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: March 31, 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 June 1, 2002: 18,681,560
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 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
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 March 31, 2002 (Unaudited) and December 31, 2001 (Audited)
March 31, December 31,
Assets 2002 2001
------ --------- -----------
Current Assets:
Cash $ 67,241 $ 76,761
Accounts Receivable, Less Allowance for Doubtful
Accounts of $148,392 and $163,054, Respectively 1,218,105 1,081,189
Prepaids and Other Assets 200,411 139,138
Deferred Income Tax Asset 642,780 633,805
----------- -----------
Total Current Assets 2,128,537 1,930,893
Note Receivable from Shareholder - 48,684
Capitalized Software, Less Accumulated Amortization
of $2,899,285 and $2,558,611, Respectively 4,992,990 5,014,774
Property and Equipment, at Cost:
Computer Equipment and Purchased Software 450,627 448,998
Capital Projects in Process 42,357 42,357
Furniture, Fixtures and Vehicles 131,649 131,649
----------- -----------
Total Property and Equipment 624,633 623,004
Less- Accumulated Depreciation (342,174) (313,993)
----------- -----------
Net Property and Equipment 282,459 309,011
Goodwill, Less Accumulated Amortization of
$2,156,755 and $2,156,755, Respectively 5,882,898 5,978,166
Assembled Workforce, Less Accumulated Amortization
of $60,238 and $60,238, Respectively 159,762 159,762
Trade Names, Less Accumulated Amortization of
$79,445 and $70,278, Respectively 470,555 479,722
Distribution Network, Less Accumulated Amortization
of $185,714 and $164,286, Respectively 414,286 435,714
Other Assets 129,296 158,829
----------- -----------
Total Assets $14,460,783 $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 March 31, 2002 (Unaudited) and December 31, 2001 (Audited)
March 31, December 31,
Liabilities and Shareholders' Equity 2002 2001
------------------------------------ --------- ------------
Current Liabilities:
Line of Credit $ 247,500 $ 120,000
Current Portion of Long-Term Debt 110,174 113,122
Current Portion of Capital Leases 1,750 5,380
Accounts Payable 1,066,123 1,021,673
Accrued Commissions 114,236 109,813
Accrued Wages and Other Liabilities 205,503 194,750
Notes Payable to Shareholders and Employees 36,077 126,821
Deferred Revenue 1,935,823 1,889,657
----------- -----------
Total Current Liabilities 3,717,186 3,581,216
Line of Credit 1,099,950 1,099,950
Notes Payable to Shareholders and Employees, Less 80,711 -
Current Portion
Long-Term Debt, Less Current Portion 706,695 730,388
Capital Lease Obligations, Less Current Portion 1,313 1,313
Deferred Income Tax Liability 282,693 397,936
Shareholders' Equity:
Common Stock, $0.001 Par Value, 50,000,000 18,432 18,269
Shares Authorized, and 18,431,560 and
18,269,253 Shares Issued and Outstanding,
Respectively
Preferred Stock, No Par Value, 10,000,000 Shares 192,000 192,000
Authorized, 192 and 0 Shares Issued and
Outstanding, Respectively
Additional Paid-In Capital 15,289,574 15,256,331
Warrants 687,440 628,539
Stock Options 65,672 60,598
Retained Deficit (7,680,883) (7,450,985)
----------- -----------
Total Shareholders' Equity 8,572,235 8,704,752
----------- -----------
Total Liabilities and Shareholders' Equity $14,460,783 $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 Months Ended March 31, 2002 and 2001 (Unaudited)
Three Months Ended
March 31,
--------------------------
2002 2001
---------- ----------
Net Sales $1,231,842 $1,271,231
Cost of Sales 524,715 413,241
---------- ----------
Gross Profit 707,127 857,990
Selling Expenses 482,985 579,036
Research and Development 51,158 74,828
Goodwill and Other Intangible Amortization 30,595 338,151
General and Administrative Expenses 454,900 582,304
---------- ----------
Operating Loss (312,511) (716,329)
Interest Expense 31,303 28,325
---------- ----------
Loss Before Income Taxes (343,814) (744,654)
Income Tax Benefit 115,336 132,678
---------- ----------
Net Loss $ (228,478) $ (611,976)
---------- ----------
Basic and Diluted Loss Per Share $(0.01) $(0.03)
---------- ----------
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 Three Months Ended March 31, 2002 and 2001 (Unaudited)
Three Months Ended
March 31,
------------------------
2002 2001
---------- ----------
Cash Flows from Operating Activities:
Net Loss $(228,478) $(611,976)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities-
Depreciation and Amortization 399,450 614,550
Loss on Disposal of Property and Equipment - 1,795
Non-Cash Consulting Services 26,074 111,587
Deferred Income Taxes, Net (115,336) (105,909)
Changes in Current Assets and Liabilities-
Accounts Receivable (136,915) (35,019)
