<PAGE>
Registration No. 333-11591
================================================================================
Securities and Exchange Commission
Pre-Effective Amendment No. 2 to
FORM S-1
Registration Statement Under the Securities Act of 1933
Tice Technology, Inc.
(Exact name of registrant as specified in its charter)
Delaware 8711 62-1647888
(State of Incorporation) (Primary Standard (IRS Employer
Industrial Classification Identification
Code Number) Number)
--------------------------------------
6711 Tice Plaza
Knoxville, Tennessee 37918
(423) 925-4501
(Address and telephone number of
Registrant's principal executive offices)
William A. Tice, President
Tice Technology, Inc.
6711 Tice Plaza
Knoxville, Tennessee 37918
(423) 925-4501
(Name, address and telephone number of agent for service)
Copy to: Lynn H. Wangerin, Esq.
Ogden Newell & Welch
1200 One Riverfront Plaza
Louisville, Kentucky 40202
(502) 582-1601
(502) 581-9564 (facsimile)
--------------------------------------
Approximate date of commencement of proposed distribution to public: As
soon as practicable after the registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Calculation of Registration Fee
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Title of each class Amount to be Proposed maximum Proposed maximum Amount of
of securities to be registered offering price aggregate offering registration fee
registered per unit price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares (1) 1,841,407 $ 0.07 $ 128,898 $ 45
Common Shares (2) 54,750 $ 1.00 $ 54,750 $ 19
Common Shares (3) 88,560 $ 3.00 $ 265,680 $ 92
Common Shares (4) 1,000,000 $ 8.00 $8,000,000 $2,759
Common Stock
Purchase Warrants 1,000,000 $ (5) $ (5) $ (5)
Total Fee $2,915
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) These securities include 300,000 shares which were issued to Monogenesis
Corporation in contemplation of distribution at a price of $0.01 per share.
They will be distributed to holders of shares of Monogenesis Corporation as
a dividend at a rate of 125 shares for each share held. The remaining
shares are to be offered for sale at market price from time to time and are
currently held by former shareholders of Tice Engineering and Sales, Inc.,
1,302,937 shares by William A. Tice and 238,470 shares by Joseph Walker &
Sons, Inc. There is no current offering price for these shares. The fee
calculation is based upon the book value of Tice Engineering and Sales,
Inc., the wholly owned subsidiary of Tice Technology, Inc., as of September
30, 1996.
(2) These are the Common Shares which will be issued in the event that
employees holding stock options exercise the options and which are
registered only for resale by the holders. The maximum offering price is
based upon the exercise price of the options.
(3) Certain individuals who have loaned funds to Tice Engineering and Sales,
Inc., the Issuer's wholly owned subsidiary, will convert such debt to
Common Shares of the Issuer at the rate of $3.00 per share as of the
effective date of the registration statement and desire to include such
shares in the registration statement for resale as Selling
Shareholders.
(4) These are the Common Shares which will be issued in the event the Common
Stock Purchase Warrants are exercised. The maximum offering price is based
upon the exercise price of the warrants.
(5) The warrants were issued to Monogenesis Corporation at a price of $0.01
each and will be distributed to holders of shares of Monogenesis
Corporation as a dividend at a rate of 400 warrants for each share held.
The warrants are registered in the same registration statement as the
Common Shares underlying the warrants and, therefore, no separate
registration fee is required pursuant to Rule 457(g).
<PAGE>
Tice Technology, Inc.
Cross Reference Sheet
<TABLE>
<CAPTION>
Page
Item Number - Part I, S-1 Location Number
- ------------------------- -------- ------
<S> <C> <C>
1. Forepart of the Registration Statement and Same 1, 2
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Same 2, *
Pages of Prospectus
3. Summary Information, Risk Factors and Summary; Risk Factors 3, 9
Ratio of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds 17
5. Determination of Offering Price Risk Factors - No Assurance of 14
Trading Market and Arbitrary
Exercise Price
6. Dilution Not applicable
7. Selling Security Holders Risk Factors - Shares Eligible 14, 15, 42
for Future Sale; Plan of
Distribution; Principal and
Selling Shareholders
8. Plan of Distribution Plan of Distribution 15
9. Description of Securities to Be Registered Securities 45
10. Interests of Named Experts and Counsel Not applicable
11. Information With Respect to the Registrant
(a) Description of business Business 19
(b) Description of property Business - Property 28
(c) Legal proceedings Legal Proceedings 40
(d) Market price of and dividends on the Risk Factors - No Dividends and 14, 45, 49
registrant's common stock and related No Assurance of Trading Market;
stockholder matters Securities; Dividends
</TABLE>
*Immediately after financial statements.
<PAGE>
<TABLE>
<CAPTION>
Page
Item Number - Part I, S-1 Location Number
- ------------------------- -------- ------
<S> <C> <C>
(e) Financial statements Financial Statements 53
(f) Selected financial data Summary - Selected Financial Data 6
(g) Supplementary financial information Not applicable
(h) Management's discussion and Management's Discussion and 29
analysis of financial Analysis of Financial Condition
condition and results of and Results of Operations
operations
(i) Changes in and disagreements Not applicable
with accountants on accounting
and financial disclosure
(j) Directors and executive officers Management 40
(k) Executive compensation Management - Executive 41
Compensation
(l) Security ownership of certain Principal and Selling 42
beneficial owners and management Shareholders
(m) Certain relationships and Management - Certain Transactions 41
related transactions
12. Disclosure of Commission Position on Liability and 49
Indemnification for Securities Act Indemnification of
Liabilities Directors and Officers
</TABLE>
<PAGE>
Prospectus
- ----------
Tice Technology, Inc.
6711 Tice Plaza
Knoxville, Tennessee 37918
(423) 925-4501
2,984,717 Common Shares (the "Shares")
(par value, $0.01 per share)
1,000,000 Common Stock Purchase Warrants (the "Warrants")
Tice Technology, Inc. (the "Issuer") is registering 300,000 Shares and
1,000,000 Warrants in an offering of such Shares and Warrants through a
distribution by Monogenesis Corporation ("Monogenesis") to its shareholders.
Monogenesis, a closed-end investment company with approximately 1,200
institutional shareholders, is a statutory underwriter in connection with the
distribution, and Monogenesis will distribute 125 Shares and 400 Warrants for
each share of Monogenesis stock held by its shareholders (the "Distribution").
See "Plan of Distribution." The Issuer will not receive any funds from the
Distribution other than the $13,000 (representing $0.01 per each Share and
Warrant) paid by Monogenesis, but will receive funds if any Warrants are
exercised. Each Warrant entitles the holder to purchase one Common Share at
$8.00 per share for 24 months. There can be no assurance that the price of a
Common Share will equal or exceed the exercise price of the Warrants or that it
will be profitable for a holder to exercise any Warrant. See "Risk Factors -
Arbitrary Exercise Price" and "Securities." The Issuer is registering 1,000,000
Shares which may be issued upon exercise of the Warrants and 54,750 Shares which
may be issued upon exercise of options held by certain employees (as selling
shareholders).
In addition to the Shares underlying the options, 1,629,967 of the Shares
registered will be registered on behalf of certain shareholders described
elsewhere for sale from time to time. See "Principal and Selling Shareholders."
The Issuer will not receive any proceeds from the sale of shares by selling
shareholders.
THE SHARES AND WARRANTS INVOLVE A HIGH DEGREE OF RISK, ARE ILLIQUID AND
SHOULD ONLY BE PURCHASED BY INVESTORS THAT CAN AFFORD TO LOSE THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" BEGINNING AT PAGE 9.
The Risk Factors described in more detail beginning on page 9 include:
. history of operating losses
. lack of working capital
. dependence on patents and new technology
. limited number of customers
. Issuer's only operations is ownership of the stock of Tice
Engineering and Sales, Inc.
. possible future acquisitions in unrelated industries in which Issuer
has no experience
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
A Monogenesis Institutional Distribution
The date of this Prospectus is ________________, 1997.
<PAGE>
(continued from previous page)
The purpose of the Distribution is to establish a public trading market to
facilitate acquisitions and access to equity capital and to provide liquidity
for employee stock incentive programs and existing shareholders. See "Risk
Factors - Acquisitions in Unrelated Industries." There is no current public
trading market for the Issuer's securities and there can be no assurance that a
market will develop after the Distribution. See "Risk Factors - No Assurance of
Trading Market."
Of the Shares to be registered for sale by Selling Shareholders, 1,302,937
Shares are owned by William A. Tice, 238,470 Shares are owned by Joseph Walker &
Sons, Inc., 88,560 Shares are owned by former holders of notes of Tice
Engineering and Sales, Inc. which were converted to Shares and 54,750 Shares are
Shares which may be issued upon exercise of certain outstanding employee options
(collectively, the "Selling Shareholders"). See "Principal and Selling
Shareholders." The Issuer will not receive any proceeds from the sale of these
Shares. The Shares held by the Selling Shareholders may be sold from time to
time. Such sales may be made on an exchange, in the over-the-counter market, or
in negotiated transactions, at market price or on negotiated terms. Upon any
sale of the Shares held by Selling Shareholders, Selling Shareholders and
participating agents, brokers or dealers may be deemed to be underwriters as
defined in the 1933 Act and commissions, discounts or any profit realized on the
resale of the Shares may be deemed to be underwriting commissions or discounts.
See "Plan of Distribution." The Issuer will pay the expenses of this
registration (approximately $100,000) other than any brokerage commissions or
discounts in connection with the sale of Selling Shareholders' Shares.
Holders of Common Shares of the Issuer may elect only 25% of the board of
directors. William A. Tice owns 100% of the Class B Common Shares, will elect
75% of the board of directors and thereby controls the Issuer. In addition, as
the current holder of 89% of the Common Shares, Mr. Tice will elect the
remaining 25% of the directors. On all other matters, Mr. Tice will control 90%
of the vote, since on all such matters Common Shares and Class B Common Shares
vote together. See "Risk Factors- Continued Control by Holder of Class B Common
Shares."
ADDITIONAL INFORMATION
----------------------
The Issuer will furnish annual reports containing audited financial
statements to its shareholders. Additional unaudited reports may be provided to
shareholders at such time as the Issuer may determine or as required by law. The
Issuer is not currently required to file reports under the Securities Exchange
Act of 1934 (the "1934 Act"), but will become subject to reporting requirements
upon effectiveness of the registration statement. See "Plan of Distribution."
The Issuer has filed a registration statement (which term shall include all
amendments, exhibits and schedules) on Form S-1 under the 1933 Act with the
Securities and Exchange Commission (the "Commission") in Washington, D.C. This
Prospectus, which constitutes a part of
2
<PAGE>
the registration statement, does not contain all of the information set forth in
the registration statement as filed including the exhibits thereto. The
registration statement may be reviewed without charge at the Commission's
principal place of business in Washington, D.C. Copies of the registration
statement may be obtained from the Public Reference Section of the Commission
located at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed prices.
In addition, the Issuer is an electronic filer. The Commission maintains a Web
site which contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is http://www.sec.gov. Statements made
in this Prospectus as to the contents of any contract or other document are not
necessarily complete, and, where such contract or other document has been filed
as an exhibit to the registration statement, reference is hereby made to such
exhibit and each such statement is qualified in all respects by such reference.
SUMMARY
-------
The following is a summary of certain information contained elsewhere in
the Prospectus. Reference is made to, and this summary is qualified by, the more
detailed information set forth in the Prospectus, which should be read in its
entirety.
<TABLE>
<CAPTION>
Plan of Distribution
- --------------------
<S> <C>
The Issuer............................ Tice Technology, Inc. (the "Issuer"),
a Delaware corporation, was
incorporated on June 21, 1996 by the
management of TES, Monogenesis
Corporation and Joseph Walker and
Sons, Inc. to act as a holding
company for TES stock and to create a
public company with a substantial
shareholder base without having to
sell shares in a traditional initial
public offering. The Issuer acquired
all of the issued and outstanding
stock of Tice Engineering and Sales,
Inc. ("TES") from the shareholders of
TES, William A. Tice and Joseph
Walker & Sons, Inc., in exchange for
5,450,220 Common Shares and 750,000
Class B Common Shares of the Issuer
as of the date of this Prospectus.
See "Business - General" and
"Securities." It may make additional
acquisitions in the future. See
"Risk Factors - Uncertainty and Risks
Associated with Future Acquisitions."
Distributing Company/ Monogenesis Corporation, a Delaware
Underwriter......................... corporation, is a statutory
underwriter and, pursuant to a
resolution of its board of directors,
is distributing Common Shares and
Warrants which it purchased from the
Issuer as a dividend to its
shareholders of record on
___________, 1997 as agreed with the
Issuer in order to create a public
company as described above. See
"Risk Factors - No Assurance of
Trading Market," "Plan of
Distribution" and "Management -
Certain Transactions."
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Distribution Ratio.................... Each Monogenesis shareholder will
receive 125 Common Shares, par value
$0.01 per share, and 400 Warrants of
the Issuer for each share of
Monogenesis stock held by it. See
"Plan of Distribution." After the
Distribution, Monogenesis will own
less than 1% of the outstanding
Common Shares of the Issuer.
Distribution Agent.................... Mid-America Bank of Louisville and
Trust Company, Monogenesis' transfer
agent, will act as distribution
agent, transfer agent and warrant
agent for the Issuer. See
"Securities - Transfer Agent and
Registrar."
Shares to be Distributed.............. Monogenesis will distribute as soon
as possible after the date of this
Prospectus 256,250 Common Shares to
its shareholders (125 Common Shares
for each share held) which constitute
approximately 4% of the issued and
outstanding Common Shares, and
approximately 4% of the total issued
and outstanding stock of all classes
of common stock of the Issuer. The
Issuer will not receive any proceeds
from the distribution of these
shares. However, the Issuer will
receive proceeds if any Warrants are
exercised. Monogenesis will retain
the remaining 43,750 Common Shares
and expects to sell shares from time
to time. See "Plan of Distribution"
and "Securities."
Warrants to be Distributed............ Monogenesis will distribute as soon
as possible after the date of this
Prospectus 820,000 Warrants to its
Shareholders (400 Warrants for each
share held) which constitute
approximately 82% of the issued and
outstanding Warrants. Monogenesis
will retain the remaining 180,000
Warrants which it may exercise or
sell from time to time. The Common
Shares and the Warrants are
separately transferable. See
"Securities."
Exercise of Warrants.................. Each Warrant entitles the holder to
purchase one Common Share of the
Issuer at an exercise price of $8.00
per share and may be exercised during
the 24 month period following
issuance of the Warrant. The
exercise price was determined by
management of the Issuer based upon
management's assessment of the
Issuer's business potential and
earnings prospects. The exercise
price may not be indicative of the
market price of the underlying
shares. See "Risk Factors -Arbitrary
Exercise Price" and "Securities." If
all Warrants are exercised, the
Common Shares underlying the Warrants
will constitute approximately 15% of
the issued and outstanding Common
Shares.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Distribution Date..................... Certificates representing the Shares
and the Warrants will be mailed to
Monogenesis shareholders as soon as
practical after the date of this
Prospectus. See "Plan of
Distribution."
Sales of Shares By Selling 1,629,967 Common Shares held by the
Shareholders......................... shareholders of the Issuer will be
registered and available for resale
by such shareholders from time to
time subject to certain limitations.
See "Principal and Selling
Shareholders." These shares
constitute approximately 28% of the
issued and outstanding Common Shares,
and approximately 25% of the total
issued and outstanding stock of all
classes of common stock of the
Issuer. The Issuer will not receive
any proceeds from the sale of Shares
held by the shareholders. See "Risk
Factors - Shares Eligible for Future
Sale" and "Plan of Distribution."
Option Shares......................... 54,750 Common Shares may be issued
upon the exercise of options held by
certain employees at an exercise
price of $1.00 per share. The
options were issued to employees as
incentives to retain long term and
key employees. Management decided
that the employees should pay
something to receive the shares, but
wanted to set the price at an amount
that it believed employees could
afford. Management believes that the
$1.00 exercise price meets this
criteria. The Common Shares
underlying the employee options are
registered for sale from time to time
by employees who exercise the
options. See "Principal and Selling
Shareholders" and "Securities."
Trading Market........................ There will be no immediate trading
market for the Shares or the
Warrants. See "Risk Factors - No
Assurance of Trading Market." The
Issuer is registering the Shares and
Warrants to attempt to establish a
public trading market in the Shares
and is applying for quotation on the
OTC Bulletin Board, but has not
applied for listing on an exchange.
See "Plan of Distribution." There
can be no assurance that a trading
market will develop.
</TABLE>
The Issuer
- ----------
Tice Technology, Inc. (the "Issuer"), a Delaware corporation, was formed to
acquire and hold all of the issued and outstanding shares of stock of Tice
Engineering and Sales, Inc. ("TES"), and to create a public company with a
substantial shareholder base without having to sell shares in a traditional
public offering. Management of TES and the Issuer anticipate that at some point
in the future it may be advantageous to acquire additional businesses in order
to expand the Issuer's
5
<PAGE>
operations or diversify its holdings. The Issuer has not yet identified any
potential targets or industries, although it expects that initial acquisitions
would be in related industries or involve related technology. Acquisitions may
also be in unrelated industries in which the Issuer has little or no experience.
See "Risk Factors - Acquisitions in Unrelated Industries." Currently, the Issuer
does not have the resources necessary to make any material acquisition, however
management believes that the Issuer's stock, especially if a trading market has
developed in the stock, might be used as some or all of the consideration for an
acquisition. The Issuer owns only the TES stock and has no other operations. The
Issuer acquired all of the issued and outstanding stock of TES, a Tennessee
corporation, in exchange for stock of the Issuer which acquisition was effective
as of the date of this Prospectus. See "Business - General."
The Issuer's wholly owned subsidiary, TES, is an engineering firm which
provides engineering and technical solutions, generally through the development
or enhancement of equipment for the apparel industry. TES researches, designs,
develops and tests specialized high technology, garment production line
stitching machines and related equipment, which, when patented, it licenses to
other manufacturers to produce or contract manufactures for its own customers.
TES currently holds eight patents over which it retains rights. It currently
sells fourteen basic products and is in the process of exploring the
applications of the technology covered by its latest patent. This patent covers
an electronically geared sewing machine which, among other things, reduces by
90% all moving parts of the sewing machine. TES currently has licensed to one
major sewing manufacturer, Brother Industries, Ltd. of Nagoya, Japan the non-
exclusive right to make, assemble, use and sell equipment using the patented
electronic gearing technology. See "Business - Products."
The Issuer was incorporated on June 21, 1996. It's principal office is
located at 6711 Tice Plaza, Knoxville, Tennessee 37918. The telephone number is
(423) 925-4501. TES was incorporated on March 16, 1973 and has the same
principal office as the Issuer. See "Business - History."
SELECTED FINANCIAL DATA
The selected financial data is that of TES. The pro forma figures of net
income per share and stockholders' equity per share reflect the capitalization
of the Issuer.
6
<PAGE>
================================================================================
Statement of Earnings Data (1):
================================================================================
<TABLE>
<CAPTION>
Years Ended March 31,
(Amounts in thousands except
per share amounts)
-----------------------------------------
1996 1995 1994 1993 1992
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues $1,242 $1,240 $ 1,309 $ 1,694 $ 1,770
Cost of Sales (808) (868) (1,000) (843) (681)
Research and Development (Net of
Reimbursements) (47) (42) (141) (34) (28)
Expenses (368) (265) (279) (1,039) (1,104)
Income (Loss) From Operations 19 65 (111) (222) (43)
Total Other Income (Expense) 5 (100) (110) 44 31
Income (Loss) Before Taxes 24 (35) (221) (178) (12)
Provision for Income Tax (5) 5 42 -- --
Net Income (Loss) Before Change in
Accounting Principle 19 (30) (179) (178) (12)
Change in Accounting Principle -- -- 70 -- --
Net Income (Loss) $ 19 $ (30) $ (109) $ (178) $ (12)
Net Income per Pro Forma Common
Share (2) $ 0.00 $(0.00) $ (0.02) $ (0.03) $ (0.00)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended December 31,
(Amounts in thousands except
per share amounts)
------------------------------
1996 1995
----- ------
<S> <C> <C>
Revenues $ 898 $ 962
Cost of Sales (622) (653)
Research and Development (Net of
Reimbursements) (97) (27)
Expenses (343) (319)
Loss From Operations (164) (37)
Total Other Income (Expense) 425 16
Income (Loss) Before Taxes 261 (21)
Provision for Income Tax (9) 4
Net Income $ 252 $ (17)
Net Income per Pro Forma Common Share (2) $0.04 $(0.00)
</TABLE>
7
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================================================================================
Balance Sheet Data (1):
================================================================================
<TABLE>
<CAPTION>
March 31,
(Amounts in thousands except
per share amounts)
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total Assets $1,435 $1,578 $1,403 $1,528 $1,666
Total Long-Term Liabilities (3) $ 661 $ 302 $ 346 $ 385 $ 453
Total Stockholders' Equity $ 145 $ 121 $ 151 $ 261 $ 439
Stockholders' Equity Per Pro Forma
Common Share (2) $ 0.02 $ 0.02 $ 0.02 $ 0.04 $ 0.07
</TABLE>
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands except
per share amounts)
----------------------------
1996 1995
------ ------
<S> <C> <C>
Total Assets $1,287 $1,357
Total Long-Term Liabilities $ -- $ 270
Total Stockholders' Equity $ 397 $ 110
Stockholders' Equity Per Pro Forma
Common Share (2) $ 0.06 $ 0.02
</TABLE>
- --------------------------------------------------------------------------------
(1) The statement of earnings data for the periods ended March 31, 1994, 1995
and 1996 and the balance sheet data at March 31, 1995 and 1996 were derived
from the audited financial statements of TES which are included in their
entirety elsewhere in this Prospectus. In addition, pro forma balance
sheets based upon the December 31, 1996 financial statements of the Issuer
and TES and assuming acquisition of TES by the Issuer and conversion of TES
debt (including adjustments) are also included in their entirety elsewhere
in this Prospectus. See "Financial Statements."
(2) Pro forma net income and stockholders' equity per share reflect the number
of shares of the Issuer's common stock (including Class B Common Stock)
which are issued and outstanding as of the date hereof (6,588,780 shares)
for all years rather than the number of shares of TES actually outstanding
on the applicable dates and have been rounded to the nearest cent. These
figures do not include Common Shares which may be issued upon exercise of
the Warrants or the options held by TES employees. See "Capitalization."
8
<PAGE>
(3) The total long-term liabilities amounts exclude the current portion of
such obligations.
RISK FACTORS
The securities described in this Prospectus involve a high degree of risk.
Prior to purchasing, Shares or Warrants investors should consider the following
factors inherent in, and affecting the business of, the Issuer and its
subsidiary, TES.
HISTORY OF OPERATING LOSSES. For four of the last five fiscal years, TES
has had a net loss: $30,000 for 1995 ($(0.00) per pro forma share), $109,000 for
1994 ($(0.02) per pro forma share), $178,000 for 1993 ($(0.03) per pro forma
share) and $12,000 for 1992 ($(0.00) per pro forma share). In 1996, it had
minimal net income of $19,000 ($0.00 per pro forma share). See "Selected
Financial Data," "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" and "Financial Statements." It had net income of
$252,000 ($0.04 per pro forma share) for the first nine months of fiscal year
1997. Its history of losses together with uncertainties relating to the
company's ability to obtain additional financing or capital create uncertainty
about its ability to continue profitably. See "Financial Statements." The
Issuer's and TES's ability to achieve profitability depends upon the ability to
exploit existing patents and develop new patents. There can be no assurance that
TES or the Issuer will achieve profitability in the future.
LACK OF WORKING CAPITAL. The Issuer and TES need substantial additional
funding in the near future to continue to be profitable, to develop and apply
the technology inherent in its latest patent for the electronically geared
sewing machine and to be able to produce orders it is currently receiving. The
Issuer and TES expect to need at least $5,000,000 in the next two years and hope
to obtain those funds through license fees received on the new technology and
sale of stock of the Issuer. Management of TES believes that the electronic
gearing technology has application to many of the manufacturing processes in the
sewing industry as well as in other industries. See "Capitalization," "Business-
General" and "Research and Development" and "Financial Statements." TES has
licensed the new technology to one manufacturer, but there can be no assurance
that the Issuer and TES will receive any additional license fees or will be able
to raise such funds. If the license of the new technology does not generate
sufficient revenues or additional funds are not available through sale of stock
or otherwise, TES may not be able to continue to operate profitably and may be
required to delay development of application of new technology. Currently, real
estate it owns and a life insurance policy on Mr. Tice are pledged on existing
debt. Mr. Tice has also personally guaranteed certain debt. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CONTINUED CONTROL BY HOLDER OF CLASS B COMMON SHARES. The Issuer has two
classes of voting stock issued and outstanding: Common Shares and Class B Common
Shares. Although each holder of Common Shares and Class B Common Shares is
entitled to one vote for each share of stock held, the current holder of Class B
Common Shares (William A. Tice) is entitled to elect 75% of the members of the
board of directors of the Issuer (presently three members). Holders of Common
Shares (together with holders of Class D Common Shares and any voting Preferred
Shares)
9
<PAGE>
are only entitled to elect 25% of the members of the board of directors
(presently one member). (If the number of issued and outstanding Common Shares,
Class D Common Shares and voting Preferred Shares is less than 10% of the
aggregate number of issued and outstanding Common Shares and Class B Common
Shares, all directors will be elected by the holders of all shares voting
together.) Thus, the holder of Class B Common Shares will control the board of
directors and therefore, the Issuer. Except with respect to matters which
require voting by class, shareholders of all classes will vote together on all
other matters properly brought before the shareholders. Currently, William A.
Tice controls the Issuer and, as sole holder of Class B Common Shares, elects
all directors elected by holders of Class B Common Shares. In addition, as
holder of 89% of the Common Shares, he can also elect all directors elected by
holders of Common Shares and control all other votes. See "Principal and Selling
Shareholders" and "Securities."
DEPENDENCE ON PATENTS AND ABILITY TO PROTECT PROPRIETARY PRODUCTS. TES has
applied for and received patent protection on certain of its inventions,
including most recently, its electronically geared sewing machine. See "Business
- - Products." There can be no assurance that others will not independently
develop proprietary information or obtain access to know-how and expertise
(patented or otherwise) substantially equivalent to that developed by TES. If a
competitor were able to develop a functionally similar product to any of TES's
patented products (especially if the competitor were one of the large sewing
machine manufacturers that is also a customer of TES), increased competition
with respect to any such product could reduce TES revenues arising from the sale
of such product as well as TES's net income. Management of TES does believe
that, at least for the next 24 months, with respect to the electronically geared
sewing technology, licensing the product from TES is more cost effective for
most sewing machine manufacturers than attempting to duplicate the results
without infringing on TES's patent. There also can be no assurance that existing
patents held by TES or future patents obtained by TES will be enforceable, that
TES's products will not infringe on patents owned by others or that competitors
will not develop similar or functionally similar patents. In the event that TES
has infringed on any such rights, it could be required to pay damages. In
addition, if TES were unable to change the design of such product so that it no
longer infringed on any intellectual property rights, it would lose the ability
to sell such product as well as the benefits of all previous marketing efforts
and name recognition associated with the product. Even if alterations to avoid
any intellectual property problems were possible, the product as changed might
not be successful in the marketplace. See "Business - Patents."
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS. Most of TES's business is
developing solutions and providing equipment for denim and work wear clothing
manufacturers. See "Business." Currently, although it has shipped products to
several hundred customers all over the world, 80% of TES's annual revenues from
sale of products come from three principal customers-Levi Strauss & Co.,
Wrangler, Inc. and A.B. Fab Company. TES also has license fee and royalty income
which, at this time, is primarily from one customer, Brother Industries, Ltd.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The loss of any of these customers without replacement with
comparable customers for any reason could materially affect TES's revenues and
income. Management hopes that its new products and license fees generated
thereby will minimize this risk.
10
<PAGE>
Risks Associated with Fixed Price Contracts. TES principally performs under
agreements to develop products, or modifications to existing products, to solve
particular industry problems or to increase efficiency or lower costs of a
manufacturing process. Generally, in pricing a job, TES estimates the time
expected to produce the solution and a prototype product. The proposed price is
based on estimates provided in-house with what management believes are suitable
margins to accommodate reasonable contingencies. Should development costs exceed
the estimated price, TES may be required to complete the project and incur
whatever losses result. Even if it incurs losses on the initial contract, it may
recoup some or all of the losses by selling the product to other manufacturers
or developing other uses or improvements to the product and marketing the
modified product. See "Business - Products."
Dependence on Health of One Industry (Sewn Products). Currently, most of
TES's revenues are derived from products and services related to the sewn
products industry. Should this industry take a substantial downturn, business
opportunities would be limited significantly. However, based upon apparel
industry trade magazines projecting a strong market for the next three to five
years, management does not believe that a substantial downturn is likely in the
near future. In addition, management believes that the new technology for the
electronically geared sewing machine has applications in other industries such
as the spinning industry for which TES is in the process of developing a
spinning machine using the electronic gearing technology. Broadening the
applications of the technology is expected to lessen TES's dependence on the
apparel industry. See "Business."
Potential Adverse Effect of Competition. TES is aware of four companies in
the United States and two in Europe that perform work similar to TES. In
addition, all of the world's leading sewing machine manufacturers (mainly based
in Japan) engage in research and development similar to that performed by TES.
Several of such manufacturers (some of which are also customers of TES) have
tried or are trying to develop machines which are similar or competitive to
TES's electronically geared machines. However, management is not aware of the
development of any method or machine which is performance competitive to TES's
electronically geared machines and one of TES's largest competitors has licensed
the technology from TES rather than attempting to develop its own. These larger
competitors do have significantly greater resources, financial and otherwise,
than TES. See "Business - Competition." TES's ability to compete depends upon
its ability to provide cost effective solutions and products to manufacturers.
There can be no assurance that TES can continue to compete effectively with
these companies.
Potential Adverse Effect of Technological Change. Although it has not been
so in the past, it is expected that the apparel industry will show more rapid
changes in what is state-of-the-art in the future. Any of TES's products could
become obsolete at any time due to technological changes and TES may not be able
to update its products quickly enough to remain competitive. See "Risk Factors -
Research and Development" and "Business - Research and Development." In
addition, some of TES's customers have told management that they are delaying
purchases in expectation of the development of applications of new technology
owned by Tice. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
11
<PAGE>
General Environmental Risks. TES previously owned and currently leases the
real estate on which its operations are located which is part of a small retail
shopping facility, commonly referred to as a strip center. In addition, TES owns
real estate on which it intends to build a new facility. See "Business -
Property." Accordingly, TES is an "owner/operator" under applicable state and
federal environmental laws. As an operator, TES is potentially responsible for
the clean-up of any hazardous or toxic materials that may be improperly located
in any of its facilities. TES outsources manufacture of components or products
which could involve environmental hazards. Thus, the development and
manufacturing processes of TES do not generate any significant quantities of
hazardous or toxic materials. See "Business - Manufacturing." Should TES be
unable to outsource this type of manufacturing, TES could be required to comply
with additional environmental regulations which might result in reduced profit
margin or cause TES to change the way it produces the product. The officers of
TES are not aware of any hazardous materials improperly located at any of TES's
facilities.
