U.S. Securities and Exchange Commission
Washington, D.C. 20549
OMBAPPROVAL
OMB NUMBER 3235-0419
Expires March 31, 2000
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FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
ONCOURSE TECHNOLOGIES, INC.
(Name of Small Business in its charter)
NEVADA 91-1922441
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
3106 South 166th Street
New Berlin, WI 53151
(Address of principal executive offices)
Issuer's telephone number: (262) 860-0565
Issuer's facsimile number: (262) 860-0561
Securities to be registered under Section 12(b) of the Act: NONE
Securities to be registered under Section 12(g) of the Act: COMMON STOCK;
COMMON STOCK
PURCHASE WARRANTS
ONCOURSE TECHNOLOGIES, INC.
FORM 10-SB
TABLE OF CONTENTS
ITEM PAGE
---- ----
Introduction 4
PART I
Item 1. Description of Business 4
Item 2. Management's Discussion and 10
Analysis and Results of Operation
Item 3. Description of Property 13
Item 4. Security Ownership of Certain Beneficial 14
Owners and Management
Item 5. Directors, Executive Officers, 15
Promoters and Control Persons
Item 6. Executive Compensation 17
Item 7. Certain Relationships and Related Transactions 18
Item 8. Description of Securities 18
PART II
Item 1. Market Price of and Dividends on Company's 20
Common Equity and Related Shareholder Matters
Item 2. Legal Proceedings 21
Item 3. Changes in and Disagreements with Accountant 21
Item 4. Recent Sale of Unregistered Securities 21
Item 5. Indemnification of Directors and Officers 22
PART F/S
OnCourse Technologies, Inc. F-1
Report of Independent Public Accountant F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Operations F-5
Consolidated Statement of Stockholders Investment F-6
Consolidated Statements of Cash Flow F-7
Notes to Consolidated Financial Statements F-8
CAM Solutions, Inc. F-20
Report of Independent Public Accountant F-21
Balance Sheet F-22
Statement of Operations F-24
Statement of Stockholders Investment F-25
Statements of Cash Flow F-26
Notes to Financial Statements F-27
Cimtronics, Inc. F-29
Report of Independent Public Accountant F-30
Balance Sheet F-31
Statement of Operations F-33
Statement of Stockholders Investment F-34
Statements of Cash Flow F-35
Notes to Financial Statements F-36
TekSoft, Inc. F-38
Report of Independent Public Accountant F-39
Balance Sheet F-40
Statement of Operations F-42
Statement of Stockholders Investment F-43
Statements of Cash Flow F-44
Notes to Financial Statements F-45
PART III
Item 1. Index to Exhibits and Description of Exhibits 76
PART I
PURPOSE OF THE REGISTRATION STATEMENT
The Company is filing this registration statement on a voluntary basis in order
to: (1) provide current, public information to the investment community; and
(2) to comply with the OTC Bulletin Board Eligibility Rule.
FORWARD-LOOKING STATEMENTS
--------------------------
This Registration Statement of OnCourse Technologies, Inc. ("OnCourse" or
"Company") 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. In addition, the
Company does not have any intention or obligation to update forward-looking
statements after the effectiveness of this Registration Statement even when new
information, future events or other circumstances have made them incorrect or
misleading. For these statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in Section 21E of the 1934 Act.
Item 1. DESCRIPTION OF BUSINESS
COMPANY BACKGROUND
------------------
The Company 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 metal-working industries. It
has four wholly owned subsidiaries. Unless specifically indicated herein, all
references to "the Company" may include the parent and/or one or more of the
subsidiaries.
Wholly-owned subsidiaries of OnCourse and the dates of their acquisition by
OnCourse include: Micro Estimating Systems, Inc, a Wisconsin corporation
("Micro") - July 31, 1998; CAM Solutions, Inc., a Minnesota corporation ("CAM
Solutions") - January 1, 1999; Cimtronics, Inc., an Arizona corporation
("Cimtronics") - October 1, 1999; and TekSoft Inc., an Arizona corporation
("TekSoft") - January 31, 2000.
Micro 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 also distributes under an exclusive arrangement
in the U.S.A. and Canada the AutoTAS tool management software of a Swedish
developer and supplier. Currently, Micro is also developing the OnCourse
internet based business-to-business electronic-commerce site.
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.
CAM Solutions also performs Direct Network Cabling ("DNC") for machine tools and
systems integration between Micro's software and other manufacturing enterprise
systems.
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. Cimtronics also performs DNC for machine tools and
systems integration between Micro's software and other manufacturing enterprise
systems.
TekSoft designs, develops and markets proprietary CAD/CAM/CAE 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.
OnCourse and Micro have headquarters in New Berlin, Wisconsin. Micro has a
sales office in North Carolina and other subsidiaries have headquarters and
operations in Arizona and Minnesota. The Company has 47 employees: 46 full-time
and 1 part time employees. In addition, the Company uses 16 full-time outside
service contract programmers.
THE BUSINESS OF THE COMPANY
---------------------------
Subsidiaries of OnCourse have, for five years or more developed and or sold
CAD/CAM/CAE software to the metalworking industries. The principal market for
the Company's software products consists of an estimated 500,000 small to medium
sized producers such as metal working manufacturers, including job shops,
plastic mold makers, manufacturers of aerospace equipment, automobiles and
automotive equipment, appliances, high technology equipment, electronics
industry components, as well as other tool and die makers. Sales are made by
direct sales force and subsidiaries (66% in 1999) and through distributors (34%
in 1999). Domestic sales accounted for 98% of the Company sales for the years
end December 31, 1999 and 1998.
CAD/CAM
-------
The Company develops and markets Windows and Windows-NT based, CAD/CAM software
used in the metal working industries. The subsidiary's flagship CAD/CAM product,
ProCAM, has an installed base in excess of 15,000 users in its nine available
languages. TekSoft has a total of over 17,000 seats for all its products
installed at facilities serving the aerospace, computer, and automotive and
mold-making industries, among others.
PROCAM
------
ProCAM is a turnkey solution designed for use in manufacturing or machining
products for the manufacturing industry. The ProCAM for Windows product
provides a fully integrated solution for 2D CAD/CAM applications and 3D
applications requiring complex surface modeling and machining. ProCAM is one of
the fastest, easiest to use CAD/CAM products on the market.
CAMWORKS
--------
CAMWorks is an intelligent CAM application that seamlessly integrates into and
is operated from within the SolidWorks environment. It incorporates
state-of-the-art CAM technologies pioneered by TekSoft such as: Associative
Machining and Knowledge Based Machining.
CAMWorks is available for Mill and Turning applications. CAMWorks addresses the
needs of today's sophisticated manufacturing engineers by delivering intelligent
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.
CAE
---
The Company offers estimating, layout and routing 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.
LAYOUT PRO ("LP")
-----------------
LP serves as a process planning and machine process layout system, which allows
users to easily calculate machining or fabrication times and to develop routings
or travelers 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 and is priced
similar to MSE.
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 to develop routings and job
travelers used for production. The system incorporates on-line 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 (SANDVIK COROMANT)
----------------------------
Micro 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.
Studies have shown that effective implementation of a Tool Management system
will increase machine up-time by as much as 50% and reduce inventory by almost
40%.
NEW PRODUCTS AND SERVICES
-------------------------
The Company has begun development of a comprehensive business-to-business
electronic-commerce service. The Company's Tools4Mfg.Com electronic-commerce
world-wide-web site is the cornerstone in its strategy to offer the
functionality of all of its proprietary software products to the world wide
metal working community. The site is currently under development and is
approximately 10 - 15% complete. The Company has not yet begun marketing or
advertising any of the anticipated functionality of this site. The time
required for completion of the site will depend upon the Company's ability to
generate funds for development. The Company expects to fund the development
from a combination of internally generated funds and capital contributed by
industry partners. Several revenues streams are projected from Tools4Mfg.com.
Revenues will be derived from sales commissions on raw materials, component
parts, and industrial tooling. The Company also expects to add transaction
fees, subscription fees, and online sales of manufacturing software.
During the years ended December 31, 1999 and 1998, the Company has expended
$17,000 and $21,000 respectively, for research and development activities. In
addition, the Company has expended $114,000 and $112,000 for its capitalized
software during the two fiscal years ended 12/31/99 and 12/31/98. There have
been no material customer sponsored research activities or expenditures.
The Company anticipates that electronic-commerce, primarily the Tools4Mfg.Com
web site, will expand revenues significantly in the markets of electronic-
commerce, extranets, and supply chain management. This primary electronic-
commerce revenue generating activity will sell tangible consumable industrial
products while providing the related electronic-transaction software.
Tools4Mfg.Com will be an intelligent, Internet-based purchasing system for use
by manufacturing firms involved in producing, processing, or purchasing custom
fabricated and machined products. The target market of Tools4Mfg.Com is the
smaller manufacturer, which represents 75% of American manufacturers. These
smaller manufacturers typically have not been able to implement the expensive
and labor intensive supply chain enterprise systems used by firms like the big
three automotive companies, and will therefore benefit most from this type of
electronic-commerce program. The Company will be positioned as an electronic
middleman fulfilling orders for component parts manufacturers.
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. No single supplier or customer has a material effect
in 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 employee 50
people or less. OnCourse subsidiaries individually have up to 19 years providing
that market with easy-to-use-and-maintain software to make job shops more
efficient.
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 intelligent, Internet-based
purchasing system for use by manufacturing firms involved in producing,
processing, or purchasing custom fabricated and machined products. The Company
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. Proven OnCourse products 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 creating a
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. Four core internet concepts will be used:
O Integrating Applications with OnCourse Portal
O Internet Applications Delivery using Third-party Application Service
Providers ("ASP")
O Draw Customers with Content
O Value Added Trading Site
RISK FACTORS
------------
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 registration statement, which could
adversely affect the value of their holdings. Neither the Company nor any other
person is authorized to make any representations as to the future market value
of the Company's stock.
Any Forward-looking statements contained in this registration document 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. See "DESCRIPTION OF
SECURITIES."
CONTROL BY THE MANAGEMENT
-------------------------
The Chief Executive Officer and the President of the Company beneficially own
approximately 61% of the outstanding common stock of the Company. The remaining
directors and other executive officers own approximately 30% 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.
FINANCING
---------
The Company intends to obtain the necessary interim and long-term financing
necessary to continue operations, 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. 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. See "MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS
OF OPERATIONS - Liquidity and Capital Resources".
COMPETITION
-----------
The markets for the Company's products are intensely competitive. 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.
LIMITED PRIOR PUBLIC MARKET AND RESTRICTIONS ON FREE SALE OF STOCK
------------------------------------------------------------------
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. See "MARKET PRICE OF AND DIVIDENDS ON THE
COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS."
DEPENDENCE ON OPERATING ENVIRONMENTS
------------------------------------
The Company's software is designed for use with computers running in the
Microsoft WindowsTM and Windows NTTM operating environments. The successful
introduction of new operating systems or significant changes in existing
operating systems could adversely affect the Company's operating results.
RAPID TECHNOLOGICAL CHANGE
--------------------------
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. 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.
MARKET FOR THE COMPANY'S ELECTRONIC-COMMERCE PRODUCTS
-----------------------------------------------------
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.
COMPETITIVE PRICING PRESSURES MAY INCREASE
------------------------------------------
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. 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.
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
QUARTERLY FLUCTUATIONS
----------------------
The Company's quarterly revenues and operating results have varied significantly
in the past and are likely to vary significantly in the future. Factors that
may affect quarterly results include the following:
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
MANAGEMENT OF FUTURE ACQUISITIONS AND 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.
LOSS OF KEY PERSONNEL OR INABILITY TO HIRE ADDITIONAL QUALIFIED PERSONNEL
-------------------------------------------------------------------------
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.
RELIANCE ON DISTRIBUTION CHANNEL
--------------------------------
The Company relies on direct sales and independent distributors to sell its
products. In 1999, 34% of the Company's total revenues were generated by its
independent distributors when excluding sales of subsidiaries 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.
YEAR 2000 COMPLIANCE
--------------------
Computers, software and other equipment utilizing microprocessors that use only
two digits to identify a year in a date field may be unable to accurately
process certain date-based information at or after the year 2000. This is
commonly referred to as the "Year 2000 issue". The Company has analyzed the
Year 2000 readiness issues related to its business systems and have determined
that all systems critical to managing the business are Year 2000 compliant.
As of the date of this Registration Statement, the Company has not experienced
any problems with Year 2000 Compliance.
REPORTS TO SECURITY HOLDERS
---------------------------
The Company intends to provide all of its shareholders with an annual report of
the Company's operations including comparative audited financial statements for
the years ended December 31, 1999 and 1998.
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. Prior to the date of this registration, the Company has not
------------------
filed reports with the Securities and Exchange Commission. However, the
Company will file such reports following the effectiveness of this registration
statement.
The Company's Internet site address is http://www.oncoursetechnologies.com.
-----------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
-----------------------------------------------------------------------
OVERVIEW
--------
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the financial statements of CAM
Solutions, Inc., Cimtronics, Inc. and TekSoft, Inc. 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 expansion plans and other factors discussed herein.
Since the Company's incorporation on May 28, 1998, the Company's mission has
been 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. This mission is carried out under
three objectives consisting of: acquiring specific other businesses; developing
Internet based, business-to-business electronic-commerce sites for use in the
procurement of customer components, raw materials, and tooling for the
metalworking industries; and raising capital and maximizing shareholder value.
The Company is on course relative to these objectives by executing strategies
that focus on a balance of three priorities: growth, profitability and
liquidity.
During the six months ended June 30, 2000 and the year ended December 31, 1999,
the Company acquired three companies: TekSoft on January 31, 2000; Cimtronics
on October 1, 1999; and CAM on January 1, 1999. Each of these acquisitions has
moved the Company closer to its goal of becoming a business partner for the
metal working industry. These acquisitions also helped complement its existing
product offerings as well as broaden the base necessary for implementing its
Internet strategy utilizing a business-to-business electronic-commerce site.
The Company also forged an exclusive arrangement to be the U.S. and Canadian
distributor and systems integrator for a tool management system offered by one
of Europe's largest tooling manufacturers that enables companies to increase
machine up-time and reduce inventory.
In addition to the above acquisitions, the Company has devoted significant
resources to upgrading its computer-aided-manufacturing and computer-aided-
engineering products and developing its business-to-business electronic-commerce
site. During the six months ended June 30, 2000, the Company invested over 28%
of net sales or $673,000 of net sales in capitalized software and research and
development activities combined. This is a significant increase over the
approximate 5% and 7% of net sales, respectively, that the Company invested
during each of the fiscal years ended December 31, 1999 and 1998 and the 5% for
the six months ended June 30, 1999. The percentage increase can be largely
attributed to the $619,000 investment level in research and development and
capitalized software by TekSoft since it was acquired on January 31, 2000.
