<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number 333-11591
TICE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1647888
(State of incorporation) (IRS Employer
Identification Number)
-----------------------------------------------------------
6711 Maynardville Highway
Knoxville, Tennessee 37918
(Address of principal executive office)
(423) 925-4501
(Registrant's telephone number, including area code)
-----------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of each of the registrants' classes of
common stock on November 10, 1998 were 5,984,889 Common Shares, 750,000 Class B
Common Shares and 0 Class D Common Shares.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets -- As of September 30, 1998 2
and March 31, 1998
Condensed Consolidated Statements of Operations -- For the Three Months and the 4
Six Months Ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows -- For the Six Months 5
Ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 6
</TABLE>
1
<PAGE>
TICE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998 (1)
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 14,085 $ 19,063
Accounts receivable 115,802 192,615
Note receivable 2,822 11,993
Prepaid expenses 31,174 9,013
Inventory, net 374,915 394,116
---------- ----------
Total current assets 538,798 626,800
Property and equipment:
Land 130,000 130,000
Equipment 532,098 528,740
Vehicles 124,599 124,599
---------- ----------
Total property and equipment 786,697 783,339
Less accumulated depreciation (608,040) (603,700)
---------- ----------
Property and equipment, net 178,657 179,639
Patents, net 179,917 174,462
Note receivable from related party 79,610 79,610
Other assets 50,218 41,818
---------- ----------
Total assets $1,027,200 $1,102,329
========== ==========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
(1) The March 31, 1998 Condensed Consolidated Balance Sheet was derived from
the audited balance sheet for the year then ended.
2
<PAGE>
TICE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998 (1)
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Deficit
Notes payable and current maturities of long-term debt $ 315,590 $ 255,039
Accounts payable 260,727 304,448
Accrued liabilities 31,193 38,815
Notes payable to related parties 43,117 8,741
----------- -----------
Total current liabilities 650,627 607,043
Notes payable to related parties 690,941 556,310
Note payable 11,382 --
----------- -----------
Total liabilities 1,352,950 1,163,353
----------- -----------
Stockholders' deficit:
Capital stock, no par value, 2,000 shares authorized, 13,493 13,493
780 shares issued and outstanding at March 31,
and September 30, 1998
Common Shares, par value $.01, 30,000,000 shares authorized, 59,199 59,076
5,907,639 and 5,919,889 shares issued and outstanding
at March 31, and September 30, 1998, respectively
Class B Common Shares, convertible, par value $.01, 7,500 7,500
5,000,000 shares authorized, 750,000 shares issued and
outstanding at March 31, and September 30, 1998
Class D Common Shares, convertible, par value $.01, - -
600,000 shares authorized, none issued or outstanding
at March 31, or September 30, 1998
Preferred Shares, par value $.01, 10,000,000 shares - -
authorized, none issued or outstanding at March 31,
or September 30, 1998
Additional paid in capital 1,628,602 1,603,727
Accumulated deficit (2,034,544) (1,744,820)
----------- -----------
Total stockholders' deficit (325,750) (61,024)
----------- -----------
Total liabilities and stockholders' deficit $ 1,027,200 $ 1,102,329
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
<PAGE>
TICE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
<TABLE>
<CAPTION>
For the three months For the six months
ended September 30, ended September 30,
1998 1997 1998 1997
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Sales and service $ 162,021 $ 280,362 $ 344,329 $ 529,282
License fees -- -- -- 250,000
Royalties 27,953 12,908 75,409 12,908
--------- ----------- --------- -----------
Total operating revenues 189,974 293,270 419,738 792,190
Operating expenses:
Cost of revenues 169,700 230,272 289,332 445,698
Research and development 46,489 41,944 99,947 87,323
Selling, general, administrative 146,706 1,544,140 275,847 1,780,683
--------- ----------- --------- -----------
Total operating expenses 362,895 1,816,356 665,126 2,313,704
Operating loss (172,921) (1,523,086) (245,388) (1,521,514)
Other expense:
Interest expense - related parties (16,633) (29,171) (30,652) (33,773)
Interest expense (1,299) (26,166) (5,877) (34,410)
Other income (expense) 291 (470) (267) 2,167
--------- ----------- --------- -----------
Total other expense (17,641) (55,807) (36,796) (66,016)
--------- ----------- --------- -----------
Loss before income taxes (190,562) (1,578,893) (282,184) (1,587,530)
Provision for income taxes 2,795 -- 7,540 5,000
--------- ----------- --------- -----------
Net loss $(193,357) $(1,578,893) $(289,724) $(1,592,530)
========= =========== ========= ===========
Basic and diluted loss per share (Note 4) $ (0.03) $ (0.26) $ (0.04) $ (0.27)
========= =========== ========= ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
<PAGE>
TICE TECHNOLOGY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
<TABLE>
<CAPTION>
Six months ended
September 30, September 30,
1998 1997
(unaudited)
<S> <C> <C>
Net cash provided (used) by operating activities $ (234,748) $ 212,764
------------ -------------
Cash flows from investing activities:
Proceeds from sale of fixed assets -- 824
Capital expenditures (3,358) (4,697)
Additions to patents and other assets (8,103) (20,842)
------------ -------------
Net cash used by investing activities (11,461) (24,715)
------------ -------------
Cash flows from financing activities:
Net proceeds (payments) of notes payable to related parties 169,631 (80,184)
Net proceeds (payments) of notes payable 46,602 (141,346)
Proceeds from issuance of stock 24,998 -
------------ -------------
Net cash provided (used) by financing activities 241,231 (221,530)
------------- -------------
Net decrease in cash and cash equivalents (4,978) (33,481)
Cash and cash equivalents, beginning of period 19,063 69,393
------------ -------------
Cash and cash equivalents, end of period $ 14,085 $ 35,912
============ =============
Noncash investing and financing activities:
During the second quarter, the Company converted
$24,707 of accounts payable into notes payable.
