UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly year ended: September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from: ____________ to ____________
Commission File Number: 0-31813
ONCOURSE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 91-1922441
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3106 South 166th Street
New Berlin, WI 53151
(Address of principal executive offices)
Issuer's telephone number: (262) 860-0565
Issuer's facsimile number: (262) 860-0561
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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 the past 90 days. [ X ] Yes [ ] No
Number of shares outstanding of each of the issuer's class of common equity, as
of October 31, 2001: 18,159,661
Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [ X ]
ONCOURSE TECHNOLOGIES, INC.
FORM 10-QSB
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
OnCourse Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
As of September 30, 2001 (Unaudited) and December 31, 2000 (Audited)
September 30, December 31,
Assets 2001 2000
------ ------------- -------------
Current Assets:
Cash $ 107,417 $ 200,411
Accounts Receivable, Less Allowance for Doubtful
Accounts of $47,881 and $24,889, Respectively 1,206,358 1,105,908
Prepaids and Other Assets 353,178 306,939
Deferred Income Tax Asset 468,394 389,670
----------- -----------
Total Current Assets 2,135,347 2,002,928
Note Receivable from Shareholder 47,782 45,041
Capitalized Software, Less Accumulated Amortization
of $2,254,602 and $1,422,334, Respectively 5,020,977 4,873,769
Property and Equipment, at Cost:
Computer Equipment and Purchased Software 477,553 377,217
Furniture, Fixtures and Vehicles 132,960 151,471
----------- -----------
Total Property and Equipment 610,513 528,688
Less- Accumulated Depreciation (278,630) (180,126)
----------- -----------
Net Property and Equipment 331,883 348,562
Goodwill, Less Accumulated Amortization of
$1,867,836 and $976,606, Respectively 6,198,520 7,256,424
Assembled Workforce, Less Accumulated Amortization
of $52,381 and $28,810, Respectively 167,619 191,190
Trade Names, Less Accumulated Amortization of
$61,111 and $33,611, Respectively 488,889 516,389
Distribution Network, Less Accumulated Amortization
of $142,857 and $78,572, Respectively 457,143 521,428
Other Assets 178,920 178,291
----------- -----------
Total Assets $15,027,080 $15,934,022
----------- -----------
----------- -----------
The accompanying consolidated notes to financial statements are an
integral part of these consolidated balance sheets.
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of September 30, 2001 (Unaudited) and December 31, 2000 (Audited)
September 30, December 31,
Liabilities and Shareholders' Equity 2001 2000
------------------------------------ ------------- ------------
Current Liabilities:
Current Portion of Long-Term Debt $ 213,732 $ 52,318
Current Portion of Capital Leases 8,673 13,060
Accounts Payable 1,008,012 823,754
Accrued Income Taxes - 14,833
Accrued Commissions 91,442 84,210
Accrued Wages and Other Liabilities 194,522 207,347
Notes Payable to Shareholders and Employees 136,652 154,587
Deferred Revenue 1,630,762 1,623,982
----------- -----------
Total Current Liabilities 3,283,795 2,974,091
Line of Credit 830,000 787,818
Notes Payable to Shareholders and Employees, - 6,757
Less Current Portion
Long-Term Debt, Less Current Portion 658,500 375,914
Capital Lease Obligations, Less Current Portion - 4,758
Dividend Payable 1,278 -
Deferred Income Tax Liability 631,485 1,042,770
Shareholders' Equity:
Common Stock, $0.001 Par Value, 50,000,000 Shares
Authorized, 18,159,661 and 17,751,227 Shares
Issued and Outstanding, Respectively 18,160 17,751
Preferred Stock, No Par Value, 10,000,000 Shares
Authorized, 192 and 0 Shares Issued and
Outstanding, Respectively 192,000 -
Additional Paid-In Capital 15,266,553 14,662,217
Warrants 601,616 713,886
Stock Options 55,924 -
Retained Deficit (6,512,231) (4,651,940)
----------- -----------
Total Shareholders' Equity 9,622,022 10,741,914
----------- -----------
Total Liabilities and Shareholders' Equity $15,027,080 $15,934,022
----------- -----------
----------- -----------
The accompanying consolidated notes to financial statements are an
integral part of these consolidated balance sheets.
OnCourse Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2001 and 2000 (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net Sales $1,261,199 $1,355,368 $ 3,997,336 $ 3,736,544
Cost of Sales 502,575 472,862 1,373,725 1,250,219
---------- ---------- ---------- ----------
Gross Profit 758,624 882,506 2,623,611 2,486,324
Selling Expenses 558,722 622,771 1,724,905 1,840,778
Research and Development 71,462 115,078 232,328 219,153
Purchased In-Process Research & Development - - - 270,000
Goodwill and Other Intangible Amortization 334,511 302,513 1,006,588 789,891
General and Administrative Expenses 518,932 637,316 1,646,408 1,459,841
---------- ---------- ---------- ----------
Operating Loss (725,003) (795,172) (1,986,618) (2,093,339)
Interest Expense 36,535 29,032 94,319 72,143
---------- ---------- ---------- ----------
Loss Before Income Taxes (761,538) (824,204) (2,080,937) (2,165,482)
Income Tax Benefit 177,808 195,485 397,009 405,883
---------- ---------- ---------- ----------
Net Loss $ (583,730) $(628,719) $(1,683,928) $(1,759,598)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Basic and Diluted Loss Per Share $(0.03) $(0.04) $(0.09) $(0.11)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
The accompanying consolidated notes to financial statements are an
integral part of these consolidated statements.
