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-23
Report of Independent Public Accountant F-24
Balance Sheet F-25
Statement of Operations F-27
Statement of Stockholders Investment F-28
Statements of Cash Flow F-29
Notes to Financial Statements F-30
Cimtronics, Inc. F-32
Report of Independent Public Accountant F-33
Balance Sheet F-34
Statement of Operations F-36
Statement of Stockholders Investment F-37
Statements of Cash Flow F-38
Notes to Financial Statements F-39
TekSoft, Inc. F-41
Report of Independent Public Accountant F-42
Balance Sheet F-43
Statement of Operations F-45
Statement of Stockholders Investment F-46
Statements of Cash Flow F-47
Notes to Financial Statements F-48
PART III
Item 1. Index to Exhibits and Description of Exhibits 78
Page 2
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.
Item 1. DESCRIPTION OF BUSINESS
COMPANY BACKGROUND
------------------
OnCourse Technologies, Inc. (the "Company" or "OnCourse") is a Nevada
corporation organized on May 28, 1998 to develop internet based business-to-
business ("B2B") electronic-commerce sites for use in the procurement of raw
materials and tooling for metalworking industries, to acquire specific other
businesses, and to raise capital. Metalworking is defined as the process or art
of shaping things out of metal. OnCourse currently has four wholly owned
subsidiaries. OnCourse subsidiaries develop and or sell and distribute
CAD/CAM/CAE software. Computer-Aided Engineering (CAE) is the integration of
design and manufacturing into a system under the direct control of digital
computers. Software systems written by "the subsidiaries" combine the use of
computers in industrial-design work, computer-aided design (CAD), with their use
in manufacturing operations, computer-aided manufacturing (CAM). This integrated
process is commonly called CAD/CAM. CAD systems generally consist of a computer
with one or more terminals featuring video monitors and interactive graphics-
input devices; they can be used to design such things as machine parts, patterns
for clothing, or integrated circuits. CAM Systems involve the use of numerically
controlled machine tools. In a CAE system, drawings developed and revised during
the design process are converted directly into instructions for the production
machines using computer-assisted part programming that will manufacture the
desired object. CAD/CAM systems can create or import the geometrical profile of
a required component as, for example, a series of connected points. The position
of each point, and the ways in which it can be reached by movements of the tool,
is calculated by the computer. After calculating the necessary tool movements,
the computer develops a complete machining program for the part to be
manufactured on a computer numerical control (CNC) machine tool. CNC is when a
computer is used as the controller in an NC (numerical control) machine tool
with the program actuated from computer memory. CNC systems are controlled by
dedicated mini- or microcomputers developed to enable machine tools to be
readily adapted to different jobs by altering the control program or software.
From May 28, 1998 until June 12, 1998, the Company was a wholly-owned subsidiary
of Innovation International, Inc. ("Innovation") and conducted no business
operations. 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. 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 Staff Legal Bulletin No. 4 dated September
16, 1997 and No-Action letters promulgated by the Securities and Exchange
Commission ("SEC") relating to a "spin-off" transaction. As a result, the
Company became separate from and no longer a subsidiary of Innovation by virtue
of a distribution of its shares to shareholders of Innovation. The Company has
not and does not conduct business operations directly but operates through
wholly owned subsidiaries acquired between 1998 and 2000 as described below. On
September 12, 2000, the Warrants, which were to expire September 30, 2000, were
extended until June 30, 2001. As of September 30, 2000, 1,046 of the warrants
have been exercised for total consideration of $1,569.
Innovation was formed in 1983 and was engaged in the business of computer
software, computer manufacturing and foreign trade until 1992 when it ceased all
business operations. At the time of the spin-off, it had approximately 460
shareholders.
Wholly-owned subsidiaries of OnCourse and the dates of their acquisition by
OnCourse include: Micro Estimating Systems, Inc, a Wisconsin corporation ("Micro
Estimating") - July 31, 1998; CAM Solutions, Inc., a Minnesota corporation ("CAM
Solutions") - January 1, 1999; Cimtronics, Inc., an Arizona corporation
("Cimtronics") - October 1, 1999; and TekSoft, Inc, an Arizona corporation
("TekSoft") - January 31, 2000.
Micro Estimating designs, develops, and markets computer-aided-engineering
("CAE") software consisting of Windows-based estimating software products and
services, including estimating, process planning and layout software for and to
customers in diverse manufacturing businesses. Micro Estimating also
distributes under an exclusive arrangement in the U.S.A. and Canada the AutoTAS
tool management software of a Swedish developer and supplier.
CAM Solutions distributes computer-aided-design/computer-aided-manufacturing
("CAD/CAM") products developed by TekSoft and other CAD/CAM software developers;
and Machine Shop Estimating, FabPlan and LayOut Pro products developed by Micro
Estimating. CAM Solutions also sells and installs Direct Numerical Control
("DNC") systems for machine tools and systems integration between Micro
Estimating's software and other manufacturing enterprise systems. A DNC system
is another
Page 3
variation of a CNC system in that a DNC system involves sending part
programs over telecommunications lines from a central computer to individual
machine tools in the factory, thus eliminating the use of storing programs on
the machines.
Cimtronics distributes CAD/CAM products developed by TekSoft and other CAD/CAM
software developers; and Machine Shop Estimating, FabPlan and LayOut Pro
products developed by Micro Estimating. Cimtronics also sells and installs DNC
systems for machine tools and systems integration between Micro Estimating's
software and other manufacturing enterprise systems.
TekSoft designs, develops and markets proprietary CAD/CAM software products used
in metal manufacturing. TekSoft distributes its products using distributors
both domestically as well as internationally. TekSoft's distributors include
CAM Solutions and Cimtronics.
Employees
---------
OnCourse and Micro Estimating have headquarters in New Berlin, Wisconsin. Micro
Estimating has a sales office in North Carolina and other subsidiaries have
headquarters and operations in Arizona and Minnesota. The OnCourse organization
has 47 employees: 46 full-time and 1 part time. In addition, TekSoft uses 16
full-time 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. TekSoft has developed and
marketed CAD/CAM software since 1981. Micro Estimating has developed and
marketed CAE software since 1982. CAM Solutions has been selling CAD/CAM/CAE
software since 1989. Cimtronics has been selling CAD/CAM/CAE software since
1993. Both CAM Solutions and Cimtronics have had meaningful CAD/CAM/CAE sales
since the years referenced above. The principal market for the subsidiaries'
software products consists of an estimated 500,000 small to medium sized
metalworking manufacturers. These manufacturers include but are not limited to,
Original Equipment Manufacturers (OEM), independent machine shops, contract
manufacturers, manufacturers of aerospace, automotive, appliance, and high
technology equipment, electronics industry components, as well as other tool and
die makers. Tool and die making is the industrial art of manufacturing stamping
dies, plastics molds, and fixtures to be used in the mass production of solid
objects. 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 ended December 31, 1999 and 1998.
Principal Products and Markets
------------------------------
CAD/CAM
-------
TekSoft develops and markets Windows and Windows-NT based, CAD/CAM software used
in the metal working industries. This subsidiary's flagship CAD/CAM product,
ProCAM, has a customer base in excess of 15,000 users in its nine available
languages. TekSoft has a total of over 20,000 users for all its products
installed at facilities serving the aerospace, computer, and automotive and
mold-making industries, among others. According to the 2000 Software Market
Assessment by CIMdata Inc., an independent research firm specializing in the NC
industry, TekSoft is ranked in the top five based on installed users for CAM
companies worldwide.
ProCAM
------
ProCAM is a CAD/CAM solution designed for use in manufacturing or machining
products for the manufacturing industry. The ProCAM for Windows product
provides a fully integrated solution for two dimension (2D) CAD/CAM applications
and three dimension (3D) applications requiring complex surface modeling and
machining. Based on past awards, ProCAM is one of the fastest, easiest to use
CAD/CAM products on the market. For example, ProCAM received a 1998 Excellence
in Manufacturing Technology Achievement Award for "Innovation" in the software
classification by the readers of American Machinist Magazine. ProCAM was also
voted a year 2000 Excellence in Manufacturing Technology Achievement Award
winner in the software classification titled "User Friendliness" by the readers
of American Machinist Magazine. Since 1877, American Machinist has covered
significant developments in manufacturing technology. The magazine is dedicated
to serving the machine tool market completely and offers readers the most up-to-
date information in the methods and practices of metalworking. American
Machinist's has a monthly subscription base of 80,000 readers consisting of
company management and manufacturing/production managers and engineers in the
Metalworking industries.
CAMWorks
--------
CAMWorks is a CAM application that is seamlessly integrated into, and is
operated from within a third party application called SolidWorks. According to
SolidWorks' website, SolidWorks is a CAD package developed by the SolidWorks
Corporation, a Dassault Systems S.A. (NASDAQ:DASTY) company. The SolidWorks
Corporation develops and markets 3D mechanical design solutions. CAMWorks
incorporates CAM technologies pioneered by TekSoft such as: Associative
Machining which allows a user to change the CAD drawing of a part and
automatically update the machining parameters without additional user
Page 4
input; and Knowledge Based Machining which allows users to edit or update a
predefined set of operational instructions for machining a specific type of
feature on a part. This allows the CAMWorks system to automatically select
the correct machining parameters for a given feature on a part, therefore
dramatically reducing the input required by the end user.
CAMWorks is currently available for Milling and Turning applications. CAMWorks
addresses the needs of today's sophisticated manufacturing engineers by
delivering CAM solutions critical to success. OnCourse believes it's the most
advanced tool available for mainstream engineers to get products to market
faster, efficiently and within budget.
CAE
---
Micro Estimating offers estimating and process planning software for a broad
spectrum of the manufacturing industries.
Machine Shop Estimating ("MSE")
-------------------------------
MSE is an engineering based cost estimating system for manufacturing companies.
MSE calculates machining times and total product costs according to company
specific estimating procedures. The software is comprised of 72 machine tool and
operation specific software modules to emulate actual machine tool and
production cycles. The machine emulation modules will produce calculations
within 1% of true production time. The software provides process planning,
machine process layouts and comprehensive management functions. It incorporates
on-line supplier links, graphical reports, and interfaces seamlessly to numerous
factory management and CAD/CAM programs. MSE libraries contain over 1,150 raw
materials specifications and incorporate 2 million speeds and feed tooling
combinations. The typical customer is a factory owner, estimator or an
engineering department in a larger facility. MSE received a 1998 Excellence in
Manufacturing Technology Achievement Award as "Readers Choice for User
Friendliness" in the software classification by the readers of American
Machinist Magazine.
LayOut Pro ("LP")
-----------------
LP serves as a process planning and machine process layout system, which allows
users to easily calculate machining or fabrication times for product production.
LP offers users the same basic functionality of the MSE product without the
pricing or quoting features. The typical customer is a process planning engineer
or manufacturer of metal working equipment. LP is a subset of MSE and contains
no manufacturing pricing functions, and is typically purchased by machine tool
builders.
FabPlan ("FP")
--------------
FabPlan is an engineering based cost estimating system designed for
manufacturers that operate fabrication equipment. FP calculates fabrication
times and total product costs according to company specific estimating
procedures and shop equipment by simulating actual machine tool cycles. The
software facilitates process planning and machine tool process layouts, which
provides calculations for fabrication times used for production. The system
incorporates supplier links, provides graphical reports, and interfaces with
numerous factory management and CAD/CAM programs. The typical customer is a
factory owner, estimator or an engineering department in a larger facility.
