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 quarter ended: June 30, 2002
[ ] 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 August 1, 2002: 18,768,664
This Quarterly Report on Form 10-QSB includes financial statements, which have
not been reviewed by an independent public accountant under Item 310(b) of
Regulation S-B. The Company discontinued its engagement of Arthur Andersen LLP
on June 7, 2002, and is still in the process of retaining a new independent
public accountant as of the date this Form 10-QSB was filed.
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: 3
Consolidated Balance Sheets 4
Consolidated Statements of Operations 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
This Quarterly Report on Form 10-QSB includes financial statements, which have
not been reviewed by an independent public accountant under Item 310(b) of
Regulation S-B. The Company discontinued its engagement of Arthur Andersen LLP
on June 7, 2002, and is still in the process of retaining a new independent
public accountant as of the date this Form 10-QSB was filed. The Company
expects to engage a new public accountant, which will review the financial
statements contained in this Form 10-QSB after it has been engaged. Upon
completion of the review, if there is a change in these financial statements,
the Company will file an amended report on Form 10-QSB containing the reviewed
financial statements, a discussion of any material changes from the unreviewed
financial statements and any other section of the Form 10-QSB that is amended to
reflect any changes in the financial statements.
OnCourse Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
As of June 30, 2002 (Unaudited) and December 31, 2001 (Audited)
Assets June 30, December 31,
------ 2002 2001
-------- ------------
Current Assets:
Cash $73,585 $76,761
Accounts Receivable, Less Allowance for Doubtful
Accounts of $145,103 and $163,054, 1,118,275 1,081,189
Respectively
Prepaids and Other Assets 300,844 139,138
Deferred Income Tax Asset 581,513 633,805
----------- -----------
Total Current Assets 2,074,217 1,930,893
Note Receivable from Shareholder - 48,684
Capitalized Software, Less Accumulated
Amortization
of $3,261,413 and $2,558,611, Respectively 4,966,688 5,014,774
Property and Equipment, at Cost:
Computer Equipment and Purchased Software 456,074 448,998
Capital Projects in Process - 42,357
Furniture, Fixtures and Vehicles 133,184 131,649
----------- -----------
Total Property and Equipment 589,258 623,004
Less- Accumulated Depreciation (368,517) (313,993)
----------- -----------
Net Property and Equipment 220,741 309,011
Goodwill, Less Accumulated Amortization of
$2,156,755 and $2,156,755, Respectively 5,808,068 5,978,166
Assembled Workforce, Less Accumulated
Amortization of $60,238 and $60,238, 159,762 159,762
Respectively
Trade Names, Less Accumulated Amortization of
$88,611 and $70,278, 461,389 479,722
Respectively
Distribution Network, Less Accumulated
Amortization of $207,143 and 392,857 435,714
$164,286, Respectively
Other Assets 110,627 158,829
----------- -----------
Total Assets $14,194,349 $14,515,555
----------- -----------
----------- -----------
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, 2002 (Unaudited) and December 31, 2001 (Audited)
Liabilities and Shareholders' Equity June 30, December 31,
------------------------------------ 2002 2001
-------- ------------
Current Liabilities:
Line of Credit $341,000 $120,000
Current Portion of Long-Term Debt 116,669 113,122
Current Portion of Capital Leases 1,220 5,380
Accounts Payable 922,235 1,021,673
Accrued Commissions 134,425 109,813
Accrued Wages and Other Liabilities 284,478 194,750
Notes Payable to Shareholders and Employees 184,353 126,821
Deferred Revenue 1,762,920 1,889,657
----------- -----------
Total Current Liabilities 3,747,300 3,581,216
Line of Credit 1,099,950 1,099,950
Notes Payable to Shareholders and Employees, 80,710 -
Less Current Portion
Long-Term Debt, Less Current Portion 676,916 730,388
Capital Lease Obligations, Less Current Portion 970 1,313
Deferred Income Tax Liability 100,162 397,936
Shareholders' Equity:
Common Stock, $0.001 Par Value, 50,000,000 18,769 18,269
18,269,253hShares,Issued8and8Outstanding,
Respectively
Preferred Stock, $0.001 Par Value and No Par 192,000 192,000
Value, Respectively, 10,000,000 Shares
Authorized, 192 and 192 Shares Issued and
Outstanding, Respectively
Additional Paid-In Capital 15,575,271 15,256,331
Warrants 562,788 628,539
Stock Options 69,110 60,598
Retained Deficit (7,929,597) (7,450,985)
----------- -----------
Total Shareholders' Equity 8,488,341 8,704,752
----------- -----------
Total Liabilities and Shareholders' Equity $14,194,349 $14,515,555
----------- -----------
----------- -----------
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, 2002 and 2001 (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2002 2001 2002 2001
----------------------- ----------------------
Net Sales $1,281,730 $1,464,906 $2,513,572 $2,736,137
Cost of Sales 523,903 457,908 1,048,618 871,150
---------- ---------- ---------- -----------
Gross Profit 757,827 1,006,998 1,464,954 1,864,987
