over fair market value of assets purchased to goodwill. The principal
asset purchased in the agreement was software, independently valued at
approximately $3.68 million. As a result of the current arbitration and legal
proceedings between SSC and the Company, on the one hand, and OAS and its
principals, on the other hand, and the closing of SSC operations from the New
York City facility on November 8, 2000, the Company has decided to write down
all the remaining book value of SSC assets which was approximately $ 4.2 million
during the quarter ended September 30, 2000. Approximately $3.6 million was
attributable to write down of capitalized software. The assumed liabilities
under the asset purchase agreement and other contingency costs will not be
removed pending the resolution of the Company's intended rescission efforts and
Chapter 11 proceedings. Other writedown charges were the result of removing the
remaining book value of assets from the Company's other non-operating
subsidiaries.
18
<PAGE>
In the third quarter of 1999, the Company sold its entire holdings of
e-Net stock having a cost basis of $5.3 million and received net proceeds of
$1.3 million. Relating to this sale, the Company recorded a loss of $3.9
million. Investment expense remained comparable to the 1999 third quarter as the
Company has not recorded the interest on the Convertible debentures due to the
discussions with the investor representative.
Other income for the three months ended September 30, 1999 consisted
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 had been treated as a change in
estimate and was classified in other income to reflect its non-recurring nature
and to not distort results of operations.
Nine months ended September 30, 2000 Compared to nine months ended September 30,
1999
The Company reported sales from continuing operations of approximately
$13.1 million for the nine-month period ended September 30, 2000, as compared to
$17.8 million for the same period in 1999. The decrease in sales of
approximately $4.6 million or 22% is attributable to the consolidation and
restructuring of its hardware reseller business and the decrease in revenues due
to the shutdown of its component supply and build to order business, which
generated sales in 1999. For the nine months, Networkland reported revenues of
approximately $8.7 million compared to Socrates Technologies Incorporated
revenue of approximately $12.2 million for the period last year, while Technet
reported revenue of approximately $4.5 million for the current nine months ended
period which is approximately $1.1 million less than reported in the period last
year. The decrease in Technet's revenues is due to the departure of key members
of Technet's management team in the current year.
Networkland uses vendor financing to finance the purchase of equipment,
hardware and software for resale to customers. Networkland is seeking accounts
receivable financing to supplement its vendor financing and reduce its reliance
on internal cash to fund purchases. Networkland must obtain additional vendor
financing to grow and sustain its business.
Gross Profit for the period remained comparable to the prior year due
to the larger volume of lower margin product sales from the Computer, Systems
Sales and Integration business relative to the higher margin Software business
compared to the lower volume of the Computer, Systems Sales and Integration
business in the current period.
Selling, general and administrative expenses decreased $411,000, or
6.4%, compared to the same period in 1999, reflecting the restructuring and
downsizing of operations, as well as the Company's continuing efforts in
reducing administrative costs which took place in the prior year period.
Depreciation and amortization increased by approximately $476,000 due
to the acceleration of depreciation and amortization of certain assets relating
to the closed facilities.
19
<PAGE>
During the nine-month period ended September 30, 2000, management
recognized a write down of approximately $3.8 million to reflect the impairment
of goodwill associated with the acquisitions of Technet and Networkland. With
the recent shift in focus of the Company on developing its e-business suite of
product offerings, management is currently reevaluating the strategic fit of the
Technet software development services business and the Networkland computer
reselling and network integration business to its business going forward. These
considerations when coupled with low barriers to entry and lack of proprietary
products or services in these lines of business led management to write down the
carrying value of goodwill associated with them to $100,000 for Technet and
$400,000 for Networkland, amounts representing management's estimates of the
cash flows to be derived from these operations during the period of evaluation.
Management believes that using estimates of earnings and cash flow for periods
longer than one year is inappropriate due to uncertainty regarding the nature of
operations and results of those operations beyond that period. Consistent with
the recording of the impairment charge, the Company will amortize the remaining
goodwill to operations over a one-year period.