AutoTAS (Sandvik Coromant)
--------------------------
Micro Estimating is the exclusive U.S. and Canadian distributor and systems
integrator for AutoTAS, a software product offered by Sandvik/Coromant of
Sweden. AutoTAS is a tooling management program that was previously only
available in Europe. Tool management software assists companies in the control
and replenishment of tooling used in the manufacturing process.
New Products and Services
-------------------------
On behalf of the Company, Micro Estimating has begun development of a business-
to-business electronic-commerce service web site called Tools4Mfg.com. The
Tools4Mfg.com world-wide-web site is the cornerstone in its strategy to offer
the functionality of all the Company's proprietary software products to the
world-wide metal working community.
The Company anticipates that electronic-commerce, primarily the Tools4Mfg.com
web site, will expand revenues in the markets of electronic-commerce and supply
chain management. Supply chain management software provides a system comprised
of integrated networks to facilitate managing design, procurement, planning,
sales, fulfillment, and service for manufacturing and sales by providing the
technologies for communicating efficiently with customers, and suppliers. 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 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 site's overall design is approximately 80% complete with respect to the
planned layout and functionality. The actual technological feasibility of the
site is approximately 15% complete based on its current capabilities.
Completed development on the site consists of basic site layout, a material
calculation system and the development of a tool that will allow end users the
ability to define a component part to the Tools4mfg.com site and then search for
contract machining suppliers based on a specific
Page 5
geographical location. These capabilities are currently available on a non-fee
basis. It is management's belief that the Tools4Mfg.com site's functionality,
when completed, will fulfill the objective set forth in this segment of the
Company's business strategy. Neither the Company nor Micro Estimating have
begun marketing or advertising any of the functionality of this site.
The Company believes that it will offer its existing customer base the
capability to get raw material pricing and to place orders for raw materials
over the Tools4mfg.com site during the third quarter of 2001. This will be
accomplished solely by the internal funding of the Company. However, there is
no certainty that the Company will be able to generate any revenues from this
completed phase of the web site development.
The Company expects to continue to fund the development of the site from a
combination of internally generated funds and capital contributed by industry
partners. The time required for completion of the site will depend upon the
Company's ability to generate funds for the remainder of the project. If the
Company continues to develop the site without the aid of outside funding, the
Company anticipates completing the site in the third quarter of 2002. However,
the time line for the completion of the project could be reduced by three to six
months if additional funding is secured during the second and third quarters of
2001. To date the Company has not received any capital contributions from its
industry partners. Several revenue 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. However,
there is significant risk in that the Company may not be able to generate any
revenue from this business strategy upon completion of the web site.
According to an article in the October 5, 2000 edition of Purchasing magazine,
it is estimated that the annual market for production-grade and metalworking
metals is at least $900 billion. Net penetration is estimated at less than
1/100 of 1% of the estimated $900 billion annual global marketplace for
production-grade and metalworking metals. The management of OnCourse feels that
even a very small percentage of this market earned as commissions and
transactions cost would generate $90 million of material transactions in which
the Company would receive commissions and transaction fees. In addition, the
Company also believes it will be able to generate revenues from tooling and
auction sales as well.
The Company believes that revenues and transaction fees could exceed $25 million
annually within the next five years. The following table shows the revenue
stream for the $25 million of revenues and transaction fees based on
management's belief. However, there is significant risk in that the Company
may not be able to generate any revenue from this business strategy upon
completion of the web site.
RAW MATERIAL AND PERISHABLE TOOLING REVENUES (MILLIONS)
-------------------------------------------------------
TOOLS4MFG AVERAGE
TOTAL ESTIMATED CAPTURES 1/100% OF TRANSACTION
Revenue Source MARKET THE MARKET (.001%) FEE OF 2.75%
-------------- ------ ------------------ ------------
RAW MATERIALS $ 900,000 $ 900 $ 24.8
TOOLING $ 4,000 $ 4 $ 0.6
---------- --------- ---------
TOTALS: $ 904,000 $ 904 $ 25.4
Research and Development
------------------------
During nine months ended September 30, 2000 and 1999 and the years ended
December 31, 1999 and 1998, the subsidiaries have expended $489,000, $13,000,
$17,000 and $21,000 respectively, for research and development activities and
purchased in-process research and development expenses as part of the TekSoft
acquisition. The $489,000 of research and development expended during the nine
months ended September 30, 2000 includes $270,000 for the purchased in-process
research and development which was written off on February 1, 2000. In
addition, the subsidiaries have expended $923,000, $77,000, $114,000 and
$112,000 for its capitalized software during the nine months ended September 30,
2000 and 1999 and the years ended December 31, 1999 and 1998 respectively.
There have been no material customer sponsored research activities or
expenditures.
Governmental Regulation and Approval
------------------------------------
The subsidiaries do 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 subsidiaries' customers may
incur expenses for environmental compliance, but there has been no effect of any
such compliance on the subsidiaries. No single supplier or customer has a
material effect in the subsidiaries' operations.
Page 6
Traditional Metal Working Manufacturers as the Subsidiaries' Software Market
----------------------------------------------------------------------------
Domestic manufacturers are estimated to conduct approximately $3.8 trillion in
annual business and these manufacturers employ 17 million people. According to
the National Institute of Standards (NIST), 75% of manufacturers employ 50
people or less. OnCourse subsidiaries individually have up to 19 years providing
that market with software to make job shops more efficient. The information
referenced below provides historical summaries of the products sold by the
OnCourse subsidiaries of Micro Estimating and TekSoft:
Users Sold Since Subsidiary was Established (Unaudited)
Year
Subsidiary Established Users Sold
---------- ----------- ----------
TekSoft 1981 20,000
Micro Estimating 1982 2,400
Historical Sales by Micro Estimating and TekSoft by Year (Unaudited)
SUBSIDIARY/ACTIVITY 1995 1996 1997 1998 1999
------------------- ---- ---- ---- ---- ----
MICRO ESTIMATING REVENUES $1,123,225 $1,517,953 $1,580,905 $1,851,151 $1,716,246
NEW MICRO ESTIMATING USERS 147 220 185 215 173
TEKSOFT REVENUES 2,774,981 $2,668,804 $2,862,826 $2,859,651 $3,157,720
NEW TEKSOFT USERS 2,157 2,074 2,225 2,539 2,460
TOTAL REVENUE $3,898,206 $4,186,757 $4,443,731 $4,710,802 $4,873,966
TOTAL OF NEW USERS ADDED 2,304 2,294 2,410 2,754 2,633
Current Environment in the Subsidiaries' Software Market
--------------------------------------------------------
A dramatic shift in supply chain management is underway in which manufacturers
are looking to electronic-commerce solutions for sourcing and supply. Addressing
those trends, the Company is developing an Internet-based purchasing system for
use by manufacturing firms involved in producing, processing, or purchasing
custom fabricated and machined products. The Tools4Mfg site will be positioned
as an electronic middleman fulfilling orders for component parts manufacturers.
This electronic-commerce system will process electronic Requests for Quotes
("RFQ") and Electronic Purchase requisitions for raw materials, component parts,
and related tooling products and ultimately be paid with electronic funds
transfers. Coupling this trend with use of the Internet as a software delivery
and maintenance mechanism will provide new opportunities and a more efficient
means for OnCourse to increase its value to customers.
The Company's Business Strategy
-------------------------------
The OnCourse strategy is to build a recognized and respected brand name as the
leader in providing software and services that make component manufacturers more
efficient and profitable. The Company's products, such as the award winning
software systems referenced above under the ProCAM and Machine Shop Estimating
("MSE") headings, are the base of this strategy and will be built upon to create
a broader position.
Existing subsidiaries' product lines have demonstrated sales growth over the
last five years. When including sales activity prior to OnCourse ownership, net
sales for Micro Estimating's products and services has grown from $1.12 million
for the year ended December 31, 1995 to pre-consolidated net sales of $1.72
million for the year ended December 31, 1999. When including sales activity
prior to OnCourse ownership, net sales for TekSoft's products and services has
grown from $2.77 million for the year ended December 31, 1995 to pre-
consolidated net sales of $3.16 million for the year ended December 31, 1999.
The Company believes that product sales and services will easily exceed the
sales growth in terms of dollars and percentage increases that were realized
over the previous five years.
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.
Page 7
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
OnCourse's subsidiaries products will have seamless interfaces to the
web portal. One of the first integrations to be done will be with Micro
Estimating's software. The MSE and FabPlan software can, via modem,
dial out to a supplier of raw materials, access their database and
receive current raw material pricing. The web portal is designed to
perform this access via the Internet, access a suppliers database, and
return current raw material pricing. When possible all OnCourse
products will integrate with those areas of the portal that perform
similar or complimentary tasks.
o Internet Applications Delivery using Third-party Application Service
Providers ("ASP")
A growing trend for software publishers is to offer their applications
via the Internet. In an ASP business model, the customer uses a web
browser to access and run a particular software application. The
application runs on a third party server and not on their local PC. The
ASP model eliminates the need for the software user to purchase and
install the applications on their local PC; the software may be run from
any compatible browser via the Internet. OnCourse's subsidiaries will
provide its software products to customers using the ASP model.
Customer acceptance and technology trends will determine if this is a
viable business model.
o Draw Customers with Content
OnCourse will draw customers with content by offering current industrial
news pertaining to the metal working industries, and by providing user
forums to exchange manufacturing ideas and problems, post questions,
create topics, check employment listings and find ideas for innovations
and improvements. There also will be several databases developed by
OnCourse allowing easy calculations and allowing the look up of common
metal working information. Customers will also be given the technology
to easily exchange or share drawings and relevant manufacturing files.
Customers will also be given the opportunity to create and use
individual mailboxes and filing systems to organize any communications
and file exchanges done through the site.
o Value Added Trading Site
The proposed value added functionality at the OnCourse portal,
Tools4Mfg.com, is in several areas. There will be an online area for
shopping for industry leading software and finding information about
software companies serving the metal working industry. Online
calculators will be provided that run in an internet browser that will
simplify some routines and time consuming manufacturing calculations.
Online databases will allow the look up of common metal working
information. There will be an online auction for selling and buying
both new and used manufacturing items. Customers will be able to shop
online for the best prices and delivery from several raw material
suppliers in real time. A facilities locator named; The Machine Shop
Selector allows for detailed and specific production facilities searches
both geographically and by specific production capabilities and provides
the communication technologies to contact multiple manufacturers for
pricing or information. Manufacturer of custom components will have the
ability to receive Requests for Quotations (RFQ's) pre-defined that
match their capabilities and preferred type of work and online forums
will allow the exchange of manufacturing ideas and problems.
Risk Factors That May Impact the Shareholder's Investment
---------------------------------------------------------
Shareholders of the Company should be aware that the ownership of the Company's
shares involves certain investment considerations and risk factors, including
those described below and elsewhere in this 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."
Page 8
Control by the Management Might Limit Independent, Public Shareholder Influence
-------------------------------------------------------------------------------
The Chief Executive Officer and the President of the Company beneficially own
approximately 62% 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. Public
shareholders' interests may not be fully represented alongside the differing
interests of management shareholders, if any. The large percentage of shares
owned by these persons will have a limiting effect on the number of shares
available for trading in the secondary market, which could have an adverse
effect on price and liquidity.