The significant acquisition and product development activity during the six
months ended June 30, 2000 and the year ended December 31, 1999 helps to explain
the change in the results of operations when comparing the six months ended June
30, 2000 and 1999 and the years ended December 31, 1999 and 1998.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
During the six months ended June 30, 2000, the Company continued to focus on
growth and profitability. The two acquisitions made on September 30, 1999
(Cimtronics) and January 31, 2000 (TekSoft) helped increase net sales by
$1,249,000 to $2,383,000 for the six months ended June 30, 2000 from $1,134,000
for the same period in 1999. The Company's deferred revenue of $1,552,000 as of
June 30, 2000 reflects an increase of $596,000 over the deferred revenues of
$956,000 for OnCourse as of December 31, 1999 due to the inclusion of TekSoft
effective February 1, 2000.
Cost of goods sold was $810,000 for the six months ended June 30, 2000 as
compared to the $231,000 for the six months ended June 30, 1999. The increase
is attributed to the Cimtronics acquisition on October 1, 1999 and the TekSoft
acquisition on January 31, 2000.
Selling expenses increased to $1,218,000 for the six months ended June 30, 2000
as compared to the $512,000 for the six months ended June 30, 1999. The
increase is largely related to the additional selling expenses for the
Cimtronics and TekSoft businesses acquired as well as increased sales and
selling expenses for Micro and CAM subsidiaries.
Research and development expense was $104,000 and $9,000 for the six months
ended June 30, 2000 and 1999, respectively. The increase is attributed to the
research and development activities of TekSoft.
General and administrative expense increased to $1,411,000 for the six months
ended June 30, 2000 compared to the $394,000 for the six months ended June 30,
1999. The largest contributing factor for this increase was the $582,000 of
goodwill amortization for the six months ended June 30, 2000 compared to the
$2,000 for 1999. The increase in goodwill is related to the Cimtronics and
TekSoft acquisitions. The remaining increase can be attributed to the expenses
of the Cimtronics and TekSoft businesses acquired.
Operating expenses, excluding goodwill amortization, were $2,151,000 for the six
months ended June 30, 2000 as compared to $913,000 for the six months ended June
30, 1999. Total operating expenses including goodwill amortization of
$582,000 totaled $2,733,000 for the six months ended June 30, 2000 compared to
$915,000 in 1999. This resulted in a pre-tax loss of $1,198,000 for the six
months ended June 30, 2000 as compared to the $24,000 loss in 1999.
Net loss after tax benefits were $982,000 and $18,000 for the six months ended
June 30, 2000 and 1999, respectively.
The Company's objectives for the current fiscal year 2000 include continuing its
development of its CAD/CAE software products and its Internet based business-to-
business electronic-commerce web site.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net sales for the year ended December 31, 1999 were $2,482,000 compared to
$1,851,000 in 1998. The Company's increase in revenues can be attributed to
revenues generated by the CAM and Cimtronics subsidiaries. The Company's
computer-aided-engineering software products and services in 1999 were flat
compared to 1998 largely due to the Year 2000 cautiousness that affected
potential customer's buying decisions. Despite the Company's products being Y2K
compliant, the Company believes that its customers exhausted their capital
expenditure budgets because of the significant expenditures made in upgrading
their core manufacturing and financial systems to ensure compliance.
Cost of goods sold is mostly comprised of purchased software and material
purchases, freight and amortization of capitalized software. Cost of goods sold
for 1999 was $636,000 compared to $419,000 in 1998. Cost of goods sold as a
percentage of net sales increased to 25.6% in 1999 from 22.6% in 1998. The
increase is largely attributed to the impact that the distributor-based sales
(higher cost of goods sold percentage of net sales) generated by the 1999
acquisitions had relative to the proprietary software sales only in 1998. Also
contributing to the increase was a $31,000 (1.2% of net sales) write-off of the
remaining unamortized capitalized software from 1995 capitalized costs.
Gross profit of $1,847,000 in 1999 increased 28.9% over the $1,433,000 in 1998.
Gross profit as a percentage of net sales was 74.4% in 1999 compared to 77.4% in
1998. The gross profit dollars increase can be attributed to higher sales due
to the addition of the CAM and Cimtronics subsidiaries. However, the higher cost
of goods sold content of the added distributor-based sales in 1999 caused gross
profit as a percentage of net sales to decrease.
Selling expenses increased to $1,110,000 for the year ended December 31, 1999 as
compared to the $735,000 for the year ended December 31, 1998. The increase is
largely related to the additional selling expenses for the CAM and Cimtronics
businesses acquired in 1999. In addition, staff was added in 1999 to open an
office in North Carolina, to develop a market for the Company's exclusive
distribution agreement of new tool management software, and to expand the
customer support function. These positions, which were mostly related to sales
or sales support activities, caused selling expenses to increase to 44.7% of net
sales in 1999 from 39.7% of net sales in 1998. These added costs are expected
to decline as a percentage of net sales if these investments generate the sales
increases as expected.
Research and development expense declined slightly to $17,000 in 1999 from
$21,000 in 1998.
General and administrative expense increased to $954,000 for the year ended
December 31, 1999 as compared to the $669,000 for the year ended December 31,
1998. The largest contributing factor for this increase was the expenses of the
CAM and Cimtronics businesses acquired. The Company had $26,000 of goodwill
amortization in 1999 resulting from the two acquisitions in 1999. There was no
goodwill amortization in 1998.
The Company generated a loss from operations of $234,000 in 1999 compared to
operating income of $8,000 in 1998. The loss is mostly attributed to goodwill
amortization and professional fees related to the Company's acquisitions and
staff additions described above coupled with the lower than expected sales
volumes in the fourth quarter of 1999 due to the Y2K issue.
Interest expense for 1999 totaled $31,000 compared to $17,000 in 1998. The
Company incurred higher interest expense in 1999 due to the financing of the
higher sales volume and staffing additions made in 1999.
The Company's provision for income taxes in 1999 was a $95,000 tax benefit
compared to a $69,000 tax provision in 1998.
Net loss was $170,000 in 1999 compared to a net loss of $79,000 in 1998 or 6.9%
and 4.2% of net sales, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position as of June 30, 2000 was approximately $156,000 as
compared to $44,000 as of June 30, 1999. During the six months ended June 30,
2000, net cash provided by operating activities was $384,000 versus $129,000 for
the six months ended June 30, 1999.
The Company's working capital as of June 30, 2000 was a negative $651,000 as
compared to the negative working capital of $393,000 as of December 31, 1999.
The increase in the negative working capital as of June 30, 2000 over December
31, 1999 is largely attributed to increased deferred revenues, and improved cash
collections on accounts receivables and increases in short-term lines of credit
that were used to finance the investment of $737,000 in capitalized software and
fixed assets.
Subsequent to June 30, 2000 the Company consolidated its bank debt by replacing
the Company's lines of credit and substantially all of the existing bank term
debt. The new debt facility consists of a $400,000 term loan due on October 1,
2005 and a $1,100,000 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, plant and
equipment and net capitalized software. The interest rate for the term loan and
revolving line of credit is 9.25% and prime (9.5% at June 30, 2000),
respectively. The monthly term debt payment of $6,500 is based on a seven-year
amortization schedule. The three-year revolving line of credit agreement as
well as the term loan will be classified as long-term debt. The debt facility
will be secured by all assets of the Company and its subsidiaries. The term
loan payments due for the next twelve months will be classified as current.
The new debt facility significantly improves the working capital position of the
Company. While the Company will still have negative working capital given the
$1,552,000 of deferred revenues as of June 30, 2000, the new debt facility
replaces the short-term lines of credit totaling $363,000 as of June 30, 2000.
It also replaces the $310,000 June 30, 2000 balance of a short-term bank note
that is due September 30, 2000 and a $142,000 June 30, 2000 balance of a long-
term note payable that is due July 21, 2001. Management believes that the new
debt facility will sufficiently support its working capital needs throughout
2001.
In addition to the above mentioned lines of credit and term debt as of June 30,
2000, the Company has several notes payable due to current and former
shareholders and employees of the Company and its subsidiaries totaling $182,000
with a current portion of $82,000 as of June 30, 2000. These notes have an
interest rate that ranges from 7% to 16.5%. The principal and interest payment
structures vary for these notes. Please refer to the accompanying consolidated
financial statements and footnotes for details. Management expects to payoff
several of these notes with the proceeds from the new debt facility.
Shareholder's Equity increased to $11,108,000 as of June 30, 2000 compared to
$476,000 and $45,000 deficit as of December 31, 1999 and December 31, 1998,
respectively. The increase in Shareholder's Equity since December 31, 1999 is
attributed to the acquisition of TekSoft for $10,755,000, $255,000 in
additional proceeds from the sale of common stock and $601,000 of common stock
issued for services. Offsetting these increases for the six months ending June
30, 2000 was the $982,000 loss realized for the six months ended June 30, 2000.
In addition, the Company recorded a reduction to retained earnings to reflect
the accounting treatment for extending the expiration date of the 1998 warrants
from March 31, 2000 to September 30, 2000. The same warrants were further
extended to June 30, 2001 subsequent to June 30, 2000. Generally accepted
accounting principals 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. The
extension resulted in a new measurement date and the incremental value of the
warrants was accounted for as a dividend to the shareholders. The value of the
remeasured warrants was determined using the Black-Scholes pricing model. See
"RECENT SALES OF UNREGISTERD SECURITIES".
The Company invested $569,000 in capitalized software for the six months ended
June 30, 2000. This compares to the $114,000 and $112,000 for the years ended
December 31, 1999 and 1998, respectively. The significant investment during the
six months ended June 30, 2000 can be mostly attributed to feature enhancements
to the Company's computer-aided-manufacturing software. The Company also made
expenditures for plant and equipment and other assets during the six months
ended June 30, 2000 of $48,000 and $119,000, respectively, compared to the
$81,000 and $0 for the year ended December 31, 1999. The increase in other
assets is largely related to license fees for third-party technology used in the
Company's CAM software products.
Management believes that cash on hand together with funds available under the
exiting and proposed lines of credit and projected cash generated from
operations will be sufficient to satisfy its short term 2000 operating
requirements in the present mode of operation. In order to meet long-term cash
flow requirements and to increase the levels of expenditure relating to product
development of its software products and Internet strategy and sales promotion
activities, the Company is seeking to raise an aggregate of $5,000,000 through a
private placement of shares of the Company's common stock. There can be no
assurances that this effort to raise additional working capital will be
successful and in the event that the Company is not successful, its ability to
aggressively market its family of engineering and manufacturing software
products will be limited.
Item 3. DESCRIPTION OF PROPERTY
All of the operations of the Company 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. TekSoft subleases a significant portion of this
related party lease as office space to other tenants. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
The following table sets forth information concerning the operating facilities:
Size In Monthly Rent As of
Tenant Square Feet Lease Expires August 1, 2000
------ ----------- ------------- --------------
OnCourse Technologies, Inc./ 4,672 11/30/2002 $3,238
Micro Estimating Systems, Inc.
3106 South 166th Street
New Berlin, WI 53151
CAM Solutions, Inc. 1,122 1/31/2003 $935
1631 East 79th Street
Suite 134
Bloomington, MN 55425
Cimtronics, Inc. 1,550 8/31/2004 $2,067
7434 East Stetson Drive
Suite C-165
Scottsdale, AZ 85251
TekSoft, Inc. 8,800 7/14/2003 $20,570
16121 North 78th Street
Scottsdale, AZ 85260
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of June 30,2000, the authorized capital stock of the Company consists of
fifty million (50,000,000) shares of common stock, par value one tenth of a cent
($.001) per share, of which sixteen million seven hundred ninety seven thousand
three hundred ninety one (16,797,391) 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.
The Company issued in 1998 four hundred thousand (400,000) Redeemable Common
Stock Purchase Warrants entitling each Warrant Holder to purchase on or before
June 30, 2001, one (1) share of Company common stock per Purchase Warrant for
the sum of one dollar and fifty cents ($1.50). Of the 400,000 warrants issued,
1,046 have been exercised as of June 30, 2000.
During 1999 and the six months ended June 30, 2000, the Company offered and
issued on various dates one hundred fifty nine thousand nine hundred thirty nine
(159,939) units of the Company's common stock. The units include one share of
Company common stock, one Company Class A common stock purchase warrant expiring
three years from the unit purchase date and one Company Class B common stock
purchase warrant expiring five years from the unit purchase date. All of the
319,878 combined Class A and Class B common stock purchase warrants are
outstanding as of June 30, 2000.
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, 400,000 shares were
earned in each of the years ended December 31, 1999 and 1998, after attaining
defined revenue goals. No shares have been earned during the six months ended
June 30, 2000. The acquisition agreement that the Company has with each of its
subsidiaries, TekSoft, Cimtronics, CAM and Micro, 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 June 30, 2000, 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. All
numbers of shares set forth in the table below and elsewhere in this Statement
reflect a one-for-two split in the Company's Common Stock effective as of
October 31, 1999, the TekSoft, Inc. acquisition as of January 31, 2000, and
additional private placement share sales through June 30, 2000.
<TABLE>
Amount and
Nature of
Name of Beneficial Beneficial Percent of
Owner and Address Relationship Ownership Class
---------------- ------------ --------- -----
<S> <C> <C> <C>
Bernard A. Woods, III (1)<F1> Director, Chairman, Chief Executive Officer, 7,091,823 42.22%
Secretary and Treasurer of OnCourse and Micro Direct
Charles W. Beyer (1)<F1> Director and President of OnCourse and Micro 3,187,350 18.98%
Direct
Gary L. Fulton (2)<F2> Director and President of TekSoft 2,295,991 13.67%
Direct
Scott R. Fulton (2)<F2> Vice President of TekSoft 1,709,086 10.17%
Direct
Craig M. Hoffman (1)<F1> Vice President-Development of Micro 353,328 2.68%
Direct
Michael Zaworski (3)<F3> President of Cimtronics 153,846 .92%
Direct
Kevin L. Bork (4)<F4> Director, and President, Secretary and 150,000 .89%
Treasurer of CAM Solutions Direct
William C. Brown (1)<F1> Chief Financial Officer of OnCourse and Micro - 0%
Direct
Sky Carver (5)<F5> Director of OnCourse and consultant to TekSoft 449,882 2.68%
Total Presented Above Officers and Directors as a Group (9 persons) 15,391,306 91.63%
Direct
Total Shares Outstanding 16,797,391 100.00%
Direct
</TABLE>
The address for each individual set forth above is noted below:
(1)<F1> OnCourse Technologies, Inc. and Micro Estimating Systems, Inc.,
3106 S. 166th Street, New Berlin, WI 53151.
(2)<F2> TekSoft, Inc., 16121 North 78th Street, Scottsdale, AZ 85260
(3)<F3> Cimtronics, Inc., 7434 E. Stetson Dr., Suite C-165, Scottsdale, AZ
85251
(4)<F4> Cam Solutions, Inc., 1621 E. 79th Street, Suite 134, Bloomington,
MN 55425
(5)<F5> 220 Daisy Lane, Soldotna, AK 99669
Item 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
The Board of Directors of the Company currently consists of five members. The
current members of the Board of Directors and the executive officers of the
Company are:
Position(s) Held Director Term
Name with the Company Age Since Expires
---- ---------------- --- ----- -------
Bernard A. Woods, III Chairman, Director,
Chief Executive Officer
and Secretary/Treasurer of
OnCourse and Micro 45 1999 2000
Charles W. Beyer Director and President of
OnCourse and Micro 48 1999 2000
Kevin L. Bork Director of OnCourse, and
President of CAM Solutions 40 1999 2000
Craig M. Hoffman Vice President of Micro 33 - -
Michael Zaworski President of Cimtronics 57 - -
Gary L. Fulton Director of OnCourse, and
President of TekSoft 49 2000 2000
Scott R. Fulton Vice President of TekSoft 42 - -
Sky Carver Director of OnCourse, and
Consultant to TekSoft 44 2000 2000
William C. Brown Chief Financial Officer of
OnCourse and Micro 41 - -
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
---------------------
CEO of OnCourse and Micro: 45 years old. An entrepreneur motivated by
bottom line results. Twenty-nine years of experience involving operations,
management and ownership of business. Hands-on management style with
organizational problem solving expertise. Strong ability to perceive,
recognize and enhance the intangible assets of an organization such
as employee morale, organizational integrity and corporate culture. In
1988, purchased Micro from its founder. From 1981 to 1994 Owner and
officer of a precision machine shop located in Pennsylvania.