OnCourse Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)
Nine Months Ended
September 30,
-------------------------
2001 2000
---------- ----------
Cash Flows from Operating Activities:
Net Loss $(1,683,928) $(1,759,598)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities-
Depreciation and Amortization 1,942,878 1,601,232
Loss on Disposal of Property and Equipment 1,795 -
Non-Cash Compensation 1,275 46,605
Non-Cash Consulting Services 306,690 226,120
Purchased In-Process Research & Development - 270,000
Deferred Income Taxes, Net (280,753) 514,049
Changes in Current Assets and Liabilities-
Accounts Receivable (100,451) (157,260)
Prepaids and Other Current Assets (130,972) (14,652)
Accounts Payable 184,258 102,289
Accrued Income Taxes (14,833) 74,610
Accrued Liabilities (5,592) 57,665
Deferred Revenue 6,781 732,455
----------- -----------
Net Cash Provided by Operating Activities 227,148 665,417
----------- -----------
Cash Flows From Investing Activities:
Capitalized Software Development Costs (979,476) (922,935)
Purchase of Property and Equipment (89,139) (102,410)
Other Assets (629) (111,301)
Acquisition of TekSoft, Inc. - 65,526
----------- -----------
Net Cash Used in Investing Activities (1,069,244) (1,071,120)
----------- -----------
Cash Flows From Financing Activities:
Proceeds From Line of Credit, Net 42,182 241,575
Proceeds from Long-Term Debt 500,000 54,091
Payments on Long-Term Debt and Notes Payable to (80,693) (66,315)
Shareholders and
Employees
Payments on Capital Lease Obligation, Net (9,145) (12,633)
Proceeds from Preferred Stock Issuance 192,000 -
Proceeds from Common Stock Issuance 107,499 218,575
Exercise of Warrants - 1,413
Increase in Notes Receivable from Shareholder (2,741) (2,482)
----------- -----------
Net Cash Provided by Financing Activities 749,102 434,224
----------- -----------
Net (Decrease) Increase in Cash (92,994) 28,521
Cash, Beginning of Period 200,411 91,684
----------- -----------
Cash, End of Period $ 107,417 $ 120,205
----------- -----------
----------- -----------
The accompanying consolidated notes to financial statements are an
integral part of these consolidated statements.
OnCourse Technologies, Inc. and Subsidiaries
Consolidated Notes to Financial Statements
For the Nine Months Ended September 30, 2001 and 2000 (Unaudited)
(1) Basis of Presentation-
---------------------
The accompanying unaudited condensed consolidated financial statements of
OnCourse Technologies, Inc. (the "Company") have been prepared by the
Company pursuant to the rules and regulations of the Securities and
Exchange Commission.
The information furnished herein reflects all adjustments and accruals that
management believes is necessary to fairly state the operating results for
the respective periods. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
such rules and regulations of the Securities and Exchange Commission under
item 310 of Regulation S-B. The notes to the condensed financial
statements should be read in conjunction with the notes to the consolidated
financials contained in the Company's Form 10-KSB for the year ended
December 31, 2000. The Company's management believes that the disclosures
are sufficient for interim financial reporting purposes. The results of
operations for any interim period are not necessarily indicative of the
results for the year.
(2) Liquidity-
---------
The Company has incurred losses over the last two years and has negative
working capital. Based upon its current plans, the Company believes it has
sufficient funds and borrowing availability, approximately $270,000
remaining, to meet its operating expenses and capital requirements through
fiscal year 2001 and into fiscal year 2002. However, the Company intends
to seek additional funding from equity offerings to existing shareholders
or other third parties during 2001. There is no assurance that such
additional funds will be available on acceptable terms, if at all. Should
the plans contemplated by management not be consummated, the Company may
have to seek alternative sources of capital, affect borrowings under its
line of credit or reevaluate its operating plans.
(3) Summary of Significant Accounting Policies-
------------------------------------------
(a) Revenue Recognition-
-------------------
Revenue from product sales is recognized upon customer acceptance and
delivery of the product provided that no significant contractual
obligations remain. Customer acceptance is realized after either the
customer pays for the software or upon receiving a document from the
customer stating that the product has been accepted by the customer.
Included in deferred revenues as of September 30, 2001 and December 31,
2000 is approximately $739,000 and $684,000, respectively, of products
which have been delivered and invoiced but for which the Company has not
been notified of customer acceptance.
Revenues also include separate maintenance fees whereby the Company
provides ongoing customer support and product upgrades. Such contracts are
reflected as deferred revenue and amortized ratably over the term of the
maintenance period ranging from 12 to 60 months.
(b) Software Development Costs-
--------------------------
Software development costs incurred in the research and development of new
software products and enhancements to existing software products are
expensed as incurred until technological feasibility of the product is
established. From the time technological feasibility is established until
the product is released, all software costs are capitalized. In addition,
capitalized software includes software acquired in the acquisition of a
subsidiary. Capitalized costs are reported at the lower of unamortized
costs or net realizable value. The costs are amortized over the greater of
the amount computed using (a) the ratio that current gross revenues for the
product bear to the total of current and anticipated future gross revenues
for that product or (b) the straight-line method over the remaining
estimated economic life of the product. During the three and nine months
ended September 30, 2001 and 2000, the Company amortized the capital
software costs straight-line over either three or five years.