Selling Expenses 461,140 587,297 944,124 1,166,333
Research and Development 94,912 86,038 146,069 160,866
Goodwill and Other 30,595 333,925 61,191 672,076
Intangible Amortization
General and Administrative
Expenses 469,573 545,024 924,473 1,127,327
---------- ---------- ---------- -----------
Operating Loss (298,393) (545,286) (610,903) (1,261,615)
Interest Expense 41,648 29,460 72,951 57,784
---------- ---------- ---------- -----------
Loss Before Income Taxes (340,041) (574,746) (683,854) (1,319,399)
Income Tax Benefit 92,747 86,523 208,083 219,201
---------- ---------- ---------- -----------
Net Loss $(247,294) $(488,223) $(475,771) $(1,100,198)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Basic and Diluted Loss
Per Share $(0.01) $(0.03) $(0.03) $(0.06)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
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, 2002 and 2001 (Unaudited)
Six Months Ended
June 30,
-------------------------
2002 2001
----------- -----------
Cash Flows from Operating Activities:
Net Loss $(475,771) $(1,100,198)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities-
Depreciation and Amortization 869,555 1,267,433
Loss on Disposal of Property and Equipment 42,356 1,795
Non-Cash Compensation - 1,275
Non-Cash Consulting Services 29,512 204,035
Deferred Income Taxes, Net (141,332) (102,945)
Changes in Current Assets and Liabilities-
Accounts Receivable (37,085) (167,132)
Prepaids and Other Current Assets (96,321) (116,953)
Accounts Payable (99,438) 179,113
Accrued Liabilities 111,499 (13,533)
Deferred Revenue (126,737) 89,770
--------- -----------
Net Cash Provided by Operating Activities 76,238 242,660
--------- -----------
Cash Flows From Investing Activities:
Capitalized Software Development Costs (654,717) (646,953)
Purchase of Property and Equipment (8,610) (26,753)
Other Assets (2,837) (798)
--------- -----------
Net Cash Used in Investing Activities (666,164) (674,504)
--------- -----------
Cash Flows From Financing Activities:
Proceeds From Line of Credit, Net 221,000 288,000
Proceeds From Notes Payable to Shareholders and 150,000 -
Employees
Payments on Long-Term Debt and Notes Payable to (61,683) (59,156)
Shareholders and Employees
Payments on Capital Lease Obligation, Net (4,502) (6,293)
Proceeds from Common Stock Issuance 233,251 100,000
Decrease (Increase) in Notes Receivable from
Shareholder 48,684 (1,840)
--------- -----------
Net Cash Provided by Financing Activities 586,750 320,711
--------- -----------
Net Decrease in Cash (3,176) (111,133)
Cash, Beginning of Period 76,761 200,411
--------- -----------
Cash, End of Period $73,585 $89,278
--------- -----------
--------- -----------
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, 2002 and 2001 (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 consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany transactions and
accounts have been eliminated in consolidation.
The information furnished herein reflects all adjustments and accruals that
management believes are 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, 2001. 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 three years and has negative
working capital. Based upon its current plans, the Company believes it has
the ability to raise sufficient equity and debt funds to meet its operating
expenses and capital requirements through fiscal year 2002 and into fiscal
year 2003. 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, borrow under its line of credit or reevaluate its
operating plans.
(3) Summary of Significant Accounting Policies-
------------------------------------------
(a) Revenue Recognition-
-------------------
Revenue from product sales and related training is recognized upon customer
acceptance and delivery of the product and training services performed
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, 2002 and December 31, 2001 is approximately $709,000 and $709,000,
respectively, of products, which have been delivered and invoiced, but for
which the Company has not been notified of customer acceptance and training
services invoiced but not yet performed.
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 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, 2002 and 2001, 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 $95,000 and $86,000 for the three
months ended June 30, 2002 and 2001, respectively. Research and
development costs were approximately $146,000 and $161,000 for the six
months ended June 30, 2002 and 2001, respectively.
Computer software development costs capitalized in the three months ended
June 30, 2002 and 2001 were approximately $336,000 and $300,000,
respectively. Computer software development costs capitalized in the six
months ended June 30, 2002 and 2001 were approximately $655,000 and
$647,000, respectively. Amortization expense for the three months ended
June 30, 2002 and 2001 of approximately $362,000 and $286,000,
respectively, is included in cost of sales in the consolidated statements
of operations. Amortization expense for the six months ended June 30, 2002
and 2001 was approximately $703,000 and $532,000, respectively.