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
<PAGE>
TICE TECHNOLOGY INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements include the
accounts of Tice Technology, Inc. ("TTI") and its wholly owned subsidiary,
Tice Engineering and Sales, Inc. ("TES"). The consolidation of these
entities will collectively be referred to as the Company. All significant
intercompany balances and transactions have been eliminated.
These financial statements have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the audited financial statements
of the Company as of and for the period ended March 31, 1998.
The information furnished reflects all adjustments which are necessary for
a fair presentation of the Company's financial position as of September 30,
1998 and the results of its operations and its cash flows for the three
month periods and six month periods ended September 30, 1998 and 1997. All
such adjustments are of a normal recurring nature.
2. RESULTS OF OPERATIONS
The results of operations for the three month periods and six month periods
ended September 30, 1998 and 1997 are not necessarily indicative of the
results to be expected for the respective full years.
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
---- ----
<S> <C> <C>
Raw Materials $ 362,493 $ 363,472
Work In Process 6,859 66,410
Finished Goods 125,563 84,234
--------- ---------
494,915 514,116
Reserve for Obsolescence (120,000) (120,000)
--------- ---------
Inventory $ 374,915 $ 394,116
========= =========
</TABLE>
6
<PAGE>
4. LOSS PER SHARE
Basic loss per share was computed by dividing net loss applicable to common
stock by the weighted average common shares outstanding during each period.
Diluted loss per share was computed by dividing net loss applicable to
common stock plus the effect of assumed conversion of debt by weighted
average common shares outstanding plus dilutive potential common shares.
Potential common shares are not included in the computation of diluted per
share amounts in periods when the Company reports a loss. Basic and diluted
loss per share are the same for both classes of TTI common stock (thus they
are not presented separately) because both have noncumulative dividend
rights of which none were available for distribution under the terms of the
Certificate of Incorporation. Following is a reconciliation of the
numerators and denominators of the basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Month Six Month
Period Ending Period Ending
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Loss:
Basic and diluted:
Loss available to
common stockholders $(193,357) $(1,578,893) $(289,724) $(1,592,530)
---------- ------------ ---------- ------------
Shares:
Basic and diluted:
Weighted average common
shares outstanding 6,661,315 6,191,737 6,665,992 6,009,547
---------- ------------ ---------- ------------
</TABLE>
5. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income, and
SFAS 131, Disclosures About Segments of an Enterprise and Related
Information, both of which are effective for fiscal years beginning after
December 31, 1997. In February 1998, the FASB issued SFAS 132, Employers'
Disclosures About Pensions and Other Postretirement Benefits, which is also
effective for fiscal periods beginning after December 15, 1997. In June
1998, the FASB issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, which is effective for fiscal quarters of fiscal years
beginning after June 15, 1999. In October 1998, the FASB issued SFAS 134,
Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, which is
effective for the first fiscal quarter beginning after December 15, 1998.
As of the quarter ended September 30, 1998, the Company did not have any
items that would be classified as other comprehensive income under SFAS
130. The Company expects that SFAS 132 will have no material impact on the
financial statements of the Company. SFAS 131, 133 and 134 will have no
impact on the Company.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following analysis of the financial condition and results of operations
of Tice Technology, Inc. ("TTI") and its subsidiary, Tice Engineering and Sales,
Inc. ("TES"), collectively referred to as the "Company," should be read in
conjunction with the Unaudited Condensed Consolidated Financial Statements and
Notes thereto included herein.
Since 1964, TES has been developing products, which provide technical
solutions to problems relating to the manufacturing process of various companies
with a primary concentration in the sewing industry. TES researches, designs,
develops, tests, manufactures, and markets specialized high technology, garment
production line stitching machines and related equipment. TES markets its
products worldwide directly to existing customers as well as through its dealer
network. Ninety-five percent (95%) of TES's customers are repeat customers with
much of its product line having been produced to address the problems of a
particular customer. TES generally retains the right to market the resulting
equipment to other customers with similar requests. TES also obtains patents on
a majority of its products and licenses its technology on a non-exclusive basis
to customers who want to manufacture various products using the technology
developed and patented by TES.
TTI was formed on June 21, 1996, to acquire and hold all of the issued and
outstanding stock of TES. When TTI's registration statement became effective on
August 1, 1997, all the TES shares were exchanged for shares of TTI. TTI's only
activity through August 1, 1997 was in conjunction with the incorporation and
registration process.
RESULTS OF OPERATIONS
The Company's revenues historically have been generated primarily from the
sales of its products and services, with service revenues representing less than
1% of such revenues. Since TES obtained a patent on its electronic gearing
technology in 1995 and in 1997 began licensing the non-exclusive rights to
manufacture equipment using the technology to other manufacturers, TES has begun
receiving license fees and royalties. The six months of fiscal 1998 ending
September 30, 1997 reflect the receipt of revenues from license fees as TES's
licensee introduced a second category of industrial sewing machine to market
which incorporated TES's electronic gearing technology and know-how whereas the
same period of fiscal 1999 had no comparable revenues. The royalty revenues
recorded for both the three and six month periods ending September 30, 1998 were
higher than those of the same periods for the prior year as a result of the
recording of revenues due from royalties on two categories of machines sold by
the licensee during the period, whereas the prior year royalties for both
periods were based on one category of machine. Management expects that during
the next two years license fee revenue will become a larger portion of total
revenues for the Company. The principal reason for the expected growth in this
area is the anticipation of additional earnings under the license agreement
currently in
8
<PAGE>
place with Brother Industries, Ltd. of Nagoya, Japan as well as expected
additional license agreements currently under negotiation.