Costs incurred up to technological feasibility are considered research and
development costs. These costs are expensed as incurred. Research and
development costs were approximately $71,000 and $115,000 for the three
months ended September 30, 2001 and 2000, respectively. Research and
development costs were approximately $232,000 and $219,000 for the nine
months ended September 30, 2001 and 2000, respectively.
Computer software development costs capitalized in the three months ended
September 30, 2001 and 2000 were approximately $333,000 and $354,000,
respectively. Computer software development costs capitalized in the nine
months ended September 30, 2001 and 2000 were approximately $979,000 and
$923,000, respectively. Amortization expense for the three months ended
September 30, 2001 and 2000 of approximately $301,000 and $280,000,
respectively, is included in cost of sales in the consolidated statements
of operations. Amortization expense for the nine months ended September
30, 2001 and 2000 was approximately $832,000 and $708,000, respectively.
(c) Goodwill-
--------
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 "Business Combinations" and No. 142
"Goodwill and Other Intangible Assets" effective for fiscal years beginning
after December 31, 2001. Under the new rules goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will
be subject to periodic impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful
lives. The statement also requires business combinations initiated after
June 30, 2001 to be accounted for using the purchase method of accounting,
and broadens the criteria for recording intangible assets separate from
goodwill.
Effective January 1, 2002, all amortization expense on goodwill and
intangible assets with indefinite lives will stop. The Company anticipates
that the application of the nonamortization provisions will increase net
income approximately $1,292,000 ($0.07 per diluted share) per year compared
to fiscal 2001. During fiscal 2002, the Company will perform the first of
the required impairment tests of goodwill and indefinite lived intangible
assets as of January 1, 2002. The Company has not yet determined what
effect these tests will have on net income and the financial position of
the Company.
(4) Long-Lived Assets-
-----------------
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 establishes a single
accounting model for long-lived assets to be disposed of by sale and
provides additional implementation guidance for assets to be held and used
and assets to be disposed of other than by sale. There will be no
financial implication related to the adoption of SFAS 144, and the guidance
will be applied on a prospective basis. The Company will adopt the
statement effective January 1, 2002.
(5) Debt-
----
During the three months ended September 30, 2001, the Company and its bank
agreed to lower the interest rate on its $400,000 term debt from 9.25% to
8.5%. The October 9, 2003 maturity date for the term debt was not
changed. During the three months ended September 30, 2001, the Company and
its bank added $500,000 in term debt with an interest rate of 8.5%. The
additional term debt matures November 23, 2005. The proceeds from the
additional term debt were used to reduce the Company's line of credit
facility. The maximum borrowing under the line of credit is $1,100,000.
The above mentioned term debt and line of credit facility is secured by all
assets of the Company and its subsidiaries. Borrowings under the line of
credit facility were $830,000 as of September 30, 2001.
(6) Shareholders' Equity _
--------------------
On September 30, 1999, the Company acquired Cimtronics, Inc. ("Cimtronics")
for 153,846 shares to the former shareholders of Cimtronics. In addition,
under the terms specified in the purchase agreement, the former
shareholders of Cimtronics may receive up to 153,846 additional shares over
the next five years if net profits, as defined in the agreement, increases.
For the twelve months ended September 30, 2001, the net profits increase
resulted in an additional 93,719 shares issued to the former shareholders
of Cimtronics at a value of approximately $.17 per share. An additional
$15,585 was allocated to goodwill.
During the nine months ended September 30, 2001, the Company amended its
Articles of Incorporation to authorize 10,000,000 shares of Preferred Stock
without par value. The Board of Directors, without action by the
shareholders, shall have the authority to divide the authorized and
unissued shares of the Company's Preferred Stock into classes or series and
to determine for any such class or series its voting rights and such
designations, preferences, options, conversion rights and other special or
relative rights as may be desired.
During the three months ended September 30, 2001, the Company entered into
a stock purchase agreement with a third-party vendor ("Purchaser"). The
agreement provided for the sale of up to 275 shares of non-voting 3% Series
A Cumulative Convertible Preferred Stock of the Company without par value.
The Purchaser agreed to purchase the shares in blocks of 192 and 83 shares
at a stated value of $1,000 per share. During the three months ended
September 30, 2001, 192 shares were sold for a total of $192,000. The
Purchaser is obligated over a two-year period to purchase the remaining 83
shares at a price of $1,000 per share upon the Company satisfactorily
completing certain conditions spelled out in the agreement. The conditions
include the Company opening offices and or distribution channels in three
specified geographic locations and maintaining an aged trade payable
balance that is less than 90 days past due. The agreement entitles
holders of the Series A Preferred Stock cumulative annual dividends at an
annual rate of 3% of the Stated Value in cash for each share held. In the
event that the two-year period lapses without the Company fulfilling the
conditions stated in the agreement, the Purchaser no longer has an
obligation to purchase the remaining 83 shares and the dividend rate on the
192 shares purchased shall increase to an annual rate of 7%. Under the
agreement, the Series A Preferred Stock shall rank senior to the Common
Stock and all other equity securities of the Company issued and outstanding
on or after the first issuance date of any of the Series A Preferred Stock
as to distributions and upon liquidation, dissolution or winding up. The
holders, at their election, have the right at any time to convert Series A
Preferred Stock into shares of Common Stock by converting the stated value
at $.60 per share. Each common stock share resulting from the conversion
will be entitled to receive one Class A Warrant and one Class B warrant of
the Company. Each Class A warrant will be exercisable at a price of $1.25
per share at any time within three years of the warrant issuance date. Each
Class B warrant will be exercisable at a price of $1.25 per share at any
time within five years of the warrant issuance date. In addition, the
purchaser is entitled to elect one member to the Board of Directors of the
Company for so long as any shares of Series A Preferred stock are
outstanding. During the three months and nine months ended September 30,
2001, the Company accrued dividends of $1,278 under this agreement.