Dependence Upon Existing Management. TES's success is dependent upon the
capabilities and reputation of its President, William A. Tice, and of its senior
management and technical personnel and on their maintaining or enhancing
existing relationships with TES's customers. See "Management." The loss of Mr.
Tice or senior management or technical staff could have a materially adverse
affect on TES's business. In such event, there can be no assurance that TES
could attract qualified replacements.
Risks Associated with Shortage of Qualified Employees. As a result of the
expansion of the number of business users of computers and the expansion in
demand for computer services and custom software programming, there is a short
supply of computer professionals. Computers and software figure in the
development of and expansion of the applications of the electronically geared
sewing machine technology recently patented by TES. The situation is not
expected to improve in the near future. Thus, it is possible that TES could have
problems finding, keeping and replacing employees. However, defense contractors
have laid off many of their computer/engineering employees and this trend is
expected to continue thereby creating a pool of employees from which TES has
drawn in the past and who would likely have at least some of the expertise
needed by TES.
Risks Associated with Uncertainty of Market Acceptance of New Products.
Although TES plans to continue to build and market its traditional product line
(which does not involve the new electronically geared technology), TES's success
is at least partially dependent on the market's acceptance of the technology
involved in the electronically geared sewing machine. Historically, clothing
manufacturing has not had significant technological progression since the
invention of the sewing machine. However, due to indications of interest from
manufacturers and TES's recent license of the technology to one manufacturer,
management believes that the new technology is gaining acceptance. Failure to
achieve significant market acceptance will have a material adverse effect on
TES's business, financial condition and results of operations. Also, unless the
new technology becomes TES's dominant product, TES's growth is also dependent on
the continued market acceptance and expansion of its traditional product line.
See "Business - Products." TES plans to continue to develop new products for its
customers to solve their manufacturing problems which products TES may chose to
add to its product line.
12
<PAGE>
Risks Associated with Warranty and Support Obligations. TES traditionally
has provided a 90-day warranty against defects in materials and workmanship with
most of its products. TES plans to continue this warranty policy. It has been
TES's past experience that the warranties have cost it less than 0.5% of gross
sales over the past five years. However, this experience could change at any
time. In addition, TES anticipates that it will need to implement a support
program for the computer software associated with the new technology for the
electronically geared machine which is expected to include computer technicians
on call 24 hours a day. During the first 24 months, a minimal number of
technicians are expected to be needed at an estimated cost of $100,000 per year.
The number of technicians needed and costs of the program are expected to
increase as more products are sold, but is not expected to exceed 0.5% of gross
sales. If TES's estimates of the need for and costs of the support program are
significantly lower than the actual costs, TES's profits could be significantly
reduced.
Risks Associated with Loss of Use of Trademarks. Management of TES does not
believe that it is infringing on the trademark of any other entity in the world.
TES obtained a certificate of registration of the name "tice(R)" for use in
connection with certain components of stitching machines from the U.S. Patent
and Trademark Office in 1980. In addition, TES has applied to register the name,
"Tice Technology," and the related logo. If TES were prohibited from using the
name, it would lose the benefits of name recognition and its previous marketing.
Uncertainty and Risks Associated with Future Acquisitions. The Issuer may
pursue other acquisitions at some point in the future. Currently, it has no
operations other than ownership of TES and does not have the resources necessary
to make any material acquisitions. The Issuer has not identified any particular
target or target industries. It may make acquisitions in the future in
industries which are not related to its current business and in which it may not
have any experience or expertise.
Risks Associated with Issuer's Lack of Operational History. The Issuer was
incorporated on June 21, 1996 and has not yet engaged in business other than the
acquisition of TES as described in this Prospectus. See "Business - General." It
therefore has no earnings record. However, the Issuer's wholly owned subsidiary,
TES, has been in business since 1964, first as a sole proprietorship then as a
partnership and, since 1973, as a corporation. See "Selected Financial Data,"
"Business - History" and "Financial Statements."
Possible Inability to Exercise Warrants in Certain States. Holders of the
Warrants will have the right to exercise the Warrants to purchase Common Shares
only if such shares qualify for sale under state securities laws or are exempt
from qualification under applicable securities or "blue sky" laws of the states
in which the various holders of the Warrants then reside and there is available
a current Prospectus permitting the sale of the Common Shares underlying the
Warrants. The Issuer has undertaken and intends to use reasonable efforts to
keep current a prospectus which will permit the sale of the Common Shares
underlying the Warrants, but there can be no assurance that the Issuer will be
able to do so. The Issuer is not required to qualify for sale the Common Shares
in any state. The Warrants may lose some of all of their value if a prospectus
covering the underlying
13
<PAGE>
shares is not kept effective or if the underlying shares are not, or cannot be,
qualified in an applicable state. See "Securities."
No Dividends. The Issuer is newly formed and has not paid dividends. It's
only significant source of earnings out of which to pay dividends will be
dividends it receives from its subsidiary, TES. TES has not historically paid
dividends to its shareholders, and has no present plans to institute a policy of
declaring dividends. In the foreseeable future, the capital requirements of TES
will likely consume all applicable operating profits and other available cash.
There is no guarantee that TES, and therefore the Issuer, will pay dividends in
the future.
Possible Adverse Effects of Issuance of Preferred Stock on Holders of
Common Shares. The Issuer's Certificate of Incorporation authorizes the issuance
of Preferred Shares with designations, rights and preferences as determined from
time to time by its Board of Directors. Accordingly, the Board of Directors is
empowered, without shareholder approval, to issue Preferred Shares with
dividends, liquidation, conversion, voting or other rights that could adversely
affect the dividends, liquidation rights, voting rights or other rights of the
holders of Common Shares. The voting rights of any Preferred Shares, however,
are limited by the Certificate of Incorporation and cannot exceed the voting
rights of any Common Shares. In the event of issuance, Preferred Shares could be
used, under certain circumstances, as a method of discouraging, delaying or
preventing a change of control of the Issuer. See "Securities."
No Assurance of Trading Market. There is not an established public trading
market for the Shares or the Warrants. There can be no assurance as to the
prices at which the Shares or the Warrants will trade or that such prices will
not be significantly below the book value of the Shares. Until the Shares and
the Warrants are fully distributed and an orderly market develops (if at all),
the prices at which the Shares or the Warrants trade may fluctuate
significantly. Prices for the Shares and the Warrants will be determined in the
marketplace and may be influenced by many factors, including the depth and
liquidity of the market, investor perception of the Issuer and the industry in
which the Issuer participates, and general economic and market conditions.
Arbitrary Exercise Price. The exercise price of the Warrants was determined
by management of the Issuer based upon management's assessment of the Issuer's
business potential and earnings prospects. It reflects management's opinion
relating to the future and may not be indicative of future market prices of the
Warrants or the underlying Shares, revenues or profitability.
Shares Eligible for Future Sale. Approximately 67% of the issued and
outstanding Common Shares of the Issuer (all shares except the Common Shares
described in this Prospectus) are "restricted securities" as such term is
defined in Rule 144 promulgated under the Securities Act of 1933 (the "1933
Act"). (Class B Common Shares may be converted to Common Shares.) Sales of
securities by affiliates of the Issuer may also be subject to Rule 144 resale
limitations. Currently, all of the restricted securities are held by William A.
Tice. See "Principal and Selling Shareholders." In general, under Rule 144, if
adequate public information is available with respect to the Issuer, beginning
90 days after the date of this Prospectus a person who has satisfied a two year
holding period may sell, within any three month period, a number of shares which
does not
14
<PAGE>
exceed the greater of 1% of the then outstanding shares of the class of
securities in question or the average weekly trading volume during the four
calendar weeks prior to such sale. Sales under Rule 144 are also subject to
certain restrictions relating to manner of sale, notice and the
availability of current public information about the issuer. Sales of
restricted securities by a person who is not an affiliate of the issuer (as
defined in the 1933 Act) and who has satisfied a three year holding period
may be made without regard to volume limitations, manner of sale, notice or
other requirements of Rule 144. The Issuer is unable to predict the effect
that sales made pursuant to Rule 144 or other exemptions under the 1933 Act
may have on the prevailing market price of the registered Common Shares, or
when such sales may begin under the holding period requirements of Rule
144.
PLAN OF DISTRIBUTION
--------------------
The Issuer issued 300,000 Common Shares and 1,000,000 Common Stock
Purchase Warrants to Monogenesis, a closed-end registered investment
company, and Monogenesis distributed 256,250 Shares and 820,000 Warrants
to its shareholders as of the date of this Prospectus at a rate of 125
Common Shares and 400 Warrants for each share of stock of Monogenesis held
on _______________, 1997. Monogenesis is a statutory underwriter which is
distributing the Shares and Warrants on behalf of the Issuer to create a
public company (the Issuer) with a substantial shareholder base without
having to sell shares in a traditional initial public offering. See "Risk
Factors - No Assurance of Trading Market." Monogenesis will retain the
43,750 Shares and 180,000 Warrants which were not distributed. It expects
to sell the Shares from time to time and may also exercise or sell the
Warrants.
Monogenesis purchased the Shares and Warrants at a price of $0.01 each
which is the par value of the Common Shares. In addition, Monogenesis
agreed to distribute Shares and Warrants to its approximately 1,200
primarily institutional shareholders at the rate described above. The
price was determined by Monogenesis and TES. The Issuer recorded
$75,000 in expenses based on the estimated fair value of the 300,000
Common Shares issued to Monogenesis less the $.01 per share price
Monogenesis paid for the Shares as of the date of this Prospectus.
Monogenesis will retain the Shares and Warrants not distributed and will
own less than 1% of the outstanding Common Shares of the Issuer after the
Distribution. The Issuer and TES have agreed to pay the expense of
registering the Shares and Warrants issued to Monogenesis which expenses
include legal, accounting, consulting, transfer agent and filing fees.
Through the distribution of the Shares and Warrants by Monogenesis (and
the sale of Shares by the Selling Shareholders from time to time), the
Issuer hopes to create a public trading market in its Common Shares to
facilitate access to public markets and equity capital and future
acquisitions and to provide liquidity for employee stock incentive
programs and existing shareholders. See "Risk Factors - No Assurance of
Trading Market" and "Uncertainty and Risks Associated with Future
Acquisitions."
Since Monogenesis is purchasing Shares and Warrants with the intent to
distribute, it is a statutory underwriter under the 1933 Act. Monogenesis
is not a broker-dealer and has not participated in any traditional
underwritings. It is registered as a closed-end investment company under
the Investment Company Act of 1940 and was formed to provide a mechanism
for companies to become reporting companies under the 1934 Act in
transactions similar to the Distribution.
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<PAGE>
Monogenesis completed one such distribution in 1992 and one in early 1997. It
has two directors -Scot D. Walker and Brian P. Westfall. TES and Mr. Tice have
agreed to indemnify Monogenesis against any liability arising out of any
representation, warranty or covenant made by TES or Mr. Tice in the agreement
with Monogenesis.
Shareholders of Monogenesis that receive Shares and Warrants will receive
such securities as a dividend. No holder of Monogenesis stock will be required
to pay any cash or other consideration for the Shares or the Warrants received
in the Distribution or surrender or exchange Monogenesis stock in order to
receive Shares or Warrants. Holders of the Warrants will be required to pay the
exercise price to exercise the Warrants. See "Securities."
Shareholders, including the recipients of Common Shares distributed by
Monogenesis, will be able to sell their Shares and Warrants which are
registered, at any time, although the sale of securities by affiliates is
limited under Rule 144. It is expected that, at such time as registered Shares
or Warrants are sold, such securities will be sold through the selling efforts
of brokers or dealers. There is no agreement with any specific brokers or
dealers relating to the Shares or the Warrants nor has any plan of distribution
or sale of the Shares or Warrants been developed, other than the dividend
distribution to Monogenesis shareholders and the debt conversion described
above.
The Shares which are held by Selling Shareholders (or which may be received
by Selling Shareholders upon the exercise of employee options) and which are
registered hereunder may be disposed of from time to time by the Selling
Shareholders, or by permitted transferees, in one or more of the following: (i)
to purchasers directly; (ii) in ordinary brokerage transactions and transactions
in which the broker solicits purchasers; (iii) through underwriters or dealers
who may receive compensation in the form of underwriting discounts, concessions
or commissions from the Selling Shareholders or permitted transferees or from
the purchasers of the securities for whom they may act as agent; (iv) by the
pledge of the Shares or Warrants as security for any loan or obligation,
including pledges to brokers or dealers who may, from time to time, effect
distribution of the Shares or Warrants or interests therein; (v) to purchasers
by a broker or dealer as principal and resale by such broker or dealer for its
own account pursuant to this Prospectus; (vi) in a block trade in which the
broker or dealer so engaged will attempt to sell the securities as agent but may
position and resell a portion of the block as principal to facilitate a
transaction; and (vii) through an exchange distribution in accordance with the
rules of the exchange or in transactions in the over-the-counter market. Such
sales may be made at then prevailing prices and terms which may be related to
the then current market price or at negotiated prices and terms. In effecting
sales brokers or dealers may arrange for other brokers or dealers to
participate.
The Selling Shareholders or their successors in interest, and any
underwriters, brokers, dealers or agents that participate in the distribution of
the Shares and Warrants held by the Selling Shareholders, may be deemed to be
"underwriters" within the meaning of the 1933 Act, and any profit on the sale of
securities by them and any discounts, concessions or commissions received by any
such underwriters, brokers, dealers or agents may be deemed to be underwriting
commissions or discounts under the 1933 Act. The Issuer and TES will pay all
expenses incident to the
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<PAGE>
registration of the Selling Shareholders' Shares and Warrants other than
underwriting discounts or commissions, brokerage fees and the fees and expenses
of counsel to the Selling Shareholders, if any. The Issuer will not receive any
proceeds from the sale of Shares or Warrants by the Selling Shareholders. In the
event of a material change in the plan of distribution disclosed in this
Prospectus, the Selling Shareholders will not be able to effect transactions in
the Shares and Warrants pursuant to this Prospectus until such time as a post-
effective amendment to the registration statement is filed with, and declared
effective by, the Commission.
Prior to or on the effective date of the registration statement, the Issuer
will file a registration statement under the 1934 Act registering the Shares and
the Warrants thereunder. Such filing together with the filing of the
registration statement under the 1933 Act will subject the Issuer to the
reporting requirements of the 1934 Act and the Issuer will be a public company.
The Issuer intends to apply for quotation of the Shares and Warrants on the OTC
Bulletin Board. At such time as it meets listing criteria, it intends to apply
for a listing of the Shares and the Warrants on a national exchange which
reports transactions on a real time basis; however, there can be no assurance
that the Shares and the Warrants will be so listed.
USE OF PROCEEDS
---------------
TES borrowed $255,187 from six persons in July and August of 1996. The debt
was evidenced by promissory notes bearing interest at 10% per annum with
original maturity dates of September 1, 1996 which were extended to April 28,
1997 awaiting the effective date of the registration statement. The proceeds of
the notes were used as working capital primarily to continue development of the
electronically geared technology. The Issuer is offering the holders of the
notes up to 88,560 Common Shares in exchange for the principal and interest on
such notes through December 15, 1996 at $3.00 per share. The Issuer will not
receive any proceeds upon conversion of the notes.
The cash proceeds of $13,000 derived from the sale of the Shares and
Warrants to Monogenesis and any proceeds derived upon the exercise of any
Warrants or options held by TES employees will be used as working capital to
hire additional employees including mechanical and electrical engineers,
purchase additional equipment and expand TES's facility to address expected
demand for the new technology. However, even if none or only a small portion of
the Warrants are exercised, there will not be sufficient funds and TES will need
to obtain funds from licenses fees or financing which may or may not be
available. See "Risk Factors - Lack of Working Capital." The Issuer does not
have any plans at this time to use the proceeds to acquire additional
businesses. The Issuer will not receive any proceeds from the sale of Shares or
Warrants by the Selling Shareholders. See "Plan of Distribution."
CAPITALIZATION
--------------
The capitalization of TES (prior to its acquisition by the Issuer) and the
pro forma capitalization of the Issuer (giving effect to the acquisition of TES)
as of December 31, 1996 are as follows:
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<PAGE>
<TABLE>
<CAPTION>
================================================================================
Capitalization of TES Prior to Acquisition:
================================================================================
<S> <C>
Stockholders' Equity:
Common stock
no par value; 2,000 shares authorized;
750 shares issued and outstanding $ 8,634
Stock Warrants to purchase 30 shares 4,859
Retained Earnings 383,701
--------
Total Stockholders' Equity $397,194
========
</TABLE>
================================================================================
Pro Forma Capitalization of the Issuer Assuming Acquisition of TES and
Conversion of TES Debt:
================================================================================
<TABLE>
<CAPTION>
Stockholders' Equity
<S> <C>
Common Shares
par value - $0.01 per share;
30,000,000 authorized
5,838,780 shares issued and outstanding(1) $ 58,388
Class B Common Shares
par value - $0.01 per share;
5,000,000 shares authorized;
750,000 shares issued and outstanding 7,500
Class D Common Shares
par value - $0.01 per share;
600,000 shares authorized;
no shares issued and outstanding -0-
--------
Total Common Shares $ 65,888
Preferred Shares
par value - $0.01 per share;
10,000,000 shares authorized;
no shares issued and outstanding -0-
Paid-in Surplus (2) 301,285
Retained Earnings 308,701
--------
Total Stockholders' Equity $675,874
========
</TABLE>
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<PAGE>
(1) In addition to the Common Shares of the Issuer held by the former
shareholder of TES, the issued and outstanding Common Shares of the Issuer
include the 300,000 Common Shares issued to Monogenesis for $3,000, the
238,470 Common Shares issued to JWSI and the 88,560 Common Shares issued
upon conversion of TES debt. This number does not include the 1,000,000
Common Shares which may be issued upon the exercise of the Warrants or the
54,750 Common Shares which may be issued upon the exercise of the options
held by TES employees. See "Securities."
(2) Pro forma balance sheets assuming acquisition of TES by the Issuer and
conversion of TES debt and showing pro forma adjustments are included in
their entirety elsewhere in this Prospectus. See "Financial Statements."
BUSINESS
--------
General
- -------
The Issuer was formed as a holding company for TES on June 21, 1996 in
connection with the registration of the Shares and Warrants to create a public
company with a substantial shareholder base without having to sell shares in a
traditional initial public offering (through the shareholder base of
Monogenesis). It is also believed that establishing the Issuer as a public
company may facilitate acquisitions at some point in the future. No particular
acquisition targets have been identified and the Issuer does not currently have
the resources to make a material acquisition. See "Risk Factors - Uncertainty
and Risks Associated with Future Acquisitions." The Issuer received all of the
issued and outstanding shares of stock of TES from TES's shareholders in
exchange for 5,450,220 Common Shares and 750,000 Class B Common Shares as of the
date of this Prospectus. The number of shares exchanged was determined by TES
and Monogenesis taking into consideration the proposed public float and
ownership interests. All of the Issuer's current business operations are
conducted through TES.
Of TES's historical revenue, 95% is derived from the sale of products
designed and manufactured by TES and further described below. The remaining 5%
is derived from rents received from real property owned by TES and some
consulting fees. TES sold the rental real estate on September 30, 1996. The
consulting fees are very minor as independent revenues; traditionally these fees
are encompassed in the design and manufacture of TES's products for a particular
customer.
TES performs original research engineering design, prototype development
and testing for its garment production line stitching machines and related
equipment. During manufacture and assembly, the arrangement of component parts
of a tice (R) product are configured to meet the purchaser's special production
line application requirements. Accordingly, most of TES's products are made-to-
order pursuant to contractual arrangements with purchasers. See "Business -
Products." Generally, a potential customer outlines a need or problem relating
to their manufacturing process,
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TES reviews the need and estimates the cost to provide the product or solution.
See "Risk Factors-Risks Associated with Fixed Price Contracts." Often then TES
applies the technology developed pursuant to a contract to other applications or
sells the product developed to other parties. See "Business-Products." TES
also manufactures replacement parts for its products and a few minor attachments
and provides consulting services at hourly rates.
During the past five years in addition to marketing and selling the
conventional product line that it has sold for some time, TES has spent
considerable time developing new technology and has obtained three patents, two
in 1994 and one in 1995. See "Business-Products." The bulk of research efforts
since 1993 have been centered on the electronic gearing technology. This
technology was initially developed for the double needle belt loop machine and,
by using a computer and servo motors, eliminates approximately 90% of the
mechanical parts as well as certain other technical problems associated with the
machine. TES also believes the technology has application to many other types of
machines including machines used in industries other than the sewing industry
such as the spinning industry for which TES is now developing a machine. To
date, in addition to the double needle belt loop machine, TES has built "proof
of concept" models of the multi-head buttonhole machine, the lap seam felling
machine, the plain lock stitch sewing machine and the heavy-duty spinning
machine. See "Business-Research and Development."
TES's success is dependant on its ability to provide solutions to the
sewing industry (and, to a certain extent, some other industries) through its
existing products or by developing new or enhanced products. TES generally
employs five engineers, but expects to employ more in the future. In addition,
Mr. Tice has worked in the business for more than 30 years and has substantial
experience in designing solutions and estimating the costs of providing
solutions. Recently in light of the rapid changes management expects will occur
in TES's business resulting from the development and exploration of the
electronic gearing technology, TES has hired additional key personnel who it
believes have the ability to run the business.
John Burchill is currently acting as TES's general manager. He has worked
in the sewing machine industry for approximately 35 years and was previously
Manager of New Products and Technical Services for Brother International Corp.,
the U.S. division of Brother Industries, Ltd., one of the world's largest sewing
machine manufacturers.
Eric Watson has accepted employment with TES as Electronics Manager. Mr.
Watson received his B.S.E.E. from Northeastern University, College of
Engineering, in Boston, Massachusetts in 1989. From 1983 (prior to receiving his
degree) through November of this year, he has been employed as a project and
design engineer for Loral Hycor, Inc., in Woburn, Massachusetts which is a
defense contractor selling products to the government and commercial industries.
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<PAGE>
Products
- --------
TES sells various products mainly to the sewn products industry. Many of
its products are covered by patents which generally provide protection for
seventeen years from date of issue. TES's basic products include:
1) Twin Needle Belt-Loop Sewing Machines -- This machine takes pre-sewn
belt loop material, which is in lengths of 50 to 150 feet, and feeds
the belt loop out to the proper length, cuts the belt loop and folds
both ends under by way of turning pins. Next, the operator activation
presents the pre-cut, pre-folded belt loop to the pants waistband
whereupon two air-operated presser feet descend upon the folded belt
loop ends, the turning pins retract and both ends of the belt loop are
sewn on simultaneously. The presser feet return to the up position,
the operator moves the garment and the process is repeated. TES has
developed a prototype of the Twin Needle Belt-Loop Sewing Machine,
which uses the new electronic gearing technology. It is covered by
TES's patent #5,458,075 which was issued on October 17, 1995.
2) Ergonomic Stands -- These stands are either pneumatically or
electronically activated by the operator who can move the table top up
and down, stopping at any desired height, thus helping production and
physical approach to the machine/stand combination. These stands are
covered by TES's patent #5,313,892 which was issued on May 24, 1994.
3) Single Needle Belt-Loop Machines -- This machine takes pre-sewn belt
loop material which is in lengths of 50 to 150 feet. The machine feeds
the belt loop out to the proper length, cuts the belt loop and folds
both ends under by way of turning pins. Next, the operator activation
presents the pre-cut, pre-folded belt loop to the pants waistband
whereupon two air-operated presser feet descend upon the folded belt
loop ends, the turning pins then retract, one end of the belt loop is
sewn, the unit indexes and the opposite end of the belt loop is sewn.
The presser feet return to the up position, the operator moves the
garment and the process is repeated. All patents, if any, on this
product have expired.
4) Button Hole Indexers -- This unit uses a conventional single head
buttonhole machine. The operator places a shirt panel with the placard
already formed at the beginning position on the buttonhole indexer
moving plate and engages the starting button. The first buttonhole is
sewn, upon completion the shirt panel is indexed the proper distance
where the second buttonhole is sewn, it is once again indexed and this
process continues through six, seven or eight buttonholes. The panel
is then removed and the operator starts the process again. All
patents, if any, on this product have expired.
21
<PAGE>
5) Takeaway Mechanisms -- These mechanisms are built to customer
specifications and are used for the purpose of moving parts or full
garments from one point to another. This product is covered under
TES's patent #5,303,910 which was issued on April 19, 1994.
6) Indexing Stackers -- Indexing stackers incorporate the patented take-
away and pick-up device described in patent #5,303,910 where as the
pick-up / take-away mechanism moves the particular part to a
predetermined position where it is placed, the stacker then moves so
that the next part picked up by the take-away is placed in a different
stack, the indexer then returns to the original position to await
receipt of the next part. The sequence is then repeated.
7) Label Loader Folders -- The label loader folders feeds a label from a
hopper to a folding mechanism that folds the label, if required. It
presents the label to the sewing machine which is then activated, the
label is sewn on the garment. The label loader repeats the process.
This product is covered by TES's patents #4,677,923 and #4,979,934
which were issued on July 7, 1987 and December 25, 1990 respectively.
8) Automatic "J" Tackers -- The term automatic "J" tacker is a generic
term for a machine designed to make one tack then shift and place a
second tack automatically. These tacks are normally placed in
positions on garments that require additional reinforcement to add
strength. Patents on this product, if any, have expired.
9) Belt-Loop Winders -- During the process of manufacturing a belt loop
in lengths of 50 to 150 feet, the belt loop winder winds the belt loop
up on a reel (very similar in appearance to a movie reel that film is
wound on). These reels are then taken to a belt loop machine where the
belt loop material is then pulled off these reels by the belt loop
sewing machine. No patents exist on this product.
10) Needle Positioners -- Needle positioners are air operated units that
are retrofitted to existing conventional sewing machines. This unit
when activated positions the needle up and out of the sewn work. This
process was traditionally done by the operator turning the pulley hand
wheel. This product is covered under TES's patents #4,271,775 and
#4,270,474 which were issued on June 9, 1981 and June 2, 1981
respectively.
11) Pocket Creasers -- The pocket creaser takes the pre-formed and cut
pocket material and first folds it, then creases it by means of heat
so that the operator can sew the pocket in a closed fashion into the
garment or, in the case of a back pocket, onto the outside of the
garment. No patents exist on this product.
12) Pneumatic Circuit Boards -- This technology was discovered in the mid-
1970's at which time TES was only one of two companies (that TES is
aware of) who were capable of manufacturing multi-level pneumatic
circuit boards. Basically, the circuit
22
<PAGE>
boards are multi-layered acrylic sheets that are grooved and ported to
facilitate the flow of air to specific ports in a valve configuration.
This technology to air is similar to an electronic printed circuit
board and greatly enhances the capability of pneumatic operations. No
patents exist on this technology although the circuit boards created
were copyrighted from 1976 to 1986 at which time the use was greatly
reduced as TES converted to electronics.
13) Air Operated Clamp Lifts -- The function of the air operated clamp
lift is to semi-automate tacker sewing machines. The clamp lift
controls the raising and lowering of the presser foot and the engaging
of the sewing machine into the sew cycle. TES's patents on this
product have expired.
14) Electronic Gearing Components for Sewing Machines -- The technology
referred to as electronic gearing is the ability to coordinate to
within one-eighth of one degree the accuracy between the needle and
the bobbin hook assembly of a sewing machine. TES believes that this
technology has many applications and is used in the Twin Needle Belt-
Loop Sewing Machine which operates as described above and is covered
by TES's patent #5,458,075 issued on October 17, 1995.
During fiscal year 1996, sales of the Label Loader Folders contributed 17%
to consolidated revenues with sales of the folders divided between three
different models, contributing 14%, 1.6% and 1.4%, respectively. During fiscal
year 1995, sales of the Label Loader Folders constituted 21% of revenues, split
between two models at 18.6% and 2.4% each. There were no products which
contributed 15% or more revenues during fiscal year 1994. Management expects
that products containing the electronic gearing technology will become its
dominant products over the next several years.
Historically, TES has primarily designed and manufactured special
application equipment and attachments for denim (blue jeans) and work wear
manufacturers. It also has manufactured equipment for other types of sewing
manufacturers that produce drapery products; upholstery; shoes; sewn medical
supplies; boat, car and aircraft interiors; and general apparel. Currently, TES
receives approximately 80% of its annual revenue from the sale of products from
three denim and work wear manufacturers -Levi Strauss & Co., Wrangler, Inc. and
A.B. Fab Company and substantially all of its license fee and royalty revenue
from one customer, Brother. The loss of any of these customers could materially
affect TES's revenues and net income. See "Risk Factors - Dependence on Limited
Number of Customers." However, management believes that, as it further develops
uses for the electronic gearing technology, such as the spinning machine it is
now developing, TES's dependence on a few customers or segment of the sewing
industry will lessen or disappear.
TES has granted Brother Industries, Ltd. ("Brother") of Nagoya, Japan, a
nonexclusive license to make, assemble, use and sell products (consisting of up
to 12 categories of industrial sewing machines) incorporating the electronic
gearing technology and related additional technology which may be developed by
TES. TES is also required to provide Brother with technical assistance and
training. In return for the license, if certain conditions are met, TES is
entitled to license fees
23
<PAGE>
of up to $6,000,000 in addition to royalties. Brother is required to pay TES an
initial license fee of $250,000 (corresponding to the first category of
machines) and has agreed to pay TES $250,000 within 30 days of the date of the
first commercial shipment of a product in any of the remaining eleven categories
and $250,000 within 60 days of the date the aggregate net sales of products in a
category equals $30,000,000. In addition, TES is entitled to a continuing
royalty of 2% of net sales, 1.75% of net sales relating to additional "know-how"
provided by TES to Brother and 80% of any sub-license income of Brother relating
to the TES technology during the life of patent or any continuation thereof.
Brother is required to pay TES additional fees at TES published rates for
technical assistance and training. Brother has developed machines in two
categories which it is advertising and promoting at trade shows.
TES is also in various stages of formal and informal negotiations with
various other manufacturers of equipment for the sewing and spinning industry
for the license of the electronic gearing technology.
Patents
- -------
TES's success depends in large part on its ability to exploit its existing
patents and to obtain additional patents on similar or new technology. TES
currently has eight patents under which it is producing products and is working
on designs for additional products. See "Business- Research and Development."
The patents have expiration dates ranging from 1998 to 2012. TES also sells
products on which it holds patents that have expired. See "Business - Products."
TES is currently working on obtaining patent protection in countries other than
the U.S. on its electronic gearing technology.
There can be no assurance that foreign patents will be approved, that TES
will develop additional proprietary products that are patentable, that any
patents issued to TES will provide TES with competitive advantages or will not
be challenged or that the patents of others will not prevent the
commercialization of products incorporating the technology. Furthermore, there
can be no assurance that others will not independently develop similar products,
duplicate TES's products or design around its patents. Any of the foregoing
could have a material adverse effect on TES's results of operations and
financial condition.
