<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:
June 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 22183
(Address of principal executive offices) (Zip Code)
(703) 288 6500
(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 August 12, 2000, shares of the Registrant's Common Stock, $.01
par value, were 25,805,569 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 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
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Contents
================================================================================
Interim Consolidated Financial Statements
Interim Consolidated Balance Sheets 4
Interim Consolidated Statements of Operations 5
Interim Consolidated Statements of Cash Flows 7
Notes to Interim Consolidated Financial Statements 8
3
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
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Consolidated balance sheets - unaudited
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(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
=====================================================================================================
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 541 $ 942
Accounts receivable, net of allowance
for doubtful accounts 4,213 3,769
Inventory 153 54
Advances and other receivables 207 211
Employee Loans and Advances 728 -
Prepaid expenses 780 194
------------- -------------
Total current assets 6,622 5,170
Property and equipment, net 326 636
Capitalized software costs, net 3,710 -
Goodwill, net 915 4,542
Deferred tax asset, net of valuation allowance - 1,200
Other assets 202 72
------------- -------------
Total assets $ 11,775 $ 11,620
============= =============
Liabilities and stockholders' equity
Current liabilities
Line of credit and financing arrangement $ 98 $ -
Notes Payable 275 134
Accounts payable and accrued liabilities 2,895 4,036
Convertible Debenture 3,559 -
------------- -------------
Total current liabilities 6,827 4,170
Stockholders' equity
Common stock, $.01 par value,
50,000,000 shares authorized, 24,398,612 and 21,396,196 shares
issued; 21,397,196 and 18,263,228 shares outstanding at
June 30, 2000 and December 31, 1999, respectively 244 212
Stock subscription receivable (150) (150)
Additional paid-in capital 57,576 51,924
Treasury stock, at cost, 3,001,416 shares (17,554) (17,554)
Accumulated deficit (35,168) (26,982)
------------- -------------
Total stockholders' equity 4,948 7,450
------------- -------------
Total liabilities and stockholders' equity $ 11,775 $ 11,620
============= =============
The accompanying notes are an integral part of these statements.
4
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
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Consolidated Statements of Operations - unaudited
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
=========================================================================================
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Products $ 2,987 $ 3,987
Services 1,506 1,962
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TOTAL SALES 4,493 5,949
Products 2,412 3,816
Services 1,231 1,133
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TOTAL COST OF SALES 3,643 4,949
------------- -------------
GROSS PROFIT 850 1,000
EXPENSES
Selling, general and administrative 2,720 2,616
Depreciation and amortization 597 228
Goodwill Writedown 3,769
Restructuring Charges - 1,204
------------- -------------
7,086 4,048
------------- -------------
LOSS FROM OPERATIONS (6,236) (3,048)
INTEREST AND FINANCING INCOME (EXPENSE) (214) (43)
OTHER INCOME (EXPENSE) 26 10
------------- -------------
LOSS BEFORE INCOME TAXES (6,424) (3,081)
INCOME TAX PROVISION
Current - -
Deferred 1,204 -
------------- -------------
NET LOSS $ (7,628) $ (3,081)
============= =============
LOSS PER SHARE
Net Loss, basic and diluted $ (0.37) $ (0.21)
Weighted average shares outstanding, basic and diluted 20,842 14,739
The accompanying notes are an integral part of these statements.
5
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<TABLE>
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
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Consolidated Statements of Operations - unaudited
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
=========================================================================================
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Products $ 6,249 $ 9,907
Services 3,101 3,893
------------- -------------
TOTAL SALES 9,350 13,800
Products 5,081 9,187
Services 2,355 2,253
------------- -------------
TOTAL COST OF SALES 7,436 11,440
------------- -------------
GROSS PROFIT 1,914 2,360
EXPENSES
Selling, general and administrative 4,123 4,707
Depreciation and amortization 796 440
Goodwill Writedown 3,769
Restructuring Charges - 1,548
------------- -------------
8,688 6,695
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LOSS FROM OPERATIONS (6,774) (4,335)
INTEREST AND FINANCING INCOME (EXPENSE) (262) (129)
OTHER INCOME (EXPENSE) 67 15
------------- -------------
LOSS BEFORE INCOME TAXES (6,969) (4,449)
INCOME TAX PROVISION
Current 14 -
Deferred 1,204 -
------------- -------------
NET LOSS $ (8,187) $ (4,449)
============= =============
LOSS PER SHARE
Net Loss), basic and diluted $ (0.41) $ (0.30)
Weighted average shares outstanding, basic and diluted 20,154 14,739
The accompanying notes are an integral part of these statements.