(c) Goodwill and Other Intangibles-
------------------------------
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, the amortization of goodwill and intangible
assets with indefinite lives was discontinued. The Company anticipates
that the application of the nonamortization provisions will increase 2002
net income approximately $1,187,000 ($0.07 per diluted share) per year
compared to fiscal 2001. During 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.
Goodwill consisting of excess of cost over fair value of the assets
acquired in previous acquisitions was amortized on a straight-line basis
over seven years for the three and six months ended June 30, 2001.
Goodwill net of accumulated amortization expense was approximately
$5,808,000 and $5,978,000 as of June 30, 2002 and December 31, 2001,
respectively. Goodwill amortization for the three months ended June 30,
2002 and 2001 was approximately $0 and $295,000, respectively. Goodwill
amortization for the six months ended June 30, 2002 and 2001 was
approximately $0 and $595,000, respectively.
The purchase price allocation relating to the assets acquired in the
January 31, 2000 acquisition of TekSoft, Inc. ("TekSoft") resulted in
several intangible assets: $220,000 for Assembled Workforce, $550,000 for
Trade Names and $600,000 for Distribution Network. The amortization of the
Assembled Workforce was discontinued in 2002 in accordance with the
Statements of Financial Accounting Standards No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets" effective
for the fiscal years beginning after December 31, 2001. The amortization
of the Assembled Workforce, which was provided utilizing the straight-line
method over the estimated useful life of seven years for the three and six
months ended June 30, 2001, was discontinued as of January 1, 2002. The
amortization for Distribution Network and Trade Names continues in 2002 and
is provided utilizing the straight-line method over the estimated useful
life of seven years and fifteen years, respectively. Total amortization
expense relating to Assembled Workforce was approximately $0 and $8,000 for
the three months ended June 30, 2002 and 2001, respectively. The total
amortization expense relating to Assembled Workforce was approximately $0
and $16,000 for the six months ended June 30, 2002 and 2001, respectively.
Total amortization expense relating to Distribution Network and Trade Names
was approximately $31,000 for each of the three months ended June 30, 2002
and 2001 and $61,000 for each of the six months ended June 30, 2002 and
2001.
(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 adopted the statement
effective January 1, 2002.
(5) Notes Receivable from Shareholder-
---------------------------------
In March 2002, a shareholder paid the Company the outstanding note
receivable and accrued interest.
(6) Notes Payable to Shareholders and Employees-
-------------------------------------------
In June 2002, the Company issued a $150,000 demand note payable to two
officers of the Company. The note has an interest rate of 8% and principle
and interest are due sixty days after a written request for payment by the
note holders. As security to the note holders, the Company agreed to issue
600,000 shares of its Common Stock in the event that the Company defaulted
on the note.
In March 2002, approximately $80,700 in notes payables to former
shareholders of TekSoft were renegotiated to interest only notes through
December 31, 2003. The interest rate on the notes was reduced from 16.5%
to a floating rate of prime plus 2.0%. The note holders have the option
after January 1, 2003 to convert the note to a three-year note at a fixed
rate of interest of prime plus 2.0% at the time of conversion. As of June
30, 2002, the balance of these notes was approximately $80,700 at an
interest rate of 6.75%.
As of March 31, 2002, the Company had several notes payable and loans to
the former shareholders and employees of TekSoft. The notes had interest
rates of 16.5% and were payable monthly and matured at various dates
through April 2002. These notes are secured by substantially all of
TekSoft's property and equipment. One of the notes was paid in full in
April 2002 and another was paid in full in May 2002. The balance of the
remaining note as of June 30, 2002 was approximately $34,000 with the due
date extended on a month-to-month basis.
In February 2002, the Company paid the remaining principal on a $5,000 non-
interest bearing demand note payable to one of its shareholders. The
Company accrued interest expense on this note at 7% per year. Interest has
not been paid since its inception and is accrued as of June 30, 2002.
(7) Debt-
----
In May 2002, the Company and its bank added an additional line of credit
agreement, which provides for borrowings up to $100,000 through August 12,
2002 (See Note 10). The revolving line of credit is limited to a borrowing
base calculated as a specific percentage of qualifying accounts receivable,
property and equipment and net capitalized software. The interest rate for
the revolving line of credit is at prime plus 1.5%. The debt facility is
secured by all of the assets of the Company. Borrowings under this line
of credit facility were $91,000 as of June 30, 2002.