During the three months ended September 30, 2001, the Company offered and
issued 14,232 shares of Company common stock, 14,232 Class A stock purchase
warrants and 14,232 Class B stock purchase warrants as payment of $10,673
in professional services to a vendor. The warrants were issued with
initial estimated values (based on Black-Scholes valuation model) ranging
from $.11 to $1.36 for each Class A warrant and $.14 to $1.45 for each
Class B warrant and expire in 2004 and 2006, respectively. Each warrant
represents the right to purchase one share of the Company's common stock at
an exercise price of $1.00.
During the three months ended September 30, 2001, the Company offered and
issued 11,538 shares of Company common stock as payment of $7,500 to a
vendor for customer relationship software.
On January 31, 2000, the Company acquired TekSoft, Inc. ("TekSoft") for
4,500,060 shares to the former shareholders of TekSoft. In addition, under
the terms specified in the purchase agreement, the former share holders of
TekSoft may receive up to 1,500,000 additional shares over the next five
years if net sales, as defined in the agreement, increases. For the year
ended December 31, 2000, the net sales increase resulted in an additional
511,206 shares issued to the former shareholders of TekSoft. During the
nine months ended September 30, 2001, an additional 122,664 shares were
issued to the former shareholders of TekSoft at a value of $.85 per share.
An additional $104,264 was allocated to goodwill.
During the nine months ended September 30, 2001, the Company offered and
issued 2,000 shares of Company common stock to a vendor as payment of
$1,980 in professional services.
During the nine months ended September 30, 2001, the Company offered and
issued 1,500 shares of Company common stock to an employee of Micro
Estimating Systems, Inc. as a hiring incentive. The Company recorded
compensation expense of $1,275 for this transaction.
During the nine months ended September 30, 2001, the Company offered and
issued on various dates units in a private placement to selected
individuals deemed financially capable of making the investment. The units
include one share of Company common stock and one Class A common stock
purchase warrant and one Class B common stock purchase warrant. The
Company issued and sold 100,000 units at $1.00 per unit during the three
months ended June 30, 2001. The warrants were issued with initial
estimated values (based on Black-Scholes valuation model) of $.85 for each
Class A warrant and $.95 for each Class B warrant and expire in 2004 and
2006, respectively. Each warrant represents the right to purchase one
share of the Company's common stock at an exercise price of $1.75.
During the nine months ended September 30, 2001, the Company offered and
issued 27,781 shares of Company common stock, 27,781 Class A stock purchase
warrants and 27,781 Class B stock purchase warrants as payment of $33,587
in professional services to three vendors. The warrants were issued
with initial estimated values (based on Black-Scholes valuation model)
ranging from $.59 to $.62 for each Class A warrant and $.69 to $.70 for
each Class B warrant and expire in 2004 and 2006, respectively. Each
warrant represents the right to purchase one share of the Company's common
stock at an exercise price ranging from $1.75 to $3.00.
(7) Deferred Savings Plan-
---------------------
Effective April 1, 2001, the Company implemented a 401(k) deferred savings
plan with discretionary profit sharing and matching features covering
substantially all employees of the Company. This plan replaced the
deferred savings plan, which was in place at one of the acquired
subsidiaries. There were no matching contributions under the plan for the
nine months ended September 30, 2001.
(8) Stock Option Plan-
-----------------
During the nine months ended September 30, 2001, the Company adopted a
Stock Option Plan (the "Plan") with an effective date of January 1, 2001.
The primary purpose of the Plan is to provide an incentive for employees of
the Company and its subsidiaries and other participants, as defined in the
plan. One million shares of the Company's common stock were reserved for
issuance pursuant to the terms of the Plan. Unless earlier terminated by
the Board of Directors, the Plan will terminate on December 31, 2010.
During the nine months ended September 30, 2001, the Company granted
589,048 options to employees at an exercise price of $0.65, and which vest
ranging from zero to five years and expire December 31, 2010. During the
nine months ended September 30, 2001, the Company granted 140,000 options
to an independent contractor at an exercise price of $0.65, and which vest
over a 12-month period ending May 3, 2002. The options expire May 3, 2007.
As of September 30, 2001, 94,000 of the options were vested. The Company
recorded $55,924 of legal and professional expenses for the nine months
ended September 30, 2001 for the vested options. During the three and
nine months ended September 30, 2001, none of the 729,048 stock options
were exercised.
(9) Warrants-
--------
OnCourse Technologies, Inc. ("OnCourse") was incorporated in Nevada on May
28, 1998 as a subsidiary of Innovation International, Inc ("Innovation").
On June 12, 1998, Innovation caused OnCourse to distribute Innovation's
800,000 common shares of OnCourse and 400,000 common stock purchase
warrants of OnCourse to Innovation's shareholders as a dividend in-kind.
The warrants are redeemable for $.05 per warrant only at the discretion of
the Company. The warrants originally entitled the holder to purchase on or
before December 31, 1999 one share of Company common stock per warrant at
an exercise price of $1.50. On December 23, 1999, the expiration date for
these common stock purchase warrants was extended to March 31, 2000. On
March 27, 2000, the expiration date was extended a second time to September
30, 2000. On September 12, 2000, the expiration date was extended a third
time to June 30, 2001.