Absence of Necessary Financing Could Disrupt Operations, Product Development,
-----------------------------------------------------------------------------
Growth Plans
------------
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 and capital contributed by industry partners. To date the
Company has not received any capital contributions from its industry partners.
There can be no assurances that there will be any market for the Company's
securities or that sufficient capital can be raised by any such private
placements. If capital is not available, it may not be possible for the
subsidiaries to develop new products, to grow existing product revenues or to
operate profitably in any market. In such event, shareholders could lose their
entire investment. See "MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF
OPERATIONS - Liquidity and Capital Resources".
Anticipated Revenues From Purchased In-process Research & Development May Not Be
--------------------------------------------------------------------------------
Realized
--------
The Company acquired $270,000 of CAMWorks in-process research and development as
part of the TekSoft acquisition on January 31, 2000. It is possible that the
Company may not complete the development related to the CAMWorks project ahead
of its competition or before technology changes in the market place that may
render the technology obsolete. As a result, the Company may not realize the
expected revenues that management believes will result from this acquired in-
process technology.
Competitors' Strengths Could Force Price Reductions, Damage Profit Prospects
----------------------------------------------------------------------------
The markets for the subsidiaries' products are intensely competitive. The CAM
industry for example has more than 200 competitors in which TekSoft is
referenced as one of the top five worldwide software providers according to the
above-mentioned CIMdata research. The estimating products offered by Micro
Estimating have a dramatically different number of competitors. There is only
one other competitor in the estimating field and that is Manufacturers
Technologies, Inc. Limited information is available on this company as they are
a privately held organization. Many of the subsidiaries' 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 subsidiaries will be able to compete effectively in the future. If the
subsidiaries are unable to compete effectively, shareholders could have a lower
return on their investment or lose their entire investment.
Limited Prior Public Market and Restrictions on Free Sale of Stock May Adversely
--------------------------------------------------------------------------------
Affect Stock Value and Liquidity
--------------------------------
There is presently a limited public market for the Company's common stock and
there can be no assurance that an active market will develop. The prices at
which the shares trade will be determined by the market place and could be
subject to significant fluctuations in response to many factors, including,
among others, variations in the Company's quarterly operating results, changing
economic conditions in the industries in which the subsidiaries participate, and
changes in government regulations. In addition, the general stock market has in
recent years experienced significant price fluctuations, often unrelated to the
operating performance of the specific companies whose stock is traded. Market
fluctuations, as well as economic conditions, may adversely affect the market
price of the Company common stock. In the event of declining stock values and
diminished liquidity, shareholders could lose their entire investment. See
"MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS."
Dependence on Operating Environments Imposes Obsolescence, Diminished Revenues
------------------------------------------------------------------------------
and Profit Exposures
--------------------
The subsidiaries' 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.
Failure by the subsidiaries to develop new products for any such changed
operating environments could result in the Company's inability to maintain
sufficient margins in which to continue its business.
Rapid Technological Change Exposes Subsidiaries To Competitive Disadvantages,
-----------------------------------------------------------------------------
Reductions in Sales, Profits, Growth Rates, Market Acceptance
-------------------------------------------------------------
Page 9
The market for the subsidiaries' 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 subsidiaries'
present products or any products under development. For instance, the Company
believes that TekSoft's CAMWorks product is an example of rapid technological
change. The CAMWorks product in the last two to three years has changed the way
CAM is being done in the manufacturing community. CAMWorks' ability to analyze
a solid model and generate machine code to produce the piece part automatically
will change the way parts will be manufactured in the future. The subsidiaries'
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
subsidiaries to develop new products and enhancements in a timely manner will
have an adverse effect on the results of the Company's operations and could
result in the Company's failure and the loss of shareholders' investment.
Absence of a Market For The Company's Electronic-Commerce Products Increases
----------------------------------------------------------------------------
Risks of Loss on Investment, Failure to Achieve Growth Targets, Difficulty in
-----------------------------------------------------------------------------
Meeting Debt Service Requirements, Diminished Investor Confidence
-----------------------------------------------------------------
A market for the Company's electronic-commerce and other business-to-business
products may not develop. If a significant market for internet-based
electronic-commerce and business-to-business products does not develop, the
Company's business may not grow according to the Company's expectations and
shareholder's prospects for capital gain will be diminished.
Competitive Pricing Pressures May Increase The Risk of Loss of Investment
-------------------------------------------------------------------------
Competitive pricing pressures might bring about a reduction in the average price
of the subsidiaries' 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 subsidiaries must develop and introduce
new products and product enhancements, and it must continue to reduce the
development and distribution costs of its products. There is no assurance that
the Company will succeed in implementing corrective action if any of these
declines occur. Failure by the subsidiaries to implement successful pricing
strategies and/or to develop new products to meet these competitive pressures
and/or to increase unit volumes could result in the Company's failure and the
loss of shareholder's investment.
New Products May Contain Undetected Hardware and Software Errors, Increase Risk
-------------------------------------------------------------------------------
of Loss of Investment
---------------------
New products the subsidiaries develop 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 subsidiaries' 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 subsidiaries' products
O Significant warranty or other liability claims
O Diversion of engineering and other resources from product development
efforts
O Significant customer relations problems
O Loss of credibility in the market
O Inability to sell its products until any errors are corrected
Any one or any combination of these consequences could result in a significant
loss in value of shareholders' investment.
Quarterly Fluctuations May Place Additional Burden on Working Capital, Need For
-------------------------------------------------------------------------------
Additional Investment
---------------------
Management believes that OnCourse's sales will fluctuate based on the
manufacturing communities purchasing trends. The Company's quarterly revenues
and operating results have varied significantly in the past and are likely to
vary significantly in the future. For example using an average of the last five
years sales activity, Micro Estimating's sales on a quarterly basis has ranged
from 20% of annual sales to as high as 30% of annual sales. TekSoft's average
quarterly sales for the same five-year period have fluctuated from 23% of annual
sales to 26% of annual sales. A typical sales pattern will start the year with
new budget spending through the first four months. Then there will be a three-
month slowdown during the summer months, which reflects reduced production and
plant shutdowns. This is then followed by an increase in sales volume through
the end of the year as companies complete their fiscal years, typically spending
remaining budgetary monies and in some cases, based on taxation issues, purchase
smaller capital expenditures to reduce tax liabilities. Other factors that may
affect quarterly results include the following:
o 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
Page 10
o The timing of the announcement and introduction of new products by the
subsidiaries or its competitors
o The mix of products sold and the mix of distribution channels through
which products are sold
o Deferrals of customer orders in anticipation of new products, services
or product enhancement introduced by the Company or its competitors
o Technological developments affecting the electronic-commerce, business-
to-business, and manufacturing software markets
Any failure by the Company to obtain sufficient lines of credit to support these
quarterly fluctuations, if any, could result in a decline in profitability and a
loss of shareholder value.
Management of Future Acquisitions and Growth Will Require Additional Investment,
--------------------------------------------------------------------------------
May Exceed Company's Ability to Manage This Growth
--------------------------------------------------
The Company has embarked upon an ambitious growth plan including the acquisition
of one or more businesses and the accumulation of capital to finance existing
and acquired businesses. It will be necessary for the subsidiaries to attract,
hire and maintain new employees at many levels, including senior management in
order to achieve and support growth. The Company expects to include the public
market for its securities as a basis for the development of key employee
incentive compensation, savings, investment and retirement plans. There can be
no assurance that the Company will be successful in any of these efforts, the
failure of which could result in slower growth, a decline in profitability and a
loss of shareholder value. See "MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S
COMMON EQUITY AND RELATED SHAREHOLDER MATTERS."
Loss of Key Personnel or Inability to Hire Additional Qualified Personnel Might
-------------------------------------------------------------------------------
Result in Failure of the Company to Implement its Plans
-------------------------------------------------------
Loss of the services of key management employees or inability to attract and
retain qualified personnel or delays in hiring required personnel, particularly
programmers and sales personnel, could delay the development and introduction
of, and negatively impact the subsidiaries' 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 subsidiaries'
main operations are located, and in other areas where it operates. There is a
risk that it will be unsuccessful in attracting and retaining the personnel it
needs for its business. Failure to attract and retain such personnel could
result in a decline in the Company's revenues and profits and a loss of
investment by shareholders.
Reliance on Contract Programmers For Development of Subsidiaries' Software
--------------------------------------------------------------------------
Products
--------
The subsidiaries use domestic and foreign contract programmers to program its
software products. Competition for these resources may cause a shortage of
contract programmers or increase the cost of these services to the point where
the Company's profitability declines. This decline in profitability could slow
product development efforts which in turn could prevent the subsidiaries from
being competitive in its markets.
Reliance on Distribution Channel Increases Exposure From Competitors Strengths,
-------------------------------------------------------------------------------
Company's Financial Constraints
-------------------------------
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 subsidiaries.
Independent choices by distributors concerning which products receive their
principal attention, the development of new or enhanced products by competitors,
the subsidiaries' relative ability to compete effectively with others in time-
to-market comparisons and a large number of factors under the control of
competitors and independent distributors may adversely effect the Company's
future operating results. Failure to attract and retain good distributors
and/or to implement more direct marketing efforts could result in a decline in
the Company's revenues and profits and a loss of investment by shareholders.
Asset Encumbrances, Operating Losses, Contingent Stock Issuances Might Increase
-------------------------------------------------------------------------------
Shareholder Dilution While Values Could Decline
-----------------------------------------------
Substantially all of the Company's assets are pledged to secure bank
indebtedness subject to compliance with certain financial ratio tests. The
Company's earned surplus deficit and continuing operating losses might reduce
the availability of such credit facilities in the future under those ratio
tests. At the same time, revenue and net income increases, if any, will
obligate the Company to issue additional shares under acquisition agreements.
Taken as a whole, these factors increase the risk of dilution in shareholder
value and impose a risk of complete loss of shareholder value unless those
trends are reversed or offset by the infusion of new capital.
Company's Bank Indebtedness Has Floating Interest Rates
-------------------------------------------------------
Page 11
The majority of the Company's existing bank indebtedness has interest rate
pricing that fluctuates with changes in the bank's prime rate. Significant
increases in the bank's prime interest rate could reduce the Company's operating
profits. A reduction in profitability will make it more difficult to implement
the Company's growth plans and to develop the products necessary to remain
competitive.
Year 2000 Compliance
--------------------
During 1999 the Company had analyzed the Year 2000 readiness issues related to
its business systems. All systems critical to managing the business were Year
2000 compliant. As of the date of this Registration Statement, the Company has
not experienced any problems with Year 2000 Compliance.
FORWARD-LOOKING STATEMENTS
--------------------------
This Registration Statement of OnCourse Technologies, Inc. includes forward-
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934 (the "1934 Act"). These statements are based on management's
beliefs and assumptions, and on information currently available to management.
Forward-looking statements include statements in which words such as "expect,"
"anticipate," "intend," "plan," "believe," "estimate," "consider," or similar
expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Company's future results and
stockholder values may differ materially from those expressed in these forward-
looking statements. Many of the factors that will determine these results and
values are beyond the Company's ability to control or predict. For these
statements, the Company claims the protection of the safe harbor for forward-
looking statements contained in Section 21E of the 1934 Act1. This protection
does not apply to statements made in an initial public offering. The Company
will comply with its reporting requirements after this registration statement
becomes effective.