6
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
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Consolidated Statements Cash Flows - unaudited
-------------------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
=============================================================================================================
<CAPTION>
SIX MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30,
2000 1999
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss from operations $ (8,187) $ (4,449)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Deferred Income Taxes 1,200 -
Depreciation and amortization 796 440
Writedown of goodwill 3,769 -
Non-cash (gains) losses from discontinued operations - 170
Loss on lease abandonment 59
Bad debt expense 300 -
Changes in operating assets and liabilities, net of Effects of
acquisitions:
Decrease (increase) in Employee Loans and Advances (1,027) -
Decrease (increase) in accounts receivable (444) 5,254
Decrease (increase) in inventory (99) 914
Decrease (increase) in tax credits and income taxes receivable - (211)
Decrease (increase) in prepaid expenses (586) 479
Decrease (increase) in other assets (130) 20
Decrease (increase) in advance deposits 4 (90)
(Decrease) increase in accounts payable and accrued liabilities (1,081) -
------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (5,426) 2,527
CASH FLOWS FROM INVESTING ACTIVITIES
Property, Plant and equipment purchases (310) (5)
Capitalized Software Costs (420) -
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (730) (5)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Note Payable 141 -
Proceeds from Issuance of Convertible Debentures 3,559 -
Net (decrease) increase in borrowings from financing arrangement 98 (3,869)
Proceeds from conversion of options 517 -
Proceeds from issuance of common stock 1,441 -
------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 5,756 (3,869)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 16
------------- -------------
NET INCREASE (DECREASE) IN CASH (401) (1,331)
CASH AT BEGINNING OF YEAR 942 2,115
------------- -------------
CASH AT END OF PERIOD $ 541 $ 784
============= =============
The accompanying notes are an integral part of these statements.
7
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
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Notes to Interim Consolidated Financial Statements
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June 30, 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. 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 six months ended June 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
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
development, marketing and systems engineering and integration of localized and
internet based e-business software solutions for small and medium sized
enterprises. Socrates' approach, called Flexible Service Providing (FSP), is to
provide its customers with flexible solutions and methods of delivering
solutions to quickly and easily gain access, transact business and utilize
software and solutions in the same manner as larger enterprises but at lower
cost.
Socrates was incorporated in the State of Delaware on April 12, 19994 under the
name "MVSI, Inc.". MVSI, Inc. changed its name to "Socrates Technologies
Corporation" by MVSI, Inc. merging with a subsidiary for the sole purpose of
effecting the name change. Upon the merger of Socrates with MVSI, Inc., a
Delaware Corporation incorporated on April 12, 1994, on November 30, 1998, the
name of MVSI, Inc., the surviving corporation, was changed to Socrates
Technologies Corporation. Unless the context otherwise requires, the "Company"
or "Socrates" refers to Socrates Technologies Corporation, its predecessor and
its subsidiaries. The Company maintains its executive offices in Virginia and
has facilities in Virginia, New Jersey and New York.
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.
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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June 30, 2000
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
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 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 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. Payments received in advance of when revenue is
recognized are recorded as deferred revenue.
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 June 30, 2000 and December 31, 1999, management has
established an allowance for doubtful accounts of approximately $1.6 million 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 on 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 below. The cost allocated to software in that acquisition, $3.68
million, is being amortized over a six year period.
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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June 30, 2000
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
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 six months ended June 30, 2000 and 1999, was
approximately $283,486 and $217,140, respectively. In addition, during the
three-month period ended June 30, 2000, management recognized a write down of
approximately $3.8 million to reflect the impairment of goodwill associated with
the acquisitions of Technet Computer Services (Technet) and Networkland, Inc.
(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. 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.
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 in the six-month period ended June 30,
2000, management determined that a writedown of the previously recorded net
deferred tax asset of $1.2 million was necessary.
