UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from: ------------ to ------------
Commission File Number: 0-31813
ONCOURSE TECHNOLOGIES, INC.
(Name of Small Business in its charter)
NEVADA 91-1922441
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
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
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK;
COMMON STOCK
PURCHASE WARRANTS
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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy of
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Revenues for its most recent fiscal year: December 31, 2001: $4,914,767
Aggregate market value of the voting and non-voting common equity held by non-
affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: 2,190,582 shares of $0.001 par value
common stock at $0.53 per share as of March 31, 2002 for a $1,161,008 market
value. Shares of common stock held by any executive officer or director of the
issuer and any person who beneficially owns 10% or more of the outstanding
common stock have been excluded from this computation because such persons may
be deemed to be affiliates. This determination of affiliate status is not a
conclusive determination for other purposes.
Number of shares outstanding of each of the issuer's class of common equity, as
of March 31, 2002: 18,431,560 shares of $0.001 par value common stock
Transitional Small Business Disclosure Format (Check one): Yes [ ]; No [ X ]
ONCOURSE TECHNOLOGIES, INC.
FORM 10-KSB
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I
Item 1. Description of Business 3
Item 2. Description of Property 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Common Equity and Related Shareholder Matters 14
Item 6. Management's Discussion and Analysis or Plan of Operation 15
Item 7. Financial Statements: 17
OnCourse Technologies, Inc. F-1 18
Report of Independent Public Accountants F-2 19
Consolidated Balance Sheets F-3 20
Consolidated Statements of Operations F-5 22
Consolidated Statements of
Shareholders' Equity F-6 23
Consolidated Statements of Cash Flows F-7 24
Notes to Consolidated Financial Statements F-8 25
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 40
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section 16(a)
of the Exchange Act 40
Item 10. Executive Compensation 42
Item 11. Security Ownership of Certain Beneficial Owners
and Management 44
Item 12. Certain Relationships and Related Transactions 45
Item 13. Exhibits and Reports on Form 8-K 47
PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
COMPANY BACKGROUND
OnCourse Technologies, Inc. (the "Company" or "OnCourse") is a Nevada
corporation organized on May 28, 1998 to develop internet based business-to-
business ("B2B") electronic-commerce sites for use in the procurement of raw
materials and tooling for metalworking industries, to acquire specific other
businesses, and to raise capital. Metalworking is defined as the process or art
of shaping things out of metal. OnCourse currently has five wholly owned
subsidiaries. OnCourse subsidiaries develop and/or sell and distribute
CAD/CAM/CAE software. Computer-Aided Engineering (CAE) is the integration of
design and manufacturing into a system under the direct control of digital
computers. Software systems written by "the subsidiaries" combine the use of
computers in industrial-design work, computer-aided design (CAD), with their use
in manufacturing operations, computer-aided manufacturing (CAM). This integrated
process is commonly called CAD/CAM. CAD systems generally consist of a computer
with one or more terminals featuring video monitors and interactive graphics-
input devices; they can be used to design such things as machine parts, patterns
for clothing, or integrated circuits. CAM Systems involve the use of numerically
controlled machine tools. In a CAE system, drawings developed and revised during
the design process are converted directly into instructions for the production
machines using computer-assisted part programming that will manufacture the
desired object. CAD/CAM systems can create or import the geometrical profile of
a required component as, for example, a series of connected points. The position
of each point, and the ways in which it can be reached by movements of the tool,
is calculated by the computer. After calculating the necessary tool movements,
the computer develops a complete machining program for the part to be
manufactured on a computer numerical control (CNC) machine tool. CNC is when a
computer is used as the controller in an NC (numerical control) machine tool
with the program actuated from computer memory. CNC systems are controlled by
dedicated mini- or microcomputers developed to enable machine tools to be
readily adapted to different jobs by altering the control program or software.
Wholly-owned subsidiaries of OnCourse and the dates of their acquisition or
incorporation by OnCourse include: Micro Estimating Systems, Inc, a Wisconsin
corporation ("Micro Estimating") - July 31, 1998; CAM Solutions, Inc., a
Minnesota corporation ("CAM Solutions") - January 1, 1999; Cimtronics, Inc., an
Arizona corporation ("Cimtronics") - October 1, 1999; TekSoft, Inc, an Arizona
corporation ("TekSoft") - January 31, 2000; and Tools4Mfg.com, a Nevada
corporation (Tools4Mfg) - December 6, 2001.
Micro Estimating designs, develops, and markets computer-aided-engineering
("CAE") software consisting of Windows-based estimating software products and
services, including estimating, process planning and layout software for and to
customers in diverse manufacturing businesses. Micro Estimating also
distributes under an exclusive arrangement in the U.S.A. and Canada the AutoTAS
tool management software of a Swedish developer and supplier.
CAM Solutions distributes computer-aided-design/computer-aided-manufacturing
("CAD/CAM") products developed by TekSoft and other CAD/CAM software developers;
and Machine Shop Estimating, FabPlan and LayOut Pro products developed by Micro
Estimating. CAM Solutions also sells and installs Direct Numerical Control
("DNC") systems for machine tools and systems integration between Micro
Estimating's software and other manufacturing enterprise systems. A DNC system
is another variation of a CNC system in that a DNC system involves sending part
programs over telecommunications lines from a central computer to individual
machine tools in the factory, thus eliminating the use of storing programs on
the machines.
Cimtronics distributes CAD/CAM products developed by TekSoft and other CAD/CAM
software developers; and Machine Shop Estimating, FabPlan and LayOut Pro
products developed by Micro Estimating. Cimtronics also sells and installs DNC
systems for machine tools and systems integration between Micro Estimating's
software and other manufacturing enterprise systems.
TekSoft designs, develops and markets proprietary CAD/CAM software products used
in metal manufacturing. TekSoft distributes its products using distributors
both domestically as well as internationally. TekSoft's distributors include
CAM Solutions and Cimtronics.
Tools4Mfg is a business-to-business electronic-commerce service web site.
Tools4Mfg, a worldwide web site, is the cornerstone in OnCourse's strategy to
offer the functionality of all the Company's proprietary software products to
the worldwide metal working community. This web site will also generate
revenues in the markets of electronic-commerce and supply chain management such
as raw material and perishable tooling.
EMPLOYEES
OnCourse and Micro Estimating have headquarters in New Berlin, Wisconsin. Micro
Estimating has a sales office in North Carolina and other subsidiaries have
headquarters and operations in Arizona, Minnesota and California. The Company
has 43 full-time employees. In addition, TekSoft uses 10 full-time contract
programmers.
BUSINESS OF THE COMPANY
Subsidiaries of OnCourse develop and/or sell CAD/CAM/CAE software to the
metalworking industries. TekSoft has developed and marketed CAD/CAM software
since 1981. Micro Estimating has developed and marketed CAE software since
1982. CAM Solutions has been selling CAD/CAM/CAE software since 1989.
Cimtronics has been selling CAD/CAM/CAE software since 1993. Both CAM Solutions
and Cimtronics have had meaningful CAD/CAM/CAE sales since the years referenced
above. The principal market for the Company's software products consists of an
estimated 500,000 small to medium sized metalworking manufacturers. These
manufacturers include but are not limited to, Original Equipment Manufacturers
(OEM), independent machine shops, contract manufacturers, manufacturers of
aerospace, automotive, appliance, and high technology equipment, electronics
industry components, as well as other tool and die makers. Tool and die making
is the industrial art of manufacturing stamping dies, plastics molds, and
fixtures to be used in the mass production of solid objects. The Company only
had one customer that made up at least 10% of net sales for the years ended
December 31, 2001 and 2000, with sales of 13% and 14%, respectively. Sales are
made by direct sales force and subsidiaries and through distributors. Sales
made by direct sales force and the Company were 39% and 45% for the years ended
December 31, 2001 and 2000, respectively. Sales made by distributors were 61%
and 55% for the years ended December 31, 2001 and 2000, respectively. Sales in
North America for the years ended December 31, 2001 and 2000 were 76% and 87%,
respectively, and sales in Europe for the years ended December 31, 2001 and 2000
were 16% and 7%, respectively.
PRINCIPAL PRODUCTS AND MARKETS
CAD/CAM
TekSoft develops and markets Windows and Windows-NT based, CAD/CAM software used
in the metal working industries. This subsidiary's flagship CAD/CAM product,
ProCAM, has a customer base in excess of 15,000 users in its nine available
languages. TekSoft has a total of over 23,500 users for all its products
installed at facilities serving the aerospace, computer, and automotive and
mold-making industries, among others. According to the 2001 Software Market
Assessment by CIMdata Inc., an independent research firm specializing in the NC
industry, TekSoft is ranked in the top eight based on installed users for CAM
companies worldwide.
PROCAM
ProCAM is a CAD/CAM solution designed for use in manufacturing or machining
products for the manufacturing industry. The ProCAM for Windows product
provides a fully integrated solution for two dimension (2D) CAD/CAM applications
and three dimension (3D) applications requiring complex surface modeling and
machining. Based on past awards, ProCAM is one of the fastest, easiest to use
CAD/CAM products on the market. For example, ProCAM received a 1998 Excellence
in Manufacturing Technology Achievement Award for "Innovation" in the software
classification by the readers of American Machinist Magazine. ProCAM was also
voted a year 2000 Excellence in Manufacturing Technology Achievement Award
winner in the software classification titled "User Friendliness" by the readers
of American Machinist Magazine. Since 1877, American Machinist has covered
significant developments in manufacturing technology. The magazine is dedicated
to serving the machine tool market completely and offers readers the most up-to-
date information in the methods and practices of metalworking. American
Machinist has a monthly subscription base of 80,000 readers consisting of
company management and manufacturing/production managers and engineers in the
Metalworking industries.
CAMWORKS
CAMWorks is a CAM application that is seamlessly integrated into, and is
operated from within a third party application called SolidWorks. According to
SolidWorks' website, SolidWorks is a CAD package developed by the SolidWorks
Corporation, a Dassault Systems S.A. (NASDAQ:DASTY) company. The SolidWorks
Corporation develops and markets 3D mechanical design solutions. CAMWorks
incorporates CAM technologies pioneered by TekSoft such as: Associative
Machining which allows a user to change the CAD drawing of a part and
automatically update the machining parameters without additional user input; and
Knowledge Based Machining which allows users to edit or update a predefined set
of operational instructions for machining a specific type of feature on a part.
This allows the CAMWorks system to automatically select the correct machining
parameters for a given feature on a part, therefore dramatically reducing the
input required by the end user.
CAMWorks is currently available for Milling and Turning applications. CAMWorks
addresses the needs of today's sophisticated manufacturing engineers by
delivering CAM solutions critical to success. OnCourse believes it's the most
advanced tool available for mainstream engineers to get products to market
faster, efficiently and within budget.
COMPUTER-AIDED-ENGINEERING ("CAE")
Micro Estimating offers estimating and process planning software for a broad
spectrum of the manufacturing industries.
MACHINE SHOP ESTIMATING ("MSE")
MSE is an engineering based cost estimating system for manufacturing
companies. MSE calculates machining times and total product costs according to
company specific estimating procedures. The software is comprised of 72 machine
tool and operation specific software modules to emulate actual machine tool and
production cycles. The machine emulation modules will produce calculations
within 1% of true production time. The software provides process planning,
machine process layouts and comprehensive management functions. It incorporates
on-line supplier links, graphical reports, and interfaces seamlessly to numerous
factory management and CAD/CAM programs. MSE libraries contain over 1,150 raw
materials specifications and incorporate 2 million speeds and feed tooling
combinations. The typical customer is a factory owner, estimator or an
engineering department in a larger facility. MSE received a 1998 Excellence in
Manufacturing Technology Achievement Award as "Readers Choice for User
Friendliness" in the software classification by the readers of American
Machinist Magazine.
LAYOUT PRO ("LP")
LP serves as a process planning and machine process layout system, which
allows users to easily calculate machining or fabrication times for product
production. LP offers users the same basic functionality of the MSE product
without the pricing or quoting features. The typical customer is a process
planning engineer or manufacturer of metal working equipment. LP is a subset of
MSE and contains no manufacturing pricing functions, and is typically purchased
by machine tool builders.
FABPLAN ("FP")
FabPlan is an engineering based cost estimating system designed for
manufacturers that operate fabrication equipment. FP calculates fabrication
times and total product costs according to company specific estimating
procedures and shop equipment by simulating actual machine tool cycles. The
software facilitates process planning and machine tool process layouts, which
provides calculations for fabrication times used for production. The system
incorporates supplier links, provides graphical reports, and interfaces with
numerous factory management and CAD/CAM programs. The typical customer is a
factory owner, estimator or an engineering department in a larger facility.
AUTOTAS
Micro Estimating is the exclusive U.S. and Canadian distributor and systems
integrator for AutoTAS, a software product offered by Sandvik/Coromant of
Sweden. AutoTAS is a tooling management program that was previously only
available in Europe. Tool management software assists companies in the control
and replenishment of tooling used in the manufacturing process.
NEW PRODUCTS AND SERVICES
PROCAM II
ProCAM II is a complete rewrite of TekSoft's original ProCAM product.
ProCAM's already easy-to-use Windows interface has received a complete facelift
with a modernized look and feel. In this newest release in December 2001,
TekSoft has introduced Machining Intelligence for Automation, a suite of tools
that automates the generation of machine tool path based on a customizable
database. ProCAM II now incorporates these tools in the optional Solids
Machining package to generate tool path directly from the solid model. Solids
Machining generates the G-code or the program required for the CNC machine to
make the part for solid models created in any solid model design program that
supports exporting files in Parasolid ASCII (x_t) or Binary (x_b) format.
Features include:
Feature Recognition -
o Automatic (AFR) - Automatically identifies prismatic machinable
features.
o Interactive (IFR) - Interactively create machinable features for solid
models.
o Automatically or interactively create patterns of identical features.
o Automatically creates work planes.
o Knowledge-based Machining (KBM).
The Technology Database (TechDB) captures a company's methodology and applies
this information to further automate the NC programming process. The TechDB
contains a complete tooling library in metric and inches. The Machine Tool and
Controller database provides the ability to incorporate specific machine
parameters. The Technology Database also encourages facility-wide consistency
and rules-based manufacturing.
Solids Machining is available for Mill or Turning applications with a choice of
machining modules: 2 Axis Mill, 3 Axis Mill and Turn. Each module provides an
advanced collection of cutting strategies and timesaving features to help
automate the machining process. This new Solids Machining module is not
included in the annual maintenance contracts and will offer significant revenue
potential to TekSoft. Based on a customer's software configuration this upgrade
will be sold for between $750 and $3,200 per user.
CAMWORKS 2001
Leading the list of more than 52 enhancements within this release in May
2001 is the ability of CAMWorks to operate in the SolidWorks Assembly Mode.
Assembly Mode functionality more closely represents the actual machining
environment through the definition and display of the work-piece, machined part,
clamps, fixtures, and tooling.
CAMWorksTM is the only CAM solution designed to work exclusively within the
SolidWorks environment. As the only SolidWorks Certified Gold Product for CAM,
CAMWorks provides state-of-the-art machining capabilities seamlessly integrated
into the SolidWorks design software. Management believes that CAMWorks is the
only CAM application that incorporates Automatic Feature Recognition (AFR),
Interactive Feature Recognition (IFR), and Knowledge-Based Machining in one
package to automate and expedite the machining process. Available for Mill or
Turning applications, CAMWorks is the closest thing to point and click machining
available today. CAMWorks addresses the needs of today's sophisticated
manufacturing engineers by delivering intelligent CAM solutions critical to
success. Management believes that CAMWorks is one of the most advanced tools
available to get products to market faster, efficiently, and within budget.
Enhanced Automatic Feature Recognition - CAMWorks continues as the leading
innovator of CAM automation with numerous enhancements to the AFR process
including a new Mill Face and Open Pocket algorithm that automatically creates
these features based on other features identified by AFR. In addition to the
numerous enhancements to existing features and operations, CAMWorks 2001 has
added many new capabilities to tool path generation, manipulation and
optimization including: Ramp Finish Machining, Rough Spiral Entry, User Defined
Tool Shapes, Rough Pocket Wedge Machining, and 2-Axis Spiral Rough. For 3-Axis
machining CAMWorks 2001 includes new Rough Spiral Entry and Rough Processing
Order by Area operations. Several new features have been added to Simulation to
aid in the definition and display of tools, tool holders, clamps and fixtures.
In addition to many improvements to existing capabilities, the TechDB now allows
the user to define and add Mill Tools, and Tool Holders to the tool library and
tool crib.
TOOLS4MFG.COM
In addition to its software products, OnCourse has established
Tools4Mfg.com, a web site for use by businesses that produce, process, or
purchase custom fabricated and machined products. The Company intends to
develop Tools4Mfg.com into an internet-based purchasing system for smaller
manufacturers that have not been able to implement the expensive and labor
intensive supply chain enterprise systems used by the largest industrial firms,
such as the big three automotive companies. The business will focus principally
on the sale of raw material and consumable industrial products, such as steel
and metal cutting tools. The Company would receive transaction fees for
managing the system. The Company released the metal raw material portion of the
site in December 2001.
The site currently provides manufacturing users with the ability to calculate
material requirements using a material calculation system and to locate
manufacturing facilities based on geographic and manufacturing capabilities when
using its Machine Shop Selector. Machine Shop Selector, which has been in
operation for over two years, assists purchasers of component parts in finding
new suppliers and manufacturers. Capabilities of suppliers of component parts
are searchable, enabling purchasing agents to execute multiple and automatic
requests for quotes (RFQ) that will be delivered in real-time via an online
agent that continually forwards opportunities for new business to those
manufacturers that match required manufacturing parameters.