CHARLES W. BEYER
-----------------
President of OnCourse and Micro: 48 years old. Marketing and Sales
executive, equally facile in operations, corporate management, the
gathering and utilization of human and financial resources. Career
Track: Engaged as General Sales Manager in September 1989; promoted
to V.P., General Manager 1990, acquired 30 percent Ownership interest
1992; promoted to President 1997. Multiplied revenues during 7 years
by a factor of 10. Played a major role in transforming Micro from relative
obscurity in 1989 to its present status as an industry leader and the
standard of its market. From 1981 - 1989 employed as sales and service
manager for midsize manufacturing firms.
GARY L. FULTON
--------------
President of TekSoft, Inc.: 49 years old. Founded TekSoft, Inc. in 1982.
Provides strategic direction regarding all business aspects of the
company including, system design, marketing, sales and administrative
functions. Prior to founding TekSoft, he was system manager of a large
southwestern manufacturer where he reorganized a computer manufacturing
facility around the CAD/CAM system and developed programming systems and
post processing for NC equipment.
SCOTT R. FULTON
---------------
Vice President of TekSoft, Inc.: 42 years old. As one of TekSoft's
founders, he has devoted 19 years to developing CAD/CAM software.
Scott has an Associates degree in Programming and has spent his entire
career at TekSoft. Scott has held positions as post processor writer,
applications programmer, product manager and head of Research and
Development. Scott is currently a senior programmer, systems analyst
and product strategist.
SKY CARVER
-----------
Consultant to TekSoft, Private Investor, Director of OnCourse: 44
years old. An investor with 20 years of business experience
managing operations and strategic planning for privately owned businesses.
Current focus is on increasing shareholder value in private investments.
Prior experience includes President of a transportation company with
200 employees and $7.5 million in sales. In 1985 he purchased a waste
management company and led an expansion that tripled its operating revenue
and increased its value seven fold. His other interests include developing
businesses in the medical field. His expertise is finding value in small
companies with potential for large shareholder returns.
KEVIN L. BORK
---------------
President of Cam Solutions: 40 years old. Entrepreneur Self-employed.
Built Cam Solutions from start-up to $600,000 in sales with no outside
capital. Has extensive industry knowledge specializing in CAD/CAM, DNC,
networks and manufacturing software. CAM Solutions performs installation
and training of manufacturing software and related hardware. His focus
during and prior to the last five years has been growing CAM Solutions.
CRAIG M. HOFFMANN
-----------------
VP - Product Development of Micro: 33 years old. Has the longest
employment with the Company starting in 1986. Managed software development
for the former owner and continues to do so. Has extensive expertise in
manufacturing software systems design, Microsoft DOS, Windows, NT and
networking environments. Plays a major role in conceiving, planning and
developing new products. Manages the programming, custom support and
training staff along with the internal office information technology
systems. Manages Internet web servers and web related customer support
systems.
MICHAEL ZAWORSKI
------------------
President of Cimtronics: 57 years old. Entrepreneur Self-employed. Built
Cimtronics from start-up to $900,000 in sales with no outside capital.
Has extensive industry knowledge specializing in CAD/CAM, DNC, networks
and manufacturing software. His focus during and prior to the last five
years has been growing Cimtronics.
WILLIAM C. BROWN, CPA
---------------------
Chief Financial Officer of OnCourse and Micro since February 2000:
41 years old. Comes to the Company with strong financial, systems and
multi-facility operations experience with a variety of manufacturing
industries. Some of his previous employers include Kohler Company and
Arthur Young & Company. Over the last five years, he was a controller of
Howard Johnson's Enterprises, Inc., 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 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.
BOARD COMMITTEES
----------------
The Board of Directors presently has no standing committees. The Board acts as
a whole on all matters coming before it.
COMPENSATION OF DIRECTORS
-------------------------
The Company presently does not compensate its Board of Directors for any
services provided as a director.
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, pays $4,167 per month for these services.
ITEM 6. 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. 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, 2000, 1999 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
Annual Other Annual Employee
Name and Principal Position Year Salary Compensation Contracts (2)<F7>
--------------------------- ---- ------ ------------ -----------------
<S> <C> <C> <C> <C>
Bernard W. Woods, III 2000 $55,640 (1)<F6> No
Director, Chairman, CEO and Secretary Treasurer 1999 56,040
of OnCourse and Micro 1998 20,000
Charles W. Beyer 2000 $100,215 (1)<F6> No
Director and President of OnCourse and Micro 1999 100,551
1998 91,940
Gary L. Fulton 2000 $125,000 Yes
Director and President of TekSoft
Scott R. Fulton 2000 $100,000 Yes
Vice President of TekSoft
Michael Zaworski 2000 $100,000 Yes
President of Cimtronics, Inc. 1999 100,000
</TABLE>
(1)<F6> In addition to their salaries from Micro Estimating Systems,
Inc., Bernard A. Woods, III and Charles W. Beyer each have a
$7,000 annual automobile allowance. Neither the Company nor its
subsidiaries has any pension, profit sharing or bonus plan.
(2)<F7> In addition to the above executive officers, Kevin L. Bork,
President of CAM Solutions, Inc., also has an employment
contract.
In addition to the foregoing, the Company and subsidiaries may adopt employee
stock option or other incentive plans in the future for their key employees.
ITEM 7. 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, Frank G. Wright, Bernard A. Woods, III and Charles
W. Beyer" for details of this agreement. 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
400,000 shares for each of the years ended December 31, 1999 and 1998.
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.
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.
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.
The Company and its subsidiaries had notes receivables and notes payables
outstanding to employees and executive officers during the six months ended June
30, 2000 and the years ended December 31, 1999 and 1998.
One of the Company's subsidiaries, TekSoft, leases office space from a company
that is owned by the current President and Vice President of TekSoft along with
a former TekSoft employee. The monthly rent amount as of August 1, 2000 is
$20,570. However, the actual rent paid has been lower historically due to
TekSoft's ability to sublet part of the building space to other tenants. The
rent paid in the years ended December 31, 1999 and 1998 total $135,049 and
$122,372, respectively.
There are no other related party transactions with the Company.
ITEM 8. DESCRIPTION OF SECURITIES
-------------------------
COMMON STOCK
------------
The Company is authorized to issue 50,000,000 shares of Common Stock, $0.001 par
value, of which 16,797,391 shares are outstanding as of June 30, 2000. The
holders of Common Stock are entitled to one vote for each share held of record
on all matters to be voted on by stockholders. There is no cumulative voting
with respect to the election of directors, with the result that the holders of
more than 50% of the shares voting for the election of directors can elect all
of the directors then up for election. The holders of Common Stock are entitled
to receive dividends when, as and if declared by the Board of Directors out of
funds legally available. In the event of liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining which are available for distribution to them after payment of
liabilities and after provision has been made for each class of stock, if any,
having preference over the Common Stock. Holders of shares of Common Stock, as
such, have no conversion, preemptive or other subscription rights, and there are
no redemption provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
As of June 30, 2000, the Company has 398,954 outstanding 1998 Redeemable Common
Stock Purchase Warrants entitling the registered owner to purchase on or before
June 30, 2001, one (1) share of the Company's Common Stock for $1.50 per share.
The 1998 Warrants are subject to redemption by the Company at $.05 per Warrant
upon thirty (30) days written notice.
As of June 30, 2000, the Company has 159,939 outstanding Class A Redeemable
Common Stock Purchase Warrants and 159,939 Class B Redeemable Common Stock
Purchase Warrants. Each Class A Warrant entitles the registered owner to
purchase one (1) share of the Company's Common Stock at a price of $2.25 per
share during the first thirty-six (36) months following the original date of
issue of the Warrant certificate. Each Class B Warrant entitles the registered
owner to purchase one (1) share of the Company's Common Stock at a price of
$2.25 per share during the first sixty (60) months following the original date
of issue of the Warrant certificate. All of the outstanding Class A and Class B
Warrants were issued during 1999 and the six months ended June 30, 2000. The
exercise price is subject to adjustment upon the occurrence of certain events.
The Class A and Class B Warrants are subject to redemption by the Company at
$.05 per warrant upon thirty (30) days written notice.
NEVADA GENERAL CORPORATION LAW ("NGCL"). The terms of Chapter 78 of the
---------------------------------------
NGCL apply to the Company since it is a Nevada corporation. Under certain
circumstances, the following selected provisions of the NGCL may delay or make
more difficult acquisitions or changes of control of the Company. The Articles
and By-laws do not exclude the Company from such provisions of the NGCL. Such
provisions also may have the effect of preventing changes in the management of
the Company. It is possible that such provisions could make it more difficult to
accomplish transactions that stockholders may otherwise deem to be in their best
interests.
CONTROL SHARE ACQUISITIONS. Pursuant to Sections 78.378 to 78.3793 of the
--------------------------
NGCL, an "acquiring person" who acquires a "controlling interest" in an "issuing
corporation" may not exercise voting rights on any "control shares" unless such
voting rights are conferred by a majority vote of the disinterested stockholders
of the issuing corporation at a special meeting of such stockholders held upon
the request and at the expense of the acquiring person. In the event that the
control shares are accorded full voting rights and the acquiring person acquires
control shares with a majority or more of all the voting power, any stockholder,
other than the acquiring person, who does not vote in favor of authorizing
voting rights for the control shares is entitled to demand payment for the fair
value of his or her shares, and the corporation must comply with the demand. For
purposes of the above provisions, "acquiring person" means (subject to certain
exceptions) any person who, individually or in association with others, acquires
or offers to acquire, directly or indirectly, a controlling interest in an
issuing corporation. "Controlling interest" means the ownership of outstanding
voting shares of an issuing corporation sufficient to enable the acquiring
person, individually or in association with others, directly or indirectly, to
exercise (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority and/or (iii) a majority or more of the voting power of
the issuing corporation in the election of directors. Voting rights must be
conferred by a majority of the disinterested stockholders as each threshold is
reached and/or exceeded. "Control shares" means those outstanding voting shares
of an issuing corporation that an acquiring person acquires or offers to acquire
in an acquisition or within 90 days immediately preceding the date when the
acquiring person became an acquiring person. "Issuing corporation" means a
corporation that is organized in Nevada, has 200 or more stockholders (at least
100 of whom are stockholders of record and residents of Nevada) and does
business in Nevada directly or through an affiliated corporation. The above
provisions do not apply if the articles of incorporation or bylaws of the
corporation in effect on the 10th day following the acquisition of a controlling
interest by an acquiring person provide that said provisions do not apply. As
noted above, the Articles and Bylaws do not exclude the Company from the
restrictions imposed by such provisions.
CERTAIN BUSINESS COMBINATIONS. Sections 78.411 to 78.444 of the NGCL
------------------------------
restrict the ability of a "resident domestic corporation" to engage in any
combination with an "interested stockholder" for three years after the
interested stockholder's date of acquiring the shares that cause such
stockholder to become an interested stockholder, unless the combination or the
purchase of shares by the interested stockholder on the interested stockholder's
date of acquiring the shares that cause such stockholder to become an interested
stockholder is approved by the board of directors of the resident domestic
corporation before that date. If the combination was not previously approved,
the interested stockholder may effect a combination after the three-year period
only if such stockholder receives approval from a majority of the disinterested
shares or the offer meets certain fair price criteria. For purposes of the above
provisions, "resident domestic corporation" means a Nevada public corporation
that has 200 or more stockholders. "Interested stockholder" means any person,
other than the resident domestic corporation or its subsidiaries, who is (i) the
beneficial owner, directly or indirectly, of 10% or more of the voting power of
the outstanding voting shares of the resident domestic corporation or (ii) an
affiliate or associate of the resident domestic corporation and, at any time
within three years immediately before the date in question, was the beneficial
owner, directly or indirectly, of 10% or more of the voting power of the then
outstanding shares of the resident domestic corporation. The above provisions do
not apply to corporations that so elect in a charter amendment approved by a
majority of the disinterested shares. Such a charter amendment, however, would
not become effective for 18 months after its passage and would apply only to
stock acquisitions occurring after its effective date. As noted above, the
Articles and Bylaws do not exclude the Company from the restrictions imposed by
such provisions.
RIGHTS AND OPTIONS. Section 78.200 of the NGCL provides that a
--------------------
corporation may create and issue, whether in connection with the issue and sale
of any shares of stock or other securities of the corporation, rights or options
for the purchase of shares of stock of any class of the corporation, to be
evidenced by such instrument as is approved by the board of directors. The terms
upon which, the time or times, which may be limited or unlimited in duration, at
or within which, and the price at which, any such shares may be purchased from
the corporation upon the exercise of any such right or option must be fixed and
stated in the Articles or in a resolution adopted by the board of directors
providing for the creation and issuance of such rights or options, and, in every
case, set forth or incorporated by reference in the instrument evidencing the
rights or options.
DIRECTORS' DUTIES. Section 78.138 of the NGCL allows directors and
-----------------
officers, in exercising their respective powers with a view to the interests of
the corporation, to consider the interests of the corporation's employees,
suppliers, creditors and customers, the economy of the state and the nation, the
interests of the community and of society and the long and short-term interests
of the corporation and its stockholders, including the possibility that these
interests may be best served by the continued independence of the corporation.
