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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:
March 31, 2000 0-26614
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SOCRATES TECHNOLOGIES CORPORATION
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(Exact Name of Registrant as Specified In Its Charter)
Delaware 54-1707718
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8500 Leesburg Pike, Vienna, Va 22183
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(Address of principal executive offices) (Zip Code)
(703) 288 6500
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(Company's telephone number, including area code)
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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 May 12, 2000, 20,814,496 shares of the Registrant's Common
Stock, $.01 par value, were outstanding.
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<PAGE>
SOCRATES TECHNOLOGIES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 14
Item 4. Submission of matters to a Vote of Security
Holders 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 18
SIGNATURES 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
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Socrates Technologies Corporation and Subsidiaries
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Contents
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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
<PAGE>
<TABLE>
Socrates Technologies Corporation and Subsidiaries
Consolidated balance sheets
(thousands of dollars, except share data)
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 2,985 $ 942
Accounts receivable, net of allowance
for doubtful accounts 4,550 3,769
Inventory 76 54
Advances and other receivables 219 211
Prepaid expenses 637 194
---------------- ----------------
Total current assets 8,467 5,170
Property and equipment, net 590 636
Acquired software costs, net 3,680 -
Goodwill, net 4,832 4,542
Deferred tax asset, net of valuation allowance 1,200 1,200
Other assets, including debt origination costs 950 72
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Total assets $ 19,719 $ 11,620
================ ================
Liabilities and stockholders' equity
Current liabilities
Line of credit and financing arrangement $ 40 $ -
Notes Payable 395 134
Accounts payable and accrued liabilities 3,597 4,036
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Total current liabilities 4,032 4,170
Convertible debenture 3,559 -
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Total liabilities 7,591 4,170
Stockholders' equity
Common stock, $.01 par value,
50,000,000 shares authorized, 23,801,912 and 21,264,644 shares
issued; 20,800,496 and 18,263,228 shares outstanding at
March 31, 2000 and December 31, 1999, respectively 238 212
Stock subscription receivable (150) (150)
Additional paid-in capital 57,136 51,924
Treasury stock, at cost, 3,001,416 shares (17,554) (17,554)
Accumulated deficit (27,542) (26,982)
Cumulative comprehensive income and losses - -
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Total stockholders' equity 12,128 7,450
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Total liabilities and stockholders' equity $ 19,719 $ 11,620
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</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
Socrates Technologies Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
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<CAPTION>
(Unaudited)
Three months ended
March 31,
----------------------------
2000 1999
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<S> <C> <C>
Products $ 3,280 $ 5,920
Services 1,576 1,931
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Total sales 4,856 7,851
Products 2,669 5,358
Services 1,124 1,133
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Total cost of sales 3,793 6,491
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Gross profit 1,063 1,360
Expenses
Selling, general and administrative 1,402 2,092
Depreciation and amortization 199 213
Restructuring Charges - 344
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1,601 2,649
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Loss from Operations (538) (1,289)
Interest and financing income (expense) (49) (79)
Other income (expense) 41 -
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Loss before income taxes (546) (1,368)
Income tax (benefit) provision
Current 14 -
Deferred - -
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Net loss $ (560) $ (1,368)
============= =============
Loss Per Share
Net loss, basic $ (0.03) $ (0.09)
Net loss, diluted $ (0.03) $ (0.09)
Weighted average shares outstanding, basic 19,467 14,739
Weighted average shares outstanding, diluted 19,467 14,739
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
<TABLE>
Socrates Technologies Corporation and Subsidiaries
Consolidated Statements Cash Flows
( Thousands of dollars)
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<CAPTION>
(Unaudited)
Three months ended
March 31,
-------------------------------
2000 1999
------------- ---------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net loss from operations $ (560) $ (1,368)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 199 213
Changes in operating assets and liabilities, net of
effects of acquisitions and dispositions:
Decrease (increase) in accounts receivable (508) 1,510
Decrease (increase) in inventory (22) 657
Decrease (increase) in advances and other receivables (8) -
Decrease (increase) in tax credits and income taxes receivable - (261)
Decrease (increase) in prepaid expenses (427) 150
Decrease (increase) in other assets (524) -
(Decrease) increase in accounts payable and accrued liabilities (960) 818
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Net Cash (Used in) Provided by Operating Activities (2,810) 1,604
Cash Flows from Investing Activities
Cash payment for purchase of subsidiary (51) -
Property, Plant and equipment purchases (9) (20)
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Net Cash Used in Investing Activities (60) (20)
Cash Flows from Financing Activities
Net (decrease) increase in line of credit 40 (3,591)
Repayment of note payable (134)
Proceeds from financing 3,559 -
Proceeds from shareholder loans - 21
Proceeds from conversion of options 517 -
Proceeds from issuance of common stock 931 -
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Net Cash (Used in) Provided by Financing Activities 4,913 (3,570)
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Net Increase (Decrease) in Cash 2,043 (1,986)
Cash at beginning of period 942 2,423
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Cash at end of period $ 2,985 $ 437
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Decerase (increase) in investments - (315)
Writedown of goodwill - 200
</TABLE>
The accompanying notes are an integral part of these statements.