The site also provides links to obtain metal raw material and industrial fluids
pricing and to place orders for these products. Currently, two vendors are
utilizing this site. In 2001, the Company agreed to allow Central Steel & Wire,
("Central") a steel distributor, exclusive use of Tools4Mfg.com for metal
material price quotes and orders. No other metal service centers or other metal
sellers can use this site without prior written consent of Central. Under this
agreement, the Company will earn a transaction fee ranging from one-half percent
to one and one-half percent on pro-rated sales figures mutually agreed-upon
by both companies. The agreement also provides the Company, upon Central
election to continue exclusivity on a month-to-month basis for a three-
month period, a transaction fee structure that pays the Company monthly the
greater of one and one-half percent on mutually agreed upon sales or $83,000.
The review dates in which Central can extend exclusivity for the months of April
2002, May 2002 and June 2002 are January 31, 2002, February 28, 2002 and March
31, 2002, respectively. Central's exclusive use of this site for metal price
quotes and orders terminates June 30, 2002 unless both companies amend the
agreement to further extend the exclusivity. The Company intends to expand this
site to additional metal service centers and sellers upon termination of the
exclusivity provisions. The Company also has a non-exclusive agreement with an
industrial fluids manufacturer that provides for transaction fees as a percent
of orders placed through the site. The Company expects transaction fees to
increase upon the addition of other manufacturing based products as well as
multiple vendors offering competing products and services.
A number of material and tool companies have direct interfaces with the
Company's estimating software, allowing direct electronic access to each
vendor's main databases for pricing information - providing raw material pricing
in seconds instead of hours or days. The Company has also interfaced its
estimating software with Tools4Mfg.com that provides the user the vehicle to
obtain online metal material quote pricing as well as purchasing the material
electronically and that transfers the pricing information into its estimating
software. Shipments at the end of 2001 of the Company's Machine Shop Estimating
and FabPlan software products included an imbedded internet interface to the
Tools4Mfg.com portal, delivering a value to customers. The Company plans to
imbed all its current Windows-based software with integrated access to
Tools4Mfg.com. This coordinated approach is designed to continue to build brand
identify by focusing on the strengths of the OnCourse product lines.
Management does not believe that any of the existing transaction processing
systems or custom component procurement systems offers the metalworking market a
satisfactory electronic purchasing solution. The opportunity for Tools4Mfg.com
is to offer the speed and cost savings that a viable electronic purchasing
solution provides. OnCourse has developed Tools4Mfg.com internally with
revenues from Central.
Until separate financing is obtained, the Company expects to continue to
fund, on a limited basis, the development of the site from a combination of
internally generated funds and capital contributed by industry partners.
Several revenue streams are projected from Tools4Mfg.com. Revenues will be
derived from transaction fees on raw materials, component parts, and industrial
tooling. The Company also expects to add transaction fees, subscription fees,
and online sales of manufacturing software. However, there is significant risk
in that the Company may not be able to generate any significant revenue or
profits from this business strategy.
According to an article in the October 5, 2000 edition of Purchasing magazine,
it is estimated that the annual market for production-grade and metalworking
metals is at least $900 billion. Net penetration is estimated at less than
1/100 of 1% of the estimated $900 billion annual global marketplace for
production-grade and metalworking metals. The management of OnCourse feels that
even a very small percentage of this market earned as commissions and
transactions cost would generate $90 million of material transactions in which
the Company would receive commissions and transaction fees. In addition, the
Company also believes it will be able to generate revenues from tooling and
auction sales as well.
The Company continues to believe that revenues and transaction fees could exceed
$25 million annually within the next five years. The following table shows the
revenue stream for the $25 million of revenues and transaction fees based on
management's belief. However, there is significant risk in that the Company
may not be able to generate any significant revenue or profits from this
business strategy.
RAW MATERIAL AND PERISHABLE TOOLING REVENUES (MILLIONS)
Total Tools4mfg Average
Estimated Captures 1/100% of Transaction
Revenue Source Market the Market (.001%) Fee of 2.75%
Raw Materials $900,000 $900.0 $24.8
Tooling 4,000 4.0 0.6
Total $904,000 $904.0 $25.4
RESEARCH AND DEVELOPMENT
During years ended December 31, 2001 and 2000, the Company expended $300,000 and
$593,000, respectively, for research and development. Research and development
expended during the year ended December 31, 2000 includes $270,000 for the
purchased in-process research and development that was written off on January
31, 2000. In addition, the Company expended $1,277,000 and $1,268,000 for
its capitalized software during the years ended December 31, 2001 and 2000,
respectively. There have been no material customer sponsored research
activities or expenditures.
GOVERNMENTAL REGULATION AND APPROVAL
The Company does not require governmental approval for any of its activities and
has incurred no cost or expense with respect to compliance with federal, state
and local environmental laws. Some of the Company's customers may incur
expenses for environmental compliance, but there has been no effect of any such
compliance on the Company. The Company only has one customer that may have a
material effect on the Company's operations with sales of 13% and 14% of net
sales for the years ended December 31, 2001 and 2000, respectively. No single
supplier has a material effect on the Company's operations.
TRADITIONAL METAL WORKING MANUFACTURERS AS THE COMPANY'S SOFTWARE MARKET
Domestic manufacturers are estimated to conduct approximately $3.8 trillion in
annual business and these manufacturers employ 17 million people. According to
the National Institute of Standards (NIST), 75% of manufacturers employ 50
people or less. OnCourse subsidiaries individually have for up to twenty years
provided that market with software to make job shops more efficient. The
information referenced below provides historical summaries of the products sold
by the OnCourse subsidiaries of Micro Estimating and TekSoft:
LICENSED USERS SOLD SINCE SUBSIDIARY WAS ESTABLISHED (UNAUDITED)
Year
Subsidiary Established Users Sold
TekSoft 1981 23,500
Micro Estimating 1982 2,700
CURRENT ENVIRONMENT IN THE COMPANY'S SOFTWARE MARKET
A dramatic shift in supply chain management is underway in which manufacturers
are looking to electronic-commerce solutions for sourcing and supply. Addressing
those trends, the Company is developing an Internet-based purchasing system for
use by manufacturing firms involved in producing, processing, or purchasing
custom fabricated and machined products. The Tools4Mfg site will be positioned
as an electronic middleman fulfilling orders for component parts manufacturers.
This electronic-commerce system will process electronic Requests for Quotes
("RFQ") and Electronic Purchase requisitions for raw materials, component parts,
and related tooling products and ultimately be paid with electronic funds
transfers. Coupling this trend with use of the Internet as a software delivery
and maintenance mechanism will provide new opportunities and a more efficient
means for OnCourse to increase its value to customers.
THE COMPANY'S BUSINESS STRATEGY
The OnCourse strategy is to build a recognized and respected brand name as the
leader in providing software and services that make component manufacturers more
efficient and profitable. The Company's products, such as the award winning
software systems referenced above under the ProCAM and Machine Shop Estimating
("MSE") headings, are the base of this strategy and will be built upon to create
a broader position.
In concert with OnCourse products is an electronic-commerce strategy. OnCourse
is expanding its business-to-business electronic-commerce site for the metals
working industry to purchase products, services, and trade.
OnCourse will use the Internet as a key part of this strategy to deliver
software, provide applications while providing a focused trading site to build a
loyal customer base. Integrating OnCourse applications with the OnCourse
Internet site will lead users to take advantage of the business-to-business
electronic-commerce site. Three core internet concepts will be used:
o INTEGRATING APPLICATIONS WITH ONCOURSE PORTAL
OnCourse's products will have seamless interfaces to the web portal. One of
the first integrations has been done with Micro Estimating's software. The
MSE and FabPlan software can, via modem or internet, dial out or access to a
supplier of raw materials, access their database and receive current raw
material pricing. When possible all OnCourse products will integrate with
those areas of the portal that perform similar or complimentary tasks.
o DRAW CUSTOMERS WITH CONTENT
OnCourse will draw customers with content by offering current industrial news
pertaining to the metal working industries, and by providing user forums to
exchange manufacturing ideas and problems, post questions, create topics,
check employment listings and find ideas for innovations and improvements.
There also will be several databases developed by OnCourse allowing easy
calculations and allowing the look up of common metal working information.
Customers will also be given the technology to easily exchange or share
drawings and relevant manufacturing files. Customers will also be given the
opportunity to create and use individual mailboxes and filing systems to
organize any communications and file exchanges done through the site.
o VALUE ADDED TRADING SITE
The proposed value added functionality at the OnCourse portal, Tools4Mfg.com,
is in several areas. There will be an online area for shopping for industry
leading software and finding information about software companies serving the
metal working industry. Online calculators will be provided that run in an
internet browser that will simplify some routines and time consuming
manufacturing calculations. Online databases will allow the look up of
common metal working information. There will be an online auction for
selling and buying both new and used manufacturing items. Customers will be
able to shop online for the best prices and delivery from several raw
material suppliers in real time. A facilities locator named "The Machine
Shop Selector" allows for detailed and specific production facilities
searches both geographically and by specific production capabilities and
provides the communication technologies to contact multiple manufacturers for
pricing or information. Manufacturers of custom components will have the
ability to receive Requests for Quotations (RFQ's) pre-defined that match
their capabilities and preferred type of work and online forums will allow
the exchange of manufacturing ideas and problems.
THE COMPANY'S MARKETING STRATEGY
The Company's principal market is small to medium size manufacturers. This
universe includes original equipment manufacturers (OEMs), independent machine
shops (job shops), contract manufacturers, tool and die makers, and component
suppliers to the aerospace, automotive, appliance, and electronics industries.
The Company estimates this market is in the range of 500,000 businesses, some of
which have multiple manufacturing facilities. Within this market, the Company's
CAM products are directed toward slightly larger and more product oriented
(versus job or made to order shops) customers than are the process planning and
estimating products.
The Company generally does not actively market to the largest industrial firms
since these businesses tend to purchase high-end integrated systems, such as
offered by Dassault/IBM. The Company has been successful in selling to
individual facilities of large manufacturers, however, where the operation
desires a cheaper and easier to use solution and has the ability to purchase its
software independently. As an example, three John Deere plants utilize OnCourse
products. Other large manufacturers that use OnCourse systems include General
Electric, Honda, Honeywell, IBM, Lockheed Martin, and TRW.
Management has developed a focused strategy to aggressively grow the business
both in the North American market as well as manufacturing centers worldwide.
This focused strategy will be the first opportunity the Company has had to
develop the market for CAMWorks since the introduction of all of the product's
modules. The strategy has the following principal elements:
o Develop a Broader Network of Value-added Resellers (VAR) and Other
Distributors
The OnCourse distribution network in the U.S. is nationwide, but certain
manufacturing centers, such as Chicago, do not have a geographically
proximate VAR for all of the Company's products. The Company intends to add
to its distribution network to fill these geographic gaps, including opening
direct sales offices in Chicago and Detroit. The Company also seeks to
upgrade its distribution capabilities by developing relationships with VARs
that are able to operate multi-office distributorships, and may do so by
acquiring one or more additional VARs.
While MSE is a market leader for estimating software in the US and OnCourse
does have one successful MSE distributor in the UK, the Company has not had
the resources to sell overseas. Since potential customers often prefer to
buy from a vendor of local nationality, developing a network of non-US
distributors will speed sales in manufacturing centers around the world. The
Company expects to utilize certain TekSoft foreign distribution relationships
to represent MSE outside the US.
As a part of the effort to strengthen its distribution, the Company has
reached an agreement in principle with one of the largest European industrial
distributors to market TekSoft products. This distributor has local offices
in most European countries and maintains its own translation department -
with more than twenty translators - to speed translation of new software
releases. The Company has also had preliminary discussions with this
distributor regarding marketing of Micro Estimating's products in Europe, a
relationship that would also facilitate translation of the Micro Estimating
products.
While there is some overlap, the MSE and TekSoft VAR networks are for the
most part distinct, and the Company plans to provide additional support to
the VAR networks to maximize opportunities cross sell OnCourse products.
Since the TekSoft installed base is larger than that of MSE, the Company also
plans to promote MSE to existing TekSoft CAM users. VARs and other
distributors are compensated based on an established commission percentage
for each VAR and distributor multiplied against its respective commission-
eligible software sales and services.
o Expand and Strengthen Relationships With the SolidWorks Distribution
Channel
The integration of CAMWorks into the SolidWorks design software (as the only
fully integrated CAM solution operating in the SolidWorks environment) has
provided the Company with an additional distribution channel. SolidWorks is
the fastest growing solids based design system, with 26,000 users licensed in
2001, up 19% over 2000. SolidWorks distributes through a network of 300
resellers operating in 70 countries worldwide. The Company, however, has
established a relationship with only 60 to 70 of the SolidWorks resellers and
seeks to develop a relationship with a large number of the resellers that it
does not currently have a relationship. This will in part be addressed by
strengthening the TekSoft distribution support effort, since the largest
investment in securing additional VAR relationships is the time it takes to
familiarize a new VAR with the Company's products.
o Expand CAD/CAM General Marketing Activities
The Company has long employed marketing programs for its estimating products,
but has not had the resources to conduct extensive marketing for the (larger
market) CAD/CAM products. In view of the technology "window" that OnCourse
has for CAMWorks, the Company intends to greatly increase its advertising and
promotion of this product to capitalize on this opportunity.
o Integrate CAMWorks With Other Solids Based CAD Products
While SolidWorks is the acknowledged market leader and fastest growing
provider of solids based CAD systems, there are a number of other vendors
with competitive solids based systems. SolidEdge, Designwave and Autodesk
are examples of such potential solid modeling partners. By integrating
CAMWorks into these systems, the Company would gain additional distribution
platforms. Management believes sales through such additional distribution
channels could increase CAM revenues 15-20% with each additional
relationship.
o Promote an Enterprise Version to Larger Customers and Pursue Follow-on
Sales to Existing Large Customers
OnCourse has integrated MSE with ProCAM (and is in the process of integrating
CAMWorks) and solids based CAD software, to create a complete engineering
based enterprise version of its products. This version, with a comparatively
low price point, is a solution that can be marketed to larger companies that
would not be prospects for OnCourse's products on a standalone basis, but can
benefit from a robust estimating system.
A large multinational company will usually have multiple production
facilities. While the Company has not targeted large firms for sales on a
company-wide basis, it has been successful in selling individual plants.
Following implementation and a customer's realization of the system's
benefits, the Company has a strong rationale for repeat sales covering that
customer's other sites. The Company believes this will be especially evident
in the case of CAMWorks, which offers greatly reduced design to manufacturing
time using less highly trained personnel at a cost that is 25-50% of
comparable systems.
o Develop a Suite of Integrated Manufacturing Software
The integration of MSE and CAMWorks is the first step in OnCourse's longer-
term goal of developing a suite of integrated manufacturing software
applications. The Company has found that many of its customers desire a one-
stop shop solution for their manufacturing software applications. The
reasons most often cited are that there is greater reliability in the
compatibility of the applications and therefore ease of use, and that there
is a single point of contact in the event of a problem. No other company
offers fully integrated software for the entire manufacturing process, except
in expensive high-end enterprise type systems that are economically
unavailable to all but the largest manufacturers.
Applications such as direct numerical control, statistical process control,
and manufacturing execution systems would fill out the suite concept.
Developers of these specialized applications, and particularly those that
have the most advanced technologies, tend to be small companies.
In addition to its target market of small to mid-size manufacturers, the
Company believes such a suite would be attractive to the lower tier of the
largest manufacturers that utilize complex integrated enterprise systems.
The reason is that such a suite could provide the same or superior
manufacturing functionality and interfaces as the complex system, but at
substantially lower cost.
ALTERNATIVE DISTRIBUTION STRATEGIES
The Company continually evaluates additional strategies and methodologies that
might be employed to get its products to market. Strategies that would enable
the Company to penetrate market segments in which it does not compete receive
special attention. As examples, the Company has considered renting its products
on a per use basis (as an ASP or application service provider) to reach smaller
manufacturers, and embedding its products or technologies in large, integrated
systems marketed to the very largest manufacturers. Integrating MSE into a
larger system would dramatically increase the estimating market for the Company
because management believes that MSE has the most extensive functionality of any
estimating application.
MANUFACTURING SOFTWARE: THE MARKET AND TRENDS IN TECHNOLOGY
THE MARKET
In a 2001 industry report, CIMdata, Inc., an independent research
organization, estimated that 2001 sales of numerical control software and
services (including CAE, CAD and CAM software) were $1.27 billion, with $806
million received by software suppliers and balance by resellers, distributors,
and other business partners. The market grew 4.4% in 2000, as the U.S. economy
slowed and manufacturing equipment sales declined, but doubled from 1993 to 2000
(a compounded annual growth rate of 10.5%). Approximately 30% of CAD users also
have CAM software requirements. The CAM market is well penetrated and mature,
but continues to grow at an average rate of 10% per year according to CIMdata.
OnCourse estimates that the CAM segment of the manufacturing software market on
which it is focused - i.e., excluding the CAM component of high-end integrated
systems sold to the largest manufacturers - is in the range of $90-120 million.
The Company believes that this segment of the market is growing at 15-25% per
year, faster than the CAM market generally, as newer, more robust systems
replace existing systems. The estimating software market is much smaller,
approximately $9 million overall, and $3.5 million exclusive of high end
integrated systems. While MSE sales have historically grown an average of 35%
per year as OnCourse has taken share from its principal competitor, management
estimates the market has been growing in the range of 10% per year.
OnCourse believes that the market available to it will effectively expand as
OnCourse begins to sell the estimating and CAD/CAM products on an integrated
basis. This is because the integrated product can be marketed to somewhat
larger manufacturers that may not have previously been an attractive market
segment for the Company's products on a standalone basis.
A number of significant trends have contributed to the growth of manufacturing
software, even during an economic downturn. The first is demand by
manufacturers in a fast-changing, highly competitive business environment to
reduce design time to get products to market more quickly ("time to market").
Secondly, as competition makes it increasingly difficult for companies to
achieve revenue growth, businesses continue to focus on manufacturing efficiency
and lower production costs as a means to increase profits. As a result, many
companies not only seek new software applications, but also will replace
manufacturing software with enhanced versions if the replacement furthers the
company's productivity.