Directors may resist a change or potential change in control if the directors,
by a majority vote of a quorum, determine that the change or potential change is
opposed to or not in the best interest of the corporation upon consideration of
the interests set forth above or if the board has reasonable grounds to believe
that, within a reasonable time, the debt created as a result of the change in
control would cause the assets of the corporation or any successor to be less
than the liabilities or would render the corporation or any successor insolvent
or would lead to bankruptcy proceedings.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND
----------------------------------------------------------------
RELATED SHAREHOLDER MATTERS
---------------------------
The Company's Common Stock, at the time of this filing, is traded only in the
environment of the Pink Sheets 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 the Company's market maker. The quotations reflect
inter-dealer prices without retail mark-up, markdown or commission, and may not
represent actual transactions. The prices are adjusted for the 1 for 2 reverse
stock split effective October 31, 1999. The Company intends to apply to have
the Common Stock traded on the OTC Bulletin Board immediately upon the
effectiveness of this Registration Statement. No assurance can be given that
such application will be approved and, if approved, that an active trading
market for the Common Stock will be established or maintained.
High Low
---- ----
Year Ended December 31, 2000
First Quarter $4.50 $4.50
Second Quarter 4.00 4.00
Year Ended December 31, 1999
July 2, 1999 (First Price Available) $5.50 $5.50
Third Quarter 0.50 0.50
Fourth Quarter 4.50 4.50
None of the holders of any shares of Common Stock of the Company are entitled to
any registration rights.
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.
As of June 30, 2000, there were approximately 500 holders of record of the
Company's common stock.
ITEM 2. LEGAL PROCEEDINGS
-----------------
Neither the Company nor any of its subsidiaries are involved in any legal
proceedings the resolution of which would have a material adverse effect on the
business or financial condition of the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT
--------------------------------------------
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.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------
The Company was organized on May 28, 1998 to develop Internet-based, business-
to-business electronic-commerce sites for use in the procurement of raw
materials and tooling for the metal working industries, to acquire specific
other businesses, and to raise capital. At inception, the Company was a wholly-
owned subsidiary of Innovation International, Inc. (Innovation). On June 12,
1998, Innovation authorized the Company to distribute 800,000 common shares of
the Company and 400,000 Redeemable Common Stock Purchase Warrants ("Spin-off
Shares") pro-rata to the more than 400 individual shareholders of Innovation as
a dividend-in-kind; and as a result of this distribution, the Company became
separate from and was no longer a subsidiary of Innovation.
There was no consideration paid in cash or otherwise by Innovation shareholders
for either the Common Stock or the Warrants. There was no underwriter, and no
commissions or fees that were paid. The securities were issued without
registration under the Securities Act of 1933 (the "1933 Act") pursuant to
rulings and No-Action letters promulgated by the Securities and Exchange
Commission ("SEC") relating to a "spin-off" transaction. Subsequent to June 30,
2000, the Warrants, which were to expire September 30, 2000, were extended
until June 30, 2001. As of June 30, 2000, 1,046 of the warrants have been
exercised for total consideration of $1,569.
On July 31, 1998, the Company issued 9,866,500 shares of Common Stock to holders
of 100% of the common stock of Micro. The former Micro shareholders, Messrs.
Woods III and Beyer, also have the right to receive an additional 2,000,000
combined (split 70% and 30% respectively) shares of Common Stock if Net Sales
should increase in any of five years immediately subsequent to the merger by
slated percentages. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS". See
Exhibit No. 8(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" for details of this agreement.
On January 1, 1999 the company issued 150,000 shares of Common Stock in exchange
for all of the stock of CAM. Mr. Bork has the right to receive up to an
additional 150,000 shares of Common Stock on the basis of one share for each
$2.00 increase in CAM's Net Profits in any of the five years immediately
subsequent to the merger. See "CERTAIN REALTIONSHIPS AND TRANSACTIONS." 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.
On October 1, 1999, the Company issued 153,846 shares of Common Stock to Michael
Zaworski and Sherri G. Zaworski in exchange for all of the stock of Cimtronics.
Michael and Sherri G. Zaworski have contingent rights to receive an additional
153,846 in the future if certain annual profit goals are met. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS". 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.
On January 31, 2000, the Company acquired all of the stock of TekSoft, Inc., in
exchange for 4,500,060 shares of Company common stock plus the contingent right
to receive 1,500,000 additional shares during the next five years if certain
revenue growth is achieved from TekSoft's CAM products. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS". See Exhibit No. 8(c) "Agreement and
Plan of Reorganization dated January 10, 2000 by and among the Company, TekSoft,
and Gary F. Fulton" for details of this agreement.
The securities issued in the above four transactions were not registered under
the 1933 Act, exemption being claimed for each case pursuant to Section 4(2)
thereof or Regulation D promulgated by the SEC.
During 1999 and through June 30, 2000 the Company offered and issued on various
dates Units at a price of $2.00 per unit. The units include one share of
Company common stock and one Company Class A common stock purchase warrant
expiring three years from the unit purchase date and one Company Class B common
stock purchase warrant expiring five years from the unit purchase date.
Approximately 160,000 units were issued and sold in a private placement to
selected individuals deemed financially capable of making the investment. The
shares were issued without registration under 1933 Act pursuant to the
provisions of Section 505 of Regulation D promulgated by the SEC and appropriate
filings with regulatory agencies of the states where the shares were offered.
In May 2000, the Company entered into a twelve-month contract with a
professional services firm. The Company issued 300,000 shares of common stock
for these services at a value of $2.00 per share.
Except for the Spin-off Shares, all of the share certificates issued in the
above-described transactions carry restrictive legends and are subject to stop
transfer orders. Generally, securities issued without registration under the
1933 Act are restricted and therefore subject to limitations on the ability of
the holder to resell. Restricted shares may be sold only upon registration
under the 1933 Act, pursuant to the provisions of Rule 144 or under some other
exemption.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The Articles of the Company waive the personal liability of a director or
officer for damages for breach of fiduciary duty except for (i) acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law or (ii) the payment of distributions in violation of Section 78.300 of the
NGCL, which concerns the unlawful payment of distributions to stockholders.
While the Articles provide directors and officers with protection from awards
for monetary damages for breaches of their duty of care, they do not eliminate
such duty. Accordingly, the Articles will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director or
officer's breach of his or her duty of care.
The Bylaws provide for indemnification of the directors and officers of the
Company to the fullest extent permitted by applicable state law, as then in
effect. The indemnification rights conferred by the Bylaws are not exclusive of
any other right to which a person seeking indemnification may otherwise be
entitled. The Company will also provide liability insurance for the directors
and officers for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers and will enter into an
indemnification agreement with each of its directors. Under its form of
indemnification agreement, the Company agrees to indemnify its directors against
all expenses, liability or losses incurred by the directors in their capacity as
such: (i) to the fullest extent permitted by applicable law; (ii) as provided
in the Bylaws as in effect on the date of such agreement; and (iii) in the event
the Company does not maintain the aforementioned insurance or comparable
coverage, to the full extent provided in the applicable policies as in effect on
the date of such agreement (the Company's obligations described in (ii) and
(iii) being subject to certain exceptions). Contractual rights under such
indemnification agreements are believed to provide the directors more protection
than the Bylaws, which are subject to change. The SEC has taken the position
that the provisions discussed in this section do not eliminate the monetary
liability of directors or officers under the Federal securities laws.
PART F/S
--------
The following financial statements of the Company are included herein:
PAGE NO.
--------
ONCOURSE TECHNOLOGIES, INC. F-1
--------------------------
Report of Independent Public Accountants F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholder's Investment F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
CAM SOLUTIONS, INC. F-20
------------------
Report of Independent Public Accountants F-21
Balance Sheet F-22
Statements of Operations F-24
Statements of Stockholder's Investment F-25
Statements of Cash Flows F-26
Notes to Financial Statements F-27
CIMTRONICS, INC. F-29
---------------
Report of Independent Public Accountants F-30
Balance Sheet F-31
Statements of Operations F-33
Statements of Stockholder's Investment F-34
Statements of Cash Flows F-35
Notes to Financial Statements F-36
TEKSOFT, INC. F-38
------------
Report of Independent Public Accountants F-39
Balance Sheet F-40
Statements of Operations F-42
Statements of Stockholder's Investment F-43
Statements of Cash Flows F-44
Notes to Financial Statements F-45
F-1
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 (UNAUDITED), AND DECEMBER 31, 1999 AND 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-2
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,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity (deficit) 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, 1999 and 1998, 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
July 24, 2000
F-3
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of June 30, 2000 (Unaudited), December 31, 1999 and 1998
<TABLE>
December 31,
June 30, ------------------------------
Assets 2000 1999 1998
------ ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Current Assets:
Cash $156,327 $91,684 $20,338
Accounts Receivable, Less Allowance for Doubtful Accounts
of $17,200, $11,600 and $7,400, Respectively 1,115,356 412,260 381,638
Prepaids and Other Assets 589,702 56,307 2,339
Deferred Income Tax Asset 499,842 205,193 78,432
----------- ---------- --------
Total Current Assets 2,361,227 765,444 482,747
Note Receivable from Shareholder 43,399 41,738 38,647
Capitalized Software, Less Accumulated Amortization of $962,743,
$501,166 and $342,165, Respectively 3,000,634 226,752 271,768
Property and Equipment, at Cost:
Computer Equipment and Purchased Software 471,253 257,515 198,554
Furniture, Fixtures and Vehicles 164,673 162,657 87,758
----------- ---------- --------
Total Property and Equipment 635,926 420,172 286,312
Less- Accumulated Depreciation (287,124) (226,085) (181,844)
----------- ---------- --------
Net Property and Equipment 348,802 194,087 104,468
Goodwill, Less Accumulated Amortization of $607,152,
$25,651 and $0, Respectively 9,060,484 597,263 -
Other Assets 179,174 8,961 7,284
----------- ---------- --------
Total Assets $14,993,720 $1,834,245 $904,914
----------- ---------- --------
----------- ---------- --------
</TABLE>
The accompanying consolidated notes to financial statements are an integral part
of these consolidated balance sheets.
F-4
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of June 30, 2000 (Unaudited), December 31, 1999 and 1998
<TABLE>
December 31,
June 30, -------------------------------
Liabilities and Shareholders' Equity (Deficit) 2000 1999 1998
---------------------------------------------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Current Liabilities:
Lines of Credit $363,337 $183,425 $245,886
Current Portion of Long-term Debt 327,045 17,200 -
Current Portion of Capital Leases 14,924 7,100 -
Accounts Payable 451,588 331,047 245,374
Accrued Income Taxes - 22,699 28,483
Accrued Commissions 78,163 61,618 63,612
Accrued Wages and Other Liabilities 143,081 63,116 47,003
Notes Payable to Shareholders and Employees 82,346 10,000 -
Deferred Revenue 1,551,780 461,911 192,173
----------- ---------- --------
Total Current Liabilities 3,012,264 1,158,116 822,531
Notes Payable to Shareholders and Employees, Less Current Portion 99,651 - -
Long-term Debt, Less Current Portion 165,106 172,912 -
Capital Lease Obligations, Less Current Portion 11,579 - -
Deferred Income Tax Liability 597,529 26,796 127,303
Shareholders' Equity (Deficit):
Common Stock, $0.001 Par Value, 50,000,000 Shares Authorized,
and 16,797,391, 11,850,156 and 10,306,000 Shares Issued and
Outstanding, Respectively 16,797 11,850 10,306
Additional Paid-In Capital 12,682,875 665,919 26,349
Warrants 1,522,297 1,864,990 -
Retained Deficit (3,114,378) (2,066,338) (81,575)
----------- ---------- --------
Total Shareholders' Equity (Deficit) 11,107,591 476,421 (44,920)
----------- ---------- --------
Total Liabilities and Shareholders' Equity (Deficit) $14,993,720 $1,834,245 $904,914
----------- ---------- --------
----------- ---------- --------
</TABLE>
The accompanying consolidated notes to financial statements are an integral part
of these consolidated balance sheets.
F-5
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Six Months Ended June 30, 2000 and 1999 (Unaudited) and Years Ended
December 31, 1999 and 1998
<TABLE>
Six Months Ended Years Ended
June 30, December 31,
------------------------------- -------------------------------
2000 1999 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $2,382,607 $1,133,604 $2,482,475 $1,851,151
Cost of Sales 810,485 230,655 635,859 418,509
---------- ---------- ---------- ----------
Gross Profit 1,572,122 902,949 1,846,616 1,432,642
Selling Expenses 1,218,007 512,262 1,109,782 735,006
Research & Development 104,075 8,500 17,100 21,000
General and Administrative Expenses 1,410,732 393,982 953,981 668,771
---------- ---------- ---------- ----------
Operating (Loss) Income (1,160,692) (11,795) (234,247) 7,865
Interest Expense 44,030 11,915 30,748 17,470
Other Income, Net (6,702) - - -
---------- ---------- ---------- ----------
Loss Before Income Taxes (1,198,020) (23,710) (264,995) (9,605)
Income Tax Benefit (Provision) 216,334 5,660 94,632 (68,983)
---------- ---------- ---------- ----------
Net (Loss) $(981,686) $(18,050) $(170,363) $(78,588)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and Diluted Loss Per Share $(0.06) $(0.01) $(0.01) $(0.01)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
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 Shareholders' Equity (Deficit)
For the Six Months Ended June 30, 2000 (Unaudited) and Years Ended December 31,
1999 and 1998
<TABLE>
Total
Common Stock Additional Retained Shareholders'
------------------------- Paid-in (Deficit) (Deficit)
Shares Amount Capital Warrants Earnings Equity
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 9,866,500 $9,867 $162,892 $ - $14,671 $187,430
Distributions to Shareholders - - - - (13,072) (13,072)
Termination of S Corporation Status - - 4,586 - (4,586) -
Issuance of Common Stock 39,500 39 (39) - - -
Contingent Shares Earned 400,000 400 (400) - - -
Net Loss - - - - (78,588) (78,588)
Offering Costs Incurred - - (140,690) - - (140,690)
---------- ------- ----------- ---------- ----------- -----------
Balance, December 31, 1998 10,306,000 10,306 26,349 - (81,575) (44,920)
Distribution of Shares in Spin-Off 800,000 800 (800) - - -
Shares Issued for Acquisitions 303,846 304 674,311 - - 674,615
Issuance of Common Stock 40,205 40 16,891 - - 16,931
Issuance of Warrants - - (51,047) 51,047 -
Warrants Issued as Dividends - - - 1,814,400 (1,814,400) -
Exercise of Warrants 105 - 615 (457) - 158
Contingent Shares Earned 400,000 400 (400) - - -
Net Loss - - - - (170,363) (170,363)
---------- ------- ----------- ---------- ----------- -----------
Balance, December 31, 1999 11,850,156 11,850 665,919 1,864,990 (2,066,338) 476,421
Shares Issued for Acquisitions 4,500,060 4,500 10,750,643 - - 10,755,143
Issuance of Common Stock 446,234 446 855,854 - - 856,300
Issuance of Warrants - - (207,763) 207,763 - -
Exercise of Warrants 941 1 4,595 (3,183) - 1,413
Warrants Issued as Dividends - - 613,627 (547,273) (66,354) -
Net Loss - - - - (981,686) (981,686)
---------- ------- ----------- ---------- ----------- -----------
Balance, June 30, 2000 (Unaudited) 16,797,391 $16,797 $12,682,875 $1,522,297 ($3,114,378) $11,107,591
---------- ------- ----------- ---------- ----------- -----------
---------- ------- ----------- ---------- ----------- -----------
</TABLE>
The accompanying consolidated notes to financial statements are an integral part
of these consolidated statements.