6
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements
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March 31, 2000
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. The results of
continuing operations for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the financial statements and footnotes included in
the Company's audited financial statements for the year ended December 31, 1999.
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 an
information technology solutions company whose business is focused on systems
engineering and integration, software engineering and customized software
development, including turnkey system development and product development, and
maintenance services and customized information technology to corporate and
government customers.
Socrates Technologies Corporation ("Socrates" or "the Company"), was
incorporated in the State of Delaware on April 14, 1994 under the name "MVSI,
Inc.". Upon the merger of Socrates Technologies Corporation, a new-formed
subsidiary of the Company, MVSI, Inc., on December 12, 1998, the name of the
Company was changed from "MVSI, Inc." to "Socrates Technologies Corporation."
Unless the context otherwise requres, the "Company" or "Socrates" refers to
Socrates Technologies Corporation, its predecessor and its subsidiaries. Since
February 1, 2000, the Company has maintained its principal executive offices at
8500 Leesburg Pike, Vienna, Virginia 22183. Its telephone number is (703)
288-6500.
Revenue Recognition
Software
The Company licenses software under non-cancelable 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 software 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 software licenses are
generally recognized in the current period, while the portion of the fees
related to services is recognized as the services are performed. When the
Company enters into a license agreement with a customer requiring significant
customization of the software products, the Company 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.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition", SOP 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition" and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions", were issued in October 1997,
March 1998, and December 1998 and address software revenue recognition matters
primarily from a conceptual level and do not include specific implementation
guidance. These standards supersede SOP 91-1 and, in part, are effective for
transactions entered into for fiscal years beginning after December 15, 1997.
Based on its reading and interpretation of SOPs 97-2 and 98-4, the Company
believes it is currently in compliance with the standards. SOP 98-9 was
effective beginning January 1, 2000 and imposes significant new requirements
such as establishing vendor specific objective evidence. Socrates Technologies
Corporation has changed certain business policies to meet the requirements of
SOP 98-9.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") and amended it in March 2000. Socrates Technologies Corporation is
required to adopt the provisions of SAB 101 in its second fiscal quarter of
2000. The Company is currently reviewing the provisions of SAB 101 and has not
fully assessed the impact of its adoption. While SAB 101 does not supercede the
software industry specific revenue recognition guidance, which the Company
believes it is in compliance with, the SEC Staff has recently informally
indicated its views related to SAB 101 which may change current interpretations
of software revenue recognition requirements. Such SEC interpretations could
result in many software companies, including Socrates Technologies Corporation,
recording a cumulative effect of a change in accounting principal retroactive to
January 1, 2000.
Hardware and Related Products
Product sales are recognized upon shipment. Typical terms of sale do not provide
the customer with the right of return except for defective products, which are
covered either by the Company's warranty or by the warranty of the original
equipment manufacturer in instances where the Company acts as a distributor.