Litigation, which could result in substantial costs to TES, may also be
necessary to enforce its patents or to determine the scope and validity of third
party proprietary rights. If competitors or customers of TES that claim
technology also claimed by TES prepare and file patent applications, TES may
have to participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial costs to TES, even if the eventual outcome is favorable. Any such
litigation or proceedings, regardless of outcome, could be expensive and time
consuming or subject TES to significant liability, require disputed rights to be
licensed from third parties or require TES to cease using the technology, all of
which could have a material adverse effect on TES's results of operations. TES
does not know of any threatened challenges to any of its patents.
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<PAGE>
Research and Development
- ------------------------
TES primarily provides solutions to production or ergonomic problems
of its customers which are primarily sewing manufacturers and produces and
markets such products or technology. It also modifies existing products and
markets them for different applications. When a sewing manufacturer or other
customer comes to TES with a problem, TES will generally consult, build and then
manufacture a piece of equipment designed to eliminate or lessen production or
ergonomic problems or enhance production capabilities. Once the piece of
equipment has been designed and produced as required by the customer, TES
generally retains rights to the design and then offers the equipment and
technology to the industry as a whole. In many cases, TES obtains a patent on
the process to protect its rights. See "Risk Factors - Dependence on Patents and
Ability to Protect Proprietary Products."
At the present time, TES is in the process of designing and building
the following equipment:
. A custom designed pickup and delivery system for a bedding
manufacturer.
. An apparatus to automatically inflate soccer balls for a
sporting goods manufacturer.
. A special system to rotate heating dryers for silk screen
printing for the same sporting goods manufacturer.
. A unit to cut belt loop and other like materials to obtain a
point cut on both ends.
TES is also in the process of designing the following equipment which uses TES's
newly patented electronically gearing technology:
. A multi-head button hole machine.
. A multi-head button sewing machine.
. A felling machine.
. A single needle plain sewer.
. A heavy-duty spinning machine.
TES incurred research and development expenses of $140,990, $192,364 and
$196,963, respectively in fiscal years 1994, 1995 and 1996, of which the 1995
and 1996 expenses were additionally reduced by reimbursements of $150,000 in
each year under the Joint Development Agreement described below. TES has
incurred research and development expenses of $97,213 during the first nine
months of fiscal year 1997.
25
<PAGE>
With respect to the felling machine, TES entered into a Joint Development
Agreement with a denim clothing manufacturer to develop a felling machine
suitable for inseaming jeans using the TES computer controlled sewing mechanism.
Under the agreement, TES retains ownership of the technology, but granted the
manufacturer a nonexclusive, paid-up license to the jointly developed felling
machine. The manufacturer paid TES a fee of $300,000 to develop the felling
machine. In return, in addition to the license, it has the exclusive right after
production of the first felling machine to purchase the resulting felling
machines so long as it purchases a minimum of the lesser of TES's entire
production or 249 machines during each year. The cost of each machine is as
agreed to from time to time, but in no event in excess of $20,000 per machine.
With respect to felling machines sold to any other person, the manufacturer is
entitled to receive a royalty of 4% of the gross selling price until such time
as it has received an amount equal to the amount paid by it to develop the
product plus interest at a rate of 10% per annum. TES currently has a first
generation prototype of the felling machine in operation, which is considered
75% complete. In November, 1996, the manufacturer requested that the work be put
on hold; development work is expected to resume in April 1997.
Market
- ------
TES's customers are primarily, but not exclusively, apparel manufacturers.
In addition to providing products used in apparel manufacturing, TES has
designed and built special equipment for Ford Motor Company, Lockheed Aerospace,
Camel Tent and Awning, and California Sail and Rigging as well as a number of
furniture manufacturers and medical supply companies. An example of special
equipment that TES has produced is an automated soccer ball inflater. TES is
currently developing a heavy-duty spinning machine for the spinning industry.
These types of sales make up approximately 1% of TES's revenues.
TES currently markets primarily to the apparel industry. It sells its
products and services directly to end users as well as by means of a dealer
network of approximately 125 dealers worldwide. In addition, TES advertises
monthly in one or more of the apparel industry's international trade magazines.
TES also regularly attends apparel industry trade shows as an exhibitor to
display its equipment and technology. TES exhibited at a trade show in Japan in
May 1996 and at the Bobbin Show in Atlanta in October 1996. It also plans to
exhibit at the 1997 Apparel Show of the Americas in Miami in March 1997 as well
as the IMB Show in Cologne, Germany in May 1997.
Backlog
- -------
TES estimates that its backlog orders believed to be firm as of March 31,
1996 and 1995 were $780,000 and $612,000 respectively. The backlog on March 31,
1996 has been completed. Backlog orders believed to be firm as of February 20,
1997 were $219,300. TES estimates that such backlog will be completed by the end
of May 1997.
26
<PAGE>
Competition
- -----------
Management believes that all of the large Japanese and most of the other
manufacturers of equipment for the apparel industry maintain research and
development departments which perform research along the same lines as TES. All
of these companies are much larger than TES and have much larger research and
development facilities. See "Risk Factors -Potential Adverse Effects of
Competition." In addition, management estimates that there are four companies of
approximately the same size as TES that provide similar services and products.
TES's management is also aware of two companies in Europe which perform similar
services, but does not know the size of the companies.
Like TES, most of these competitors perform research and development at a
customer's request. TES has found that its competitors have designed products
similar to TES's Single Needle Belt Loop Machine, Ergonomic Stands and Pocket
Creasers to which extent there is direct competition with these TES products,
although one of TES's largest competitors has licensed the patented electronic
gearing technology from TES as opposed to trying to develop its own technology.
Generally, the market in this industry is targeted through advertising in trade
journals and attendance at trade shows such as the Bobbin Show. The principal
methods of competition, in addition to technology, are price, workmanship,
overall machine performance and service offered.
Manufacturing
- -------------
TES generally manufactures all prototype products which it develops
pursuant to service agreements and manufactures the already developed products
it offers. It also sometimes manufactures the final products under such
contracts for the customer. However, TES's general policy has been to outsource
manufacturing of components (such as nickel and chrome plating for the ergonomic
stands) which for various reasons create environmental hazards. So far TES has
found that it has generally been less expensive to outsource when the
environmental compliance costs are factored in. In the event that TES were no
longer able to outsource the manufacture of these components or products, it
would most likely change the finish. TES has no current plans or perceived need
to make any material capital expenditures for environmental control.
TES's facility has the machining capabilities of sawing, milling, welding,
brazing, sanding, surface grinding, drilling, tapping, threading, turning
(lathe), riveting, bending, heat treating and painting. TES maintains an
assembly department which consists of eight assembly stations, each with an
assortment of hand tools, electronic and air-driven power tools, vises, air
supply and electronic requirements. In addition, the assembly department has two
stations designated for the assembly of electronic circuit boards and
components. During manufacture and assembly and prior to shipment, each product
manufactured by TES goes through a series of quality checks.
TES maintains an in-house inventory of all parts it manufactures and
approximately 80% of the components supplied by outside vendors. Approximately
25% of components of TES products are vendor supplied. TES generally uses
components supplied by a number of different sources and is therefore not
predominantly dependant on one supplier of any component of any of its products.
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<PAGE>
In addition, with the exception of a few items such as P.L.C.s (programmable
logic controller, i.e. mini computer), PC computers, electric motors and
electric switches (which are available from numerous suppliers), TES has the
capability of manufacturing the components used in its products. Raw materials
are also available from many suppliers.
Property
- --------
Until September 30, 1996 when it was sold, TES owned a small retail
shopping facility (commonly known as a strip center) in Knoxville, Tennessee.
The land and building were valued at $755,000 on TES's balance sheet. The
property was sold for $825,000. The proceeds were primarily used to pay off bank
loans. TES uses approximately 20,000 square feet of the total 33,000 square feet
available at the strip center for its operations and under an oral agreement
with the buyer may remain in the space rent free until May 1997. The rent free
space added a prepaid rent benefit to TES valued at $32,000. The rent benefit is
expensed each month at the rate of $4,000 per month. After the expiration of the
rent free period, TES may continue to rent the space on a month to month basis
at a rate to be negotiated (which is expected to be in the vicinity of $4,000
per month). Of that space, the manufacturing area consists of 18,000 square
feet, 2,000 square feet of which constitute research and development operations.
The remaining 2,000 square feet houses the administrative offices.
TES also owns approximately 5.71 acres of undeveloped land approximately
one quarter mile from the existing facility. To meet anticipated growth needs,
TES plans to build a 55,000 square foot building consisting of 40,000 square
feet for manufacturing and assembly and 15,000 for research and development and
administrative offices on the land. TES has architectural drawings of the
proposed facility and, assuming sufficient capital is available, expects the
facility to be complete by September or October 1997. See "Risk Factors - Lack
of Working Capital." Based on bids received from contractors over the last three
months, the costs of construction of the building are estimated to be
$1,600,000. In the event that TES were unable to remain in its current space
until its new facility is built, management believes that there is adequate
available space in the Knoxville area and that this would not create a problem
for TES. TES has no unusual space requirements.
TES's machinery and equipment consists of saws, mills, welding and brazing
equipment, sanders, surface grinders, drill presses, tapping and threading
machines, lathes, riveting and binding equipment, heat treating ovens and
painting equipment, hand tools, electronic and air-driven power tools, vises,
air compressors and electronic testing equipment. TES's machinery and equipment
is valued at $518,000 on TES's balance sheet. Management believes replacement
costs would be closer to $1,000,000.
Employees
- ---------
TES is a non-union shop with eighteen hourly employees. It also has eight
salaried employees. TES employees are machinists, welding specialists,
electronic specialists, assembly personnel, shipping and inventory personnel,
clerical workers, electronic and mechanical engineers
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<PAGE>
and sales and service personnel. Approximately 70% of TES's employees have been
employees of TES for at least ten years.
History
- -------
TES was founded by Richard E. Tice (William Tice's father) in 1964 as a
contract designer and manufacturer of specialized, pneumatically operated
garment sewing equipment. Richard Tice had entered the garment making industry
in 1916 as a 13 year old apparel factory worker and worked through the years as
a sewing machine mechanic and equipment innovator, obtaining his first patent in
1950. William A. Tice began working in his father's firm in the 1960's when he
was a teenager. Upon his father's retirement in 1972, William Tice began running
the business and in 1973 incorporated as Tice Engineering and Sales, Inc. Mr.
Tice purchased the last of his father's shares in TES in 1979 and purchased
shares held by his mother in 1995. William Tice obtained his first patent in
1975.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following is management's discussion and analysis of TES's financial
condition and results of operations for the nine month periods ended December
31, 1996 and 1995 and the years ended March 31, 1996, 1995 and 1994.
Analysis of Operations
- ----------------------
Nine Months Ended December 31, 1996 Compared to Nine Months Ended
- -----------------------------------------------------------------
December 31, 1995.
- ------------------
Net sales revenue for the first nine months of fiscal year 1996 (the "1996
Period") was $961,721 compared with $898,371 for the first nine months of fiscal
year 1997 (the "1997 Period"). The differences in net sales revenue between the
periods was primarily due to differences in volume of orders among TES's
products. The changes in net sales revenue from one period to the next is
generally based on fluctuations in customer orders arising out of customer needs
and budgets and since much of TES's products are not products which are replaced
annually, similar orders from the same customers may not appear during the next
year. The fluctuations in orders affect sales volumes of various products
accordingly. In order to maintain competitive prices, management does not
generally make changes in sale price from year to year which are greater than
10% and do not generally affect sales volume. Reduction in volume of sales of a
particular product reduces profit attributable to that product for the period.
The 1996 Period sales included $242,351 (25% of sales) of Label
Loader/Folders, $220,601 (23% of sales) of Ergonomic Stands, and $181,737 (19%
of sales) of Automatic J-Tackers whereas the first nine months of 1997 did not
contain comparable sales. For the 1997 Period, net sales revenue primarily
consisted of $327,188 (36% of sales) of Label Loader/Folders,
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<PAGE>
up significantly from the 1996 Period, and $180,098 (20% of sales) of Automatic
J-Tackers. The Label Loader/Folders are part of TES's regular product line on
which it holds a patent and are ordered periodically by its customers. Sales of
Ergonomic Stands were $87,945 which were down significantly from the same period
of the previous year. Sales of particular equipment, such as the Label
Loader/Folders or Ergonomic Stands, fluctuate as they are sometimes ordered by
an apparel manufacturer in large quantities in one quarter to replace or update
their existing equipment within their budget period and such sales can easily
affect the total sales dollars of one period versus another. TES typically does
not have sales equally divided throughout the year and the timing of large sales
vary from year to year. The remaining revenues from each of these periods were
generated from sales of a mix of TES's other products (primarily Single Needle
Belt Loop Machines) and parts replacement sales.
Management believes that less than 5% of TES's products will become obsolete in
the next 24 months. Most of TES's main products are patented providing some
protection from competitors. In addition, although management expects its larger
customers to purchase products containing the electronic gearing technology
instead of certain other TES products, management believes that many of its
smaller customers or customers located in third world countries will not be able
to afford the equipment using the new technology and will continue to purchase
traditional products. Management believes that the new electronic gearing
technology will only replace approximately 10% of its existing product line in
the near future. In addition, management believes that the decrease in sales for
the 1997 Period as compared to the period of the previous year was primarily due
to the adverse effect of TES's development of the new electronic gearing
technology on sales of existing products. Some of TES's customers have indicated
that they are holding orders for traditional equipment anticipating a conversion
to the new technology. Specifically, certain customers have indicated that they
may want to order the Twin Needle Belt Loop Machine, the Off-the-Arm Lap Seam
Felling Machine, the Button Hole Machine and the Button Sewer incorporating the
electronic gearing technology. TES is currently testing production machines
using the electronic gearing technology and management believes that it can
deliver production models of the Twin Needle Belt Loop Machine in early spring
of 1997.
Cost of sales for the 1996 Period amounted to $653,294 compared to $621,623
for the 1997 Period. Gross profit for the 1996 Period was $308,427 as compared
to $276,748 for the 1997 Period. This represents a decrease in the gross profit
margin from 32% for the 1996 Period to 31% for the 1997 Period. Gross profit
margin was lower in the 1997 Period due to an increase in direct material
purchases in the 1997 Period for orders to be shipped in the fourth quarter.
This is reflected in the cost of direct materials increasing from 41% of sales
in the 1996 Period to 42% of sales in the 1997 Period. Direct overhead costs
also increased from 7% of sales in the 1996 Period to 10% of sales for the 1997
Period. This increase was largely the result of increased clerical salaries and
related payroll tax due to the hiring of a new general manager as well as rent
expense of $4,000 per month allocated to direct overhead after the sale of the
shopping center on September 30, 1996, to account for a rent benefit received.
Other direct costs showed only slight reductions between the two periods. Direct
labor in production and assembly represented 11% and 10% respectively for the
1996 and 1997 Periods. Sales and service salaries amounted to 9% and 7% of
respective sales for the 1996 and 1997 Periods.
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<PAGE>
TES incurs research and development ("R&D") costs on an ongoing basis to
design and develop new equipment as well as to improve existing equipment. R&D
costs are expensed as incurred. Costs incurred in the 1996 Period amounted to
$176,679, of which $150,468 was related to a Joint Development Agreement with a
denim clothing manufacturer to design an inseam felling machine on a non-
exclusive basis. These costs were offset by $150,000 in reimbursements from the
manufacturer resulting in nonreimbursed R&D costs of $26,679. The receipt of the
$150,000 in this period was the last of the scheduled $300,000 reimbursements
under the Joint Development Agreement. TES is required to complete final design
and development of the felling machine at its expense. Although the equipment is
in the first generation prototype stage and is considered to be 75% complete in
November 1996, the denim clothing manufacturer requested that the work be put on
hold; development is expected to resume in April 1997. TES expects to incur
approximately $250,000 in R&D costs to complete development of the felling
machine under the agreement. Due to this delay by the manufacturer, direct labor
and expenses decreased accordingly with labor expenses alone decreasing from
$123,897 in the 1996 Period to $78,322 in the 1997 Period. This resulted in a
lower R&D cost for the 1997 period of $97,213 but with no reimbursements to
offset it. Of the 1997 Period costs, $47,971 related to the Joint Development
Agreement. Future periods will continue to result in additional R&D costs as a
result of equipment design and development as described in "Business - Research
and Development." The inseam felling machine being developed under the Joint
Development Agreement uses the same technology as the electronic gearing and
therefore can be developed simultaneously with costs incurred benefiting other
projects as well.
Selling, general and administrative expenses increased from $318,647 in the
1996 Period to $343,201 in the 1997 Period. This represented an increase from
33% of sales revenue in the 1996 Period to 38% of sales revenue in the 1997
Period. While many expenses decreased in the 1997 Period compared to the 1996
Period, a few categories of expense showed significant increases.
Subsequent to the sale of TES's Westwind Jet in November 1995, airplane
expenses decreased from $69,015 in the 1996 Period to $21,266 in the 1997
Period. The decision to sell the aircraft was based on the need for additional
working capital and to reduce debt, as well as the high market conditions which
allowed the aircraft to be sold at a price higher than TES paid four years
earlier. The 1997 Period airplane expenses were incurred as the need arose to
charter aircraft after the sale of the airplane. Management found that, under
certain circumstances, it is less expensive to charter aircraft than to take a
commercial flight, especially when there are several people traveling, often by
saving hotel and other costs if a one-day trip is not possible using commercial
airlines. However, in the 1997 Period, some trips were made at times when local
aircraft were not available for charter, or the destination was outside the
country as in the trade show TES attended in Japan. These commercial travel
needs contributed to the increased travel and related expenses from $15,479 in
the 1996 Period to $28,696 in the 1997 Period. The trade show in Japan takes
place only once every three years.
Advertising and promotions decreased slightly from $53,534 during the 1996
Period to $47,447 during the 1997 Period resulting from two potential licensees
displaying TES's electronic gearing technology at the trade show in Japan at
their expense during the 1997 Period. This show resulted in the finalization of
the license agreement with Brother. See "Business -Research and
31
<PAGE>
Development." Commission expense decreased significantly from $11,719 to $550
for the 1996 and 1997 Periods respectively as TES did not use the services of a
consultant that it had used during the 1996 Period. Patent expenses amortized
during the 1997 Period increased to $3,411 from $1,569 during the 1996 Period as
TES began amortizing the patent expenses relating to the electronic gearing
technology for which the patent was issued in October 1995. Legal and accounting
expenses decreased from $16,025 during the 1996 Period to $617 during the 1997
Period (the majority of the fees incurred in the 1997 Period were directly
related to the registration and are an expense of the Issuer with a comparable
amount reflected as a receivable due from the Issuer to TES.
Indirect labor (payroll and benefit costs) increased from $105,202 in the
1996 Period to $175,825 in the 1997 Period due to the addition of key employees
and allocation of a lesser amount of officer's salary to R&D expenses as Mr.
Tice began devoting more time to developing the Issuer and less time to R&D.
Rent expenses substantially increased from $270 in the 1996 Period to
$6,000 in the 1997 Period as TES began to incur rent expenses after the sale of
the shopping center in September 1996, although no payments of rent will be made
until June 1997. TES negotiated eight months of rent-free occupancy as part of
the purchase price of the property which is reflected on the balance sheet in
prepaid expenses. The $4,000 per month rent expenses beginning in June 1997
should not substantially affect TES's results of operations and cash flows since
the addition of the rent payments is offset by reduction of approximately $6,500
per month interest payments and $3,400 principal payments due to the payoff of
the Home Federal Bank loan with proceeds of the sale of the real property. The
sale of the shopping center also resulted in the prepayment of TES's pro rata
share of property taxes on the property sold in September 1996 which taxes were
not paid until a later period in the previous year. This change in timing is
reflected in the increase of taxes - other from $10 for the 1996 Period to
$9,699 in the 1997 Period.
Other income increased net income by $16,059 in the 1996 Period and by
$424,754 in the same period of 1997 through the sale of fixed assets. In the
1996 Period, TES realized a gain of $105,593 from the sale of the aircraft in
November 1995 and, in the 1997 Period, a gain of $500,363 from the sale of the
shopping center in September 1996. Income (expense) related to the rental
property went from net expenses of $1,601 for the 1996 Period to $2,300 of net
income in the 1997 Period as a result of the shopping center sale which reduced
depreciation, property tax and insurance expenses although the 1997 Period did
include rental expense of $6,000 for TES's continued occupancy in the center
after the sale. TES expects to continue to incur rental expenses of $4,000 per
month until it has moved to its own building.
Interest expense on long term debt decreased from $75,164 in the 1996
Period to $66,700 in the 1997 Period as a result of the elimination of
approximately $790,000 of debt with the proceeds from the sale of the shopping
center. Interest to related parties in the 1996 Period amounted to $12,953 which
was accrued for interest due to William Tice, a company officer, for funds he
loaned to TES for working capital at a 10% interest rate. Interest to related
parties in the 1997 Period amounted to $11,212 of which $5,767 was accrued for
interest due to William Tice, and $4,970 for interest due to Billie Joe Clayton,
both of whom are company directors; and $475 for interest due
32
<PAGE>
to John Burchill, a company employee. The interest due was for funds loaned to
TES at 10% interest for additional working capital, all of such debt is
unsecured and subordinate to other debt of TES. The debt is in the form of 90
days renewable notes. The debt to Mr. Burchill and Mr. Clayton was converted to
Common Shares of the issuer at $3.00 per share as of the date of this
prospectus.
The average amount of outstanding debt for the 1996 Period was $1,204,198
at an average interest rate of 9.75% while the average amount of outstanding
debt for the 1997 Period was $997,844 at the same average interest rate. The
amount of outstanding debt was reduced significantly on September 30, 1996 when
approximately$790,000 was paid to one of TES's lenders in satisfaction of
several loans.
TES had a net loss of $20,840 in the first nine months of fiscal 1996
compared with net income before provision for income taxes of $261,088 in the
first nine months of fiscal 1997. The gain for the 1997 Period is primarily
attributable to the sale of the real estate on September 30, 1996. After the
provision for income taxes, TES had a net loss of $16,586 for the 1996 Period
and net income of $251,771 for the 1997 Period. The 1996 Period reflects
$121,444 in deferred tax assets divided as short and long term, and the 1997
Period reflects $102,337 in deferred tax assets all of which are short term.
These deferred tax assets are a result of tax loss carryovers from prior loss
years. Prior to the second quarter of the 1997 Period deferred tax assets were
recognized at a 15% tax rate as it was expected that TES would have taxable
income in future years of $50,000 or less per year. Upon the sale of the
shopping center in the 1997 Period which generated a substantial gain, and the
execution of the license agreement with Brother which will generate an initial
license fee of $250,000 and periodic license fees of $250,000 (if equipment
using the licensed technology is sold and reaches certain sales levels) plus
royalties (with no significant additional costs incurred), as well as the normal
income received from operations, management believes that TES will realize the
balance of the deferred tax asset prior to the end of the 1997 Period;
therefore, the deferred tax asset is treated as a current asset and no valuation
allowance is made. The tax rate recognized is 34% at the December 31, 1996
period as required in accordance with Accounting Principles Board Opinion 20,
"Accounting for Changes in Accounting Estimates" as well as FAS 109 "Accounting
for Income Taxes" in which deferred tax assets are valued at the tax rate
expected to apply to taxable income in the period in which the asset is
realized.
The auditor's report on the audited financial statements of TES for the
year ended March 31, 1996, originally dated May 23, 1996, contained an
explanatory paragraph noting substantial doubt about TES's ability to continue
as a going concern. Since that time, TES has realized substantial gains from the
sale of company assets, has retired a substantial portion of both short-term and
long-term debt and has entered into a licensing agreement with a sewing machine
manufacturer which will provide net operating income for the year end March 31,
1997 and which management believes will generate $3,000,000 in license fees (in
addition to royalty income) over the next three years. Because of this new
information, the auditors' have removed this going concern explanatory paragraph
from their report and re-issued the financial statements, dated February 10,
1997.
33
<PAGE>
Certain amounts in the December 1995 income statements have been
reclassified from general and administrative expenses to cost of sales, applied
overhead, research and development and rental property expenses to be consistent
with the December 1996 interim (unaudited) financial statements. See "Financial
Statements."
Year ended March 31, 1996 Compared with Years Ended March 31, 1995 and 1994
- ---------------------------------------------------------------------------
Net sales revenue for 1996 was $1,242,558 compared to $1,239,854 for 1995,
and $1,308,708 for 1994. In fiscal year 1996, sales of the Label Loader/Folders
constituted 17% of sales revenue. The sales were divided among three models -
14%, 1.6% and 1.14%. In fiscal year 1995, sales of Label Loader/Folders
represented 21% of sales revenue, divided between two models -18.6% and 2.4%.
Sales of no other products represented 15% or more of sales revenue in either
year. In fiscal year 1994, a variety of products and parts replacements were
sold with sales of no one product constituting 15% or more of sales revenues.
Revenues from services such as providing seminars, on-site installation fees and
non-warranty equipment repair amounted to less than 1% of sales in each of the
periods listed.
Cost of sales have decreased in each succeeding year since 1994. Cost of
sales amounted to $808,161 in 1996, $867,702 in 1995 and $999,797 in 1994. Gross
profit margin was $434,397 for 1996 as compared to $372,152 for 1995 and
$308,911 for 1994. The gross profit margin improved in each of these years going
from 23.6% in 1994 to 30.1% in 1995 and 35% in 1996. This improvement was
largely due to the lower material costs which reduced in proportion to gross
sales, material costs also reduced due to the type of sales made since certain
products, such as Ergonomic Stands, contain less costly materials. In addition,
management has worked to consolidate material purchases to obtain better volume
discounts from suppliers. Another significant factor in the reduction of cost of
sales was the reduction in sales and services salaries in fiscal year 1996 due
to the loss of sales/service personnel late in the year who were not replaced
until the following year.
TES incurs R&D expenses on an ongoing basis to design and develop new
equipment as well as to improve existing equipment. R&D costs are expensed as
incurred. Costs incurred in fiscal year 1996 amounted to $196,963 of which
$160,633 were related to a Joint Development Agreement with a denim clothing
manufacturer to design an inseam felling machine on a non-exclusive basis which
was offset by the receipt of $150,000 in reimbursements from the manufacturer.
The remaining R&D costs for fiscal year 1996 were $46,963. In fiscal year 1995,
TES had R&D expenses of $192,364 of which $150,468 were related to the same
Joint Development Agreement and were also offset by the receipt of $150,000 in
reimbursements from the manufacturer, resulting in remaining R&D costs of
$42,364 for fiscal year 1995. During fiscal year 1994, TES incurred R&D costs of
$140,990. These costs were not related to any joint development agreement and,
therefore, were not offset by any reimbursements. The R&D costs for fiscal year
1994 were primarily related to development of the electronic gearing technology.
The Joint Development Agreement with the denim clothing manufacturer also
involves the same technology. Under the terms of the Joint Development
Agreement, the denim manufacturer was responsible for reimbursing TES for costs
of up to $300,000. Any additional development costs of the inseam felling
machine are at the expense of TES. The equipment related to this agreement is in
the first generation
34
<PAGE>
prototype stage and is considered to be 75% complete. The denim clothing
manufacturer requested in November 1996 that the work be put on hold;
development is expected to resume in April 1997. Future periods will continue to
result in additional R&D costs as a result of equipment design and development
as described in "Business - Research and Development." The design of the inseam
felling machine used the electronic gearing technology and, therefore, design
advancements and knowledge obtained can relate to many projects.
Selling, general and administrative expenses increased from $278,632 in
1994 to $264,592 in 1995 to $368,149 in 1996. These expenses were 21% of sales
revenue in 1994 and 1995 as compared to 30% of sales revenue in 1996. The
increase in expenses for fiscal year 1996 was due mainly to increases in
airplane and travel related expenses, legal and accounting fees and clerical
salaries.
Airplane and travel related expenses increased from $45,101 in 1994 to
$58,874 in 1995 to $93,776 in 1996. The large increase in fiscal year 1996 was
due to $20,000 of expenses incurred due to mandatory aircraft maintenance
required by the Federal Aviation Administration. An additional $8,000 was
incurred in 1996 to rent a van to take a prototype Electronically Geared Sewing
Machine to various customer locations to introduce the equipment to the market.
The company aircraft was sold in November 1995, but additional airplane expenses
were incurred as aircraft was chartered as needed to cover trips which would
have otherwise required overnight stays and other expenses which would have been
incurred to travel via commercial airlines.
The amount of patent expenses amortized increased from $72 in 1994 to
$1,223 in 1995 when the patents issued on the "Takeaway Mechanism" and the
"Ergonomic Stand" allowing for amortization of related costs. Patent expenses
increased again to $4,042 in 1996 when the patent for the "Electronic Gearing
Technology" issued in October 1995 and the related expenses began to be
amortized. Legal and accounting expenses increased from $5,808 in 1994 to $8,300
in 1995 to $33,056 in 1996. The increase was due to the expenses associated with
preparing the licenses for the new electronic gearing technology as well as
consultations with attorneys and accountants relating to this registration
statement. Indirect labor (payroll and benefit costs) amounted to $91,088 in
1994, $59,617 in 1995 and $94,490 in 1996. Payroll and benefit costs represented
7% of sales revenue in 1994 compared to 5% in 1995 and 8% in 1996. The lower
indirect labor costs in 1995 were largely due to the loss of a purchasing agent,
who has since been replaced, and the allocation of some clerical staff salaries
to R&D during that period.
Other expenses amounted to $110,371 in 1994 and $100,449 in 1995 while TES
has other income of $5,332 in 1996. The other income for fiscal year 1996 was
the result of the sale of the company aircraft in November 1995 for $105,593 as
well as additional income of $7,275 received in commissions on outgoing freight.
The rental property generated net expenses of $19,591 in 1994 and net income of
$9,918 in 1995 as vacant buildings were rented then in 1996 net income from
rental property decreased to $3,151 due to the vacancy of a large area during
remodeling for a large dry cleaning outlet.
35
<PAGE>
Interest to related parties in fiscal years 1994, 1995 and 1996 was $4,105,
$15,326 and $16,312, respectively, which constituted accrued interest due to
William Tice, a company officer, for funds loaned to TES for working capital at
a 10% interest rate. Such debt is in the form of 90 day renewable notes and is
unsecured and subordinate to other debts of TES. Other interest expense for debt
to unrelated parties increased from $87,400 in 1994 to $96,446 in 1995 then
decreased to $94,551 in 1996. The average debt for fiscal year 1994 was
$1,112,700 at an average interest rate of 8.58% as compared to the average debt
for fiscal year 1995 which was $1,245,300 at an average interest rate of 9.27%,
and an average debt for fiscal year 1996 of $1,177,500 at an average interest
rate of 9.75%. The reduction in interest paid in 1996 was a direct result of the
reduction in debt which resulted from the sale of the company aircraft in
November 1995.
TES has a net loss before taxes of $221,082 in 1994 with a provision for
income tax benefit of $41,680 which resulted in a net loss of $179,402. The net
loss before taxes in 1995 amounted to $35,253 with a provision for income tax
benefit of $5,591 which resulted in a net loss of $29,662. Then in 1996 TES
showed a net income of $24,617 which when reduced by income taxes of $5,537
resulted in a net income of $19,080. After implementing a change in accounting
principal in 1994 which accounted for deferred income taxes due to past losses
the resulting income/losses for the three year period was a net loss in 1994 of
$109,483; a net loss in 1995 of $29,662; and net income in 1996 of $19,080. The
greater losses in 1994 were primarily due to the significant amount of funds
spent on research and development for the new electronic gearing technology
without receiving any developmental fees from outside sources. In 1995 the
receipt of $150,000 in development fees greatly helped to offset these
expenditures. Then in 1996 although research and development costs increased the
receipt of additional development fees, the income realized from the sale of the
aircraft, and the reduction in cost of sales and other operating expenses
resulted in an income for the year.
