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: June 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 July 31, 2001: 18,040,172
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 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
OnCourse Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
As of June 30, 2001 (Unaudited) and December 31, 2000
June 30, December 31,
Assets 2001 2000
------ -------- ------------
Current Assets:
Cash $ 89,278 $ 200,411
Accounts Receivable, Less Allowance for Doubtful
Accounts of $46,169 and $24,889, Respectively 1,273,040 1,105,908
Prepaids and Other Assets 303,892 306,939
Deferred Income Tax Asset 473,800 389,670
----------- -----------
Total Current Assets 2,140,010 2,002,928
Note Receivable from Shareholder 46,881 45,041
Capitalized Software, Less Accumulated Amortization
of $1,953,933 and $1,422,334, Respectively 4,989,123 4,873,769
Property and Equipment, at Cost:
Computer Equipment and Purchased Software 414,098 377,217
Furniture, Fixtures and Vehicles 134,030 151,471
----------- -----------
Total Property and Equipment 548,128 528,688
Less- Accumulated Depreciation (238,365) (180,126)
----------- -----------
Net Property and Equipment 309,763 348,562
Goodwill, Less Accumulated Amortization of
$1,571,777 and $976,606, Respectively 6,573,923 7,256,424
Assembled Workforce, Less Accumulated Amortization
of $44,524 and $28,810, Respectively 175,476 191,190
Trade Names, Less Accumulated Amortization of
$51,945 and $33,611, Respectively 498,055 516,389
Distribution Network, Less Accumulated Amortization
of $121,429 and $78,572, Respectively 478,571 521,428
Other Assets 179,089 178,291
----------- -----------
Total Assets $15,390,891 $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 June 30, 2001 (Unaudited) and December 31, 2000
June 30, December 31,
Liabilities and Shareholders' Equity 2001 2000
------------------------------------ ---------- ----------
Current Liabilities:
Current Portion of Long-Term Debt $ 50,922 $ 52,318
Current Portion of Capital Leases 11,524 13,060
Accounts Payable 1,002,868 823,754
Accrued Income Taxes - 14,833
Accrued Commissions 89,837 84,210
Accrued Wages and Other Liabilities 203,019 207,347
Notes Payable to Shareholders and Employees 141,289 154,587
Deferred Revenue 1,713,752 1,623,982
----------- -----------
Total Current Liabilities 3,213,211 2,974,091
Line of Credit 1,075,818 787,818
Notes Payable to Shareholders and Employees,
Less Current Portion - 6,757
Long-Term Debt, Less Current Portion 338,210 375,914
Capital Lease Obligations, Less Current Portion - 4,758
Deferred Income Tax Liability 832,362 1,042,770
Shareholders' Equity:
Common Stock, $0.001 Par Value, 50,000,000
Shares Authorized, 18,040,172 and 17,751,227
Shares Issued and Outstanding, Respectively 18,040 17,751
Preferred Stock, No Par Value, 10,000,000
Shares Authorized in 2001, No Shares
Issued and Outstanding - -
Additional Paid-In Capital 15,251,601 14,662,217
Warrants 540,124 713,886
Stock Options 48,748 -
Retained Deficit (5,927,223) (4,651,940)
----------- -----------
Total Shareholders' Equity 9,931,290 10,741,914
----------- -----------
Total Liabilities and Shareholders' Equity $15,390,891 $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 Six Months Ended June 30, 2001 and 2000 (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net Sales $1,464,906 $1,431,602 $ 2,736,137 $ 2,381,175
Cost of Sales 457,908 417,818 871,150 777,357
---------- ---------- ----------- -----------
Gross Profit 1,006,998 1,013,784 1,864,987 1,603,818
Selling Expenses 587,297 641,893 1,166,333 1,218,007
Research and Development 86,038 61,572 160,866 104,075
Purchased In-Process Research & Development - - - 270,000
Goodwill and Other Intangible Amortization 333,925 303,745 672,076 487,378
General and Administrative Expenses 545,024 429,211 1,127,327 822,525
---------- ---------- ----------- -----------
Operating Loss (545,286) (422,637) (1,261,615) (1,298,167)