On June 8, 2001, the expiration date was extended a fourth time to June 30,
2002. Generally accepted accounting principles required that the warrants
be classified as equity and accreted to the estimated redemption value
based on the terms of the warrants. At the time of original issuance the
warrants were not assigned an initial value or any accretion as their
estimated fair market value approximated zero. Under the guidelines
outlined in FASB No. 123, "Accounting for Stock Based on Compensation," a
change in the characteristics of the warrant, such as an extension of the
expiration date, triggers a remeasurement point. Each of the extensions
resulted in a new measurement date and the incremental value of the
warrants was accounted for as a dividend to the shareholders. The
incremental value reflected as a dividend was calculated as the difference
between the value of the new warrants given by the shareholders, i.e., the
canceled warrants. The value of the warrants at each measurement point was
determined using the Black-Scholes pricing model. A dividend was recorded
for approximately $175,000 in June 2001. During the nine months ended
September 30, 2001, none of the 398,824 remaining warrants were exercised.
(10) Subsequent events-
-----------------
Subsequent to September 30, 2001, the Company entered into an agreement and
offered and issued 59,323 shares of Company common stock, 59,323 Class A
stock purchase warrants and 59,323 Class B stock purchase warrants to a
vendor as payment of $91,199 of accounts payable as of September 30, 2001.
The Company will record an extraordinary gain on the extinguishment of debt
of $64,330 during the three months ending December 31, 2001 under this
agreement based on the difference between a conversion price ranging from
$1.00 to $2.00 as defined in the agreement and the $0.18 market share
price. The warrants were issued with initial estimated values (based on
Black-Scholes valuation model) ranging from $0.11 to $0.12 for each Class A
warrant and $0.15 to $0.16 for each Class B warrant and expire in 2004 and
2006, respectively. Each warrant represents the right to purchase one
share of the Company's common stock at an exercise price ranging from $1.75
to $3.00. The agreement with the vendor calls for future hardware and
software purchases to be converted at a common stock price of $1.00 and for
equal number of Class A and Class B stock purchase warrants at an exercise
price of $1.75.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and notes, thereto and the other
financial information appearing elsewhere in this filing. In addition to
historical information, the following discussion and other parts of this filing
contain forward-looking information that involves risks and uncertainties. The
Company's actual results could differ materially from those anticipated by such
forward-looking information due to competitive factors, risks associated with
the Company's plans and other information expressed or implied by these forward-
looking statements. There may be other risks and circumstances that management
is unable to predict. When used in this Quarterly Report, the words "believes",
"expects", "intends", "plans", "anticipates", "estimates" and similar
expressions are intended to identify forward looking statements, although there
may be some forward-looking statements not accompanied by these expressions.
All forward-looking statements are intended to be covered by the safe harbor
created by Section 21E of the Securities Exchange Act of 1934.
The Company's goal is to become the collaborative business partner for the metal
working industry by providing technology products and services that improve the
profitability and efficiency of metal component manufacturers. On January 31,
2000, the Company acquired TekSoft, Inc. This acquisition helped complement its
existing product offerings as well as broaden the base necessary for
implementing its Internet strategy utilizing a business-to-business electronic-
commerce site.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
The Company's net sales decreased from $1,355,000 for the three months ended
September 30, 2000 to $1,261,000 for the same period in 2001 for a 7% decrease.
The sales decline reflects the overall condition of the U.S. economy and the
constraints that the manufacturing sector is under due to general cautiousness
and out of financial necessity. Also contributing to the decline is the concern
relative to the September 11, 2001 attack on the World Trade Center in New York
City and the Pentagon in Washinghton, D.C. Deferred revenue of $1,631,000 as of
September 30, 2001 reflects a modest decrease from the deferred revenue of
$1,689,000 as of September 30, 2000. The general concerns and conservative
outlook by the metal working industry as well as a delay in the launch of the
Company's ProCAM II computer-aided-manufacturing (CAM) software package, from
the third quarter to the fourth quarter, contributed to the decline.
Cost of sales consist primarily of amortization of capitalized software
development costs, royalties paid for third party software included in the
Company's products, direct materials used to transfer and support the Company's
software products, equipment and allocated overhead. Cost of goods sold was
$503,000 or 40% of net sales for the three months ended September 30, 2001 as
compared to the $473,000 or 35% of net sales for the three months ended
September 30, 2000. The gross margin percentage for the three months ended
September 30, 2001 declined from the same period in 2000 largely due to an
increase in the capitalized software amortization expense and the impact of
reduced net sales measured against these fixed expenses and the start of
amortization related to the capitalized software cost of the latest software
product versions of Machine Shop Estimating and CAMWorks which were released
in April 2001 and May 2001, respectively.
Selling expenses decreased 10% to $559,000 for the three months ended September
30, 2001 as compared to $623,000 for the same period in 2000. Selling expenses
as a percentage of net sales were 44% and 46% for the three months ended
September 30, 2001 and 2000, respectively. Lower advertising and other general
selling expenses accounted for the decrease. Management expects selling
expenses to rise for the remainder of 2001 as the Company plans to aggressively
promote the features of its recent and expected software product releases as
well as the Tools4Mfg.com web site.
During the three months ended September 30, 2001 and 2000, the Company devoted
significant time and resources to finalizing the release of its new products.