The Company's product sales and service revenues have previously been
largely attributable to sales to three primary customers. These three customers
represented 77.7% of product sales revenue in the first six months of fiscal
1998, whereas the same three customers represented 65.04% of product sales
revenue in the first six months of fiscal 1999. This decrease in percentage
resulted from decreased sales to two of the three primary customers, one of
which is a primary representative for the Company's Latin American market. As a
result, international sales decreased from 24.8% of total product sales in the
first six months of fiscal 1998 to 17.92% in the same period of fiscal 1999.
There are no gains or losses included in operations related to foreign currency
exchanges due to the terms of international sales which require payment in U.S.
currency.
The Company exhibited its equipment at the 1998 Bobbin World Show in
Atlanta, Georgia in September 1998 and at the Laguna 807 Show in Torreon City,
Mexico in October 1998. Management believes that customers in some instances
will withhold placing orders until after the conclusion of major trade shows
such as these. Indications of interest in the Company's traditional product line
and products that incorporate its patented electronic gearing technology were
very substantial at these shows. The FS2000 Felling Machine, which uses the
electronic gearing technology, was exhibited for the first time at the Bobbin
World Show. The simplicity of the machine design, ease of operation, and
substantial ergonomic improvements received rave reviews from show attendees and
exhibitors alike. After the close of the Bobbin World Show, orders totaling
$195,000 were received for the FS2000 Felling Machine and interest in
negotiations for license agreements have heightened. To date, 48 customers have
requested FS2000 trial units. Additional orders for traditional Tice products as
well as the FS2000 felling machine have been received in the current quarter as
a result of the successful shows, and other customers have indicated that they
will have orders pending budget releases. Product sales can fluctuate from
period to period based on many factors such as the customer's budget, equipment
needs, and upgrade requirements therefore product sales broken down by item or
period are not necessarily indicative of the total sales for the year.
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain items reflected in the Company's
unaudited condensed consolidated statements of operations.
9
<PAGE>
<TABLE>
<CAPTION>
Percentage of Total Revenues
Three Months Ended Six Months Ended
September 30, September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating revenues:
Sales and service 85.3% 95.6% 82.0% 66.8%
License fees 0.0% 0.0% 0.0% 31.6%
Royalties 14.7% 4.4% 18.0% 1.6%
------ ------ ----- ------
Total operating revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenues 89.3% 78.5% 68.9% 56.3%
Research and development 24.5% 14.3% 23.8% 11.0%
Selling, general, administrative 77.2% 526.5% 65.7% 224.8%
------ ------ ----- ------
Total operating expenses 191.0% 619.3% 158.4% 292.1%
Operating loss (91.0%) (519.3%) (58.4%) (192.1%)
Other expense:
Interest expense - related parties (8.8%) (9.9%) (7.3%) (4.3%)
Interest expense (0.7%) (8.9%) (1.4%) (4.3%)
Other income (expense) 0.2% (0.2%) (0.1%) 0.3%
------ ------ ----- ------
Total other expense (9.3%) 19.0% (8.8%) (8.3%)
------ ------ ----- ------
Loss before income taxes (100.3%) (538.3%) (67.2%) (200.4%)
Provision for income taxes 1.5% 0.0% 1.8% 0.6%
------ ------ ----- ------
Net loss (101.8%) (538.3%) (69.0%) (201.0%)
====== ====== ===== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Total Revenues. Total revenues for the second quarter of fiscal 1999 which
---------------
ended September 30, 1998 decreased by approximately $103,000 to $189,974 from
$293,270 in the second quarter of the previous year. This decrease was largely
the result of an approximate 42% reduction in sales revenues from $280,362 for
the three month period ending September 30, 1997 to $162,021 for the three month
period ending September 30, 1998. Decreased product sales and service revenues
reflected decreases in sales of two traditional products, the Ergonomic Stands
and the Label Loader/Folders. Royalty income increased approximately 117% from
$12,908 in the second quarter of fiscal 1998 to $27,953 in the second quarter of
fiscal 1999 primarily as a
10
<PAGE>
result of receipts related to two classes of machines in fiscal 1999 versus
receipts related to only one class of machine in fiscal 1998.
Sales of the Single Needle Belt Loop Machines increased in the second
quarter of fiscal 1999 representing 37% of total product revenue as opposed to
8.7% of product revenue in the same period of the prior year. This increase
resulted from an upgrade to the equipment, which was completed and available to
customers late in the second quarter of fiscal 1999. The Label Loader/Folder
represented 17.21% of sales in the second quarter of fiscal 1999 as compared to
33.7% of sales in the second quarter of the prior year. Sales of the Label
Loader/Folders are expected to increase again in the current quarter as one of
the Company's primary customers is currently replacing older versions of this
unit with a newer upgraded model over a period of three to six months. Sales of
Ergonomic Stands decreased to 6.34% in the second quarter of fiscal 1999 from
30% of sales in the same period of the prior year. The reported figures on
Ergonomic Stands are provided for orders where a customer will purchase the
stand alone, with or without table top, for use as a table/workstation or to
mount existing equipment on at the customer's location. Ergonomic Stands,
however, are also typically purchased as part of a package unit and are included
with products such as Single Needle Belt Loop Machines and Label Loader/Folders
approximately 95% of the time. Therefore, sales of Ergonomic Stands are
typically higher when taking into consideration sales of the unit as an integral
part of another product.