Interest Expense 29,460 23,862 57,784 43,110
---------- ---------- ----------- -----------
Loss Before Income Taxes (574,746) (446,499) (1,319,399) (1,341,277)
Income Tax Benefit 86,523 48,801 219,201 210,398
---------- ---------- ----------- -----------
Net Loss $ (488,223) $ (397,698) $(1,100,198) $(1,130,879)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Basic and Diluted Loss Per Share $ (0.03) $ (0.03) $ (0.06) $ (0.07)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
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 Six Months Ended June 30, 2001 and 2000 (Unaudited)
Six Months Ended
June 30,
----------------------------
2001 2000
------------ ------------
Cash Flows from Operating Activities:
Net Loss $(1,100,198) $(1,130,879)
Adjustments to Reconcile Net Loss to Net
Cash Provided by Operating Activities-
Depreciation and Amortization 1,267,433 976,868
Loss on Disposal of Property
and Equipment 1,795 -
Non-Cash Compensation 1,275 46,605
Non-Cash Consulting Services 204,035 101,968
Purchased In-Process
Research & Development - 270,000
Deferred Income Taxes, Net (102,945) (343,827)
Changes in Current Assets
and Liabilities-
Accounts Receivable (167,132) (83,745)
Prepaids and Other Current Assets (116,953) 3,789
Accounts Payable 179,113 (146,420)
Accrued Liabilities (13,533) 117,417
Deferred Revenue 89,770 596,795
----------- -----------
Net Cash Provided by Operating
Activities 242,660 408,571
----------- -----------
Cash Flows From Investing Activities:
Capitalized Software Development Costs (646,953) (569,162)
Purchase of Property and Equipment (26,753) (48,309)
Other Assets (798) (117,844)
Acquisition of TekSoft, Inc. - 65,526
----------- -----------
Net Cash Used in Investing Activities (674,504) (669,789)
----------- -----------
Cash Flows From Financing Activities:
Proceeds From Line of Credit, Net 288,000 179,912
Proceeds from Long-Term Debt - 14,091
Payments on Long-Term Debt and Notes
Payable to Shareholders and Employees (59,156) (42,826)
Payments on Capital Lease Obligation, Net (6,293) (7,795)
Proceeds from Stock Issuance 100,000 182,727
Exercise of Warrants - 1,413
Increase in Notes Receivable from Shareholder (1,840) (1,661)
----------- -----------
Net Cash Provided by Financing
Activities 320,711 325,861
----------- -----------
Net Decrease in Cash (111,133) 64,643
Cash, Beginning of Period 200,411 91,684
----------- -----------
Cash, End of Period $ 89,278 $ 156,327
----------- -----------
----------- -----------
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 Six Months Ended June 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 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 June 30, 2001 and December 31, 2000 is
approximately $794,000 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, which begins after the
expiration of the one-year of free support included with the initial
purchase of the software for some of the Company's products.
(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 six months
ended June 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 $86,000 and $62,000 for the three
months ended June 30, 2001 and 2000, respectively. Research and
development costs were approximately $161,000 and $104,000 for the six
months ended June 30, 2001 and 2000, respectively.
Computer software development costs capitalized in the three months ended
June 30, 2001 and 2000 were approximately $300,000 and $335,000,
respectively. Computer software development costs capitalized in the six
months ended June 30, 2001 and 2000 were approximately $647,000 and
$569,000, respectively. Amortization expense for the three months ended
June 30, 2001 and 2000 of approximately $286,000 and $257,000,
respectively, is included in cost of sales in the consolidated statements
of operations. Amortization expense for the six months ended June 30, 2001
and 2000 was approximately $532,000 and $428,000, 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.