Revenue from services is generally recognized as the services are rendered using
contractual billing rates. Revenue billed in advance of customer acceptance is
deferred until such time as acceptance occurs. 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.
Accounts Receivable
Accounts receivable is stated at the unpaid balances, less allowance on
collectible accounts. Management periodically reviews its outstanding accounts
receivable to assess collectibility of balances based on past experience and
evaluation of current adverse situations which may affect collectibility of
receivables. As of March 31, 2000 and December 31, 1999, management has
established an allowance for doubtful accounts of approximately $1.4 million and
$409,000, respectively.
7
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements
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March 31, 2000
NOTE A-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 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.
Acquired Software Costs
The Company acquired certain computer software on March 1, 2000, in connection
with the acquisition of substantially all of the assets of Object Application
Systems, Inc. ("OAS"), which is more fully described below. The portion of the
purchase price allocated to software in that acquisition, $3.68 million, is
being amortized over a six year period.
The six-year amortization period was derived after management analysis with
respect to certain external factors, including, but not limited to, anticipated
future revenues, estimated economic life and changes in software and hardware
technologies. These capitalized software costs require an ongoing assessment of
recoverability and are subject to considerable judgments by the Company's
management.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired in business combinations accounted for as purchases. Goodwill is being
amortized on the straight-line method over ten years. Amortization expense
charged to operations for the three months ended March 31, 2000 and
1999, was approximately $136,000 and $123,000, respectively. Management
regularly reviews the carrying value of goodwill against anticipated cash flows
of each business in order to evaluate recoverability. It is possible that
estimates of anticipated future gross profits of the acquired businesses will be
reduced significantly in the near term. As a result, the carrying amount of
goodwill may be reduced materially in the near term.
Income Taxes
Deferred taxes are recognized, subject to valuation allowance, for temporary
differences in the timing of recognition of certain income and expenses for
financial statement and income tax purposes using the liability method.
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.
8
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements-Continued
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March 31, 2000
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
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.
Stock Options
As permitted by generally accepted accounting standards, the Company accounts
for the value of stock options granted in accordance with Accounting Principles
Board Opinion No.25 (APB 25), whereby if stock options' exercise prices are set
at fair market value or above at the measurement date, usually the date of
grant, no compensation expense is recognized at that date.
Using Estimates in Preparing Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
presentation.
NOTE B-FINANCING ARRANGEMENTS
During the fourth quarter of 1999, the Company entered into two short term
accounts receivable financing agreements with a finance company, which provided
for advances against accounts receivable in the amounts of $85,000 and $100,000,
respectively. Of these amounts, at December 31, 1999 the Company owed
approximately $129,000, which was repaid in January of 2000.
During the quarter ended March 31, 2000, the Company entered into a factoring
agreement which provides the Company with the ability to sell certain
receivables for which it receives 80% of the face value of such receivables, up
to a maximum amount of $1 million.
NOTE C-CONVERTIBLE DEBENTURES
On March 20, 2000, the Company issued a series of debentures, convertible under
certain circumstances into shares common stock of the Company, for an aggregate
price of $4.5 million. The debentures bear interest at the rate of 4%, which, at
the option of the holder, may be paid in shares of common stock. The shares of
stock underlying the debentures will be included in a registration statement
expected to be filed by the Company with the SEC in May 2000. Of the $4.5
million, the Company received approximately $3.2 million ($3.5 million less
approximately $370,000 commission and legal expenses) at the closing, with
another $1 million to be
9
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements-Continued
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March 31, 2000
NOTE C-CONVERTIBLE DEBENTURE-Continued
received after the registration of the underlying shares becomes effective. The
debentures generally are convertible either after 120 days or after the
registration becomes effective, whichever event occurs first. There are certain
penalties included in the agreements for failure to register the underlying
stock. The debentures are convertible into common stock at the lower of $3.38 or
the lowest closing price of the Company's common stock during the 30 trading
days immediately preceding conversion. Each debenture has attached to it a
warrant granting the holder the right to purchase .5 shares at $6.77 per share
and .1 shares at $12.00 per share. The Company has not yet obtained a valuation
of the detachable warrants. Once obtained, the proceeds from the issuance of the
debentures will be 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 acounted for as original issue discount to
be amortized over the term of the debentures. The fair value attributable to the
warrants will be allocated to equity. The effect of not recording this
allocation in the first quarter of 2000 is not material to the Company's
statement of operations. The Company expects to record related costs of
approximately $470,000 for commissions and legal costs related to the issuance
of the debentures, as debt origination costs, to be amortized over the lives of
the debentures.