Remaining product sales in both periods were generated from a mix of TES's
other traditional products. The timing of sales of a particular product from
period to period may fluctuate greatly depending on customer needs. Typically a
customer will replace or upgrade a particular piece of equipment throughout one
plant in one quarter as their budget permits and therefore product sales broken
down by item by period is not necessarily indicative of the total sales volume
of that item for the year. The above products are all part of the Company's
traditional product line, and are continually upgraded to meet changing customer
requirements. Products that are frequently upgraded to meet changing customer
specifications are generally produced in two segments. The first segment
consists of the base unit that can be fitted to the needs of several customers.
The second segment consists of the few parts added to the base unit which meet
customer's specifications, although several customers may also use the same
specifications. The second segment is generally produced per order, therefore
reducing the potential for significant obsolete inventory.
Cost of Revenues. Cost of revenues decreased approximately 26.3% to
-----------------
$169,700 in the second quarter of fiscal 1999 from $230,272 in the second
quarter of fiscal 1998. This was largely the result of decreased material
purchases during the second quarter of fiscal 1999 which were directly related
to the decrease in sales revenue for that period. Cost of revenues as a
percentage of sales revenue increased from 82.1% in the 1998 period to 104.7% in
the 1999 period largely as a result of an approximate 42% decrease in sales and
an approximate 19% increase in direct labor and related benefits for the 1999
period as compared to the same period in fiscal 1998. This was offset somewhat
by the decreased material purchases and an approximate 26% reduction in overhead
applied in the second quarter of fiscal 1999 as compared to the same period of
fiscal 1998. Cost of revenues as a percentage of total revenues increased
11
<PAGE>
from 78.5% in the 1998 period to 89.3% in the 1999 period largely as a result of
the decreased sales for the 1999 period which were somewhat offset by an
approximate 117% increase in royalty revenues in the 1999 period. Royalty
revenues have no associated costs.
Research and Development. Research and development costs remained
------------------------
relatively consistent, reflecting only an 11% increase to $46,489 in the second
quarter of fiscal 1999 from $41,944 in the second quarter of fiscal 1998. This
increase was primarily due to increases in salary and related benefits relating
to engineering which became effective late in the second quarter of fiscal 1998.
The research and development department focuses on advancing the electronic
gearing technology as well as improving the performance of current products,
developing new products both with and without the electronic gearing technology,
and expanding the electronic gearing technology to serve new markets.
Selling, General, and Administrative. Selling, general, and administrative
------------------------------------
("SG&A") expenses decreased by approximately $1,400,000 or 90.5% to $146,706 in
the second quarter of fiscal 1999 from $1,544,140 in the second quarter of
fiscal 1998. This decrease was primarily the result of recording $1,348,964 in
the 1998 period to reflect the non-recurring expenses relating to the
registration process, as well as $34,578 to implement and maintain a stockholder
relations program; whereas the 1999 period did not include registration expenses
and reflected only $10,707 in expenses relating to stockholder relations. The
remaining SG&A expense for the fiscal 1999 period represent a 15.3% decrease
over the 1998 period. This was primarily due to (i) increased advertising and
related travel expenses incurred in the 1998 period as a result of the July 1997
IMB trade show in Germany, and (ii) expenses incurred in the 1998 period for
recruiting additional engineering staff.
Operating Loss. Operating loss totaled $172,921 for the second quarter of
--------------
fiscal 1999 as opposed to an operating loss of $1,523,086 for the second quarter
of fiscal 1998. The loss in the 1998 period resulted primarily from expenses
incurred in connection with the Company's registration statement.
Interest Expense and Interest Expense - Related Parties. Interest expense
-------------------------------------------------------
and interest expense - related parties decreased from $55,337 in the 1998 period
to $17,932 in the 1999 period primarily due to the recording of $44,280 in
interest in the 1998 period which related to debt converted to stock upon the
effective date of the Company's registration statement.
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Total Revenues. Total revenues decreased approximately 47% in the first
--------------
six months of fiscal 1999 to $419,738 from $792,190 in the first six months of
the prior year. This decrease in the first six months of fiscal 1999 as
compared to the same period of the prior year was largely the result of
decreases in product sales and service revenues and license fee income. Product
sales and service revenues were down 35% to $344,329 in the 1999 period as
compared to $529,282 in the same period of fiscal 1998. The first six months of
the fiscal 1998 period also included $250,000 in license fee income whereas the
same period of fiscal 1999 had no
12
<PAGE>
comparable income. Income from royalties increased 584% to $75,409 for the first
six months of fiscal 1999 as compared to $12,908 for the same period of the
prior year.