In March 2002, the Company and its bank agreed to extend the maturity date
on the $250,000 line of credit from March 13, 2002 to May 13, 2002. In May
2002, the bank further extended the maturity date to January 31, 2003.
Borrowings under this line of credit facility were $250,000 as of June 30,
2002.
(8) Shareholders' Equity -
---------------------
In June 2002, the Company offered and issued 14,113 shares of Company
common stock, 14,113 Class A stock purchase warrants and 14,113 Class B
stock purchase warrants as payment of $7,664 in professional services to a
vendor. The warrants were issued with initial estimated values (based on
Black-Scholes valuation model) ranging from $0.20 to $0.44 for each Class A
warrant and from $0.23 to $0.48 for each Class B warrant and expire in 2005
and 2007, respectively. Each warrant represents the right to purchase one
share of the Company's common stock at an exercise price ranging from $0.50
to $0.75 per share.
On January 31, 2000, the Company acquired 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 five years ending January 31,
2005 if net sales, as defined in the agreement, increases. During the six
months ended June 30, 2002, an additional 72,991 shares were earned under
this agreement at a value of $0.28 per share. An additional $20,437 was
allocated to goodwill. As of June 30, 2002, 739,877 of the contingent
shares have been earned and issued.
In May 2002, the Company changed its Preferred Stock from no par to a par
value of $0.001 per share.
In April 2002, the Company offered and issued 250,000 units in private
placements to an individual deemed financially capable of making the
investment. Units include one share of Company common stock and one two-
year Class D common stock purchase warrant and one three-year Class A
common stock purchase warrant and expire in 2004 and 2005, respectively.
The units were sold for $0.50 per unit. The exercise price for the Class D
warrant was $0.65 per share. The exercise price for the Class A warrant
was $0.85 per share. The Company estimated the value of the warrants to be
$0.22 for each Class D warrant and $0.25 for each Class A warrant based on
the Black-Scholes valuation model.
In March 2002, the Company offered and issued 150,000 units in a private
placement to an officer of the Company. Units included one share of
Company common stock and one three-year Class A common stock purchase
warrant and one five-year Class B common stock purchase warrant and expire
in 2005 and 2007, respectively. The units sold for $0.50 per unit. The
exercise price for the Class A warrant was $0.75 per share. The exercise
price for the Class B warrant was $1.00 per share. The Company estimated
the value of the warrants to be $0.21 for each Class A warrant and $0.23
for each Class B warrant based on the Black-Scholes valuation model.
In January 2002, the Company offered and issued 12,307 shares of Company
common stock, 12,307 Class A stock purchase warrants and 12,307 Class B
stock purchase warrants as payment of $12,307 in professional services to a
vendor. The warrants were issued with initial estimated values (based on
Black-Scholes valuation model) of $0.42 for each Class A warrant and $0.48
for each Class B warrant and expire in 2005 and 2007, respectively. Each
warrant represents the right to purchase one share of the Company's common
stock at an exercise price of $1.75 per share.
(9) Stock Option Plan-
-----------------
In March 2002, the Board of Directors authorized 250,000 stock options for
distribution in 2002 at an exercise price of $0.37 per share for the
benefit of current employees with 50,000 reserved for new employees. The
vesting period will be five years or less based on the years of service
performed by the employee. The options will expire December 31, 2010.
In 2001, the Company granted 140,000 stock options to an independent
contractor at an exercise price of $0.65 per share, and which vest over a
12-month period ending May 3, 2002. The options expire May 3, 2007.
During the three months ended June 30, 2002 and 2001, the Company recorded
legal and professional expenses for the options vesting during this period
of $3,438 and $48,748, respectively. During the six months ended June 30,
2002 and 2001, the Company recorded legal and professional expenses of
$8,512 and $48,748, respectively. As of June 30, 2002, all of the options
were vested.
During the three and six months ended June 30, 2002, none of the stock
options granted by the Company were exercised.
(10) Subsequent events-
-----------------
Subsequent to June 30, 2002, the Company signed a $75,000 notes payable
with two officers of the Company. The note has an interest rate of 8% and
principle and interest are due sixty days after a written request for
payment by the note holders. As security to the note holders, the Company
agreed to issue 600,000 shares of its Common Stock in the event that the
Company defaulted on the note.
Subsequent to June 30, 2002, the Company and the bank extended the maturity
date on the $100,000 line of credit facility from August 12, 2002 to
November 12, 2002.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
The fluctuations in the economy continue to negatively impact the investment
decision-making processes of manufacturing driven businesses. In light of this
fluctuating economy, the Company's net sales decreased from $1,465,000 for the
three months ended June 30, 2001 to $1,282,000 for the same period in 2002 for a
13% decrease. In the case of the Company's estimating products that have lesser
competition, sales have partially declined due to delays in the sale of its
software products as potential buyers have pushed back the timing of their
purchases in efforts to conserve cash or until economic conditions improve.