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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June 30, 2000
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Earnings Per Share
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share," effective for
periods ending after December 15, 1997. This Statement establishes standards for
computing and presenting earnings per share (EPS). It requires dual presentation
of basic and diluted EPS on the face of the statement of operations for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity.
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 June 30, 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.
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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June 30, 2000
================================================================================
NOTE C - CONVERTIBLE DEBENTURE
The Company entered into a Securities Purchase Agreement and Registration Rights
Agreement on March 20, 2000 to issue 4% Debentures due March 20, 2005 and
underlying Warrants to certain foreign investors who are "Accredited Investors"
under Rule 501 of Regulation D under the Securities Act of 1933, as amended.
These agreements and the terms of the Debentures and Warrants impose certain
restrictions on the ability of Socrates to dilute current shareholders through
the issuance of additional shares of capital stock and on consummating mergers
and acquisitions with third parties without the consent of the Debenture
holders. Further, the conversion of the 4% Debentures due March 20, 2005, which
may occur as early as July 2000, will cause substantial dilution to existing
shareholders. Socrates expects to raise approximately $3.175 million net of
expenses, through the private placement of the Debentures,which money will be
used for working capital, retirement of certain debts of the Company and its
subsidiaries and acquisition costs. The Securities Purchase Agreement,
Registration Rights Agreement, Form of Debenture and Form of Warrant shall be
referred to collectively as the "Financing Agreements".
The Company is attempting to raise sufficient funds through new, alternative
financing sources to redeem the 4% Debentures due March 20, 2005. There can be
no assurance that Socrates will be able to raise sufficient funds to redeem the
4% Debentures due March 20, 2005 issued under the Financing Agreements. The
failure to redeem the Debentures may result in the conversion of these
Securities and the exercise of the warrants, which conversion and exercise may
substantially dilute existing shareholders.
The Company and the representatives of the investors for the 4% Debentures due
March 20, 2005, have an agreement for a standstill in respect of Socrates'
obligations under the Financing Agreements in order to enhance its efforts to
locate alternative financing. There can be no assurance that Socrates will be
able to locate alternative financing to redeem the 4% Debentures due March 20,
2005. Further, under the standstill agreement with the investors'
representative, the Company remains obligated to proceed with registering the
Shares for issuance upon the conversion of the 4% Debentures due March 20, 2005
and the exercise of the underlying Warrants.
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
June 30, 2000.
The Company and the representative of the investors are also negotiating a
restructuring and rescission of the terms of the 4% Debentures due March 20,
2005. There can be no assurance that the investors will agree to restructure or
rescind the Financing Agreements.
The amount due under the convertible debenture as of June 30, 2000 has been
classified as a current liability pending the outcome of the above negotiations
and attempts to refinance this obligation.
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. 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 no less than $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
----------
Total purchase price $ 4,730
==========
12
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
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Notes to Interim Consolidated Financial Statements-Continued
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June 30, 2000
================================================================================
NOTE D - ACQUISITION OF OBJECT APPLICATION SYSTEMS, INC.-Continued
Allocation of purchase price
Accounts receivable $ 254
Loans and exchanges 354
Security deposits 16
Internally developed software 3,680
Goodwill 426
----------
Total allocation of purchase price $ 4,730
==========
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 June 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 June 30, 2000, the Company had no one customer that
accounted for 10 percent of the Company's total revenue. For the three months
ended June 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 June 30, 2000 and 1999.
Financial information relating to the Company's industry segments for continuing
operations for the three months ended June 30, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
Three months ended June 30, 2000
-------------------------------------------------------------------------------------
Computer
System Sales,
Integration Software General
and Training Development Corporate Total
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 3,050 $ 1,443 $ - $ 4,493
Operating profit (loss) (1,342) (3,144) (1,750) (6,236)
Net income (loss) (1,323) (3,357) (7,628) (7,627)
Identifiable Assets 1,290 6,953 3,475 11,718
Three months ended June 30, 1999
-------------------------------------------------------------------------------------
Computer
System Sales,
Integration Software General
and Training Development Corporate Total
Sales to unaffiliated customers $ 3,987 $ 1,962 $ - $ 5,949
Operating profit (loss) (2,725) 200 (522) (3,047)
Net income (loss) (2,853) 166 (395) (3,082)
Identifiable Assets 6,431 4,977 2,582 13,990
</TABLE>
The Company provides financial information for segment reporting purposes for
two lines of business representing its continuing operations during the six
months ended June 30, 2000 and 1999, respectively. Continuing operations are
represented by the Company's Computer Systems Sales, Integration and Training
business and its Software Development business.