TRENDS IN TECHNOLOGY
Demand has also been fueled by technological improvements that have
enhanced the functionality and value of the software. Notable among these
improvements has been the development of solid modeling and the introduction of
feature recognition. Software developers incorporating these improvements into
their products are able to offer systems that reduce time, costs, and errors in
manufacturing.
Solid modeling is a computer generated three-dimensional depiction of a product.
Solid computer models permit designers to better understand how their products
will look and function before committing to preparing manufacturing documents
and making production tools. The geometry from solid models can also be used in
a variety of analytical systems to evaluate performance or other physical
attributes of a product before it is manufactured. As a result, costly mistakes
can be avoided in taking a design into production.
Feature recognition is the identification of the design geometry of a feature
that can be machined (e.g., a hole). Software incorporating feature recognition
automatically analyzes the part model and identifies machinable features based
on the part's geometry and topology (automatic feature recognition), or queries
the user as to areas not recognized automatically until the system has enough
information to define the area as a feature (interactive feature recognition).
Each feature can then be linked to a corresponding machining routine stored in a
database. By automating the interpretation of design data, manufacturing
programs can be prepared more quickly and with fewer opportunities for error.
RISK FACTORS THAT MAY IMPACT THE SHAREHOLDERS INVESTMENT
Shareholders of the Company should be aware that the ownership of the Company's
shares involves certain investment considerations and risk factors, including
those described below and elsewhere in this annual report, which could adversely
affect the value of their holdings. The Company can't make any representations
as to the future market value of the Company's stock.
Any forward-looking statements contained in this annual report should not be
relied upon as predictions of future events. Such statements are necessarily
dependent on assumptions, data or methods that may be incorrect or imprecise and
that may be incapable of being realized. Investors are hereby notified that
such information reflects the opinions of Company management as to the future.
Investors should use their own judgment as to the significance of this
information to their individual investment decisions.
Investment in the Company's Common Stock must be considered speculative due to a
number of risk factors including, but not limited to, the limited history of
trading in the Company's Common Stock in any Public Market.
IMPACT OF POLITICAL UNREST MAY FURTHER WEAKEN THE DOMESTIC AND GLOBAL
MARKETPLACE
The United States economy was shaken as a result of the events that took place
on September 11, 2001. The terrorist activities coupled with a recession in the
United States economy has reduced software sales and profitability in the
manufacturing marketplace. The Company was also negatively impacted as sales
were less than projected and lower than needed to support the infrastructure
established to market and support the Company's new technologies. As a result,
the Company experienced higher than planned operating losses in which caused the
Company to increase its borrowings under its line of credit agreements. The
Company may not be able to absorb additional losses if another terrorist
activity further eroded the manufacturing and United States economy.
CONTROL BY THE MANAGEMENT MIGHT LIMIT INDEPENDENT, PUBLIC SHAREHOLDER INFLUENCE
The Chief Executive Officer and the President of the Company beneficially own
approximately 52% of the outstanding common stock of the Company. The remaining
directors and other executive officers beneficially own approximately 36% of the
outstanding common stock of the Company. Accordingly, the Chief Executive
Officer and President together, or along with the Board of Directors and other
executive officers, will exercise control over the Company, including control
over the election of directors, the appointment of officers, and the business
policies, investments and future acquisitions, if any, of the Company. Public
shareholders' interests may not be fully represented alongside the differing
interests of management shareholders, if any. The large percentage of shares
owned by these persons will have a limiting effect on the number of shares
available for trading in the secondary market, which could have an adverse
effect on price and liquidity.
ABSENCE OF NECESSARY FINANCING COULD DISRUPT OPERATIONS, PRODUCT DEVELOPMENT AND
GROWTH PLANS
The Company will need to obtain interim and long-term financing to continue
operations, to repay outstanding indebtedness, to fund present and future
product development, and to maintain the competitive position of its software
products in their manufacturing markets. There is no guarantee that the Company
will have the financial ability to meet all of those goals. The Company expects
to raise additional capital from time to time by private placements of the
Company's securities and capital contributed by industry partners. In 2001 the
Company received $192,000 of preferred stock proceeds from an industry
partner that supplies software development and programming resources to TekSoft.
There can be no assurances that there will be any market for the Company's
securities or that sufficient capital can be raised by any such private
placements. If capital is not available, it may not be possible for the Company
to develop new products, to grow existing product revenues or to operate
profitably in any market. In such event, shareholders could lose their entire
investment. See "MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
- Liquidity and Capital Resources".
ANTICIPATED REVENUES FROM PURCHASED IN-PROCESS RESEARCH & DEVELOPMENT MAY NOT BE
REALIZED
The Company acquired $270,000 of CAMWorks in-process research and development as
part of the TekSoft acquisition on January 31, 2000. It is possible that the
Company will not reap the benefits related to the CAMWorks development project
or that such development does not provide the Company with any competitive
advantages or that there will be technology changes in the market place that may
render the technology obsolete. As a result, the Company may not realize the
expected revenues that management believes will result from this acquired in-
process technology.
COMPETITORS'S STRENGTHS COULD FORCE PRICE REDUCTIONS AND DAMAGE PROFIT PROSPECTS
The markets for the Company's products are intensely competitive. The CAM
industry has more than 200 competitors in which TekSoft is referenced as one of
the top eight worldwide software providers based on installed seats according to
the above-mentioned CIMdata research. The estimating products offered by Micro
Estimating have only one competitor, Manufacturers Technologies, Inc. Limited
information is available on this company as it is a privately held organization.
The Company may also face competition from new entrants in its markets. Many of
the Company's present or prospective competitors have or may have substantially
greater financial, technical, marketing and sales resources than the Company.
There can be no assurance that the Company will be able to compete effectively
in the future. If the Company is unable to compete effectively, shareholders
could have a lower return on their investment or lose their entire investment.
LIMITED PRIOR PUBLIC MARKET AND RESTRICTION ON FREE SALE OF STOCK MAY ADVERSELY
AFFECT STOCK VALUE AND LIQUIDITY
There is presently a limited public market for the Company's common stock and
there can be no assurance that an active market will develop. The prices at
which the shares trade will be determined by the market place and could be
subject to significant fluctuations in response to many factors, including,
among others, variations in the Company's quarterly operating results, changing
economic conditions in the industries in which the Company participates, and
changes in government regulations. In addition, the general stock market has in
recent years experienced significant price fluctuations, often unrelated to the
operating performance of the specific companies whose stock is traded. Market
fluctuations, as well as economic conditions, may adversely affect the market
price of the Company common stock. In the event of declining stock values and
diminished liquidity, shareholders could lose their entire investment. See
"MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS."
DEPENDENCE ON OPERATING ENVIRONMENTS IMPOSES OBSOLESCENCE, DIMINISHED REVENUES
AND PROFIT EXPOSURES
The Company's software is designed for use with computers running on Microsoft
platforms. The successful introduction of new operating systems or significant
changes in existing operating systems could adversely affect the Company's
operating results. Failure by the Company to develop new products for any such
changed operating environments could result in the Company's inability to
maintain sufficient margins in which to continue its business.
RAPID TECHNOLOGICAL CHANGE EXPOSES THE COMPANY TO COMPETITIVE DISADVANTAGES,
REDUCTIONS IN SALES, PROFITS, GROWTH RATES AND MARKET ACCEPTANCE
The market for the Company's products is characterized by rapid technological
advances, evolving industry standards, changes in end-user requirements and
frequent new product introductions and enhancements. The introduction of
hardware or software products embodying new technologies and the emergence of
new standards could have an adverse effect on the Company's present products or
any products under development. For instance, the Company believes that
TekSoft's CAMWorks product is an example of rapid technological change.
CAMWorks' ability to analyze a solid model and generate machine code to produce
the piece part automatically will change the way parts will be manufactured in
the future. The Company's future success will depend upon its ability to
enhance its present products as well as introduce new products that are
responsive to technological developments and end-user requirements and
development market appeal. Any failure by the Company to develop new products
and enhancements in a timely manner will have an adverse effect on the results
of the Company's operations and could result in the Company's failure and the
loss of shareholders' investment.
ABSENCE OF A MARKET FOR THE COMPANY'S ELECTRONIC-COMMERCE PRODUCTS INCREASES
RISKS OF LOSS ON INVESTMENT, FAILURE TO ACHIEVE GROWTH TARGETS, DIFFICULTY IN
MEETING DEBT SERVICE REQUIREMENTS AND DIMINISHED INVESTOR CONFIDENCE
A market for the Company's electronic-commerce and other business-to-business
products may not develop. If a significant market for internet-based
electronic-commerce and business-to-business products does not develop, the
Company's business may not grow according to the Company's expectations and
shareholder's prospects for capital gain will be diminished.
COMPETITIVE PRICING PRESSURES MAY INCREASE THE RISK OF LOSS OF INVESTMENT
Competitive pricing pressures might bring about a reduction in the average price
of the Company's products, resulting in a decrease in revenues and gross
margins. Changes in product mix and other factors might also influence prices.
If price reductions occur, the Company's revenues will decline unless it is able
to offset these decreases by increasing its sales volumes or by changing its
current revenue model. In addition, in order to maintain its gross margins, the
Company must develop and introduce new products and product enhancements, and it
must continue to reduce the development and distribution costs of its products.
There is no assurance that the Company will succeed in implementing corrective
action if any of these declines occur. Failure by the Company to implement
successful pricing strategies and/or to develop new products to meet these
competitive pressures and/or to increase unit volumes could result in the
Company's failure and the loss of shareholder's investment.
NEW PRODUCTS MAY CONTAIN UNDETECTED HARDWARE AND SOFTWARE ERRORS
New products the Company develops may contain undetected hardware and software
errors, which could require significant expenditures of time and money to
correct, harm its relationships with existing customers and negatively impact
its reputation in the industry. In addition, the Company's products are
combined with products from other vendors. If such problems occur, it may be
difficult to identify the source of the problem. If such problems should occur,
and if the Company is unable to rapidly correct any such problems, there may be
consequences such as:
o Delay or loss of market acceptance of the Company's products
o Significant warranty or other liability claims
o Diversion of engineering and other resources from product development
efforts
o Significant customer relations problems
o Loss of credibility in the market
o Inability to sell its products until any errors are corrected
Any one or any combination of these consequences could result in a significant
loss in value of shareholders' investment.
QUARTERLY FLUCTUATIONS MAY PLACE ADDITIONAL BURDEN ON WORKING CAPITAL, NEED FOR
ADDITIONAL INVESTMENT
Management believes that OnCourse's sales will fluctuate based on the
manufacturing community's purchasing trends. The Company's quarterly revenues
and operating results have varied significantly in the past and are likely to
vary significantly in the future. For example using an average of the last
seven years sales activity, Micro Estimating's sales on a quarterly basis has
ranged from approximately 19% of annual sales to as high as 33% of annual sales.
TekSoft's average quarterly sales for the same seven-year period have fluctuated
from approximately 23% of annual sales to 27% of annual sales. A typical sales
pattern will start the year with new budget spending through the first four
months. Then there will be a three-month slowdown during the summer months,
which reflects reduced production and plant shutdowns. This is then followed by
an increase in sales volume through the end of the year as companies complete
their fiscal years, typically spending remaining budgetary monies and in some
cases, based on taxation issues, purchase smaller capital expenditures to reduce
tax liabilities. Other factors that may affect quarterly results include the
following:
o Expansion and recession of the United States and Global economies.
o Significant events caused by Global political events.
o The overall strength of the economy, timing, size and terms of customer
orders
o Changes in customer buying patterns
o Uncertainties associated with the introduction of any new product or
product enhancement
o The timing of the announcement and introduction of new products by the
Company or its competitors
o The mix of products sold and the mix of distribution channels through
which products are sold
o Deferrals of customer orders in anticipation of new products, services or
product enhancement introduced by the Company or its competitors
o Technological developments affecting the electronic-commerce, business-
to-business, and manufacturing software markets
Any failure by the Company to obtain sufficient lines of credit to support these
quarterly fluctuations, if any, could result in a decline in profitability and a
loss of shareholder value.
MANAGEMENT OF FUTURE ACQUISTIONS AND GROWTH WILL REQUIRE ADDITIONAL INVESTMENT,
MAY EXCEED COMPANY'S ABILITY TO MANAGE THIS GROWTH
The Company has embarked upon an ambitious growth plan including the acquisition
of one or more businesses and the accumulation of capital to finance existing
and acquired businesses. It will be necessary for the Company to attract, hire
and maintain new employees at many levels, including senior management in order
to achieve and support growth. The Company expects to include the public market
for its securities as a basis for the development of key employee incentive
compensation, savings, investment and retirement plans. There can be no
assurance that the Company will be successful in any of these efforts, the
failure of which could result in slower growth, a decline in profitability and a
loss of shareholder value. See "MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS."
LOSS OF KEY PERSONNEL OR INABILITY TO HIRE ADDITIONAL QUALIFIED PERSONNEL MIGHT
RESULT IN FAILURE OF THE COMPANY TO IMPLEMENT ITS PLANS
Loss of the services of key management employees or inability to attract and
retain qualified personnel or delays in hiring required personnel, particularly
programmers and sales personnel, could delay the development and introduction
of, and negatively impact the Company's ability to sell its products. In
addition to key management personnel, the Company's success depends on its
ability to attract and retain highly skilled technical, managerial, marketing
and other personnel. Competition for these personnel is intense. In recent
years, there has been a strong demand for qualified skilled and unskilled
employees in the Wisconsin, Minnesota and Arizona areas, where the Company's
main operations are located, and in other areas where it operates. There is a
risk that it will be unsuccessful in attracting and retaining the personnel it
needs for its business. Failure to attract and retain such personnel could
result in a decline in the Company's revenues and profits and a loss of
investment by shareholders.
RELIANCE ON CONTRACT PROGRAMMERS FOR DEVELOPMENT OF THE COMPANY'S SOFTWARE
PRODUCTS
The Company uses domestic and foreign contract programmers to program its
software products. Competition for these resources may cause a shortage of
contract programmers or increase the cost of these services to the point where
the Company's profitability declines. This decline in profitability could slow
product development efforts, which in turn could prevent the Company from being
competitive in its markets.
RELIANCE ON DISTRIBUTION CHANNEL, INCREASED EXPOSURE FROM COMPETITORS STRENGTHS,
AND THE COMPANY'S FINANCIAL CONSTRAINTS
The Company relies on direct sales and independent distributors to sell its
products. For the years ended December 31, 2001 and 2000, 61% and 55%,
respectively, of the Company's total revenues were generated by its independent
distributors when excluding sales of the Company that were previously
independent distributors. Distributors also represent other products that may
either complement or compete directly with those of the Company. Independent
choices by distributors concerning which products receive their principal
attention, the development of new or enhanced products by competitors, the
Company's relative ability to compete effectively with others in time-to-market
comparisons and a large number of factors under the control of competitors and
independent distributors may adversely effect the Company's future operating
results. Failure to attract and retain good distributors and/or to implement
more direct marketing efforts could result in a decline in the Company's
revenues and profits and a loss of investment by shareholders.
ASSET ENCUMBRANCES, OPERATING LOSSES AND CONTINGENT STOCK ISSUANCES MIGHT
INCREASE SHAREHOLDER DILUTION WHILE VALUES COULD DECLINE
Substantially all of the Company's assets are pledged to secure bank
indebtedness. The bank debt is subject to compliance with certain financial
ratio covenants. The Company's earned surplus deficit and continuing operating
losses might reduce the availability of such credit facilities in the future
under those covenants or may cause the Company to default on its credit
facilities, which would permit the bank to accelerate the payment of principal
and interest under the credit facilities. At the same time, revenue and net
income increases, if any, will obligate the Company to issue additional shares
under acquisition agreements. Taken as a whole, these factors increase the risk
of dilution in shareholder value and impose a risk of complete loss of
shareholder value unless those trends are reversed or offset by the infusion of
new capital.
COMPANY'S BANK INDEBTEDNESS HAS FLOATING INTEREST RATES
The Company's existing line of credit facility has interest rate pricing that
fluctuates with changes in the bank's prime rate. Significant increases in the
bank's prime interest rate could reduce the Company's operating profits. A
reduction in profitability will make it more difficult to implement the
Company's growth plans and to develop the products necessary to remain
competitive.
FORWARD-LOOKING STATEMENTS
This annual report of OnCourse Technologies, Inc. includes forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 (the "1934 Act"). These statements are based on management's beliefs and
assumptions, and on information currently available to management. Forward-
looking statements include statements in which words such as "expect,"
"anticipate," "intend," "plan," "believe," "estimate," "consider," or similar
expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Company's future results and
stockholder values may differ materially from those expressed in these forward-
looking statements. Many of the factors that will determine these results and
values are beyond the Company's ability to control or predict. For these
statements, the Company claims the protection of the safe harbor for forward-
looking statements contained in Section 21E of the 1934 Act.[CWB1]
REPORTS TO SECURITY HOLDERS
The public may read and copy any materials that the Company has on file with the
Securities and Exchange Commission ("SEC") at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
(800) SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC. The SEC's Internet site address is
http://www.sec.gov
------------------
The Company's Internet site address is http://www.oncoursetechnologies.com.
-----------------------------------
ITEM 2. DESCRIPTION OF PROPERTY
All of the operations of the Company and its subsidiaries are conducted from
office space leased from non-related party landlords except as noted for
TekSoft. TekSoft leases office space with a related party that is renewable in
five-year increments for a period of twenty-five years. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
The following table sets forth information concerning the operating facilities:
MONTHLY RENT
SIZE IN AS OF
TENANT SQUARE FEET LEASE EXPIRES JANUARY 1, 2002
------ ----------- ------------- ---------------
OnCourse Technologies, Inc./ 4,672 11/30/2002 $3,435
Micro Estimating Systems, Inc.