F-7
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999 (Unaudited) and Years Ended
December 31, 1999 and 1998
<TABLE>
Six Months Ended Years Ended
June 30, December 31,
-------------------------- --------------------------
2000 1999 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(981,686) $(18,050) $(170,363) $(78,588)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities-
Depreciation and Amortization 1,016,385 88,022 233,314 156,001
Loss on Disposal of Property And Equipment - - - 1,077
Deferred Income Taxes, Net (156,780) 4,036 (62,349) 38,300
Noncash Compensation Expense 47,725 - - -
Changes in Current Assets and Liabilities-
Accounts Receivable (83,745) 134,360 190,676 (66,437)
Prepaids and Other Current Assets 98,444 2,942 (42,607) 22,251
Accounts Payable (146,419) (84,041) (23,973) 91,006
Accrued Liabilities (5,205) (21,334) (36,337) 2,548
Deferred Revenue 595,363 22,644 38 15,245
---------- -------- --------- ---------
Net Cash Provided by Operating Activities 384,082 128,579 88,399 181,403
Cash Flows from Investing Activities:
Capitalized Software Development Costs (569,162) (52,612) (113,985) (111,838)
Purchase of Property and Equipment (48,309) (11,904) (81,296) (11,880)
Other Assets (119,204) (4,232) (1,677) -
Acquisition of CAM Solutions, Inc. - 13,670 13,670 -
Acquisition of Cimtronics, Inc. - - 27,648 -
Acquisition of TekSoft, Inc. 65,527 - - -
Proceeds from Sale of Property and Equipment - - - 17,500
---------- -------- --------- ---------
Net Cash Used in Investing Activities (671,148) (55,078) (155,640) (106,218)
---------- -------- --------- ---------
Cash Flows From Financing Activities:
Net (Payments) Proceeds on Line of Credit 160,963 1,000 (62,461) 105,386
Proceeds from Long Term Debt 14,091 - 194,116 -
Payments on Long Term Debt (23,877) (3,238) (4,004) (24,095)
Payments on Capital Lease Obligation (7,795) - (3,062) -
Proceeds from Stock Issuance 208,575 - 16,931 -
Exercise of Warrants 1,413 - 158 -
(Increase) Decrease in Notes Receivable from Shareholder (1,661) (1,546) (3,091) 769
Offering Costs Incurred - (45,794) - (140,690)
Distributions to Shareholders - - - (13,072)
---------- -------- --------- ---------
Net Cash Provided by (Used in) Financing Activities 351,709 (49,578) 138,587 (71,702)
---------- -------- --------- ---------
Net Increase in Cash 64,643 23,923 71,346 3,483
Cash, Beginning of Year 91,684 20,338 20,338 16,855
---------- -------- --------- ---------
Cash, End of Year $156,327 $44,261 $91,684 $20,338
---------- -------- --------- ---------
---------- -------- --------- ---------
</TABLE>
The accompanying consolidated notes to financial statements are an integral part
of these consolidated statements.
F-8
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Notes to Financial Statements
June 30, 2000 (Unaudited), December 31, 1999 and 1998
(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")
pursuant to which Micro 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 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.
Because the acquisition of Micro by OnCourse is treated as a reverse
purchase for financial accounting purposes, the historical financial
statements prior to July 31, 1998, are those of Micro.
Acquisitions and Pro Forma Information-
--------------------------------------
CAM Solutions, Inc.
------------------
On January 1, 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. The goodwill associated with the purchase is being
amortized on a straight-line basis over seven years.
The following unaudited pro forma information presents the results
of operations of the Company as if the acquisition of CAM Solutions
had taken place on January 1, 1998. The pro forma information
includes an adjustment for amortization expense as a result of
goodwill. 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 period or the future
results of the combined operations had the acquisition of CAM taken
place.
Year Ended
December 31, 1998
(Unaudited)
-----------------
Net Sales $2,314,264
Net Loss (100,603)
Basic and Diluted Loss Per Share (0.00)
Cimtronics, Inc.
---------------
On October 1, 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. The purchase price was approximately $625,000, and
resulted in goodwill of approximately $591,000. The goodwill
associated with the purchase is being amortized on a straight-line
basis over seven years.
The following unaudited pro forma information presents the results
of operations of the Company as if the acquisition of Cimtronics
had taken place on January 1, 1998. The pro forma information
includes an adjustment for amortization expense as a result of
goodwill. 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
Cimtronics taken place.
Year Ended Year Ended
December 31, 1999 December 31, 1998
(Unaudited) (Unaudited)
----------------- -----------------
Net Sales $3,099,480 $2,494,132
Net Loss (137,033) (49,012)
Basic and Diluted
Loss Per Share (0.01) (0.00)
TekSoft, Inc.
-------------
On January 31, 2000, the Company acquired TekSoft, for
approximately 4,500,000 shares of common stock. The former
shareholders of TekSoft may receive up to 1,500,000 in additional
shares over the next five years if sales, as defined, 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 assets purchased by $8,957,000, on a preliminary
basis. The goodwill associated with the purchase is being
amortized on a straight-line basis over 7 years. The preliminary
allocation of purchase price was as follows:
Current Assets $1,052,000
Capitalized Software 2,666,000
Property and Equipment 168,000
Other Assets 51,000
Liabilities Assumed (2,139,000)
Goodwill 8,957,000
-----------
$10,755,000
-----------
-----------
The Company anticipates that additional adjustments will be made to
goodwill once the valuation of the in process research and
development is completed and if any contingent shares are issued as
part of the purchase agreement. The Company anticipates on
completing the valuation of the in-process research and development
by January 31, 2001.
The following unaudited pro forma information presents the results
of operations of the Company as if the acquisition of TekSoft had
taken place on January 1, 1998. The pro forma information includes
an adjustment for amortization expense as a result of goodwill.
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.
Six Months Ended Year Ended Year Ended
June 30, 2000 December 31, 1999 December 31, 1998
(Unaudited) (Unaudited) (Unaudited)
--------------- --------------- ---------------
Net Sales $2,648,082 $5,333,967 $4,685,090
Net Loss (1,006,474) (1,564,040) (1,584,243)
Basic and Diluted
Loss Per Share $(.06) $(.10) $(.11)
OnCourse and its subsidiaries, Micro, CAM Solutions, Cimtronics and
TekSoft are hereafter referred to as the "Company".
(2) Nature of Operations-
--------------------
The Company develops, produces and 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 principal markets for the Company's software
and support services is North America and Europe. For the six months
ended June 30, 2000, sales in North America and Europe were approximately
72% and 15% , respectively. For the six months ended June 30, 1999 and
the years ended December 31, 1999 and 1998, sales in North America and
Europe were 98% and 2%, respectively.
There were no customers for the six months ended June 30, 2000 and 1999,
and the year ended December 31, 1999 that had sales greater than 10% of
Company net sales. For the year ended December 31, 1998, approximately
14% of sales were to a single customer.
(3) 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
CAM Solutions and Cimtronics subsequent to the acquisition dates
are included in the unaudited June 30, 2000 and audited 1999
consolidated financial statements. All transactions for TekSoft
subsequent to the acquisition on January 31, 2000 date are included
in the June 30, 2000 unaudited consolidated financial statements.
All intercompany transactions and accounts have been eliminated in
consolidation.
(b) Revenue Recognition-
-------------------
Revenue from product sales is recognized upon customer acceptance
and delivery of the product provided that no significant
contractual obligations remain. Customer acceptance is realized
after either the customer pays for the software or upon receiving a
document from the customer stating that the product has been
accepted by the customer. Included in deferred revenues is
approximately $568,000 as of June 30, 2000, respectively, of
products which have been delivered and invoiced but for which the
Company has not been notified of customer acceptance.
Revenues also include separate maintenance fees whereby the Company
provides ongoing customer support and product upgrades. Such
contracts are reflected as deferred revenue and amortized ratably
over the term of the maintenance period ranging from 12 to 36
months, which begins after the expiration of the one-year of free
support period included with the initial purchase of the software
for some of the Company's products.
(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. Capitalized costs are reported at
the lower of unamortized costs or net realizable value. The costs
are amortized on the straight-line method over the estimated
economic life of the product of 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
$104,000, $8,500, $17,000 and $21,000 for the six months ended June
30, 2000 and 1999 and the years ended December 31, 1999 and 1998,
respectively.
Computer software development costs capitalized in the six months
ended June 30, 2000 and 1999 and the years ended December 31, 1999
and 1998 were approximately $569,000, $52,600, $114,000 and
$112,000, respectively. Amortization expense for the six months
ended June 30, 2000 and 1999 and the years ended December 31, 1999
and 1998 of approximately $462,000, $61,400, $159,000 and $119,000,
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.
<TABLE>
Six Months Six Months Years Ended
Ended Ended December 31,
June 30, June 30, --------------------------
2000 1999 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding-Basic EPS 15,712,131 11,260,012 11,306,104 9,878,796
Effect of Dilutive Shares--Outstanding Warrants 433,051 272,874 702,678 -
Effect Of Dilutive Shares--Shares Subject to
Right-of-Return - - - 612,603
---------- ---------- ---------- ----------
Weighted Average Shares Outstanding-Dilutive EPS 16,145,182 11,532,886 12,008,782 10,491,399
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
For the six months ended June 30, 2000 and 1999 and the year ended
December 31, 1999, outstanding warrants for common stock were
excluded in the computation of diluted EPS because their inclusion
would have had an antidilutive effect on EPS.
For 1998, the number of shares Micro shareholders received in
consideration of the merger was used as the number of shares
outstanding at the beginning of the year. The contingent shares of
800,000 were excluded in the computation of diluted EPS because
their inclusion would have had an antidilutive effect on EPS.
At December 31, 1998, the 400,000 outstanding warrants for common
stock were excluded from the computation of diluted EPS because
their inclusion would have had an antidilutive effect on EPS.
(g) Offering Costs-
--------------
Costs associated with stock offerings have been recorded as a
reduction to shareholders' (deficit) equity as these costs were
netted against the proceeds of the stock offering. 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.
(h) Advertising Costs-
-----------------
All advertising costs are expensed the first time the advertising
takes place. Advertising expenses for the six months ended June
30, 2000 and 1999 and the years ended December 31, 1999 and 1998
were approximately $121,000, $75,000, $123,000 and $223,000,
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 1998 financial
statements to be consistent with the 1999 financial statement
presentation.
(l) Interim Financial Statements-
----------------------------
The results of operations for the six months ended June 30, 2000
and 1999 are not necessarily indicative of the results to be
expected for the full year. All information as of June 30, 2000
and for the six months ended June 30, 2000 and 1999 is unaudited,
but, in the opinion of management, contains all adjustments,
consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of
operations and cash flows of the companies.
(4) 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.
(5) Goodwill-
--------
Amortization of goodwill, consisting of excess of cost over fair value of
the assets acquired in the transactions described in Note 1, is being
provided utilizing the straight-line method over the estimated useful
life of seven years.
The Company continuously reviews intangible assets to assess
recoverability from expected future operations using undiscounted cash
flows. Impairment would be recognized in operating results if a
permanent diminution in value occurred.
Goodwill amortization for the six months ended June 30, 2000 and 1999 and
the years ended December 31, 1999 and 1998 was approximately $582,000,
$2,000, $26,000 and $0, respectively.
(6) Lines of Credit-
---------------
The Company has two lines of credit with a bank as of June 30, 2000.
The first line of credit agreement is with a bank, which provides for
borrowings up to $225,000. Borrowings under the line of credit bear
interest at prime (8.5% at December 31, 1999 and 9.5% at June 30, 2000)
plus 1.5%. The maturity date is October 21, 2000. Borrowings are limited
to a certain percentage of eligible accounts receivable. The line is
secured by essentially all assets of the Company. Borrowings under the
line of credit were approximately $183,000, $183,000 and $200,000 as of
June 30, 2000 and years ended December 31, 1999 and 1998, respectively.
Subsequent to December 31, 1999, the Company entered into a second line
of credit agreement with the same bank, which provides for borrowings of
up to $200,000 for one of the Company's subsidiaries. The maturity date
is February 4, 2001. Borrowings under the line of credit bear interest at
prime (9.5% at June 30, 2000) plus 1.5%. Borrowings are limited to a
certain percentage of eligible accounts receivable. The line is secured
by essentially all assets of the Company. Borrowings under the line of
credit were $180,000 as of June 30, 2000.
Subsequent to June 30, 2000 the Company consolidated its bank debt by
replacing the Company's lines of credit and substantially all of the
existing bank term debt. The new debt facility consists of a $400,000
term loan due on October 1, 2005 and a $1,100,000 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, plant and
equipment and net capitalized software. The interest rate for the term
and revolving line of credit is 9.25% and prime (9.5% at June 30, 2000),
respectively. The monthly term debt payment of $6,500 is based on a
seven-year amortization schedule. The three-year revolving line of
credit agreement as well as the term loan will be classified as long-term
debt. The debt facility will be secured by all assets of the Company and
its subsidiaries.
The Company also had an additional line of credit at the end of 1998 with
a bank that provided for borrowings up to $50,000, to purchase equipment
and software. The Company had borrowings under the line of approximately
$46,000 as of December 31, 1998. The outstanding liability was paid as
of June 30, 1999.
(7) Notes Payable to Shareholders and Employees-
-------------------------------------------
As of June 30, 2000 and December 31, 1999, the Company has a non-interest
bearing $10,000 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. This note is classified as a
current liability.
The Company has several notes payable and loans to the former
shareholders and employees of TekSoft. The two former primary
shareholders and two other employees loaned money to TekSoft to finance
the acquisition of property and equipment. The notes bear an interest
rate of 16.5% as of June 30, 2000 and are payable monthly and mature at
various dates up to April 2002. These notes are secured by substantially
all of the TekSoft's property and equipment. The balance of these notes
totaled $140,358 as of June 30, 2000. The current portion of these notes
is $40,707 as of June 30, 2000. These notes are classified as long-term
liabilities.
The Company has a note payable to former subsidiary shareholders and
current Company shareholders who loaned money to the subsidiary under a
line of credit agreement to finance the operations. This loan bears an
interest rate of 16.5%, payable monthly. This loan totaled $31,639 at
June 30, 2000. This note is classified as a current liability with the
interest due annually at December 31, 2000.