While the same delays have occurred for the Company's computer-aided-
design/computer-aided-manufacturing (CAD/CAM) software products, the Company
also faces a significantly higher number of competitors vying for fewer sales
opportunities. This competition for CAD/CAM sales has led to discounting off of
list price. Deferred revenue decreased 9% from $1,936,000 as of March 31, 2002
to $1,763,000 as of June 30, 2002.
Cost of sales was $524,000 or 41% of net sales for the three months ended June
30, 2002 as compared to $458,000 or 31% for the same period in 2001. The gross
margin percentage for the three months ended June 30, 2002 declined from the
same period in 2001 mostly due to an increase in fixed capitalized software
amortization expense for the Company's products and was further negatively
impacted by a reduction in sales. The capitalized software amortization expense
for the three months ended June 30, 2002 was $362,000 compared to $286,000 for
the three months ended June 30, 2001. This increase is due to the Machine Shop
Estimating 9.0 and 9.5, CAMWorks 2001, CAMWorks 2001 Plus and ProCAM II products
for which the Company began amortizing capitalized costs after their product
releases on various dates during or after the three months ended June 30, 2001,
but before the beginning of the three months ended June 30, 2002. Many of the
other costs recorded as cost of sales are fixed in nature as well.
Selling expenses decreased 21% to $461,000 for the three months ended June 30,
2002 as compared to $587,000 for the same period in 2001. Selling expenses as a
percentage of net sales were 36% and 40% for the three months ended June 30,
2002 and 2001, respectively. The decline in selling expenses occurred largely
due to reduced spending in advertising and promotional activities for the
Company's products in 2002 as compared to 2001. The advertising reduction was
made due to the Company's decision to direct its resources to developing its
product offerings. Also contributing to the reduction was the decline in the
economy causing sales to decline, which tightened cash flows and restricted
spending.
Total research and development expense was $95,000 and $86,000 for the three
months ended June 30, 2002 and 2001, respectively.
Goodwill and other intangible amortization expenses were $31,000 and $334,000
for the three months ended June 30, 2002 and 2001, respectively. The decrease
is attributed to the Company implementing the Financial Accounting Standards
Board's Statements of Financial Accounting Standard 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 amortization expense for goodwill
was $0 and $295,000 for the three months ended June 30, 2002 and 2001,
respectively. The amortization expense for other intangibles was $31,000 and
$38,000 for the three months ended June 30, 2002 and 2001, respectively. The
decrease in amortization of other intangibles is related to the Assembled
Workforce acquired as part of the TekSoft acquisition, which under the new
accounting rules has an indefinite life and therefore is no longer amortized.
General and administrative expenses decreased to $470,000 for the three months
ended June 30, 2002 compared to $545,000 for the same period in 2001. General
and administrative expenses as a percentage of net sales were 37% of net sales
for the three months ended June 30, 2002 as compared to 37% for 2001. The dollar
decrease occurred mostly due to reductions in professional and legal expenses.
The Company recorded $42,000 for the three months ended June 30, 2001 for a
professional services agreement for consulting services as compared to the $0
for the three months ended June 30, 2002. The Company issued 300,000 shares of
common stock in 2000 for these services at a value of $2.00 per share. In
February 2001, this agreement was extended an additional nine months to February
2002, which reduced the monthly amortization related to this agreement from
$50,000 to $14,000. In addition, significant legal and professional expenses
were incurred during the three months ended June 30, 2001 associated with the
Company's follow-on expenses for the 10-SB and various other SEC filings. The
same level of professional and legal expenses was not incurred during the three
months ended June 30, 2002 thus contributing to the expense decrease.
Operating expenses including goodwill and other intangible asset amortization
were $1,056,000 for the three months ended June 30, 2002 as compared to
$1,552,000 for the same period in 2001.
Interest expense increased from $29,000 for the three months ended June 30, 2001
to $42,000 for three months ended June 30, 2002. The increase is attributed to
additional debt incurred by the Company that was used to finance the development
of the Company's new products released in 2001and continued during the six
months ended June 30, 2002 and to fund losses that the Company incurred for the
same period. The Company remains committed to product development and has
borrowed money to support this development. The Company also retained employees
that it believed necessary to support growth that it continues to expect for the
three months ending December 31, 2002. The Company continued to benefit from
lower interest rates during the three months ended June 30, 2002 as compared to
interest rates in the same period in 2001. The Company had a pre-tax loss of
$340,000 for the three months ended June 30, 2002 as compared to the $575,000
pre-tax loss for the three months ended June 30, 2001.