NOTE D-ACQUISITION OF OBJECT APPLICATION SYSTEMS, INC.
Effective March 1, 2000, the Company acquired substantially all of the assets
and certain liabilities of Object Applications Systems, Inc. ("OAS") for total
consideration of approximately $4.7 million, payable in cash, note payable and
common stock of the Company valued at approximately $3.79 million. The Company
will record the transaction as an asset purchase, allocating the total purchase
price to the various assets purchased, with any excess of purchase price over
fair market vale of assets purchased to goodwill. The principal asset purchased
in the agreement is software, independently valued at $3.68 million. The
estimated purchase price allocation, is as follows
(unaudited):
Cash and note payable $ 420
Capital Stock 3,786
Liabilities assumed 487
Deferred revenue, maintenance contracts 37
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Total purchase price $4,730
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Allocation of purchase price
Accounts receivable $ 272
Loans and exchanges 354
Fixed assets, net 6
Security deposits 16
Internally developed software 3,680
Goodwill 402
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Total allocation of purchase price $4,730
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NOTE E-SEGMENT INFORMATION
The Company provides financial information for segment reporting purposes for
two lines of business representing its continuing operations during the three
months ended March 31, 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 March 31, 2000, the Company had no one customer that
accounted for 10 percent of the Company's total revenue. For the three months
ended March 31, 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 March 31, 2000 and 1999.
10
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements-Continued
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March 31, 2000
NOTE E-SEGMENT INFORMATION-Continued
Financial information relating to the Company's industry segments for continuing
operations for the three months ended March 31, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
Three months ended March 31, 2000
------------------------------------------------------------
Computer
System Sales,
Integration Software General
and Training Development Corporate Total
------------ ----------- --------- -----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $3,293 $1,560 $ 3 $ 4,856
Operating profit (loss) (38) (28) (472) (538)
Net income (loss) (47) (111) (402) (560)
Identifiable Assets 5,144 9,926 4,649 19,719
<CAPTION>
Three months ended March 31, 1999
------------------------------------------------------------
Computer
System Sales,
Integration Software General
and Training Development Corporate Total
------------ ----------- --------- -----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 5,920 $1,931 $ - $ 7,851
Operating profit (loss) (1,238) 136 (186) (1,288)
Net income (loss) (1,419) 107 (56) (1,368)
Identifiable Assets 11,170 4,526 2,277 17,973
</TABLE>
11
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Socrates Technologies Corporation and Subsidiaries
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Notes to Interim Consolidated Financial Statements-Continued
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March 31, 2000
NOTE F-LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to or a party to,
from time to time, certain legal proceedings and claims that have arisen and
have not been fully adjudicated. Unless disclosed herein or in previously, the
Company does not believe that these matters will have a material adverse affect
on the Company and its financial condition or results of operations.
The Company filed a Motion to Dismiss in the matter of Hirata Corporation and
Hirata Corporation USA v. Daniel Porush, Jordan Belfort, et al. (U.S.D.C., S.D.
Indiana, Case Number IP98-0855-C-D/F). The Motion to Dismiss has not been
scheduled for a hearing as of May 12, 2000.
The Company's subsidiary, Socrates Technologies Inc. (STI), settled in April
2000 the lawsuit styled Washington Sports & Entertainment Inc. v. Socrates
Technologies Inc. (D.C. Superior Court, 3/00). Under the settlement, the Company
paid $200,000 in past-due license fees to reinstate the license suite and
technical support agreements between Washington Sports & Entertainment, Inc. and
STI concerning the use and technical support of the MCI Center sports and
entertainment center in Washington, D.C., and agreed to pay the remaining
license fees in equal monthly installments.