During the three months ended September 30, 2001 and 2000, the Company invested
over 32% and 35%, respectively, of net sales or $404,000 and $469,000,
respectively, in the forms of capitalized software development costs and
research and development activities. The capitalized software development
investment has declined in dollars as well as a percentage of net sales from
2000 levels due to the completion and release of the CAMWorks and Machine Shop
Estimating upgrades during the three months ended June 30, 2001 whereas the
Company was working on these development projects as well as the ProCAM II
upgrade in 2000. Total research and development costs expensed during the three
months ended September 30, 2001 and 2000, were $71,000 and $115,000,
respectively. Total costs capitalized as software development costs were
$333,000 and $354,000 for the three months ended September 30, 2001 and 2000,
respectively. Management expects capitalized software and research and
development costs to remain steady for the remainder of 2001.
Goodwill and other intangible amortization expenses were $335,000 and $303,000
for the three months ended September 30, 2001 and 2000, respectively. The
increase is related to the TekSoft acquisition on January 31, 2000. Goodwill
amortization was $296,000 and $264,000 for the three months ended September 30,
2001 and 2000, respectively. Other intangible amortization was comprised of
amortization of the assembled workforce, trade names and distribution network
intangible assets acquired as part of the TekSoft acquisition. Goodwill and
other intangible amortization expenses are expected to remain constant for the
remainder of 2001.
General and administrative expenses decreased to $519,000 or 41% of net sales
for the three months ended September 30, 2001 as compared to the $637,000 or 47%
of net sales for the three months ended September 30, 2000. The decrease in
general and administrative expenses from the three months ended September 30,
2000 is largely related to lower accounting fees and reduced amortization of a
professional services contract for consulting services. The Company issued
300,000 shares of common stock for these services at a value of $2.00 per share
on May 19, 2000. This contract was subsequently extended to February 19, 2002,
for no additional consideration, which reduced the monthly expense from $50,000
to $14,000 per month starting in February 2001. The amortization of this
professional services contract resulted in general and administrative expense of
$42,000 and $150,000 for the three months ended September 30, 2001 and 2000,
respectively. Management expects some increase in general and administrative
costs associated with new business initiatives as well as the normal increase in
administrative resources required to support ongoing growth.
Interest expense increased to $37,000 for the three months ended September 30,
2001 from $29,000 for the same period in 2000. This increase is attributed to
additional debt incurred by the Company that was used to finance the development
of the Company's computer-aided-manufacturing and computer-aided-engineering
software products. However, lower interest rates on its line of credit facility
as well as a reduced interest rate on its term debt helped interest expense to
increase at a lower rate than the increase in bank debt. Management expects
interest expense to increase during the remainder of 2001, as the company will
incur additional debt that will be used to promote its enhanced software
products and the Tools4Mfg.com web site and to compensate for the lower sales
volumes. After interest expense, the Company had a pre-tax loss of $762,000 for
the three months ended September 30, 2001 as compared to the $824,000 pre-tax
loss for the same period in 2000.
The net loss after tax benefits was $584,000 and $629,000 for the three months
ended September 30, 2001 and 2000, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
The Company's net sales increased from $3,737,000 for the nine months ended
September 30, 2000 to $3,997,000 for the same period in 2001 for a 7% increase.
The increase is partially related to the Company having nine months of TekSoft
net sales in 2001 compared to only eight months of net sales for the same period
in 2000. Management believes that sales for the nine months ended September 30,
2001, which were below expectations, reflects the general concerns and
conservative outlook that the metal working industry has taken given the many
negative domestic and global economic indicators reported prior to and during
the nine-month period ended September 30, 2001. Strong sales growth in the
Company's computer-aided-design/computer-aided-manufacturing (CAD/CAM) software
products and the introduction of Tools4Mfg.com helped to offset a decline in
computer-aided-estimating (CAE) software sales.
Cost of goods sold was $1,374,000 or 34% of net sales for the nine months ended
September 30, 2001 as compared to the $1,250,000 or 33% of net sales for the
nine months ended September 30, 2000. The gross margin percentage for the nine
months ended September 30, 2001 declined from the same period in 2000 largely
due to sales increases that were at a lower rate than the increase in the
capitalized software amortization expense for the Machine Shop Estimating and
CAMWorks software products which were released in April 2001 and May 2001,
respectively, and other cost of goods sold components.
Selling expenses decreased 6% to $1,725,000 for the nine months ended September
30, 2001 as compared to $1,841,000 for the same period in 2000. Selling
expenses as a percentage of net sales were 43% and 49% for the nine months ended
September 30, 2001 and 2000, respectively. Lower advertising and other general
selling expenses accounted for the decrease.
During the nine months ended September 30, 2001 and 2000, the Company devoted
significant time and resources to finalizing the release of its new products.
During the nine months ended September 30, 2001 and 2000, the Company invested
over 30% and 38%, respectively, of net sales or $1,212,000 and $1,412,000,
respectively, in the forms of capitalized software development costs, internal
research and development activities and purchased in-process research and
development related to the TekSoft acquisition. Total research and development
costs expensed during the nine months ended September 30, 2001 and 2000, were
$232,000 and $219,000, respectively. Total purchased in-process research and
development costs expensed during the nine months ended September 30, 2001 and
2000, were $0 and $270,000, respectively. Total costs capitalized as software
development costs were $979,000 and $923,000 for the nine months ended September
30, 2001 and 2000, respectively.
Goodwill and other intangible amortization expenses were $1,007,000 and $790,000
for the nine months ended September 30, 2001 and 2000, respectively. The
increase is largely related to the TekSoft acquisition in which nine months of
amortization occurred in 2001 as compared to only eight months in 2000.