13
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SOCRATES TECHNOLOGIES CORPORATION AND SUBSIDIARIES
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Notes to Interim Consolidated Financial Statements-Continued
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June 30, 2000
================================================================================
NOTE E - SEGMENT INFORMATION-Continued
For the six months ended June 30, 2000, the Company had no one customer that
accounted for 10 percent of the Company's total revenue. For the six months
ended June 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 six months ended June 30, 2000 and 1999.
Financial information relating to the Company's industry segments for continuing
operations for the Six months ended June 30, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
Six months ended June 30, 2000
-------------------------------------------------------------------------------------
Computer
System Sales,
Integration Software General
and Training Development Corporate Total
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 6,347 $ 3,003 $ - $ 9,350
Operating profit (loss) (1,039) (3,351) (2,384) (6,774)
Net Loss (2,013) (3,618) (2,556) (8,187)
Identifiable Assets 1,290 6,953 3,475 11,718
Six months ended June 30, 1999
-------------------------------------------------------------------------------------
Computer
System Sales,
Integration Software General
and Training Development Corporate Total
Sales to unaffiliated customers $ 9,249 $ 4,551 $ - $13,800
Operating profit (loss) (3,877) 285 (743) (4,335)
Net income (loss) (4,119) 240 (570) (4,449)
Identifiable Assets 6,431 4,977 2,582 13,990
</TABLE>
NOTE F - LOANS AND ADVANCES
The Company has advanced approximately $673,000 to certain officers and
employees on a non-interest bearing basis which are due on demand. Certain of
the advances are collateralized by the officers' equity in the Company.
NOTE G - SUBSEQUENT EVENTS
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 Company
continues to occupy the remaining 12,759 square feet of the Largo facility,
which space will be used for computer training until October 31, 2000. Income
from the sublease is expected to offset the Company's rental expense, and
therefore, no loss has been accrued for this facility. The Company will attempt
to sublease the remaining 12,759 square feet at the Largo facility after the
completion of current computer training classes on October 31, 2000.
The Company moved its principal executive offices in order to consolidate
operations in Vienna, Virginia into one location. The Company moved its
principal executive offices from 8500 Leesburg Pike, Suite 406, Vienna, Virginia
22183 to 8133 Leesburg Pike, Suite 770, Vienna, Virginia 22182 on August 1,
2000. The Company is seeking to sublease the 5,101 square feet at 8500 Leesburg
Pike, Suite 406, Vienna, Virginia 22183. The Company has accrued a loss of
approximately $59,000 on this lease abandonment.
14
<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 three months ended June 30, 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"), continued to
focus on the development of its e-business suite of product offerings. The
Company also took steps to wind down certain aspects of its business by closing
its Largo, Maryland training facility, consolidating office space in Virginia
and reducing both staff and management positions. AS of July 7, 2000, the senior
management of the Company has been reduced to three persons: Mitchell Jerine,
Chairman of the Board and Chief Operating Officer; Timothy Keenan, Chief
Executive Officer and President; and Paul Richter, Vice President of Human
Resources, General Counsel and Secretary. The duties of Treasurer and Vice
President of Finance and Administration are being performed by the
aforementioned three executives. The Company believes that the three senior
officers are able to efficiently perform the essential duties of senior
management.
SSC develops, resells, and implements a family of e-business software
systems for small and mid size enterprises. These services include internet
connectivity, e-mail hosting, website development/hosting, e-commerce, e-CRM and
ERP software systems. The Company plans to convert its ERP system to web based
applications by mid-2001. The 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. This development effort was begun in the second
quarter of 2000 and significant time and effort was spent in development,
strategic initiatives and alliances and development of sales and marketing plans
for the e-business suite of solutions. (See Liquidity and Capital Resources,
below and Note D, Notes to Consolidated Financial Statements.)