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, 2000 and 1999.
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 nine months ended September 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
Page 12
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, through its Micro Estimating
subsidiary, 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 subsidiaries have 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 nine months ended September 30, 2000, the Company invested
over 37% of net sales or $1,412,000 of net sales in capitalized software and
internal and purchased 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 nine months ended September 30, 1999. The
percentage increase can be largely attributed to the $1,322,000 investment level
in internal and purchased research and development and capitalized software by
TekSoft since it was acquired on January 31, 2000.
The Company acquired both developed and in-process technologies as part of the
TeckSoft acquisition on January 31, 2000. An appraisal was performed on the
TekSoft computer-aided-design and computer-aided-manufacturing software product
lines: ProCAM 2000, CAMWorks 99 and CAMWorks 2000. The developed technology
was valued at $4,300,000. This was comprised of $3,150,000 for the current
completed ProCAM 2000 software and $1,150,000 for the CAMWorks 1999 software.
An estimated useful life of five years was determined to be reasonable for the
TekSoft's developed technologies.
Generally, in-process research and development is distinguished from developed
technology based upon whether "technological feasibility" has been achieved.
The technological feasibility of a product is established when the enterprise
has completed all planning, designing, testing, and sampling activities that are
necessary to establish that the product can be produced to meet its design
specifications including functions, applications, and technical performance
requirements. The in-process technology was determined to be $270,000 for
the CAMWorks software. For approximately five months prior to the valuation
date, the engineering staff had begun the work on the release version CAMWorks
2000. At the date of acquisition, the release had not yet reached the beta
stage.
At the date of acquisition, TekSoft planned the release of a new version of the
CAMWorks software for May of 2000. Very little of the code base, comprising the
existing basic infrastructure, would be rewritten for this release or for the
next several releases. The next release is scheduled for early 2001. The 2001
release will be added to the then existing core code and, based on the
historical pattern, will add an estimated 20% in features and functionality to
the base. The CAMWorks 2000 project will include 90 or more enhancements.
The significant acquisition and product development activity during the nine
months ended September 30, 2000 and the year ended December 31, 1999 helps to
explain the change in the results of operations when comparing the nine months
ended September 30, 2000 and 1999 and the years ended December 31, 1999 and
1998.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the nine months ended September 30, 2000, the Company continued to focus
on growth. The two acquisitions made on October 1, 1999 (Cimtronics) and
January 31, 2000 (TekSoft) helped increase net sales by $2,016,000 to $3,737,000
for the nine months ended September 30, 2000 from $1,721,000 for the same period
in 1999. The Company's deferred revenue of $1,689,000 as of September 30, 2000
reflects an increase of $733,000 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 $1,250,000 for the nine months ended September 30, 2000
as compared to the $362,000 for the nine months ended September 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 $1,841,000 for the nine months ended September 30,
2000 as compared to the $777,000 for the nine months ended September 30, 1999.
The increase is largely related to the additional selling expenses for the
Cimtronics and TekSoft businesses acquired as well as selling expenses due to an
increase in sales of the Micro Estimating and CAM subsidiaries.
Page 13
Research and development expense was $219,000 and $13,000 for the nine months
ended September 30, 2000 and 1999, respectively. The increase is attributed to
the research and development activities of TekSoft.
The Company acquired $270,000 of in-process research and development as part of
the TekSoft acquisition. This non-recurring amount was written off immediately
in accordance with APB No. 16, "Accounting for Business Combinations."
General and administrative expense including goodwill and other intangible
amortization increased to $2,256,000 for the nine months ended September 30,
2000 compared to the $624,000 for the nine months ended September 30, 1999. The
largest contributing factor for this increase was the $687,000 of goodwill
amortization for the nine months ended September 30, 2000 compared to the $3,000
for 1999. The increase in goodwill is related to the Cimtronics and TekSoft
acquisitions. Another contributing factor towards the increase relates to
$103,000 of amortization expense incurred for the nine months ended September
30, 2000 for the amortization of the Assembled Work Force, Trade Names and
Distribution Network intangible assets resulting from the TekSoft acquisition.
There was $0 incurred for the nine months ended September 30, 1999. The
remaining increase can be attributed to the expenses of the Cimtronics and
TekSoft businesses since acquisition.
Operating expenses, excluding goodwill and other intangible asset amortization,
were $3,796,000 for the nine months ended September 30, 2000 as compared to
$1,411,000 for the nine months ended September 30, 1999. Total operating
expenses including goodwill and other intangible asset amortization totaled
$4,586,000 for the nine months ended September 30, 2000 compared to $1,414,000
in 1999. This resulted in a pre-tax loss of $2,165,000 for the nine months
ended September 30, 2000 as compared to the $77,000 loss in 1999.
Net loss after tax benefits were $1,760,000 and $52,000 for the nine months
ended September 30, 2000 and 1999, respectively.
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. Micro Estimating'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 Micro Estimating'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 Micro Estimating'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.
Page 14
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 September 30, 2000 was approximately $120,000
as compared to $26,000 as of September 30, 1999. During the nine months ended
September 30, 2000, net cash provided by operating activities was $665,000
versus $51,000 for the nine months ended September 30, 1999.
The Company's working capital as of September 30, 2000 was a negative $1,454,000
as compared to the negative working capital of $393,000 as of December 31, 1999.
The increase in the negative working capital as of September 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 $1,025,000 in
capitalized software and fixed assets.
Subsequent to September 30, 2000, the Company consolidated its bank debt by
replacing the Micro Estimating and TekSoft 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 September 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 new debt facility significantly improves the working capital position of the
Company. While the Company will still have negative working capital given the
$1,689,000 of deferred revenues as of September 30, 2000, the new debt facility
replaces the short-term lines of credit totaling $425,000 as of September 30,
2000. It also replaces the $300,000 September 30, 2000 balance of a short-term
bank note that was due September 30, 2000, the $140,000 September 30, 2000
balance of a long-term note payable that is due July 21, 2001, and the $40,000
equipment term note that is due August 4, 2002. Management believes that the
new debt facility will support its working capital needs throughout 2001.
In addition to the above mentioned lines of credit and term debt as of September
30, 2000, the Company has several notes payable due to current and former
shareholders and employees of the Company and its subsidiaries totaling $172,000
with a current portion of $42,000 as of September 30, 2000. These notes have
interest rates that range 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.
Shareholder's Equity increased to $10,340,000 as of September 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, $265,000 in
additional proceeds from the sale of common stock and $601,000 of common stock
issued for services. Offsetting these increases for the nine months ending
September 30, 2000 was the $1,760,000 loss realized for the nine months ended
September 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 on September 12, 2000. Generally accepted accounting
principles required that the warrants be classified as equity and accreted to
the estimated redemption value based on the terms of the warrants. At the time
of original issuance the warrants were not assigned an initial value or any
accretion as their estimated fair market value approximated zero. 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 $923,000 in capitalized software for the nine months ended
September 30, 2000. This compares to $114,000 and $112,000 for the years ended
December 31, 1999 and 1998, respectively. The significant investment during the
nine months ended September 30, 2000 can be mostly attributed to feature
enhancements to TekSoft's computer-aided-manufacturing software. The Company
also made expenditures for plant and equipment and other assets during the nine
months ended September 30, 2000 of $102,000 and $111,000, 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 TekSoft's CAM software products.
Page 15
Management believes that cash on hand together with funds available under the
existing and proposed lines of credit and projected cash generated from
operations will be sufficient to satisfy its short term 2000 and 2001 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. Any failure by the Company to develop new products
and enhancements in a timely manner will have an adverse affect on the results
of the Company's operations and could result in the Company's failure and the
loss of Shareholders' investment.
Item 3. DESCRIPTION OF PROPERTY
All of the operations of the Company and its subsidiaries are conducted from
office space leased from non-related party landlords except as noted for
TekSoft. TekSoft leases office space with a related party that is renewable in
five-year increments for a period of twenty-five years. 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 October 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) 1,122 1/31/2003 $1,311
1631 East 79th Street
Suite 134
Bloomington, MN 55425
CAM Solutions, Inc. (2) 413 7/16/2001 $548
2121 W. Army Trail Road
Suite 102
Addison, IL 60101
Cimtronics, Inc. 1,550 8/31/2004 $2,196
7434 East Stetson Drive
Suite C-165
Scottsdale, AZ 85251
TekSoft, Inc. 8,800 7/14/2003 $20,570
16121 North 78th Street
Scottsdale, AZ 85260
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of September 30, 2000, the authorized capital stock of the Company consists
of fifty million (50,000,000) shares of common stock, par value one tenth of a
cent ($.001) per share, of which seventeen million two hundred two thousand
three hundred ninety one (17,202,391) 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 September 30, 2000.
During 1999 and the nine months ended September 30, 2000, the Company offered
and issued on various dates one hundred sixty four thousand nine hundred thirty
nine (164,939) 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
Page 16
329,878 combined Class A and Class B common stock purchase warrants are
outstanding as of September 30, 2000. See "RECENT SALES OF UNREGISTERED
SECURITIES".
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. Four hundred thousand (400,000) shares have been earned
during the nine months ended September 30, 2000. The acquisition agreement that
the Company has with each of its subsidiaries, TekSoft, Cimtronics, CAM and
Micro Estimating, contains a change in control provision that causes the Company
to issue additional shares of common stock to the former subsidiary shareholders
should a change in control occur in the Company or that subsidiary. See "RECENT
SALES OF UNREGISTERED SECURITIES".
The following table sets forth, as of September 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 September 30, 2000.
Amount and
Nature of
Name of Beneficial Beneficial Percent of
Owner and Address Relationship Ownership Class
----------------- ------------ --------- -----
Bernard A. Woods, III (1) Director, Chairman, Chief Executive Officer, 7,371,823 42.85%
Secretary and Treasurer of OnCourse and Micro Direct
Estimating
Charles W. Beyer (1) Director and President of OnCourse and Micro 3,307,350 19.23%
Estimating Direct
Gary L. Fulton (2) Director and President of TekSoft 2,295,991 13.35%
Direct
Scott R. Fulton (2) Vice President of TekSoft 1,709,086 9.94%
Direct
Craig M. Hoffman (1) Vice President-Development of Micro Estimating 353,328 2.05%
Direct
Michael Zaworski (3) President of Cimtronics 153,846 .89%
Direct
Kevin L. Bork (4) Director, and President, Secretary and Treasurer 150,000 .87%
of CAM Solutions Direct
William C. Brown (1) Chief Financial Officer of OnCourse and Micro - 0.00%
Estimating Direct
Sky Carver (5) Director of OnCourse and consultant to TekSoft 449,882 2.62%
Total Presented Above Officers and Directors as a Group (9 persons) 15,791,306 91.80%
Direct
Total Shares Outstanding 17,202,391 100.00%
Direct
The address for each individual set forth above is noted below:
(1) OnCourse Technologies, Inc. and Micro Estimating Systems, Inc., 3106
S. 166th Street, New Berlin, WI 53151.
(2) TekSoft, Inc., 16121 North 78th Street, Scottsdale, AZ 85260
(3) Cimtronics, Inc., 7434 E. Stetson Dr., Suite C-165, Scottsdale, AZ
85251
(4) Cam Solutions, Inc., 1621 E. 79th Street, Suite 134, Bloomington, MN
55425
(5) 220 Daisy Lane, Soldotna, AK 99669
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:
Page 17
Director Term
Name Position(s) Held with the Company Age Since Expires
---- ---------------------------------- --- ----- -------
Bernard A. Woods, III Chairman, Director, Chief Executive Officer and
Secretary/Treasurer of OnCourse and Micro Estimating 45 1999 2000
Charles W. Beyer Director and President of OnCourse and Micro Estimating 48 1999 2000
Kevin L. Bork Director of OnCourse, and President of CAM Solutions 41 1999 2000
Craig M. Hoffman Vice President of Micro Estimating 33 - -
Michael Zaworski President of Cimtronics 58 - -
Gary L. Fulton Director of OnCourse, and President of TekSoft 49 2000 2000
Scott R. Fulton Vice President of TekSoft 43 - -
Sky Carver Director of OnCourse, and Consultant to TekSoft 44 2000 2000
William C. Brown Chief Financial Officer of OnCourse and Micro Estimating 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 Estimating: In 1988 he purchased Micro
Estimating from its founder. From 1981 to 1994 he was Owner and
officer of a precision machine shop located in Pennsylvania.
