<PAGE>
FORM 10-Q
UNITED STATES
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 June 30, 1999
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 August 3, 1999 were 8,512,615 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 June 30, 1999 2
and March 31, 1999
Condensed Consolidated Statements of Operations -- For the Three Months 4
Ended June 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows -- For the Three Months 5
Ended June 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements 6
</TABLE>
1
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Tice Technology, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
-------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999 (1)
----------- -----------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,496,916 $ 24,155
Accounts receivable, net 93,530 65,245
Prepaid expenses 15,889 8,097
Inventory, net 412,931 387,654
----------- -----------
Total current assets 2,019,266 485,151
Property and equipment:
Land 130,000 130,000
Equipment 536,254 536,254
Vehicles 107,751 107,751
----------- -----------
Total property and equipment 774,005 774,005
Less accumulated depreciation (598,463) (596,364)
----------- -----------
Property and equipment, net 175,542 177,641
Patents, net 188,786 178,803
Debt issuance costs, net 39,845 --
Other assets 4,350 4,350
----------- -----------
Total assets $ 2,427,789 $ 845,945
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
(1) The March 31, 1999 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>
June 30, March 31,
1999 1999 (1)
----------- -----------
(unaudited)
<S> <C> <C>
Liabilities and stockholders' equity (deficit)
Notes payable and current maturities of long-term debt $ 207,550 $ 214,790
Accounts payable 74,462 233,030
Accrued liabilities 24,686 109,798
Notes payable to related parties, current portion 50,000 197,698
----------- -----------
Total current liabilities 356,698 755,316
Notes payable to related parties, long-term portion 413,656 620,482
Note payable, long-term portion, net of $85,000 discount 918,433 9,424
----------- -----------
Total liabilities 1,688,787 1,385,222
----------- -----------
Stockholders' equity (deficit):
Capital stock, no par value; 2,000 shares authorized; 13,493 13,493
780 shares issued and outstanding at June 30,
and March 31, 1999
Common Shares, par value $.01; 30,000,000 shares authorized; 85,122 59,941
8,512,215 and 5,994,064 shares issued and outstanding
at June 30, and March 31, 1999, 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 June 30, and March 31, 1999
Class D Common Shares, convertible, par value $.01; -- --
600,000 shares authorized; none issued or outstanding
Preferred Shares, par value $.01; 10,000,000 shares - -
authorized; none issued or outstanding
Additional paid in capital 3,133,524 1,704,161
Accumulated deficit (2,500,637) (2,324,372)
----------- -----------
Total stockholders' equity (deficit) 739,002 (539,277)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 2,427,789 $ 845,945
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
(1) The March 31, 1999 Condensed Consolidated Balance Sheet was derived from
the audited balance sheet for the year then ended.
3
<PAGE>
Tice Technology, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
-----------------------------------------------
<TABLE>
<CAPTION>
For the three months
ended June 30,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Operating revenues:
Sales and service $ 103,478 $ 182,308
Royalties 26,990 47,456
----------- -----------
Total operating revenues 130,468 229,764
Operating expenses:
Cost of revenues 118,712 119,632
Research and development 24,760 53,458
Selling, general and administrative 152,242 129,141
----------- -----------
Total operating expenses 295,714 302,231
----------- -----------
Operating loss (165,246) (72,467)
Other income (expense):
Interest expense - related parties (14,943) (14,019)
Interest income (expense) 652 (4,578)
Other income (expense) 5,971 (558)
----------- -----------
Total other expense, net (8,320) (19,155)
----------- -----------
Loss before income taxes (173,566) (91,622)
Provision for income taxes 2,699 4,745
----------- -----------
Net loss $ (176,265) $ (96,367)
=========== ===========
Loss per share (Note 4):
Basic and diluted $ ( 0.02) $ (0.01)
=========== ===========
</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>
Three months ended
June 30, June 30,
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Net cash flows from operating activities:
Net loss $ (176,265) $ (96,367)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 3,423 3,403
Increase in cash surrender value of life insurance -- (4,200)
Changes in operating assets and liabilities:
Receivables (28,285) (13,282)
Prepaid expenses (7,792) (6,281)
Inventory (25,277) 2,703
Accounts payable and accrued liabilities (152,471) 5,363
----------- -----------
Net cash used by operating activities (386,667) (108,661)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment -- (1,841)
Additions to patents (11,307) (686)
----------- -----------
Net cash used by investing activities (11,307) (2,527)
---------- -----------
Cash flows from financing activities:
Proceeds from notes payable to related parties -- 78,643
Proceeds from notes payable and long-term debt 1,000,000 238,543
Principal payments on notes payable to related parties (149,282) (24,633)
Principal payments on notes payable and long-term debt (13,231) (189,969)
Net proceeds from issuance of stock and stock warrants 1,073,093 24,998
Expenses related to placement of associated debt (39,845) --
---------- -----------
Net cash provided by financing activities 1,870,735 127,582
---------- -----------
Net increase in cash and cash equivalents 1,472,761 16,394
Cash and cash equivalents, beginning of period 24,155 19,063
---------- -----------
Cash and cash equivalents, end of period $1,496,916 $ 35,457
========== ===========
Noncash investing and financing activities:
During the three months ended June 30, 1999, the Company converted $86,183 of
accrued salaries and interest into notes payable to related parties; and
$291,425 of notes payable and $5,026 of accrued interest into common stock. The
Company recorded an $85,000 discount associated with the issuance of warrants in
conjunction with the $1,000,000 of long-term notes payable. This discount was
reflected in additional paid-in-capital.