(8) Debt-
----
Long-term debt as of June 30, 2000 and December 31, 1999 consists of the
following:
<TABLE>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Note payable to bank, prime (9.5% as June 30, 2000 and 8.5% at December 31, 1999)
plus 1.0 %, due in monthly installments of $1,911 including interest, through
July 21, 2001, secured by essentially all assets of the Company and personally
guaranteed by the President and CEO of OnCourse $142,121 $146,296
Note payable to bank, prime (9.5% as of June 30, 2000) plus .75%, through
September 30, 2000, due in monthly installments of $5,912, secured by essentially
all assets of the subsidiary and personally guaranteed by the subsidiary's
former shareholders. 309,953 -
Auto loan, 8.5% interest, due in monthly installments of $458 including interest,
through November 18, 2004, secured by auto 20,206 22,016
Auto loan, 8.9% interest, due in monthly installments of $543 including interest,
through January 1, 2004, secured by auto 19,871 21,800
-------- --------
Total Long-term Debt 492,151 190,112
Less- Current Maturities (327,045) (17,200)
-------- --------
$165,106 $172,912
-------- --------
-------- --------
</TABLE>
Approximate principal payments on long-term debt are as follows:
For The Twelve Months Ended:
--------------------------------------
At June 30, At December 31,
----------- ---------------
(Unaudited)
2000 $ - $17,200
2001 327,045 19,400
2002 18,791 21,300
2003 20,688 23,300
2004 19,924 18,900
Thereafter 105,703 90,012
(9) 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 13) that
is renewable in five-year increments for a period of twenty-five years.
The Company subleases a significant portion of this related party lease
as office space to other tenants. In addition, the Company also leases
an automobile and computer equipment. Total rent expense, net of
sublease payments, was approximately $97,200 and $ 26,100 for the six
months ended June 30, 2000 and 1999, respectively, and $59,100 and
$50,300 for the years ended December 31, 1999 and 1998, respectively.
Property under capital leases is included in property and equipment as
follows:
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
Computer Equipment $38,099 $10,162
Less-Accumulated Amortization (6,680) (1,016)
------- -------
Net Capital Lease Assets $31,419 $9,146
------- -------
------- -------
The Company had no assets under capital leases at December 31, 1998.
Approximate minimum annual rental commitments as of June 30, 2000 and the
year ended December 31, 1999 are as follows:
<TABLE>
(Unaudited) Audited
June 30, 2000 December 31, 1999
-------------------------- -----------------------------
Capital Operating Capital Operating
For Year Ending 12/31: Leases Leases Leases Leases
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
2000 $10,700 $166,000 $7,600 $83,300
2001 15,100 333,200 - 86,200
2002 4,800 329,900 - 82,900
2003 - 152,900 - 29,900
2004 - 19,000 - 19,000
Thereafter - - - -
------- ---------- ------ --------
Total Minimum Lease Payments $30,600 $1,001,000 7,600 $301,300
---------- --------
---------- --------
Less Amount Representing Interest- (4,100) (500)
------- ------
Present Value of Minimum Lease Payments
(at 1/1/00 or Lease Inception) $26,500 $7,100
------- ------
------- ------
Current Portion $14,900 $7,100
------- ------
------- ------
</TABLE>
(10) Warrants-
--------
In connection with the issuance of stock during the six months ended June
30, 2000, the Company issued 126,734 Class A stock purchase warrants and
126,734 Class B stock purchase warrants. The warrants were issued with
initial estimated values (based on the Black-Scholes valuation
model) ranging from $2.85 to $5.19 per Class A Warrant and $3.16 to
$5.56 per Class B Warrant. Each warrant represents the right to purchase
one share of the Company's common stock at an exercise price of $2.25.
The Class A Warrants expire in 2003, three years from the date of
issuance. The Class B Warrants expire in 2005, five years from the date
of issuance. As of June 30, 2000, all warrants issued during the six
months ended June 30, 2000 were outstanding.
In connection with the issuance of stock during 1999, the Company issued
33,205 Class A stock purchase warrants and 33,205 Class B stock purchase
warrants. The warrants were issued with initial values ranging from
$1.49 to $5.19 per Class A Warrant and $1.73 to $5.57 per Class B Warrant
(based on the Black-Scholes valuation model). Each warrant represents the
right to purchase one share of the Company's common stock at an exercise
price of $2.25. The Class A Warrants expire in 2002, three years from the
date of issuance. The Class B Warrants expire in 2004, five years from
the date of issuance. As of June 30, 2000 and December 31, 1999, all
warrants issued in 1999 were outstanding.
In connection with the spin-off of OnCourse by Innovation (Note 1), the
Company granted 400,000 common stock purchase warrants to Innovation's
shareholders as a dividend in-kind. 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. Generally accepted
accounting principals 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. The extension resulted in a new measurement
date and the incremental value of the warrants was accounted for as a
dividend to the shareholders. The value of the remeasured warrants was
determined using the Black-Scholes pricing model. A dividend was
recorded for approximately $66,000 and $1,814,000 for the six months
ended June 30, 2000 and the year ended December 31, 1999, respectively.
During the six months ended June 30, 2000 and the year ended December 31,
1999, 941 and 105, respectively, of the 400,000 warrants were exercised.
Subsequent to June 30, 2000, the remaining warrants were extended a third
time to June 30, 2001.
The table below summarizes the transactions related to the Company's
warrants to purchase common stock:
Weighted-
Average
Number of Exercise
Warrants Price
-------- --------
Balance at December 31, 1997 - $ -
Warrants Issued 400,000 1.50
------- -----
Balance at December 31, 1998 400,000 1.50
Warrants Sold (Class A and Class B) 66,410 2.25
Warrants Exercised (1998 Warrants) (105) 1.50
------- -----
Balance at December 31, 1999 466,305 1.61
Warrants Sold (Class A and Class B) 253,468 2.25
Warrants Exercised (1998 Warrants) (941) 1.50
------- -----
Balance at June 30, 2000 (Unaudited) 718,832 $1.83
------- -----
------- -----
All warrants are exercisable as of June 30, 2000 and December 31, 1999.
(11) Reverse Stock Split-
-------------------
Effective October 31, 1999, OnCourse exercised a 1-for-2 reverse stock
split by amending the Articles of Incorporation of OnCourse so that each
two (2) authorized common shares with par value of one-tenth of one cent
($.001) per share of the Corporation be converted into one (1) common
share with par value of one-tenth of one cent ($.001) per share.
Effective the same date, OnCourse reduced the total authorized shares
from 100,000,000 to 50,000,000. This resulted in reducing the shares
outstanding as of October 31, 1999 from 22,861,602 shares to 11,430,801
shares. All shares and per share data in the financial statements have
been restated to reflect the impact of the split for all periods
presented.
(12) Shareholders' Equity (Deficit)-
------------------------------
Consideration for the CAM Solutions acquisition included the issuance of
150,000 shares to the former shareholder of CAM Solutions. In addition,
under the terms specified in the purchase agreement the former
shareholder of CAM Solutions may receive up to 150,000 additional shares
over the next five years if net income, as defined, increases. There
were no shares earned during the six months ended June 30, 2000 or the
year ended December 31, 1999 under the purchase agreement net income
criteria.
Consideration for the Cimtronics acquisition included the issuance of
153,846 shares to the former shareholders of Cimtronics. In addition,
the former shareholders of Cimtronics may receive up to 153,846
additional shares over the next five years if net income, as defined,
increases. There were no shares earned during the six months ended June
30, 2000 or the year ended December 31, 1999 under the purchase agreement
net income criteria.
Consideration in the 1998 reverse triangular merger included the issuance
of 9,866,500 shares to the former shareholders of Micro. Accordingly,
shares issued and outstanding, all historical weighted average share and
per share amounts and activity from prior periods in the consolidated
statements of shareholders' equity (deficit) have been retroactively
restated. In addition, the former shareholders of Micro 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 achieved for the years ended
December 31, 1999 and 1998, and as a result, an additional 400,000 shares
per year have been allocated to the former shareholders of Micro.
The 800,000 shares of common stock issued to Innovation's shareholders on
June 12, 1998 provided for a one-year right-of-return as defined per the
merger agreement. These shares were not reflected on the statements of
shareholders' equity (deficit) until the right-of-return expired. No
shares were returned to the Company during 1999 or 1998.
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 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. Approximately $75,000 was amortized during
the six months ended June 30, 2000 (unaudited). The balance of $525,000
is reflected as a component of Prepaids and Other Assets on the balance
sheet as of June 30, 2000 (unaudited).
In connection with the termination of the Company's S Corporation status
for Federal income tax purposes (Note 15) all retained earnings, as of
July 31, 1998, were reclassified as additional paid-in capital.
(13) Supplemental Disclosure of Cash Flow Information-
------------------------------------------------
<TABLE>
Six Months Ended Years Ended
June 30, December 31,
---------------------------- ----------------------------
2000 1999 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Approximate Cash Paid for-
Interest $34,700 12,100 $30,700 $20,600
Income Taxes 4,500 400 13,300 -
Noncash Transactions-
Capital Leases 14,100 - 10,200 -
Compensation Expense 47,725 - - -
Warrants Issued as Dividends 66,354 - 1,814,400 -
Common Stock Issued for
Services (Note 12) 75,000 - - -
</TABLE>
14) Related Party Transactions-
--------------------------
Certain owners and employees of the Company have notes and loans with the
Company (Note 7).
A subsidiary's building that the Company occupies and 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 (Note 9).
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 pays the shareholder $4,167 per month for these services.
15) Income Taxes-
------------
Prior to July 31, 1998 the shareholders of Micro had elected to have the
Company treated as an "S Corporation" for Federal income tax purposes and
a "C Corporation" for state income tax purposes. As an S Corporation, a
company's taxable income or loss is includable in the individual tax
returns of its shareholders and as a C Corporation, the tax liability is
the responsibility of the Corporation. Accordingly, prior to July 31,
1998, the financial statements only include a provision and liability for
current and deferred state income taxes and do not include any provision
or liability for current or deferred Federal income taxes related to
Micro.
Effective August 1, 1998, the Company became subject to Federal and state
income taxes as a C Corporation and is required to account for income
taxes in accordance with Statement of Financial Accounting Standards No.
109 ("SFAS 109"), "Accounting for Income Taxes." In connection with this
change in the Company's tax status, SFAS 109 requires the Company to
record deferred income taxes on the balance sheet for all book and tax
differences existing on the date of change to C Corporation status. The
related effect of recording basis differences is charged or credited to
current earnings. The change in tax status resulted in recognition of a
net deferred income tax liability and a corresponding charge to net
income of approximately $76,000 in 1998.
The provision for income taxes for the six months ended June 30, 2000 and
1999, and the years ended December 31, 1999 and 1998 consists of:
<TABLE>
Six Months Ended Years Ended
June 30, December 31,
---------------------------- ----------------------------
2000 1999 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current-
Federal $(455,248) $(9,005) $(71,700) $(3,615)
State (59,901) (1,263) (16,200) (384)
--------- ------- -------- -------
Total Current (515,149) (10,268) (87,900) (3,999)
Deferred Income Taxes 298,815 4,608 (6,732) 72,982
--------- ------- -------- -------
Total Income Tax
(Benefit) Provision $(216,334) $(5,660) $(94,632) $68,983
--------- ------- -------- -------
--------- ------- -------- -------
</TABLE>
A reconciliation of the statutory Federal income tax rate to the
consolidated effective income tax rate is as follows:
<TABLE>
Six Months Ended Years Ended
June 30, December 31,
--------------------------- ----------------------------
2000 1999 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Statutory Federal Income Tax Rate (35)% (35)% (35)% (35)%
State Income Taxes, Net of Federal
Income Tax Benefit (5) (5) (6) (4)
Goodwill Amortization 18 9 4 -
Other 4 7 1 757
---- ---- ---- ----
Effective Income Tax Rate (18)% (24)% (36)% 718%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
The significantly high effective tax rate for the year ended December 31,
1998 is due to the deferred tax impact from the Company converting from
an S Corporation to a C Corporation.
Temporary differences that give rise to the deferred income tax asset and
liability at June 30, 2000 and December 31, 1999 and 1998 are as follows:
<TABLE>
December 31,
June 30, -------------------------------
2000 1999 1998
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Deferred Revenue $367,687 $200,155 $75,524
Other 132,155 5,038 2,908
---------- -------- ---------
Current Deferred Income Tax Asset 499,842 205,193 78,432
Capitalized Software Costs (1,006,490) (98,256) (106,805)
Book Versus Tax Depreciation Methods (32,786) (32,786) (20,498)
Net Operating Loss Carryforwards 460,272 54,477 -
Other (18,525) 49,769 -
---------- -------- ---------
Long-Term Deferred Income Tax Liability (597,529) (26,796) (127,303)
---------- -------- ---------
Net Deferred Income Tax Asset (Liability) ($97,687) $178,397 $(48,871)
---------- -------- ---------
---------- -------- ---------
</TABLE>
The Company has generated a net operating loss ("NOL") carryforwards of
approximately $61,000 during the six months ended June 30, 2000. 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.
The Company generated a federal net operating loss of approximately
$189,000 in 1999. The Company anticipates carrying back a portion of the
NOLs. An estimated income tax receivable of approximately $27,000 is
included in other current assets. As of December 31, 1999, the Company
has remaining NOLs of approximately $117,000 and $189,000 available for
future use against Federal and state income tax liabilities,
respectively. The unused portion of these federal and state NOLs will
expire in the year 2019 and 2014, respectively.
16) Deferred Savings Plan-
---------------------
TekSoft has a 401(k) deferred savings plan with a discretionary matching
feature covering substantially all employees of TekSoft. During the six
months ended June 30, 2000, 0% of the employee's contribution to the Plan
was matched by the Company.
F-20
CAM SOLUTIONS, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
CAM Solutions, Inc.:
We have audited the accompanying balance sheet of CAM Solutions, Inc. as of
December 31, 1998, and the related statements of operations, shareholder's
equity (deficit) and cash flows for the year 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 audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CAM Solutions, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
The Company was acquired by OnCourse Technologies, Inc. on January 1, 1999 (See
Note 6). The financial statements do not include any adjustments that might
result from the outcome of this transaction.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
July 10, 2000
F-22
CAM SOLUTIONS, INC.
Balance Sheet
As of December 31, 1998
Assets
------
Current Assets:
Cash $13,670
Accounts Receivable, Less Allowance of $4,710 125,121
Prepaid and Other Assets 9,306
--------
Total Current Assets 148,097
Property and Equipment, at Cost:
Computer Equipment and Purchased Software 29,566
Furniture, Fixtures and Vehicles 48,636
--------
Total Property and Equipment 78,202
Less- Accumulated Depreciation (44,869)
--------
Net Property and Equipment 33,333
--------
Total Assets $181,430
--------
--------
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-23
CAM SOLUTIONS, INC.
Balance Sheet
As of December 31, 1998
Liabilities and Shareholder's Deficit
-------------------------------------
Current Liabilities:
Current Portion of Note Payable $6,604
Accounts Payable 85,333
Accrued Liabilities 16,835
Deferred Revenue 63,941
--------
Total Current Liabilities 172,713
Distributions Payable 10,000
Note Payable, Less Current Portion 1,733
Shareholder's (Deficit) Equity:
Common Stock 11,453
Retained Deficit (14,469)
--------
Total Shareholder's Deficit (3,016)
--------
Total Liabilities and Shareholder's Deficit $181,430
--------
--------
The accompanying notes to financial statements are an integral part of this
balance sheet.
F-24
CAM SOLUTIONS, INC.