Sales of the Automatic J-Tackers increased in the first six months of
fiscal 1999 representing 22.38% of total product revenue as opposed to 6.5% of
product revenue in the same period of the prior year. This increase resulted
from an upgrade to the equipment, which was completed and available to customers
early in the first quarter of fiscal 1999. Sales of the Single Needle Belt Loop
Machine also increased representing 27.6% and 21% of product revenues for the
fiscal 1999 and 1998 periods respectively. Sales of the Label Loader/Folders
decreased to 5.97% of total product revenues for the first six months of fiscal
1999 as compared to 24.8% for the same period of the prior year. The Label
Loader/Folders were upgraded in the first quarter of fiscal 1999 to meet
changing customer specifications although anticipated orders from customers were
not received until late in the second quarter of fiscal 1999. Sales of the
Label Loader/Folders are expected to increase over the next three to six month
period as customers replace older units and upgrade other existing units to
conform to their new requested specifications. Ergonomic stands as a stand-
alone unit decreased from 18.9% of sales in the first six months of fiscal 1998
to 4.1% in the same period of fiscal 1999. Ergonomic Stands, however, are also
typically purchased as part of a package unit and are included with
approximately 95% of products such as Single Needle Belt Loop Machines and Label
Loader/Folders.
Sales volume of a particular product can vary greatly from quarter to
quarter as customers update or replace equipment depending on their needs and
budget requirements. The above products are each sold regularly as part of the
Company's standard product line. Remaining product sales for both periods were
from sales of a variety of other products and replacement parts in the Company's
standard product line. The Company is continually upgrading its products to
meet customer needs and adding to its existing product line to remain
competitive which is evidenced by 95% of the Company's customers being repeat
customers.
Cost of Revenues. Cost of revenues decreased approximately 35% to $289,332
----------------
in the fiscal 1999 period from $445,698 in the fiscal 1998 period. This
decrease was primarily related to lower cost of materials and overhead applied
in the 1999 period. Material purchases decreased approximately $195,000 which
was directly related to the decrease in sales revenue for that period. Total
overhead applied decreased 15.6% from $92,791 in the first six months of fiscal
1998 to $78,301 for the same period of fiscal 1999. This decrease primarily
related to decreased salary and related benefits.
Research and Development. Research and development costs increased by
------------------------
14.5% to $99,947 in the first six months of fiscal 1999 from $87,323 in the
first six months of fiscal 1998 due to increases in salary and related benefits
relating to engineering which became effective in the second quarter of fiscal
1998. The research and development department focuses on advancing the
electronic gearing technology as well as improving the performance of current
products, developing new products both with and without the electronic gearing
technology, and expanding the electronic gearing technology to serve new
markets.
13
<PAGE>
Selling, General, and Administrative. SG&A expenses decreased by
------------------------------------
approximately $1,500,000 to $275,847 in the first six months of fiscal 1999 from
$1,780,683 in the first six months of fiscal 1998. This decrease was primarily
the result of recording $1,431,997 in the fiscal 1998 period to reflect the non-
recurring expenses relating to the registration process, stock distribution, and
implementation of a stockholder relations program. The remaining SG&A expenses
for the fiscal 1999 period represent a 21% decrease from the 1998 period. The
1998 period reflected costs incurred for recruiting additional engineering staff
as well as increased advertising and travel expenses relating to the July 1997
IMB trade show in Germany whereas the 1999 period had no comparable costs.
Operating Loss. The operating loss decreased from $1,521,514 in the first
--------------
six months of fiscal 1998 to $245,388 in the first six months of fiscal 1999.
The decreased losses resulted primarily due to expenses incurred during the 1998
period which were non-recurring expenses relating to the registration process.
Interest Expense and Interest Expense-Related Parties. Interest expense
-----------------------------------------------------
and interest expense-related parties decreased by approximately 46.4% from
$68,183 in the 1998 period to $36,529 in the 1999 period. This decrease was
primarily a result of a non-cash interest charge of $44,280 and the conversion
of $119,910 of notes to Common Shares of the Company in the second quarter of
fiscal 1998 which was offset somewhat as the Company incurred additional
indebtedness from related parties subsequent to September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through a
combination of cash flows from operations, bank borrowings, and borrowings from
individuals. The Company's capital requirements have arisen primarily in
connection with purchases of fixed and intangible assets, and the Company makes
significant expenditures each year for research and development and marketing
new technology.
Net cash used by operating activities was $234,748 in the six month period
ended September 30, 1998 and net cash provided by operating activities was
$212,764 in the same period of the previous year. The primary cause for the
change was increases and decreases in working capital items.
Net cash used by investing activities was $11,461 in the 1999 period and
$24,715 in the 1998 period. Primary uses of funds were related to capital
expenditures, patents and notes receivable. Capital expenditures totaled
approximately $3,400 in the 1999 period and $4,700 in the 1998 period. Capital
expenditures are expected to increase over the next year during which time the
Company expects to move from its existing facility. See "Future Operations."
Net cash provided by financing activities was $241,231 in the 1999 period
and net cash used by financing activities was $221,530 in the 1998 period. The
cash provided by financing activities in the 1999 period was proceeds from notes
payable issued to related parties and others.
14
<PAGE>
Cash used by financing activities in the 1998 period related to payments on
notes payable to related parties and others.
The Company's principal commitments at September 30, 1998 consisted
primarily of notes payable to related parties as well as other notes payable.