The auditors report on the audited financial statements for the year ended
March 31, 1996, originally dated May 23, 1996, contained an explanatory
paragraph noting substantial doubt about TES's ability to continue as a going
concern. Since that time, TES has realized substantial gains from the sale of
company assets, has retired a substantial portion of both short-term and long-
term debt and has entered into a licensing agreement with a sewing machine
manufacturer which will provide net operating income for the year end March 31,
1997 and which management believes will generate $3,000,000 in license fees (in
addition to royalty income) over the next three years. Because of this new
information, the auditors' have removed the going concern explanatory paragraph
from their report and re-issued the financial statements, dated February 10,
1997.
Certain amounts in the March 31, 1996, 1995 and 1994 income statements have
been reclassified from general and administrative expenses to cost of sales,
applied overhead, research and development and rental property expenses to be
consistent with the December 1996 and 1995 interim (unaudited) financial
statements. See "Financial Statements."
36
<PAGE>
Future Operations
- -----------------
Within the next year or two, TES must move from its existing facility. TES
plans to build a new facility on undeveloped property it owns to allow for
continued growth in personnel and product development. Management is currently
negotiating an arrangement in which a facility will be built to TES's
specifications on this property and expects that the property will be sold and
leased back to TES. The lease is expected to have a 15 year term and include an
option to purchase the facility. Based on bids received from contractors over
the last three months, the costs of construction of the new building are
estimated to be $1,600,000. Management currently expects the new facility to be
completed by September or October of 1997.
TES has been developing products which provide technical solutions to
problems relating to the manufacturing processes of various companies, primarily
in the sewing industry, but also in other industries since the business began in
1964. Ninety-five percent of its customers are repeat customers. Much of its
product line is equipment which was produced for a particular customer to
address a problem. TES solves the problem for the customer but keeps the right
to market the resulting equipment and then sells the equipment to other
customers with similar situations. For example, the Label Loader/Folder was
originally built at the request of Levi Strauss, but has since been sold to
numerous denim and work wear manufacturers all over the world including
Wrangler, Inc., Lee Company and H.I.S. Company. Sale of the equipment is
ongoing.
TES markets products such as the Label Loader/Folder through its dealer
network, direct sales and advertising (primarily in trade journals) and by
attendance at trade shows. Management believes that its traditional products
will continue to generate sales and that TES will continue to solve other
problems which may arise in the manufacturing process for its customers.
Management also believes that there is great demand for products which will
incorporate the electronic gearing technology and is designing various machines
using the new technology including a multi-head button hole machine, a multi-
head button sewing machine, a felling machine, a single needle plain sewer and a
heavy-duty spinning machine.
With the sale of the shopping center in September of 1996, TES was able to
significantly reduce its debt. In addition, as of February 20, 1997, it had a
backlog of orders it believes to be firm of approximately $219,300 for equipment
using traditional technology and has had indications of interest for additional
orders of approximately $500,000 relating to products using the new electronic
gearing technology when production models are complete. The indications of
interest are not firm orders and may never come to fruition. Management believes
that the ongoing orders for traditional equipment will be sufficient to allow
TES to continue operations through the next year.
In addition to revenues which may be received from products containing the
new technology, TES licensed the electronic gearing technology to Brother
Industries, Ltd. and has begun formal and informal negotiations with other
sewing machine manufacturers. Management believes that other sewing machine
manufacturers will license the electronic gearing technology to remain
competitive with Brother. The bulk of any fees and royalties generated under any
such licenses will
37
<PAGE>
be profit since TES is not expected to incur any additional significant
expenses in connection with the licenses. This income would provide TES
with additional working capital. Management intends to use the funds to
expand its operations so that it will be able to fill the orders it
believes it will receive for products using the new technology as well as
continuing to market its traditional product line. Initial market reaction
to the new technology has been favorable as evidenced by the Joint
Development Agreement with the denim clothing manufacturer and the license
with Brother. In addition, it hopes to use the funds for development of
additional applications of the electronic gearing technology thereby
broadening its customer base.
At some point in the future, management may deem it advantageous for
the Issuer to pursue diversification or other goals through acquisition of
businesses which may or may not be in industries related to TES's current
business. The acquisitions may be funded through the use of the Issuer's
securities or through other means depending upon the situation at the time.
Management has not identified any particular targets nor does it expect to
pursue any acquisitions until it has had the opportunity to further develop
applications of the electronic gearing technology.
Liquidity and Capital Resources
-------------------------------
December 31, 1996 Compared to December 31, 1995
-----------------------------------------------
At December 31, 1995 the ratio of current assets to current
liabilities was 0.59 to 1 compared to 1.03 to 1 at December 31, 1996. The
major reason for this change was the retirement of short term debt upon the
sale of the real estate and an increase in the current portion of deferred
tax assets. Quick liquidity (current assets less inventories to current
liabilities) was 0.14 to 1 at December 31, 1995 and 0.50 to 1 at December
31, 1996. The current and quick ratios both improved from December 31, 1995
to December 31, 1996 due to the repayment of current debt. The monthly
average collection period was 36 days in 1995 and 41 days in 1996.
In the period ended December 31, 1995, cash used in operations was
$1,412 compared to $311,733 for the period ended December 31, 1996. Cash
used in operations increased in the period ended December 31, 1995 and
increased for the period ended December 31, 1996 due to increased costs of
materials related to sales, increased on-hand inventory and lack of
reimbursement of R&D costs as well as increased travel, rent and related
expenses resulting from the sale of the airplane and the real property.
Cash was also reduced by expenditures relating to the organization of the
issuer. Cash provided by investing activities during the period ended
December 31, 1995 was $254,328 and for the period ended December 31, 1996
was $786,942. The sale of the land and building generating $824,475 was the
major cause of this change. Cash used in financing activities for the
period ended December 31, 1995 was $277,366 and for the period ended
December 31, 1996, $471,698. Cash used in financing activities increased
from the 1996 Period to the 1997 Period as a result of payments of debt,
both short-term and long-term, while cash received from financing
activities primarily involved the refinancing of certain debt.
The ratio of debt to total capitalization was 0.92 to 1 at December
31, 1995 and 0.69 to 1 at December 31, 1996. Total expenditures for fixed
assets (equipment) during the nine
38
<PAGE>
months ended December 31, 1995 were of $11,438 and for the period ended
December 31, 1996, $5,594. TES has no commitments for capital expenditures
due to its present lack of funds to fulfill any such commitments.
TES borrowed $225,000 from SunTrust Bank, East Tennessee, N.A. on
August 31, 1996 pursuant to a commercial note with a maturity date of
August 30, 1997. The interest rate is the lender's Base Rate plus 1% which
is currently 9.25%. The funds were initially borrowed under a 120 day
renewable note which was converted to long-term debt on August 31, 1996.
The restructuring was done at the request of the bank to provide for
monthly payments of principal. The note is payable in eleven installments
of $4,711.84 with a final payment of the remaining principal and accrued
interest due on the maturity date. As of December 31, 1996, TES owed
$215,989 under the note. The note is secured by a Deed of Trust on Lot #4
on Tice Lane which is the undeveloped real estate on which TES intends to
build its new facility, an assignment of a life insurance policy on Mr.
Tice and Mr. Tice's personal guaranty. The debt was incurred to provide
working capital for the continued development of the new technology and for
fees relating to license negotiations and registration of the Issuer's
stock. TES expects to use funds from operations including licensing fees to
repay the debt.
In addition, TES has a ninety-day renewable note in the principal
amount of $20,000 due and payable upon demand or if no demand is made on
May 24, 1997 with Commercial Bank. The note was originally issued in the
principal amount of $25,000 which amount was reduced at the last renewal.
The note bears interest at a rate of 9.25% per annum and is secured by a
1989 Mercedes 420. The debt was incurred for working capital and TES
expects to use funds from operations to repay it.
TES also has borrowed funds from Mr. Tice. As of December 31, 1996,
the principal balance owed him was $81,908. All of the debt bears interest
at the rate of 10% per annum and is subordinate to other debts of TES
unless written notice is otherwise given. Payments totaling $136,975 have
been made to Mr. Tice on these notes in fiscal year 1997. The notes are
renewable in 90 day increments. The outstanding promissory notes are due
and payable as follows: $15,000 due March 19, 1997; $285 due March 28,
1997; $50,000 due March 29, 1997; $1,098 due March 30, 1997; $1,000 due
April 15, 1997; $3,000 due April 21, 1997; $2,000 due April 26, 1997; and
$9,525 due April 27, 1997. The debt was incurred to provide working capital
which was primarily used for operations and to cover expenses of
development of the new technology. The notes were extended to retain
working capital. The debt is expected to be repaid out of operating income
when TES's operating income and cash flow can support repayment.
March 31, 1996 Compared with March 31, 1995
-------------------------------------------
At March 31, 1995 the ratio of current assets to current liabilities
was 0.53 to 1 compared with 1.02 to 1 at March 31, 1996. The major reason
for the change was the restructure of the notes payable from short term to
long term debt. Quick liquidity (current assets less inventories to current
liabilities) was 0.24 to 1 at March 31, 1995 and 0.28 to 1 at March 31,
1996. The current ratio and quick ratio both improved due to the
restructure of current debt. The monthly average collection period was 36
days in 1995 and 41 days in 1996.
39
<PAGE>
In the year ended March 31, 1995, cash used by operating activities
was $142,966 compared to cash provided by operating activities in fiscal
year 1996 of $19,820. The increase in cash provided by operations was
attributable to a decrease in costs of materials related to sales, as well
as an increase in cash received from customers in payment of receivables.
Cash used by investing activities in 1995 was $36,714 and in 1996 cash
provided by investing activities was $220,730. The sale of the aircraft
generating $350,000 was the cause for this change. Cash provided from
financing activities in 1995 was $202,307 and cash used in financing
activities in 1996 was $283,292. Cash used in financing activities
increased in fiscal 1996 as a result of increased principal payments on
notes held by an officer of TES and the payoff of debt upon the sale of the
airplane.
The ratio of debt to total capitalization was 0.92 to 1 at March 31,
1995 and 0.90 to 1 at March 31, 1996. Total expenditures for fixed assets
during fiscal year 1996 consisted mainly of improvements to the buildings
of $27,835 and $9,422 for new equipment.
LEGAL PROCEEDINGS
-----------------
There are no material legal proceedings currently pending against TES
or the Issuer.
MANAGEMENT
----------
Officers and Directors of the Issuer and TES
--------------------------------------------
<TABLE>
<CAPTION>
Name Position with the Issuer (1) Position with TES
- -------------------- --------------------------------- -----------------------
<S> <C> <C>
William A. Tice President, Chairman of the President, Chairman of
Board, Director Board, Director
Karen Ann Walton Vice President, Secretary/ Vice President,
Treasurer, Director Secretary/
Treasurer, Director
Sarah Y. Sheppeard Director Director
Billie Joe Clayton Director Director
- -----------------------------------------------------------------------------------
</TABLE>
(1) All persons listed were appointed to such positions in 1996.
Officers serve at the discretion of the Board of Directors. Directors
hold office until the next annual meeting of shareholders and until their
successors have been elected and accept office. Directors receive
directors' fees of $300 per year.
40
<PAGE>
William A. Tice, age 52, has been President, Chairman of the Board
and a director of TES since 1972 when he purchased the business from his
father. Mr. Tice received an associate degree in Accounting and Business
Administration from Knoxville Business College in 1974.
Karen Ann Walton, age 36, has been Secretary and a director of TES
since 1983, Treasurer from December 1983 to June 1986 and since July 1996
and an employee since 1978. She became General Manager and a Vice
President in 1988. From June 1992 to March 1993, she also worked for
Kimberly-Clark Corp assisting in relocating their accounts receivable
department from Neenah, Wisconsin to Knoxville. Ms. Walton became a
Licensed Public Accountant in 1989, but due to her employment with a
single company has ceased maintaining the license. She received an
Associates Degrees in Accounting and Computer Programming from Draughon's
Junior College in Knoxville, Tennessee in 1986.
Sarah Y. Sheppeard, age 41, has been a director of TES since 1995.
She is currently a partner with the Knoxville law firm of Sheppeard &
Swanson and has held such position since April 1994. Prior to forming her
current firm, she was a partner with the Knoxville law firm of Sheppeard
and Susano from 1989 to 1994. Prior to that, she was a sole practitioner
since leaving Lockridge & Becker, P.C. in 1985. She received her J.D.
from the University of Tennessee College of Law in 1979 and a B.S. also
from the University of Tennessee in 1976.
Billie Joe Clayton, age 61, recently became a director of TES and the
Issuer. Mr. Clayton is currently the chief executive officer of Clayton
Motors, Inc. and affiliated companies and has held such position since
1961. He is also a director and Vice Chairman of the Board of Clayton
Homes, Inc. since 1985. He is a Regional Director for First Tennessee
Bank.
Executive Compensation
----------------------
The following table sets forth the compensation of the President (the
Chief Executive Officer) for the fiscal years ending March 31, 1996, 1995
and 1994. The Issuer has not paid any compensation.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------
Name and Other Annual
Principal Position Year Salary ($) Bonus ($) Compensation($)(1)
- ------------------ ---- ---------- --------- --------------------
<S> <C> <C> <C> <C>
William A. Tice, President, 1996 75,000 -0- 29,600
Chief Executive Officer 1995 68,500 -0- 17,218
1994 100,000 -0- 12,978
- -------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
(1) Other annual compensation includes life insurance premiums on split
dollar (for 1996, $17,780), regular life insurance (for 1996, $9,695;
for 1995, $15,770; and for 1994, $11,025), and health insurance
premiums (for 1996, $2,125; for 1995, $1,448; and for 1994, $1,953).
TES provides Mr. Tice with the use of a 1989 Mercedes 420 SEL; he pays
the expenses of operation. Mr. Tice also received interest on certain
notes reflecting funds loaned to TES. See "Management - Certain
Transactions."
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
For all years referenced in the Summary Compensation Table, the two
shareholders of TES, Bill Tice and Daisy Tice (his mother who was a
director and shareholder of TES until her retirement in August 1995),
determined executive compensation.
Certain Transactions
Management believes that all of the transactions listed below are at
least as fair as a similar transaction with an unaffiliated third party
would have been.
During the last three years, Mr. Tice has loaned TES money on which
debt he had received interest at a rate of 10% per annum. For fiscal
years ending March 31, 1994, 1995 and 1996, he received interest totaling
$12,859, $15, 327 and $11,628, respectively. See "Management's Discussion
and Analysis of Financial Condition." For the first nine months of fiscal
year 1997, Mr. Tice received interest totaling $5,767.
TES invested $1,245.25 in gold and silver certificates which
subsequently declined in value by approximately $200. Mr. Tice purchased
the certificates at the purchase price of $1,245.25 to avoid future losses
by TES.
Ms. Sheppeard is corporate counsel for the Issuer and TES and provides
legal services to Mr. Tice from time to time.
Mr. Clayton loaned TES $130,000 at an interest rate of 10% per annum
and converted the principal and interest through December 15, 1996 into
44,990 Common Shares of the Issuer at a rate of $3.00 per share.
John Burchill who is an employee and general manager of TES loaned TES
$10,000 at an interest rate of 10% per annum and converted the principal
and interest through December 15, 1996 into 3,491 Common Shares of the
Issuer at a rate of $3.00 per share.
42
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
-----------------------------------
Management and 5% or Greater Shareholders
- -----------------------------------------
The following table sets forth information with respect to ownership of
issued and outstanding stock and warrants of the Issuer by management and 5% or
greater shareholders as of the date hereof:
<TABLE>
<CAPTION>
Total Number of Percent Number of Percent
Securities Owned of Registered After
Name and Address Title of Class Beneficially Class (1) Shares Sale (2)
- ---------------- -------------- ---------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
William A. Tice (3) Common Shares 5,211,750 89% 1,302,937 67% (4)
7610 Breckenridge Lane Class B Common Shares 750,000 100% -0-
Knoxville, TN
Bille Joe Clayton (5) Common Shares 44,990 1% 44,990 0% (4)
817 Laurel Hill Road Class B Common Shares -0- 0% -0-
Knoxville, TN
Karen Ann Walton (6) Common Shares 15,000 * 15,000 0% (4)
7633 Breckenridge Lane Class B Common Shares -0- 0% -0-
Knoxville, TN
Total number of shares Common Shares 5,271,740 90% 1,362,927 67% (4)
owned by directors and Class B Common Shares 750,000 100% -0-
executive officers as a
group
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*Less than 1%
(1) These figures do not include Common Shares which may be issued upon the
exercise of the Warrants, but do include Common Shares which may be issued
upon exercise of employee options. See "Securities."
(2) This is the percent of class of the Shares held by Selling Shareholders
assuming all Shares offered are sold, all employee options are exercised
and no Warrants are exercised.
(3) Mr. Tice is President, Chairman of the Board and a director of the Issuer
and TES. See "Management." Mr. Tice's son Chris, who is an employee of TES,
has options to purchase up to 10,000 Common Shares upon the same terms and
conditions as the other employees. See "Securities." These shares are not
included in the numbers listed opposite Mr. Tice's name. In addition, Mr.
Tice intends to give a total of 65,000 of his Shares to his brother,
sister, a son (not employed by TES) and a daughter either outright or in
trust.
(4) No Class B Common Shares will be registered or available for public sale by
Selling Shareholders.
43
<PAGE>
(5) Mr. Clayton became a director of the Issuer and TES in 1996. These are the
Common Shares that Mr. Clayton received upon conversion of certain debt to
equity. See "Management - Certain Transactions."
(6) Ms. Walton is Vice President, Secretary/Treasurer and a director of the
Issuer and TES. See "Management." The shares listed are shares which Ms.
Walton is entitled to receive if she exercises options she received as an
employee of TES. The terms and conditions of the options are the same as for
other employees who hold options. See "Securities."
Other Selling Shareholders
- --------------------------
The following table sets forth information with respect to ownership of the
Issuer by Selling Shareholders (including employees who hold options to acquire
Shares registered for resale hereunder) who are not part of management and hold
less than 5% of the issued and outstanding shares of any class as of the date
hereof. No person listed below owns any Class B Common Shares.
<TABLE>
<CAPTION>
Total Number of Percent Number of Percent
Securities Owned of Registered After
Name and Address Title of Class Beneficially Class (1) Shares Sale (2)
- ---------------- -------------- ------------ --------- ------ --------
<S> <C> <C> <C> <C> <C>
Joseph Walker & Sons Common Shares 238,470 4% 238,470 0%
88 Walker Creek Road
Walker, WV
John Garret Common Shares 19,284 * 19,284 0%
3518 Crown Point Road
Louisville, TN
Sam Baird (1) Common Shares 10,000 * 10,000 0%
7713 Windsong Drive
Powell, TN
Greg Cunningham (1) Common Shares 10,000 * 10,000 0%
6107 E. Emory Road
Knoxville, TN
Chris Tice (1) Common Shares 10,000 * 10,000 0%
321 Old Dandridge Pike
Knoxville, TN
Fred Pickell Common Shares 6,994 * 6,994 0%
700 Hill Avenue
Knoxville, TN
BHD Creations Common Shares 6,936 * 6,936 0%
P. O. Box 2832
Murfreesboro, TN
Gary Koontz Common Shares 6,865 * 6,865 0%
108 Hillcrest Avenue
Knoxville, TN
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Total Number of Percent Number of Percent
Securities Owned of Registered After
Name and Address Title of Class Beneficially Class(1) Shares Sale(2)
- ---------------- -------------- ------------ -------- ------ -------
<S> <C> <C> <C> <C> <C>
John B. Burchill (2) Common Shares 3,991 * 3,991 0%
6433 Downridge Road
Knoxville, TN
Scott Brenneman (1) Common Shares 3,000 * 3,000 0%
509 Hardwick Drive
Knoxville, TN
Randy Curington (1) Common Shares 2,000 * 2,000 0%
P. O. Box 91
Corryton, TN
Rory Karnes (1) Common Shares 2,000 * 2,000 0%
7710 Karnes Road
Corryton, TN
Larry Stipes (1) Common Shares 2,000 * 2,000 0%
7505 John Road
Corryton, TN
Adriana Kay (1) Common Shares 250 * 250
5523 Jericho Lane
Knoxville, TN
- ------------------------------------------------------------------------------------------------
</TABLE>
*less than 1%
(1) The Shares listed are shares which may be received if employee options held
by such persons are exercised. See "Securities."
(2) Of the Shares listed, 500 are Shares which Mr. Burchill may receive if he
exercises options he received as an employee of TES. See "Securities."
Joseph Walker and Sons, Inc. ("JWSI") began providing consulting services
to TES in May of 1994. JWSI acted and acts as a business financial development
advisor to TES in connection with the formation of the Issuer and other matters.
Services included aid in the development of TES's business plan and in
implementing business financial development plans. As consideration for the
services, JWSI received an initial retainer fee of warrants to purchase stock
equal to 4% of the stock of TES outstanding at the time of employment. The right
to purchase the warrants at one cent for each share was earned at the end of the
first year of employment and the warrants were issued on May 5, 1995. The
warrants are presented in the financial statements as a portion of the
stockholders' equity of TES, an organizational expense of the Issuer and,
correspondingly, a portion of the amounts due from a related company of TES.
JWSI exchanged the warrants for 238,470 Common Shares which constitute
approximately 4% of the total issued and outstanding Common Shares. (By
agreement with TES, JWSI converted all Class B Common Shares it was entitled to
receive under its warrants to Common Shares.)
45
<PAGE>
SECURITIES
----------
Description of Capital Stock
- ----------------------------
Common Shares. The Issuer is authorized to issue 30,000,000 Common Shares,
par value $.01 per share, of which 5,838,780 shares were issued and outstanding
as of the date of this Prospectus. There will be approximately 1,200 holders of
the issued and outstanding Common Shares after the Distribution. However,
William A. Tice currently owns 89% of the issued and outstanding Common Shares
and together with his ownership of 100% of the Class B Common Shares controls
the Issuer. See "Risk Factors - Continued Control by Holder of Class B Common
Shares." See "Principal and Selling Shareholders." The holders of Common Shares
of the Issuer are entitled to one vote per share on all entitled matters
including the election of directors and do not have cumulative voting rights.
With respect to the election of directors, holders of Common Shares (together
with holders of Class D Common Shares and of any Preferred Shares with voting
rights) voting as a separate class are entitled to elect 25% of the members of
the Board of Directors of the Issuer. Holders of Class B Common Shares are
entitled to elect the remaining directors. See "Risk Factors - Control By
Holders of Class B Common Shares." Notwithstanding the foregoing, if, on the
record date for any shareholders' meeting at which directors are to be elected,
the number of issued and outstanding Common Shares, Class D Common Shares and
voting Preferred Shares is less than 10% of the aggregate number of issued and
outstanding voting shares of all classes, all directors will be elected by the
holders of all voting shares voting together.
The holders of Common Shares have a noncumulative $.05 per share annual
dividend preference over non-stock dividends paid on Class B Common Shares
(described below) from funds legally available for dividends when, as and if
declared by the Board of Directors of the Issuer. See "Risk Factors - No
Dividends." In addition, holders of Class B Common Shares may not receive any
dividends unless holders of Common Shares receive a dividend per share at least
equal to the dividend per share paid to holders of Class B Common Shares. Stock
dividends may only be paid to holders of Common Shares in Common Shares and only
if the same number of Class B Common Shares will be paid with respect to each
outstanding Class B Common Share. The payment of dividends may also be subject
to preferential or identical rights, if any, of the holders of other outstanding
securities. See "Risk Factors - Possible Adverse Effects of Issuance of
Preferred Stock." Common Shares or Class B Common Shares may not be combined or
subdivided without at the same time making a proportionate combination or
subdivision of the shares of the other of such classes.
Holders of Common Shares are also entitled to share ratably in all of the
assets of the Issuer available for distribution to holders of common shares
(including Class B Common Shares and Class D Common Shares) upon liquidation,
dissolution or winding up of the affairs of the Issuer subject to the preference
of holders of Common Shares, but only to the extent of the par value of such
Common Shares, and subject to any preferential rights of the holders of any
other outstanding securities. See "Risk Factors - Possible Adverse Effects of
Issuance of Preferred Stock." Common Shares do not have preemptive, subscription
or conversion rights and are not subject to call or
46
<PAGE>
redemption (there are no applicable sinking fund provisions). All Common Shares
now outstanding are fully paid and nonassessable.
Class B Common Shares. In addition to Common Shares, the Issuer is
authorized to issue 5,000,000 Class B Common Shares, $.01 par value per share,
of which 750,000 shares were issued and outstanding as of the date hereof. See
"Principal and Selling Shareholders." There is one holder of Class B Common
Shares, William A. Tice. Holders of Class B Common Shares have the right to one
noncumulative vote per share on all matters on which they are entitled to vote.
For the election of directors, the holders of a majority of Class B Common
Shares are entitled to elect 75% of the members of the Board of Directors. If,
on the record date for any shareholders' meeting at which directors are to be
elected, the number of issued and outstanding Common Shares, Class D Common
Shares and voting Preferred Shares is less than 10% of the aggregate number of
issued and outstanding voting shares of all classes, all directors will be
elected by the holders of all voting shares voting together. If more than 90% of
the aggregate number of issued and outstanding Common Shares, Class B Common
Shares, Class D Common Shares and voting Preferred Shares are Class B Common
Shares, the holders of a majority of Class B Common Shares will in practice be
able to elect all of the members of the Board of Directors. See "Risk Factors -
Control By Holder of Class B Common Shares."
Holders of Class B Common Shares are entitled to receive dividends when, as
and if declared subject to a non-cumulative $.05 per share annual dividend
preference on each Common Share. See "Risk Factors - No Dividends." In addition,
holders of Class B Common Shares may not receive any dividend unless holders of
Common Shares receive a dividend per share at least equal to the dividend per
share paid to holders of Class B Common Shares. Stock dividends may only be paid
to holders of Class B Common Shares in Class B Common Shares and may only be
paid in shares at all if the same number of Common Shares will be paid with
respect to each outstanding Common Share. The payment of dividends may also be
subject to preferential or identical rights, if any, of the holders of other
outstanding securities. See "Risk Factors - Possible Adverse Effects of Issuance
of Preferred Stock."
Holders of Class B Common Shares are also entitled to share ratably in all
of the assets of the Issuer available for distribution to holders of common
shares (including Common Shares and Class D Common Shares) upon liquidation,
dissolution or winding up of the affairs of the Issuer, subject to the
preference of holders of Common Shares, but only to the extent of the par value
of such Common Shares, and subject to any preferential rights of other
shareholders. See "Risk Factors - Possible Adverse Effects of Issuance of
Preferred Stock." Holders of Class B Common Shares have preemptive rights only
as to Class B Common Shares. Class B Common Shares are not subject to call or
redemption (there are no applicable sinking fund provisions). All Class B Common
Shares now outstanding are fully paid and nonassessable.
In addition, the Board of Directors must seek the approval of a majority of
the holders of Class B Common Shares to grant rights to subscribe for, purchase
or issue shares of authorized and unissued Class B Common Shares. Common Shares
or Class B Common Shares may not be combined or subdivided without at the same
time making a proportionate combination or
47
<PAGE>
subdivision of the shares of the other of such classes. Each share may also be
converted into one Common Share at any time at the option of the holder.
At this time, 100% of the issued and outstanding Class B Common Shares are
owned by William A. Tice. See "Principal and Selling Shareholders." The holders
of Class B Common Shares elect 75% of the directors and therefore Mr. Tice
controls the Issuer. In addition, Mr. Tice held 89% of the issued and
outstanding Common Shares by which ownership he controls decisions by holders of
Common Shares as well. See "Risk Factors - Continued Control By Holder of Class
B Common Shares."
Class D Common Shares. Class D Common Shares are a convertible security
created in order to secure highly motivated executive personnel for the Issuer
and its subsidiaries and take the place of compensation stock options, although
the Issuer remains authorized to issue stock options. There are 600,000 Class D
Common Shares authorized at $.01 par value per share. Class D Common Shares are
identical to Common Shares and have equal rights and privileges with Common
Shares except as described below. Class D Common Shares are nontransferable. The
Board of Directors, by resolution, may authorize the issuance of Class D Common
Shares; provided that, each such resolution contains a formula under which the
shares may be converted to Common Shares. In no case may the Board of Directors
set any conversion rights which could result in the issuance of more than ten
Common Shares for each Class D Common Share. At the close of business on the
fifth anniversary of the date of a resolution authorizing the issuance of any
Class D Common Shares, such issued and outstanding but unconverted shares will
be deemed to have been converted at the rate of one Common Share for each such
Class D Common Share. There are no issued and outstanding Class D Common Shares
as of the date of this Prospectus.
Preferred Shares. The Board of Directors of the Issuer, by resolution, has
the authority to issue, in one or more series, up to 10,000,000 Preferred
Shares. Such unissued shares will have such preferences, rights and limitations
as are established by the Board of Directors except that the voting rights, if
any, of one Preferred Share may not exceed the voting rights of one Common
Share. See "Risk Factors -Possible Adverse Effects of Issuance of Preferred
Stock." There are no issued and outstanding Preferred Shares as of the date of
this Prospectus.
Common Stock Purchase Warrants. The Issuer has issued and outstanding
1,000,000 Common Stock Purchase Warrants, each Warrant entitling the holder to
purchase one Common Share of the Issuer. The Warrants may be exercised at any
time during the 24 month period beginning on the date of this Prospectus at an
exercise price of $8.00 per share, subject to adjustment, by surrendering the
Warrant to the Warrant Agent with the subscription properly completed and
executed with payment of the exercise price. See "Risk Factors - Arbitrary
Exercise Price." No fractional Common Shares will be issued in connection with
the exercise of Warrants. The Issuer has no right to call the Warrants.
If a holder of Warrants fails to exercise the Warrants prior to their
expiration, the Warrants will expire and the holder will have no further rights
with respect to the Warrants. If a market for the Warrants develops, the holder
may sell the Warrants instead of exercising them. There can be
48
<PAGE>
no assurance that a market for the Warrants will develop or continue. See "Risk
Factors - No Assurance of Trading Market." If the Issuer is unable to qualify
for sale the Common Shares underlying the Warrants (or the shares are exempt
from qualification) in the states in which the various holders of the Warrants
then reside, holder of the Warrants may have no choice but to let the Warrants
expire. See "Risk Factors - Possible Inability to Exercise Warrants in Certain
States."
A holder of Warrants will not have any rights or privileges of a
shareholder of the Issuer prior to exercise of such Warrants. The Issuer will
keep available a sufficient number of authorized Common Shares to permit
exercise of the Warrants. The exercise price of the Warrants and the number of
shares issuable upon exercise of the Warrants will be subject to adjustment in
the event of stock dividends, stock splits, combinations, reorganizations,
subdivisions and reclassifications. No assurance can be given that the market
price of the Issuer's Common Shares will exceed the exercise price at any time
during the term of the Warrants.