Charles W. Beyer
----------------
President of OnCourse and Micro Estimating: Engaged as General Sales
Manager in September 1989; promoted to V.P., General Manager 1990,
promoted to President 1997. From 1981 - 1989 employed as sales and
service manager for midsize manufacturing firms.
Gary L. Fulton
--------------
President of TekSoft, Inc.: Founded TekSoft, Inc. in 1982. Prior to
founding TekSoft, he was system manager of a large southwestern
manufacturer.
Scott R. Fulton
---------------
Vice President of TekSoft, Inc.: Co-founder of TekSoft in 1982.
Currently a senior programmer, systems analyst and product strategist.
Sky Carver
----------
Consultant to TekSoft, Private Investor, and Director of OnCourse:
Prior experience includes President of Burton Carver and Company,
Inc., a transportation company (1982 to 1985) with 200 employees and
$7.5 million in sales. He owned and was President of Peninsula
Sanitation Co., Inc. (1985-1998), a waste management company. He is
currently the owner and President of Spine Therapy Center (started in
January 1996), which specializes in treatment of lower back pain.
Kevin L. Bork
-------------
President of Cam Solutions: Self-employed. Founded Cam Solutions as
a start-up in 1989 to $600,000 in sales.
Craig M. Hoffmann
-----------------
VP - Product Development of Micro Estimating: Employee of Micro
Estimating since 1986.
Michael Zaworski
----------------
President of Cimtronics: Self-employed. Founded Cimtronics as a
start-up in 1993 to $900,000 in sales.
Page 18
William C. Brown,
----------------
CPA, Chief Financial Officer of OnCourse and Micro Estimating since
February 2000: Over the last five years, he was controller of Howard
Johnson's Enterprises, Inc. (1990 to 1997), a $32 million formulator
of lawn and garden and ice melter products distributed throughout the
U.S., and most recently, the Chief Financial Officer of Herker
Industries, Inc. (1997 to 2000), a $25 million precision metal turning
and assembly company. Manages all financial, treasury, risk and
benefits administration for the Company including the subsidiaries'
financial systems and activities.
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.
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
Annual Other Annual Employment
Name and Principal Position Year Salary Compensation Contracts (2)
--------------------------- ---- ------ ------------ -----------------
Bernard W. Woods, III 2000 $55,640 (1) No
Director, Chairman, CEO and Secretary Treasurer 1999 56,040 (1)
of OnCourse and Micro Estimating 1998 20,000 (1)
Charles W. Beyer 2000 $100,215 (1) No
Director and President of OnCourse and Micro 1999 100,551 (1)
Estimating 1998 91,940 (1)
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
(1) In addition to their salaries from Micro Estimating Systems, Inc.,
Bernard A. Woods, III and Charles W. Beyer each have an approximate
$7,000 in annual automobile allowances. Neither the Company nor its
subsidiaries has any pension, profit sharing or bonus plan.
(2) 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 Estimating, 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%)
Page 19
or more. Messrs. Woods III and Beyer combined have earned 400,000 shares for
the nine months ended September 30, 2000 and 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 one of its subsidiaries had an outstanding note receivable with
an executive officer with a balance of $44,220, $41,738 and $38,647 as of
September 30, 2000, December 31, 1999 and December 31, 1998, respectively.
The Company and its subsidiaries had outstanding notes payables to employees and
executive officers with a total balance of $171,900, $10,000 and $0 as of
September 30, 2000, December 31, 1999 and December 31, 1998, respectively.
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 October 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
net rent paid in the years ended December 31, 1999 and 1998 was $135,049 and
$122,372, respectively.
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.
There are no other related party transactions with the Company or its
subsidiaries.
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 17,202,391 shares are outstanding as of September 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 September 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 only by the Company at $.05
per Warrant upon thirty (30) days written notice.
As of September 30, 2000, the Company has 164,939 outstanding Class A Redeemable
Common Stock Purchase Warrants and 164,939 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 nine months ended September 30, 2000.
The exercise price is subject to adjustment upon the occurrence of certain
events. The
Page 20
Class A and Class B Warrants are subject to redemption only 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
Page 21
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 $6.00 $4.50
Second Quarter 6.00 2.25
Third Quarter 4.00 0.25
Year Ended December 31, 1999
July 2, 1999 (First Price Available) $5.50 $5.50
Third Quarter 6.00 0.50
Fourth Quarter 6.00 0.55
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 September 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 Staff
Legal Bulletin No. 4 dated September 16, 1997 and No-Action letters
Page 22
promulgated by the Securities and Exchange Commission ("SEC") relating to a
"spin-off" transaction. The Company has not claimed an exemption (other than
compliance with Staff Legal Bulletin No. 4) as it does not consider the
transaction to have been a sale. On September 12, 2000, the Warrants, which
were to expire September 30, 2000, were extended until June 30, 2001. As of
September 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 Estimating. The former Micro Estimating
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 Estimating, Frank G. Wright,
Bernard A. Woods, III and Charles W. Beyer" for details of this agreement.
These shares were issued without registration under the 1933 Act pursuant to the
exemption provided by Section 4(2) of that Act exempting transactions not
involving a public offering. These sales were limited to a few persons who
owned all the stock of the acquired companies. No brokers or dealers were
involved.
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. These shares were issued without registration under the 1933 Act
pursuant to the exemption provided by Section 4(2) of that Act exempting
transactions not involving a public offering. These sales were limited to a few
persons who owned all the stock of the acquired companies. No brokers or
dealers were involved.
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. These shares were issued without registration under the 1933 Act
pursuant to the exemption provided by Section 4(2) of that Act exempting
transactions not involving a public offering. These sales were limited to a few
persons who owned all the stock of the acquired companies. No brokers or
dealers were involved.
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(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. These shares were issued
without registration under the 1933 Act pursuant to the exemption provided by
Section 4(2) of that Act exempting transactions not involving a public offering.
These sales were limited to a few persons who owned all the stock of the
acquired companies. No brokers or dealers were involved.
During 1999 and through September 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 165,000 units were issued and sold in a private placement to
selected individuals deemed financially capable of making the investment. The
shares units 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 an unrelated
professional services firm. The Company issued 300,000 shares of common stock
at a value of $2.00 per share for financial public relations and acquisition
analysis services.
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.
In general, under Rule 144, a person (or persons) whose shares are aggregated
who has beneficially owned his or her restricted shares for at least one year,
including persons who may be deemed "affiliates" of the Company, as that term is
defined under the 1933 Act, would be entitled to sell within any three month
period a number of shares that does not exceed the greater of 1% of the then
outstanding shares of the Company's Common Stock or the average weekly trading
volume in the over the counter market during the four calendar weeks preceding
such sale. The sales also would be subject to the requirement that there be
current information publicly available and that the issuer has filed all
required reports under the 1934 Act. As a reporting
Page 23
company when this registration statement becomes effective, the Company will
satisfy this requirement. Equivalent information may be available through
other sources (annual reports and press releases) prior to the time the
Company's securities are registered. The sales must also be broker sales when
the broker simply executes a sale, does not solicit offers to purchase and
receives no more than the normal commission. In addition, a person who is
deemed not to have been an affiliate of the Company at any time during the 90
days preceding a sale by such person, and who has owned his or her restricted
shares for at least two years, would be entitled to sell such shares under
Rule 144 at any time without regard to the volume limitations and availability
of public information.
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.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the small business
issuer (the Company) pursuant to the foregoing provisions, or otherwise, the
small business issuer (the Company) has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the 1933 Act
and is, therefore, unenforceable.
Page 24
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-23
-------------------
Report of Independent Public Accountants F-24
Balance Sheet F-25
Statements of Operations F-27
Statements of Stockholder's Investment F-28
Statements of Cash Flows F-29
Notes to Financial Statements F-30
Cimtronics, Inc. F-32
----------------
Report of Independent Public Accountants F-33
Balance Sheet F-34
Statements of Operations F-36
Statements of Stockholder's Investment F-37
Statements of Cash Flows F-38
Notes to Financial Statements F-39
TekSoft, Inc. F-41
-------------
Report of Independent Public Accountants F-42
Balance Sheet F-43
Statements of Operations F-45
Statements of Stockholder's Investment F-46
Statements of Cash Flows F-47
Notes to Financial Statements F-48
Page 25
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999 AND 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
OnCourse Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of OnCourse
Technologies, Inc. (a Nevada Corporation) and subsidiaries as of December 31,
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-2
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of September 30, 2000 (Unaudited), December 31, 1999 and 1998
December 31,
September 30, ---------------------------
Assets 2000 1999 1998
------ -------- -------- --------
(Unaudited)
Current Assets:
Cash $ 120,205 $ 91,684 $ 20,338
Accounts Receivable, Less Allowance for
Doubtful Accounts of $17,100, $11,600 and
$7,400, Respectively 1,188,871 412,260 381,638
Prepaids and Other Assets 459,502 56,307 2,339
Deferred Income Tax Asset 465,556 205,193 78,432
----------- ---------- --------
Total Current Assets 2,234,134 765,444 482,747
Note Receivable from Shareholder 44,220 41,738 38,647
Capitalized Software, Less Accumulated
Amortization of $1,209,645, $501,166 and
$342,165, Respectively 4,741,208 226,752 271,768
Property and Equipment, at Cost:
Computer Equipment and Purchased Software 525,354 257,515 198,554
Furniture, Fixtures and Vehicles 164,673 162,657 87,758
----------- ---------- --------
Total Property and Equipment 690,027 420,172 286,312
Less- Accumulated Depreciation (328,947) (226,085) (181,844)
----------- ---------- --------
Net Property and Equipment 361,080 194,087 104,468
Goodwill, Less Accumulated Amortization of
$713,003, $25,651 and $0, Respectively 6,641,502 597,263 --
Assembled Workforce, Less Accumulated
Amortization of $20,952 in 2000 199,048 -- --
Trade Names, Less Accumulated Amortization
of $24,444 in 2000 525,556 -- --
Distribution Network, Less Accumulated
Amortization of $57,143 in 2000 542,857 -- --
Other Assets 171,270 8,961 7,284
----------- ---------- --------
Total Assets $15,460,875 $1,834,245 $904,914
----------- ---------- --------
----------- ---------- --------
The accompanying consolidated notes to financial statements are an integral part
of these consolidated balance sheets.