The Company used the proceeds of these notes to provide working capital for
operations and for the continuing development of the electronic gearing
technology as well as to fund the costs of license and royalty agreement
negotiations and the registration of securities of the Company. Several of
these notes were extended to retain working capital. On August 1, 1997, the
effective date of the registration statement, $145,770 of notes payable to
related parties and $119,910 of notes were converted to 88,560 Common Shares of
the Company at $3.00 per share. Remaining notes payable, with interest rates
ranging from 10% to prime plus 1%, are due in fiscal 1999. The Company plans to
extend the remaining related party notes payable if working capital is not
sufficient to repay the loans. Due to the continuing demand for the new
technology, management is actively seeking up to a $2,000,000 line of credit to
provide funds for the tooling, inventory, and additional personnel needed to
meet the industry's demands for the new technology. There are no significant
restrictive covenants relating to the existing notes payable, although several
of the notes are personally guaranteed by the President of the Company.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income,
which is effective for fiscal years beginning after December 15, 1997.
Additionally, in June 1997, the FASB issued SFAS 131, Disclosures about Segments
of an Enterprise and Related Information, which is also effective for fiscal
years beginning after December 15, 1997. In February 1998, the FASB issued SFAS
132, Employers' Disclosures About Pensions and Other Postretirement Benefits,
which is also effective for fiscal periods beginning after December 15, 1997.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, which is effective for fiscal quarters of fiscal years
beginning after June 15, 1999. In October 1998, the FASB issued SFAS 134,
Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, which is
effective for the first fiscal quarter beginning after December 15, 1998. As of
the quarter ended September 30, 1998, the Company did not have any items that
would be classified as other comprehensive income under SFAS 130. The Company
expects that SFAS 132 will have no material impact on the financial statements
of the Company. SFAS 131, 133 and 134 will have no impact on the Company.
YEAR 2000 ISSUES
Many currently installed computer systems and software products are coded
to accept only two-digit entries to represent years. For example, the year
"1997" would be represented by "97". These systems and products will need to be
able to accept four-digit entries to distinguish years beginning with 2000 from
prior years. As a result, systems and products that do not accept four-
15
<PAGE>
digit year entries will need to be upgraded or replaced to comply with such
"Year 2000" requirements.
The Company's products are not date sensitive. With respect to its
internal systems, the Company has reviewed such systems to assess the impact of
the year 2000. Based upon that review and information provided from vendors,
the Company believes that the only system affected is its IBM AS400 main frame
computer which controls the Company's administrative, accounting, financial, and
inventory software. As part of the Company's participation in IBM's ongoing
maintenance program, IBM has made the necessary modifications available in an
upgrade release for the operating system and software package that the Company
uses. The Company purchased the upgrade package during the 1998 fiscal year at
a cost of $1,400 and plans to complete installation and testing of the upgrade
by the end of January 1999. The Company does not anticipate any material
disruption in its operations as the result of installing the upgrade. The
Company believes that the overall cost of compliance should not exceed $7,000
and expenses such compliance costs when incurred.
It is uncertain whether the Company's customers and suppliers will have
Year 2000 issues that may affect the Company, but the Company currently is
developing a plan to evaluate the Year 2000 compliance status of its customers
and suppliers. There can be no guarantee that those with such systems that are
not now Year 2000 compliant will be timely converted to compliance.
Additionally, there can be no guarantee that those customers and suppliers of
business importance to the Company will successfully and timely reprogram or
replace, and test, all of their own computer hardware, software, and process
control systems.
Although the Company expects its critical systems to be compliant by
January 31, 1999, there is no guarantee that these results will be achieved.
Specific factors that give rise to this uncertainty include a possible loss of
technical resources to perform the work, failure to identify all susceptible
systems, non-compliance by third parties whose systems and operations impact the
Company, and other similar uncertainties. A reasonably possible worst case
scenario might include the Company's inability to accurately maintain accounting
records. Such an event could result in a material disruption to the Company's
operations. Specifically, the Company could experience an interruption in its
ability to collect and process payments of receivables, invoice shipments,
and/or process payables. Should the worst case scenario occur it could,
depending on its duration, have a material impact on the Company's results of
operations and financial positions, although the Company does have manual
procedures in place that would help keep this to a minimum.
FUTURE OPERATIONS
Management believes that its traditional products will continue to generate
sales revenue and that TES will continue to solve other problems for customers
as they arise in their manufacturing processes. New product developments such
as the label loader/folder for woven labels and upgrades to existing equipment,
using traditional technology, are expected to keep the traditional product line
competitive as the Company continually works on developing products
16
<PAGE>
that its competitors have not attempted or have failed to develop. In addition,
there is a great demand for products incorporating the electronic gearing
technology. The Company is in various stages of design and development on
machines using the electronic gearing technology including a three-dimensional
stitching machine for automotive air bags, a multi-head buttonhole machine, a
multi-head button sewing machine, a single needle plain sewer, and a keyhole
buttonhole machine.
The Company has recently completed the first production FS2000 felling
machine, incorporating the electronic gearing technology, which was developed
under a joint development agreement with a major denim manufacturer. The
Company exhibited this machine, as well as other products containing the
patented electronic gearing technology and products from its standard product
line, at the 1998 Bobbin World Show that was held in Atlanta, Georgia during
September 1998.
The demand for the electronic gearing technology has grown; the Company is
making preparations to meet the existing and expected future demands of its
manufacturing and research and development efforts. Management is actively
seeking financing of $2,000,000 to provide funds for additional equipment,
tooling, inventory, and personnel needed to meet the industry's demands for this
technology. Management has decided that it would be economically feasible to
start a second shift and to subcontract some of its manufacturing processes at
such time that the demand exceeds the capacity of the operations capable in one
eight-hour shift in the facility to be constructed later this year.