The net loss after the tax benefit was $247,000 and $488,000 for the three
months ended June 30, 2002 and 2001, respectively.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
The comments made in the previous "Three Months Ended June 30, 2002 and 2001"
section relative to the impact that the economy had on sales are equally
appropriate relative to the Company's sale for the six months ended June 30,
2002 and 2001. The Company's net sales decreased from $2,736,000 for the six
months ended June 30, 2001 to $2,514,000 for the same period in 2002 for an 8%
decrease. Deferred revenue decreased 7% from $1,890,000 as of December 31, 2001
to $1,763,000 as of June 30, 2002.
Cost of sales was $1,049,000 or 42% of net sales for the six months ended June
30, 2002 as compared to $871,000 or 32% for the same period in 2001. The gross
margin percentage for the six months ended June 30, 2002 declined from the same
period in 2001 mostly due to an increase in fixed capitalized software
amortization expense for the Company's products and was further impacted by a
reduction in sales. The capitalized software amortization expense for the six
months ended June 30, 2002 was $703,000 compared to $532,000 for the six months
ended June 30, 2001. This increase is due to the Machine Shop Estimating 9.0
and 9.5, CAMWorks 2001, CAMWorks 2001 Plus and ProCAM II products for which the
Company began amortizing capitalized costs after their product releases on
various dates during or after the six months ended June 30, 2001, but before the
beginning of the six months ended June 30, 2002. Many of the other costs
recorded as cost of sales are fixed in nature as well.
Selling expenses decreased 19% to $944,000 for the six months ended June 30,
2002 as compared to $1,166,000 for the same period in 2001. Selling expenses as
a percentage of net sales were 38% and 43% for the six months ended June 30,
2002 and 2001, respectively. The decline in selling expenses occurred largely
due to reduced spending in advertising and promotional activities for the
Company's products in 2002 as compared to 2001. The advertising reduction was
made due to the Company's decision to direct its resources to developing its
product offerings. Also contributing to the reduction was the decline in the
economy causing sales to decline, which tightened cash flows and restricted
spending.
Total research and development expense was $146,000 and $161,000 for the six
months ended June 30, 2002 and 2001, respectively.
Goodwill and other intangible amortization expenses were $61,000 and $672,000
for the six months ended June 30, 2002 and 2001, respectively. The decrease is
attributed to the Company implementing the Financial Accounting Standards
Board's Statements of Financial Accounting Standard 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 amortization expense for goodwill
was $0 and $595,000 for the six months ended June 30, 2002 and 2001,
respectively. The amortization expense for other intangibles was $61,000 and
$77,000 for the six months ended June 30, 2002 and 2001, respectively. The
decrease in amortization of other intangibles is related to the Assembled
Workforce acquired as part of the TekSoft acquisition, which under the new
accounting rules has an indefinite life and therefore is no longer amortized.
General and administrative expenses decreased to $924,000 for the six months
ended June 30, 2002 compared to $1,127,000 for the same period in 2001. General
and administrative expenses as a percentage of net sales decreased to 37% of net
sales for the six months ended June 30, 2002 as compared to 41% for 2001. The
decrease occurred mostly due to reductions in professional and legal expenses.
The Company recorded $21,000 for the six months ended June 30, 2002 for a
professional services agreement for consulting services as compared to the
$120,000 for the six months ended June 30, 2001. This represents a decrease of
$99,000 in general and administrative expenses from the six months ended June
30, 2001. The Company issued 300,000 shares of common stock in 2000 for these
services at a value of $2.00 per share. In February 2001, this agreement was
extended an additional nine months to February 2002, which reduced the monthly
amortization related to this agreement from $50,000 to $14,000. In addition,
significant legal and professional expenses were incurred during the six months
ended June 30, 2001 associated with the Company's follow-on expenses for the 10-
SB and various other SEC filings. The same level of professional and legal
expenses was not incurred during the six months ended June 30, 2002 thus
contributing to the expense decrease.
Operating expenses including goodwill and other intangible asset amortization
were $2,076,000 for the six months ended June 30, 2002 as compared to $3,127,000
for the same period in 2001.
Interest expense increased from $58,000 for the six months ended June 30, 2001
to $73,000 for six months ended June 30, 2002. The increase is attributed to
additional debt incurred by the Company that was used to finance the development
of the Company's new products released in 2001and continued during the six
months ended June 30, 2002 and to fund losses that the Company incurred for the
same period. The Company remains committed to product development and has
borrowed money to support this development. The Company also retained employees
that it believed necessary to support growth that it continues to expect in the
three months ending December 31, 2002. The Company continues to benefit from
lower interest rates during the six months ended June 30, 2002 as compared to
interest rates in the same period in 2001. The Company had a pre-tax loss of
$684,000 for the six months ended June 30, 2002 as compared to the $1,319,000
pre-tax loss for the six months ended June 30, 2001.