The Warrants were issued pursuant to a Warrant Agreement between the Issuer
and Mid-America Bank of Louisville and Trust Company (the "Warrant Agent"). All
descriptions of the Warrants are qualified in their entirety by reference to the
Warrant Agreement which is included as an exhibit to the Registration Statement
of which this Prospectus is a part.
Employee Stock Options. The Issuer granted options to purchase 54,750
Common Shares to ten of the employees of TES as of the date of this Prospectus.
The options may be exercised at any time during the 24-month period after
issuance at an exercise price of $1.00 per share. The options are "nonqualified"
options and the employees will have compensation income upon the exercise of the
options to the extent of the difference between the exercise price and the fair
market value of the Common Shares. The options are nontransferable except upon
the employee's death. A holder of the options will not have any rights or
privileges of a shareholder of the Issuer prior to exercise of the options. If
the options are not exercised prior to expiration, the holder has no further
rights.
Transfer Agent, Registrar and Warrant Agent
- -------------------------------------------
The transfer agent and registrar for the Common Shares and the Warrant
Agent is Mid-America Bank of Louisville and Trust Company, P.O. Box 1101,
Louisville, Kentucky 40201-1101.
DIVIDENDS
---------
The Issuer has not paid any dividends. In addition, TES historically has
not paid dividends. It is expected that the capital requirements of TES will
prevent payment of dividends in the near future. There is no guarantee that TES,
and therefore the Issuer, will pay dividends in the future. See "Risk Factors -
No Dividends" and "Possible Adverse Effects of Issuance of Preferred Stock."
49
<PAGE>
LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS
----------------------
Officers and directors of the Issuer are covered by certain provisions of
the Delaware General Corporation Law and the Certificate of Incorporation and
Bylaws of the Issuer, which serve to limit, and, in certain instances, to
indemnify them against, certain liabilities which they may incur in such
capacities.
Elimination of Liability in Certain Circumstances
- -------------------------------------------------
Delaware has enacted legislation which authorizes corporations to limit or
eliminate the personal liability of directors to corporations and their
shareholders for monetary damages for breach of a director's fiduciary duty of
care. The duty of care requires that, when acting on behalf of the corporation,
directors must exercise an informed business judgment based on all material
information reasonably available to them. Absent the limitations authorized by
the legislation, directors are accountable to corporations and their
shareholders for monetary damages for conduct constituting negligence or gross
negligence in the exercise of their duty of care. Although the statute does not
change directors' duty of care, it enables corporations to limit available
relief to equitable remedies such as injunction or rescission by including
certain provisions in its Certificate of Incorporation.
The Issuer's Certificate of Incorporation limits the liability of its
directors to the Issuer or its shareholders (in their capacity as directors, but
not in their capacity as officers) to the fullest extent permitted by the
legislation. Specifically, the directors of the Issuer will not be personally
liable for monetary damages for breach of director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Issuer or its shareholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit.
Indemnification
- ---------------
The Issuer's Certificate of Incorporation provides that the Issuer
indemnify any and all of its directors or officers or former directors or
officers or any person who may have served at its request as a director or
officer of another corporation in which it owns shares of capital stock or of
which it is a creditor against expenses actually and necessarily incurred by
them in connection with the defense of any action, suit or proceeding in which
they, or any of them, are made parties, or a party, by reason of being or having
been directors or officers of the Issuer, or of such other corporation, except
in relation to matters as to which any such director or officer or former
director or officer or person shall be adjudged in such action, suit or
proceeding to be liable for negligence or misconduct in the performance of duty.
In addition, Section 7.1(a) of the Issuer's Bylaws provides that the Issuer
must indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or
50
<PAGE>
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Issuer) by reason
of the fact that such person is or was a director, officer, employee or agent of
the Issuer, or is or was serving at the request of the Issuer as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the Issuer, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
the conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement or conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the Issuer, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that this conduct was
unlawful.
Section 7.1(b) of the Issuer's Bylaws provides that the Issuer must
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Issuer to procure a judgment in its favor by reason of the fact that such person
is or was a director, officer, employee or agent of the Issuer or is or was
serving at the request of the Issuer as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred in connection with the defense or settlement of such action
or suit if such person acted in good faith and in a manner reasonably believed
to be in or not opposed to the best interests of the Issuer, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Issuer unless and
only to the extent that the Delaware Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Delaware Court of Chancery or such other court shall deem proper.
Section 7.1(d) of the Issuer's Bylaws provides that any indemnification
under Sections 7.1(a) and (b) (unless ordered by a court) shall be made by the
Issuer only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because such person has met the applicable standard of conduct.
Such determination shall be made (i) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, (ii) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (iii) by the shareholders of the Issuer. To the
extent, however, that a director, officer, employee or agent of the Issuer has
been successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in the defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred in connection therewith, without the
necessity of authorization in the specific case under Section 7.1(c).
51
<PAGE>
Under Section 7.1(e), expenses incurred by a director, officer, employee or
agent of the Issuer in defending or investigating a threatened or pending
action, suit or proceeding may be paid by the Issuer in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director, officer, employee or agent to repay such amount
if it shall ultimately be determined that such person is not entitled to be
indemnified by the Issuer.
The indemnification and advancement of expenses provided by or granted
pursuant to the Issuer's Bylaws are not exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any Bylaw, agreement, contract, vote of shareholders or disinterested directors
or otherwise, both as to action in official capacity and as to action in another
capacity while holding such office, it being the Issuer's policy that
indemnification of the persons specified in the Bylaws shall be made to the
fullest extent permitted by law. The indemnification and advancement of expenses
provided by, or granted pursuant to the Issuer's Bylaws shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to directors, officers or persons controlling the Issuer pursuant
to the foregoing provisions, the Issuer has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1933 Act and is therefore unenforceable.
LEGAL MATTERS
-------------
The Issuer has been advised with respect to certain legal aspects of the
offering by Ogden Newell & Welch, 1200 One Riverfront Plaza, Louisville,
Kentucky 40202.
EXPERTS
-------
The financial statements of TES at March 31, 1996 and 1995, and for each of
the years in the three year period ended March 31, 1996 and the financial
statements of the Issuer at December 31, 1996, appearing in this Prospectus have
been audited by Boring & Goins, P.C., Certified Public Accountants, 107 Main
Avenue, P. O. Box 2850, Knoxville, Tennessee 37901, as set forth in its reports
thereon appearing elsewhere herein. The financial statements are included in
reliance upon such report given upon the authority of such firm as an expert in
accounting and auditing.
52
<PAGE>
FINANCIAL STATEMENTS
--------------------
TABLE OF CONTENTS
-----------------
Tice Engineering and Sales, Inc.
Nine Months Ended December 31, 1996 and 1995
Years Ended March 31, 1996, 1995 and 1994
Tice Technology, Inc.
December 31, 1996
<TABLE>
<CAPTION>
Tice Engineering and Sales, Inc. Page
- -------------------------------- ----
<S> <C>
Unaudited Balance Sheets - December 31, 1996 and 1995.................. F - 1
Unaudited Statements of Income - For the Nine Months Ended
December 31, 1996 and 1995........................................... F - 3
Unaudited Statements of Stockholder's Equity - For the Nine Months
Ended December 31, 1996 and 1995..................................... F - 4
Unaudited Statements of Cash Flows - For the Nine Months Ended
December 31, 1996 and 1995........................................... F - 5
Unaudited Notes to Financial Statements - December 31, 1996 and 1995... F - 7
Schedules.............................................................. F - 15
Independent Auditor's Report - May 23, 1996 and February 10, 1997...... F - 18
Consolidated Balance Sheets - March 31, 1996 and 1995.................. F - 19
Consolidated Statements of Income - For the Years Ended
March 31, 1996, 1995 and 1994........................................ F - 21
Consolidated Statements of Stockholder's Equity - For the Years Ended
March 31, 1996, 1995 and 1994........................................ F - 22
Consolidated Statement of Cash Flows - For the Years Ended
March 31, 1996, 1995 and 1994........................................ F - 23
Notes to Consolidated Financial Statements - March 31, 1996,
1995 and 1994........................................................ F - 25
Schedule............................................................... F - 32
Tice Technology, Inc. Page
- --------------------- ----
Pro Forma Balance Sheets Assuming Acquisition of TES and
Conversion of TES Debt............................................... F - 35
Independent Auditor's Report - February 10, 1997....................... F - 37
Balance Sheet - December 31, 1996...................................... F - 38
Notes to Financial Statements - December 31, 1996...................... F - 39
</TABLE>
53
<PAGE>
Tice Engineering and Sales, Inc.
Balance Sheets
(Unaudited)
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6,333 $ 21,114
Accounts receivable
Trade 151,396 53,156
Employee 15,685 18,605
Prepaid expenses 44,829 25,817
Inventory 470,795 444,389
Due from related company 124,319 4,859
Deferred income tax asset 102,337 10,500
---------- ----------
Total current assets 915,694 578,440
Fixed assets:
Land 130,000 305,000
Building and improvements -- 447,565
Equipment 517,599 560,546
Vehicles 124,599 175,859
---------- ----------
772,198 1,488,970
Less accumulated depreciation (585,528) (900,109)
----------- ----------
Net fixed assets 186,670 588,861
Other assets:
Utility deposit 890 890
Cash surrender value - officer's life 14,250 --
Patent, net of accumulated amortization 115,745 76,558
Note receivable - split dollar life insurance 53,340 --
Investments -- 1,245
Deferred income tax benefit -- 110,944
---------- ----------
Total other assets 184,225 189,637
---------- ----------
$1,286,589 $1,356,938
========== ==========
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Notes payable - officer $ 81,908 $ 152,652
Accounts payable 291,146 162,505
Payroll and payroll taxes payable 1,538 18,364
Pension plan payable 5,477 --
Franchise tax payable 2,647 --
Current maturities of long-term debt 506,679 643,492
---------- ----------
Total current liabilities 889,395 977,013
Long term debt less current maturities -- 270,168
Stockholder's equity:
Capital stock, no stated value, 2000 shares
authorized, 750 shares issued
and outstanding 8,634 8,634
30 stock warrants outstanding 4,859 4,859
Retained earnings 383,701 96,264
---------- ----------
Total stockholder's equity 397,194 109,757
---------- ----------
$1,286,589 $1,356,938
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
Tice Engineering and Sales, Inc.
Statements of Income
(Unaudited)
For the Nine Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Operating Revenues:
Sales $ 894,294 $959,160
Service 4,077 2,561
---------- --------
Total Revenues 898,371 961,721
Operating Expenses:
Cost of sales and service 621,623 653,294
Research and Development (Net of
Reimbursements) 97,213 26,679
Selling, General and Administrative 343,201 318,647
---------- --------
1,062,037 998,620
---------- --------
Loss from operations (163,666) (36,899)
Other income/expense:
Interest income -- 176
Rental income 28,200 34,650
Rental property expenses (25,900) (36,251)
Gain on sale of fixed assets 500,363 105,593
Interest--related parties (11,212) (12,953)
Other interest (66,700) (75,164)
Other income 3 8
---------- --------
Total other income/expense 424,754 16,059
---------- --------
Net income/(loss) before taxes 261,088 (20,840)
Provision for income tax (9,317) 4,254
---------- --------
Net income/(loss) $ 251,771 $(16,586)
========== ========
Earnings per share $ .038
Pro-forma outstanding shares 6,588,780
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Tice Engineering and Sales, Inc.
Statements of Stockholder's Equity
(Unaudited)
For the Nine Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Total
Common Stock Retained Stockholder's
Stock Warrants Earnings Equity
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Balance March 31, 1995 $ 8,634 $ $112,850 $121,484
Issuance of 30 stock warrants 4,859 4,859
Net income (loss) for the nine months
ended December 31, 1995 <16,586> <16,586>
-------- -------- -------- --------
Balance December 31, 1995 $ 8,634 $ 4,859 $ 96,264 $109,757
======== ======== ======== ========
Balance March 31, 1996 $ 8,634 $ 4,859 $131,930 $145,423
Net income for the nine months
ended 12/31/96
251,771 251,771
-------- -------- -------- --------
Balance December 31, 1996 $ 8,634 $ 4,859 $383,701 $397,194
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
(PAGE)
Tice Engineering and Sales, Inc.
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Operating activities:
Net income/(loss) $ 251,771 $ (16,586)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 29,714 38,025
Gain on sale of fixed assets (500,363) (105,593)
Change in operating assets and liabilities:
(Increase)/Decrease in receivables (32,020) 134,222
(Increase)/Decrease in inventory (5,798) (117,094)
(Increase)/Decrease in prepaid expenses (16,538) 1,441
(Increase)/Decrease in amount due from
related company (119,460) --
(Increase)/Decrease in deferred income
tax benefit 9,317 (4,254)
Increase/(Decrease) in accounts payable 94,234 56,964
Increase/(Decrease) in payroll tax payable (3,067) 14,333
Increase/(Decrease) in franchise tax payable -- (2,870)
Increase/(Decrease) in customer deposits (25,000) --
Increase/(Decrease) in pension payable 5,477
----------- --------
Net cash provided by operations (311,733) (1,412)
Investing activities:
Proceeds from sale of fixed assets 856,475 308,513
Purchase of fixed assets (5,994) (11,438)
Increase in accounts receivable -
split dollar life insurance (35,560) --
Increase in patents (27,979) (42,747)
----------- --------
Net cash provided by investing activities 786,942 254,328
Financing activities:
Proceeds from officer loans 89,767 75,953
Proceeds from short term borrowing 125,000 --
Proceeds from refinancing of long-term debt 700,000 --
Proceeds from Business Associate loans 265,680 --
Principal payment on short term borrowing (1,209,001) --
Principal payments on officer loan (136,975) (106,109)
Principal payments on long-term debt (306,169) (247,210)
----------- --------
Net cash provided in financing
activities (471,698) (277,366)
----------- --------
Net increase/(decrease) in cash 3,511 (24,450)
Cash balance, March 31 2,822 45,564
----------- --------
Cash balance, December 31 $ 6,333 $ 21,114
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Tice Engineering and Sales, Inc.
Statements of Cash Flows (Continued)
(Unaudited)
For the Nine Months Ended December 31, 1996 and 1995
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Cash paid during the nine months for:
Interest $66,700 $75,164
Taxes 9,699 2,880
Non-Cash investing and financing activities:
Interest accrued on officers loan 5,767 12,953
Interest accrued on note payable -
Business Associates 10,493 --
Issuance of stock warrants in exchange for services 4,859
Six months free rent included in contract
for sale of shopping center 32,000 --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Financial Statements
(Unaudited)
December 31, 1996 and 1995
1. Summary of Significant Accounting Policies
Business Activity
The Company designs and manufactures robotic and pneumatic industrial sewing
machine attachments.
Trade Accounts Receivable
The Company considers accounts receivable to be fully collectible; accordingly,
no allowance for doubtful accounts is required. If amounts become uncollectible,
they will be charged to operations when that determination is made.
Inventories
Inventories are stated at lower of cost or market. Cost is determined using the
first-in, first-out method.
Inventories at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Raw materials $365,101 $380,543
Work in progress 20,830 4,109
Finished goods 84,864 59,736
-------- --------
$470,795 $444,388
======== ========
</TABLE>
Cash and Cash Equivalents
For purposes of the statement of cash flows the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash and/or cash equivalents.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due and deferred taxes
related primarily to the basis of inventory for financial and income tax
reporting. The deferred tax assets represent the future tax return consequences
of those differences. Deferred tax assets also are recognized for operating
losses that are available to offset future taxable income.
F-7
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Financial Statements (Continued)
(Unaudited)
December 31, 1996 and 1995
1. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method and accelerated methods over the estimated useful lives of
the assets. Significant improvements are capitalized while maintenance and
repairs are expensed as incurred.
Patents
Certain legal and other direct expenses incurred in order to obtain patents on
company designed and manufactured parts have been capitalized at cost. Patent
costs of $27,979 and $42,749 have been capitalized in the nine months ending
December 31, 1996 and 1995, respectively. Amortization is calculated by the
straight-line-method over a seventeen year estimated useful life. Amortization
expense totaled $3,411 and $1,569 during the nine months ended December 31,
1996 and 1995, respectively.
Interim Unaudited Financial Statements
The accompanying unaudited financial statements for the nine months ended
December 31, 1996 and 1995 have been prepared on the same basis as the
Company's audited financial statements as of and for the years ended March 31,
1996 and 1995. In the opinion of management, all adjustments, consisting of
normal, recurring accruals, necessary to present fairly the financial position
of the Company at December 31, 1996 and 1995 and the results of operations and
cash flows for the nine months ended December 31, 1996 and 1995 have been
included. The results of operations for such interim periods are not
necessarily indicative of the results expected for the full years ended March
31, 1996 and 1997.
2. Notes Payable and Long-Term Debt
Notes payable consisted of the following at December 31,:
1996 1995
-------- -------
Note payable to a bank, dated 4/25/96, original
maturity date of 5/27/96, extended to 2/25/97,
interest at 9.25% payable monthly, secured
by a vehicle. $ 25,000 --
F-8
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Financial Statements (Continued)
(Unaudited)
December 31, 1996 and 1995
<TABLE>
<CAPTION>
2. Notes Payable and Long-Term Debt (continued)
1996 1995
---- ----
<S> <C> <C>
Bank line of credit, original date 7/11/94, 120
day renewable, $225,000 converted to long-term
debt on 8/31/96, interest at bank interest rate
plus 1%, principal and interest payments of
$4,711.84 monthly and final payment of
$192,644 due 8/30/97, secured by property. $ 215,999 $ 200,000
Notes payable to an individual, dated 12/12/86,
interest at 10%, principal and interest of
$6,343 due monthly through April, 2001, secured
by real estate. -- 313,660
Bank line of credit, original date 3/28/86, due on
demand, interest at 9.25% payable monthly,
secured by accounts receivable, inventory,
and equipment. -- 400,000
Notes payable to individuals (Business Associates)
dated 6/18/96 to 8/29/96, 90 day renewable,
interest at 10%, principle and interest due
4/30/97, interest of $10,493 accrued through
12/15/96. 265,680 --
--------- ---------
506,679 913,660
Less current maturities (506,679) 643,492
--------- ---------
$ -0- $ 270,168
========= =========
</TABLE>
3. Joint Development Agreement
In December, 1994, the Company entered into a Joint Development Agreement with a
denim clothing manufacturer to develop a specialized sewing machine for the
manufacture of jeans. The manufacturer reimbursed the Company $150,000 in
development fees during the nine months ended December 31, 1995. The Company
incurred $128,069 in research and development expenses related to this project
during the nine months ended December 31, 1995 and $41,903 during the nine
months ended December 31, 1996. Under the terms of the agreement, the denim
clothing manufacturer will have exclusive rights to purchase said sewing machine
for an initial period of two years from the date of shipment of the first
production machine. After the initial two year period, in order to maintain its
exclusive rights, the manufacturer must purchase certain minimum quantities. In
the event the Company sells machines to a third party, the Company is required
to pay royalties to the manufacturer up to the amount reimbursed to the Company
for development fees, plus 10% interest. Under no circumstances is any portion
of the development fee refundable.
F-9
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Financial Statements (Continued)
(Unaudited)
December 31, 1996 and 1995
4. Research and Development
As required by statement of Financial Accounting Standards No. 2, the Company
expenses research and development costs (including research and development
performed under contract) as incurred. Included in current year expenses are
the following attributable to research and development during the nine months
ended December 31,
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Legal, patent fees $ 5,203 $ 10,442
Salaries 78,322 123,897
Travel 1,518 516
Insurance 2,336 5,053
Payroll tax 5,992 9,478
Telephone 2,011 1,638
Utilities 1,001 1,032
Materials 830 24,623
--------- ---------
97,213 176,679
Less reimbursements (Note 3) -- (150,000)
--------- -------
$ 97,213 $ 26,679
========= =========
</TABLE>
5. Related Party Transactions
Included in current liabilities is a note payable to William Tice, a company
officer and a major stockholder. The note bears 10% interest and is due on
demand and is subordinated debt.
During the nine months ended December 31, 1996, the Company borrowed an
additional $84,000, made principal payments of $136,975, and accrued interest
on the loan totaling $5,767. During the nine months ended December 31, 1995,
the Company borrowed an additional $63,000, made principal payments of
$106,009, and accrued interest on the loan totaling $12,953.
Additionally, the notes payable to banks are secured by a second mortgage on
Mr. Tice's personal residence as well as his personal guarantee.
Also, included in notes payable - business associates (Note 2) is a note
payable to John Burchill, a company employee. The Company borrowed $10,000 from
Mr. Burchill on June 24, 1996. The note is renewable every 90 days through
April 30, 1997 and bears 10% interest. Interest on the note of $475 has been
accrued through December 15, 1996.
Also, included in notes payable - business associates (Note 2) is a note
payable to Joe Clayton, a member of the board of the Company. The Company
borrowed $90,000 on July 18, 1996 and $40,000 on August 23, 1996. The note is
renewable every 90 days through April 30, 1997 and bears interest at 10%.
Interest of $4,970 has been accrued on the note through December 15, 1996.
The notes payable to Mr. Burchill and Mr. Clayton, including interest accrued
through December 15, 1996, are convertible to shares of common stock of Tice
Technology, Inc. at $3 per share. (Note 12)
F-10
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Financial Statements (Continued)
(Unaudited)
December 31, 1996 and 1995
6. Income Taxes
Effective April 1, 1993, the Company changed to an asset and liability method
of accounting for income taxes in accordance with Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax basis of assets and
liabilities and are measured using enacted tax rates. There was no effect on
pre-tax income of the adoption of FAS-109 during the year ended March 31,
1994.
The components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current expense
Federal
State
Deferred tax benefit due to temporary differences
Federal <4,353> <1,148>
State <768> <458>
Deferred tax benefit due to net operating
loss carryover
Federal 89,155 <1,891>
State 15,733 <757>
Deferred tax benefit due to change in
accounting estimate (Note 7) <90,450> --
------ --------
Total provision for income taxes $ 9,317 $<4,254>
======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of inventory for financial reporting purposes and
amounts used for income taxes. Deferred tax assets have also been provided for
operating losses available to offset future income.
The following is a summary of the significant components of the Company's
deferred tax assets as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Section 263 A cost in ending inventory $ 39,948 $ 18,676
Net operating loss carryovers 62,389 102,768
-------- --------
Net deferred tax assets $102,337 $121,444
======== ========
</TABLE>
At December 31, 1996 and 1995, the Company had loss carryovers available to
offset future taxable income of $140,923 and $460,705, respectively. At
December 31, 1996, the carrying value of inventory for tax purposes was $99,871
higher than reported in financial statements.
F-11
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Financial Statements (Continued)
(Unaudited)
December 31, 1996 and 1995
7. Change in Accounting Estimate
Change in deferred tax asset due to change in accounting estimate:
At March 31, 1996, the Company's last fiscal year end, and in prior periods,
deferred tax assets were recorded for net operating loss carryovers and the
difference in the carrying value of inventory for financial statements and tax
purposes at a 15% Federal tax rate and 6% state tax rate. The nominal Federal
rate of 15% was applied because it was expected that the Company would have
taxable income in future years of $50,000 or less per year. Since the March 31,
1996 balance sheet date, however, new information as to future operating income
and gains on sales of fixed assets, indicate that the full benefit of the loss
carryovers will be realized in years ending March 31, 1997 and 1998. Under the
rules of FAS 109 "Accounting for Income Taxes", deferred tax assets are valued
at the tax rate expected to apply to taxable income in the period in which the
asset is realized, therefore the statutory flat tax rate of 34% is applicable at
December 31, 1996. Had the loss carryovers available and inventory adjustment at
March 31, 1996, been valued at a 34% Federal tax rate instead of 15%, the total
deferred tax asset at March 31, 1996 would have been $207,227 and the decrease
in the asset from March 31, 1996 to December 31, 1996 would have been $104,890
instead of $9,255. In accordance with Accounting Principles Board Opinion 20,
"Accounting for Changes in Accounting Estimates" the March 31, 1996 financial
statements have not been re-stated to reflect this change and the net effect of
this change has been recorded in the current period.
8. Major Customers and Export Sales
<TABLE>
<CAPTION>
1996 1995
---- ----
Sales % of Sales Sales % of Sales
------------------- --------------------
<S> <C> <C>
Customer 1 $325,523 36.4 $241,708 25.2
Customer 2 178,859 20.0 181,281 18.9
Customer 3 86,747 9.7 219,648 22.9
------------------- --------------------
$591,129 66.1 $642,637 67.0
=================== ====================
</TABLE>
Approximately 4% of the Company's sales are export sales. All export sales are
paid with an irrevocable letter of credit drawn on U.S. funds, therefore, there
are no exchange gains or losses included in income.
9. Note Receivable - Split Dollar Life Insurance
The Company is paying the premiums on life insurance policies on the life of
William Tice, a company officer, in a split dollar agreement with collateral
assignment, whereby the premiums paid by the Company are to be repaid upon
receipt of the proceeds of the policy by Mr. Tice's beneficiaries. The Company
is not a beneficiary on this policy. Premiums paid on the policy during the nine
months ended December 31, 1996 totaled $35,560.
F-12
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Financial Statements (Continued)
(Unaudited)
December 31, 1996 and 1995
10. Employee Benefits
Employee benefits consist of group health insurance and group term life
insurance provided for employees and their dependents totaling $26,083 and
$40,428 for the nine months ended December 31, 1996 and 1995, respectively.
Also, during the nine months ended December 31,1996, the Company implemented a
qualified 401 K plan. The plan allows the employees to contribute from 1% to
15% of their gross pay up to maximum of $9,500 (for 1996). Each year the
Company chooses whether or not to match a portion of the employee contribution.
For the nine months ended December 31, 1996, the Company elected to match the
first 3% of the first 6% of employee contributions. The Company portion is on
a vesting schedule for employees at the rate of 20% per year for five years.
All employees were eligible on the enrollment date and new hires must meet a
six-month employment period to be eligible. The Company acts as its own
trustee and is covered by a $60,000 surety bond. As of December 31, 1996, the
balance in all individual accounts is $8,535. During the nine months ended
December 31, 1996, the Company contributions to the plan totaled $2,479.
11. Sale of Rental Property/Contingent Lease
On September 30, 1996, the Company sold rental property with a book value of
$356,112 for $825,000 cash plus an eight-month lease which allows the Company
to continue to occupy space in the property rent-free through May, 1997. After
May 31, 1997, the Company can continue to occupy space in the property for
$4,000 per month rent. The value of the eight-month initial lease of $32,000
was included in the selling price of the property and recorded on the balance
sheet as prepaid rent. The Company has recorded three months rent expense
totaling $12,000, during the period ended December 31, 1996. The balance of
prepaid rent of $20,000 is included on the balance sheet under the caption
"Prepaid expenses".
12. Stock Warrants
On May 5, 1995, the Company issued 30 stock warrants to Joseph Walker & Sons,
Inc. in exchange for consulting services provided to the Company in connection
with their plan of reorganization. The warrants can be converted to 30 shares
of Company stock at an exercise price of $1 per share on or before May 5, 2005.
The value of the warrants has been recorded at the fair market value of the
services rendered.
13. Convertible Debt
During the nine months ended December 31, 1996, the Company issued $255,187 of
convertible debt to six individuals (Business Associates). Each $3 of debt is
convertible to one share of common stock of Tice Technology, Inc.. The notes
bear interest at 10%. Interest accrued through December 15, 1996 of $10,493
will be included in the convertible debt. Interest accrued after that date
will be paid to the debt holder at the time of conversion, which is on or
before April 28, 1997.
F-13
<PAGE>
TICE ENGINEERING AND SALES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
DECEMBER 31, 1996 AND 1995
14. PRO-FORMA OUTSTANDING SHARES
The pro-forma average common shares outstanding of 6,588,780 is made up of
5,838,780 Common Shares and 750,000 Class B Common Shares. In compliance with
requirements of the Securities and Exchange Commission stock and stock warrants
issued within a one year period prior to an initial public offering must be
treated as outstanding for all periods presented. Therefore the shares
outstanding at December 31, 1996 have been revised for the shares issued at the
time the registration becomes effective.
F-14
<PAGE>
TICE ENGINEERING AND SALES, INC.
SCHEDULES OF COST OF SALES
(UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Materials $377,314 $394,174
Assembly and production labor 90,931 103,123
Assembly and production expense 1,099 3,710
Salaries - sales and service 62,725 88,093
Shop expense 1,098 1,043
Applied overhead 88,456 63,151
-------- --------
$621,623 $653,294
======== ========
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
TICE ENGINEERING AND SALES, INC.
SCHEDULES OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Advertising and promotions $ 47,447 $ 53,534
Airplane 21,266 69,015
Amortization 3,411 1,569
Bad debts 75 587
Depreciation 8,789 9,653
Dues and fees 2,759 225
Employee benefits 18,898 20,647
Insurance 9,708 11,557
Legal and accounting 617 16,025
Meals and entertainment 2,267 1,179
Moving expense 3,700 --
Office supplies 7,181 8,996
Postage 1,021 958
Commissions 550 11,719
Donations 125 286
Royalty 2,672 2,661
Salaries-officer 93,800 36,751
Salaries-other 59,337 31,694
Scholarship fund 1,449 --
Shop 1,099 1,042
Taxes-payroll 3,790 16,110
Taxes-other 9,699 10
Telephone 7,037 5,730
Training 70 --
Travel 24,704 9,093
Utilities 4,005 4,129
Vehicle 1,725 5,207
Rent 6,000 270
-------- --------
$343,201 $318,647
======== ========
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
Tice Engineering and Sales, Inc.
Schedules of Applied Overhead
(Unaudited)
For The Nine Months Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Depreciation $ 3,329 $ 5,468
Employee benefits 8,607 14,728
Equipment maintenance 616 1,058
Insurance 1,239 --
Office supplies 798 1,000
Postage 114 106
Legal and accounting -- 540
Salaries - clerical and purchasing 15,061 3,522
Salaries - officer 27,200 23,831
Payroll taxes 19,481 6,401
Telephone 1,005 819
Utilities 5,006 5,160
Rent 6,000 518
------- -------
$88,456 $63,151
======= =======
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
Tice Engineering and Sales, Inc.
Knoxville, Tennessee
We have audited the accompanying consolidated balance sheets of Tice Engineering
and Sales, Inc. as of March 31, 1996 and 1995, and the related statements of
income, stockholder's equity and cash flows for each of the three years in the
period ended March 31, 1996. These financial statements and the schedules listed
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedules based on our
audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 Tice Engineering and Sales,
Inc. as of March 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended March 31, 1996, in
conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information on pages
F-32 through F-34 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
Boring & Goins, P.C.
Knoxville, Tennessee
May 23, 1996
Except for Notes 6, 10, 11, 12 and 13 as to which the date is February 10, 1997.
F-18
<PAGE>
Tice Engineering and Sales, Inc.