3106 South 166th Street
New Berlin, WI 53151
CAM Solutions, Inc. 1,122 2/28/2003 $1,372
1631 East 79th Street
Suite 134
Bloomington, MN 55425
Cimtronics, Inc. (1) 1,550 8/31/2004 $2,260
7434 East Stetson Drive
Suite C-165
Scottsdale, AZ 85251
Cimtronics, Inc. (2) 788 4/30/04 $1,379
1947 Camino Vida Roble
#105
Carlsbad, CA 92008
TekSoft, Inc. 8,800 6/30/06 $15,767
16121 North 78th Street
Scottsdale, AZ 85260
(1) LOCATION OF CIMTRONICS' CORPORATE OFFICE.
(2) LOCATION OF CIMTRONICS' BRANCH OFFICE.
ITEM 3. 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 a material adverse effect on the
business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, at the time of this filing, is traded on the OTC
Bulletin Board under the OCTH symbol and has very limited trading volume or
activity. The following table sets forth, for the fiscal quarters indicated and
available, the high and low bid prices for the Company's Common Stock as
reported by financial websites tracking stock trading activity. The quotations
reflect inter-dealer prices without retail mark-up, markdown or commission, and
may not represent actual transactions. No assurance can be given that an active
trading market for the Common Stock will be maintained.
High Low
Year Ended December 31, 2001
First Quarter $1.75 $0.75
Second Quarter 1.05 0.50
Third Quarter 1.12 0.16
Fourth Quarter 0.49 0.13
Year Ended December 31, 2000
First Quarter $6.00 $4.50
Second Quarter 6.00 2.25
Third Quarter 4.00 0.25
Fourth Quarter 1.75 0.60
The Company has not paid any dividends on its Common Stock and intends to retain
all earnings for use in its operations and to finance the development and the
expansion of its business. It does not anticipate paying any dividends on the
Common Stock in the foreseeable future. The payment of dividends is within the
discretion of the Company's Board of Directors. Any future decision with
respect to dividends will depend on future earnings, future capital needs and
the Company's operation and financial condition, among other factors. The
Company's long-term line of credit restricts the payment of dividends.
As of December 31, 2001, there were approximately 820 holders of record of the
Company's common stock.
The Company entered into an agreement signed November 7, 2001, and offered and
issued 59,323 shares of Company common stock, 59,323 Class A stock purchase
warrants and 59,323 Class B stock purchase warrants to a vendor as payment of
$91,199 of accounts payable as of September 30, 2001. The Company recorded a
reduction to professional fees of $63,586 during the year ending December 31,
2001 under this agreement based on the difference between a conversion price
ranging from $1.00 to $2.00 as defined in the agreement and the $0.18 market
share price. The warrants were issued with initial estimated values (based on
Black-Scholes valuation model) ranging from $0.12 to $0.13 for each Class A
warrant and $0.16 for each Class B warrant and expire in 2004 and 2006,
respectively. Each warrant represents the right to purchase one share of the
Company's common stock at an exercise price ranging from $1.75 to $3.00. The
agreement with the vendor calls for future hardware and software purchases to be
converted at a common stock price of $1.00 and for equal number of Class A and
Class B stock purchase warrants at an exercise price of $1.75.
During the quarter ended December 31, 2001, the Company offered and issued
17,253 shares of Company common stock, 17,253 Class A stock purchase warrants
and 17,253 Class B stock purchase warrants as payment of $12,940 in professional
services to a vendor for invoices dated or accrued on December 13, 2001 and
December 31, 2001. The warrants were issued with initial estimated values
(based on Black-Scholes valuation model) ranging from $0.29 to $0.37 for each
Class A warrant and $0.34 to $0.42 for each Class B warrant and expire in 2004
and 2006, respectively. Each warrant represents the right to purchase one share
of the Company's common stock at an exercise price of $1.00.
On January 31, 2000, the Company acquired TekSoft, Inc. ("TekSoft") for
4,500,060 shares to the former shareholders of TekSoft. In addition, under the
terms specified in the purchase agreement, the former share holders of TekSoft
may receive up to 1,500,000 additional shares over the next five years if net
sales, as defined in the agreement, increases. For the year ended December 31,
2000, the net sales increase resulted in an additional 511,206 shares allocated
to the former shareholders of TekSoft. During the year ended December 31, 2001,
an additional 155,680 shares were issued to the former shareholders of TekSoft
at an average value of $0.75 per share. An additional $116,150 was allocated to
goodwill.
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 there under for all of the above described
transactions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 Annual 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 1934 Act. See "RISK FACTORS" section for
additional risk factors that could affect future operations.
The Company's goal is to become the collaborative business partner for the metal
working industry by providing technology products and services that improve the
profitability and efficiency of metal component manufacturers. On January 31,
2000, the Company acquired TekSoft, Inc. This acquisition helped complement its
existing product offerings as well as broaden the base necessary for
implementing its internet strategy utilizing a business-to-business electronic-
commerce web site. When reviewing the following discussion and analysis, it is
important to note that the Company reported twelve months of operating results
for TekSoft for the year ending December 31, 2001 as compared to only eleven
months for the year ending December 31, 2000.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
The Company as well as other manufacturing driven businesses operated in a
recessionary economy during the year ended December 31, 2001. In light of this
down economy, OnCourse net sales of $4,915,000 for the year ended December 31,
2001 were 6% lower than the $5,248,000 reported for the year ended December 31,
2000. However, when assuming that TekSoft was acquired by OnCourse as of
January 1, 2000 and adding TekSoft's January 2000 proforma net sales of
$265,000, net sales declined 11% from OnCourse's $5,513,000 of proforma sales
for the year ended December 31, 2000. Sales were lower than anticipated during
the three months ended December 31, 2001 as the Company discounted from the list
price of software products sold in response to a recessionary economy and
competitive pressures. Deferred revenue increased 16% from $1,624,000 as of
December 31, 2000 to $1,890,000 as of December 31, 2001. Increased sales of
the Company's CAMWorks CAM software coupled with $100,000 in revenues related to
Tools4Mfg.com helped to offset sales decreases in Machine Shop Estimating and
ProCAM CAM software.
Cost of sales was $1,904,000 or 39% of net sales for the year ended December 31,
2001 as compared to the $1,699,000 or 32% of net sales for the year ended
December 31, 2000. The gross margin percentage for the year ended December 31,
2001 declined from the same period in 2000 primarily due to lower sales for 2001
and a large increase in the capitalized software amortization expense for the
Machine Shop Estimating, CAMWorks 2001, Tools4Mfg and ProCAM II software product
which began upon the products release in 2001. The Company amortized $1,136,000
of capitalized software for the year ended December 31, 2001 as compared to the
$921,000 amortized in 2000. Also contributing to the increase in capitalized
software amortization was the fact that the Company had twelve months of
capitalized software amortization for TekSoft in 2001 as compared to only eleven
months in 2000.
Selling expenses decreased to $2,491,000 for the year ended December 31, 2001 as
compared to the $2,494,000 sales for the year ended December 31, 2000. Selling
expenses as a percentage of net sales increased to 51% of net sales for the year
ended December 31, 2001 as compared to 48% for 2000 primarily due to lower sales
in 2001. The decline in selling expenses occurred largely due to reduced
spending in advertising and promotional activities for the Company's products in
2001 as compared to 2000. The advertising reduction was made due to the
Company's decision to direct its resources to developing its CAMWorks 2001,
ProCAM II and Tools4Mfg product offerings. Also contributing to the reduction
was the decline in the economy causing sales to decline, which tightened cash
flows and restricted spending. Offsetting the reduced advertising expenses was
an increase in the Company's bad debt expense due to bankruptcy filings by
customers in the fourth quarter and an increase in the bad debt allowance when
factoring the negative impact that the terrorist activity had on an already
recessionary economy. The Company recorded total bad debt expense of $239,000
including bankruptcies and bad debt allowance increases for the year ended
December 31, 2001 as compared to only $10,000 for 2000. The Company increased
its bad debt allowance from $25,000 as of December 31, 2000 to $163,000 as of
December 31, 2001.
Total research and development expense was $300,000 and $593,000 for years ended
December 31, 2001 and 2000, respectively. The decrease is attributed to
$270,000 of purchased in-process research and development as part of the TekSoft
acquisition in 2000. This non-recurring amount was written off immediately in
2000 in accordance with APB No. 16, "Accounting for Business Combinations."
Goodwill and other intangible amortization was $1,334,000 and $1,092,000 for the
years ended December 31, 2001 and 2000, respectively. The largest factor in the
increase is related to the TekSoft acquisition, which contributed $967,000 of
the goodwill and $154,000 of other intangible amortization for the year ended
December 31, 2001 as compared to $747,000 of goodwill and $141,000 of other
intangible amortization for the year ended December 31, 2000. The increase in
TekSoft goodwill and other intangible amortization is primarily related to
twelve months of amortization in 2001 as compared to only 11 months in 2000.
The Company also booked additional goodwill expense in 2001 due to increases in
goodwill for contingent shares earned by former shareholders of the Company's
acquisitions and related deferred tax accounting. Other intangible amortization
was comprised of amortization of the assembled workforce, trade names and
distribution network intangible assets.
General and administrative expense decreased to $2,105,000 for the year ended
December 31, 2001 compared to $2,143,000 for the year ended December 31, 2000.
General and administrative expenses as a percentage of net sales increased to
43% of net sales for the year ended December 31, 2001 as compared to 41% for
2000 primarily due to lower sales in 2001. The Company recorded $204,000 for
the year ended December 31, 2001 for a professional services agreement for
consulting services as compared to the $375,000 for the year ended December 31,
2000. This represents a decrease of $171,000 in general and administrative
expenses from the year ended December 31, 2000. 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. The Company had $21,000 remaining on this contract as
of December 31, 2001, which will be expensed during the first quarter of 2002.
Offsetting this decrease were $50,000 in professional fees incurred by the
Company in its efforts to raising additional equity capital and other
professional and legal expenses incurred in 2001 associated with the Company's
follow-on expenses for the 10-SB and various other SEC filings. Fewer expenses
related to SEC filings were incurred during the year ended December 31, 2000
since the Company did not make its initial SEC filing until October 2000.
Operating expenses including purchased in-process research and development and
goodwill and other intangible asset amortization, were $6,230,000 for the year
ended December 31, 2001 as compared to $6,322,000 for the year ended December
31, 2000.
Interest expense increased from $105,000 in 2000 to $120,000 for the year ended
December 31, 2001. 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 to fund losses that the Company incurred for the
year ended December 31, 2001. 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 throughout 2001 by the Federal Reserve Bank's monetary
policy. The Company had a pre-tax loss of $3,339,000 for the year ended
December 31, 2001 as compared to the $2,879,000 pre-tax loss in 2000.
The net loss after tax benefit was $2,621,000 and $2,312,000 for the years ended
December 31, 2001 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
OnCourse has incurred losses over the last two years and has negative working
capital. Based upon its current plans, the Company believes it has 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 December 31, 2001 was approximately $77,000 as
compared to $200,000 as of December 31, 2000. During the year ended December
31, 2001, net cash provided by operating activities was $138,000 versus $915,000
for the year ended December 31, 2000. The decline 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 $1,359,000 and $1,482,000 for the years ended
December 31, 2001 and 2000, respectively. The Company invested $1,277,000 in
capitalized software development costs for the year ended December 31, 2001 as
compared to $1,268,000 for the same period in 2000. The Company had positive
cash flows from financing activities of $1,098,000 and $676,000 for the years
ended December 31, 2001 and 2000, respectively. The financing activities for
the year ended December 31, 2001 were primarily comprised of $432,000 on the
line of credit facility, $381,000 of net term debt and notes payables and
$192,000 of preferred stock proceeds.
The Company's working capital as of December 31, 2001 was a negative $1,650,000
as compared to the negative working capital of $971,000 as of December 31, 2000.
The $679,000 decrease in working capital over the December 31, 2000 balance is
largely attributed to deferred revenue which increased $266,000, an increase in
accounts payable, which increased from the $824,000 balance as of December 31,
2000 to the $1,022,000 balance as of December 31, 2001 and the short-term line
of credit facility obtained in December 2001 that had a balance of $120,000 as
of December 31, 2001. The accounts payable and short-term line of credit
facility increase and working capital decrease is largely due to lower sales and
slower cash collections due to the recession experienced during the year ended
December 31, 2001. The loss resulted in a decline of working capital
and adversely affected the Company's ability to pay its vendors on a timely
basis. Tight cash flows in the manufacturing marketplace caused by the
recession led to the Company incurring significantly higher bad debt expenses
than historically experienced.
The Company had total interest bearing debt of $2,197,000 and $1,395,000 as of
December 31, 2001 and 2000, respectively, consisting of current and long-term
portions of a line of credit, term debt, capital leases and notes payable to
shareholders. This represents an increase of $802,000 during the year ended
December 31, 2001, which was made up of a $432,000 increase in the Company's
line of credit facility, a $415,000 increase in the Company's term debt, a
$34,000 reduction in notes payables and a $11,000 reduction in capital leases.
The Company had borrowings of $1,100,000 and $120,000 against its $1,100,000
long-term line of credit and $250,000 short-term line of credit facilities,
respectively, as of December 31, 2001. Subsequent to year-end, the maturity
date on the $250,000 short-term line of credit facility was extended from March
13, 2002 to January 31, 2003. Subsequent to year-end, approximately $81,000 in
notes payables to former shareholders of TekSoft were renegotiated to an
interest only note 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 the conversion.
Shareholder's Equity decreased to $8,705,000 as of December 31, 2001 compared to
$10,742,000 as of December 31, 2000. The decrease in Shareholder's Equity since
December 31, 2000 is attributed to a $2,621,000 loss for the year ended December
31, 2001. The Company received $192,000 of proceeds from the sale of preferred
stock, issued common stock for cash and services for $73,000, issued warrants
for $172,000, issued contingent shares earned during 2001 of $89,000 and stock
options issued for $61,000, which helped to offset the loss incurred for the
year ended December 31, 2001. Subsequent to year-end, the Company offered and
issued 150,000 units in a private placement to an officer of the Company. Units
include 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 were sold for $.50 per
unit. Subsequent to year-end, the Company offered and issued 250,000 units in a
private placement to an officer of the Company. 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 $.50 per unit.
The Company invested $1,277,000 in capitalized software for the year ended
December 31, 2001. This compares to $1,268,000 for the year ended December 31,
2000. The modest increase during the year ended December 31, 2001 can be mostly
attributed to OnCourse incurring twelve months of TekSoft development as
compared to only eleven months for the year ended December 31, 2000. The
Company continued to make investments in its CAD/CAM and estimating software and
Tools4Mfg.com website development, which were $1,118,000, $141,000 and $18,000,
respectively, for the year ended December 31, 2001. The Company released
CAMWorks 2001 and ProCAM II versions of its CAD/CAM software, versions 9.0 and
9.5 of its estimating software and released from beta its raw material quoting
and procurement capabilities on its Tools4Mfg.com websites. The Company
believes that the development work done in 2001 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 same is true for transaction
fees expected from its Tools4Mfg.com website.
The Company also made expenditures for computer equipment and purchased software
during the year ended December 31, 2001 of $72,000 compared to the $120,000 for
the year ended December 31, 2000. The Company also made expenditures for
purchased software of $42,000 that was not fully implemented as of December 31,
2001. Other fixed assets declined from $151,000 as of December 31, 2000 to
$132,000 as of December 31, 2001 largely due to a $22,000 disposal of a Company
owned vehicle.
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 year ended December 31,
2001 and as projected for the first six months of 2002.
Subsequent to year-end, a shareholder paid the Company the total outstanding
note receivable and accrued interest balance of approximately $50,000.
The Company has approximately $130,000 available as of December 31, 2001 under
its revolving line of credit facilities. The Company also intends to work with
its bank to further extend this 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.
ITEM 7. FINANCIAL STATEMENTS
The following report and financial statements of the Company are contained on
the pages indicated.
OnCourse Technologies, Inc. Page F-1
Report of Independent Public Accountants Page F-2
Consolidated Balance Sheets Page F-3
Consolidated Statements of Operations Page F-5
Consolidated Statements of Shareholder's Equity Page F-6
Consolidated Statements of Cash Flows Page F-7
Notes to Consolidated Financial Statements Page F-8
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
OnCourse Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of OnCourse
Technologies, Inc. (a Nevada Corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of OnCourse
Technologies, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
March 15, 2002
F-2
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2001 and 2000
Assets 2001 2000
------ -------- --------
Current Assets:
Cash $ 76,761 $ 200,411
Accounts Receivable, Less Allowance for Doubtful Accounts
of $163,054 and $24,889, Respectively 1,081,189 1,105,908
Prepaids and Other Assets 139,138 306,939
Deferred Income Tax Asset 633,805 389,670
----------- -----------
Total Current Assets 1,930,893 2,002,928
Note Receivable from Shareholder 48,684 45,041
Capitalized Software, Less Accumulated Amortization
of $2,558,611 and $1,422,334, Respectively 5,014,774 4,873,769
Property and Equipment, at Cost:
Computer Equipment and Purchased Software 448,998 377,217
Capital Projects in Process 42,357 -
Furniture, Fixtures and Vehicles 131,649 151,471
----------- -----------
Total Property and Equipment 623,004 528,688
Less- Accumulated Depreciation (313,993) (180,126)
----------- -----------
Net Property and Equipment 309,011 348,562
Goodwill, Less Accumulated Amortization of $2,156,755
and $976,606, Respectively 5,978,166 7,256,424
Assembled Workforce, Less Accumulated Amortization 159,762 191,190
of $60,238 and $28,810, Respectively
Trade Names, Less Accumulated Amortization of $70,278 479,722 516,389
and $33,611, Respectively
Distribution Network, Less Accumulated Amortization 435,714 521,428
of $164,286 and $78,572, Respectively
Other Assets 158,829 178,291
----------- -----------
Total Assets $14,515,555 $15,934,022
----------- -----------
----------- -----------
The accompanying consolidated notes to financial statements are an
integral part of these consolidated balance sheets.