The Company's decision to focus on the SSC development and its
operation of the Networkland Inc. ("Networkland") and the development of Technet
Computer Services, Inc. ("Technet") resulted in the closing of the unprofitable
Largo, Maryland training facility and consolidation of staff and resources in
Virginia. The Company is also considering other overhead reduction measures,
which measures the Company may or may not implement (depending on the future
financial performance of the Company). As a result of these decisions additional
non-cash write-offs of equipment, receivables, tax assets and goodwill were
taken in the second quarter of 2000. (See Computer Training Center to close
October 31, 2000 and Company's Principal Executive Offices below.)
15
<PAGE>
Results of Operations
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
The Company reported sales from continuing operations of approximately
$4.5 million for the three-month period ended June 30, 2000, as compared to $5.9
million for the same period in 1999. The decrease in sales of approximately $1.4
million or 24% 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 $3.0
million compared to Socrates Technologies Incorporated revenue of approximately
$5.9 million for the period last year, while Technet reported revenue of
approximately $1.3 million for the current quarter which is approximately the
same reported in the period last year. Socrates Solutions Corporation reported
revenue of approximately $156,000 for the current quarter.
Gross Profit for the period decreased from $1.1 million to $850,000 and
Gross profit increased as a percentage of sales to 18.9% from 16.8%. This
improvement is due to the concentration on higher margin opportunities in
software development and networking services.
Selling, general and administrative expenses increased $104,000, or
4.0%, compared to the same period in 1999, reflecting a charge associated with
consolidating management staff to other offices, and additional bad debts
expense to allow for uncollectible accounts receivable.
Depreciation and amortization increased by approximately $369,000 due
to the acceleration of depreciation and amortization of certain assets relating
to the closed facilities.
In addition, during the three-month period ended June 30, 2000,
management recognized a write down of approximately $3.8 million to reflect the
impairment of goodwill associated with the acquisitions of Technet Computer
Services (Technet) and Networkland, Inc. (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.
Investment expense increased in the quarter ended June 30, 2000
compared to the comparable 1999 quarter by approximately $171,000, primarily as
a result of borrowings.
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 in
the six-month period ended June 30, 2000, management determined that a writedown
of the previously recorded net deferred tax asset of $1.2 million was necessary.
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. The table below segregates operations of the Company's three
operating subsidiaries.
16
<PAGE>
<TABLE>
<CAPTION>
Quarter ended June 30, 2000
-----------------------------------------------------------------------------------------------------
Networkland Technet SSC All Other Total
----------- ----------- ------ --------- -----------
<S> <C> <C> <C> <C> <C>
Sales $ 2,929 $ 1,286 $ 156 $ 122 $ 4,493
Gross profit on sales 517 79 155 99 850
Expenses* 403 230 933 1,749 3,315
Earnings (loss) from operations $ 114 $ (150) $(778) $ (1,650) $ (2,464)
</TABLE>
* The above expenses do not include $3.8 million in write-offs of goodwill.
Six months ended June 30, 2000 Compared to Six months ended June 30, 1999
The Company reported sales from continuing operations of approximately
$9.4 million for the six-month period ended June 30, 2000, as compared to $13.8
million for the same period in 1999. The decrease in sales of approximately $4.4
million or 33% 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 six months, Networkland reported revenues of approximately $6.2 million
compared to Socrates Technologies Incorporated revenue of approximately $9.2
million for the period last year, while Technet reported revenue of
approximately $2.7 million for the current quarter which is approximately the
same reported in the period last year. Socrates Solutions Corporation reported
revenue of approximately $257,000 for the six months.
Networkland uses internal cash and 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 of
equipment, hardware and software for customers. The lack of such additional
financing hinders the ability of Networkland to expand its business.
Gross Profit for the period decreased from $2.4 million to $1.9 million
and Gross profit increased as a percentage of sales to 21% from 17%. This
improvement is due to the concentration on higher margin opportunities in
software development and networking services.
Selling, general and administrative expenses decreased $584,000, or
12%, 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.
Depreciation and amortization increased by approximately $356,000 due
to the acceleration of depreciation and amortization of certain assets relating
to the closed facilities.
In addition, during the three-month period ended June 30, 2000,
management recognized a write down of approximately $3.8 million to reflect the
impairment of goodwill associated with the acquisitions of Technet Computer
Services (Technet) and Networkland, Inc. (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.