Consolidated Balance Sheets
March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash $ 2,822 $ 45,564
Accounts receivable
Trade 119,060 196,209
Employee 16,002 9,774
Due from related party 4,859 --
Prepaid expenses 28,291 27,258
Inventory 464,997 327,295
Deferred income tax benefit 10,500 --
---------- ----------
Total current assets 646,531 606,100
Fixed assets:
Land 305,000 305,000
Building and improvements 449,885 422,050
Equipment 558,531 549,109
Vehicles 124,599 450,859
---------- ----------
1,438,015 1,727,018
Less accumulated depreciation (875,404) (910,320)
---------- ----------
Net fixed assets 562,611 816,698
Other assets:
Utility deposit 890 890
Cash surrender value - officer's life 14,250 --
Investments -- 1,245
Patent, net of accumulated amortization 91,657 35,380
Note receivable - split dollar life insurance 17,780 --
Deferred income tax benefit 101,153 117,190
---------- ----------
Total other assets 225,730 154,705
---------- ----------
$1,434,872 $1,577,503
========== ==========
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Notes payable--officer $ 129,116 $ 182,708
Notes payable -- 815,000
Accounts payable 196,912 105,541
Payroll and payroll taxes payable 4,605 4,031
Franchise tax payable 2,647 2,870
Customer deposit 25,000 --
Current maturities of long-term debt 269,844 43,492
-------- ----------
Total current liabilities 628,124 1,153,642
Long term debt less current maturities 661,325 302,377
Stockholders' equity:
Capital stock, no stated value, 2,000 shares,
authorized, 750 issued and outstanding 8,634 8,634
30 stock warrants outstanding 4,859 --
Retained earnings 131,930 112,850
---------- ----------
Total stockholders' equity 145,423 121,484
---------- ----------
$1,434,872 $1,577,503
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
Tice Engineering and Sales, Inc.
Consolidated Statements of Income
For the Years Ended March 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Sales $1,239,666 $1,235,492 $1,305,478
Service 2,892 4,362 3,230
---------- ---------- ----------
Total Revenues 1,242,558 1,239,854 1,308,708
Expenses:
Cost of sales and service 808,161 867,702 999,797
Research and Development (Net of
reimbursements) 46,963 42,364 140,990
Selling, General and Administrative 368,149 264,592 278,632
---------- ---------- ----------
Total Expenses 1,223,273 1,174,658 1,419,419
---------- ---------- ----------
Operating Income/(Loss) 19,285 65,196 (110,711)
Other income/(expense):
Interest income 176 618 500
Rental income 49,575 52,920 33,675
Rental expense (46,424) (43,002) (53,266)
Gain on sale of fixed assets 105,593 -- --
Interest - related parties (16,312) (15,326) (4,105)
Interest - other (94,551) (96,446) (87,480)
Other income 7,275 787 305
---------- ---------- ----------
Total other income/(expense): 5,332 (100,449) (110,371)
---------- ---------- ----------
Income/(Loss) before provision for income taxes 24,617 (35,253) (221,082)
Provision for income tax (5,537) 5,591 41,680
---------- ---------- ----------
Net income/loss before change in
accounting principle 19,080 (29,662) (179,402)
Change in accounting principle
Cumulative effect to March 31, 1994
of application of Statement of
Financial Accounting Standards 109
"Accounting for Income Taxes" -- -- 69,919
---------- ---------- ----------
Net income/(loss) $ 19,080 $ (29,662) $ (109,483)
========== ========== ==========
Income per share $.003
Outstanding shares 6,588,780
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
Tice Engineering and Sales, Inc.
Consolidated Statements of Stockholder's Equity
For the Years Ended March 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Total
Common Stock Retained Stockholders
Stock Warrants Earnings Equity
------ -------- -------- ------------
<S> <C> <C> <C> <C>
Balance April 1, 1993 $8,634 $ $ 251,995 $ 260,629
Net loss for the year
ended March 31, 1994 (109,483) (109,483)
------ ------ --------- ---------
Balance March 31, 1994 8,634 142,512 151,146
Net loss for the year
ended March 31, 1995 (29,662) (29,662)
------ ------ --------- ---------
Balance March 31, 1995 8,634 112,850 121,484
Issuance of 30 stock warrants 4,859 4,859
Net income for the year
ended March 31, 1996 19,080 19,080
------ ------ --------- ---------
Balance March 31, 1996 $8,634 $4,859 $ 131,930 $ 145,423
====== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
Tice Engineering and Sales, Inc.
Consolidated Statements of Cash Flows
For the Years Ended March 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- ----------
<S> <C> <C> <C>
Operating activities:
Net income/(loss) $ 19,080 $ (29,662) $(109,483)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 51,887 51,994 60,507
Gain on sale of fixed assets (105,593) -- --
Changes in operating assets and liabilities:
(Increase)/Decrease in receivables 70,921 (124,393) 120,216
(Increase)/Decrease in inventories (137,702) (35,485) 73,983
(Increase)/Decrease in prepaid expenses (1,033) (1,261) (14,145)
(Increase)/Decrease in deferred tax asset 5,539 (5,591) (111,599)
Increase/(Decrease) in accounts payable 91,371 (1,639) (72,925)
Increase/(Decrease) in accrued expenses 25,350 3,071 397
--------- --------- ---------
Net cash provided by operating activities 19,820 (142,966) (53,049)
Investing activities:
Purchase of fixed assets (37,257) (4,957) (10,624)
Proceeds from sale of fixed assets 349,091 -- --
Investment in patents (60,319) (31,757) (4,918)
Increase in cash value life insurance (14,250) -- --
Increase in note receivable-split
dollar life insurance (17,780) -- --
Sale of investment at cost 1,245 -- --
--------- --------- ---------
Net cash provided by investing activities 220,730 (36,714) (15,542)
Financing activities:
Proceeds from notes payable -- 225,000 50,000
Proceeds from officer loan 79,312 80,526 64,211
Principal payments on officer loan (132,904) (63,850) (7,200)
Principal payments on notes payable (229,700) (39,369) (49,867)
--------- --------- ---------
Net cash provided by financing activities (283,292) 202,307 57,144
--------- --------- ---------
Net increase/(decrease) in cash (42,742) 22,627 (11,447)
Cash Balance, April 1, 45,564 22,937 34,384
--------- --------- ---------
Cash Balance, March 31, $ 2,822 $ 45,564 $ 22,937
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
Tice Engineering and Sales, Inc.
Consolidated Statements of Cash Flows (Continued)
For the Years Ended March 31, 1996, 1995 and 1994
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash paid during the years for:
Interest $94,551 $96,446 $87,480
Taxes 2,870 2,156 2,281
Non-Cash investing and financing activities:
Interest accrued on officer's loan 16,312 15,326 4,105
Issuance of stock warrants in exchange
for services 4,859 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies
Business Activity
The Company designs and manufactures robotic and pneumatic industrial sewing
machine attachments.
Trade Accounts Receivable
The Company considers accounts receivable to be fully collectible; accordingly,
no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
Inventories
Inventories are stated at lower of cost or market. Cost is determined using the
first-in, first-out method.
Inventories at March 31 consist of:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Raw materials $278,735 $196,377
Work in progress 141,994 101,461
Finished goods 44,268 29,457
-------- --------
$464,997 $327,295
======== ========
</TABLE>
Cash and Cash Equivalents
For purposes of the statement of cash flows the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash and/or cash equivalents.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due and deferred taxes
related primarily to the basis of inventory for financial and income tax
reporting. The deferred tax assets represent the future tax return consequences
of those differences. Deferred tax assets also are recognized for operating
losses that are available to offset future taxable income.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method and accelerated methods over the estimated useful lives of
the assets. Significant improvements are capitalized while maintenance and
repairs are expensed as incurred.
F-25
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies (continued)
Patents
Certain legal and other direct expenses incurred in order to obtain patents on
company designed and manufactured parts have been capitalized at cost. Patent
costs of $49,877 and $31,757 have been capitalized in the years ending March
31, 1996, and 1995, respectively. Amortization is calculated by the straight-
line-method over a seventeen year estimated useful life. Amortization expense
totaled $4,042 and $1,223 during the year ended March 31, 1996 and 1995,
respectively.
2. Notes Payable and Long-Term Debt
Notes payable consisted of the following at March 31,:
<TABLE>
<CAPTION>
1996 1995
-------- ----------
<S> <C> <C>
Note payable to a bank, dated 3/28/96, interest at 9.5%
payable monthly, due on demand, secured by accounts
receivable, furniture, fixtures and equipment. $ 400,000 $ 400,000
Note payable to a bank, dated 7/11/94, originally due
November 11, 1994, renewable every 120 days,
renewed to October 11, 1996, interest at bank index
rate plus 1%, payable monthly. $ 225,000 $ 225,000
Notes payable to a bank, dated 8/14/91, due on demand,
interest at bank index rate plus 1%, secured by airplane. -- 190,000
Note payable to an individual, dated 2/29/86, interest at 10%,
principal and interest payments of $6,343 due monthly
through August, 2001, secured by shopping center. 306,169 345,869
---------- ---------
931,169 1,160,869
Less current maturities 269,844 858,492
---------- ---------
$ 661,325 $ 302,377
========== =========
</TABLE>
F-26
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 1996, 1995 and 1994
2. Notes Payable and Long-Term Debt (continued)
Maturities of notes payable and long term debt at March 31,:
<TABLE>
<CAPTION>
Year 1996 1995
- ------------- -------- ----------
<S> <C> <C>
1996 $ -- $ 858,492
1997 269,844 48,046
1998 49,212 53,077
1999 54,096 58,635
2000 59,465 64,775
2001 65,367 77,844
Thereafter 433,185 --
---------- ----------
$ 931,169 $1,160,869
========== ==========
</TABLE>
On May 6, 1996, the Company borrowed $700,000 from a bank at 9.5% thru May of
1999 and 3.5% over prime thereafter. The loan is payable in 120 equal
installments of $9,112. The Company intends to use the proceeds to pay $625,000
to retire short term debt, and accordingly, that amount has been classified as
long term debt at March 31, 1996.
In addition, the Company obtained a working capital loan on May 6, 1996 of
$100,000 with interest at prime + 2% due and payable on August 31, 1996.
3. Joint Development Agreement
In December, 1994, the Company entered into a Joint Development Agreement with
a denim clothing manufacturer to develop a specialized sewing machine for the
manufacture of jeans. The manufacturer reimbursed the Company $150,000 in
development fees during each of the years ended March 31, 1996 and 1995. The
Company incurred $160,633 in research and development expenses related to this
project during the year ended March 31, 1996 and $150,468 during the year ended
March 31, 1995. Under the terms of the agreement, the denim clothing
manufacturer will have exclusive rights to purchase said sewing machine for an
initial period of two years from the date of shipment of the first production
machine. After the initial two year period, in order to maintain its exclusive
rights, the manufacturer must purchase certain minimum quantities. In the event
the Company sells machines to a third party, the Company is required to pay
royalties to the manufacturer up to the amount reimbursed to the Company for
development fees, plus 10% interest. Under no circumstances is any portion of
the development fee refundable.
F-27
<PAGE>
TICE ENGINEERING AND SALES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996, 1995 AND 1994
4. RESEARCH AND DEVELOPMENT
As required by statement of Financial Accounting Standards No. 2, the Company
expenses research and development costs (including research and development
performed under contract) as incurred. Included in expenses are the following
attributable to research and development during the years ended March 31,:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Legal, patent fees $ 8,444 $ -- $ 222
Salaries 150,496 134,077 119,838
Travel 1,129 4,000 --
Insurance 5,614 4,893 2,949
Payroll tax 11,513 9,336 9,168
Telephone 2,337 2,350 2,052
Utilities 1,433 1,353 1,498
Materials 15,997 36,355 5,263
--------- --------- --------
196,963 192,364 140,990
Less reimbursements (Note 3) (150 000) (150,000) --
--------- --------- --------
Net research and development expense $ 46,963 $ 42,364 $140,990
========= ========= ========
</TABLE>
5. RELATED PARTY TRANSACTIONS
Included in current liabilities at March 31, 1996 and 1995, is a note payable to
William Tice, a company officer and a major stockholder. The note bears 10%
interest and is due on demand and is subordinated debt.
During the year ended March 31, 1996, the Company borrowed an additional
$63,000, made principal payments of $131,652, and accrued interest on the loan
totaling $16,312. During the year ended March 31, 1995, the Company borrowed an
additional $65,200, made principal payments of $63,850, and accrued interest on
the loan totaling $15,326. Additionally, the notes payable to banks are secured
by a second mortgage on Mr. Tice's personal residence as well as his personal
guarantee.
6. INCOME TAXES
Effective April 1, 1993, the Company changed to an asset and liability method of
accounting for income taxes in accordance with Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax basis of assets and liabilities and are
measured using enacted tax rates. There was no effect on pre-tax income of the
adoption of FAS-109 during the year ended March 31, 1994.
F-28
<PAGE>
TICE ENGINEERING AND SALES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996, 1995 AND 1994
6. INCOME TAXES (CONTINUED)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current Expense
Federal $ $ $
State
Deferred tax benefit due to temporary
differences
Federal (4,708) (472) 1666
State (1,883) (188) 667
Deferred tax benefit due to net
operating loss carryover
Federal 8,664 (3,523) (31,438)
State 3,464 (1,408) (12,575)
------- -------- ---------
Total provision for income taxes $ 5,537 $(5,591) $(41,680)
======= ======== =========
</TABLE>
The following is a reconciliation of the provision for income taxes to the
expected amounts attributable to continuing operations using the applicable
effective rate.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Expected statutory amount 15% (15%) (15%)
Nondeductible meals and .4 .1 .3
entertainment
Nondeductible life insurance .6 .9 1.7
----------------------------
Actual tax provision 16% (14%) (13%)
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of inventory for financial reporting purposes and
amounts used for income tax purposes. Deferred taxes have also provided for
operating losses available to offset future taxable income.
F-29
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 1996, 1995 and 1994
6. Income Taxes (Continued)
The following is a summary of the significant components of the Company's
deferred tax assets as of March 31,
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Section 263 A Cost in ending inventory $ 23,662 $ 17,069 $ 16,409
Net operating loss carryovers 87,991 100,121 95,190
-------- -------- --------
Net deferred tax asset $111,653 $117,190 $111,599
======== ======== ========
</TABLE>
At March 31, 1996, 1995 and 1994, the Company had loss carryovers available to
offset future taxable income of $390,342, $448,104 and $424,623, respectively.
At March 31, 1996, the carrying value of inventory for tax purposes was
$112,674 higher than reported in the financial statements.
7. Major Customers and Export Sales
The Company sells a substantial portion of its products to three major
customers. Transactions with these major customers consisted of the following
during the years ended March 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Sales % Sales % Sales %
------------ ------------ ------------
<S> <C> <C> <C>
Customer 1 $582,643 47 $395,357 32 $549,657 42
Customer 2 272,727 22 197,679 16 170,132 13
Customer 3 136,363 11 -- --
------------ ------------ ------------
$991,733 80% $593,036 48% $719,789 55%
============ ============ ============
</TABLE>
Approximately 4% of the Company's sales are export sales. All export sales are
paid with an irrevocable letter of credit drawn on U.S. funds, therefore, there
are no exchange gains or losses included in income.
8. Note Receivable - Split Dollar Life Insurance
The Company is paying the premiums on life insurance policies on the life of
William Tice, a company officer, in a split dollar agreement with collateral
assignment, whereby the premiums paid by the Company are to be repaid upon
receipt of the proceeds of the policy by Mr. Tice's beneficiaries. The Company
is not a beneficiary on this policy. Premiums paid on the policy during the year
ended March 31, 1996 totaled $17,780.
F-30
<PAGE>
Tice Engineering and Sales, Inc.
Notes to Consolidated Financial Statements (Continued)
March 31, 1996, 1995 and 1994
9. Employee Benefits
Employee benefits consist of group health insurance and group term life
insurance provided for employees and their dependents totaling $23,734, $19,422
and $23,211 for the years ended March 31, 1996, 1995 and 1994, respectively.
10. Stock Warrants
On May 5, 1995, the Company issued 30 stock warrants to Joseph Walker & Sons,
Inc. in exchange for consulting services provided to the Company in connection
with their plan of reorganization. The warrants can be converted to 30 shares of
Company stock at an exercise price of $1 per share on or before May 5, 2005. The
value of the warrants has been recorded at the fair market value of the services
rendered.
11. Going Concern
The auditors' report on the audited financial statements for the year ended
March 31, 1996, originally dated May 23, 1996, contained an explanatory
paragraph because of substantial doubt about its ability to continue as a going
concern. Since that time, the Company has realized substantial gains from sales
of Company assets, has retired a substantial portion of both short-term and
long-term debt, and has entered into a licensing agreement with a sewing machine
manufacturer which should provide net operating income for the year ended March
31, 1997. Because of this new information, the auditors' have removed this going
concern explanatory paragraph from the auditors report and re-issued the
financial statements, dated February 10, 1997.
12. Pro-Forma Average Common Shares
The pro-forma average common shares outstanding of 6,588,780 is made up of
5,838,780 Common Shares and 750,000 Class B Common Shares. In compliance with
requirements, of the securities and exchange commission stock and stock warrants
issued within a one year period prior to an initial public offering must be
treated as outstanding for all periods presented. Therefore the shares
outstanding at December 31, 1996 have been revised for the shares issued at the
time the registration becomes effective.
13. Reclassification
Certain amounts in the March 31, 1996, 1995 and 1994 income statements have been
reclassified from general and administrative expenses to cost of sales, applied
overhead, research and development and rental property expenses to be consistent
with the December 31, 1996 and 1995 interim (unaudited) financial statements
included in the SEC registration statement.
F-31
<PAGE>
Tice Engineering and Sales, Inc.
Consolidated Schedules of Cost of Sales
For the Years Ended March 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Materials $450,937 $492,455 $587,226
Production and assembly labor 128,900 106,518 137,860
Production and assembly expense 4,045 2,029 3,843
Sales and service salaries 108,868 155,560 144,160
Shop expense 1,605 1,539 1,549
Commissions 14,405 5,545 11,958
Applied overhead 99,401 104,056 113,201
-------- -------- --------
$808,161 $867,702 $999,797
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
Tice Engineering and Sales, Inc.
Consolidated Schedules of Selling, General and Administrative Expenses
For The Years Ended March 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Advertising $ 70,539 $ 68,111 $ 52,082
Airplane 71,728 47,242 33,584
Amortization 4,042 1,223 72
Bad debts 587 28 1,143
Depreciation 12,159 14,786 23,114
Donations -- -- 744
Dues and fees 525 993 957
Employee benefits 10,633 12,951 11,148
Employee training -- -- 1,184
Insurance 8,631 7,364 14,098
Legal and accounting 33,056 8,300 5,808
Meals and entertainment 1,630 1,964 1,247
Office supplies 12,572 8,812 8,655
Postage 1,191 1,237 1,001
Rent 383 533 304
Royalty 3,843 3,714 942
Salaries - officers 34,825 35,799 44,429
Salaries - other 42,801 7,416 30,559
Scholarship fund -- -- 2,408
Shop 1,605 1,540 1,549
Taxes - payroll 6,231 3,451 4,952
Taxes - other 15,808 15,820 14,319
Telephone 8,181 8,226 7,180
Travel 14,058 7,280 6,159
Utilities 6,761 5,414 6,883
Vehicle 6,360 2,388 4,111
-------- -------- --------
$368,149 $264,592 $278,632
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
Tice Engineering and Sales, Inc.
Consolidated Schedules of Applied Overhead
For The Years Ended March 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Depreciation $ 7,240 $ 7,539 $ 8,875
Equipment maintenance 1,085 638 1,210
Employee benefits 13,101 22,058 18,485
Insurance 1,758 2,554 2,518
Legal and accounting 576 148 223
Office supplies 1,311 979 962
Postage 132 137 111
Rent 743 817 371
Salaries - officer 29,522 28,374 37,318
Salaries - other 13,734 11,719 10,750
Taxes payroll 21,864 21,152 24,756
Telephone 1,169 1,175 1,026
Utilities 7,166 6,766 6,596
------- -------- --------
$99,401 $104,056 $113,201
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
PRO FORMA BALANCE SHEETS ASSUMING ACQUISITION
OF TES AND CONVERSION OF TES DEBT:
The pro forma balance sheets are included to show the expected effects on the
balance sheets of the Issuer and TES of certain events which occurred after the
balance sheet date and on the effective date of the registration statement.
These are (i) the exercise of the warrants by JWSI; (ii) the reorganization in
which the shareholders of TES exchanged all of the issued and outstanding stock
of TES for 5,450,220 Common Shares (5,211,750 to Mr. Tice and 238,470 to JWSI)
and 750,000 Class B Common Shares and TES became a wholly owned subsidiary of
the Issuer; (iii) the conversion of $265,680 of debt of TES to 88,560 Common
Shares of the Issuer; and (iv) the issuance of 300,000 Common Shares and
1,000,000 Common Stock Purchase Warrants of the Issuer to Monogenesis for
$13,000.
<TABLE>
<CAPTION>
Tice Engineering &
Tice Technology, Inc. Sales, Inc. Tice Technology, Inc.
Balance Sheet Balance Sheet Pro-Forma & Subsidiary Pro-
ASSETS December 31, 1996 December 31, 1996 Adjustments Forma Balance Sheet
- ------ --------------------- ------------------ ----------- --------------------
<S> <C> <C> <C> <C>
Current Assets $ 24,200 $ 6,333 $ 3,000 (5) $ 43,533
Cash 10,000 (6)
Accounts receivable 167,081 167,081
Inventory 470,795 470,795
Prepaid expenses 44,829 44,829
Deferred income tax asset 102,337 102,337
Due from related company 124,319 (124,319) (1)
Total current assets -------- ---------- ----------
24,200 915,694 828,575
Fixed Assets 772,198 772,198
Less accumulated depreciation (585,528) (585,528)
----------- -----------
Net fixed assets 186,670 186,670
Other Assets
Utility deposits 890 890
Cash surrender value - officer's life 14,250 14,250
Note receivable - split dollar life insurance 53,340 53,340
Patent, net of accumulated amortization 115,745 115,745
Organization cost 100,119 100,119
-------- ---------- ----------
Total other assets 100,119 184,225 284,344
-------- ---------- ----------
Total Assets $124,319 $1,286,589 $1,299,589
======== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
Current Liabilities $ $ 81,908 $ $ 81,908
Note payable - officer 296,623 296,623
Accounts payable 4,185 4,185
Taxes payable
Current maturities - long term debt 506,679 (265,680) (4) 240,999
Due to related company 124,319 (124,319) (1)
-------- ---------- ----------
Total Liabilities 124,319 889,395 623,715
</TABLE>
F-35
<PAGE>
Pro Forma Balance Sheets Assuming Acquisition
of TES and Conversion of TES Debt:
<TABLE>
<CAPTION>
Tice Engineering &
Tice Technology, Inc. Sales, Inc. Tice Technology, Inc.
Balance Sheet Balance Sheet Pro-Forma & Subsidiary Pro-
December 31, 1996 December 31, 1996 Adjustments Forma Balance Sheet
--------------------- ----------------- ----------- ---------------------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S
- -----------------------------
EQUITY (continued)
------------------
Stockholder's Equity 8,634 (8,634)(2)
Capital stock, no stated value, 2,000
shares authorized, 750 shares issued and
outstanding
30 stock warrants outstanding 4,859 (4,859)(3)
Common Shares, par value $.01 per share, 52,117 (2)
30,000,000 shares authorized, 5,838,780 2,385 (3)
shares issued and outstanding 886 (4)
3,000 (5) 58,388
Class B Common Shares, par value $.01 per share, 7,500 (2) 7,500
5,000,000 shares authorized, 750,000 shares issued
and outstanding
Class D Common Shares, par value $.01 per share,
600,000 shares authorized, no shares issued -0-
and outstanding ----------
Total Common Shares 65,888
Preferred Shares, par value $.01 per share, 10,000,000
shares authorized, no shares issued and outstanding -0-
Paid in surplus (50,983) (2)
2,474 (3)
264,794 (4)
75,000 (5)
10,000 (6) 301,285
Retained earnings 383,701 (75,000) (5) 308,701
-------- ---------- ----------
Total stockholder's equity -0- 397,194 675,874
-------- ---------- ----------
Total Liabilities and Stockholder's $124,319 $1,286,589 $1,299,589
Equity ======== ========== ==========
</TABLE>
(1) Eliminate inter-company receivables and payables.
(2) Exchange of Mr. Tice's stock in Tice Engineering and Sales, Inc. for
5,211,750 Common Shares and 750,000 Shares of Class B Common.
(3) 238,470 Common Shares issued to JWSI upon conversion of warrants issued by
TES.
(4) 88,560 Common Shares issued upon conversion of $265,680 debt of TES at $3
per share.
(5) Issuance of 300,000 Common Shares to Monogenesis for $3,000 cash and
services valued at $75,000.
(6) Issuance of 1,000,000 Common Stock Purchase Warrants to Monogenesis
for $10,000.
F-36
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Tice Technology, Inc.
We have audited the accompanying balance sheet of Tice Technology, Inc. as
of December 31, 1996. This financial statement is the responsibility of
the company's management. Our responsibility is to express an opinion on
this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall balance sheet presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Tice Technology, Inc. as
of December 31, 1996, in conformity with generally accepted accounting
principles.
BORING & GOINS, P.C.
Knoxville, Tennessee
February 10, 1997
F-37
<PAGE>
Tice Technology, Inc.
Balance Sheet
December 31, 1996
ASSETS
------
<TABLE>
<CAPTION>
Current Assets
<S> <C>
Cash - checking $ 24,200
Other Assets
Organization and registration cost 100,119
--------
Total Assets $124,319
========
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current Liabilities
Due to related company $124,319
Stockholder's Equity --
--------
Total Liabilities and Stockholder's Equity $124,319
========
F-38
<PAGE>
Tice Technology, Inc.
Notes to Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
Nature of Business
Tice Technology, Inc., a newly formed Delaware corporation, was formed to
acquire and hold all of the issued and outstanding stock of Tice Engineering and
Sales, Inc. Tice Engineering and Sales, Inc. is an engineering firm which
provides engineering and technical solutions for the apparel industry. Tice
Technology, Inc. was incorporated on June 21, 1996. Management of Tice
Engineering and Sales, Inc. and Tice Technology, Inc. anticipate that at some
point in the future it may be advantageous to acquire additional business and
that Tice Technology, Inc. stock may be used as some or all of the consideration
for such acquisition.
Development Stage
The Company has not commenced operations as of December 31, 1996 and the only
activity to date has been solely in conjunction with the incorporation and
registration process, which have been capitalized.
2. Organization Cost
Organization cost represent legal, consulting and accounting costs related to
the cost of organization and registration and will be amortized on the straight
line method over five years.
3. Related Company
Tice Technology, Inc. will acquire all of the issued and outstanding stock and
all the outstanding warrants and options of Tice Engineering and Sales, Inc., a
Tennessee Corporation, in exchange for stock and warrants of the company when
the filed registration statement becomes effective. The company's management is
the same as Tice Engineering & Sales, Inc.
4. Capital Structure
Tice Technology, Inc. is authorized at December 31, 1996 to issue the following
number of shares at the stated par value:
Authorized Shares Par Value Per Share
----------------- -------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Common Shares 30,000,000 $.01
Class B Common Shares 5,000,000 $.01
Class D Common Shares 600,000 $.01
Preferred Shares 10,000,000 $.01
</TABLE>
F-39
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and if given or made, such information or representations must not be
relied upon as having been authorized by the Issuer. The delivery of this
Prospectus at any time does not imply that the information herein is correct as
of any time subsequent to its date of issue. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any of these securities.
_________________________
TABLE OF CONTENTS
_________________________
<TABLE>
<CAPTION>
Page
----
<S> <C>
Additional Information 2
Summary 3
Risk Factors 9
Plan of Distribution 15
Use of Proceeds 17
Capitalization 17
Business 19
Management's Discussion 29
and Analysis of Financial
Condition
Legal Proceedings 40
Management 40
Principal and Selling 42
Shareholders
Securities 45
Dividends 49
Liability and Indemnification 49
of Directors
Legal Matters 52
Experts 52
Financial Statements 53
_________________________
</TABLE>
2,984,717 Common Shares
and
1,000,000 Common Stock
Purchase Warrants
of
Tice Technology, Inc.
______________________________
PROSPECTUS
______________________________
__________________, 1997
Until _____________________, 1997, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
<PAGE>
Part II - Information Not Required In Prospectus
- ------- --------------------------------------
Item 13. Other Expenses of Issuance and Distribution
-------------------------------------------
Expenses of the offering are estimated to be approximately $100,000 which
amount includes the following items:
<TABLE>
<CAPTION>
<S> <C>
Registration fee - federal $ 2,915
Registration fees - state $ 0
Transfer Agent Fees* $15,000
Printing and EDGAR Filing Costs* $12,000
Legal Fees (including fees relating
to the reorganization)* $50,000
Accounting Fees $20,000
</TABLE>
- --------------------------------------------------------------------------------
* estimates
The Selling Shareholders are not paying any expenses of the registration.
Item 14. Indemnification of Directors and Officers
-----------------------------------------
The Issuer has provisions in its Certificate of Incorporation which limit
its directors' monetary liability to it or its shareholders except: (a) for any
breach of the director's duty of loyalty to the corporation or its shareholders;
(b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (c) for unlawful payment of dividends
or unlawful repurchase or redemption of its own stock; or (d) for any
transaction from which the director derived an improper personal benefit.
The Issuer is required to indemnify its officers and directors for any
liability incurred by them in their capacity as such except in relation to
matters as to which any such director or officer or former director or officer
or person shall be adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of duty.
Item 15. Recent Sales of Unregistered Securities
---------------------------------------
On the effective date of this Registration Statement, the Issuer issued
5,450,220 Common Shares and 750,000 Class B Common Shares to the shareholders of
Tice Engineering and Sales, Inc. in exchange for all of TES's issued and
outstanding stock (238,470 Class B Common Shares issued to Joseph Walker and
Sons, Inc. were converted to Common Shares) and options to purchase 54,750
Common Shares to ten employees. The Issuer also issued 88,560 shares to six
persons in satisfaction of certain debt of TES. The Issuer claims exemption from
registration under Section 4(2) of the Securities Act of 1933.
Of the Common Shares issued to TES shareholders and note holders, 1,629,967
shares (in addition to the Common Shares sold to Monogenesis) will be registered
under this Registration Statement. The remaining securities issued will bear a
restrictive legend. The Common Shares which may be issued upon exercise of the
employee stock options will also be registered under this Registration
Statement.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
------------------------------------------
Index to Exhibits and Financial Statement Schedules
---------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Exhibit Page
Table Number Number
------------ ------
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
I. Plan of Acquisition, Reorganization, Arrangement, 2
Liquidation or Succession
- ---------------------------------------------------------------------------------------------
(i) Stock Purchase Agreement and Plan of +
Reorganization (including all schedules)
- ---------------------------------------------------------------------------------------------
II. Articles of Incorporation and Bylaws 3
- ---------------------------------------------------------------------------------------------
(i) Certificate of Incorporation of Tice Technology, Inc. +
- ---------------------------------------------------------------------------------------------
(ii) Bylaws of Tice Technology, Inc. +
- ---------------------------------------------------------------------------------------------
III. Instruments Defining the Rights of Security Holders 4
- ---------------------------------------------------------------------------------------------
(i) Common Stock Purchase Warrant Agreement
Between Tice Technology, Inc. and Warrant Agent
- ---------------------------------------------------------------------------------------------
IV. Opinion of Counsel - Legality of Securities Being 5 *
Registered
- ---------------------------------------------------------------------------------------------
V. Material Contracts 10
- ---------------------------------------------------------------------------------------------
(i) Agreement Between Tice Technology, Inc. and *
Transfer Agent
- ---------------------------------------------------------------------------------------------
(ii) Patent, Technical Data and Assistance License
Between Tice Engineering and Sales, Inc. and
Brother Industries, Ltd.