F-3
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2001 and 2000
Liabilities and Shareholders' Equity 2001 2000
------------------------------------ -------- --------
Current Liabilities:
Line of Credit $ 120,000 $ -
Current Portion of Long-Term Debt 113,122 52,318
Current Portion of Capital Leases 5,380 13,060
Accounts Payable 1,021,673 823,754
Accrued Income Taxes - 14,833
Accrued Commissions 109,813 84,210
Accrued Wages and Other Liabilities 194,750 207,347
Notes Payable to Shareholders and Employees 126,821 154,587
Deferred Revenue 1,889,657 1,623,982
----------- -----------
Total Current Liabilities 3,581,216 2,974,091
Line of Credit 1,099,950 787,818
Notes Payable to Shareholders and Employees, - 6,757
Less Current Portion
Long-Term Debt, Less Current Portion 730,388 375,914
Capital Lease Obligations, Less Current Portion 1,313 4,758
Deferred Income Tax Liability 397,936 1,042,770
Shareholders' Equity:
Common Stock, $0.001 Par Value, 50,000,000
Shares Authorized, and 18,269,253 and
17,751,227 Shares Issued and Outstanding,
Respectively 18,269 17,751
Preferred Stock, No Par Value, 10,000,000 Shares
Authorized, 192 and 0 Shares Issued and 192,000 -
Outstanding, Respectively
Additional Paid-In Capital 15,256,331 14,662,217
Warrants 628,539 713,886
Stock Options 60,598 -
Retained Deficit (7,450,985) (4,651,940)
----------- -----------
Total Shareholders' Equity 8,704,752 10,741,914
----------- -----------
Total Liabilities and Shareholders' Equity $14,515,555 $15,934,022
----------- -----------
----------- -----------
The accompanying consolidated notes to financial statements are an
integral part of these consolidated balance sheets.
F-4
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2001 and 2000
2001 2000
-------- --------
Net Sales $ 4,914,767 $ 5,247,617
Cost of Sales 1,903,668 1,699,293
----------- -----------
Gross Profit 3,011,099 3,548,324
Selling Expenses 2,490,872 2,493,764
Research and Development 299,751 323,445
Purchased In-Process Research & Development - 270,000
Goodwill and Other Intangibles Amortization 1,333,959 1,091,948
General and Administrative Expenses 2,105,431 2,142,749
----------- -----------
Operating Loss (3,218,914) (2,773,582)
Interest Expense 120,094 105,235
----------- -----------
Loss Before Income Taxes (3,339,008) (2,878,817)
Income Tax Benefit 717,766 566,624
----------- -----------
Net Loss $(2,621,242) $(2,312,193)
----------- -----------
----------- -----------
Basic and Diluted Loss Per Share $(0.15) $(0.14)
----------- -----------
----------- -----------
The accompanying consolidated notes to financial statements are an
integral part of these consolidated statements.
F-5
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2001 and 2000
Common Stock Preferred Stock
------------ ---------------
Additional
Paid-in Stock Retained Stockholders'
Shares Amount Shares Amount Capital Warrants Options Deficit Equity
------ ------ ------ ------ ---------- -------- ------- ------- ------
Balance, December
31, 1999 11,850,156 $11,850 - $ - $ 665,919 $1,864,990 $ - $(2,066,338) $ 476,421
Shares Issued
for Acquisition 4,500,060 4,500 - - 10,750,643 - - - 10,755,143
Issuance of
Common Stock 488,734 489 - - 925,835 - - - 926,324
Issuance of Warrants - - - - (220,942) 220,942 - - -
Warrants Issued
as Dividends - - - - 1,642,128 (1,368,719) - (273,409) -
Exercise of Warrants 1,071 1 - - 4,934 (3,327) - - 1,608
Contingent
Shares Earned 911,206 911 - - 893,700 - - - 894,611
Net Loss - - - - - - - (2,312,193) (2,312,193)
---------- ------- --- -------- ----------- ---------- ------- ----------- -----------
Balance, December
31, 2000 17,751,227 17,751 - - 14,662,217 713,886 - $(4,651,940) $10,741,914
Issuance of
Common Stock 268,627 269 - - 72,837 - - - 73,106
Proceeds for
Preferred Stock - - 192 192,000 - - - - 192,000
Dividends on
Preferred Stock - - - - - - - (2,718) (2,718)
Issuance of Warrants - - - - - 172,293 - - 172,293
Issuance of Stock - - - - - - 60,598 - 60,598
Options
Warrants Issued
as Dividends - - - - 432,725 (257,640) - (175,085) -
Contingent
Shares Earned 249,399 249 - - 88,552 - - - 88,801
Net Loss - - - - - - - (2,621,242) (2,621,242)
---------- ------- --- -------- ----------- ---------- ------- ----------- -----------
Balance, December
31, 2001 18,269,253 $18,269 192 $192,000 $15,256,331 $ 628,539 $60,598 $(7,450,985) $ 8,704,752
---------- ------- --- -------- ----------- ---------- ------- ----------- -----------
---------- ------- --- -------- ----------- ---------- ------- ----------- -----------
The accompanying consolidated notes to financial statements are an integral part
of these consolidated statements.
F-6
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2001 and 2000
2001 2000
-------- --------
Cash Flows from Operating Activities:
Net Loss $(2,621,242) $(2,312,193)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities-
Depreciation and Amortization 2,609,622 2,145,893
Loss on Disposal of Property and Equipment 1,795 17,786
Non-Cash Compensation 1,275 94,105
Non-Cash Consulting Services 401,222 404,493
Purchased In-Process Research & Development - 270,000
Deferred Income Taxes, Net (702,058) (592,264)
Changes in Current Assets and Liabilities-
Accounts Receivable 24,719 (74,297)
Prepaids and Other Current Assets (36,199) (12,088)
Accounts Payable 197,918 225,747
Accrued Liabilities (4,545) 79,939
Deferred Revenue 265,675 667,565
----------- -----------
Net Cash Provided by Operating Activities 138,182 914,686
----------- -----------
Cash Flows From Investing Activities:
Capitalized Software Development Costs (1,277,282) (1,268,185)
Purchase of Property and Equipment (101,630) (137,593)
Other Assets 19,463 (141,346)
Acquisition of TekSoft, Inc. - 65,526
----------- -----------
Net Cash Used in Investing Activities (1,359,449) (1,481,598)
----------- -----------
Cash Flows From Financing Activities:
Proceeds on Line of Credit, Net 432,132 604,393
Proceeds from Long-Term Debt 500,000 440,000
Payments on Long-Term Debt and Notes Payable to (119,246) (567,396)
Shareholders and Employees
Proceeds on Capital Lease Obligation 2,226 14,100
Payments on Capital Lease Obligation (13,351) (16,490)
Proceeds from Stock and Warrant Issuance 107,499 202,727
Proceeds for Preferred Stock 192,000 -
Exercise of Warrants - 1,608
Increase in Notes Receivable from Shareholder (3,643) (3,303)
----------- -----------
Net Cash Provided by Financing Activities 1,097,617 675,639
----------- -----------
Net (Decrease) Increase in Cash (123,650) 108,727
Cash, Beginning of Year 200,411 91,684
----------- -----------
Cash, End of Year $76,761 $200,411
----------- -----------
----------- -----------
The accompanying consolidated notes to financial statements are an
integral part of these consolidated statements.
F-7
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 2001 and 2000
(1) Description of Merger and Acquisitions-
--------------------------------------
OnCourse Technologies, Inc. ("OnCourse") was incorporated in Nevada on
May 28, 1998 as a subsidiary of Innovation International, Inc.
("Innovation"). On June 12, 1998, Innovation caused OnCourse to distribute
Innovation's 800,000 common shares of OnCourse and common stock purchase
warrants of OnCourse to Innovation's shareholders as a dividend-in-kind.
These shares were subject to a unilateral right of return through June 12,
1999, and not reflected as being issued and outstanding until the
expiration of the right of return. Effective June 12, 1998, as a result of
that distribution ("spin-off"), OnCourse became separate from and was no
longer a subsidiary of Innovation.
Following completion of the spin-off, OnCourse entered into an agreement
with the shareholders of Micro Estimating Systems, Inc. ("Micro
Estimating") pursuant to which Micro Estimating was merged into a newly
organized subsidiary, Micro Acquisition Corporation ("Acquisition"), which
immediately thereafter changed its name to Micro Estimating Systems, Inc.
Consideration for the merger included the issuance of 9,866,500 shares to
the former shareholders of Micro Estimating, plus the potential for an
additional 2,000,000 shares if certain sales growth contingencies are met
as defined in the agreement. This entire transaction became effective on
July 31, 1998.
Acquisitions and Pro Forma Information-
--------------------------------------
Tools4Mfg.com, Inc.-
------------------
During December 2001, OnCourse incorporated Tools4Mfg.com, Inc.
("Tools4Mfg") as a 100% owned subsidiary of OnCourse. Tools4Mfg did not
begin operations and has not been funded by the Company as of December 31,
2001.
TekSoft, Inc.-
------------
On January 31, 2000, OnCourse acquired TekSoft, Inc. ("TekSoft"), for
4,500,060 shares of common stock. In addition, the former shareholders of
TekSoft may receive up to 1,500,000 in additional shares over the next five
years if sales, as defined in the agreement, increases.
The acquisition was accounted for as a purchase and, accordingly, the
accompanying consolidated financial statements include the results of
operations of TekSoft subsequent to the acquisition date. The total
purchase price of $10,755,000 was allocated to the assets and liabilities
of TekSoft based upon their respective fair value, with the remainder
allocated to goodwill. The purchase price paid plus the liabilities
assumed exceeded the fair value of the tangible and other intangible assets
purchased by $5,702,000 based on the appraisal performed by an independent
appraisal firm. The final allocation of the purchase price was as follows:
F-8
Current Assets $1,034,000
Capitalized Software 4,300,000
Property and Equipment 167,000
Other Assets 51,000
Liabilities Assumed (2,139,000)
Intangible--Assembled Work Force 220,000
Intangible--Trade Names 550,000
Intangible--Distribution Network 600,000
Acquired In-Process Research and Development 270,000
Intangible--Goodwill 5,702,000
-----------
$10,755,000
-----------
-----------
The classification of complete and incomplete technology is in compliance
with SFAS No. 2 "Accounting for Research and Development Costs" and SFAS
No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed." Generally, in-process research and development is
distinguished from developed technology based upon whether "technological
feasibility" has been achieved. The technological feasibility of a product
is established when the enterprise has completed all planning, designing,
testing, and sampling activities that are necessary to establish that the
product can be produced to meet its design specifications including
functions, applications, and technical performance requirements. The in-
process technology was determined to be $270,000 of which all was
attributed to the CAMWorks 2000 software. For approximately five months
prior to the valuation date, the engineering staff had been at work on the
release version CAMWorks 2000. At the date of acquisition, the release had
not yet reached the beta stage. Significant assumptions were made in order
to determine the value of the above-mentioned assets. The net cash flows
inflows from significant projects were assumed to start in the first year
given the stage of the in-process product technology. Historical pricing,
product margins and expense levels were released based on the unaudited
years ended October 31, 1995 through October 31, 1999. The overall
weighted average cost of capital was estimated to be approximately 20%
based on a weighting of 10% debt and 90% equity capital structure. The
cost of equity capital estimated at 21% was based on using the capital
asset pricing model which reflects the risk-free rate of return plus risk
premiums. The cost of debt estimated at 9.9% was based on the yield of BB-
rated corporate debt as of the valuation date.
The following unaudited pro forma information presents the results of
operations of OnCourse as if the acquisition of TekSoft had taken place on
January 1, 2000. The pro forma information includes an adjustment for
amortization expense as a result of goodwill and other intangible assets.
The pro forma information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made at the
beginning of the periods presented or the future results of the combined
operations had the acquisition of TekSoft taken place.
Pro Forma
Year Ended
December 31, 2000
(Unaudited)
-----------------
Net Sales $5,513,092
Net Loss (2,083,194)
Basic and Diluted Loss Per Share $(0.12)
F-9
CAM Solutions, Inc.-
------------------
In 1999, OnCourse entered into an agreement with the shareholder of CAM
Solutions, Inc. ("CAM Solutions") pursuant to which CAM Solutions was
acquired as a 100% owned subsidiary of OnCourse. Consideration for the
acquisition included the issuance of 150,000 shares of OnCourse stock to
the former shareholder of CAM Solutions. In addition, the former
shareholder of CAM Solutions may receive up to 150,000 additional shares of
OnCourse stock over the next five years if net income, as defined per the
agreement, increases. The acquisition was accounted for using the purchase
method of accounting. The purchase price was approximately $50,000, and
resulted in goodwill of approximately $32,000.
Cimtronics, Inc.-
---------------
In 1999, OnCourse entered into an agreement with the shareholder of
Cimtronics, Inc. ("Cimtronics") pursuant to which Cimtronics was acquired
as a 100% owned subsidiary of OnCourse. Consideration for the acquisition
included the issuance of 153,846 shares of OnCourse Stock to the former
shareholder of Cimtronics. In addition, the former shareholder of
Cimtronics may receive up to 153,846 additional shares of OnCourse stock
over the next five years if net income, as defined per the agreement,
increases. The acquisition was accounted for using the purchase method of
accounting and accordingly the accompanying consolidated financial
statements include the results of operations of Cimtronics subsequent to
the acquisition date. The purchase price was approximately $625,000, and
resulted in goodwill of approximately $591,000.
OnCourse and its subsidiaries, Micro Estimating, CAM Solutions, Cimtronics,
TekSoft and Tools4Mfg are hereafter referred to as the "Company".
Consolidated Pro Forma for 2000-
-------------------------------
The following unaudited pro forma information presents the results of
operations of the Company for the year ended December 31, 2000, as if the
acquisition of TekSoft had taken place on January 1, 2000. The pro forma
information includes an adjustment for amortization expense as a result of
goodwill and other intangible assets and the write-off of the purchased in-
process research and development as part of the TekSoft acquisition. The
pro forma information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made at the
beginning of the periods presented or the future results of the combined
operations had the acquisition of TekSoft taken place.
Pro Forma
TekSoft Revised
Consolidated One Month Consolidated
Year Ended Ended Pro Forma Year Ended
December 31, January 31, Adjustments December 31,
2000 2000 TekSoft 2000
------------ ------------ ----------- ------------
Net Sales $ 5,247,617 $280,661 $(15,186) $ 5,513,092
Cost of Sales 1,699,293 106,840 (15,186) 1,790,947
----------- -------- -------- -----------
Gross Profit 3,548,324 173,821 - 3,722,145
SG&A 4,959,958 120,514 - 5,080,472
Amort. of Goodwill and Other Intangibles 1,091,948 - 91,970 1,183,918
Purchased In-Process R&D 270,000 - (270,000) -
----------- -------- -------- -----------
Operating (Loss) Income (2,773,582) 53,307 178,030 (2,542,245)
Other Expense (105,235) (2,338) - (107,573)
----------- -------- -------- -----------
(Loss) Income Before Taxes (2,878,817) 50,969 178,030 (2,649,818)
Income Tax Benefit 566,624 - - 566,624
----------- -------- -------- -----------
Net (Loss) Income $(2,312,193) $50,969 $178,030 $(2,083,194)
----------- -------- -------- -----------
----------- -------- -------- -----------
F-10
The adjustments to net sales and cost of sales represent the intercompany
sales and purchases between OnCourse and TekSoft during the year ended
December 31, 2000. The adjustment for the TekSoft amortization of goodwill
and other intangibles line item is comprised of adding one month of
amortization expense for the goodwill and other intangible assets resulting
from the TekSoft purchase price allocation and the acquisition expenses
incurred by the Company. The reduction of in-process research and
development was made since the above presentation is as if the acquisition
was made as of January 1, 2000 and the $270,000 write-off of the in-process
research and development was already reflected in the presentation for the
year ended December 31, 2000.
(2) Nature of Operations-
--------------------
The Company develops, produces and or markets computer-aided
design/computer-aided manufacturing ("CAD/CAM"), estimating, layout,
routing and direct numerical control ("DNC") software for job shops and the
machining industry. The Company also operates a business-to-business
electronic-commerce service web site to the worldwide metal working
community. The principal markets for the Company's software and support
services are North America and Europe. For the year ended December 31,
2001, sales in North America and Europe were 76% and 16%, respectively.
For the year ended December 31, 2000, sales in North America and Europe
were 87% and 7%, respectively.
Sales to one customer totaled approximately 13% and 14% of consolidated net
sales, including those sales deferred at December 31, 2001 and 2000,
respectively. There were no other customers that had sales greater than
10% of the Company's net sales for the years ended December 31, 2001 and
2000.
(3) Liquidity-
---------
OnCourse has incurred losses over the last two years and has negative
working capital. Based upon its current plans, the Company believes it has
sufficient funds and borrowing availability, $130,000 remaining, to meet
its operating expenses and capital requirements through fiscal year 2002
and into fiscal year 2003. However, the Company intends to seek such
additional funding from equity offerings to existing shareholders or other
third parties during 2002. 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.
(4) Summary of Significant Accounting Policies-
------------------------------------------
(a) Basis of Presentation-
---------------------
The consolidated financial statements include the accounts of OnCourse
and its wholly owned subsidiaries. All transactions for TekSoft
subsequent to the acquisition date are included in the consolidated
financial statements. All intercompany transactions and accounts have
been eliminated in consolidation.
(b) Revenue Recognition-
-------------------
Revenue from product sales and related training services 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 December 31, 2001 and 2000 are
approximately $709,000 and $684,000, respectively of products which
have been delivered and invoiced but for which the Company has not
been notified of customer acceptance 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 fees 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.
F-11
Revenues also include separate transaction fees earned from the
Company's business-to-business electronic-commerce service web site.
Such fees are based on the transaction's value and commission rate and
are recorded as earned.