F-3
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of September 30, 2000 (Unaudited), December 31, 1999 and 1998
December 31,
September 30, -------------------------
Liabilities and Shareholders' Equity (Deficit) 2000 1999 1998
---------------------------------------------- ------------- -------- --------
(Unaudited)
Current Liabilities:
Lines of Credit $425,000 $183,425 $245,886
Current Portion of Long-term Debt 459,803 17,200 -
Current Portion of Capital Leases 13,427 7,100 -
Accounts Payable 700,297 331,047 245,374
Accrued Income Taxes 97,359 22,699 28,483
Accrued Commissions 92,485 61,618 63,612
Accrued Wages and Other Liabilities 168,880 63,116 47,003
Notes Payable to Shareholders and Employees 42,117 10,000 -
Deferred Revenue 1,688,872 461,911 192,173
----------- ---------- --------
Total Current Liabilities 3,688,240 1,158,116 822,531
Notes Payable to Shareholders and Employees,
Less Current Portion 129,765 -- --
Long-term Debt, Less Current Portion 58,973 172,912 --
Capital Lease Obligations, Less Current Portion 8,238 -- --
Deferred Income Tax Liability 1,235,981 26,796 127,303
Shareholders' Equity (Deficit):
Common Stock, $0.001 Par Value, 50,000,000 Shares
Authorized, and 17,202,391, 11,850,156 and 10,306,000
Shares Issued and Outstanding, Respectively 17,202 11,850 10,306
Additional Paid-In Capital 13,714,792 665,919 26,349
Warrants 707,030 1,864,990 --
Retained Deficit (4,099,346) (2,066,338) (81,575)
----------- ---------- --------
Total Shareholders' Equity (Deficit) 10,339,678 476,421 (44,920)
----------- ---------- --------
Total Liabilities and Shareholders'
Equity (Deficit) $15,460,875 $1,834,245 $904,914
----------- ---------- --------
----------- ---------- --------
The accompanying consolidated notes to financial statements are an integral part
of these consolidated balance sheets.
F-4
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) and Years
Ended December 31, 1999 and 1998
Nine Months Ended Years Ended
September 30, December 31,
-------------------------- --------------------------
2000 1999 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Net Sales $3,736,544 $1,720,529 $2,482,475 $1,851,151
Cost of Sales 1,250,219 362,230 635,859 418,509
----------- ---------- ---------- ----------
Gross Profit 2,486,324 1,358,299 1,846,616 1,432,642
Selling Expenses 1,840,778 777,392 1,109,782 735,006
Research & Development 219,153 13,000 17,100 21,000
Purchased In-Process Research & Development 270,000 - - -
Goodwill and Other Intangibles Amortization 789,891 3,404 25,651 -
General and Administrative Expenses 1,466,548 620,267 928,330 668,771
---------- ---------- ---------- ----------
Operating (Loss) Income (2,100,046) (55,764) (234,247) 7,865
Interest Expense 72,143 21,056 30,748 17,470
Other Income, Net (6,707) 2 -- --
---------- ---------- ---------- ----------
Loss Before Income Taxes (2,165,482) (76,822) (264,995) (9,605)
Income Tax Benefit (Provision) 405,883 24,968 94,632 (68,983)
---------- ---------- ---------- ----------
Net (Loss) $(1,759,598) $(51,854) $(170,363) $(78,588)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
Basic and Diluted Loss Per Share $(0.11) $(0.01) $(0.01) $(0.01)
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
The accompanying consolidated notes to financial statements are an integral part
of these consolidated statements.
F-5
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
For the Nine Months Ended September 30, 2000 (Unaudited) and Years Ended
December 31, 1999 and 1998
Total
Common Stock Additional Retained Shareholders'
------------------------ Paid-in (Deficit) (Deficit)
Shares Amount Capital Warrants Earnings Equity
---------- ---------- ---------- ---------- ---------- ------------
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
Upon Expiration of 800,000 800 (800) - - -
Right-of-Return
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 451,234 451 865,847 - 2 866,300
Issuance of Warrants - - (213,942) 213,942 - -
Exercise of Warrants 941 1 4,595 (3,183) (1) 1,412
Warrants Issued as Dividends - - 1,642,130 (1,368,719) (273,411) -
Contingent Shares Earned 400,000 400 (400) - - -
Net Loss - - - - (1,759,598) (1,759,598)
---------- ------- ----------- ---------- ----------- -----------
Balance, September 30, 2000 17,202,391 $17,202 $13,714,792 $707,030 ($4,099,346) $10,339,678
(Unaudited) ---------- ------- ----------- ---------- ----------- -----------
---------- ------- ----------- ---------- ----------- -----------
The accompanying consolidated notes to financial statements are an integral part
of these consolidated statements.
F-6
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) and Years
Ended December 31, 1999 and 1998
Nine Months Ended Years Ended
September 30, December 31,
------------------------- --------------------------
2000 1999 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
Cash Flows from Operating Activities:
Net Loss $(1,759,598) $(51,854) $(170,363) $(78,588)
Adjustments to Reconcile Net Loss to Net
Cash Provided by Operating Activities-
Depreciation and Amortization 1,601,232 134,866 233,314 156,001
In-Process Research and Development 270,000 - - -
Loss on Disposal of Property - - - 1,077
And Equipment
Deferred Income Taxes, Net 514,049 (1,778) (62,349) 38,300
Noncash Compensation Expense 46,605 1,000 - -
Noncash Services Expense 226,120 - - -
Changes in Current Assets
and Liabilities-
Accounts Receivable (157,260) 109,073 190,676 (66,437)
Prepaids and Other Current Assets (14,652) (17,299) (42,607) 22,251
Accounts Payable 102,289 (104,290) (23,973) 91,006
Accrued Income Taxes 74,610 (36,903) - -
Accrued Liabilities 57,665 309 (36,337) 2,548
Deferred Revenue 732,455 17,389 38 15,245
----------- -------- --------- --------
Net Cash Provided by 665,417 50,513 88,399 181,403
Operating Activities
Cash Flows from Investing Activities:
Capitalized Software Development Costs (922,935) (76,849) (113,985) (111,838)
Purchase of Property and Equipment (102,410) (35,324) (81,296) (11,880)
Other Assets (111,301) (4,232) (1,677) -
Acquisition of CAM Solutions, Inc. - 13,670 13,670 -
Acquisition of Cimtronics, Inc. - - 27,648 -
Acquisition of TekSoft, Inc. 65,526 - - -
Proceeds from Sale of Property and Equipment - - - 17,500
----------- -------- --------- --------
Net Cash Used in
Investing Activities (1,071,120) (102,735) (155,640) (106,218)
----------- -------- --------- --------
Cash Flows From Financing Activities:
Net (Payments) Proceeds on Line of Credit 241,575 (81,000) (62,461) 105,386
Proceeds from Long Term Debt 54,091 160,162 194,116 -
Payments on Long Term Debt (66,315) (6,375) (4,004) (24,095)
Payments on Capital Lease Obligation (12,633) (957) (3,062) -
Proceeds from Stock Issuance, 218,575 (11,442) 16,931 (140,690)
Net of Offering Costs
Exercise of Warrants 1,413 - 158 -
(Increase) Decrease in Notes Receivable (2,482) (2,318) (3,091) 769
from Shareholder
Distributions to Shareholders - - - (13,072)
----------- -------- --------- --------
Net Cash Provided by (Used in)
Financing Activities 434,224 58,070 138,587 (71,702)
----------- -------- --------- --------
Net Increase in Cash 28,521 5,848 71,346 3,483
Cash, Beginning of Year 91,684 20,338 20,338 16,855
----------- -------- --------- --------
Cash, End of Year $120,205 $26,186 $91,684 $20,338
----------- -------- --------- --------
----------- -------- --------- --------
The accompanying consolidated notes to financial statements are an integral part
of these consolidated statements.
F-7
ONCOURSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Notes to Financial Statements
September 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
Estimating") pursuant to which Micro Estimating was merged into a newly
organized subsidiary, Micro Acquisition Corporation ("Acquisition"), which
immediately thereafter changed its name to Micro Estimating Systems, Inc.
Consideration for the merger included the issuance of 9,866,500 shares to
the former shareholders of Micro Estimating plus the potential for an
additional 2,000,000 shares if certain sales growth contingencies are met
as defined in the agreement. This entire transaction became effective on
July 31, 1998.
Because the acquisition of Micro Estimating 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 Estimating.
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.
Proforma
Year Ended
December 31, 1998
(Unaudited)
-----------------
Net Sales $2,314,264
Net Loss (100,603)
Basic and Diluted Loss Per Share (0.00)
F-8
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.
Proforma Proforma
Year Ended Year Ended
December 31, 1999 December 31, 1998
(Unaudited) (Unaudited)
----------------- -----------------
Net Sales $3,099,480 $2,494,132
Net Loss (138,286) (49,012)
Basic and Diluted Loss Per Share (0.01) (0.00)
TekSoft, Inc.
------------
On January 31, 2000, the Company acquired TekSoft, Inc. ("TekSoft"),
for approximately 4,500,000 shares of common stock. In addition, the
former shareholders of TekSoft may receive up to 1,500,000 in
additional shares over the next five years if sales, as defined,
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 $5,702,000 based on an appraisal. The final allocation
of the purchase price was as follows:
Current Assets $1,034,000
Capitalized Software 4,300,000
Property and Equipment 167,000
Other Assets 51,000
Liabilities Assumed (2,139,000)
Intangible - Assembled Work Force 220,000
Intangible - Trade Names 550,000
Intangible - Distribution Network 600,000
Acquired In-Process Research and Development 270,000
Intangible - Goodwill 5,702,000
-----------
$10,755,000
-----------
-----------
An appraisal was done relative to the assets acquired in the TekSoft
acquisition. The appraisal was performed using a form of the income
approach, commonly referred to as the discounted future earnings
method, to estimate the value of the in-process research and
development.
The classification of complete and incomplete technology is in
compliance with SFAS No. 2 "Accounting for Research and Development
Costs" and SFAS No. 86 "Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed."
F-9
Generally, in-process research and development is distinguished from
developed technology based upon whether "technological feasibility"
has been achieved. The technological feasibility of a product is
established when the enterprise has completed all planning, designing,
testing, and sampling activities that are necessary to establish that
the product can be produced to meet its design specifications
including functions, applications, and technical performance
requirements. The in-process technology was determined to be $270,000
of which all was attributed to the CAMWorks 2000 software. For
approximately five months prior to the valuation date, the engineering
staff had begun the work on the release version CAMWorks 2000. At the
date of acquisition, the release had not yet reached the beta stage.
The appraisal required that significant assumptions be made in order
to determine the value of the above-mentioned assets. The net cash
flows inflows from significant projects were assumed to start in the
first year given the stage of the in-process product technology. The
appraisal used historical pricing, product margins and expense levels
based on the unaudited years ended October 31, 1995 through October
31, 1999. The overall weighted average cost of capital was estimated
to be approximately 20% based on a weighting of 10% debt and 90%
equity capital structure. The cost of equity capital estimated at 21%
was based on using the capital asset pricing model which reflects the
risk-free rate of return plus risk premiums. The cost of debt
estimated at 9.9% was based on the yield of BB-rated corporate debt as
of the valuation date.