The Company anticipates that income from license fees and royalty revenues
will increase over the next several years as its existing licensee introduces
new electronically geared equipment to the market, as additional manufacturers
license the technology, and as royalty revenues increase based on increased
sales of products by the current licensee and royalties are generated by
potential additional licensees.
To provide for continued growth, the Company plans to build a new facility
that would provide sufficient space for the Company's needs. The Company owns
approximately six acres of undeveloped land where the building will be
constructed. The estimated cost of building the new facility is $1,600,000.
The Company plans to construct the facility during the 1999 calendar year. The
cost of the facility is expected to be funded through a Knox County bond issue.
Management's recent decision to subcontract some of the manufacturing and to
start a second shift, when required, has allowed use of the original site.
As of September 30, 1998, the Company had backlog orders it believes to be
firm totaling approximately $270,000 of which approximately $77,000 is for
equipment that is part of the Company's standard product line and is expected to
be completed by November 30, 1998. The backlog also reflects orders of
approximately $195,000 for ten FS2000 Felling Machines. Delivery of the FS2000
is expected to begin in January 1999. In addition, the Company has received
requests from 48 different manufacturers for a FS2000 trial unit. The Company
also has indications of interest for additional orders totaling approximately
$750,000 relating to
17
<PAGE>
products, other than the felling machine, using the electronic gearing
technology upon completion of production models and $1,176,000 for new products
currently being developed using traditional technology. There is no assurance
that these indications of interest will become firm orders.
Although the Company has no present acquisition agreement or arrangements,
management may make strategic acquisitions in the future which may or may not be
in related industries, using stock, cash, debt, or a combination thereof.
Depending on the terms of the acquisition, the Company may need to incur
additional indebtedness or issue equity securities to make any such acquisition.
Management has not identified any particular targets for acquisition.
The Company believes that future results of operations will be influenced
by a number of factors including general economic conditions, dependence on key
customers, and market acceptance of new technology. Because of these factors,
as well as other factors, historical results should not be relied on as an
indicator of future performance.
FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition, words such as
"believes," "anticipates," "expects," and similar expressions are intended to
identify forward-looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance, or achievements of the Company or events, or timing
of events, relating to the Company to differ materially from any future results,
performance, or achievements of the Company or events, or timing of events,
relating to the Company expressed or implied by such forward-looking statements.
The Company cannot assure that it will be able to anticipate or respond timely
to the changes which could adversely affect its operating results in one or more
fiscal quarter. Results of operations in any past period should not be
considered indicative of results to be expected in future periods. Fluctuations
in operating results may result in fluctuations in the price of the Company's
common securities
Management is currently reviewing potential debt and equity financing
options. There can be no assurance that any such financing will be available on
acceptable terms. If such financing is not available on satisfactory terms, the
Company may be unable to expand its business or develop new customers as desired
and its operating results may be adversely affected. Debt financing will
increase expenses and must be repaid regardless of operating results. Equity
financing could result in dilution to existing stockholders.
Some of the more prominent known risks and uncertainties inherent in the
Company's business are set forth below. However, this section does not discuss
all possible risks and uncertainties to which the Company is subject, nor can it
be assumed that there are not other risks and uncertainties which may be more
significant to the Company.
18
<PAGE>
Such other factors include, among others:
. lack of working capital needed to further develop and apply the
electronic gearing technology and other products and management's
ability to find acceptable financing to supply such working capital;
. the potential failure by the Company to successfully negotiate
additional licensing agreements;
. continued dependence on a small number of significant customers for
substantially all of the Company's revenue and the potential loss of
one or more of the Company's principal customers;
. the shortage of qualified and competent software engineers and the
risk that the Company will be unable to retain its key employees and
managers, especially in the event the Company loses one or more of its
principal customers;
. dependence on the apparel industry and the potential failure to
diversify the Company's product and service offerings and to expand
its markets into other industries;
. the unanticipated expense of new product development, the potential
failure by the Company to complete new products under development and
others started in the future successfully or on a timely basis, and
the failure of such products to achieve substantial market acceptance;
. the dependence on patents and ability to protect proprietary products,
the potential that existing patents held by TES or future patents
obtained by TES will not 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; and
. the potential adverse effect of competition, the potential failure by
the Company to provide competitive timely designs of cost-effective
solutions and products to manufacturers, and the potential adverse
effect of technological change with which the Company is unable to
keep pace.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
TTI does not have any market risk sensitive instruments.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On June 8, 1998 in a transaction not involving any public offering pursuant
to 4(2) of the Securities Act of 1933 (the "Act"), TTI sold 12,500 Common Shares
to one individual for $2.00 per share. In addition, also in transactions not
involving any public offering pursuant to 4(2) of the Act, on October 15, 1998,
TTI sold 15,000 shares to one individual and his spouse and, on October 16,
1998, TTI sold 50,000 shares to one individual. There was no underwriter or
broker involved and no solicitation of any other potential investors.
TTI's registration statement became effective on August 1, 1997 (SEC file
number 333-11591). Under the registration statement, TTI registered 300,000
Common Shares and 1,000,000 Common Stock Purchase Warrants (the "Warrants")
which were sold to Monogenesis Corporation ("Monogenesis") for a total of
$13,000. Monogenesis, as statutory underwriter, distributed 125 shares and 400
Warrants to each of its shareholders for each share of stock of Monogenesis held
by them. Monogenesis retained 44,375 Common Shares and 182,000 Warrants. TTI
also registered 1,541,407 Common Shares for shareholders of TTI, 54,750 Common
Shares underlying employee stock options, 88,560 Common Shares issued in
satisfaction of $255,187 in principal of notes and a portion of the interest on
such notes, and the 1,000,000 Common Shares underlying the Warrants. Each
Warrant entitles the holders to purchase one Common Share for $8.00 for 24
months.