(c) Inventories-
-----------
The Company expenses as incurred various materials (compact disks and
manuals) and supplies used to produce, package and ship its products.
The value of supplies on hand at year-end is not material in relation
to the overall financial statements.
(d) 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 as of December 31,
2001 and 2000 includes software acquired in the acquisition of TekSoft
(see Note 1). 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 2001 and 2000, the Company amortized the capitalized
software costs straight-line over three to 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 $300,000 and
$323,000 in 2001 and 2000, respectively. In addition, $270,000 of
acquired in-process research and development resulting from the
TekSoft acquisition was written off as of January 31, 2000.
Computer software development costs capitalized in 2001 and 2000 were
approximately $1,277,000 and $1,268,000, respectively. Amortization
expense for the years ended December 31, 2001 and 2001 of
approximately $1,136,000 and $921,000, respectively, is included in
cost of sales in the consolidated statements of operations.
(e) Property and Equipment-
----------------------
Property and equipment, which consist primarily of office and computer
equipment, is stated at cost and is depreciated over the estimated
useful lives of the assets (3 to 7 years) over straight-line and
accelerated depreciation methods.
Maintenance and repair costs are expensed as incurred. Improvements
that extend the useful life of the assets are capitalized to plant and
equipment accounts and amortized over the remaining useful life.
(f) Earnings per Share-
------------------
Basic earnings per share ("EPS") is calculated using net income (loss)
available to common shareholders divided by the weighted average
number of common shares outstanding during the year. Diluted EPS is
similar to basic EPS except that the weighted average number of common
shares outstanding is increased to include the number of additional
shares that would have been outstanding if the dilutive potential
common shares had been issued and the contingent shares earned in the
current year are adjusted as if they were outstanding the entire year.
F-12
2001 2000
-------- --------
Weighted Average Shares
Outstanding--Basic EPS 17,996,593 16,379,120
Incremental Shares from
Outstanding Warrants - 68,490
Convertible Preferred Shares 320,000 -
Contingent Shares Earned 160,233 808,170
---------- ----------
Weighted Average Shares
Outstanding--Dilutive EPS 18,476,826 17,255,780
---------- ----------
---------- ----------
For the years ended December 31, 2001 and 2000, the computation of
diluted EPS has an antidilutive effect on EPS due to operating losses.
(g) Offering Costs-
--------------
Costs associated with stock offerings have been recorded as a
reduction to shareholders' (deficit) as these costs were netted
against the proceeds of the stock offering in the period the costs
were incurred. All costs associated with aborted stock offerings have
been expensed. There were $0 and $44,000 recorded as a reduction to
shareholders' equity for the years ended December 31, 2001 and 2000,
respectively.
(h) Advertising Costs-
-----------------
All advertising costs are expensed the first time the advertising
takes place. Advertising expenses for the years ended December 31,
2001 and 2000 were approximately $242,000 and $342,000, respectively.
(i) Other Assets-
------------
Included in Other Assets are licenses for the right to use certain
third party software in the Company's products. These licenses range
from three to five years and are amortized over the terms of these
licenses on a straight-line basis. The Company periodically evaluates
the realizability of these assets in relation to the software products
that they are used in.
(j) Use of Estimates-
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(k) Reclassification-
----------------
Certain amounts have been reclassified in the 2000 financial
statements to be consistent with the 2001 financial statement
presentation.
(5) Note Receivable from Shareholder-
--------------------------------
The note receivable is due from a shareholder of the Company. The note
earns interest at 8% and is due on April 15, 2002. (See Note 19.)
(6) Goodwill and Other Intangibles-
------------------------------
Goodwill consisting of excess of cost over fair value of the assets
acquired in the transactions described in Note 1 is being amortized on a
straight-line basis over seven years. Goodwill amortization for the years
ended December 31, 2001 and 2000 was approximately $1,180,000 and $951,000,
respectively. The Company assesses goodwill and other intangibles for
impairment annually. Management believes no impairment exists as of
December 31, 2001.
F-13
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 and Distribution Network assets is being provided utilizing the
straight-line method over the estimated useful life of seven years. The
amortization of the Trade Names asset is on a straight-line basis over the
estimated useful life of fifteen years. Total amortization expense
relating to these intangible assets for the years ended December 31, 2001
and 2000 was approximately $154,000 and $141,000, respectively.
(7) New Accounting Pronouncements-
-----------------------------
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 "Business Combinations" and No. 142
"Goodwill and Other Intangible Assets" effective for fiscal years beginning
after December 31, 2001. Under the new rules goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will
be subject to periodic impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful
lives. The statement also requires business combinations initiated after
June 30, 2001 to be accounted for using the purchase method of accounting,
and broadens the criteria for recording intangible assets separate from
goodwill.
Effective January 1, 2002, all amortization expense on goodwill and
intangible assets with indefinite lives will stop. The Company anticipates
that the application of the nonamortization provisions will increase net
income approximately $1,187,000 ($0.07 per diluted share) per year compared
to 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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 establishes a single
accounting model for long-lived assets to be disposed of by sale and
provides additional implementation guidance for assets to be held and used
and assets to be disposed of other than by sale. There will be no
financial implication related to the adoption of SFAS 144, and the guidance
will be applied on a prospective basis. The Company will adopt the
statement effective January 1, 2002.
(8) Notes Payable to Shareholders and Employees-
-------------------------------------------
As of December 31, 2001 and 2000, the Company has a $5,000 and $10,000,
respectively, non-interest bearing demand note payable to one of its
shareholders. The Company is accruing interest expense at 7% per year.
Interest has not been paid on this note since its inception. Subsequent to
year-end, the note was paid.
As of December 31, 2001, the Company has several notes payable and loans to
the former shareholders and employees of TekSoft. The notes bear interest
of 16.5% and are payable monthly and mature 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 $90,182 and $119,705, as
of December 31, 2001 and 2000, respectively. (See Note 19.)
The Company has an interest only note payable to former TekSoft
shareholders and current Company shareholders who loaned money to TekSoft
under a line of credit agreement to finance the operations. This note
bears an annual interest rate of 16.5% with the interest paid annually.
This note totaled $31,639 at December 31, 2001 and 2000. (See Note 19.)
(9) Lines of Credit-
---------------
The Company has a line of credit agreement with a bank, which provides for
borrowings up to $1,100,000. The line of credit is a three-year revolving
line of credit agreement due October 9, 2003. 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
(4.75% at December 31, 2001). The revolving line of credit agreement is
classified as long-term debt as no payments are required until the end of
the three-year period. (See Note 10.) The debt facility is secured by all
assets of the Company and its subsidiaries.
F-14
The Company has an additional line of credit agreement with a bank, which
provides for borrowings up to $250,000 through March 13, 2002. (See Note
19.) 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 1.0%. The debt facility is
secured by all assets of the assets of the Company. Borrowings under the
line of credit were approximately $120,000 as of December 31, 2001.
(10) Debt-
----
Long-term debt as of December 31, 2001 and 2000 consists of the following:
December 31, December 31,
2001 2000
------------ ------------
Line of Credit (see Note 9) $1,099,950 $ 787,818
Note payable to bank, 8.5% interest, due in monthly
installments of $6,500 including interest, through
October 1, 2005, secured by all assets of the
Company. 348,687 392,414
Note payable to bank, 8.5% interest, due in monthly
installments of $7,949 including interest, through
November 23, 2005, secured by all assets of the
Company. 482,426 -
Auto loan, 8.9% interest, due in monthly
installments of $543 including interest, through
January 1, 2004, secured by auto 12,397 17,552
Auto loan, 8.5%, paid in 2001 - 18,266
---------- ----------
Total Long-Term Debt 1,943,460 1,216,050
Less- Current Maturities (113,122) (52,318)
---------- ----------
$1,830,338 $1,163,732
---------- ----------
---------- ----------
Approximate principle payments on long-term debt as of December 31, 2001
are as follows:
2002 $ 113,122
2003 1,221,529
2004 126,179
2005 482,630
Thereafter -
(11) Lease Commitments-
-----------------
The Company leases all of its office and warehouse space under operating
leases. One of these leases is with a related party (see Note 16) that is
renewable in five-year increments for a period of twenty-five years. The
Company subleases a portion of this related party lease as office space to
other tenants on a year-to-year lease. In addition, the Company also
leases automobiles and computer equipment. Total rent expense, net of
sublease payments, was approximately $269,800 and $218,600 for the years
ended December 31, 2001 and 2000, respectively.
F-15
Property under capital leases is included in property and equipment as
follows:
December 31, December 31,
2001 2000
------------ ------------
Computer Equipment $ 27,014 $27,014
Less- Accumulated Depreciation (12,651) (5,897)
-------- -------
Net Capital Lease Assets $ 14,363 $21,117
-------- -------
-------- -------
Approximate minimum annual rental commitments as of December 31, 2001 are
as follows:
Capital Operating
For the Year Ending December 31: Leases Leases
------- ---------
2002 $5,600 $ 296,800
2003 700 242,800
2004 610 221,400
2005 - 189,200
Thereafter - 94,600
------ ----------
Total Minimum Lease Payments 6,910 $1,044,800
----------
----------
Less Amount Representing Interest- 217
------
Present Value of Minimum Lease Payments $6,693
------
Current Portion $5,380
------
------
12) Warrants-
--------
OnCourse Technologies, Inc. ("OnCourse") was incorporated in Nevada on May
28, 1998 as a subsidiary of Innovation International, Inc ("Innovation").
On June 12, 1998, Innovation caused OnCourse to distribute Innovation's
800,000 common shares of OnCourse and 400,000 common stock purchase
warrants of OnCourse to Innovation's shareholders as a dividend in-kind.
The warrants are redeemable for $.05 per warrant only at the discretion of
the Company. The warrants originally entitled the holder to purchase on or
before December 31, 1999 one share of Company common stock per warrant at
an exercise price of $1.50. On December 23, 1999, the expiration date for
these common stock purchase warrants was extended to March 31, 2000. On
March 27, 2000, the expiration date was extended a second time to September
30, 2000. On September 12, 2000, the expiration date was extended a third
time to June 30, 2001. Dividends of approximately $273,000 were recorded
for these warrants during the year ended December 31, 2000.
On June 8, 2001, the expiration date was extended a fourth time to June 30,
2002. Generally accepted accounting principles required that the warrants
be classified as equity and accreted to the estimated redemption value
based on the terms of the warrants. At the time of original issuance the
warrants were not assigned an initial value or any accretion as their
estimated fair market value approximated zero. Under the guidelines
outlined in FASB No. 123, "Accounting for Stock Based on Compensation," a
change in the characteristics of the warrant, such as an extension of the
expiration date, triggers a remeasurement point. Each of the extensions
resulted in a new measurement date and the incremental value of the
warrants was accounted for as a dividend to the shareholders. The
incremental value reflected as a dividend was calculated as the difference
between the value of the new warrants issued compared to warrants given by
the shareholders, i.e., the canceled warrants. The value of the warrants
at each measurement point was determined using the Black-Scholes pricing
model. A dividend was recorded for approximately $175,000 in June 2001.
During the year ended December 31, 2001, none of the 398,824 remaining
warrants were exercised.
F-16
The Company recorded approximately $175,000 and $273,000 in dividends for
these warrants during the years ended December 31, 2001 and 2000,
respectively.
The table below summarizes the transactions related to the Company's
warrants to purchase common stock:
Number of Weighted-Average
Warrants Exercise Price
--------- ----------------
Balance at December 31, 1999 466,305 $1.61
Warrants Sold 283,468 2.25
Warrants Exercised (1,071) 1.50
--------- -----
Balance at December 31, 2000 748,702 $1.85
Warrants Sold 437,178 1.86
--------- -----
Balance at December 31, 2001 1,185,880 $1.85
--------- -----
--------- -----
All warrants are exercisable as of December 31, 2001.
(13) Stock Options-
-------------
Effective January 1, 2001, the Company adopted a Stock Option Plan (the
"Plan"). One million shares of the Company's common stock has been
reserved for issuance pursuant to the terms of the Plan. Unless earlier
terminated by the Board of Directors, the Plan will terminate on December
31, 2010. During the year ended December 31, 2001, the Company granted
589,048 options to employees at an exercise price of $0.65, and which vest
over periods ranging from zero to five years and expire December 31, 2010.
(See Note 19.)
During the year ended December 31, 2001, the Company granted 140,000
options to an independent contractor at an exercise price of $0.65, and
which vest over a 12-month period ending May 3, 2002. The options expire
May 3, 2007. As of December 31, 2001, 112,000 of the options were vested.
The Company recorded $60,598 of legal and professional expenses for the
year ended December 31, 2001.
During the year ended December 31, 2001, none of the 729,048 stock options
were exercised.
14) Shareholders' Equity -
---------------------
Preferred Stock-
--------------
During 2001, an amendment to the Company's Articles of Incorporation was
approved to authorize 10,000,000 shares of Preferred Stock without par
value. The Board of Directors, without action by the shareholders, shall
have the authority to divide the authorized and unissued shares of the
Company's Preferred Stock into classes or series and to determine for any
such class or series its voting rights and such designations, dividends,
preferences, options, conversion rights and other special or relative
rights as may be desired. The Company does not have a specific dividend
policy for preferred stock. The policy is established as each class or
series is created and negotiated by the Company and preferred shareholders.
Subsequent to year-end, the Preferred Stock was changed from a no par value
to a par value of $0.001 per share.
F-17
During 2001, the Company entered into a stock purchase agreement with a
third-party vendor ("Purchaser"). The agreement provided for the sale of
up to 275 shares of non-voting 3% Series A Cumulative Convertible Preferred
Stock of the Company without par value. The Purchaser agreed to purchase
the shares in blocks of 192 and 83 shares at a stated value of $1,000 per
share. During the year ended December 31, 2001, the Company received
proceeds of $192,000 for the sale of 192 shares. The Purchaser is
obligated over a two-year period to purchase the remaining 83 shares at a
price of $1,000 per share upon the Company satisfactorily completing
certain conditions spelled out in the agreement. The conditions include
the Company opening offices and or distribution channels in three specified
geographic locations and maintaining an aged trade payable balance that is
less than 90 days past due. The agreement entitles holders of the Series
A Preferred Stock cumulative annual dividends at an annual rate of 3%. In
the event that the two-year period lapses without the Company fulfilling
the conditions stated in the agreement, the Purchaser no longer has an
obligation to purchase the remaining 83 shares and the dividend rate on the
192 shares purchased shall increase to an annual rate of 7%. Under the
agreement, the Series A Preferred Stock shall rank senior to the Common
Stock and all other equity securities of the Company issued and outstanding
on or after the first issuance date of any of the Series A Preferred Stock
as to distributions and upon liquidation, dissolution or winding up. The
holders, at their election, have the right at any time to convert Series A
Preferred Stock into shares of Common Stock by converting at the stated
value at $.60 per share. Each common stock share resulting from the
conversion will be entitled to receive one Class A Warrant and one Class B
warrant of the Company. Each Class A warrant will be exercisable at a
price of $1.25 per share at any time within three years of the warrant
issuance date. Each Class B warrant will be exercisable at a price of
$1.25 per share at any time within five years of the warrant issuance date.
In addition, the purchaser is entitled to elect one member to the Board of
Directors of the Company for so long as any shares of Series A Preferred
stock are outstanding. During the year ended December 31, 2001, the Company
accrued dividends of $2,718 under this agreement.
Common Stock-
------------
During 2001, the Company offered and issued on various dates 100,000 units
at a $1.00 per unit in a private placement to selected individuals. The
units include one share of Company common stock and one Class A common
stock purchase warrant and one Class B common stock purchase warrant. Each
warrant represents the right to purchase one share of the Company's common
stock at an exercise price of $1.75. The warrants were issued with initial
estimated values (based on Black-Scholes valuation model) of $0.85 for each
Class A warrant and $0.95 for each Class B warrant and expire in 2004 and
2006, respectively.
During 2000, the Company offered and issued on various dates Units in a
private placement to selected individuals. The units include one share of
Company common stock and one Class A common stock purchase warrant and one
Class B common stock purchase warrant. The Company issued and sold 118,250
units at $2.00 per unit and 10,000 units at $1.00 per unit during 2000.
The warrants were issued with initial estimated values (based on Black-
Scholes valuation model) ranging from $2.85 to $5.19 for each Class A
warrant and ranging from $3.16 to $5.56 for each Class B warrant and expire
in 2003 and 2005, respectively. Each warrant represents the right to
purchase one share of the Company's common stock at an exercise price of
$2.25.
Transactions With Vendors-
-------------------------
During 2001, the Company entered into an agreement and offered and issued
59,323 shares of Company common stock, 59,323 Class A stock purchase
warrants and 59,323 Class B stock purchase warrants to a vendor as payment
for $91,199 of accounts payable. The Company recorded a reduction to
professional fees of $63,586 during under this agreement based on the
difference between a conversion price ranging from $1.00 to $2.00 as
defined in the agreement and the $0.18 market share price. The warrants
were issued with initial estimated values (based on Black-Scholes valuation
model) ranging from $0.12 to $0.13 for each Class A warrant and $0.16 for
each Class B warrant and expire in 2004 and 2006, respectively. Each
warrant represents the right to purchase one share of the Company's common
stock at an exercise price ranging from $1.75 to $3.00. The agreement
with the vendor calls for future hardware and software purchases to be
converted at a common stock price of $1.00 and for equal number of Class A
and Class B stock purchase warrants at an exercise price of $1.75.
F-18
During 2001, the Company offered and issued 37,291 shares of Company common
stock, 37,291 Class A stock purchase warrants and 37,291 Class B stock
purchase warrants as payment of $35,225 for professional services. The
warrants were issued with initial estimated values (based on Black-Scholes
valuation model) ranging from $0.11 to $1.36 for each Class A warrant and
$0.14 to $1.45 for each Class B warrant and expire in 2004 and 2006,
respectively. Each warrant represents the right to purchase one share of
the Company's common stock at an exercise price ranging from of $1.00 to
$3.00.