The nonamortization provisions of the Statement will not impact
amortization expense related to acquisitions initiated prior to June 30,
2001, but any goodwill or indefinite lived intangibles acquired subsequent
to June 30, 2001 will not be amortized. 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
$1,182,000 ($0.06 per diluted share) per year. 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) Shareholders' Equity-
--------------------
On January 31, 2000, the Company acquired TekSoft, Inc. ("TekSoft"), for
approximately 4,500,000 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 three months ended June 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, which will be
amortized over its remaining useful life.
During the three months ended June 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 three months ended June 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 three months ended June 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 March 31, 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 three months ended March 31, 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 $.85 to $1.72 for each Class A warrant and $.95 to $1.90 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.
(5) 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 was no matching contributions under the plan for the
three months ended June 30, 2001.
(6) Stock Option Plan-
-----------------
During the three months ended June 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 three months ended June 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 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. As of June 30, 2001, 76,000 of the options were vested. The
Company recorded $48,748 of legal and professional expenses for the three
months ended June 30, 2001.
(7) 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 for the
three months ended June 30, 2001. During the three and six months ended
June 30, 2001, none of the 398,824 remaining warrants were exercised.
(8) Subsequent Events-
-----------------
Subsequent to June 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. Subsequent to June 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 the 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 the
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.
Subsequent to June 30, 2001, the Company received a $75,000 over-line to
its line of credit facility by its bank. The over-line expires September
12, 2001.
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 has moved the Company
closer to its goal of becoming a business partner for the metal working
industry. This acquisition also 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 JUNE 30, 2001 AND 2000
The Company's net sales increased from $1,432,000 for the three months ended
June 30, 2000 to $1,465,000 for the same period in 2001 for a 2% increase. The
net sales for the three months ended June 30, 2001 increased from the $1,271,000
for the three months ended March 31, 2001 for a 15% increase. The Company
generated $60,000 of net sales related to its Tools4Mfg.com web site for the
three months ended June 30, 2001. This marks the first time this new business
unit has generated revenues. Management believes that sales for the three
months ended June 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 three month period ended June 30, 2001. Deferred revenue of
$1,714,000 as of June 30, 2001 reflects an increase of $161,000 over deferred
revenue of $1,553,000 as of June 30, 2000 and an increase of $53,000 over
deferred revenue of $1,661,000 as of March 31, 2001. Management expects that
third quarter 2001 revenue will increase moderately due to sales increases
generated by recent product releases of Machine Shop Estimating (version 9.0),
CAMWorks 2001 and Tools4Mfg.com and a scheduled release of its ProCAM II product
in September 2001 that will offset the overall negative trend in the economy.
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
$458,000 or 31% of net sales for the three months ended June 30, 2001 as
compared to the $418,000 or 29% of net sales for the three months ended June 30,
2000 and as compared to the $413,000 or 33% of net sales for the three months
ended March 31, 2001. The gross margin percentage for the three months ended
June 30, 2001 declined slightly over the same period in 2000 largely due to an
increase in the capitalized software amortization expense. The capitalized
software amortization expense increase corresponds with 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. Management expects that the overall
profit margin as a percent of net sales to improve for the remainder of 2001 as
higher revenues will absorb the fixed content of capitalized software cost
amortization.
Selling expenses decreased 9% to $587,000 for the three months ended June 30,
2001 as compared to $642,000 for the same period in 2000. Selling expenses as a
percentage of net sales was 40% and 45% for the three months ended June 30, 2001
and 2000, respectively. Lower advertising, compensation 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. However, selling expenses as a percent of
net sales should decline starting in the fourth quarter 2001.
During the three months ended June 30, 2001 and 2000, the Company devoted
significant time and resources to finalizing the release of its new products.