The net loss after the tax benefit was $476,000 and $1,100,000 for the three
months ended June 30, 2002 and 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred losses over the last three years and has negative
working capital. Based upon its current plans, the Company believes it has the
ability to raise sufficient equity and debt funds to meet its operating expenses
and capital requirements through fiscal year 2002 and into fiscal year 2003.
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, borrow
under its line of credit or reevaluate its operating plans.
The Company's cash position as of June 30, 2002 was approximately $74,000 as
compared to $77,000 as of December 31, 2001. During the six months ended June
30, 2002, net cash provided by operating activities was $76,000 versus $243,000
for the six months ended June 30, 2001. The relatively low amount of cash flow
from operations for the six months ended June 30, 2002 is largely related to
reduced sales caused by the recessionary period experienced by the Company and
the manufacturing marketplace and the Company not reducing spending to offset
the sales decline. The Company incurred higher than planned losses as a result.
The Company decided to retain all of its employees because it believed it
necessary in order to handle its expected sales growth in 2002 as well as
continue developing the next generation of manufacturing software. Cash flows
used in investing activities were $666,000 and $675,000 for the six months ended
June 30, 2002 and 2001, respectively. The Company invested $655,000 in
capitalized software development costs and $11,000 for property and equipment
and other assets for the six months ended June 30, 2002 as compared to $647,000
and $28,000, respectively, for the same period in 2001. The Company had
positive cash flows from financing activities of $587,000 and $321,000 for the
six months ended June 30, 2002 and 2001, respectively. The financing activities
for the six months ended June 30, 2002 were primarily comprised of positive
inflows of $221,000 on the line of credit facility, $233,000 of common stock
proceeds, $150,000 of notes payable to shareholders and $49,000 shareholder
payment of notes receivable, which were partially offset by $66,000 of payments
on long-term debt, notes payables to shareholders and capital lease obligations.
The Company's working capital as of June 30, 2002 was a negative $1,673,000 as
compared to the negative working capital of $1,650,000 as of December 31, 2001.
The $23,000 decrease in working capital from the December 31, 2001 balance is
largely attributed to the unfavorable effects of a $221,000 increase in the
current portion of the line of credit, a $24,000 increase in accrued commissions
and a $58,000 increase in the current portion of notes payable to shareholders,
which were partially offset by the favorable effects of a $37,000 increase in
net accounts receivables, a $162,000 increase in prepaid and other current
assets and a $127,000 reduction in the deferred revenue. The short-term line of
credit facility increase and additional $150,000 notes payable to shareholders
is largely due to lower sales and slower cash collections due to the recession
experienced during the six months ended June 30, 2002. The loss resulted in a
decline of working capital and adversely affected the Company's ability to pay
its vendors on a timely basis.
The Company had total interest bearing debt of $2,502,000 and $2,197,000 as of
June 30, 2002 and December 31, 2001, 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 $305,000 during the six
months ended June 30, 2002, which was made up of a $221,000 increase in the
Company's line of credit facility and $150,000 of notes payable to shareholders,
which was partially offset by a $50,000 reduction in term debt, a $12,000
reduction in notes payables to shareholders and a $4,000 reduction in capital
leases. As of June 30, 2002, the Company had borrowings of $1,099,950 and
$341,000 against its $1,100,000 long-term line of credit and $350,000 short-term
line of credit facilities, respectively. Subsequent to June 30, 2002, the
Company and its bank agreed to extend the maturity date of the additional
$100,000 line of credit agreement from August 12, 2002 to November 12, 2002.
Subsequent to June 30, 2002, the Company signed a $75,000 notes payable with two
officers of the Company at an interest rate of 8% that is due sixty days upon
written notice. As security to the note holders, the Company will issue 300,000
shares to the note holders in the event that the Company is in default on the
note. The Company intends on seeking additional debt and equity financing to
supplement its cash needs. However, there are no assurances that the bank or
other lending or equity sources will provide additional capital financing.
Shareholder's Equity decreased to $8,488,000 as of June 30, 2002 compared to
$8,705,000 as of December 31, 2001. The decrease in Shareholder's Equity for
the six months ended June 30, 2002 is largely attributed to a $476,000 net loss
and $2,000 of dividends accrued on preferred stock. This decrease was partially
offset by $233,000 of proceeds from the issuance of common stock for cash and
services, $20,000 of common stock for contingent shares earned and $9,000 of
stock options issued.