During 2001, the Company offered and issued 11,538 shares of Company common
stock as payment of $7,500 to a vendor for customer relationship software.
During 2001, the Company offered and issued 2,000 shares of Company common
stock to a vendor as payment of $1,980 in professional services.
During 2001, the Company offered and issued 21,975 shares of Company common
stock, 21,975 Class A stock purchase warrants and 21,975 Class B stock
purchase warrants as payment of $21,975 in professional services to two
vendors. Each warrant represents the right to purchase one share of the
Company's common stock at an exercise price of $1.75. The warrants were
issued with initial estimated values (based on Black-Scholes valuation
model) ranging from $0.59 to $0.62 for each Class A warrant and $0.69 to
$0.70 for each Class B warrant and expire in 2004 and 2006, respectively.
In May 2000, the Company entered into a twelve-month contract with a
professional services firm for consulting services. The Company issued
300,000 shares of common stock in 2000 for these services at a value of
$2.00 per share. The cost associated with this contract is being amortized
over the term of the agreement. This agreement extended in 2001 to
February 2002. Approximately $204,000 and $375,000 was amortized during
the years ended December 31, 2001 and 2000, respectively. The balance of
$21,000 is reflected as a component of Prepaids and Other Assets on the
balance sheet as of December 31, 2001.
During 2000, the Company offered and issued 2,500 shares of Company common
stock as payment for $5,000 of outside programming services performed. The
market price of the company common stock was $1.01 on the date of issuance.
These services were related to software development and were capitalized.
During 2000, the Company offered and issued 13,484 shares of Company common
stock as payment of $26,968 in professional services. In addition to the
common stock being issued, 13,484 Class A stock purchase warrants and
13,484 Class B stock purchase warrants were issued. The warrants were
issued with initial estimated values (based on Black-Scholes valuation
model) of $5.19 for each Class A warrant and $5.56 for each Class B warrant
and expire in 2003 and 2005, respectively.
Transactions With Employees-
---------------------------
During 2001, the Company offered and issued 1,500 shares of Company common
stock to an employee of Micro Estimating Systems, Inc. as a hiring
incentive. The Company recorded compensation expense of $1,275 for this
transaction.
During 2000, the Company offered and issued 19,500 shares of Company common
stock to the employees of TekSoft, as an incentive to continue employment
following the Company's acquisition of TekSoft. The Company offered and
issued 5,000 shares of Company common stock to an employee as a hiring
incentive. In addition, the Company also awarded another employee 20,000
shares as a part of that employee's compensation package. The Company
recorded total compensation expense of $94,105 for these transactions.
F-19
Contingent Shares-
-----------------
On January 31, 2000, the Company acquired TekSoft, Inc. ("TekSoft") for
4,500,060 shares to the former shareholders of TekSoft. In addition, under
the terms specified in the purchase agreement, the former share holders of
TekSoft may receive up to 1,500,000 additional shares over the next five
years if net sales, as defined in the agreement, increases. During the
year ended December 31, 2001, an additional 155,680 shares were issued to
the former shareholders of TekSoft at an average value of $0.75 per share.
An additional $73,218 was allocated to goodwill. For the year ended
December 31, 2000, the net sales increase resulted in an additional 511,206
shares issued to the former shareholders of TekSoft at a value of $1.75
with approximately $895,000 allocated to goodwill.
Under the terms specified in the purchase agreement with Cimtronics, the
former shareholders of Cimtronics may receive up to 153,846 additional
shares through 2004 if net profits, as defined in the agreement, increases.
For the year ended December 31, 2001, the net profits increase resulted in
an additional 93,719 shares issued to the former shareholders of Cimtronics
at a value of approximately $0.17 per share and an additional $15,585 was
allocated to goodwill. There were no shares earned during 2000 under the
purchase agreement net income criteria.
Consideration for the CAM Solutions acquisition included a provision that
the former shareholder of CAM Solutions may receive up to 150,000
additional shares over the next five years if net income, as defined in the
agreement, increases. There were no shares earned during 2001 and 2000
under the purchase agreement net income criteria.
Consideration in the 1998 reverse triangular merger included a provision
that the former shareholders of Micro Estimating may receive up to a total
of 2,000,000 additional shares through 2003 if certain targeted net sales
increases, as defined, are achieved. The targeted increase in net sales,
as defined, was not achieved for the year ended December 31, 2001, but was
achieved for the year ended December 31, 2000. For the years ended
December 31, 2001 and 2000, 0 and 400,000 shares, respectively, were
allocated to the former shareholders of Micro Estimating. As of December
31, 2001, 1,200,000 of the 2,000,000 additional shares have been allocated
to the former shareholders of Micro Estimating since the merger.
15) Supplemental Disclosure of Cash Flow Information-
------------------------------------------------
Years Ended
December 31,
--------------------
2001 2000
-------- --------
Approximate Cash Paid for:
Interest $142,600 $122,500
Income Taxes 100 4,500
Noncash Transactions:
Capital Leases - 14,100
Compensation to Employees 1,300 94,100
Warrants Issued as Dividends 175,100 273,400
Preferred Stock Dividends 2,700 -
Common Stock Issued for Services (see Note 14) 137,400 404,500
Common Stock Issued for Software (see Note 14) 7,500 -
Stock Options Issued for Services (see Note 13) 60,600 -
16) Related Party Transactions-
--------------------------
Certain owners and employees of the Company have notes and loans with the
Company (see Note 8).
A building that the Company leases is owned and operated by a partnership,
consisting of two former principal owners of a subsidiary (and current
Company shareholders) and a previous employee of the subsidiary (see Note
11). The lease expense, net of sublease, was $162,600 and $126,200 for the
years ended December 31, 2001 and 2000, respectively.
F-20
The Company also has a consulting agreement with a shareholder to provide
expert advice to the Company concerning business strategies. The agreement
became effective December 1, 1999 and expires December 1, 2004. The
Company expenses $4,167 per month for these services with a total expense
of $50,000 recorded for each of the years ended December 31, 2001 and 2000.
Approximately $17,000 and $67,000 is recorded as a component of Accounts
Payable on the balance sheets as of December 31, 2001 and 2000,
respectively.
17) Income Taxes-
------------
The provision for income taxes for the years ended December 31 consists of:
2001 2000
-------- --------
Current-
Federal $(1,383,906) $(1,106,110)
State (227,309) (232,885)
----------- -----------
Total Current (1,611,215) (1,338,995)
Deferred Income Taxes 893,449 772,371
----------- -----------
Total Income Tax Benefit $ (717,766) $ (566,624)
----------- -----------
----------- -----------
A reconciliation of the statutory Federal income tax rate to the
consolidated effective income tax rate is as follows:
Years Ended
December 31,
----------------
2001 2000
------ ------
Statutory Federal Income Tax Rate (35)% (35)%
State Income Taxes, Net of Federal Income Tax Benefit (5) (5)
Goodwill Amortization 13 12
Other 5 8
----- -----
Effective Income Tax Rate (22)% (20)%
----- -----
----- -----
Temporary differences, which give rise to the deferred income tax asset and
liability at December 31, are as follows:
2001 2000
-------- --------
Deferred Revenue $ 542,474 $ 359,452
Other 91,331 30,218
----------- -----------
Current Deferred Income Tax Asset 633,805 389,670
Capitalized Software Costs (2,089,951) (1,988,049)
Book Versus Tax Depreciation Methods (28,029) (31,829)
Net Operating Loss Carryforwards 1,784,541 1,073,877
Other (64,497) (96,769)
----------- -----------
Long-Term Deferred Income Tax Liability (397,936) (1,042,770)
----------- -----------
Net Deferred Income Tax Asset (Liability) $ 235,869 $ (653,100)
----------- -----------
----------- -----------
The Company generated net operating losses ("NOL") of approximately
$1,640,000 and $1,683,000 in 2001 and 2000, respectively. The Company also
acquired net operating losses of approximately $753,000 relating to the
acquisition of TekSoft. The annual use of the NOL carryforwards acquired
with TekSoft is limited to the lesser of the Company's taxable income or
the amount of the IRS imposed limitation pursuant to the "change in
ownership" provisions of the Tax Reform Act of 1986. These NOL
carryforwards will expire at various dates beginning in 2018 through 2020.
As of December 31, 2001, the Company has remaining NOL carryforwards of
approximately $3,068,000 available for future use against Federal and State
income tax liabilities.
F-21
18) Deferred Savings Plan-
---------------------
Effective April 1, 2001, the Company implemented a 401(k) deferred savings
plan with discretionary profit sharing and matching features covering
substantially all employees of the Company. This plan replaced the TekSoft
401(k) deferred savings plan. There were no matching contributions under
the plan for the year ended December 31, 2001.
TekSoft, through March 31, 2001, had a 401(k) deferred savings plan with a
discretionary matching feature covering substantially all employees of
TekSoft. During the years ended December 31, 2001 and 2000, none of the
employee's contributions to the plan were matched by the Company.
(19) Subsequent Events-
-----------------
In May 2002, the Company changed its Preferred Stock from no par value 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. 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.
In March 2002, the Company offered and issued 150,000 units in a private
placement to an officer of the Company. Units include 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 were 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 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 March 2002, the bank extended the $250,000 line of credit agreement due
March 13, 2002 to January 31, 2003.
In March 2002, a shareholder paid the Company the outstanding note
receivable and accrued interest.
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 the conversion.
F-22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not changed its independent auditor within the Company's
last two fiscal years or has not experienced disagreements on any matter of
accounting principles or procedures or financial statement disclosures
within the Company's last two fiscal years.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLAINCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company currently consists of six members. The
current members of the Board of Directors and the executive officers of the
Company are:
DIRECTOR TERM
NAME POSITION(S) HELD WITH THE COMPANY AGE SINCE EXPIRES
Bernard A. Woods, III Chairman, Director, Chief Executive Officer and
Secretary/Treasurer of OnCourse and Micro Estimating 47 1999 2002
Charles W. Beyer Director and President of OnCourse and Micro Estimating 50 1999 2002
Kevin L. Bork Director of OnCourse, and President, Secretary and
Treasurer of CAM Solutions 42 1999 2002
Craig M. Hoffmann Vice President - Product Development of Micro Estimating 35 - -
Michael Zaworski President of Cimtronics 59 - -
Gary L. Fulton Director of OnCourse, and President of TekSoft 50 2000 2002
Scott R. Fulton Vice President of TekSoft 44 - -
Sky Carver Director of OnCourse, and Consultant to TekSoft 45 2000 2002
William C. Brown Chief Financial Officer of OnCourse and Micro Estimating 42 - -
Manu Parpia Director of OnCourse 51 2001 2002
All Directors' terms of office extend until the annual meeting of the Company's
shareholders following their election and until successors are elected and
qualified. Executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The only family
relationship between any of the Directors and executive officers is that the
Messrs. Fulton are brothers, and there are no agreements or understandings
pursuant to which any Director or executive officer is elected.
The following is a brief description of the business experience of the directors
and executive officers of the Company:
BERNARD A. WOODS, III
Chairman, CEO, Secretary and Treasurer of OnCourse since 1998 and CEO of Micro
Estimating since 1997: In 1988 he purchased Micro Estimating from its founder.
From 1981 to 1994 he was Owner and officer of a precision machine shop located
in Pennsylvania.
CHARLES W. BEYER
President of OnCourse since 1998 and President of Micro Estimating since 1997:
Hired by Micro Estimating as General Sales Manager in September 1989; promoted
to V.P., General Manager 1990, promoted to President 1997. From 1981 - 1989
employed as sales and service manager for midsize manufacturing firms.
KEVIN L. BORK
President of Cam Solutions since 1989: Founded Cam Solutions as a start-up in
1989 to $600,000 in sales.
CRAIG M. HOFFMANN
VP - Product Development of Micro Estimating since 1998: Employee of Micro
Estimating since 1986.
MICHAEL ZAWORSKI
President of Cimtronics since 1993: Founded Cimtronics as a start-up in 1993 to
$900,000 in sales.
GARY L. FULTON
President of TekSoft, Inc. since 1982: Founded TekSoft, Inc. in 1982. Prior to
founding TekSoft, he was system manager of a large southwestern manufacturer.
SCOTT R. FULTON
Vice President of TekSoft, Inc. since 1982: Co-founder of TekSoft in 1982.
Currently a senior programmer, systems analyst and product strategist.
SKY CARVER
Consultant to TekSoft, Private Investor, and Director of OnCourse: Prior
experience includes President of Burton Carver and Company, Inc., a
transportation company (1982 to 1985) with 200 employees and $7.5 million in
sales. He owned and was President of Peninsula Sanitation Co., Inc. (1985-1998),
a waste management company. He is currently the owner and President of Spine
Therapy Center (started in January 1996), which specializes in treatment of
lower back pain.
WILLIAM C. BROWN, CPA
Chief Financial Officer of OnCourse and Micro Estimating since February 2000:
Over the last five years, he was Controller of Howard Johnson's Enterprises,
Inc. (1990 to 1997), a $32 million formulator of lawn and garden and ice melter
products distributed throughout the U.S., and most recently, the Chief Financial
Officer of Herker Industries, Inc. (1997 to 2000), a $25 million precision metal
turning and assembly company. Manages all financial, treasury, risk and benefits
administration for the Company including the subsidiaries' financial systems and
activities.
MANU PARPIA
Director of OnCourse: Managing Director since 1994 of Geometric Software
Solutions Co. LTD (GSSL), a public company headquartered in India. GSSL has
software development centers in Mumbai and Pune, India, sales and marketing
headquarters in Nashua, NH, and sales offices in Germany and Japan. He has over
23 years in the engineering industry including 16 years in the CAD/CAM industry.
His areas of specialization include international marketing and business
development, business strategy and commercialization of technology.
BOARD COMMITTEES
The Board of Directors presently has no standing committees. The Board acts as
a whole on all matters coming before it.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires the Company's directors and executive
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file with the SEC initial reports of beneficial
ownership on Form 3 and reports of changes in beneficial ownership of the
Company's equity securities on Form 4 or 5. The rules promulgated by the SEC
under section 16(a) of the 1934 Act require those persons to furnish the Company
with copies of all reports filed with the SEC pursuant to section 16(a). Based
solely upon a review of such forms actually furnished to the Company, and
written representations of certain of the Company's directors and executive
officers that no forms were required to be filed, all directors, executive
officers and 10% stockholders have filed with the SEC on a timely basis all
reports required to be filed under section 16(a) of the 1934 Act, except that
Bernard A. Woods, III filed a late Form 3 in April 2001 and a late Form 4 to
report transactions during June 2001, Charles W. Beyer filed a late Form 3 in
May 2001 and a late Form 5 to report a stock option grant in 2001, Gary L.
Fulton filed a late Form 3 in May 2001 and a late Form 4 to report a transaction
during June 2001, Scott R. Fulton filed a late Form 3 in May 2001 and a late
Form 4 to report a transaction during June 2001, Kevin L. Bork has not filed a
Form 3 or a Form 5 to report a stock option grant in 2001, Manu Parpia has not
filed a Form 3 and William C. Brown filed a late Form 3 in May 2001 and a late
Form 5 to report a stock option grant in 2001.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the paid or granted
compensation to the Chief Executive Officer and President of the Company as well
as other executive officers of the Company and its subsidiaries whose annual pay
equals or exceeds $100,000 (the "named executive officers"). There are no other
executive officers of the Company or its subsidiaries that had an aggregate
salary and bonus that will or have exceeded $100,000 in fiscal years ended
December 31, 2001 and 2000.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------- ------------
OTHER SECURITIES
ANNUAL ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION OPTIONS (#) COMPENSATION
--------------------------- ---- ------ ------------- ------------ ----------- ------------
Bernard W. Woods, III 2001 $76,200 - $10,930 (2) 10,939 $7,470 (3)
Director, Chairman, CEO and 2000 61,100 - 10,000 (2) - -
Secretary Treasurer of OnCourse
and Micro Estimating
Charles W. Beyer 2001 125,100 - - 17,699
Director and President of 2000 106,000 $2,500 (1) - - -
OnCourse and Micro Estimating
Gary L. Fulton 2001 120,556 - - 18,975 -
Director and President of TekSoft 2000 123,340 - - - -
Michael Zaworski 2001 120,333 - - 18,149 -
President of Cimtronics, Inc. 2000 117,996 - - - -
(1) Mr. Beyer received a general bonus of $2,500 along with other Micro
Estimating employees for the their efforts for the year ended December
31, 2000.
(2) For 2000, consists of $9,132 for personal use portion of a Company
leased vehicle and related gasoline and miscellaneous maintenance
expenses, and $868 for miscellaneous other personal expenses. For
2001, consists of $10,930 for personal use portion of a Company leased
vehicle and related gasoline and miscellaneous maintenance expenses.
(3) For 2001, consists of $7,470 for term life and health insurance
premiums paid by the Company whereby Mr. Woods, III and/or family
members are beneficiaries.
In addition to the foregoing, the Company and subsidiaries may adopt incentive
plans in the future for their key employees.
COMPENSATION OF DIRECTORS
The Company presently does not compensate its Board of Directors for any
services provided as a director. However, Mr. Sky Carver, Director, has a
consulting agreement for business advisory services to TekSoft that was entered
into prior to the Company acquiring TekSoft and prior to his appointment as
director of the Company. The agreement, which became effective on December 1,
1999 and expires December 1, 2004, provides for the payment by the Company of
$4,167 per month for these services.
STOCK OPTIONS
Options granted during 2001. The Company adopted a stock option plan for its
employees effective January 1, 2001. The Company filed a Form S-8 registration
with the Securities Exchange Commission for this plan on May 11, 2001 and is
referenced in Part III, Item 13. "INDEX TO EXHIBITS", Exhibit No. 10(i). The
following table provides certain information regarding stock options granted to
the named executive officers of the Company during the year ended December 31,
2001.