- ---------------------------------------------------------------------------------------------
VI. Subsidiaries of the Registrant 21 *
- ---------------------------------------------------------------------------------------------
VII. Consent of Experts 23
- ---------------------------------------------------------------------------------------------
(i) Consent of Boring & Goins, P.C.,
Certified Public Accountants
- ---------------------------------------------------------------------------------------------
(ii) Consent of Counsel - See Exhibit 5
- ---------------------------------------------------------------------------------------------
VIII. Financial Data Schedule 27
- ---------------------------------------------------------------------------------------------
</TABLE>
* Included in original filing of Registration Statement and incorporated by
reference herein.
+ Included in Pre-Effective Amendment No. 1 to the Registration Statement and
incorporated by reference herein.
<PAGE>
Item 17. Undertakings
------------
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this pre-effective amendment no. 2 to this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Knoxville, State of Tennessee, on March 5, 1997.
Tice Technology, Inc.
By: \s\ William A. Tice
-------------------
William A. Tice, President, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this pre-
effective amendment no. 1 to this registration statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<S> <C>
\s\ William A. Tice
- ----------------------------------------------------- on March 5, 1997
William A. Tice, President, Chief Executive Officer
\s\ Karen A. Walton
- ----------------------------------------------------- on March 5, 1997
Karen A. Walton, Chief Financial Officer
</TABLE>
The following are at least a majority of the directors of Tice
Technology, Inc.:
<TABLE>
<S> <C>
\s\ William A. Tice
- ----------------------------------------------------- on March 5, 1997
William A. Tice, Director
\s\ Karen A. Walton
- ----------------------------------------------------- on March 5, 1997
Karen A. Walton, Director
\s\ Sarah Y. Sheppeard
- ----------------------------------------------------- on March 5, 1997
Sarah Y. Sheppeard, Director
</TABLE>
<PAGE>
Exhibit 4(i)
COMMON STOCK PURCHASE WARRANT AGREEMENT
---------------------------------------
This Common Stock Purchase Warrant Agreement is made as of
______________________, 1997, by and between Tice Technology, Inc., a Delaware
corporation (the "Company"), and Mid-America Bank of Louisville and Trust
Company, a Kentucky banking corporation (the "Warrant Agent").
WHEREAS, the Company has determined to issue and deliver Common Stock
Purchase Warrants (the "Warrants") entitling the holders of the Warrants to
purchase an aggregate of 1,000,000 Common Shares of the Company;
WHEREAS, the Company desires to provide for the form and provisions of the
Warrants, the terms upon which they will be issued and may be exercised, and the
respective rights, limitations and immunities of the Company, the Warrant Agent
and the holders of the Warrants; and
WHEREAS, all acts and things necessary have been done and performed to make
the Warrant, when executed on behalf of the Company and countersigned by or on
behalf of the Warrant Agent, as provided in this Agreement, the valid, binding
and legal obligation of the Company, and to authorize the execution and
delivery of this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements contained herein,
the parties hereto agree as follows:
Article I
Execution and Countersignature of Warrants
1.01. Execution and Countersignature of Warrants.
(a) Each Warrant, whenever issued, shall be dated
____________________________, 1997, shall be substantially in the form of
Exhibit A attached hereto and incorporated hereby, and shall be signed by, or
bear the facsimile signature of, the President or a Vice President and of the
Secretary or an Assistant Secretary of the Company. If any officer whose
facsimile signature has been placed upon any Warrant ceases to be that officer
before the Warrant is issued, the Warrant may be issued with the same effect as
if the officer had not ceased to be that officer on the date of issuance.
(b) No Warrant may be exercised until it has been countersigned by the
Warrant Agent. The Warrant Agent shall countersign a Warrant only if:
(i) the Warrant is to be issued in exchange or substitution for one or
more previously countersigned Warrants, as provided in this Agreement, or
(ii) the Company instructs the Warrant Agent to do so.
<PAGE>
(c) Unless and until countersigned by the Warrant Agent pursuant to this
Agreement, a Warrant is invalid and of no effect.
Article II
Warrant Price, Duration and Exercise of Warrants
2.01. Warrant Price. Each Warrant, when countersigned by the Warrant
Agent, shall entitle the holder of the Warrant, subject to the provisions of
this Agreement, to purchase from the Company the number of Common Shares stated
in the Warrant at the price of $8.00 per share, subject to the adjustments
provided in Article III of this Agreement. The Warrant Price as used herein
shall refer to the price per share at which Common Shares may be purchased at
the time a Warrant is exercised.
2.02. Duration of Warrants. Warrants may be exercised only on or before a
date that is 24 months after the date of the Warrants (the "Expiration Date").
Notwithstanding the foregoing, if notice has been given as provided in Article
III hereof in connection with the liquidation, dissolution or winding up of the
Company, the Warrants shall expire at the close of business on the third full
business day before the date specified in the notice as the record date for
determining holders of stock entitled to receive any distribution upon the
liquidation, dissolution or winding up; provided, however, that such date is at
least 5 business days after the date of the notice.
2.03. Exercise of Warrants.
(a) A Warrant, when countersigned by the Warrant Agent, may be exercised by
surrendering it at the office of the Warrant Agent in Louisville, Kentucky, or
at the office of its successor as warrant agent, prior to the close of business
of the Warrant Agent on the Expiration Date or such earlier date as may be
applicable with the exercise form set forth in the Warrant duly completed and
executed, and by paying in full, in lawful money of the United States, the
Warrant Price for each full Common Share as to which the Warrant is exercised,
and any applicable taxes. Notwithstanding the foregoing, the Company is only
required to use reasonable efforts which will permit the purchase and sale of
the Common Shares underlying the Warrants and is not required to qualify the
Warrants or the Common Shares underlying the Warrants in any state.
(b) As soon as practicable after the exercise of any Warrant, the Company
shall issue to, or upon the order of, the holder or holders of the Warrant, in
whatever name or names the Warrant holder may direct, a certificate or
certificates for the number of full Common Shares to which the holder or holders
are entitled, registered in the name or names specified by the holder or
holders, and, if the Warrant is not exercised in full (except with respect to a
remaining fraction of a share), a new countersigned Warrant for the number of
shares (including fractional shares) as to which the Warrant has not been
exercised. All Warrants surrendered shall be canceled by the Company.
(c) If the same holder of one or more Warrants exercises the purchase
rights under the Warrants in the same transaction in a manner that leaves the
right to purchase a fraction
2
<PAGE>
of a share unexercised, the Company shall pay a cash adjustment with respect to
that final fraction in an amount equal to the same fraction of the current
market price of one Common Share on the business day that next precedes the day
of exercise reduced by the same fraction of the Warrant Price of one Common
Share on that day. For this purpose, the current market price shall be the
price of one Common Share on the principal stock exchange on which the Common
Shares is traded on the next preceding business day, or, if no sales take place
on that day or if the Common Shares are not then listed on a stock exchange, the
average of the reported bid and asked prices on that day in the over-the-counter
market.
(d) All Common Shares issued upon the exercise of a Warrant shall be duly
and validly issued, fully paid and nonassessable, and the Company shall pay all
taxes in connection with the issuance of such shares. The Company shall not be
required to pay any tax imposed in connection with any transfer involved in the
issuance of a certificate for Common Shares in any name other than that of the
holder or holders of the Warrant surrendered in connection with the purchase of
the shares. In this case the Company shall not be required to issue or deliver
any stock certificate until the tax has been paid.
(e) Each person in whose name any certificate for Common Shares is issued
shall be deemed to have become the holder of record of the shares on the date on
which the Warrant was surrendered and payment of the Warrant Price and any
applicable taxes was made, irrespective of the date of delivery of the
certificate, except that, if the date of surrender and payment is a date when
the stock transfer books of the Company are closed, a person shall be deemed to
have become the holder of shares at the close of business on the next succeeding
date on which the stock transfer books are open. Except as otherwise provided
in Article III, each person holding any shares received upon exercise of
Warrants shall be entitled to receive only dividends or distributions which are
payable to holders of record on or after the date on which the person is deemed
to become the holder of record of such shares.
Article III
Adjustments
3.01. Stock Dividends - Split-Ups. If after the date of this Agreement,
and subject to the provisions of Section 3.07 hereof, the number of outstanding
Common Shares of the Company is increased by a stock dividend payable in Common
Shares or by a split-up of Common Shares, then, on the day following the date
fixed for the determination of holders of Common Shares entitled to receive the
stock dividend or split-up, the number of shares issuable on exercise of each
Warrant shall be increased in proportion to the increase in outstanding shares
and the then applicable Warrant Price shall be correspondingly decreased.
3.02. Aggregation of Shares. If after the date of this Agreement, and
subject to the provisions of Section 3.07 hereof, the number of outstanding
Common Shares of the Company is decreased by a combination or reclassification
of Common Shares, then, after the effective date of the combination or
reclassification, the number of Common Shares issuable on exercise of each
3
<PAGE>
Warrant shall be decreased in proportion to the decrease in outstanding Common
Shares and the then applicable Warrant Price shall be correspondingly increased.
3.03. Special Stock Dividends. If after the date of this Agreement, and
subject to the provisions of Section 3.07 hereof, shares of any class of stock
of the Company (other than Common Shares) are issued by way of a stock dividend
on outstanding Common Shares, then, commencing with the day following the date
fixed for the determination of holders of Common Shares entitled to receive the
stock dividend, in addition to any Common Share receivable upon exercise of the
Warrants, the Warrant holders upon exercise of the Warrants shall be entitled to
receive, as nearly as practicable, the same number of shares of dividend stock,
plus any shares issued upon any subsequent change, replacement, subdivision or
combination of the stock dividend, to which the holders would have been entitled
if their Warrants would have been exercised immediately prior to the stock
dividend. No adjustment in the Warrant Price shall be made merely by virtue of
the happening of any event specified in this Section 3.03.
3.04. Reorganization, Etc. If after the date of this Agreement any
capital reorganization or reclassification of the Common Shares of the Company,
or consolidation or merger of the Company with another corporation, or sale of
all or substantially all of its assets to another corporation is effective,
then, as a condition of the reorganization, reclassification, consolidation,
merger or sale, lawful and fair provision shall be made whereby the Warrant
holders after the transaction shall have the right to purchase and receive, upon
the basis and upon the terms and conditions specified in the Warrants and in
lieu of the Common Shares of the Company purchasable and receivable immediately
prior to the transaction upon the exercise of the rights represented by the
Warrants, the shares of stock, securities or assets that may be issued or
payable with respect to or in exchange for a number of outstanding Common Shares
equal to the number of Common Shares purchasable and receivable immediately
prior to the transaction upon the exercise of the rights represented by the
Warrants if the reorganization, reclassification, consolidation, merger or sale
had not taken place. Appropriate provisions shall be made in connection with a
reorganization, reclassification, consolidation, merger or sale with respect to
the rights and interests of the Warrant holders to the end that the provision of
this Agreement (including, without limitation, provisions for adjustments of the
Warrant Price and of the number of shares purchasable upon exercise of the
Warrants) shall immediately after the transaction be applicable as nearly as
possible to any shares of stock, securities or assets deliverable immediately
after the transaction upon the exercise of the Warrants. The Company shall not
effect any consolidation, merger or sale unless, prior to the consummation of
the transaction, the successor corporation (if other than the Company) resulting
from the consolidation or merger, or the corporation purchasing the assets,
assumes by written instrument executed and delivered to the Warrant Agent the
obligation to deliver to the Warrant holders the shares of stock, securities or
assets in accordance with the foregoing provisions that the holders may be
entitled to purchase.
3.05. Notice of Change in Warrant. Upon any adjustment of the Warrant
Price or the number of shares issuable on exercise of a Warrant, then and in
each case the Company shall give written notice of the adjustment to the Warrant
Agent. The notice shall state the Warrant Price resulting from the adjustment
and the increase or decrease, if any, in the number of shares
4
<PAGE>
purchasable at that price upon exercise of a Warrant, setting forth in
reasonable detail the method of calculation and the facts upon which the
calculation is based. The Company shall mail or cause to be mailed to each
holder of Warrants at the address registered with the Company, a notice setting
forth such change or adjustment. Failure to file a statement or to give notice,
or any defect in a statement or notice, shall not affect the legality or
validity of the changes or adjustments.
3.06. Other Notices. In case at any time:
(a) the Company pays any dividends payable in stock upon its Common Shares
or makes any distributions (other than regular cash dividends) to the holders of
its Common Shares;
(b) the Company offers for subscription pro rata to the holders of its
Common Shares any additional shares of stock of any class or any other rights;
(c) there is a capital reorganization, a classification of the capital
stock of the Company or a consolidation or merger of the Company with, or a sale
of all or substantially all of its assets to, another corporation; or
(d) there is a voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in any one or more of these cases, the Company shall give written notice
in the manner set forth in Section 3.05 of this Agreement of the date on which
(i) the books of the Company close or a record is taken for the dividend,
distribution or subscription rights, or (ii) the reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up takes place. The notice also shall specify the date as of which the
holders of record of Common Shares shall participate in dividend, distribution
or subscription rights, or shall be entitled to exchange their Common Shares for
securities or other property deliverable upon the reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up. The notice shall be given and published at least 20 days prior to
the transaction in question and not less than 20 days prior to the record date
or the date on which the Company's transfer books are closed with respect to the
transaction. Failure to give or publish the notice, or any defect in the
notice, shall not affect the legality or validity of any transaction covered or
to be covered in the notice.
3.07. Limitation on Fractions. Notwithstanding anything in Sections 3.01
or 3.02 hereof to the contrary, cumulative adjustments in the number of shares
issuable upon exercise of Warrants shall be made only to the nearest multiple of
one-tenth of a share, i.e., fractions of less than five-hundredths of a share
shall be disregarded and fractions of five-hundredths of a share or more shall
be treated as being one-tenth of a share.
3.08. Form of Warrant. The form of Warrant need not be changed due to any
change pursuant to this article, and Warrants issued after a change may state
the same Warrant Price and the same number of shares as is stated in the
Warrants initially issued pursuant hereto. However, at any time in its sole
discretion, the Company may make any change in the form of Warrant that
5
<PAGE>
it may deem appropriate and that does not affect the substance of the Warrants.
Any Warrant subsequently issued and countersigned, whether in exchange or
substitution for an outstanding Warrant or otherwise, may be in the form as so
changed.
Article IV
Other Provisions Relating to Rights of Holders of Warrants
4.01. No Rights as Stockholder Conferred by Warrants. A Warrant does not
entitle its holder to any of the rights of a stockholder of the Company.
4.02. Lost, Stolen, Mutilated or Destroyed Warrants. If any Warrant is
lost, stolen, mutilated or destroyed, the Company and the Warrant Agent may
issue a new Warrant of like denomination, tenor and date as the Warrant so lost,
stolen, mutilated or destroyed. Any such issuance of a new Warrant shall be on
whatever terms and conditions with respect to indemnity or otherwise that the
Company and Warrant Agent may in their sole discretion impose (which shall, in
the case of a mutilated Warrant, include the surrender of the Warrant). Any new
Warrant shall constitute an original contractual obligation of the Company,
regardless of whether the allegedly lost, stolen, mutilated or destroyed Warrant
is at any time enforceable by anyone.
4.03. Reservation of Common Shares. The Company shall at all times
reserve and keep available the number of its authorized but unissued Common
Shares which is sufficient to permit the exercise in full of all outstanding
Warrants. If at any time the number of authorized but unissued Common Shares is
not sufficient for these purposes, the Company shall take such corporate action
as, in the opinion of counsel, may be necessary to increase its authorized but
unissued shares to the number of shares sufficient for these purposes. The
Warrants, and the Common Shares issuable upon exercise of the Warrants, are
registered under the Securities Act of 1933, as amended.
Article V
Ownership and Transfer of Warrants
5.01. Ownership of Warrants. Warrants issued pursuant to this Agreement
shall be treated as owned only by the holder of record as determined by the
Warrant Agent.
5.02. Transfer of Warrants. After countersignature by the Warrant Agent
in accordance with the provisions of this Agreement, one or more Warrants may be
surrendered to the Warrant Agent for transfer and, upon their cancellation, the
Warrant Agent shall countersign and deliver in exchange one or more new
Warrants, as requested by the holder of the canceled Warrant or Warrants, for
purchase of the same aggregate number of shares as were evidenced by or
applicable to the Warrant or Warrants so canceled. The Company shall give
notice to the registered holders of the Warrants of any change in the address,
or in the designation, of the Warrant Agent.
6
<PAGE>
Article VI
Warrant Agent
6.01. Resignation, Consolidation or Merger of Warrant Agent.
(a) The Warrant Agent, or any successor, may resign its duties and be
discharged from all further duties and liabilities hereunder after giving one
month's notice in writing to the Company, except that shorter notice may be
given if the Company, in writing, accepts such shorter notice as sufficient. If
the office of Warrant Agent becomes vacant by resignation or incapacity to act
or otherwise, the Company shall appoint in writing a successor Warrant Agent in
place of the Warrant Agent.
(b) If the Company fails to make an appointment within 30 days after
it has been notified in writing of a resignation or an incapacity by the
resigning or incapacitated Warrant Agent or by the holder of a Warrant (who
must, with any notice, submit the Warrant for inspection by the Company), then
the holder of any Warrant may apply to any court of competent jurisdiction for
the appointment of a successor Warrant Agent. Any successor Warrant Agent,
whether appointed by the Company or by a court, must be a corporation organized,
doing business and in good standing under the laws of the United States of
America or of any State, authorized under the laws under which it is governed to
exercise corporate trust powers, be subject to supervision or examination by
federal or state authorities, and have a combined capital and surplus of not
less than $5,000,000. The combined capital and surplus of any successor Warrant
Agent shall be deemed to be the combined capital and surplus set forth in the
most recent report of its condition published prior to its appointment, provided
that these reports are published at least annually pursuant to law or to the
requirements of a federal or state supervision or examining authority.
(c) After appointment, any successor Warrant Agent shall be vested
with all the authorities, powers, rights, immunities, duties and obligations of
its predecessor Warrant Agent with like effect as if originally named as Warrant
Agent under this Agreement without any further act or deed. However, if for any
reason it becomes necessary or appropriate, the predecessor Warrant Agent shall
execute and deliver, at the Company's expense, an instrument transferring to a
successor Warrant Agent all the authority, powers, rights, immunities, duties
and obligations of a Warrant Agent hereunder. Not later than the effective date
of any appointment the Company shall give notice of the appointment to the
predecessor Warrant Agent to each transfer agent for its Common Shares and to
the registered holders of the Warrants. Failure to give notice, or any defect
in a notice, shall not affect the validity of the appointment of a successor
Warrant Agent.
(d) Any corporation into which the Warrant Agent may be merged or with
which it may be consolidated or any corporation resulting from any merger or
consolidation to which the Warrant Agent is a party shall be the successor
Warrant Agent under this Agreement without any further act.
6.02. Fees and Expenses of Warrant Agent. The Company shall (a) pay the
Warrant Agent reasonable remuneration for its services as Warrant Agent
hereunder and reimburse the Warrant
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<PAGE>
Agent upon demand for all expenditures that it may reasonably incur in the
execution of its duties hereunder, for example and not by way of limitation,
including the cost of legal counsel utilized by Warrant Agent pursuant to
Section 6.03(a) hereof; and (b) perform, execute, acknowledge and deliver or
cause to be performed, executed, acknowledged and delivered all further and
other acts, instruments and assurances that reasonably may be required by the
Warrant Agent to carry out or perform this Agreement.
6.03. Additional Provisions.
(a) The Warrant Agent may consult with legal counsel (who may be legal
counsel for the Company) and the opinion of legal counsel shall be full and
complete authorization and protection to the Warrant Agent with respect to any
action taken or omitted by it in good faith and in accordance with the opinion.
(b) Whenever in the performance of its duties under this Agreement the
Warrant Agent deems it necessary or desirable that any fact or matter be proved
or established by the Company prior to taking or suffering any action hereunder,
the fact or matter (unless other evidence with respect thereto is specifically
prescribed in this Agreement) may be deemed to be conclusively proved and
established by a statement signed by the President or a Vice President or the
Treasurer or an Assistant Treasurer or the Controller or the Secretary of the
Company and delivered to the Warrant Agent. However, in its discretion, the
Warrant Agent may in lieu of a signed statement accept other evidence of a fact
or matter or may require further or additional evidence that to it may seem
reasonable.
(c) The Warrant Agent shall be liable hereunder only for its own
negligence or willful misconduct.
(d) The Warrant Agent shall not be liable for or by reason of any of
the statements of fact or recital contained in this Agreement or in the Warrants
(except its countersignature of the Warrants) or be required to verify the
statements or recitals, and all of these statements and recitals are and shall
be deemed to have been made only by the Company.
(e) The Warrant Agent shall not be responsible for (i) the validity of
this Agreement, (ii) the execution and delivery of this Agreement or the
validity and execution of any Warrants (except its countersignature or execution
of the Warrants), (iii) any breach by the Company of any covenant or condition
contained herein or in any Warrant, (iv) the making of any adjustment required
by Article III of this Agreement or (v) the manner, method or amount of any
adjustment or the ascertaining of the existence of facts that would require any
adjustment. The Warrant Agent also, by any act under or pursuant hereto, shall
not be deemed to make any representation or warranty as to the authorization or
reservation of any Common Shares to be issued pursuant hereto, as to any Warrant
or as to whether, when issued, Common Shares shall be duly and validly issued,
fully paid and nonassessable.
8
<PAGE>
6.04. Acceptance of Agency. The Warrant Agent hereby accepts the agency
established by this Agreement and agrees to perform this Agreement upon the
terms and conditions set forth herein. Among other things, the Warrant Agent
shall account promptly to the Company with respect to Warrants exercised and
concurrently pay to the Company all moneys received by it for the purchase of
Common Shares through the exercise of Warrants.
Article VII
Other Matters
7.01. Payment of Taxes. The Company shall from time to time promptly pay
all taxes and charges that may be imposed upon the Company or the Warrant Agent
in connection with the issuance or delivery of Common Shares upon the exercise
of Warrants, but the Company shall not be required to pay any transfer taxes in
connection with the Warrants or shares.
7.02. Modification of Agreement. Without the consent or concurrence of the
holders of the Warrants, the Warrant Agent may by supplemental agreement or
otherwise concur with the Company in making any changes or corrections in this
Agreement that it is advised by counsel (who may be counsel for the Company) are
required to cure any ambiguity or to correct any defective or inconsistent
provision or clerical omission or mistake or manifest error contained herein.
7.03. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
7.04. Notices and Demands to Company and Warrant Agent. Any notice or
demand authorized by this Agreement to be given or made by the Company, the
Warrant Agent or by the holder of any Warrant shall be sufficiently given or
made if sent by certified or registered mail, postage prepaid, addressed (until
another address is filed in writing), as follows:
To the Company: Tice Technology, Inc.
6711 Tice Plaza
Knoxville, Tennessee 37918
Attn: William A. Tice
To the Warrant Agent: Mid-America Bank of Louisville
and Trust Company
500 West Broadway
Louisville, Kentucky 40202
Attn: _______________________
7.05. Applicable Law. The validity, interpretation and performance of this
Agreement and of the Warrants shall be governed by the laws of the State of
Delaware.
7.06. Persons Having Rights Under This Agreement. Nothing expressed in
this Agreement and nothing that may be implied from any of the provisions hereof
is intended, or shall be construed,
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<PAGE>
to confer upon, or give to, any person or corporation other than the parties to
this Agreement and the holders of the Warrants any right, remedy or claim under
or by reason of this Agreement or of any covenant, conditions, stipulation,
promise or agreement contained herein, and all covenants, conditions,
stipulations, promises and agreements contained herein shall be for the sole and
exclusive benefit of the parties hereto and their respective successors and
assigns and of the holders of the Warrants.
7.07. Examination of Agreement. A copy of this Agreement shall be
available at all reasonable times at the office of the Warrant Agent for
inspection by the holder of any Warrant. The Warrant Agent may require the
holder seeking inspection to submit the Warrant for inspection by it.
7.08. Effect of Headings. The article and section headings in this
Agreement are for convenience only and are not part of this Agreement and shall
not affect the interpretation hereof.
WITNESS the signatures of the parties to this Agreement as of the day first
above written.
Tice Technology, Inc.
By:
------------------------------
Title:
---------------------------
Mid-America Bank of Louisville and Trust
Company
By:
------------------------------
Title:
---------------------------
<PAGE>
[Sample Warrant Certificate Language]
Number W- COMMON STOCK PURCHASE WARRANT Warrants
Expiring ___________, 199
TICE TECHNOLOGY, INC.
Incorporated under the Laws of the State of Delaware
CUSIP 886337 11 2
This Warrant Certificate certifies that
is the registered holder of
Common Stock Purchase Warrants (the "Warrants") to purchase Common Shares, $.01
par value per share (the "Shares"), of Tice Technology, Inc., a Delaware
corporation (the "Corporation"). Each Warrant evidenced hereby entitles the
holder to purchase from the Corporation on or before the close of business of
the Warrant Agent on ______________, 1999 (the "Expiration Date"), except as
otherwise provided in the Warrant Agreement, one fully paid and non-assessable
share at the initial exercise price, subject to adjustment in certain events
(the "Exercise Price"), of $8.00. The Warrants may be exercised by surrender of
this Warrant Certificate and payment of the Exercise Price at the office of the
Warrant Agent in Louisville, Kentucky. Exercise of these Warrants is subject to
the conditions set forth herein and in the Warrant Agreement dated
______________, 1997 (the "Warrant Agreement") between the Corporation and Mid-
America Bank of Louisville and Trust Company, as Warrant Agent (the "Warrant
Agent"). The holder shall be responsible for any transfer taxes payable upon
transfer or exercise.
All capitalized terms used but not defined herein have the meanings set
forth in the Warrant Agreement.
Payment of the Exercise Price must be made in cash of by certified or
official bank check payable to the order of the Corporation.
Reference is hereby made to the further provisions of this Warrant
Certificate and the Warrant Agreement including, without limitation, those set
forth on the reverse hereof, and such further provisions are incorporated herein
by reference and will for all purposes have the same effect as though fully set
forth herein.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
[seal]
Dated Tice Technology, Inc.
--------------
By:
COUNTERSIGNED: ------------------------
MID AMERICA BANK OF LOUISVILLE AND TRUST COMPANY President
(Louisville, Kentucky) WARRANT AGENT
Attest
BY By:
------------------------
AUTHORIZED SIGNATURE Secretary
<PAGE>
The Warrants evidenced by this Certificate are part of a duly authorized
issue of Warrants issued pursuant to the Warrant Agreement which agreement is
incorporated by reference, made a part hereof and hereby referenced to for a
description of the rights, obligations, duties and immunities thereunder of the
Warrant Agent, the Corporation and the holders.
No fractional shares will be issued upon exercise of any Warrant. A Warrant
does not entitle its holder to any of the rights of a stockholder of the
Corporation. The Corporation shall at all times reserve and keep available the
number of its authorized but unissued Common Shares which is sufficient to
permit the exercise in full of all outstanding Warrants.
The validity, interpretation and performance of the Warrant Agreement and the
Warrants shall be governed by the laws of the State of Delaware.
The Corporation and the Warrant Agent may deem and treat the registered
holder(s) hereof as the absolute owner(s) of the Warrants represented by this
Certificate (notwithstanding any notation of ownership or other writing hereon
made by anyone), for the purpose of any exercise or transfer hereof, for notice
purposes and for all other purposes.
Warrants may be exercised to purchase Shares from the Corporation in
accordance with the Warrant Agreement at the Exercise Price. The holder(s) of
Warrants as evidenced by this Certificate may exercise them by surrendering the
Warrant Certificate with the form of election to purchase set forth hereon
properly completed and executed, together with payment of the Exercise Price and
any applicable transfer taxes, at the office of the Warrant Agent in Louisville,
Kentucky. In the event that, upon any exercise of Warrants evidenced hereby the
number of Shares purchased will be less than the total number of Shares which
may be purchased hereunder, there will be issued to the holder hereof, or such
holder's assignee, a new Warrant Certificate evidencing the number of Shares not
purchased.
The Warrants evidenced hereby are transferrable by the registered holder(s)
in person or by duly authorized attorney(s) on the books of the Corporation by
surrendering the Warrant Certificate with the form of assignment set forth
hereon properly completed and executed at the office of the Warrant Agent in
Louisville, Kentucky.
ASSIGNMENT
FOR VALUE RECEIVED, ______________________________________________________
hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
- ------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
_________________________________________Warrants represented by the within
Certificate, and do hereby irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ________________________________
X_____________________________________________
X_____________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By__________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM),PURSUANT TO S.E.C. RULE 17 Ad-15.
ELECTION TO PURCHASE
(To be executed upon exercise of the Warrants)
The undersigned hereby irrevocably elects to exercise the right, represented
by this Warrant Certificate, to purchase ____________ Common Shares and herewith
tenders in payment for such Shares cash or a certified or official bank check
payable to this order of the Corporation in the amount of $______________ all in
accordance with the terms hereof. The undersigned requests that a certificate
for such Shares be registered in the name of ___________________________________
___________________________________________ whose address is and that such
certificate be delivered to _______________________________________ whose
address is ______________________________________ If said number of Shares is
less than all the Shares purchasable hereunder, the undersigned requests that
a new Warrant Certificate representing Warrants to purchase the remaining
balance of the Shares be registered in the name of ____________________________
whose address is _______________________________________ and that such
certificate be delivered to ____________________________________ whose address
is____________________________________ Dated:__________________
X_____________________________________________
X_____________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM),PURSUANT TO S.E.C. RULE 17 Ad-15.
<PAGE>
Exhibit 10 (ii)
PATENT, TECHNICAL DATA AND ASSISTANCE LICENSE
This Agreement effective the 1st day of January, 1997, and made between
Tice Engineering and Sales, Inc., a Delaware, USA corporation having a place of
business at Tice Plaza, 6711 Maynardville Highway, Knoxville, Tennessee 37918,
(hereinafter "Tice") and Brother Industries, Ltd. a Japanese company, having a
place of business at 15-1 Naeshiro-cho, Mieuho-ku, Nagoya, 467 JAPAN
(hereinafter "Licensee").
WITNESSETH THAT:
WHEREAS, Tice possesses technical information and knowledge and is able to
provide technical assistance and services relating to electronically geared
sewing machines, to the assembly, manufacture and use thereof, and to methods of
sewing;
WHEREAS, Tice is the owner of all right, title and interest in and to the
Letters Patent, Utility Models, and applications therefor as listed in Schedule
A;
WHEREAS, Tice has provided technical information to Licensee in accordance
with confidentiality and non-disclosure agreements executed by Tice and
Licensee's Affiliates; and
WHEREAS, Licensee desires to acquire and Tice is willing to grant, transmit
to and provide Licensee the rights, licenses, technical assistance, technical
knowledge and services as hereinafter set forth.