The Company has not received a final decision from the Nasdaq Qualifications
Listing Panel ("QLP") on whether the Company has complied with all the
conditions listed in the QLP's February 7, 2000 decision for continued listing
of the Company's Stock on the Nasdaq National Market System. The Company has
received and timely responded to several inquiries and requests for information
from the QLP since February 7, 2000. The Company believes that it has complied
with the QLP decision as of May 12, 2000.
NOTE G-SUBSEQUENT EVENTS
The Company has received a letter from the Nasdaq Stock Market, Inc.'s
Qualification Listing Department questioning whether the Debenture Agreements
violate Nasdaq marketplace Rule 4460(i), which rule requires shareholder
approval of any transaction that causes the Company to issue shares of its
equity securities that equal or exceed 20% of the then outstanding and issued
shares of the Company's Common Stock. The Company may be required by the Nasdaq
Stock Market, Inc. to call a shareholders' meeting to vote on ratification of
the Debenture Agreements. As of May 12, 2000, a final determination on this
issue has not been received by the Company.
12
<PAGE>
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PART I. FINANCIAL INFORMATION
- -----------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis of the Company's historical
results of operations and of its liquidity and capital resources should be read
in conjunction with the Company's consolidated financial statements and
accompanying notes.
Moreover, this Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements
concerning the Company's business and operations. Such statements involve risks
and uncertainties that could cause actual results to differ due to a variety of
risk factors set forth herein and from time to time in the Company's filings
with the Securities and Exchange Commission and other public announcements.
Overview
The three months ended March 31, 2000 continued to be a period of
evolution and change for the Company. During this quarter the Company, through a
wholly owned subsidiary, Socrates Solutions Corporation ("SSC"), completed the
acquisition of substantially all of the assets of Object Application Systems,
Inc. ("OAS"), which is being operated as a division of SSC.
OAS develops and implements a family of ERP software systems for small
and mid size enterprises. The Company plans to convert these systems to web
based applications during the year 2000. The OA/System ERP software "vertical"
application products include OA/Manufacturing, OA/Distribution, and
OA/Converting. OA/System products are capable of supporting virtually every
aspect of manufacturing, importing, converting, and distribution. The
applications include customer sales order processing, purchasing, inventory
management, shipping, invoicing, production scheduling, production planning,
general ledger, accounts receivable, financing of receivables, accounts payable,
letter of credit processing, financial reporting and multi-currency. Additional
OA/System products include OA/EDI for Electronic Data Interchange (EDI)
transactions and OA/Data Collection for radio frequency (RF) warehouse
management. (See Liquidity and Capital Resources, below and Note D, Notes to
Consolidated Financial Statements.)
Results of Operations
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999
The Company reported sales from continuing operations of approximately
$4.9 million for the three-month period ended March 31, 2000, as compared to
$7.9 million for the same period in 1999. The decrease in sales of approximately
$3.0 million or 38% 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. For the current quarter,
Networkland reported revenues of approximately $3.3 million compared to Socrates
Technologies Incorporated revenue of approximately $5.9 million for the period
last year, while Technet reported revenue of approximately $1.4 million for the
current quarter compared to $1.9 million for the same period last year. Socrates
Solutions Corporation reported revenue of approximately $101,000 for the current
quarter, reflecting one month of revenue from the operations formerly associated
with OAS.
Gross Profit for the period decreased from $1.4 million to $1.1
million, reflecting the decrease in sales from period to period. Gross profit
did, however, increase as a percentage of sales to 21.9% from 17.3%. This
improvement is due to the concentration on higher margin opportunities in
software development and networking services.
Selling, general and administrative expenses decreased $690,000, or
33.3%, 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.
13
<PAGE>
Depreciation and amortization decreased by approximately $14,000.