17
<PAGE>
Investment expense increased in the six months ended June 30, 2000
compared to the comparable 1999 six months by approximately $133,000, 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. The table below segregates operations of the Company's three
operating subsidiaries.
<TABLE>
<CAPTION>
Six Months ended June 30, 2000
-----------------------------------------------------------------------------------------------------
Networkland Technet SSC All Other Total
----------- ----------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
Sales $ 6,187 $ 2,745 $ 257 $ 161 $ 9,350
Gross profit on sales 1,106 509 182 117 1,914
Expenses* 859 627 1,050 2,382 4,918
Earnings (loss) from operations $ 247 $ (51) $ (868) $ (2,266) $ (2,938)
</TABLE>
* The above expenses does not include $3.8 million in write-offs of goodwill.
Capital Resources, Liquidity and Backlog
As of June 30, 2000, the Company had working capital of approximately
$3.4 million including cash and cash equivalents of approximately $.55 million
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 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 $100,000
under this agreement. This accounts receivable financing was terminated in July,
2000. The Company is currently seeking a new source of accounts receivable
financing to purchase equipment or hardware from time to time for its customers.
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 purchase 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 sold 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 were included in a registration
statement filed by the Company with the SEC on June 29, 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 per share. The Company expects to record
related expenses of approximately $470,000 for commissions and legal expenses
related to the sale of the debentures.
18
<PAGE>
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.
Computer Training Center to close October 31, 2000
The Company decided on July 6, 2000 to stop and dissolve its computer
training business due to poor financial performance and the cost of complying
with new licensing laws in the State of Maryland for computer training
companies. The Company will continue to conduct computer training courses at
Largo through October 2000 in order to satisfy its current contract with the job
training service of Prince Georges' County, Maryland. After the completion of
the scheduled computer training classes in October 2000, the Company will
attempt to sublease the remaining 12,759 square feet that it occupies at the
Largo, Maryland facility. {need to mention if sublease is likely here} The
Company laid off the computer training operation's sales and administrative
staff in July 2000. The Company uses independent contractors as instructors and
has no obligation to them after October 2000. The Company believes that the
closing of the computer training operation will reduce operating expenses by at
least $30,000 per quarter.
Sublease of Largo Facilities
The Company is seeking to reduce its operating expenses by
consolidating its operations into as few office spaces as possible and
subleasing unused or vacated office space.
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
Company continues to occupy the remaining 12,759 square feet of the Largo
facility, which space will be used for computer training until October 31, 2000.
The Company will attempt to sublease the remaining 12,759 square feet at the
Largo facility after the completion of current computer training classes on
October 31, 2000. Since October 1, 1999, the Largo facility has been used solely
for computer training classes and as a storage space for Company equipment and
furniture. 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.
The Company also leased in July 2000 approximately 3,000 square feet of
the 7,500 square feet at its 8133 Leesburg Pike, 7th Floor, Vienna, Virginia
22182. The remaining space is used by Technet Computer Services, Inc., a wholly
owned subsidiary of the Company, and for the Company's principal executive
offices.
Company's Principal Executive Offices
The Company moved its principal executive offices from 8500 Leesburg
Pike, Suite 406, Vienna, Virginia 22183 to 8133 Leesburg Pike, Suite 770,
Vienna, Virginia 22182 on August 1, 2000. The Company moved its principal
executive offices in order to consolidate operations in Vienna, Virginia into
one location. The Company is seeking to sublease the 5,101 square feet at 8500
Leesburg Pike, Suite 406, Vienna, Virginia 22183.
Litigation
The Company's settled with one defendant for cash and the execution of
a release in its lawsuit against one of the defendants in August 2000 in
SOCRATES TECHNOLOGIES INC. V. NATIONAL PUBLIC RADIO, ET AL. (D.C. Superior
Court). The Company currently intends to go to trial against the other two
defendants. A trial date has not been set in this case.
19
<PAGE>
The Company filed motion to dismiss the complaint in HIRATA CORPORATION
AND HIRATA USA CORPORATION V. SOCRATES TECHNOLOGIES CORPORATION, ET AL. (U.S.
District Court, Indiana). The plaintiffs have responded with briefs in
opposition to the motion to dismiss. The Company does not expect to receive a
decision on its motion to dismiss until September 2000 or October 2000.