All of the shares and Warrants to be distributed by Monogenesis have been
distributed. The selling shareholders may sell their shares from time to time at
market price or in negotiated or other transactions. TTI believes that no
selling shareholders that owns over 5% of TTI's Common Shares sold any Common
Shares during the first two quarters of fiscal 1999.
Since August 1, 1997, the effective date of the registration statement, and
prior to September 30, 1998, TTI has incurred for its account in connection with
the issuance and distribution of the securities registered the following
amounts:
<TABLE>
<CAPTION>
Direct or Indirect Payments
to Directors, Officers, Holders
of 10% of Any Class of Stock Direct or Indirect
or Affiliates of TTI Payments to Others
-------------------- ------------------
<S> <C> <C>
Underwriting Discounts
or Commissions 0 $ (1)
Finders' Fees 0 0
Underwriter's Expenses 0 0
Other Expenses 0 175,940
-- --------
Total Expenses $0 $175,940 (1)
</TABLE>
20
<PAGE>
(1) TTI recorded $1,047,000 in expenses and in additional paid in capital based
upon the estimated fair value of the 300,000 Common Shares issued to
Monogenesis less the $0.01 per share price it paid for the shares. The
estimated fair value of the shares retained by Monogenesis at the time was
$155,313.
There were no net offering proceeds to TTI since there were no significant
offering proceeds ($255,187 in reduction of debt, $13,000 cash to purchase the
securities to be distributed and $19,158 from exercise of Warrants and options),
nor were there intended to be any significant proceeds. The registration
statement primarily related to a distribution of shares and warrants as a
dividend and not to a traditional sale of securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TTI has held its annual meeting on September 24, 1998. William A. Tice,
Karen A. Walton, Sarah Y. Sheppeard, and Billie Joe Clayton were elected as the
four members of the Board of Directors. Also voted upon at the meeting were the
company's 1998 Employee Stock Option Plan and ratification of the appointment of
PricewaterhouseCoopers LLP as independent auditors for the 1999 fiscal year.
<TABLE>
<CAPTION>
Broker
For Against Withheld Non-Votes
--------- ------- -------- ---------
<S> <C> <C> <C> <C>
Election of Directors
William A. Tice 5,227,123 -0- 2,125 482,911
Karen A. Walton 5,227,123 -0- 2,125 482,911
Sarah Y. Sheppeard 5,227,123 -0- 2,125 482,911
Billie Joe Clayton 5,226,873 -0- 2,375 482,911
Approve 1998 Employee
Stock Option Plan 5,221,798 6,700 750 482,911
Ratify appointment of
PricewaterhouseCoopers LLP 5,227,248 1,000 1,000 482,911
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Index
<TABLE>
<CAPTION>
Exhibit Page
Table Number Number
------------- ------
<S> <C> <C>
I. Plan of Acquisition, Reorganization, Arrangement, 2
Liquidation or Succession
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Table Number Number
------------- ------
<S> <C> <C>
(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, (i) +
Inc.
(ii) Bylaws of Tice Technology, Inc. (ii) +
III. Instruments Defining Rights of Security Holders 4
(i) Common Stock Purchase Warrant Agreement x
Between Tice Technology, Inc. and Warrant Agent
IV. Financial Data Schedule 27 24
</TABLE>
+ Previously filed as an exhibit to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-1 of Tice Technology, Inc. which became
effective August 1, 1997.
X Previously filed as an exhibit to Pre-Effective Amendment No. 2 to the
above described Registration Statement.
(b) No reports have been filed on Form 8-K.
22
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Tice Technology, Inc.
By: /s/ William A. Tice
----------------------------------------
William A. Tice, President
Date: November 13, 1998
---------------------------------------
By: /s/ Karen A. Walton
----------------------------------------
Karen A. Walton, Chief Financial Officer
Date: November 13, 1998
---------------------------------------
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TICE TECHNOLOGY, INC. AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-START> JUL-01-1998 APR-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 14,085 14,085
<SECURITIES> 0 0
<RECEIVABLES> 118,624 118,624
<ALLOWANCES> 0 0
<INVENTORY> 374,915 374,915
<CURRENT-ASSETS> 538,798 538,798
<PP&E> 786,697 786,697
<DEPRECIATION> 608,040 608,040
<TOTAL-ASSETS> 1,027,200 1,027,200
<CURRENT-LIABILITIES> 650,627 650,627
<BONDS> 702,323 702,323
0 0
0 0
<COMMON> 80,192 80,192
<OTHER-SE> (405,942) (405,942)
<TOTAL-LIABILITY-AND-EQUITY> 1,027,200 1,027,200
<SALES> 162,021 344,329
<TOTAL-REVENUES> 189,974 419,738
<CGS> 169,700 289,332
<TOTAL-COSTS> 362,895 665,126
<OTHER-EXPENSES> 0 267
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 17,932 36,529
<INCOME-PRETAX> (190,562) (282,184)
<INCOME-TAX> 2,795 7,540
<INCOME-CONTINUING> (172,921) (245,388)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (193,357) (289,724)
<EPS-PRIMARY> (0.03) (0.04)
<EPS-DILUTED> (0.03) (0.04)
</TABLE>