In addition, during the nine-month period ended September 30, 2000,
management recognized a writedown of approximately $ 6.1 million which consisted
primarily of the impairment of assets which the Company acquired in the asset
purchase agreement with Object Applications Systems, Inc. ("OAS") OAS for total
consideration of approximately $4.7 million, payable in cash, note payable and
common stock of the Company. The Company recorded the transaction as an asset
purchase, allocating the total purchase price to the various assets purchased,
with any excess of purchase price over fair market value of assets purchased to
goodwill. The principal asset purchased in the agreement was software,
independently valued at approximately $3.68 million. As a result of the current
arbitration and legal proceedings between SSC and the Company, on the one hand,
and OAS and its principals, on the other hand, and the closing of SSC operations
from the New York City facility on November 8, 2000, the Company has decided to
write down all the remaining book value of SSC assets which was approximately $
4.2 million during the quarter ended September 30, 2000. Approximately $3.6
million was attributable to write down of capitalized software. The assumed
liabilities under the asset purchase agreement and other contingency costs will
not be removed pending the resolution of the Company's intended rescission
efforts and Chapter 11 proceedings. Other writedown charges were the result of
removing the remaining book value of assets from the Company's other
non-operating subsidiaries.
Investment expense increased in the nine months ended September 30,
2000 compared to the comparable 1999 nine month period by approximately
$137,000, primarily as a result of interest penalties paid by the Company's
non-operating subsidiaries.
In the third quarter of 1999, the Company sold its entire holdings of
e-Net stock having a cost basis of $5.3 million and received net proceeds of
$1.3 million. Relating to this sale, the Company recorded a loss of $3.9
million. Investment expense remained comparable to the 1999 third quarter as the
Company has not recorded the interest on the Convertible debentures due to the
discussions with the investor representative.
Other income for the three months ended September 30, 1999 consisted
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 had been treated as a change in
estimate and was classified in other income to reflect its non-recurring nature
and to not distort results of operations.
20
<PAGE>
Capital Resources, Liquidity and Backlog
As of September 30, 2000, the Company had working capital of
approximately $247,000 including cash and cash equivalents of approximately
$259,000 and excluding the convertible debentures of $3.6 million which has been
presented as a current liability due to the current negotiations to refinance
this obligation. Cash on hand and cash generated during the quarter was used
principally to fund operations and to satisfy claims against the Company's
non-operating subsidiaries.
The Company is continuing its negotiations with the representative of
the holders of the 4% Convertible Subordinated Debentures due on March 20, 2005
("Debentures"). The Company has made no payments to date on the debt. The
representative of the holders of the Debentures has indicated to the Company in
December 2000 that it is willing to consider a final resolution of the pending
issues and to do so in a manner that is beneficial to both the Company and its
Debenture holders. Management feels confident at this time that a reasonable
resolution of all remaining issues can be reached, especially in light of recent
discussions with the Debenture holders' representative and the forbearance shown
by the Debenture holders for the past 8 months.
The amount due under the convertible debentures as of September 30,
2000 has been classified as a current liability pending the outcome of the above
negotiations and attempts to refinance this obligation.
In the second quarter of 2000, the Company entered into agreements with
individual accredited investors for a private placement of shares of the
Company's common stock, which resulted in an increase in equity, cash and
tangible assets of approximately $450,000. In the third quarter of 2000, the
Company entered into certain agreements with individual accredited investors for
a private placement of shares of the Company's common stock, which resulted in
an increase in equity, cash and tangible assets of approximately $400,000.
The Company believes that it needs additional working capital to grow
its business. After unsuccessfully seeking financing from financial
institutions, institutional investors and other third-party financing sources in
the past six months, the Company asked Fred Sajedi, Networkland's chief
executive officer and president, to enter into a one-time factoring agreement
whereby Mr. Sajedi provided $100,000 for working capital for the parent company
and its subsidiaries. The aggregate face amount of factored accounts receivable
was approximately $217,000. The Board of Directors of the Company approved these
financing terms in light of the need of the Company for financing and believes
that the terms of the financing are reasonable in light of the condition of the
Company and the absence of alternative financing. Due to the losses incurred
from discontinued or non-operating subsidiaries, and the low level of the
Company's stock market price, the Company has been unsuccessful in raising
additional funding since September 2000. The Company's current business plan is
based on operating the business with no or little infusion of funding from
outside sources.