Statement of Operations
For the Year Ended December 31, 1998
Net Sales $509,863
Cost of Sales 265,801
--------
Gross Profit 244,062
Selling Expenses 146,944
General and Administrative Expenses 113,674
--------
Operating Loss (16,556)
Interest Expense 921
--------
Net Loss $(17,477)
--------
--------
The accompanying notes to financial statements are an integral part of this
statement.
F-25
CAM SOLUTIONS, INC.
Statement of Shareholder's Equity (Deficit)
For the Year Ended December 31, 1998
Total
Retained Shareholder's
Common Earnings Equity
Stock (a)<F8> (Deficit) (Deficit)
------------- -------- -------------
Balance, December 31, 1997 $11,453 $19,147 $30,600
Distributions to Shareholder - (16,139) (16,139)
Net Loss - (17,477) (17,477)
------- -------- -------
Balance, December 31, 1998 $11,453 $(14,469) $(3,016)
------- -------- -------
------- -------- -------
(a)<F8> 25,000 shares authorized, issued and outstanding, no par value.
The accompanying notes to financial statements are an integral part of this
statement.
F-26
CAM SOLUTIONS, INC.
Statement of Cash Flows
For the Year Ended December 31, 1998
Cash Flows from Operating Activities:
Net Loss $(17,477)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities-
Depreciation 14,969
Changes in Current Assets and Liabilities-
Accounts Receivable (62,631)
Prepaid and Other Assets (5,686)
Accounts Payable 19,133
Accrued Liabilities 5,503
Deferred Revenue 52,492
-------
Net Cash Provided by Operating Activities 6,303
-------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (5,011)
-------
Cash Flows from Financing Activities:
Payments on Notes Payable (6,114)
Distributions to Shareholder (6,139)
-------
Net Cash Used in Financing Activities (12,253)
-------
Net Decrease in Cash (10,961)
Cash, Beginning of Year 24,631
-------
Cash, End of Year $13,670
-------
-------
Supplemental Disclosure of Cash Flow Information:
Approximate Cash Paid for Interest $970
The accompanying notes to financial statements are an integral part of this
statement.
F-27
CAM SOLUTIONS, INC.
Notes to Financial Statements
December 31, 1998
(1) Nature of Operations-
--------------------
CAM Solutions, Inc. (the "Company") 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 principal market for the Company's software and support services is
North America. The Company was acquired by OnCourse Technologies, Inc.
("OnCourse") on January 1, 1999 (see Note 6).
(2) Summary of Significant Accounting Policies-
------------------------------------------
(a) Revenue Recognition-
-------------------
Revenue from product sales is recognized upon customer acceptance and
delivery of the product provided that no significant contractual
obligations remain.
Revenues also include separate maintenance fees whereby the Company
provides ongoing customer support. Such contracts are reflected as
deferred revenue and amortized ratably over the term of the
maintenance period, generally twelve months.
(b) Property and Equipment-
----------------------
Property and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets (5
to 7 years). Maintenance and repair costs are expensed as incurred.
Improvements that extend the useful life of the assets are capitalized
to property and equipment accounts and amortized over the remaining
useful life.
(c) Advertising Costs-
-----------------
All advertising costs are expensed the first time the advertising
takes place. Advertising expenses for 1998 were approximately $7,700.
(d) 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.
(3) Note Payable-
------------
Note payable as of December 31, 1998 consists of an auto loan that bears
interest at 7.75% with monthly principal and interest payments of $585
maturing in 2000.
(4) Lease Commitments-
-----------------
The Company leases office space under an operating lease, which expires in
January 2003. Total rent expense was approximately $10,800 in 1998.
Approximate minimum annual rental commitments as of December 31, 1998 are
as follows:
1999 $10,500
2000 10,800
2001 11,000
2002 11,400
2003 1,000
(5) Income Taxes-
------------
The Company's shareholder has elected to have the Company treated as an "S
Corporation" for income tax purposes. As an S Corporation, the company's
taxable income or loss is includable in the individual tax return of the
shareholder. Accordingly, the financial statements do not include any
provision or asset or liability for current or deferred income taxes.
(6) Subsequent Event-
----------------
On January 1, 1999, the Company entered into an agreement with OnCourse
pursuant to which the Company was acquired in a stock for stock exchange by
OnCourse.
F-29
CIMTRONICS, INC.
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Cimtronics, Inc.:
We have audited the accompanying balance sheets of Cimtronics, Inc. as of
September 30, 1999 and December 31, 1998, and the related statements of
operations, shareholders' equity (deficit) and cash flows for the nine months
ended September 30, 1999 and the year ended December 31, 1998. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Cimtronics, Inc. as of
September 30, 1999 and December 31, 1998, and the results of its operations and
its cash flows for the nine months ended September 30, 1999 and the year ended
December 31, 1998 in conformity with accounting principles generally accepted in
the United States.
The Company was acquired by OnCourse Technologies, Inc. on October 1, 1999 (See
Note 7). The financial statements do not include any adjustments that might
result from the outcome of this transaction.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
July 10, 2000
F-31
CIMTRONICS, INC.
Balance Sheets
As of September 30, 1999 and December 31, 1998
Assets 1999 1998
------ -------- --------
Current Assets:
Cash $27,648 $41
Accounts Receivable, Less Allowance of $1,226
and $0, Respectively 96,177 100,001
Note Receivable from Shareholder - 13,909
Prepaids and Other Assets 256 4,886
-------- --------
Total Current Assets 124,081 118,837
Property and Equipment, at Cost:
Furniture and Fixtures 34,325 25,414
Less- Accumulated Depreciation (20,834) (17,726)
-------- --------
Net Property and Equipment 13,491 7,688
Other Assets 1,799 1,799
-------- --------
Total Assets $139,371 $128,324
-------- --------
-------- --------
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-32
CIMTRONICS, INC.
Balance Sheets
As of September 30, 1999 and December 31, 1998
Liabilities and Shareholders' Deficit 1999 1998
------------------------------------- -------- --------
Current Liabilities:
Accounts Payable $24,314 $33,365
Accrued Liabilities 16,000 9,445
Distributions Payable 3,500 -
Note Payable to Shareholder - 4,985
Deferred Revenue 205,759 113,290
-------- --------
Total Current Liabilities 249,573 161,085
Shareholders' (Deficit) Equity:
Common Stock 500 500
Retained Deficit (110,702) (33,261)
-------- --------
Total Shareholders' Deficit (110,202) (32,761)
-------- --------
Total Liabilities and Shareholders' Deficit $139,371 $128,324
-------- --------
-------- --------
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-33
CIMTRONICS, INC.
Statements of Operations
For the Nine Months Ended September 30, 1999 and
The Year Ended December 31, 1998
1999 1998
-------- --------
Net Sales $652,555 $669,528
Cost of Sales 262,857 261,423
-------- --------
Gross Profit 389,698 408,105
Selling Expenses 208,122 201,567
General and Administrative Expenses 85,500 91,402
-------- --------
Operating Income 96,076 115,136
Interest and Other Expenses 662 1,111
-------- --------
Net Income $95,414 $114,025
-------- --------
-------- --------
The accompanying notes to financial statements are an integral part of these
statements.
F-34
CIMTRONICS, INC.
Statements of Shareholders' Equity (Deficit)
For the Nine Months Ended September 30, 1999 and
The Year Ended December 31, 1998
Total
Retained Shareholders'
Common Earnings Equity
Stock (a)<F9> (Deficit) (Deficit)
------------- -------- -------------
Balance, December 31, 1997 $500 $26,027 $26,527
Distributions to Shareholders - (173,313) (173,313)
Net Income - 114,025 114,025
---- --------- ---------
Balance, December 31, 1998 500 (33,261) (32,761)
Distributions to Shareholders - (172,855) (172,855)
Net Income - 95,414 95,414
---- --------- ---------
Balance, September 30, 1999 $500 $(110,702) $(110,202)
---- --------- ---------
---- --------- ---------
(a)<F9> 10,000 shares authorized, 500 shares issued and outstanding, $1 par
value.
The accompanying notes to financial statements are an integral part of these
statements.
F-35
CIMTRONICS, INC.
Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and the Year Ended December 31,
1998
1999 1998
-------- --------
Cash Flows from Operating Activities:
Net Income $95,414 $114,025
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities-
Depreciation and Amortization 3,108 3,748
Changes in Current Assets and Liabilities-
Accounts Receivable 3,824 (19,854)
Prepaids and Other Assets 4,630 (3,799)
Accounts Payable (9,051) 11,330
Accrued Liabilities 6,555 2,428
Deferred Revenue 92,469 67,698
------- --------
Net Cash Provided by
Operating Activities 196,949 175,576
------- --------
Cash Flows from Investing Activities:
Proceeds from Note Receivable from Shareholder 13,909 559
Purchase of Property and Equipment (8,911) -
------- --------
Net Cash Provided by
Investing Activities 4,998 559
------- --------
Cash Flows from Financing Activities:
Payments on Note Payable (4,985) (3,826)
Distributions To Shareholders (169,355) (173,313)
------- --------
Net Cash Used in Financing Activities (174,340) (177,139)
------- --------
Net Increase (Decrease) in Cash 27,607 (1,004)
Cash, Beginning of Period 41 1,045
------- --------
Cash, End of Period $27,648 $41
------- --------
------- --------
Supplemental Disclosure of Cash Flow Information:
Approximate Cash Paid for Interest $250 $970
The accompanying notes to financial statements are an integral part of these
statements.
F-36
CIMTRONICS, INC.
Notes to Financial Statements
September 30, 1999 and December 31, 1998
(1) Nature of Operations-
--------------------
Cimtronics, Inc. (the "Company") markets computer-aided design and
computer-aided manufacturing (CAD/CAM), estimating, layout, routing and
direct numerical control (DNC) software for job shops and the machining
industry. The principal market for the Company's software and support
services is North America. The Company was acquired by OnCourse
Technologies, Inc. ("OnCourse") on October 1, 1999 (see Note 7).
(2) Summary of Significant Accounting Policies-
------------------------------------------
(a) Revenue Recognition-
-------------------
Revenue from product sales is recognized upon customer acceptance and
delivery of the product provided that no significant contractual
obligations remain.
Revenues also include separate maintenance fees whereby the Company
provides ongoing customer support. Such contracts are reflected as
deferred revenue and amortized ratably over the term of the
maintenance period ranging from one to three years.
(b) Property and Equipment-
----------------------
Property and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets (5
to 7 years). 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.
(c) Advertising Costs-
-----------------
All advertising costs are expensed the first time the advertising
takes place. Advertising expenses for 1999 were immaterial and were
approximately $6,200 for 1998.
(d) 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.
(3) Note Receivable from Shareholder-
--------------------------------
The note receivable was due from a shareholder of the Company and was fully
repaid during the nine month period ended September 30, 1999.
(4) Note Payable to Shareholder-
---------------------------
The Company had a note payable to a shareholder bearing interest at 9%.
The note was paid in full during the nine month period ended September 30,
1999.
(5) Lease Commitments-
-----------------
The Company leases its office space under an operating lease that expires
in August 2004. Total rent expense was approximately $15,000 and $10,500
in the nine month period ended September 30, 1999 and the year ended
December 31, 1998, respectively.
Approximate minimum annual rental commitments as of September 30, 1999 are
as follows:
1999 (3 months) $6,200
2000 25,300
2001 26,600
2002 27,100
2003 27,400
2004 18,600
(6) Income Taxes-
------------
The Company's shareholders have elected to have the Company treated as an
"S Corporation" for income tax purposes. As an S Corporation, the
company's taxable income or loss is includable in the individual tax
returns of its shareholders. Accordingly, the financial statements do not
include a provision and asset or liability for current and deferred income
taxes.
(7) Subsequent Event-
----------------
On October 1, 1999, the Company entered into an agreement with OnCourse
pursuant to which the Company was acquired in a stock for stock exchange by
OnCourse.
F-38
TEKSOFT, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
TekSoft, Inc.:
We have audited the accompanying balance sheets of TekSoft, Inc. (an Arizona
Corporation) as of December 31, 1999 and 1998, and the related 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 financial statements referred to above present fairly, in
all material respects, the financial position of TekSoft, Inc. as of December
31, 1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
The Company was acquired by OnCourse Technologies, Inc. on January 31, 2000 (see
Note 11). The financial statements do not include any adjustments that might
result from the outcome of this transaction.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
June 14, 2000
F-40
TEKSOFT, INC.
Balance Sheets
As of December 31, 1999 and 1998
Assets 1999 1998
------ -------- --------
Current Assets:
Cash $140,653 $209,869
Accounts Receivable 640,777 720,232
Deferred Taxes 388,028 345,587
Prepaids and Other 33,193 47,114
---------- ----------
Total Current Assets 1,202,651 1,322,802
Capitalized Software, Net 2,647,856 2,256,884
Property and Equipment, at Cost:
Computer Equipment and Purchased Software 291,538 361,453
Furniture and Fixtures 147,019 147,019
---------- ----------
Total Property and Equipment 438,557 508,472
Less- Accumulated Depreciation (265,446) (282,504)
---------- ----------
Net Property and Equipment 173,111 225,968
Other Assets, Net 52,848 40,494
---------- ----------
Total Assets $4,076,466 $3,846,148
---------- ----------
---------- ----------
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-41
TEKSOFT, INC.
Balance Sheets
As of December 31, 1999 and 1998
Liabilities and Shareholders' Equity 1999 1998
------------------------------------ -------- --------
Current Liabilities:
Current Portion of Notes Payable and
Capital Lease Obligations $76,826 $61,188
Current Portion of Long Term Debt 328,902 -
Accounts Payable 340,753 231,505
Accrued Liabilities 79,986 89,524
Deferred Revenue 1,104,186 1,164,686
---------- ----------
Total Current Liabilities 1,930,653 1,546,903
Notes Payable and Capital Lease Obligations,
Less Current Portion 128,206 159,385
Long Term Debt, Less Current Portion - 243,304
Deferred Tax Liability 796,698 815,773
Shareholders' Equity:
Voting Common Stock: no Par, 10,000 Shares
Authorized, 2,925 and 2,593 Shares
Outstanding, Respectively 538,840 288,840
Nonvoting Common Stock: no Par, 10,000 Shares
Authorized, 4,574 Shares Outstanding
in Both Years 61,550 61,550
Treasury Stock (145,944) (145,944)
Retained Earnings 766,463 876,337
---------- ----------
Total Shareholders' Equity 1,220,909 1,080,783
---------- ----------
Total Liabilities and
Shareholders' Equity $4,076,466 $3,846,148
---------- ----------
---------- ----------
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-42
TEKSOFT, INC.