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED (#) (1) 2001 PRICE ($/SHARE) DATE
---- ------------------- ---- --------------- ----
Bernard A. Woods, III 10,939 1.50% $0.65 December 31, 2010
Charles W. Beyer 17,699 2.43 $0.65 December 31, 2010
Gary L. Fulton 18,975 2.60 $0.65 December 31, 2010
Michael Zaworski 18,149 2.49 $0.65 December 31, 2010
(1) The options vest 20% each year based on each employee's anniversary
date and years of service. The options listed above are 100% vested
as each executive has over five years of service.
Option Values as of December 31, 2001. The following table provides certain
information regarding the value of unexercised options held by the named
executive officers as of December 31, 2001. No named executive officer
exercised any options during the year ended December 31, 2001.
AGGREGATED OPTION VALUES AS OF DECEMBER 31, 2001
------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AS OF DECEMBER 31, 2001 ($)
AS OF DECEMBER 31, 2001 (#) EXERCISABLE/UNEXERCISABLE
NAME EXERCISABLE/UNEXERCISABLE (1)
---- --------------------------- ---------------------------
Bernard A. Woods, III 10,939 / 0 $0 / $0
Charles W. Beyer 17,699 / 0 0 / 0
Gary L. Fulton 18,975 / 0 0 / 0
Michael Zaworski 18,149 / 0 0 / 0
(1) Calculated based on closing sale price of $0.36 per share on December
31, 2001.
EMPLOYMENT AGREEMENTS
On December 4, 2000, the Company entered into an employment agreement with
Charles W. Beyer, which terminates April 30, 2004. Pursuant to the employment
agreement, Mr. Beyer will receive a base salary of $125,000 commencing on the
February 9, 2001 pay date. The employment agreement with Mr. Beyer provides
that the executive officer is eligible to participate in medical, health,
dental, disability and life insurance policies. Pursuant to the employment
agreement, Mr. Beyer has agreed not to compete with the Company during
employment and for the greater of twelve months following termination for any
reason or the period remaining on the initial employment term, and has agreed to
maintain the confidentiality of the Company's proprietary information and trade
secrets. The employment agreement provides that if the executive officer's
employment is terminated by the Company without "cause" or by the executive
officer for "good reason," the executive officer will be entitled to
continuation of his then effective base salary for a period equal to the
remainder of the initial term or for six months if termination occurs after an
extension beyond the initial term.
On September 30, 1999, the Company and Cimtronics, Inc. entered into an
employment agreement with E. Michael Zaworski, which terminates September 30,
2004. Pursuant to the employment agreement, Mr. Zaworksi will receive a base
salary of $100,000 commencing on the October 15, 1999 pay date. The employment
agreement with Mr. Zaworski provides that the executive officer is eligible to
participate in medical, health, dental, disability and life insurance policies.
Pursuant to the employment agreement, Mr. Zaworski has agreed not to compete
with the Company during employment and for a period of two years following
termination of employment and has agreed to maintain the confidentiality of the
Company's proprietary information and trade secrets. The employment agreement
provides that if the executive officer's employment is terminated by the
Company, the executive officer will be entitled to the compensation earned by
him prior to the date of termination as provided in this agreement computed pro-
rata up to and including such date.
On January 10, 2000, the Company and TekSoft, Inc. entered into an employment
agreement with Gary L. Fulton, which terminates January 31, 2004. Pursuant to
the employment agreement, Mr. Fulton will receive a base salary of $125,000
commencing on the January 15, 2000 pay date. The employment agreement with Mr.
Fulton provides that the executive officer is eligible to participate in
medical, health, dental, disability and life insurance policies. Pursuant to
the employment agreement, Mr. Fulton has agreed not to compete with the Company
during employment and for the greater of twelve months following termination for
any reason or the period remaining on the initial employment term, and has
agreed to maintain the confidentiality of the Company's proprietary information
and trade secrets. The employment agreement provides that if the executive
officer's employment is terminated by the Company without "cause" or by the
executive officer for "good reason," the executive officer will be entitled to
continuation of his then effective base salary for a period equal to the
remainder of the initial term or for six months if termination occurs after an
extension beyond the initial term.
On January 10, 2000, the Company and TekSoft, Inc. entered into an employment
agreement with Scott R. Fulton, which terminates January 31, 2004. Pursuant to
the employment agreement, Mr. Fulton will receive a base salary of $100,000
commencing on the January 15, 2000 pay date. The employment agreement with Mr.
Fulton provides that the employee is eligible to participate in medical, health,
dental, disability and life insurance policies. Pursuant to the employment
agreement, Mr. Fulton has agreed not to compete with the Company during
employment and for the greater of twelve months following termination for any
reason or the period remaining on the initial employment term, and has agreed to
maintain the confidentiality of the Company's proprietary information and trade
secrets. The employment agreement provides that if the employee's employment is
terminated by the Company without "cause" or by the employee for "good reason,"
the employee will be entitled to continuation of his then effective base salary
for a period equal to the remainder of the initial term or for six months if
termination occurs after an extension beyond the initial term.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 2001, the authorized capital stock of the Company consists of
fifty million (50,000,000) shares of common stock, par value one tenth of a cent
($.001) per share, of which 18,269,253 shares are validly issued, fully paid,
non-assessable and outstanding and none of which are issued in violation of the
preemptive rights of any shareholder.
In addition, pursuant to acquisition agreements, the Company had reserved three
million eight hundred three thousand eight hundred forty six (3,803,846) shares
of its voting common stock for issuance to management shareholders if defined
revenue and profit goals are attained. Of these shares, 249,399 and 911,206
shares were earned in the years ended December 31, 2001 and 2000, respectively,
after attaining defined revenue goals. The acquisition agreement that the
Company has with each of its subsidiaries, TekSoft, Cimtronics, CAM and Micro
Estimating, contains a change in control provision that causes the Company to
issue additional shares of common stock to the former subsidiary shareholders
should a change in control occur in the Company or that subsidiary.
The following table sets forth, as of December 31, 2001, the beneficial
ownership of the Company's outstanding shares of Common Stock by (i) the only
persons who own of record or are known to own, beneficially, more than 5% of the
Company's Common Stock; (ii) each director of the Company, (iii) each executive
officer of the Company; and (iv) all directors and executive officers as a
group. The following table also includes stock options that were vested as of
March 1, 2002. The Company adopted a stock option plan effective January 1,
2001. Please refer to the Company's Form S-8 filed with the Commission on May
11, 2001 and the stock option plan found in Part III, Item 13, "Index to
Exhibits", Exhibit 10(i).
AMOUNT AND
NATURE OF
NAME OF BENEFICIAL BENEFICIAL PERCENT OF
OWNER AND ADDRESS RELATIONSHIP OWNERSHIP CLASS
----------------- ------------ --------- ----------
Bernard A. Woods, III (1), (7) Director and Chairman of OnCourse and Chief 6,228,107 34.07%
Executive Officer, Secretary and Treasurer of Direct and
OnCourse and Micro Estimating Indirect
Charles W. Beyer (1), (8) Director of OnCourse and President of OnCourse and 3,237,299 17.70%
Micro Estimating Direct and
Indirect
Gary L. Fulton (2), (9) Director of OnCourse and President of TekSoft 2,655,220 14.52%
Direct
Scott R. Fulton (2), (10) Vice President of TekSoft 1,977,552 10.82%
Direct
Craig M. Hoffmann (1), (11) Vice President-Product Development of Micro 1,044,928 5.70%
Estimating Direct
Michael Zaworski (3), (12) President of Cimtronics 273,856 1.50%
Direct
Kevin L. Bork (4), (13) Director of OnCourse, and President, Secretary and 158,451 0.87%
Treasurer of CAM Solutions Direct
William C. Brown (1), (14) Chief Financial Officer of OnCourse and Micro 19,590 0.11%
Estimating Direct
Sky Carver (5) Director of OnCourse and consultant to TekSoft 667,053 3.65%
Direct
Manu Parpia (6) Director of OnCourse 0 0.00%
Direct
Total Presented Above Officers and Directors as a Group (10 persons) 16,262,056 88.19%
Direct
The address and vested stock options for each individual set forth above is
noted below:
(1) OnCourse Technologies, Inc. and Micro Estimating Systems, Inc., 3106
S. 166th Street, New Berlin, WI 53151.
(2) TekSoft, Inc., 16121 North 78th Street, Scottsdale, AZ 85260
(3) Cimtronics, Inc., 7434 E. Stetson Dr., Suite C-165, Scottsdale, AZ
85251
(4) Cam Solutions, Inc., 1621 E. 79th Street, Suite 134, Bloomington, MN
55425
(5) 220 Daisy Lane, Soldotna, AK 99669
(6) Geometric Software Solutions Co. Ltd., Godrej Bhavan, 4A Home Street,
Fort, Mumbai-400 001, India
(7) Includes 5,217,168 direct shares and 1,000,000 indirect shares that
are split equally between two children. Includes 10,939 shares of
Common Stock subject to vested stock options.
(8) Includes 3,069,600 direct shares and 150,000 indirect shares that are
split equally between three children. Includes 17,699 shares of
Common Stock subject to vested stock options.
(9) Includes 18,975 shares of Common Stock subject to vested stock
options.
(10) Includes 15,188 shares of Common Stock subject to vested stock
options.
(11) Includes 58,945 shares of Common Stock subject to vested stock
options.
(12) Includes shares jointly owned with Sherri Zaworski and their combined
26,291 shares of Common Stock subject to vested stock options.
(13) Includes 8,451 shares of Common Stock subject to vested stock options.
(14) Includes 14,590 shares of Common Stock subject to vested stock
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an Agreement, the Company may be obligated to issue up to 2 million
(2,000,000) shares combined of its voting Common Stock as contingent
consideration to Bernard A. Woods, III and Charles W. Beyer should Net Sales
increase in any of the five years immediately subsequent to the merger. See
Exhibit No. 8(a) "Agreement and Plan of Reorganization dated July 23, 1998 by
and among the Company, Micro Estimating, Frank G. Wright, Bernard A. Woods, III
and Charles W. Beyer" for details of this agreement incorporated by previous
submission with the Company's 10-SB registration statement dated October 31,
2000. Per the Agreement, Messrs. Woods and Beyer could receive up to an
aggregate of four hundred thousand 400,000 (split 70% and 30% respectively)
shares of the Company's voting Common Stock in each year. Such contingent stock
grants are in accordance with the following schedule: One hundred thousand
100,000 shares if such increase is seven percent (7%) or more but less than ten
percent (10%); one hundred fifty thousand (150,000) shares if such increase is
ten percent (10%) or more but less than fifteen percent (15%); and two hundred
thousand (200,000) shares if such increase is fifteen percent (15%) or more.
Messrs. Woods III and Beyer combined have earned 0 shares for the year ended
December 31, 2001 and 400,000 shares for each of the years ended December 31,
2000 and 1999.
Pursuant to an Agreement, the Company may be obligated to issue up to one
hundred fifty thousand (150,000) shares of the Company's voting Common Stock as
contingent consideration to Kevin Bork. In the event that CAM Solutions, Inc.,
has Net Profits in any of the five years immediately subsequent to the merger.
Kevin Bork will receive one (1) share of the Company's voting common stock for
each two ($2.00) dollar of Net Profits, up to an aggregate of one hundred fifty
thousand (150,000) shares. See Exhibit No. 8(b) "Agreement and Plan of
Reorganization dated December 30, 1998 by and among the Company, CAM Solutions
and Kevin Bork" for details of this agreement. There were no shares earned
during 2001, 2000 or 1999 under the purchase agreement's net income criteria.
Pursuant to an Agreement, the Company may be obligated to issue up to one
hundred fifty three thousand eight hundred forty six (153,846) shares of the
Company's voting Common Stock as contingent consideration to E. Michael Zaworski
and Sherri G. Zaworski in the event that certain future annual profit goals are
met. See Exhibit No. 8(c) "Agreement and Plan of Reorganization dated September
30, 1999 by and among the Company, Cimtronics, E. Michael Zaworski and Sherri G.
Zaworski" for details of this agreement. There were 93,719 shares earned during
2001 and no shares earned during 2000 or 1999 under the purchase agreement's net
income criteria.
Pursuant to an Agreement, the Company may be obligated to issue up to one
million five hundred thousand (1,500,000) shares of the Company's voting Common
Stock as contingent consideration to former shareholders of TekSoft combined
during the next five years if certain revenue growth is achieved from TekSoft's
CAM products. See Exhibit No. 8(d) "Agreement and Plan of Reorganization dated
January 10, 2000 by and among the Company, TekSoft, and Gary F. Fulton" for
details of this agreement. There were 155,680 and 511,206 shares earned during
2001 and 2000, respectively, under the purchase agreement's net revenue
criteria.
The Company and its subsidiaries had outstanding notes payables to employees and
executive officers with an approximate total balance of $126,800 and $161,300
for the years ended December 31, 2001 and 2000, respectively. Subsequent to
year-end, approximately $80,700 in notes payables to former shareholders of
TekSoft were renegotiated to a twenty-four month interest only note effective
January 1, 2002. The $80,700 of notes payable included $69,913 for Gary F.
Fulton, President of TekSoft and director of OnCourse. The interest rate on the
notes was reduced from 16.5% to a floating rate of prime plus 2.0%. The new
maturity date on the note is December 31, 2003 with the principal due at that
time. The note holders have the option anytime 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 the conversion. These notes will be classified as long-term debt.
The terms for the remaining $46,100 in notes remain unchanged.
One of the Company's subsidiaries, TekSoft, leases office space from a company
that is owned by Gary F. Fulton, President of TekSoft and director of OnCourse
and Scott R. Fulton, Vice President of TekSoft along with a former TekSoft
employee. Effective July 1, 2001, the monthly rent amount is $15,767. The net
rent expensed during the year ended December 31, 2001 was approximately
$162,600.
Mr. Sky Carver, Director, has a consulting agreement for business advisory
services to TekSoft that was entered into prior to the Company acquiring
TekSoft. The agreement, which became effective on December 1, 1999 and expires
December 1, 2004, expenses $4,167 per month for these services.
PART III
--------
Item 13. INDEX TO EXHIBITS
-----------------
Exhibit No. Page Number Description
----------------------- -----------
3(a) ** Articles of Incorporation of the Company
3(b) ** Bylaws of the Company
3(c) 50 Certificate of Amendment to Articles of
Incorporation of OnCourse Technologies, Inc. dated
October 28, 1999.
3(d) 53 Certificate of Amendment to Articles of
Incorporation of OnCourse Technologies, Inc. dated
May 1, 2002.
3(e) 55 Certificate of Designation, Powers, Preferences
and Rights of the Series of Preferred Stock of
OnCourse Technologies, Inc. to be Designated 3%
Series A Cumulative Convertible Preferred Stock
dated May 1, 2002.
10(a) ** Agreement and Plan of Reorganization dated July
23, 1998 by and among the Company, Micro, Frank G.
Wright, Bernard A. Woods, III and Charles W. Beyer
(Exhibit 8(a))
10(b) ** Agreement and Plan of Reorganization dated
December 30, 1998 by and among the Company, CAM
Solutions and Kevin L. Bork (Exhibit 8(b))
10(c) ** Agreement and Plan of Reorganization dated
September 30, 1999 by and among the Company,
Cimtronics, E. Michael Zaworski and Sherri G.
Zaworski (Exhibit 8(c))
10(d) ** Agreement and Plan of Reorganization dated January
10, 2000 by and among the Company, TekSoft, Inc.
and Gary F. Fulton (Exhibit 8(d))
10(e) 60 Employment Agreement By and Between OnCourse
Technologies, Inc. as the Employer and Charles W.
Beyer as the Employee dated December 4, 2000
10(f) 71 Employment Agreement By and Between Cimtronics,
Inc., as the Employer and E. Michael Zaworski as
the Employee, dated September 30, 1999
10(g) 80 Employment Agreement By and Between TekSoft, Inc.,
as the Employer and Gary L. Fulton as the
Employee, dated January 10, 2000
10(h) 90 Employment Agreement By and Between TekSoft, Inc.,
as the Employer and Scott R. Fulton as the
Employee, dated January 10, 2000
10(i) * Stock Option Plan Effective January 1, 2001.
10(j) 100 Revolving Credit Agreement dated October 9, 2000
10(k) 108 Loan Agreement dated August 23, 2001
10(l) 112 Business Note dated October 9, 2000
10(m) 114 Business Note dated August 23, 2001
10(n) 116 Business Note dated December 13, 2001
21 118 Subsidiaries of the registrant
23 119 Consent of Arthur Andersen LLP
99 120 Letter to Commission Pursuant to Temporary Note 2T
to Item 310 of Regulation S-B
No reports on Form 8-K were filed during the fourth quarter of the year ended
December 31, 2001.
* Incorporated by reference to the Company's Form S-8 filed with the
Commission on May 11, 2001.
** Incorporated by reference to the Company's Form 10-SB filed with the
Commission on October 23, 2000.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized this 10th day of May 2002.
ONCOURSE TECHNOLOGIES, INC.
By: /s/Bernard A. Woods, III 5/10/02
------------------------------ -------
Bernard A. Woods, III Date
Chief Executive Officer, Secretary, Treasurer, Director
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/Bernard A. Woods, III 5/10/02
------------------------------ -------
Bernard A. Woods, III Date
Chief Executive Officer, Secretary, Treasurer, Director
(Principal Executive Officer)
By: /s/Charles W. Beyer 5/10/02
------------------------------ -------
Charles W. Beyer Date
President, Director
By: /s/William C. Brown 5/10/02
------------------------------ -------
William C. Brown Date
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
By: /s/Kevin L. Bork 5/10/02
------------------------------ -------
Kevin L. Bork Date
President of CAM Solutions, Inc., Director
Chief Financial Officer
By: /s/Gary L. Fulton 5/10/02
------------------------------ -------
Gary L. Fulton Date
President of TekSoft, Inc., Director