The following unaudited pro forma information presents the results of
operations of 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 and other
intangible assets. The pro forma information is not necessarily
indicative of the results of operations that would have occurred had
the purchase been made at the beginning of the periods presented or
the future results of the combined operations had the acquisition of
TekSoft taken place.
Proforma Proforma Proforma
Nine Months Ended Year Ended Year Ended
September 30, 2000 December 31, 1999 December 31, 1998
(Unaudited) (Unaudited) (Unaudited)
------------------ ----------------- -----------------
Net Sales $4,002,019 $5,333,967 $4,685,090
Net Loss (1,519,675) (1,252,792) (1,542,995)
Basic and Diluted Loss Per Share $(0.09) $(0.08) $(0.11)
OnCourse and its subsidiaries, Micro Estimating, CAM Solutions,
Cimtronics and TekSoft are hereafter referred to as the "Company".
Consolidated Proformas for 1999
-------------------------------
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisitions of Cimtronics and
TekSoft had taken place on January 1, 1999. The pro forma information
includes an adjustment for amortization expense as a result of
goodwill and other intangible assets and the write-off of the
purchased in-process research and development as part of the TekSoft
acquisition. The pro forma information is not necessarily indicative
of the results of operations that would have occurred had the purchase
been made at the beginning of the periods presented or the future
results of the combined operations had the acquisitions of Cimtronics
and TekSoft taken place.
F-10
Proforma
Revised
Cimtronics Consolidated
Consolidated TekSoft Nine Months Ended
For Year Ended For Year Ended Proforma Ended Proforma Year Ended
December 31, December 31, Adjustments September 30, Adjustments December 31,
1999 1999 TekSoft 1999 Cimtronics 1999
-------------- -------------- ----------- ------------- ----------- ------------
Net Sales $2,482,475 $3,157,720 $ (306,228) $652,555 $(35,550) $ 5,950,972
Cost of Sales 635,859 1,350,976 (306,228) 262,857 (35,550) 1,907,914
---------- ---------- ----------- -------- -------- -----------
Gross Profit 1,846,616 1,806,744 - 389,698 - 4,043,058
SG&A 2,055,212 1,914,601 - 293,622 - 4,263,435
Amort. Of Goodwill and
Other Intangibles 25,651 - 972,555 - 63,337 1,061,543
Purchased In-process R&D - - 270,000 - - 270,000
---------- ---------- ----------- -------- -------- -----------
Operating (Loss) Income (234,247) (107,857) (1,242,555) 96,076 (63,337) (1,551,920)
Other Income (Expense) (30,748) (63,533) - (662) - (94,943)
---------- ---------- ----------- -------- -------- -----------
(Loss) Income Before Taxes (264,995) (171,390) (1,242,555) 95,414 (63,337) (1,646,863)
Income Tax (Expense) Benefit 94,632 61,516 - - - 156,148
---------- ---------- ----------- -------- -------- -----------
Net (Loss) Income $(170,363) $(109,874) $(1,242,555) $ 95,414 $(63,337) $(1,490,715)
---------- ---------- ----------- -------- -------- -----------
---------- ---------- ----------- -------- -------- -----------
The adjustments to TekSoft and Cimtronics' net sales and cost of sales
represent the intercompany sales and purchases between OnCourse and
TekSoft and Cimtronics during the year ended December 31, 1999. The
adjustment for the TekSoft amortization of goodwill and other
intangibles is comprised of adding twelve months of amortization
expense for the goodwill and other intangible assets resulting from
the TekSoft purchase price allocation (Note 1) and the acquisition
expenses incurred by the Company. The adjustment for the Cimtronics
amortization of goodwill is comprised of adding nine months of
amortization expense for the goodwill resulting from the Cimtronic's
purchase price allocation.
Consolidated Proformas for the Nine Months Ended September 30, 2000
-------------------------------------------------------------------
The following unaudited pro forma information presents the results of
operations of the Company for the nine months ended September 30,
2000, as if the acquisition of TekSoft had taken place on January 1,
1999. The pro forma information includes an adjustment for
amortization expense as a result of goodwill and other intangible
assets and the write-off of the purchased in-process research and
development as part of the TekSoft acquisition. The pro forma
information is not necessarily indicative of the results of operations
that would have occurred had the purchase been made at the beginning
of the periods presented or the future results of the combined
operations had the acquisition of TekSoft taken place.
Proforma
Revised
Consolidated Consolidated
Nine Months Nine Months
Ended TekSoft Proforma Ended
September 30, One Month Ended Adjustments September 30,
2000 January 31, 2000 TekSoft 2000
------------- ---------------- ----------- -------------
Net Sales $ 3,736,544 $280,661 $(15,186) $ 4,002,019
Cost of Sales 1,250,219 106,840 (15,186) 1,341,873
----------- -------- -------- -----------
Gross Profit 2,486,325 173,821 -- 2,660,146
SG&A 3,526,479 120,514 -- 3,646,993
Amort. of Goodwill and
Other Intangibles 789,891 -- 81,046 870,937
Purchased In-process R&D 270,000 -- (270,000) --
----------- -------- -------- -----------
Operating (Loss) Income (2,100,045) 53,307 188,954 (1,857,784)
Other Income (Expense) (65,436) (2,338) -- (67,774)
----------- -------- -------- -----------
(Loss) Income Before Taxes (2,165,481) 50,969 188,954 (1,925,558)
Income Tax Benefit 405,883 -- -- 405,883
----------- -------- -------- -----------
Net (Loss) Income $(1,759,598) $ 50,969 $188,954 $(1,519,675)
----------- -------- -------- -----------
----------- -------- -------- -----------
F-11
The adjustments to net sales and cost of sales represent the
intercompany sales and purchases between OnCourse and TekSoft during
the nine months ended September 30, 2000. The adjustment for the
TekSoft amortization of goodwill and other intangibles line item is
comprised of adding one month of amortization expense for the goodwill
and other intangible assets resulting from the TekSoft purchase price
allocation (Note 1) and the acquisition expenses incurred by the
Company. The reduction of in-process research and development was
made since the above presentation is as if the acquisition was made as
of January 1, 1999 and the $270,000 write-off of the in-process
research and development was already reflected in the presentation for
the nine months ended September 30, 2000.
(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 nine months ended September
30, 2000, sales in North America and Europe were approximately 86% and 8%,
respectively. For the nine months ended September 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 nine months ended September 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 September 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 September 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 $672,000 as of
September 30, 2000 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.
F-12
(d) Software Development Costs-
--------------------------
Software development costs incurred in the research and development of
new software products and enhancements to existing software products
are expensed as incurred until technological feasibility of the
product is established. From the time technological feasibility is
established until the product is released, all software costs are
capitalized. In addition, Capitalized Software as of September 30,
2000 includes software acquired in the acquisition of TekSoft (See
Note 1). Capitalized costs are reported at the lower of unamortized
costs or net realizable value. The costs are amortized over the
greater of the amount computed using (a) the ratio that current gross
revenues for the product bear to the total of current and anticipated
future gross revenues for that product or (b) the straight-line method
over the remaining estimated economic life of the product.
Costs incurred up to technological feasibility are considered research
and development costs. These costs are expensed as incurred.
Research and development costs were approximately $219,000, $13,000,
$17,000 and $21,000 for the nine months ended September 30, 2000 and
1999 and the years ended December 31, 1999 and 1998, respectively.
The $270,000 of acquired in-process research and development resulting
from the TekSoft acquisition was written off as of February 1, 2000.
Computer software development costs capitalized in the six months
ended September 30, 2000 and 1999 and the years ended December 31,
1999 and 1998 were approximately $923,000, $77,000, $114,000 and
$112,000, respectively. Amortization expense for the nine months
ended September 30, 2000 and 1999 and the years ended December 31,
1999 and 1998 of approximately $708,000, $95,000, $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.
Nine Months Ended Years Ended
September 30, December 31,
------------------------- ----------------------
2000 1999 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
Weighted Average Shares
Outstanding-Basic EPS 16,477,200 11,262,199 11,306,104 9,878,796
Effect of Dilutive Shares--
Outstanding Warrants 60,233 268,662 702,678 --
Effect Of Dilutive Shares--Shares
Subject to Right-of-Return -- -- -- 612,603
---------- ---------- ---------- ----------
Weighted Average Shares
Outstanding-Dilutive EPS 16,537,433 11,530,861 12,008,782 10,491,399
F-13
For the nine months ended September 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 Estimating 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 nine months ended September
30, 2000 and 1999 and the years ended December 31, 1999 and 1998 were
approximately $218,000, $109,000, $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 nine months ended September 30, 2000
and 1999 are not necessarily indicative of the results to be expected
for the full year. All information as of September 30, 2000 and for
the nine months ended September 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.
F-14
(5) Goodwill and Intangibles-
------------------------
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 reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Goodwill
associated with the assets reviewed will be included in determining the
recoverability based on the future undiscounted cash flows expected to be
generated from those assets. In the event that impairment exists, goodwill
shall be eliminated before reducing the carrying amount of the impaired
long-lived assets and identifiable intangibles.
Goodwill amortization for the nine months ended September 30, 2000 and 1999
and the years ended December 31, 1999 and 1998 was approximately $687,000,
$3,000, $26,000 and $0, respectively.
The purchase price allocation relating to the assets acquired in the
January 31, 2000 acquisition of TekSoft resulted in several intangible
assets as described in Note 1. The purchase price allocation resulted in
$220,000 for Assembled Workforce, $550,000 for Tradenames and $600,000 for
Distribution Network. The amortization of the Assembled Workforce and
Distribution Network assets are being provided utilizing the straight-line
method over the estimated useful life of seven years. The amortization of
the Tradenames asset is being provided using the straight-line method over
the estimated useful life of 15 years. Total amortization expense relating
to these intangible assets for the nine months ended September 30, 2000 and
1999 and the years ended December 31, 1999 and 1998 was approximately
$103,000, $0, $0 and $0, respectfully.
(6) Lines of Credit-
---------------
The Company has two lines of credit with a bank as of September 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 September 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 $225,000, $183,000 and $200,000 as of
September 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 September 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 $200,000 as of September 30, 2000.
Subsequent to September 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 (Note 8). 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 revolving line of
credit is at prime (9.5% at September 30, 2000). 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 in
1999.
F-15
(7) Notes Payable to Shareholders and Employees-
-------------------------------------------
As of September 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.
As of September 30, 2000, 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% 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 $130,243 as of September 30,
2000. These notes are classified as long-term liabilities with a current
portion of $32,117 as of September 30, 2000.
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
September 30, 2000. This note is classified as a long-term liability due
October 15, 2001.