Statements of Operations
For the Years Ended December 31, 1999 and 1998
1999 1998
-------- --------
Net Sales $3,157,720 $2,859,651
Cost of Sales 1,350,976 1,196,499
---------- ----------
Gross Profit 1,806,744 1,663,152
Operating Costs and Expenses:
Product Development 100,689 225,091
Sales and Marketing Expenses 777,439 953,383
General and Administrative Expenses 1,036,473 820,967
---------- ----------
Operating loss (107,857) (336,289)
Other Expense (Income):
Interest, Net 86,609 45,233
Other, Net (23,076) (21,284)
---------- ----------
Loss Before Income Taxes (171,390) (360,238)
Income Tax Benefit 61,516 138,386
---------- ----------
Net Loss $(109,874) $(221,852)
---------- ----------
---------- ----------
The accompanying notes to financial statements are an integral part of these
statements.
F-43
TEKSOFT, INC.
Statements of Shareholders' Equity
For the Years Ended December 31, 1999 and 1998
<TABLE>
Voting Common Nonvoting Common
Stock Stock Total
-------------------- -------------------- Treasury Retained Shareholders'
Shares Amount Shares Amount Stock Earnings Equity
------ -------- ------ -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 2,175 $38,840 4,574 $61,550 $(145,944) $1,098,189 $1,052,635
Sale of Common Stock 418 250,000 - - - - 250,000
Net Loss - - - - - (221,852) (221,852)
----- -------- ----- ------- --------- -------- ----------
Balance, December 31, 1998 2,593 288,840 4,574 61,550 (145,944) 876,337 1,080,783
Sale of Common Stock 332 250,000 - - - - 250,000
Net Loss - - - - - (109,874) (109,874)
----- -------- ----- ------- --------- -------- ----------
Balance, December 31, 1999 2,925 $538,840 4,574 $61,550 $(145,944) $766,463 $1,220,909
----- -------- ----- ------- --------- -------- ----------
----- -------- ----- ------- --------- -------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-44
TEKSOFT, INC.
Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998
1999 1998
-------- --------
Cash Flows from Operating Activities:
Net Loss $(109,874) $(221,852)
Adjustments to Reconcile Net Loss to Net
Cash Provided by Operating Activities-
Depreciation and Amortization 1,030,200 863,152
Loss on Disposal of Property and Equipment 9,262 8,809
Deferred Taxes (61,516) (138,386)
Changes in Current Assets and Liabilities-
Accounts Receivable 79,455 (227,952)
Prepaids and Other 35,330 25,140
Accounts Payable 109,248 138,533
Accrued Liabilities (9,538) 15,594
Deferred Revenue (60,500) 433,675
---------- ----------
Net Cash Provided by
Operating Activities 1,022,067 896,713
---------- ----------
Cash Flows from Investing Activities:
Capitalized Software Development Costs (1,318,198) (1,092,882)
Purchase of Licenses (48,200) -
Purchase of Property and Equipment (28,326) (206,677)
Proceeds from Sale of Property and Equipment - 200
---------- ----------
Net Cash Used in
Investing Activities (1,394,724) (1,299,359)
---------- ----------
Cash Flows from Financing Activities:
Net Proceeds from Line of Credit 85,598 243,304
Payments on Notes Payable (29,449) -
Proceeds from Notes Payable - 50,342
Payments on Capital Lease Obligation (2,708) -
Proceeds from Sales of Common Stock 250,000 250,000
---------- ----------
Net Cash Provided by
Financing Activities 303,441 543,646
---------- ----------
Net (Decrease) Increase in Cash (69,216) 141,000
Cash, Beginning of Year 209,869 68,869
---------- ----------
Cash, End of Year $140,653 $209,869
---------- ----------
---------- ----------
Supplemental Disclosure of Cash Flow Information:
Approximate Cash Paid for-
Interest $90,000 $50,000
Supplemental Disclosure of Noncash Transactions:
Capital leases and related obligations $16,000 $ -
The accompanying notes to financial statements are an integral part of these
statements.
F-45
TEKSOFT, INC.
Notes to Financial Statements
December 31, 1999 and 1998
(1) Nature of Operations-
--------------------
TekSoft, Inc. (the "Company") develops, produces and markets computer aided
design and computer aided manufacturing software used primarily in metal
manufacturing industries. The Company sells its products through a network
of distributors and dealers who handle the installation and after sales
service, support and customization of the software to the end user.
Approximately 14% and 17% of sales during 1999 and 1998, respectively, were
to a single distributor. Approximately 58% and 63% of sales during 1999
and 1998, respectively, were to customers in the United States and Canada.
Approximately 27% and 23% of sales during 1999 and 1998, respectively, were
to customers in Europe.
(2) Summary of Significant Accounting Policies-
------------------------------------------
(a) Revenue Recognition-
-------------------
Revenue from product sales is recognized upon delivery of the product
and customer acceptance, provided that no significant contractual
obligations remain. Included in deferred revenues are approximately
$556,000 and $622,000 as of December 31, 1999 and 1998, respectively,
of products which have been delivered and invoiced but for which the
Company has not been notified of customer acceptance.
Revenues also include separate maintenance fees whereby the Company
provides, if and when available, product upgrades. Such contracts are
reflected as deferred revenue and amortized ratably over the term of
the maintenance periods ranging from one to three years. Amortization
begins after there is delivery of the software upgrade and customer
acceptance.
(b) Prepaids-
--------
Included in prepaids are various materials (CD's and manuals) and
supplies used to store, package and ship products.
(c) Property and Equipment-
----------------------
Property and equipment, which consists primarily of office and
computer equipment, is stated at lower of cost or market. Property
and equipment is depreciated using an accelerated depreciation method
over the estimated useful lives of the assets ranging from three to
seven years.
Maintenance and repair costs are expensed as incurred. Improvements
that extend the useful life of the assets are capitalized to property
and equipment accounts and amortized over the remaining useful life.
(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. Capitalized costs are reported at the lower of
unamortized costs or net realizable value. The costs are amortized on
a product-by-product basis using the straight-line method over the
estimated economic life of the product that is assumed to be five
years. All other research and development expenditures are expensed
as incurred.
Computer software development costs capitalized in 1999 and 1998 were
approximately $1,318,000 and $1,093,000, respectively. Amortization
expense for 1999 and 1998 of approximately $927,000 and $789,000,
respectively, is included in cost of sales in the statements of
operations. Accumulated amortization was approximately $3,296,000 and
$2,369,000 as of December 31, 1999 and 1998, respectively.
(e) 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.
(f) Advertising Costs-
-----------------
All advertising costs are expensed the first time the advertising
takes place. Advertising expenses for 1999 and 1998 were
approximately $261,000 and $285,000, respectively.
(g) 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.
(3) Operating Expenses-
------------------
The employees and the president of the Company took a voluntary pay cut
starting in December of 1998. The employees continued to receive reduced
pay for a total of three months, ending in February of 1999. The President
continued to receive reduced pay until the completion of the acquisition by
OnCourse (Note 11). Total savings from this voluntary pay cut reduced
operating losses by approximately $231,000 and $41,000 in 1999 and 1998,
respectively.
(4) Note Payable to Shareholders and Employees-
------------------------------------------
The two primary shareholders and two other employees loaned money to the
Company to finance the acquisition of property and equipment. The notes
bear an interest rate of 16.5%, payable monthly and matures in May 2001.
These notes are secured by substantially all of the Company's property and
equipment.
The balance of these notes totaled $159,486 and $188,640 as of December 31,
1999 and 1998, respectively. The current portion of these notes is $39,679
and $29,549 as of December 31, 1999 and 1998, respectively.
The shareholders also loaned money to the Company under a line of credit
agreement to finance operations. This loan is convertible into common
stock at the fixed price of $65 per share if the Company is unable to repay
the loan. This loan bears an interest rate of 16.5%, payable monthly.
This loan totaled $31,639 as of December 31, 1999 and 1998. The loan is
classified as current on the financial statements.
Interest paid on these amounts totaled approximately $34,000 and $30,000 in
1999 and 1998, respectively.
(5) Debt-
----
Indebtedness as of December 31, 1999 and 1998, consists of the following:
1999 1998
-------- --------
Term note, payable in monthly installments of $3,230
beginning July 1, 2000, final payment due June 1,
2008; variable interest rates based on 0.75% above
the prime rate (8.50% at December 31, 1999). $309,953 $243,304
Term note, payable in 2000; variable interest rates
based on 1.25% above the prime rate (8.50% at
December 31, 1999). 18,949 -
-------- --------
328,902 243,304
Less - Current Maturities 328,902 -
-------- --------
$ - $243,304
-------- --------
-------- --------
Current maturities of indebtedness at December 31, 1999 are as follows:
2000 $328,902
Thereafter -
--------
$328,902
--------
--------
Subsequent to year end the bank called these loans as a result of the
Company being acquired by OnCourse. The term note originally due
in 2000 was paid in full subsequent to year-end with proceeds from a new
line of credit (See Note 11.) The term note originally due in 2008 was
extended by the bank until September 2000.
(6) Lease Commitments-
-----------------
The Company leases its office space under an operating lease, which expires
in July 2003, from a related party (Note 10). The lease automatically
renews in five-year increments for a period of twenty-five years. The
Company subleases a significant portion of this office space to other
tenants. Total rent expense, net of tenant sublease payments, was
approximately $135,000 and $122,000 in 1999 and 1998, respectively.
Approximate minimum annual rental commitments for office space for the
years ended December 31, are as follows:
2000 $247,000
2001 247,000
2002 247,000
2003 123,000
The Company also leases software for use internally under a capital lease.
The lease contains a bargain purchase option, which allows the Company to
purchase the software for $1 at the completion of lease term. The term of
this lease is thirty-six months and it expires in May 2002. The software
is capitalized as computer equipment; the unamortized asset at December 31,
1999 totaled $14,308.
Minimum annual rental commitments for the year ended December 31, are
approximately as follows:
2000 $5,500
2001 5,600
2002 2,600
(7) Treasury Stock-
--------------
Treasury Stock consists of 2,025 shares of voting common stock and 432
shares of nonvoting common stock repurchased by the Company.
(8) Income Taxes-
------------
The Company has historically filed its Federal and State income tax returns
as of October 31 utilizing the cash basis of accounting. As of October 31,
1999, the Company had Federal and State net operating loss carryforwards of
approximately $543,000, to offset future taxable income. Federal and State
net operating loss carryforwards expire within fifteen years and five
years, respectively.
However, pursuant to the "change in ownership" provisions of the Tax Reform
Act of 1986, utilization of the Company's net operating loss carryforwards
may be limited, subsequent to the acquisition of the Company by OnCourse
(Note 11).
Total income tax benefit was allocated as follows:
1999 1998
-------- --------
Current-
Federal $153,448 $79,659
State 22,798 11,835
Deferred (114,730) 46,892
-------- --------
Total Allocated Benefit for Income Taxes $61,516 $138,386
-------- --------
-------- --------
A reconciliation of the difference between the statutory Federal tax rate
and the Company's effective tax rate follows:
1999 1998
-------- --------
Statutory Federal Rate 34.0% 34.0%
State Income Taxes, net of Federal Benefit 5.2 5.2
Other (3.3) (0.8)
----- -----
Effective Rate 35.9% 38.4%
----- -----
----- -----
The tax effects of temporary differences that give rise to significant
elements of the deferred tax assets and deferred tax liabilities as of
December 31, 1999 and 1998 are as follows:
1999 1998
------- --------
Current Deferred Tax Assets-
Deferred Revenues $220,309 $218,145
Cash basis versus accrual basis change 147,043 99,411
Accrued Employee Benefits 20,676 28,031
----------- ---------
Total Current Deferred Tax Assets $388,028 $345,587
----------- ---------
----------- ---------
Noncurrent Deferred Tax Assets (Liabilities)-
Capitalized Software $(1,064,438) $(907,267)
Net Operating Loss Carryforwards 267,740 91,494
----------- ---------
Total Noncurrent Deferred Tax Liabilities $(796,698) $(815,773)
----------- ---------
----------- ---------
(9) Deferred Savings Plan-
---------------------
The Company has a 401(k) deferred savings plan covering substantially all
employees. During 1998, a portion of the employee's contribution to the
Plan was matched by the Company. The matching contribution under the plan
was approximately $21,100 in 1998. The Company ceased matching
contributions to the Plan in November of 1998.
(10) Related Party Transactions-
--------------------------
Certain owners and employees of the Company have notes and loans with the
Company (Note 4).
The building that the Company occupies and leases is owned and operated by
a partnership, consisting of two principal owners of the Company and a
previous employee of the Company (Note 6).
The Company has a licensing agreement with Micro Estimating Systems, Inc.,
a wholly owned subsidiary of OnCourse (Note 11), utilizing a software
library of the Company's products. In addition, the Company sells products
to two distributors that are wholly owned subsidiaries of OnCourse. No
adjustments have been made to the financial statements herein to eliminate
the effects of these transactions. All transactions are considered to be
arms-length transactions.
The Company also entered into a consulting agreement with the outside
investor to provide expert advice to the Company concerning business
strategies. The agreement became effective December 1, 1999 and expires
December 1, 2004. The Company pays the outside investor $4,167 per month
for these services.
(11) Subsequent Events-
-----------------
On January 31, 2000, the Company was purchased by OnCourse Technologies
Inc. ("OnCourse"). The Company exchanged all of the outstanding shares of
the company for 4.5 million shares of OnCourse Class A Common Stock. In
addition, the former shareholders of the Company may receive up to 1.5
million additional shares over the next five years if sales, as defined,
increases. The transaction will be accounted for as a purchase. The
financial statements herein reflect only the operations of the Company and
do not reflect any adjustments to record the fair market value of the
acquired assets and liabilities of the Company by OnCourse.
Subsequent to December 31, 1999, the Company executed a line of credit with
a bank for $200,000. This line is secured by essentially all of the
Company's assets. The maturity date is February 4, 2001. The interest rate
is prime, plus 1.5%. Interest is payable on a monthly basis.
PART III
--------
ITEM 1. INDEX TO EXHIBITS
-----------------
Exhibit No. Page Number Description
----------- ----------- -----------
2(a) 78 Certificate of Articles of Incorporation of the
Company
2(b) 86 Bylaws of the Company
3 Not applicable
5 Not applicable
6 Not applicable
7 Not applicable
8(a) 123 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
8(b) 139 Agreement and Plan of Reorganization dated
December 30, 1998 by and among the Company, CAM
Solutions and Kevin L. Bork
8(c) 155 Agreement and Plan of Reorganization dated
September 30, 1999 by and among the Company,
Cimtronics, E. Michael Zaworski and Sherri G.
Zaworski
8(d) 171 Agreement and Plan of Reorganization dated January
10, 2000 by and among the Company, TekSoft, Inc.
and Gary F. Fulton.
10 191 Consent of Arthur Andersen LLP
27 192 Financial Data Schedule
SIGNATURES
In accordance with Section 12 of the Exchange Act of 1934, the Company
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized this 20th day of October, 2000.
ONCOURSE TECHNOLOGIES, INC.
/s/Bernard A. Woods, III
By:----------------------------------------
Bernard A. Woods, III
Chief Executive Officer, Treasurer
/s/Charles W. Beyer
By:----------------------------------------
Charles W. Beyer
President
/s/William C. Brown
By:----------------------------------------
William C. Brown
Chief Financial Officer