Goodwill amortization was $891,000 and $687,000 for the nine months ended
September 30, 2001 and 2000, respectively. Other intangible amortization was
comprised of amortization of the assembled workforce, trade names and
distribution network intangible assets acquired as part of the TekSoft
acquisition.
General and administrative expenses increased to $1,646,000 or 41% of net sales
for the nine months ended September 30, 2001 as compared to the $1,467,000 or
39% of net sales for the nine months ended September 30, 2000. The increase
from the nine months ended September 30, 2000 is largely related to the
professional and legal expenses incurred in 2001 associated with the Company's
initial 10-SB and various other SEC filings. A lesser portion of the expenses
related to SEC filings were incurred during the nine months ended September 30,
2000 since the Company didn't obtain full reporting status until December 2000.
In addition, some of the professional and legal expenses incurred during the
nine months ended September 30, 2000 were offset against equity in conjunction
with the Company's equity fund raising efforts.
Interest expense increased to $94,000 for the nine months ended September 30,
2001 from $72,000 for the same period in 2000. This increase is attributed to
additional debt incurred by the Company that was used to finance the development
of the Company's computer-aided-manufacturing and computer-aided-engineering
software products. After interest expenses, the Company had a pre-tax loss of
$2,081,000 for the nine months ended September 30, 2001 as compared to the
$2,165,000 pre-tax loss for the same period in 2000.
The net loss after tax benefits was $1,684,000 and $1,760,000 for the nine
months ended September 30, 2001 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
OnCourse has incurred losses over the last two years and has negative working
capital. Based upon its current plans, the Company believes it has sufficient
funds and borrowing availability to meet its operating expenses and capital
requirements through fiscal year 2001 and into fiscal year 2002. However, the
Company intends to seek such additional funding from equity offerings to
existing shareholders or other third parties during 2001. There is no assurance
that such additional funds will be available on acceptable terms, if at all.
Should the plans contemplated by management not be consummated, the Company
may have to seek alternative sources of capital, affect borrowing under its
line of credit or reevaluate its operating plans.
The Company's cash position as of September 30, 2001 was approximately $107,000
as compared to $200,000 as of December 31, 2000. During the nine months ended
September 30, 2001, net cash provided by operating activities was $227,000
versus $665,000 for the nine months ended September 30, 2000. Cash flows used
in investing activities were $1,069,000 and $1,071,000 for the nine months ended
September 30, 2001 and 2000, respectively. The Company invested $979,000 in
capitalized software development costs for the nine months ended September 30,
2001 compared to $923,000 for the same period in 2000. The Company had positive
cash flows from financing activities of $749,000 and $434,000 for the nine
months ended September 30, 2001 and 2000, respectively. The financing
activities for the nine months ending September 30, 2001 were primarily
comprised of $419,000 of net proceeds from term debt and issuance of preferred
stock and common stock of $192,000 and $107,000, respectively.
The Company's working capital as of September 30, 2001 was a negative $1,148,000
as compared to the negative working capital of $971,000 as of December 31, 2000.
This represents a decrease of $177,000 in working capital over the December 31,
2000 balance. Working capital, excluding deferred revenue, was $482,000 at
September 30, 2001 as compared to $653,000 as of December 31, 2000.
The Company had total interest bearing debt of $1,848,000 and $1,395,000 as of
September 30, 2001 and December 31, 2000, respectively, consisting of current
and long-term portions of a line of credit, term debt, capital leases and notes
payable to shareholders. This represents an increase of $452,000 during the
nine months ended September 30, 2001, which was largely made up of a $419,000
net increase in the Company's term debt. The Company's $1,100,000 long-term
line of credit facility had outstanding borrowings of $830,000 as of September
30, 2001.
Shareholder's Equity decreased from $10,742,000 as of December 31, 2000 to
$9,622,000 as of September 30, 2001. The decrease in Shareholder's Equity since
December 31, 2000 is largely attributed to the $1,684,000 net loss incurred
during the nine months ended September 30, 2001. Offsetting the net loss was
$192,000 of preferred stock issued for cash, $197,000 of additional common stock
issued for cash, services and compensation, $56,000 of stock options granted for
services, $120,000 of additional common stock issued for contingent shares
earned by former shareholders of TekSoft and Cimtronics according to their
respective purchase agreements and accrued dividends of $1,000.
The Company invested $979,000 in capitalized software for the nine months ended
September 30, 2001. This compares to $923,000 for the same period in 2000. The
significant investment during the nine months ended September 30, 2001 was
mostly attributed to feature enhancements to TekSoft's computer-aided-
manufacturing software. The Company released its new versions of its Machine
Shop Estimating computer-aided-engineering software and CAMWorks' computer-
aided-manufacturing software in April 2001 and May 2001, respectively. The
Company is currently in beta testing of its ProCAM II computer-aided-
manufacturing software with a release date scheduled for towards the end of
November 2001. The Company is also in beta testing of the raw materials
procurement capabilities of its Tools4Mfg.com web site with a release date
scheduled for November 2001.