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 results of
operations.
Delisting of Company's Common Stock
The Nasdaq Stock Market, Inc. delisted the Company's Common Stock,
$0.01 par value, from the Nasdaq National Market System (NMS) at the start of
trading on June 30, 2000. The Nasdaq cited the Company's failure to comply with
Nasdaq Marketplace Rule 4460(i) in connection with the financing under the March
2000 agreements to issue 4% Debentures due March 20, 2005 to certain investors
in a private placement as the reason for the delisting. The Company has appealed
the delisting of its Common Stock to The Nasdaq Listing Qualifications Review
Council. The Company expects a decision on its appeal in September 2000.
The Company was notified of the delisting after the close of the stock
markets on June 29, 2000. The Company was negotiating a restructuring of the
terms and conditions of the 4% Debentures due March 20, 2005 when the Common
Stock was delisted. The Company is optimistic about its prospects for
negotiating a restructuring of the terms and conditions of the 4% Debentures due
March 20, 2005 in August 2000 but no assurance can be given that it will be
successful.
Since being delisted on June 30, 2000, the Company's Common Stock has
traded on the "pink sheets" of the Over the Counter market and, during the last
week of July 2000 started to trade on the Over the Counter Bulletin Board
(Symbol: SOCT.OB).
Besides the appeal of the delisting decision, the Company is
considering a number of possible actions to restore the Company's Common Stock
to a more liquid market. The Company may be unable to list its Common Stock with
a more liquid market.
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.
20
<PAGE>
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.
--------------------------------------------------------------------------------
PART II. OTHER INFORMATION
--------------------------------------------------------------------------------
[Richter please update]
ITEM 1. LEGAL PROCEEDINGS
Legal proceedings is discussed above in "Litigation" above.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 purchase shares of the Company's common stock,
resulting in an increase of equity, cash and tangible assets of approximately
$517,000.
The Company offered warrants to purchase shares of its Common Stock,
$0.01 par value, in a private placement to a limited number of accredited
investors (as defined in Rule 501(a). The Warrants granted piggyback
registration rights to the underlying shares of Common Stock. The Warrants were
sold at $0.50 per Warrant and entitled the holder to purchase a minimum of
20,000 shares of Common Stock at a 25% discount from the closing market price of
the Common Stock on the date of exercise of the Warrant. For the quarter ending
June 30, 2000, the Company issued Warrants to purchase 253,164 shares of Common
Stock to one accredited investor at a per share purchase price of 39 cents per
share. This private placement will remain open until September 30, 2000. The
Company received $100,000 in aggregate offering proceeds from the exercise of
the Warrant. The total proceeds of the above financings was used by the Company
to make the following payments:
Aggregate Offering Proceeds: $1,896,000
Salaries at SSC and Accounts Payable (223,000)
Payment of Socrates Technologies
Inc. Accounts Payable (265,000)
Commission to Private Placement Agent (20,800)
Working Capital Requirements (1,387,200)
Total Expenditures: ($1,896,000)
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.
21
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As described above in Note C - "Convertible Debentures" to the
financial statements, the Company entered into agreements to issue 4% Debentures
due March 20, 2005. While the Company is negotiating a restructuring of the
terms of the 4% Debentures due March 20, 2005, the Company believes that an
aggregate amount of accrued interest of approximately $36,000 for June, July and
August 2000 on the 4% Debentures due March 20, 2005, will be due and payable by
the Company to the investors in August or September 2000 as a condition to
restructuring the terms. While the Company and the investors' representative
were negotiating to restructure the terms of the 4% Debentures due March 20,
2005, it is the Company's understanding that these debentures and the underlying
warrants were held in escrow by legal counsel to the investors' representative
and these debentures were not released to the investors by legal counsel to the
investors' representatives until August 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 Annual Meeting of Shareholders on April 21,
2000. The results of that meeting were reported in Part II of the Form 10-Q for
the quarter ended March 30, 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 May 24, 2000
Form 8-K, filed May 25, 2000
Form 8-K, filed June 26, 2000
Form 8-K, filed July 5, 2000
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOCRATES TECHNOLOGIES CORPORATION
August 15, 2000
By: /S/ Timothy J. Keenan
-------------------------------
Timothy J. Keenan
Chief Executive Officer
23