Prepaids and Other Current Assets 4,113 (1,028)
Accounts Payable 44,450 98,555
Accrued Liabilities 13,756 (63,573)
Deferred Revenue 46,166 36,942
--------- ---------
Net Cash Provided by Operating Activities 53,280 45,924
--------- ---------
Cash Flows From Investing Activities:
Capitalized Software Development Costs (318,891) (346,533)
Purchase of Property and Equipment (1,629) (17,329)
Other Assets 29,534 14,340
--------- ---------
Net Cash Used in Investing Activities (290,986) (349,522)
--------- ---------
Cash Flows From Financing Activities:
Proceeds From Line of Credit, Net 127,500 202,000
Payments on Long-Term Debt and Notes Payable to
Shareholders and Employees (36,674) (40,983)
Payments on Capital Lease Obligation, Net (3,630) (2,619)
Proceeds from Common Stock Issuance 92,306 100,000
Decrease (Increase) in Notes Receivable from
Shareholder 48,684 (938)
--------- ---------
Net Cash Provided by Financing Activities 228,186 257,460
--------- ---------
Net (Decrease) Increase in Cash (9,520) (46,138)
Cash, Beginning of Period 76,761 200,411
--------- ---------
Cash, End of Period $ 67,241 $ 154,273
--------- ---------
--------- ---------
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 Three Months Ended March 31, 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 OnCourse 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 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, 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 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 March
31, 2002 and December 31, 2001 is approximately $753,000 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 months ended
March 31, 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 $51,000 and $75,000 for the three
months ended March 31, 2002 and 2001, respectively.
Computer software development costs capitalized in the three months ended
March 31, 2002 and 2001 were approximately $319,000 and $347,000,
respectively. Amortization expense for the three months ended March 31,
2002 and 2001 of approximately $341,000 and $245,000, respectively, is
included in cost of sales in the consolidated statements of operations.
(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 months ended March 31, 2001. Goodwill net
of accumulated amortization expense was approximately $5,883,000 and
$5,978,000 as of March 31, 2002 and December 31, 2001, respectively.
Goodwill amortization for the three months ended March 31, 2002 and 2001
was approximately $0 and $300,000, respectively.
The purchase price allocation relating to the assets acquired in the
January 31, 2000 acquisition of 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 months ended March 31,
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 March 31, 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 March 31, 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 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 March
31, 2002, the balance of these notes was approximately $80,700 at an
interest rate of 6.75%.
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 March 31, 2002.
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. The balance of these notes totaled
$36,077 as of March 31, 2002.
(7) Debt-
----
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. (See
Note 10.) Borrowings under this line of credit facility were $247,500 as
of March 31, 2002.
(8) Shareholders' Equity -
---------------------
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. The exercise price for
the Class B warrant was $1.00. 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.
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.
(9) Stock Option Plan-
-----------------
In March 2002, the Board of Directors authorized 250,000 stock options for
distribution in 2002 at a grant price of $0.37 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, and which vest over a 12-month
period ending May 3, 2002. The options expire May 3, 2007. For the three
months ended March 31, 2002, the Company recorded $5,074 of legal and
professional expenses for the options vesting during this period. As of
March 31, 2002, 130,000 of the options were vested.
During the three months ended March 31, 2002, none of the stock options
granted by the Company were exercised.
(10) Subsequent events-
-----------------
In May 2002, the Company changed its Preferred Stock from no par to a par
value of $0.001 per share.
In May 2002, the Company and its bank agreed to extend the maturity date on
the $250,000 line of credit from May 13, 2002 to January 31, 2003.
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. The revolving line of credit is limited to a borrowing base
calculated as a specified 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.