As previously disclosed, the Company has completed its restructing.
There were no restructuring charges for the first quarter of 2000 compared to
$344,000 for the same period last year.
Investment income and expense decreased in the quarter ended March 31,
2000 compared to the comparable 1999 quarter by approximately $30,000, primarily
as a result of borrowings.
While the above analysis is prepared for consistency with prior
reports, the Company does not believe that the presentation is indicative of its
current operations. The Company bases this belief upon the acquisitions of
Networkland and OAS, as well as the restructuring concluded in the fourth
quarter of 1999. For the quarter ended March 31, 2000, the three operating
subsidiaries of the Company, Networkland, Technet and SSC were profitable from
operations on a combined basis. The table below segregates those operations.
<TABLE>
Quarter ended March 31, 2000
<CAPTION>
Networkland Technet SSC All Other Total
----------- ------- --- --------- -----------
<S> <C> <C> <C> <C> <C>
Sales $ 3,258 $1,459 $101 $ 38 $4,856
Gross profit on sales 590 430 26 18 1,136
Expenses 456 396 117 633 1,674
Earnings (loss) from operations $ 134 $ 34 $(91) $(615) $ (538)
</TABLE>
Liquidity and Capital Resources
As of March 31, 2000, the Company had working capital of approximately
$4.5 million including cash and cash equivalents of approximately $3.0 million.
Cash on hand and cash generated during the quarter was used principally to
reduce borrowings.
In February 2000, the Company entered in to a new agreement with a
financing company to provide up to $1 million of financing by factoring specific
accounts receivable. To date the Company has financed approximately $40,000
under this agreement.
In January and February 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 $931,000.
During the first quarter, holders of 316,600 options to purchase common
shares exercised their rights to puchase shares of the Company's common stock,
resulting in an increase of equity, cash and tangible assets of approximately
$517,000.
On March 20, 2000, the Company issued a series of debentures, convertible under
certain circumstances into shares common stock of the Company, for an aggregate
price of $4.5 million. The debentures bear interest at the rate of 4%, which, at
the option of the holder, may be paid in shares of common stock. The shares of
stock underlying the debentures will be included in a registration statement
intended to be filed by the Company with the SEC in May 2000. Of the $4.5
million, the Company received approximately $3.2 million ($3.5 million less
approximately $370,000 commission and legal expenses) at the closing, with
another $1 million to be received after the registration of the underlying
shares becomes effective. The debentures generally are convertible either after
120 days or after the registration becomes effective, whichever event occurs
first. There are certain penalties included in the agreements for failure to
register the underlying stock. The debentures are convertible into common stock
at the lower of $3.38 or the lowest closing price of the Company's common stock
during the 30 trading days immediately preceding conversion. Each debenture has
attached to it a warrant granting the holder the right to purchase .5 shares at
$6.77 per share and .1 shares at $12.00
14
<PAGE>
per share. The Company has not yet obtained a valuation of the detachable
warrants. Once obtained, the proceeds from the issuance of the debentures will
be 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 acounted for as original issue discount to be
amortized over the term of the debentures. The fair value attributable to the
warrants will be allocated to equity. The effect of not recording this
allocation in the first quarter of 2000 is not material to the Company's
statement of operations. The Company expects to record related costs of
approximately $470,000 for commissions and legal expenses related to the
issuance of the debentures, as debt origination costs, to be amortized over the
life of the debentures.
Management believes that the working capital and liquidity position of
the Company, together with funds available under the Company's debentures
outlined above, are adequate to meet the Company's working capital requirements
based upon its current level of operations. However, significant internal growth
or additional acquisitions could create a need for additional working capital.
The Company's ability to raise additional funds through secondary offerings of
equity or debt securities will be subject to conditions in capital markets.
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.