Management believes that the Company needs to raise additional capital
through the placement of equity or debt securities based upon its current level
of operations. 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 accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets, and the
satisfaction of liabilities in the normal course of business. The Company has
experienced significant net losses since, currently has a significant working
capital deficit, and is in need of additional investment capital. Although the
Company expects operating results to improve, there can be no assurances that
the Company will not experience adverse results of operations in the future,
that it will be able to satisfy its current obligations in the normal course of
business, or obtain additional investment capital. The Company believes that
without additional investment capital it will not have sufficient cash to fund
the growth and maintenance of its activities in the near future, and may not be
able to continue operating. As such, the Company's continuation as a going
concern is dependent upon its ability to raise additional financing and to
successfully develop and introduce its products to market. These factors among
others may indicate that the Company will be unable to continue as a going
concern. The Company is actively pursuing additional financing to provide the
necessary funds for working capital and for strategic partnerships.
21
<PAGE>
Sublease of Largo Facilities
The Company leased 22,170 square feet of its 34,929 square foot
facility at Largo, Maryland on August 1, 2000 to a local technology company. The
sublease runs until the expiration of the Company's lease on July 31, 2002. The
sublease will reduce the Company's monthly lease expense for the Largo facility
from approximately $45,000 to approximately $12,000 per fiscal quarter. On or
about December 6, 2000, The Company's STI subsidiary surrendered the remaining
12,710 square feet of space at the Largo, Maryland facility to the landlord
pursuant to a court order. The landlord intends to sublease the surrendered
space to a third party. STI is uncertain at this time if it will have any future
liability under the lease for the Largo, Maryland facility.
Company's Principal Executive Offices
The Company's principal executive offices are located at 8133 Leesburg
Pike, Suite 770, Vienna, Virginia 22182.
Litigation
SSC filed a lawsuit has commenced legal proceedings in U.S. District
Court for the Southern District of New York on or about December 13, 2000
against Mitchell Jerine, Allen Jerinsky, Carl Jerinsky and Nancy Cocchiara,
former employees of SSC, and their company RocketHorse. The lawsuit alleges that
the defendants destroyed the business of SSC for their own personal benefit and
that the defendants have infringed certain intellectual property rights of SSC.
SSC is also seeking injunctive relief against the defendants to prevent further
actions against SSC as well as to retrieve certain SSC property under the
control of the defendants.
The Company received an arbitration claim from Mitchell Jerine and
Allen Jerinsky on or about December 6, 2000 for alleged breach of their SSC
employment agreements. The arbitration is under the American Arbitration
Association commercial rules with the arbitration proceeding taking place in New
York City. The Company believes the claims are without merit. The Company has
filed is filing a counterclaim on or about December 15, 2000 in the arbitration
seeking damages for alleged breach of the March 2000 asset purchase agreement
between OAS and the Company and SSC, damages for alleged breach of the SSC
employment agreements by Mr. Jerine and Mr. Jerinsky and to rescission of the
aforementioned asset purchase agreement.
The plaintiffs' period for appeal of the dismissal of the complaint in
HIRATA CORP. AND HIRATA US CORP. V. SOCRATES TECHNOLOGIES CORPORATION, ET AL.
(U.S. District Court for Indiana, Indianapolis Division) has expired without an
appeal being filed. The Company does not believe that the plaintiffs' would be
successful in any attempt to file the lawsuit in another jurisdiction because
the statute of limitations has run on the alleged claims against the Company.
The Company believes that the plaintiffs' claims were frivolous and were only
filed after the plaintiffs failed to prevail against or collect monies from the
original defendants.
STI settled its lawsuit in SOCRATES TECHNOLOGIES INC. V. NATIONAL
PUBLIC RADIO, ET AL. (D.C. Superior Court) with all defendants on or about
December 12, 2000. Defendants paid STI a cash sum to settle the lawsuit.
The Company is also subject to certain other legal proceedings and
claims which have arisen in the ordinary course of business and which have not
been fully adjudicated. The results of legal proceedings cannot be predicted
with certainty; however, in the opinion of management, the Company does not have
a potential liability related to any legal proceedings and claims that would
have a material adverse effect on its financial condition or operations.