During the three months ended June 30, 2001 and 2000, the Company invested over
26% and 28%, respectively, of net sales or $386,000 and $396,000, respectively,
in the forms of capitalized software development costs and research and
development activities. Total research and development costs expensed during
the three months ended June 30, 2001 and 2000, were $86,000 and $62,000,
respectively. Total costs capitalized as software development costs were
$300,000 and $335,000 for the three months ended June 30, 2001 and 2000,
respectively, and will be amortized over either three or five years. Management
expects capital software and research and development costs to remain steady
for the remainder of 2001.
Goodwill and other intangible amortization expenses were $334,000 and $304,000
for the three months ended June 30, 2001 and 2000, respectively. The increase
is related to the TekSoft acquisition on January 31, 2000. Goodwill
amortization was $295,000 and $265,000 for the three months ended June 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 steady.
General and administrative expenses increased to $545,000 or 37% of net sales
for the three months ended June 30, 2001 as compared to the $429,000 or 30% of
net sales and $582,000 or 46% of net sales for the three months ended June 30,
2000 and March 31, 2001, respectively. The increase from the three months ended
June 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. Expenses related to SEC filings weren't incurred during the three
months ended June 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 three months ended June 30, 2000 were offset against equity
in conjunction with the Company's equity fund raising efforts. The decrease in
general and administrative expenses from the three months ended March 31, 2001
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, $75,000 and $78,000 for the three months ended June 30, 2001 and 2000,
and March 31, 2001, 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 $29,000 for the three months ended June 30, 2001
from $24,000 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. Management expects interest expenses 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. After
interest expense, the Company had a
pre-tax loss of $575,000 for the three months ended June 30, 2001 as compared to
the $446,000 pre-tax loss for the same period in 2000.
The net loss after tax benefits was $488,000, $398,000 and $612,000 for the
three months ended June 30, 2001 and 2000 and March 31, 2001, respectively.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
The Company's net sales increased from $2,381,000 for the six months ended June
30, 2000 to $2,736,000 for the same period in 2001 for a 15% increase. The
increase is partially related to the Company having six months of TekSoft net
sales in 2001 compared to only five months of net sales for the same period in
2000. However, 2001 sales increased over and above 2000 levels even after
considering the extra month of TekSoft net sales. Management believes that
sales for the six months ended June 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 six-month period ended June 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 $871,000 or 32% of net sales for the six months ended
June 30, 2001 as compared to the $777,000 or 33% of net sales for the six months
ended June 30, 2000. The gross margin percentage for the six months ended June
30, 2001 improved slightly over the same period in 2000 largely due to sales
increases that were at a higher 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 4% to $1,166,000 for the six months ended June 30,
2001 as compared to $1,218,000 for the same period in 2000. Selling expenses as
a percentage of net sales were 43% and 51% for the six months ended June 30,
2001 and 2000, respectively. Lower advertising, compensation and other general
selling expenses accounted for the decrease.
During the six months ended June 30, 2001 and 2000, the Company devoted
significant time and resources to finalizing the release of its new products.
During the six months ended June 30, 2001 and 2000, the Company invested over
30% and 40%, respectively, of net sales or $808,000 and $943,000, 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 six months ended June 30, 2001 and 2000, were $161,000 and $104,000,
respectively. Total purchased in-process research and development costs
expensed during the six months ended June 30, 2001 and 2000, were $0 and
$270,000, respectively. Total costs capitalized as software development costs
were $647,000 and $569,000 for the six months ended June 30, 2001 and 2000,
respectively.
Goodwill and other intangible amortization expenses were $672,000 and $487,000
for the six months ended June 30, 2001 and 2000, respectively. The increase is
largely related to the TekSoft acquisition in which six months of amortization
occurred in 2001 as compared to only five months in 2000. Goodwill amortization
was $595,000 and $423,000 for the six months ended June 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 $1,127,000 or 41% of net sales
for the six months ended June 30, 2001 as compared to the $823,000 or 35% of net
sales for the six months ended June 30, 2000. The increase from the six months
ended June 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. Expenses related to SEC filings weren't incurred during the six
months ended June 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 six months ended June 30, 2000 were treated as IPO costs
which were offset against equity in conjunction with the Company's equity fund
raising efforts. Also contributing to the increase in the professional and
legal expenses was an increase in the 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 $120,000 for the six
months ended June 30, 2001 as compared to $75,000 for the three months ended
June 30, 2000.