Recent Developments
The Company has received a letter from the Nasdaq Stock Market, Inc.'s
Qualification Listing Department questioning whether the Debenture Agreements
violate Nasdaq marketplace Rule 4460(i), which rule requires shareholder
approval of any transaction that causes the Company to issue shares of its
equity securities that equal or exceed 20% of the then outstanding and issued
shares of the Company's Common Stock. The Company may be required by the Nasdaq
Stock Market, Inc. to call a shareholders' meeting to vote on ratification of
the Debenture Agreements. As of May 12, 2000, a final determination on this
issue has not been received by the Company.
Item 4. The Company held its 1999 Annual Meeting of Shareholders on April 21,
2000. At the 1999 Annual Meeting of Shareholders, the following resolutions were
presented for shareholder approval: election of directors and ratification of
Grant Thornton, LLP, as independent auditors for fiscal years 1999 and 2000. The
number of shares entitled to vote on both resolutions was 20,825,370. Both
resolutions were approved by the following vote:
Matter: Election of Directors
VOTING
-----------------------------------------------------
Director
Nominee For Withheld Approval %
Andreas Keller 15,842,272 596,450 76%
Timothy Keenan 17,879,483 15,200 86%
Mariellen Lowry 17,878,533 15,950 86%
Richard Prins 17,894,483 200 86%
Paul Richter 17,869,483 30,300 86%
Fred Sajedi 17,794,483 15,200 86%
Matter: Ratification of Independent Auditors
VOTING
-----------------------------------------------------
For Against Abstain
17,615,578 116,050 162,095
The Company will hold its 2000 Annual Meeting of Shareholders in New York City
in late October 2000.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company is subject to or a
party to, from time to time, certain legal proceedings and claims that have
arisen and have not been fully adjudicated. Unless disclosed herein or in
previous filings with the Commission, the Company does not believe that these
matters will have a material adverse affect on the Company and its financial
condition or results of operations.
The Company filed a Motion to Dismiss in the matter of Hirata
Corporation and Hirata Corporation USA v. Daniel Porush, Jordan Belfort, et al.
(U.S.D.C., S.D. Indiana, Case Number IP98-0855-C-D/F). The Motion to Dismiss has
not been scheduled for a hearing as of May 12, 2000.
The Company's subsidiary, Socrates Technologies Inc. (STI), settled in
April 2000 the lawsuit styled Washington Sports & Entertainment Inc. v. Socrates
Technologies Inc. (D.C. Superior Court, 3/00). Under the settlement, the Company
paid $200,000 in past-due license fees to reinstate the license suite and
technical support agreements between Washington Sports & Entertainment, Inc. and
STI concerning the use and technical support of the MCI Center sports and
entertainment center in Washington, D.C., and agreed to pay the remaining
license fees in equal monthly installments.
The Company has not received a final decision from the Nasdaq
Qualifications Listing Panel ("QLP") on whether the Company has complied with
all the conditions listed in the QLP's February 7, 2000 decision for continued
listing of the Company's Common Stock on the Nasdaq National Market System. The
Company has received and timely responded to several inquiries and requests for
information from the QLP since February 7, 2000. The Company believes that it
has complied with the QLP decision as of May 12, 2000.
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, filed February 2, 2000.
Form 8-K, filed March 15, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOCRATES TECHNOLOGIES CORPORATION
May 15, 2000
By: Andreas A. Keller
--------------------
Andreas A. Keller
VP Finance & Administration
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000937603
<NAME> SOCRATES TECHNOLOGIES CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1.000
<CASH> 2,985
<SECURITIES> 0
<RECEIVABLES> 5,950
<ALLOWANCES> (1,400)
<INVENTORY> 76
<CURRENT-ASSETS> 8,467
<PP&E> 1,593
<DEPRECIATION> (1,003)
<TOTAL-ASSETS> 19,719
<CURRENT-LIABILITIES> 4,032
<BONDS> 3,559
0
0
<COMMON> 238
<OTHER-SE> 11,890
<TOTAL-LIABILITY-AND-EQUITY> 19,719
<SALES> 4,586
<TOTAL-REVENUES> 4,586
<CGS> 3,796
<TOTAL-COSTS> 1,601
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> (560)
<INCOME-TAX> 0
<INCOME-CONTINUING> (560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (560)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