1
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NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, it is hereby agreed as follows:
ARTICLE I
As used herein unless the context otherwise requires:
1.1 (a) "PATENTS" means the unexpired Letters Patent, Utility Models, and
applications therefor owned or controlled by Tice as of the date of
this Agreement relating to electronically geared sewing machines
including but not limited to those listed in Schedule A hereof, and
any continuation, continuation in part, division, reissue or extension
thereof and any patents or the like issuing thereon.
(b) "IMPROVEMENT PATENTS" means any unexpired Letters Patent, utility
model, inventors certificate or the like and applications therefor
hereafter filed or acquired by Tice during the initial seven years (7)
of the term of this Agreement relating to an improvement in
electronically geared sewing machines or to an improved method of
assembling, making or using the same or to an improved method of
sewing.
1.2 (a) "KNOW-HOW" means technical information or knowledge now possessed by
Tice relating to electronically geared sewing machines; methods of
assembling, making and using the same; and to methods of sewing
including, among other things, blueprints, drawings, structural
parameters,
2
<PAGE>
manufacturing, assembly procedures and methods, engineering standards,
methods and procedures for material and component selection, operating
and service instructions, but not including technical information or
knowledge pertaining to software but including:
(i) informative and knowledge heretofore disclosed to Licensee
in accordance with confidentiality and non-disclosure
agreements entered into by Tice and Licensee and in
anticipation of this Agreement ("Communicated KNOW-HOW");
and
(ii) information and knowledge which has not been disclosed to
Licensee as of the date of this Agreement ("Additional KNOW-
HOW").
(b) "IMPROVEMENT KNOW-HOW" means technical information or knowledge
acquired by Tice during the initial seven (7) years of the term of
this Agreement relating to an improvement in KNOW-HOW, improved
methods of sewing, improved electronically geared sewing machines or
to an improved method or means for assembling, making or using
electronically geared sewing machines.
1.3 "TECHNICAL ASSISTANCE" means the assistance of Tice in the design,
specification, drawing and other engineering functions relating to
electronically geared sewing machines, as requested by Licensee and
utilizing KNOW-HOW
3
<PAGE>
and/or IMPROVEMENT KNOW-HOW, as appropriate and provided for pursuant
to Section 2.4 hereof.
1.4 "PRODUCTION TECHNICAL TRAINING" means instruction and training in the
assembly and manufacture of PRODUCT as requested by Licensee and
utilizing KNOW-HOW and/or IMPROVEMENT KNOW-HOW, as appropriate
pursuant to Section 2.4.
1.5 "PATENTED METHOD" means a method claimed in a PATENT or, as provided
for pursuant to Section 2.4 hereof, an IMPROVEMENT PATENT.
1.6 "PATENTED PRODUCT" means an apparatus or the like covered by one or
more claims of a PATENT or used or adapted for use to practice a
PATENTED METHOD covered by one or more claims of a Patent or, as
provided for pursuant to Section 2.4 hereof, an IMPROVEMENT PATENT
provided that a continuing royalty shall be payable based on a pending
priority patent application and corresponding patent applications
pending in different countries or communities only after a claim has
been indicated to be allowable in one of said applications by a Patent
Office listed in Schedule C whereupon a continuing royalty shall be
payable based on and with respect to each said corresponding
application, including the priority application and, upon the grant of
each corresponding Patent, continuing royalty shall be due and payable
for
4
<PAGE>
the full term of such Patent during this Agreement. Tice agrees timely
to provide Licensee with a copy of such Patent Office action(s) which
indicate a claim is allowable together with a copy of the patent
application in which the claim is indicated to be allowable. Licensee
agrees not to disclose this information to another party until the
information is available to the public and this information shall not
be considered KNOW-HOW or IMPROVEMENT KNOW-HOW under Section 3.3. Tice
also agrees to provide Licensee with a copy of each issued Patent
under which a license has been granted pursuant to this Agreement or a
Supplementary Agreement pursuant to Section 2.4.
1.7 "LICENSED PRODUCT" means electronically geared sewing machines or the
like and spare, repair and replacement parts therefor, designed, made,
assembled, or used utilizing, in accordance with, or embodying KNOW-
HOW or IMPROVEMENT KNOW-HOW, as provided pursuant to Section 2.4
hereof, or with or embodying TECHNICAL ASSISTANCE and/or PRODUCTION
TECHNICAL TRAINING or information derived therefrom.
1.8 "PRODUCT" means a PATENTED PRODUCT, a LICENSED PRODUCT and/or
apparatus used or adapted for use to practice a PATENTED METHOD.
5
<PAGE>
1.9 "CATEGORY" means a category of PRODUCTS in the Field listed in
Schedule B.
1.10 "INTRODUCTION DATE" means, with respect to each Category, the date of
the first commercial shipment of a PRODUCT in that Category.
1.11 "MILESTONE DATE" means, with respect to each Category, the date on
which the aggregate Net Sales of all PRODUCT in that Category by
License and its Affiliates equals $30,000,000 U.S.
1.12 "NET SALES" means the f.o.b. factory price for the sale of a Product
exclusive of allowance or returns but in no event less than the most
recent invoice price for the nearest equivalent PRODUCT sold to an
unrelated third party in an arms length transaction within six (6)
months.
1.13 "FIELD" means the field of industrial sewing machines.
1.14 "TERRITORY" means the world.
1.15 "AFFILIATE" means an entity at least fifty percent (50%) of whose
voting share capitol is owned or directly or indirectly controlled by
Licensee.
ARTICLE II
----------
2.1 Tice grants to Licensee and its AFFILIATES a non-exclusive license to
make, assemble, use and sell PATENTED PRODUCT in the FIELD in the
TERRITORY under the PATENTS.
6
<PAGE>
2.2 Tice grants to Licensee and its AFFILIATES a non-exclusive right to
grant sublicenses, including paid-up sublicenses, to their customers
to practice PATENTED METHODS in the FIELD in the TERRITORY utilizing
PRODUCT purchased from Licensee or an AFFILIATE on which a royalty is
paid pursuant to Section 3.2 hereof.
2.3 Tice grants Licensee and its AFFILIATES a non-exclusive license to use
COMMUNICATED KNOW-HOW and, upon the transfer of ADDITIONAL KNOW-HOW at
LICENSEE'S request pursuant to this Section 2.3 and Section 5.1,
ADDITIONAL KNOW-HOW in the FIELD to design, specify, assemble, make,
use and sell PRODUCT in the FIELD in the TERRITORY. Tice agrees to
transfer ADDITIONAL KNOW-HOW to Licensee within ninety (90) days
following execution of this Agreement upon Licensee's written request.
2.4 Tice agrees to timely inform Licensee of the existence of any
IMPROVEMENT PATENT(S) and/or IMPROVEMENT KNOW-HOW in the FIELD
hereafter filed or developed by Tice. Tice shall provide Licensee
with a general description of the Improvement, its use, benefits and
the like to facilitate Licensee's evaluation provided that in no event
shall Tice disclose or be required to disclose information pertaining
to the Improvement which is considered by Tice to be confidential
KNOW-HOW or IMPROVEMENT KNOW-HOW until Licensee has requested such in
writing. Tice shall, at
7
<PAGE>
Licensee's written request, enter a Supplementary Agreement relating
to said IMPROVEMENT PATENTS and/or IMPROVEMENT KNOW-HOW in the FIELD
at terms and conditions to be negotiated and subject to such prior
approvals, registrations or the like as may then be required by any
governmental or community agency for the performance of this
Agreement.
2.5 No right or license is granted hereby, by implication or otherwise,
under any patent, patent application, technical information, know-how,
trade secret, trademark, trademark application or registration or
trade name of Tice or in any field except as specifically provided
herein.
ARTICLE III
-----------
3.1 Licensee shall and agrees to pay Tice an Initial License Fee
comprising (i) $250,000 U.S. within thirty (30) days of the execution
of this Agreement by Licensee and (ii) installment payments within
thirty (30) days of the INTRODUCTION DATE and within sixty (60) days
of the MILESTONE DATE for each CATEGORY in accordance with the
following schedule:
Introduction Milestone
Date Date
------------ -----------
Category I -- $250,000 US
Category 2 to 12 $250,000 US 250,000 US
8
<PAGE>
Tice shall have the right, at its option, to adjust the U.S. Dollar
amounts listed above in this Section 3.1 for any installment payment
which comes due and payable in each year after December 31, 2001 by
written notice to Licensee. If Tice exercises such right, the amounts
due shall be determined by multiplying the amount listed above by the
fraction having as its numerator the Annual Average of the Consumer
Price Index for all Urban Consumers, U.S. City Average, 1967 = 100, as
published by the U.S. Department of Labor Statistics, for the
preceding calendar year then ended and having as its denominator the
Annual Average for the same Consumer Price index for the year 1996. If
such Consumer Price Index is no longer published, then an index
selected by Tice and reasonably acceptable to Licensee which reflects
the changing purchasing power of U.S. currency and which is published
by the U.S. Government or, in the absence of such government
publication, a reputable private organization shall be substituted for
such Consumer Price Index.
3.2 Licensee agrees to pay or cause an AFFILIATE to pay Tice a continuing
patent royalty of two percent (2%) of Licensee's and its AFFILIATES
NET SALES of PATENTED PRODUCT assembled, made, used, sold, or sold or
adapted for use under a PATENT and, subject to a Supplementary
9
<PAGE>
Agreement pursuant to Section 2.4 hereof, an IMPROVEMENT PATENT.
3.3 Licensee agrees to pay or cause an AFFILIATE to pay Tice a continuing
technical fee for COMMUNICATED KNOW-HOW and, upon and after the
transfer of ADDITIONAL KNOW-HOW at Licensee's written request pursuant
hereto, ADDITIONAL KNOW-HOW and, subject to a Supplementary Agreement
pursuant to Section 2.4 hereof, IMPROVEMENT KNOW-HOW of one and three
quarter percent (1.75%) of Licensee's and its AFFILIATES NET SALES of
LICENSED PRODUCT assembled, made, used, or sold by Licensee and its
AFFILIATES, said technical fee to be payable (i) with respect to
COMMUNICATED KNOW-HOW, for a period ending five (5) years from the
date of this Agreement and (ii), with respect to ADDITIONAL KNOW-HOW
or, as appropriate, IMPROVEMENT KNOW-HOW, for a period ending ten (10)
years from the date of the first commercial sale of PRODUCT by
Licensee or the last transfer of KNOW-HOW or, as appropriate,
IMPROVEMENT KNOW-HOW or the provision of TECHNICAL ASSISTANCE or
TRAINING pursuant to Section 5.1, whichever last occurs. Any
disagreement which may arise as to whether a technical fee is due Tice
arising from Licensee's and/or an Affiliates' use of COMMUNICATED
KNOW-HOW with respect to a Product introduced after the date of this
Agreement, shall be finally settled under the Rules of the American
10
<PAGE>
Arbitration Association by an arbitrator appointed according to said
Rules, it being agreed by the parties that a technical fee is due with
respect to Product introduced prior to the execution of this
Agreement. The arbitrator shall apply substantive Tennessee law. The
arbitration shall take place in Chicago, Illinois.
3.4 Only one continuing royalty or fee namely the highest amount payable
under Section 3.2 or 3.3 hereof, as appropriate, shall be due Tice for
each PRODUCT sold by Licensee or an AFFILIATE.
3.5 Licensee agrees to pay or cause an AFFILIATE to pay Tice eighty
percent (80%) of the sub-license income, if any, Licensee and its
Affiliates receive pursuant to sublicenses grant under this Agreement.
3.6 Licensee and its AFFILIATES agrees to exercise their best effort to
exploit the PATENTS however Licensee has no obligation to produce or
use Product in any CATEGORIES unless clearly set forth in a written
document signed by Licensee and has no obligation to pay an initial
fee for categories in which Licensee and its Affiliates do not make,
use, or sell Products.
ARTICLE IV
----------
4.1 Licensee and its AFFILIATES shall keep complete and proper records of
all PRODUCTS assembled, made, used, sold or otherwise disposed of by
Licensee and its
11
<PAGE>
AFFILIATES or sold for use to practice or sublicensed to practice a
PATENTED METHOD on a separate, royalty bearing basis, with credit
shown for returns for which credit is given to customers, such records
to show separately the quantity of PRODUCTS assembled, made, and sold
to each customer or otherwise used or disposed of, NET SALES totals,
customers to whom a separate, royalty bearing sublicense is granted,
the date of invoice and shipment and any sublicense income received.
Sales shall be considered as made on the date of invoice or shipment,
whichever shall first occur. On or before the last day of February and
August of each year during the term hereof and on the sixtieth (60th)
day after termination hereof, Licensee shall send Tice a report, in
writing, certified by an officer of Licensee as to its correctness,
showing separately the NET SALES of PRODUCT assembled, made, used,
sold, or otherwise disposed of by Licensee and its AFFILIATES, any
sublicense income received by Licensee and its AFFILIATES, the parties
to whom a separate, royalty hearing sublicense has been granted and a
PRODUCT sold and computing the amount due Tice, for the preceding
calendar half. Unless Licensee shall be otherwise directed in writing
by Tice, each such report shall be accompanied by the proper amount
then payable to Tice as shown in such report. Licensee shall
12
<PAGE>
make application for any permission required from any governmental
agency to make the payments required hereunder within thirty (30) days
after the close of each calendar half with respect to the payments due
for said calendar half and shall promptly notify Tice of any
unfavorable decision on said application.
4.2 Tice shall have the right, during reasonable business hours, to have
the correctness of any such report audited, at its expense, by an
independent public accountant chosen by Tice who may examine records
of Licensee and its AFFILIATES only on material pertinent to this
Agreement. Such records of Licensee and its AFFILIATES shall be kept
available for at least four (4) years after termination of the
calendar year in which they are made. At Tice's request, but no more
than once with respect to each calendar year, Licensee agrees to
cause, at Tice's expense, its outside auditors to provide Tice with a
statement representing that the records, reports and payments kept and
made by Licensee and its AFFILIATES are accurate and correct and that
Licensee or its AFFILIATES have made the payments required hereunder.
4.3 Unless Licensee shall be otherwise directed in writing by Tice, all
payments called for under this Agreement shall be in United States
currency payable to Tice by wire
13
<PAGE>
transfer at Sun Trust Bank of East Tennessee, Drawer 5500, Knoxville,
Tennessee 37997 USA; Account No. 5613264; Routing No. 064207441,
without deduction for taxes of any kind, provided that if any
government shall assess and require Licensee to withhold and pay any
tax on behalf of Tice, as a percentage of the payments provided for
herein, and if Licensee shall pay such taxes, furnish Tice evidence
satisfactory to the Internal Revenue Service of the United States that
said withheld taxes have been paid on behalf of Tice and if Tice is
entitled to a United States tax credit therefor by treaty or law, then
Licensee may deduct from such payments the amount of such taxes
actually paid by Licensee on behalf of Tice.
4.4 The amount of payments accrued other than in U.S. currency, shall be
converted directly into U.S. dollars (if a direct exchange rate
between the currencies is available) at the foreign exchange rate
quoted for the country in which the royalty accrued by the Tokyo
branch of Citibank, N.A., at the close of banking on the last business
day of the royalty report period.
4.5 Licensee shall pay Tice interest at the U.S. prime rate on the date of
payment plus two percent (2%), per annum compounded quarterly on any
payment that is overdue hereunder from the date such payment is due to
the date
14
<PAGE>
of payment. This interest payment shall be in addition to any other
remedy provided Tice by law or this Agreement.
ARTICLE V
---------
5.1 Within ninety (90) days of the execution of this Agreement and at the
written request of Licensee, Tice agrees to provide Licensee with
ADDITIONAL KNOW-HOW and Tice further agrees:
(a) To the end that Licensee may be well informed of said KNOW-HOW and
receive TECHNICAL ASSISTANCE and PRODUCTION TECHNICAL TRAINING, there
may be visitation of personnel of both parties at the reasonable
written request of Licensee and by prearrangement with Tice, all
traveling expenses to and from Tice's facility and living expenses for
Licensee's personnel away from home shall be borne by Licensee under
the following conditions:
(i) Licensee may send not more than four (4) qualified personnel
to a facility designated by Tice for training and
instruction on KNOW-HOW and for TECHNICAL ASSISTANCE and
PRODUCTION TECHNICAL TRAINING for a period of two (2) weeks
initially and thereafter for at least a one (1) week period,
in any calendar year during the initial seven (7) years of
the term hereof. Salaries, travel expenses and
15
<PAGE>
all other expenses of Licensee's employees shall be borne by
Licensee. Licensee agrees to pay Tice a fee for each man-day
of training and instruction at Tice's published daily
service rate.
(ii) At Licensee's reasonable written request, Tice shall send a
qualified technical person to a Licensee's plant from time
to time during the initial seven (7) calendar years of the
term hereof to assist Licensee in the use of KNOW-HOW and to
provide TECHNICAL ASSISTANCE and TRAINING. Licensee shall
pay Tice at Tice's published daily service rate for each day
or fraction thereof away from home for each such technical
person supplied to Licensee pursuant hereto and, in
addition, shall pay all travel, (business class outside the
U.S.) living and other expenses incurred by Tice's
employees.
(b) Representatives of either party shall at all times during their
presences on the premises of the other be subject to plant rules and
regulations of such other party pertaining to conduct of persons other
than employees, but they shall not for any purpose be deemed to be
employed by, or considered as an agent of, such other party. Licensee
shall maintain Workman's Compensation
16
<PAGE>
and health insurance, each of which is valid with respect to the U.S.,
covering each employee of Licensee during his or her presence on the
premises of Tice.
(c) Tice agrees to fulfill the obligations provided in subparagraphs (a)
and (b) of this Section 5.1 with respect to IMPROVEMENT KNOW-HOW, and
TECHNICAL ASSISTANCE related thereto, subject to a Supplementary
Agreement pursuant to Section 2.4 hereof.
5.2 Licensee agrees that said KNOW-HOW and IMPROVEMENT KNOW-HOW, as
appropriate, is confidential and agree not to disclose or use, except
pursuant hereto and notwithstanding termination hereof, said KNOW-HOW
and IMPROVEMENT KNOW-HOW, as appropriate, to the extent that it is not
in the public domain. Licensee agrees to limit access to KNOW-HOW,
and, as appropriate, IMPROVEMENT KNOW-HOW to those of its employees
which have a need to have access to facilitate Licensee's use thereof
and who have an agreement with Licensee to hold confidential
information received from third parties confidential. Licensee agrees
to provide Tice with a list of its employees who have been given
access to KNOW-HOW and, as appropriate, IMPROVEMENT KNOW-HOW on each
December 1 during the term of this AGREEMENT and at such other times
as Tice shall request.
17
<PAGE>
ARTICLE VI
----------
6.1 Tice shall not be liable for any consequences or damage arising out of
or resulting from anything made available hereunder including the
licensing or practice of Patents nor be liable to Licensee or its
Affiliates for consequential damages under any circumstances.
6.2 Licensee shall notify Tice of any infringement or threatened
infringement by a third party of any PATENT which shall become known
to it. Tice shall use its own discretion in deciding whether to act on
this information, and its refusal to act thereon shall not affect this
Agreement.
ARTICLE VII
-----------
7.1 Licensee agrees to mark any PATENTED PRODUCT sold pursuant hereto, or
to all packages or containers in which PATENTED PRODUCTS are sold,
with the numbers of the PATENTS.
7.2(a) Each PRODUCT shall have a sticker supplied by Tice with the logo "TICE
TECHNOLOGY" (as registered by Tice) prominently displayed thereon at a
location or locations and in a manner and form mutually agreed by Tice
and Licensee in writing; it being understood and agreed that the
sticker and manner, form and location(s) shown in Schedule D are
mutually acceptable and agreed. Each Operator and Service Manual and
Sales Brochure shall have
18
<PAGE>
the logo "TICE TECHNOLOGY" in the same manner and form printed thereon
in a prominent location.
(b) The purchase and sale documents, including invoices, associated with
the sale of each Product shall include the following or equivalent
approved in writing by Tice:
"The purchase of this equipment includes the grant of a license
to use the equipment to practice methods covered by patents of
Tice Engineering and Sales"
7.3 Licensee agrees, at Tice's expense (including the purchase price
extended to Licensee's most favored customers) and request, to deliver
to Tice one PRODUCT in each Category specified by Tice from current
manufacture but no more than two (2) times in any calendar year of the
term of this Agreement. Tice may, in its discretion, terminate Section
7.2(a) of this Agreement.
ARTICLE VIII
------------
8.1 As to each PATENT, all grants, obligations and provisions herein
relating thereto shall continue in full force and effect, unless
otherwise provided or sooner terminated as herein provided, until the
expiration date of said PATENT. In the event any Patent is determined
invalid in any court, Licensee shall have the right to withhold
reports and payments relating to such Patent until such determination
is reversed or vacated. Tice shall be
19
<PAGE>
entitled to terminate this Agreement if and when Licensee withholds
any report or payment.
8.2 As to all grants, obligations and provisions relating to said KNOW-HOW
and TECHNICAL ASSISTANCE, this Agreement shall continue in full force
and effect, unless otherwise provided or sooner terminated as herein
provided, until (i) with respect to COMMUNICATED KNOW-HOW, the elapse
of a five (5) year period from the date of this Agreement and, (ii)
with respect to ADDITIONAL KNOW-HOW, until the elapse of a ten (10)
year period commencing on the date of the first commercial sale of
PRODUCT manufactured by Licensee under this Agreement or the last
transfer of KNOW-HOW or provision of TECHNICAL ASSISTANCE or TRAINING
pursuant to Section 5.1, whichever last occurs.
8.3 Tice may terminate this Agreement forthwith upon written notice to
Licensees if:
(a) Licensee remains in default in making any payment or report
required hereunder, or fails to comply with any other provision
hereof for a period of thirty (30) days after written notice of
such default or failure is given by Tice to Licensee.
(b) Licensee shall become insolvent, make an assignment for the
benefit of creditors or the like, or commit any act of
bankruptcy, or if any order for the compulsory liquidation,
reorganization or the like,
20
<PAGE>
of Licensee shall be made by any court or governmental agency or
the like.
8.4 Any termination of this Agreement shall not relieve Licensee of
liability for any payments accrued prior to the effective date of such
termination, or for any payments on PRODUCT manufactured under this
Agreement prior to the effective date of such termination and sold
thereafter.
8.5 Upon termination pursuant to Section 8.3 hereof, Licensee shall have
no right or license in or to said KNOW-HOW and hereby agrees to cease
and desist using said KNOW-HOW for a reasonable period, which shall
not be less than a two (2) year period following the effective date of
such termination. Upon the elapse of said two (2) year period,
Licensee shall have no right to use or disclose and agrees to desist
from use of such of said KNOW-HOW not then generally in the public
domain.
ARTICLE IX
----------
9.1 This Agreement may, at any time, and without Licensee's consent, be
assigned by Tice without such assignment operating to terminate,
impair or in any way change any of the obligation or rights which Tice
would have had, or any of the obligations or rights which Licensee
would have had if such assignment had not occurred. From, and after,
the making of any such assignment by Tice, the
21
<PAGE>
such assignee shall be substituted for Tice as a party hereto and Tice
shall no longer be bound hereby.
9.2 This Agreement shall inure to the benefit of, and be binding upon, the
successors and assigns of both parties, but no assignment by Licensee
of this Agreement, or any part thereof, including any transfer or the
like in conjunction with a sale, merger or the like of Licensee or any
part thereof, shall have any force or validity whatsoever, except,
unless and until approved in writing by Tice.
ARTICLE X
---------
10.1 Tice represents and warrants:
a) Tice owns the Patents listed in Schedule A free of any lien or
encumbrance;
b) Tice has the right to prosecute the patent applications listed in
Schedule A and upon issuance of any patents pursuant thereto will
own the same, free of any lien or encumbrance;
c) Tice employees having access to Tice KNOW-HOW have executed
agreements pursuant to which they have undertaken not to use the
Tice KNOW-HOW and/or have a fiduciary duty to Tice not use Tice
KNOW-HOW except for Tice purposes nor to disclose the same to
others;
22
<PAGE>
d) As of the date of this Agreement, Tice is not aware of any patent
(United States or Foreign) owned by any other person, firm or
corporation that is infringed by PRODUCT.
10.2 Tice and Licensee each represents and warrants to the other that each
respectively has full power and authority to enter into this License
Agreement and to carry out the transactions contemplated hereby, and
that all necessary corporate action has been duly taken in connection
therewith.
ARTICLE XI
----------
11.1 Each of the parties shall inform the other of any infringement of the
Patents of which it becomes aware.
11.2 Tice shall have the right but not the obligation to take action
against the infringer.
ARTICLE XII
-----------
12.1 Subject to other provisions of this Agreement which shall control,
either party shall hold in confidence and not disclose to any third
party any confidential information disclosed by the other party
without a prior written consent of the other party.
12.2 Each party hereto agrees that the contents of this Agreement and any
payments or reporting made with respect thereto shall be kept
confidential between the parties hereto and shall not be disclosed in
the form of press
23
<PAGE>
releases or otherwise to third parties except its legal counsel,
except to the extent necessary to comply with governmental
requirements or otherwise as required by law or legal process.
ARTICLE XIII
------------
13.1 All notices, requests or communications which either party may desire,
or be required, to give to the other shall be in writing and shall be
deemed to have been duly served if and when forwarded by registered or
certified mail to such address as shall have been designated by notice
from the addressee for addressing a notice to it, or if no such
designation shall have been made, then to the address of the party
appearing above. Any notices, requests or communications not
following the above procedure is not effective.
13.2 The failure to act upon any default hereunder shall not be deemed to
constitute a waiver of such default.
13.3 The validity, legality and enforceability of any provision hereof
shall not be affected or impaired in any way by any holding that any
other provision contained herein is invalid, illegal or unenforceable
in any respect.
13.4 This Agreement, various confidentiality and non disclosure agreements,
and, if entered into by the parties at a later date, the Tice Software
Agreement
24
<PAGE>
constitute the entire agreement between the parties with respect to
the subject matter hereof.
13.5 In the event Tice grants a license to a third party on more favorable
terms than those herein, then Licensee may at its option substitute a
license in the exact form and substance as granted to the third party
for the license herein, and payments previously made by Licensee to
Tice hereunder shall be credited against payments of like type [e.g.
initial payment, continuing royalty] required in such more favorable
license. This provision shall not, however, apply to any license to a
third party that arises, either directly or indirectly, out of any
litigation, or settlement of litigation, with the third party, or
which includes some unique consideration other than the payment of
moneys or consideration which Licensee cannot provide or which
includes other agreements, licenses or rights.
13.6 This Agreement does not include, nor does it infer, any right in Tice
to use any of Licensee's trademarks.
13.7 This Agreement shall be interpreted in accordance with the law of
state of Tennessee USA and the parties agree that original
jurisdiction over the parties and disputes under or related to this
Agreement shall reside with the U.S. District Court for the Eastern
District of Tennessee.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
TICE ENGINEERING AND SALES, INC. BROTHER INDUSTRIES, LTD.
BY /s/ William A. Tice By /s/ Yoshihiro Yasui
----------------------------- -------------------------
26
<PAGE>
SCHEDULE A
----------
(1) Patent Information
U.S. Patent No. 5,458,075
U.S. Application:
Serial No. 08/656,037
Filing Date: 24 May 1996.
PCT Application:
PCT International Application No.
PCT/US95/12032
Dated: 12 Sept. 1995
Priority Date: 15 Sept 1994
27
<PAGE>
SCHEDULE B
----------
CATEGORY
- --------
AUTOMATIC BACK YOKE SEWER
AUTOMATIC BELT LOOP SEWER
AUTOMATIC BUTTON HOLER
AUTOMATIC BUTTON SEWER
AUTOMATIC COLLAR SEWER
AUTOMATIC CUFF SEWER
AUTOMATIC POCKET SETTER
AUTOMATIC POCKET WELT SEWER
AUTOMATIC SLEEVE VENT SEWER
CHAIN STITCH MACHINE
ELECTRONIC EDGE SEAMER
ELECTRONIC EMBROIDERY MACHINE
FEED OFF THE ARM MACHINE
LOCK STITCH MACHINE
PROGRAMMABLE ELECTRONIC PATTER SEWER
28
<PAGE>
SCHEDULE C
----------
European Patent Office
Australia
Austria
Switzerland
Germany
France
United Kingdom
Netherlands
Sweden
Japan
South Korea
Canada
29
<PAGE>
SCHEDULE D
----------
[PICTURE OF TICE LOGO]
30
<PAGE>
Exhibit 23
----------
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------
We consent to the reference to our firm under the captions "Experts" and
"Financial Statements" and to the use of our report dated May 23, 1996 and
February 10, 1997 relating to certain financial statements of Tice Engineering
and Sales, Inc. and to the use of our report dated February 10, 1997 relating to
certain financial statements of Tice Technology, Inc. in Amendment No. 2 to Form
S-1 filed on behalf of Tice Technology, Inc. for the registration of 2,984,717
Common Shares and 1,000,000 Common Stock Purchase Warrants of Tice Technology,
Inc. under Section 8(a) of the Securities Act of 1933.
Dated: March 6, 1997 Boring & Goins, P.C.
By: /s/ Roger L. Goins
--------------------------------
Title: /s/ Vice President/Secretary
-----------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Financial Statements of Tice Engineering and Sales, Inc. for Fiscal Year Ended
March 31, 1996 and Nine Month Period Ended December 31, 1996 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1997
<PERIOD-START> APR-01-1995 APR-01-1996
<PERIOD-END> MAR-31-1996 DEC-31-1996
<CASH> 2,822 6,333
<SECURITIES> 0 0
<RECEIVABLES> 119,060 151,396
<ALLOWANCES> 0 0
<INVENTORY> 464,997 470,795
<CURRENT-ASSETS> 646,531 915,694
<PP&E> 1,438,015 772,198
<DEPRECIATION> 875,404 585,528
<TOTAL-ASSETS> 1,434,872 1,286,589
<CURRENT-LIABILITIES> 628,124 889,395
<BONDS> 661,325 0
<COMMON> 8,634 8,634
0 0
0 0
<OTHER-SE> 136,789 388,560
<TOTAL-LIABILITY-AND-EQUITY> 1,434,872 1,286,589
<SALES> 1,239,666 894,294
<TOTAL-REVENUES> 1,242,558 898,371
<CGS> 808,161 621,623
<TOTAL-COSTS> 1,269,697 1,087,937
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 110,863 77,912
<INCOME-PRETAX> 24,617 261,088
<INCOME-TAX> 5,537 9,317
<INCOME-CONTINUING> 19,285 (163,666)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 19,080 251,771
<EPS-PRIMARY> 25.44 335.69<F1>
<EPS-DILUTED> 0.00 0.04<F2>
<FN>
<F1> Earnings per share are calculated based upon the number of shares of Tice
Engineering and Sales, Inc. issued and outstanding (750) during the periods
reflected in the applicable financial statements.
<F2> Earnings per share fully diluted are the earnings per share adjusted to
reflect the number of shares of Tice Technology, Inc. (which will own all
shares of Tice Engineering and Sales, Inc.) issued and outstanding as of
the effectice date (6,585,279).
</FN>
</TABLE>