The Company invested $655,000 in capitalized software for the six months ended
June 30, 2002. This compares to $647,000 for the six months ended June 30,
2001. The Company believes that the development work done in 2001 and the six
months ended June 30, 2002 related to automatic feature recognition as found in
its CAMWorks and ProCAM II CAD/CAM software and the integration of this
technology with its estimating software will provide significant revenue
opportunities in 2002 and 2003. Offsetting $9,000 of property and equipment
purchases for the six months ended June 30, 2002 was a disposal of a partially
developed customer relationship management software package that has a book
value of approximately $42,000. The Company determined that the cost to
complete the development and implementation of this package was significantly
higher than planned and decided that it would seek other alternatives.
The Company intends on financing future expenditures for property and equipment,
capitalized software and sales growth using capital provided by sales of common
stock through private placement activities. Capital is required in order to
supplement lower than expected internally generated cash flows from operations
due to the recessionary period experienced during the six months ended June 30,
2002 and the year ended December 31, 2001 and as projected for the third quarter
of 2002.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may be subject to contingent liabilities resulting from litigation
and claims incident to the ordinary course of business. As of the date of this
report, the Company does not believe that it is subject to any legal proceedings
the probable resolution of which would have material adverse effect on the
business or financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
In June 2002, the Company offered and issued 14,113 shares of Company common
stock, 14,113 Class A stock purchase warrants and 14,113 Class B stock purchase
warrants as payment of $7,664 in professional services to a vendor. The
warrants were issued with initial estimated values (based on Black-Scholes
valuation model) ranging from $0.20 to $0.44 for each Class A warrant and from
$0.23 to $0.48 for each Class B warrant and expire in 2005 and 2007,
respectively. Each warrant represents the right to purchase one share of the
Company's common stock at an exercise price ranging from $0.50 to $0.75 per
share.
On January 31, 2000, the Company acquired 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 five years ending January 31, 2005 if net
sales, as defined in the agreement, increases. During the three months ended
June 30, 2002, an additional 72,991 shares were earned under this agreement at a
value of $0.28 per share. An additional $20,437 was allocated to goodwill. As
of June 30, 2002, 739,877 of the contingent shares have been earned and issued.
In April 2002, the Company offered and issued 250,000 units in private
placements to an individual deemed financially capable of making the investment.
Units include one share of Company common stock and one two-year Class D common
stock purchase warrant and one three-year Class A common stock purchase warrant
and expire in 2004 and 2005, respectively. The units were sold for $0.50 per
unit. The exercise price for the Class D warrant was $0.65 per share. The
exercise price for the Class A warrant was $0.85 per share. The Company
estimated the value of the warrants to be $0.22 for each Class D warrant and
$0.25 for each Class A warrant based on the Black-Scholes model.
The Company believes that it has satisfied the exemption from the securities
registration requirement provided by Section 4(2) of the Securities Act of 1933
and Regulation D promulgated thereunder for all of the above-described
transactions.
In May 2002, the Company changed its Preferred Stock from no par value to a par
value of $0.001 per share.
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
On May 1, 2002, shareholders holding a majority of the voting power of all
shareholders and all of the directors of the Company adopted resolutions by
action by consent in writing in lieu of meeting to ratify and adopt a
Certificate of Amendment to Articles of Incorporation and a Certificate of
Designation, Powers, Preferences and Rights of the Series of Preferred Stock of
OnCourse Technologies, Inc. The Certificate of Amendment to Articles of
Incorporation and Certificate of Designation, Powers, Preferences and Rights of
the Series of Preferred Stock were filed as Exhibits 3(d) and 3(e) of the
Company's 10-KSB filed with the Securities and Exchange Commission on May 14,
2002.
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
Exhibit No. Page Number Description
---------- ----------- -----------
10(a) 19 Business Note dated May 13, 2002. Extends the
maturity date of Business Note dated March 13,
2002.
10(b) 21 Business Note dated May 14, 2002. Additional line
of credit facility.
(b) REPORTS ON FORM 8-K
The Company filed an 8-K with the Securities and Exchange Commission on June 12,
2002, and as amended on June 21, 2002, to report under Item 4. "Changes in the
Registrant's Certifying Accountant", that the Company discontinued its
engagement of Arthur Andersen LLP as its auditors. The Company also reported
that is was still in the process of retaining a new independent public
accountant as of the date of that report.
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, 2002
------------------------------
Bernard A. Woods III, CEO
By: /s/ Charles W. Beyer Date: August 14, 2002
------------------------------
Charles W. Beyer, President
By: /s/ William C. Brown Date: August 14, 2002
------------------------------
William C. Brown, CFO