Interest expense increased to $58,000 for the six months ended June 30, 2001
from $43,000 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
$1,319,000 for the six months ended June 30, 2001 as compared to the $1,341,000
pre-tax loss for the same period in 2000.
The net loss after tax benefits was $1,100,000 and $1,131,000 for the six months
ended June 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 June 30, 2001 was approximately $89,000 as
compared to $200,000 as of December 31, 2000. During the six months ended June
30, 2001, net cash provided by operating activities was $243,000 versus $409,000
for the six months ended June 30, 2000. Cash flows used in investing activities
were $675,000 and $670,000 for the six months ended June 30, 2001 and 2000,
respectively. The Company invested $647,000 in capitalized software development
costs for the six months ended June 30, 2001 compared to $569,000 for the same
period in 2000. The Company had positive cash flows from financing activities
of $321,000 and $326,000 for the six months ended June 30, 2001 and 2000,
respectively. Financing cash flows related to increases in debt were offset by
decreases in the sale of stock.
The Company's working capital as of June 30, 2001 was a negative $1,191,000 as
compared to the negative working capital of $971,000 as of December 31, 2000.
This represents a decrease of $220,000 in working capital over the December 31,
2000 balance. Working capital, excluding deferred revenue, was $523,000 at
June 30, 2001 as compared to $653,000 as of December 31, 2000.
The Company had total interest bearing debt of $1,618,000 and $1,395,000 as of
June 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 $223,000 during the six
months ended June 30, 2001, which was largely made up of a $288,000 increase in
the Company's long-term line of credit facility that was partially offset by
payments towards its various term debt loans. The Company's $1,100,000 long-
term line of credit facility had outstanding borrowings of $1,076,000 as of June
30, 2001.
Subsequent to June 30, 2001, the Company received a $75,000 over-line to its
line of credit facility by its bank. The over-line expires September 12, 2001.
Shareholder's Equity decreased from $10,742,000 as of December 31, 2000 to
$9,931,000 as of June 30, 2001. The decrease in Shareholder's Equity since
December 31, 2000 is largely attributed to the $1,100,000 net loss incurred
during the six months ended June 30, 2001. Offsetting the net loss was $137,000
of additional common stock issued for cash, services and compensation, $48,000
of stock options granted for services and $104,000 of additional common stock
issued for contingent shares earned by former shareholders of TekSoft according
to the purchase agreement.
The Company invested $647,000 in capitalized software for the six months ended
June 30, 2001. This compares to $569,000 for the same period in 2000. The
significant investment during the six months ended June 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 September 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 October 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 $24,000 available as of June 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
On January 31, 2000, the Company acquired TekSoft for approximately 4,500,000
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 three months ended June 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,
which will be amortized over its remaining useful life.
During the three months ended June 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 three months ended June 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 three months ended June 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 June 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 and other
participants of the Company and its subsidiaries 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 three months ended
June 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. In connection with these options there was no compensation
expense recorded by the Company. 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. As of June 30, 2001, 76,000 of the options were
vested. In connection with these options the Company recorded legal and
professional expenses of $48,748 for the three months ended June 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 June 30, 2001
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
ITEM 5. OTHER INFORMATION
None applicable.
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 June 30, 2001.
(b) REPORTS ON FORM 8-K
None filed by the Company in the three months ended June 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: August 14, 2001
-----------------------------
Bernard A. Woods III, CEO
By: /s/Charles W. Beyer Date: August 14, 2001
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Charles W. Beyer, President
By: /s/William C. Brown Date: August 14, 2001
-----------------------------
William C. Brown, CFO