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. The exercise price for the Class A warrant was $0.85.
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.
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 MARCH 31, 2002 AND 2001
The Company as well as other manufacturing driven businesses operated in a
recessionary economy during the three months ended March 31, 2002. In light of
this down economy, the Company's net sales decreased from $1,271,000 for the
three months ended March 31, 2001 to $1,232,000 for the same period in 2002 for
a 3% decrease. Sales were lower than anticipated during the three months ended
March 31, 2002 as the Company discounted from the list price of software
products sold in response to the continued recessionary economy and competitive
pressures. Deferred revenue increased 2% from $1,890,000 as of December 31,
2001 to $1,936,000 as of March 31, 2002.
Cost of sales was $525,000 or 43% of net sales for the three months ended March
31, 2002 as compared to $413,000 or 33% for the same period in 2001. The gross
margin percentage for the three months ended March 31, 2002 declined from the
same period in 2001 mostly due to an increase in capitalized amortization
expense for the Company's products. The capitalized amortization expense for
the three months ended March 31, 2002 was $341,000 compared to $245,000 for the
three months ended March 31, 2001. This increase is due to the Machine Shop
Estimating 9.0 and 9.5, CAMWorks 2001, CAMWorks 2001 Plus and ProCAM II products
which the Company began amortizing its respective capitalized costs after their
product releases on various dates after March 31, 2001.
Selling expenses decreased 17% to $483,000 for the three months ended March 31,
2002 as compared to $579,000 for the same period in 2001. Selling expenses as a
percentage of net sales were 39% and 46% for the three months ended March 31,
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 $51,000 and $75,000 for the three
months ended March 31, 2002 and 2001, respectively.
Goodwill and other intangible amortization expenses were $31,000 and $338,000
for the three months ended March 31, 2002 and 2001, respectively. The decrease
is attributed to the Company implementing the Financial Accounting Standards
Board's 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 amortization expense for goodwill was $0 and $300,000
for the three months ended March 31, 2002 and 2001, respectively. The
amortization expense for other intangibles was $31,000 and $38,000 for the three
months ended March 31, 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 expense decreased to $455,000 for the three months
ended March 31, 2002 compared to $582,000 for the same period in 2001. General
and administrative expenses as a percentage of net sales decreased to 37% of net
sales for the three months ended March 31, 2002 as compared to 46% for 2001. The
decrease occurred mostly due to reductions in professional and legal expenses.
The Company recorded $21,000 for the three months ended March 31, 2002 for a
professional services agreement for consulting services as compared to the
$78,000 for the three months ended March 31, 2001. This represents a decrease
of $57,000 in general and administrative expenses from the three months ended
March 31, 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
three months ended March 31, 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 were not incurred during the three months ended
March 31, 2002 thus contributing to the expense decrease.
Operating expenses including goodwill and other intangible asset amortization
were $1,020,000 for the three months ended March 31, 2002 as compared to
$1,574,000 for the same period in 2001.
Interest expense increased from $28,000 for the three months ended March 31,
2001 to $31,000 for three months ended March 31, 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 2001 and the three
months ended March 31, 2002 and to fund losses that the Company incurred for the
same period. The Company decided to finish development work on its products to
ensure that they were developed and at a point that they would be available for
sale. The Company also retained employees that it believed necessary to support
growth that it continues to expect in 2002. Offsetting the increase in overall
borrowings by the Company were favorable interest rate reductions generated
since March 31, 2001 by the Federal Reserve Bank's monetary policy. The Company
had a pre-tax loss of $344,000 for the three months ended March 31, 2002 as
compared to the $745,000 pre-tax loss for the three months ended March 31, 2001.
The net loss after tax benefit was $228,000 and $612,000 for the three months
ended March 31, 2002 and 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
OnCourse 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 March 31, 2002 was approximately $67,000 as
compared to $77,000 as of December 31, 2001. During the three months ended
March 31, 2002, net cash provided by operating activities was $53,000 versus
$46,000 for the three months ended March 31, 2001. The relatively low amount
for cash flow from operations for the three months ended March 31, 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 $291,000 and $350,000 for the three
months ended March 31, 2002 and 2001, respectively. The Company invested
$319,000 in capitalized software development costs for the three months ended
March 31, 2002 as compared to $347,000 for the same period in 2001. The Company
had positive cash flows from financing activities of $228,000 and $257,000 for
the three months ended March 31, 2002 and 2001, respectively. The financing
activities for the three months ended March 31, 2002 were primarily comprised of
$128,000 on the line of credit facility, $92,000 of common stock proceeds,
$48,000 shareholder payment of notes receivable and $40,000 of payments on long-
term debt, notes payables to shareholders and capital lease obligations.