22
<PAGE>
Delisting of Company's Common Stock
The Company appealed in August 2000 the decision by Nasdaq to delists
its Common Stock from the Nasdaq National Market System, effective June 30,
2000. The Nasdaq Listing Qualifications Review Council recently upheld the
delisting of the Company's Common Stock. The Company may not appeal this
decision further, although the Nasdaq Board of Governors in its discretion may
review this decision. The Company has not received any indication that the
Nasdaq Board of Governors intends to make any such review.
The Company may apply to Nasdaq for listing of its Common Stock on the
Nasdaq SmallCap Market without prejudice. However, there can be no assurance
that any Nasdaq SmallCap Market listing application submitted by the Company
will be approved by Nasdaq even if the Company meets Nasdaq's initial listing
standard.
The Company believes that the delisting has made it more difficult and
more expensive for the Company to raise money, either through the sale of stock
or by other means, because it is more difficult for investors to find and trade
securities listed on the Over the Counter "pink sheets" or Bulletin Board, some
brokerage firms are hesitant or will not trade securities listed on the Over the
Counter "pink sheets" or the Over the Counter Bulletin Board; and securities
traded on the Over the Counter "pink sheets" or Bulletin Board are often usually
micro-cap or smaller companies and are deemed to be a riskier investment than
companies traded on other national stock markets or stock exchanges.
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.
Seasonality
Based on its experience to date, the Company believes that its future
operating results may be subject to quarterly variations based on a variety of
factors. Such effects may not be apparent in the Company's operating results
during a period of expansion. However, the Company can make no assurances that
its business can be significantly expanded under any circumstances.
Year 2000
The Company has experienced no significant problems related to the Year
2000 with its internal systems nor with any equipment or systems sold to its
customers.
The information presented above contains forward-looking statements
that are subject to risks and uncertainties. The company's actual results may
differ significantly from those discussed above and elsewhere in this Form 10-Q
regarding market risk, business development, reorganization of operations and
other business, financial and regulatory matters. The above discussion should be
read in conjunction with the 1999 Form 10-K and the condensed consolidated
financial statements and notes thereto included elsewhere in this Form 10-Q.
23
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PART II. OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
Legal proceedings is discussed above in "Litigation" above.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In the third quarter of 2000, the Company entered into certain
agreements with individual accredited investors for a private placement of
shares of the Company's common stock, which resulted in an increase in equity,
cash and tangible assets of approximately $400,000.
The Company's operations are not currently producing enough profits to
cover operating expenses and outstanding accounts payable of the Company and its
subsidiaries (including discontinued operations). Unless the Company's
operations produce increased profits, the Company will be forced to privately or
publicly sell its securities to raise enough working capital to pay operating
expenses and outstanding and due accounts payable, or to seek debt financing
from financial institutions or through the sale of debt instruments. In light of
the reoccurring losses experienced by the Company in the past consecutive fiscal
quarters, it is unlikely that the Company can obtain such funding or financing
at all or on commercially reasonable terms. As such, the Company's current
business plan is based on no or little outside funding or investments.
ITEM 3. DEFAULTS UPON SENIOR DEBT SECURITIES
As described above in Note C - "Convertible Debentures" to the
financial statements, the Company entered into agreements to issue 4%
Convertible Subordinated Debentures due March 20, 2005 ("Debentures"). While the
Company is negotiating a restructuring of the terms of the 4% Debentures due
March 20, 2005, the position of the Debenture holders is that interest accrues
on the Debentures, subject to adjustment under revised terms and conditions. The
Company and the representative of the Debenture holders have entered into a
standstill agreement whereby neither side will assert their respective rights
until there is a final resolution of the Company's efforts to renegotiate the
terms and conditions of the Debentures. Those negotiations are continuing and
the Company expects to reach a final resolution of the issues during the first
quarter of fiscal year 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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, dated December 15, 2000
Form 8-K, Amendment Number 1 to the Form 8-K, filed November 27,
2000, filed December 6, 2000
Form 8-K, dated November 27, 2000
Form 8-K, filed November 13, 2000
Form 8-K, filed October 11, 2000
24
<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
December 22, 2000
By: /s/ Andreas Keller
-----------------------
Andreas Keller, Treasurer and Vice
President of Finance
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