The Company intends on financing future expenditures for property and equipment,
capitalized software and sales growth using internally generated cash flows from
operations. The Company has approximately $270,000 available as of September
30, 2001 under its long-term revolving line of credit facility. Additional
sales of common stock, if any, through private placement activities will help
supplement internally generated cash flows in meeting the Company's operating
and growth needs.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries are involved in any legal
proceedings the resolution of which would have a material adverse effect on the
business or financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
During the three months ended September 30, 2001, the Company entered into a
stock purchase agreement with a third-party vendor ("Purchaser"). The agreement
provided for the sale of up to 275 shares of non-voting 3% Series A Cumulative
Convertible Preferred Stock of the Company without par value. The Purchaser
agreed to purchase the shares in blocks of 192 and 83 shares at a stated value
of $1,000 per share. During the three months ended September 30, 2001, 192
shares were purchased for a total of $192,000. The Purchaser is obligated over
a two-year period to purchase the remaining 83 shares at a price of $1,000 per
share upon the Company satisfactorily completing the conditions spelled out in
the agreement. The conditions include the Company opening offices and or
distribution channels in three specified geographic locations and maintaining an
aged trade payable balance that is less than 90 days past due. The agreement
entitles holders of the Series A Preferred Stock cumulative annual dividends at
an annual rate of 3% of the stated value in cash for each share held. In the
event that the two-year period lapses without the Company fulfilling the
conditions stated in the agreement, the Purchaser no longer has an obligation to
purchase the remaining 83 shares and the dividend rate on the 192 shares
purchased shall increase to an annual rate of 7%. Under the agreement, the
Series A Preferred Stock shall rank senior to the Common Stock and all other
equity securities of the Company issued and outstanding on or after the first
issuance date of any of the Series A Preferred Stock as to distributions and
upon liquidation, dissolution or winding up. The holders, at their election,
have the right at any time to convert Series A Preferred Stock into shares of
Common Stock by converting the stated value at $.60 per share. Each common
stock share resulting from the conversion will be entitled to receive one Class
A Warrant and one Class B warrant of the Company. Each Class A warrant will be
exercisable at a price of $1.25 per share at any time within three years of the
warrant issuance date. Each Class B warrant will be exercisable at a price of
$1.25 per share at any time within five years of the warrant issuance date. In
addition, the purchaser is entitled to elect one member to the Board of
Directors of the Company for so long as any shares of Series A Preferred stock
are outstanding. During the three months ended September 30, 2001, the Company
accrued dividends of $1,278 under this agreement.
On September 30, 1999, the Company acquired Cimtronics for 153,846 shares to the
former shareholders of Cimtronics. In addition, under the terms specified in
the purchase agreement, the former shareholders of Cimtronics may receive up to
153,846 additional shares over the next five years if net profits, as defined in
the agreement, increases. For the twelve months ended September 30, 2001, the
net profit increase resulted in an additional 93,719 shares issued to the former
shareholders of Cimtronics at a value of approximately $.17 per share. An
additional $15,585 was allocated to goodwill, which will be amortized over its
remaining useful life.
During the three months ended September 30, 2001, the Company offered and issued
14,232 shares of Company common stock, 14,232 Class A stock purchase warrants
and 14,232 Class B stock purchase warrants as payment of $10,673 in professional
services to a vendor. The warrants were issued with initial estimated values
(based on Black-Scholes valuation model) ranging from $.12 to $1.36 for each
Class A warrant and $.14 to $1.45 for each Class B warrant and expire in 2004
and 2006, respectively. Each warrant represents the right to purchase one share
of the Company's common stock at an exercise price of $1.00.
During the three months ended September 30, 2001, the Company offered and issued
11,538 shares of Company common stock as payment of $7,500 to a vendor for
customer relationship software.
During the three months ended June 30, 2001, the Company granted 140,000 options
to an independent contractor at an exercise price of $0.65, and which vest over
a 12-month period ending May 3, 2002. The options expire May 3, 2007. During
the three months ended September 30, 2001, an additional 18,000 options became
vested bringing the total to 94,000 vested options. In connection with these
options, the Company recorded legal and professional expenses of $7,176 for the
three months ended September 30, 2001.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company was not in default with regards to its debt facilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the three months ended September 30, 2001
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
ITEM 5. OTHER INFORMATION
On November 1, 2001, the Company passed a board of director resolution
restricting any shareholder presently owning one percent or more of the common
stock of the Company from directly or indirectly selling, offering to sell,
granting any option for the sale of, assigning, transferring, pledging or
otherwise encumbering or disposing of any shares of common stock or securities
convertible into, exercisable or exchangeable for or evidencing any right to
purchase or subscribe for any share of common stock of the Company (either
pursuant to Rule 144 and the regulations under the Securities Act of 1933 or
otherwise) or disposing of any beneficial interest therein. This resolution was
adopted to protect the interests of the Corporation and its stockholders and as
a prerequisite to the willingness of certain investment banking and corporate
economic image firms to assist the Company in implementing its growth
strategies. In connection with such willingness of certain investment banking
and corporate economic image firms, the Company is in the process of negotiating
agreements with various entities to implement the Company's growth strategies.
The restriction shall be effective immediately and shall continue for the lesser
of two and one half years from the date of resolution, or two years from the
date of retention to a corporate economic image firm.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
None required for the three months ended September 30, 2001.
(b) REPORTS ON FORM 8-K
None filed by the Company in the three months ended September 30, 2001.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OnCourse Technologies, Inc.
a Nevada Corporation
By: /s/Bernard A. Woods III Date: November 14, 2001
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Bernard A. Woods III, CEO
By: /s/Charles W. Beyer Date: November 14, 2001
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Charles W. Beyer, President
By: /s/William C. Brown Date: November 14, 2001
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William C. Brown, CFO