The Company's working capital as of March 31, 2002 was a negative $1,589,000 as
compared to the negative working capital of $1,650,000 as of December 31, 2001.
The $61,000 increase in working capital over the December 31, 2001 balance is
largely attributed to the favorable effects of a $137,000 increase in net
accounts receivables, a $61,000 increase in prepaid and other current assets,
and a $91,000 reduction in the current portion of notes payable to shareholders,
which were partially offset by the unfavorable effects of a $128,000 increase in
the current portion of the line of credit, a $45,000 increase in deferred
revenue, a $44,000 increase in accounts payables, and a $15,000 combined
increase in accrued liabilities and commissions. The accounts payable and
short-term line of credit facility increase is largely due to lower sales and
slower cash collections due to the recession experienced during the three months
ended March 31, 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 $2,284,000 and $2,197,000 as of
March 31, 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 $87,000 during the
three months ended March 31, 2002, which was made up of a $128,000 increase in
the Company's line of credit facility, which was partially offset by a $37,000
reduction in term debt and notes payables and a $4,000 reduction in capital
leases. As of March 31, 2002, the Company had borrowings of $1,099,950 and
$247,500 against its $1,100,000 long-term line of credit and $250,000 short-term
line of credit facilities, respectively. Subsequent to March 31, 2002, the
maturity date on the $250,000 short-term line of credit facility was extended
from May 13, 2002 to January 31, 2003. Subsequent to March 31, 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. The revolving
line of credit is limited to a borrowing base calculated as a specified
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. The Company also intends to work with its bank to further extend its
short-term line of credit facility as well as increase its $1,100,000 long-term
line of credit facility. However, there are no assurances that the bank will
extend the Company's short-term line of credit beyond January 31, 2003 nor
increase maximum borrowing under the $1,100,000 long-term line of credit
facility.
Shareholder's Equity decreased to $8,572,000 as of March 31, 2002 compared to
$8,705,000 as of December 31, 2001. The decrease in Shareholder's Equity for
the three months ended March 31, 2002 is largely attributed to a $228,000 loss
and $1,000 of dividends accrued on preferred stock. This decrease was partially
offset by $92,000 of proceeds from the issuance of common stock for cash and
services and $5,000 of stock options issued. Subsequent to March 31, 2002, the
Company offered and issued 250,000 units in a private placement 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 Company invested $319,000 in capitalized software for the three months ended
March 31, 2002. This compares to $347,000 for the three months ended March 31,
2001. The decrease during the three months ended March 31, 2002 as compared to
the same period in 2001 is attributed to a reduction in development activity as
a result of the completion of several phases of product development. The
Company continued to make investments in its CAD/CAM and estimating software and
Tools4Mfg.com website development, which were $286,000, $25,000 and $8,000,
respectively, for the three months ended March 31, 2002. The Company believes
that the development work done in 2001and the three months ended March 31, 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.
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 three months ended March
31, 2002 and the year ended December 31, 2001 and as projected for the second
and third quarters of 2002.
During the three months ended March 31, 2002, a shareholder paid the Company the
total outstanding note receivable and accrued interest balance of approximately
$50,000.
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 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 2008,
respectively. The units sold for $0.50 per unit. The exercise price for the
Class A warrant was $0.75. The exercise price for the Class B warrant was
$1.00. 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.
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.
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.
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 March 31, 2002
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
Exhibit No. Page Number Description
----------- ----------- -----------
10(a) 17 Business Note dated March 13, 2002. Extends the
maturity date of Business Note dated December 13,
2001.
(b) REPORTS ON FORM 8-K
None filed by the Company in the three months ended March 31, 2002.
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: June 6, 2002
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Bernard A. Woods III, CEO
By: /s/Charles W. Beyer Date: June 6, 2002
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Charles W. Beyer, President
By: /s/William C. Brown Date: June 6, 2002
----------------------------
William C. Brown, CFO