(8) Debt-
----
Long-term debt as of September 30, 2000 and December 31, 1999 consists of
the following:
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
Note payable to bank, prime (9.5% as September 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 $140,192 $146,296
Note payable to bank, prime (9.5% as of September 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 300,263 --
Note payable to bank, 10.5%, due in monthly installments of
$1,028 including interest, through August 4, 2004, secured by
essentially all assets of two subsidiaries and personally
guaranteed by the subsidiaries' presidents and Company chairman 40,000 --
Auto loan, 8.5% interest, due in monthly installments of $458
including interest, through November 18, 2004, secured by auto 19,612 22,016
Auto loan, 8.9% interest, due in monthly installments of $543
including interest, through January 1, 2004, secured by auto 18,709 21,800
-------- --------
Total Long-term Debt 518,776 190,112
Less- Current Maturities (459,803) (17,200)
-------- --------
$58,973 $172,912
-------- --------
-------- --------
F-16
Subsequent to September 30, 2000 the Company consolidated its bank debt by
replacing the Company's lines of credit (Note 6) and above $140,192,
$300,263 and $40,000 notes payable to banks as of September 30, 2000. 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 interest rate for the term debt is 9.25%. The monthly term
debt payment of $6,500 is based on a seven-year amortization schedule. The
term debt will be secured by all assets of the Company and its
subsidiaries.
Approximate principal payments on long-term debt are as follows:
For The Twelve Months Ended:
-------------------------------------
At September 30, At December 31,
---------------- ---------------
(Unaudited)
2000 $459,800 $17,200
2001 19,500 19,400
2002 21,500 21,300
2003 17,100 23,300
2004 876 18,900
Thereafter -- 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 14) 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 operating lease expenses, net of
sublease payments, was approximately $158,900 and $37,800 for the nine
months ended September 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:
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
Computer Equipment $37,176 $10,162
Less-Accumulated Amortization (10,202) (1,016)
------- -------
Net Capital Lease Assets $26,974 $9,146
------- -------
------- -------
The Company had no assets under capital leases at December 31, 1998.
Approximate minimum annual rental commitments as of September 30, 2000 and
the year ended December 31, 1999 are as follows:
F-17
(Unaudited) Audited
September 30, 2000 December 31, 1999
-------------------- -----------------------
Capital Operating Capital Operating
Leases Leases Leases Leases
-------- --------- ------- ---------
For Period Ending:
2000 $16,100 $59,700 $7,600 $83,300
2001 8,700 340,300 - 86,200
2002 - 339,200 - 82,900
2003 - 153,600 - 29,900
2004 - 18,600 - 19,000
Thereafter - - - -
------- -------- ------ --------
Total Minimum Lease
Payments $24,800 $911,500 7,600 $301,300
-------- -------
-------- -------
Less - Amount Representing
Interest (3,073) (500)
------- -------
Present Value of Minimum
Lease Payments $21,727 $7,100
------- -------
------- -------
Current Portion $13,427 $7,100
------- ------
------- ------
(10) Warrants-
--------
In connection with the issuance of stock during the nine months ended
September 30, 2000, the Company issued 131,734 Class A stock purchase
warrants and 131,734 Class B stock purchase warrants. The warrants were
issued with initial estimated values (based on the Black-Scholes valuation
model) ranging from $1.49 to $5.19 per Class A Warrant and $1.73 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 September 30, 2000, all warrants issued during the nine months ended
September 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 September 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 are redeemable for $.05
per warrant only at the discretion of the Company. The warrants originally
entitled the holder to purchase, on or before December 31, 1999 one share
of Company common stock per warrant at an exercise price of $1.50. On
December 23, 1999, the expiration date for these common stock purchase
warrants was extended to March 31, 2000. On March 27, 2000, the expiration
date was extended a second time to September 30, 2000. On September 12,
2000, the expiration date was extended a third time to June 20, 2001.
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. Under the guidelines of
FASB 123, "Accounting for Stock Based Compensation," a change in the
characteristics of the warrant, such as an extension of the expiration
date, triggers a remeasurement point. Each of the extensions resulted in a
new measurement date and the incremental value of the warrants was
accounted for as a dividend to the shareholders. The incremental value
reflected as a dividend was calculated as the difference between the value
of the new warrants given by the Company, i.e., extended warrants, less the
remaining value of the warrants given up by the Shareholders, i.e., the
cancelled warrants. The value of the warrants at each remeasurement point
was determined using the Black-Scholes pricing model. A dividend was
recorded for approximately $273,000 and $1,814,000 for the nine months
ended September 30, 2000 and the year ended December 31, 1999,
respectively. During the nine months ended September 30, 2000 and the year
ended December 31, 1999, 941 and 105, respectively, of the 400,000 warrants
were exercised.
The table below summarizes the transactions related to the Company's
warrants to purchase common stock:
F-18
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) 263,468 2.25
Warrants Exercised (1998 Warrants) (941) 1.50
------- -----
Balance at September 30, 2000 (Unaudited) 728,832 $1.83
------- -----
------- -----
All warrants are exercisable as of September 30, 2000 and December 31, 1999.
(11) Reverse Stock Split-
-------------------
Effective October 31, 1999, OnCourse exercised a 1-for-2 reverse stock
split by amending the Articles of Incorporation of OnCourse so that each
two (2) authorized common shares with par value of one-tenth of one cent
($.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 nine months ended September 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 nine months ended September 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 Estimating.
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
Estimating may receive up to a total of 2,000,000 additional shares through
2003 if certain targeted net sales increases, as defined, are achieved.
The targeted increase in net sales, as defined, was achieved for the nine
months ended September 30, 2000, and 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 Estimating.
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 $225,000 was amortized during the
nine months ended September 30, 2000. The balance of $375,000 is reflected
as a component of Prepaids and Other Assets on the balance sheet as of
September 30, 2000.
F-19
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-
------------------------------------------------
Nine Months Ended Years Ended
September 30, December 31,
--------------------- -------------------
2000 1999 1999 1998
-------- -------- -------- --------
Approximate Cash Paid for-
Interest $80,200 $17,700 $30,700 $20,600
Income Taxes 4,500 400 13,300 -
Noncash Transactions-
Capital Leases 14,100 10,200 10,200 -
Compensation Expense 46,600 - 1,000 -
Warrants Issued as 273,400 - 1,814,400 -
Dividends
Common Stock Issued for
Services (Note 12) 226,100 - - -
(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 net lease expense was $90,800 for the nine
months ended September 30, 2000.
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 Estimating 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 Estimating.
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 nine months ended September 30, 2000
and 1999, and the years ended December 31, 1999 and 1998 consists of:
F-20
Nine Months Ended Years Ended
September 30, December 31,
-------------------- -------------------
2000 1999 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
Current-
Federal $(757,213) $(26,538) $(71,700 $(3,615)
State (108,173) (4,018) (16,200) (384)
--------- -------- -------- -------
Total Current (865,386) (30,556) (87,900) (3,999)
Deferred Income Taxes 458,578 5,588 (6,732) 72,982
--------- -------- -------- -------
Total Income Tax
(Benefit) Provision $(406,808) $(24,968) $(94,632) $68,983
--------- -------- -------- -------
--------- -------- -------- -------
A reconciliation of the statutory Federal income tax rate to the
consolidated effective income tax rate is as follows:
Nine Months Ended Years ended
September 30, December 31,
----------------------- -----------------
2000 1999 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
Statutory Federal Income
Tax Rate (35)% (35)% (35)% (35)%
State Income Taxes, Net of
Federal Income Tax Benefit (5) (5) (6) (4)
Goodwill Amortization 12 9 4 -
Other 9 7 1 757
----- ----- ----- -----
Effective Income Tax Rate (19)% (24)% (36)% 718%
----- ----- ----- -----
----- ----- ----- -----
The significantly higher 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 September 30, 2000 and December 31, 1999 and 1998 are as
follows:
December 31,
September 30, ------------------
2000 1999 1998
------------- ------ ------
(Unaudited)
Deferred Revenue $437,472 $200,155 $75,524
Other 28,083 5,038 2,908
Current Deferred Income
Tax Asset 465,555 205,193 78,432
---------- -------- --------
Capitalized Software Costs (1,937,741) (98,256) (106,805)
Book Versus Tax Depreciation Methods (32,786) (32,786) (20,498)
Net Operating Loss Carryforwards 842,390 54,477 -
Other (107,843) 49,769 -
---------- -------- --------
Long-Term Deferred Income
Tax Liability (1,235,980) (26,796) (127,303)
---------- -------- --------
Net Deferred Income Tax
Asset (Liability) ($770,425) $178,397 $(48,871)
---------- -------- --------
---------- -------- --------
The Company has generated a net operating loss ("NOL") carryforwards of
approximately $1,160,000 during the nine months ended September 30, 2000.
The Company also acquired net operating losses of approximately $753,000
relating to the acquisition of Teksoft.
F-21
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 $117,000 in 1999. The Company carried back
approximately $72,000 of the NOLs for federal tax purposes. As of December
31, 1999, the Company has remaining NOLs of approximately $45,000 and
$117,000 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. An estimated
income tax receivable of approximately $27,000 is included in other current
assets.
(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 nine
months ended September 30, 2000, none of the employee's contribution to the
Plan was matched by the Company.
F-22
CAM SOLUTIONS, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-23
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-24
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-25
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-26
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-27
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) (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) 25,000 shares authorized, issued and outstanding, no par value.
The accompanying notes to financial statements are an integral part of this
statement.
F-28
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-29
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.
F-30
(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-31
CIMTRONICS, INC.
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-32
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-33
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-34
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-35
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-36
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) (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) 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-37
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-38
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.
F-39
(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-40
TEKSOFT, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-41
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-42
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-43
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 $76,826 $61,188
Lease Obligations
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-44
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-45
TEKSOFT, INC.
Statements of Shareholders' Equity
For the Years Ended December 31, 1999 and 1998
Nonvoting Common
Voting Common Stock Stock Total
------------------- ---------------- Treasury Retained Shareholders'
Shares Amount Shares Amount Stock Earnings Equity
------ ------ ------ ------ -------- -------- -------------
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
----- ------- ----- ------- --------- ---------- ----------
----- ------- ----- ------- --------- ---------- ----------
The accompanying notes to financial statements are an integral part of these
statements.
F-46
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-47
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.
F-48
(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.
F-49
(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.
F-50
(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
-------- --------
$388,028 $345,587
Total Current Deferred Tax Assets -------- --------
-------- --------
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.
F-51
(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.
F-52
PART III
--------
ITEM 1. INDEX TO EXHIBITS
-----------------
Exhibit No. Page Number Description
---------- ----------- -----------
2(a) * Certificate of Articles of Incorporation of
the Company
2(b) * Bylaws of the Company
3 Not applicable
5 Not applicable
6 Not applicable
7 Not applicable
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
8(b) * Agreement and Plan of Reorganization dated
December 30, 1998 by and among the Company,
CAM Solutions and Kevin L. Bork
8(c) * Agreement and Plan of Reorganization dated
September 30, 1999 by and among the Company,
Cimtronics, E. Michael Zaworski and Sherri
G. Zaworski
8(d) * Agreement and Plan of Reorganization dated
January 10, 2000 by and among the Company,
TekSoft, Inc. and Gary F. Fulton.
10 80 Consent of Arthur Andersen LLP
* PREVIOUSLY SUBMITTED
Page 78
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 3rd day of April, 2001.
ONCOURSE TECHNOLOGIES, INC.
By (Signed by Bernard A. Woods, III)
Bernard A. Woods, III
Chief Executive Officer, Treasurer
By (Signed by Charles W. Beyer)
Charles W. Beyer
President
By (Signed by William C. Brown)
William C. Brown
Chief Financial Officer
Page 79