</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, 1999.
The information furnished reflects all adjustments which are necessary for
a fair presentation of the Company's financial position as of June 30, 1999
and the results of its operations and its cash flows for the three month
periods ended June 30, 1999 and 1998. All such adjustments are of a normal
recurring nature.
2. Results of Operations
The results of operations for the three month periods ended June 30, 1999
and 1998 are not necessarily indicative of the results to be expected for
the respective full years.
3. Inventory
Inventory consists of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
---- ----
<S> <C> <C>
Raw Materials $ 382,042 $ 343,968
Work In Process 113,871 118,103
Finished Goods 37,018 45,583
--------- ---------
532,931 507,654
Reserve for Obsolescence (120,000) (120,000)
--------- ---------
Inventory $ 412,931 $ 387,654
========= =========
</TABLE>
6
<PAGE>
4. Loss per Share
Basic and diluted loss per share were computed by dividing net loss
applicable to common stock by the weighted average common shares
outstanding during each period. 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 loss per share:
<TABLE>
<CAPTION>
Three Month
Period Ending
June 30,
1999 1998
<S> <C> <C>
Loss:
Basic and diluted:
Loss available to
common stockholders $ (176,265) $ (96,367)
Shares:
Basic and diluted:
Weighted average common
shares outstanding 7,536,650 6,662,440
</TABLE>
5. Effect of New Accounting Pronouncements
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. It is not anticipated that
this statement will have a material impact on the Company.
6. Private Placement Transaction
On April 30, 1999, the Company issued 700,000 Common Shares for an
investment of $280,000, or $0.40 per Common Share. The fair value of the
Common Shares on the date of commitment by the investors was determined to
be $0.70 per Common Share. The difference between the price paid for the
Common Shares and their fair value was considered a cost of the offering
and has been reflected in additional paid-in-capital.
On June 25, 1999, the Company issued 1,500,000 Common Shares for $1,050,000
and notes payable of $1,000,000. The notes bear interest at 10% and mature
four years from issuance. Included with the notes payable were warrants to
purchase 100,000 Common Shares, exercisable within four years at $0.50 per
share. The price paid for each Common Share was $0.70. The fair value of
the shares on the date of issuance was determined to be $1.00 per
7
<PAGE>
share. The difference between the actual price paid for the shares and the
fair value on that date was considered a cost of the offering and has been
reflected in additional paid-in-capital. In addition, the Company incurred
additional costs of approximately $257,000 associated with the stock
issuance which were charged to additional paid-in-capital. Approximately
$39,000 of costs were associated with the issuance of the notes payable.
These costs will be amortized over the four-year term of the notes. The
Company has recorded an $85,000 discount associated with the issuance of
the warrants in the private placement. This discount, to be amortized over
the four year term of the warrants, will represent additional interest
expense to the Company and was determined using the Black-Scholes pricing
model.
In connection with the offering, the Company issued an option to purchase
50,000 restricted Common Shares at $1.00 per share for five years as a
finder's fee. The fair value of the options is considered a cost of the
offering and is reflected in additional paid-in-capital.
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 and the audited financial statements and notes
thereto for the year ended March 31, 1999.
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 three months of fiscal 2000 ending
June 30, 1999 and
8
<PAGE>
the three months of fiscal 1999 ending June 30, 1998 reflect the recording of
revenues due from royalties on two categories of machines sold by the licensee
during the period. Management expects that, during the next two years, license
fee revenue, though expected to increase, will be a smaller 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 place with Brother Industries, Ltd. of Nagoya, Japan as well as
expected additional license agreements with other manufacturers to be explored
in the future.
The Company's product sales and service revenues have previously been
largely attributable to sales to three primary customers. These three customers
represented 60% of product sales revenue in the first three months of fiscal
2000, whereas the same three customers represented 79% of product sales revenue
in the first three months of fiscal 1999. This decrease in percentage resulted
from decreased sales to two of the three primary customers. One such customer
has reduced purchases due to their reorganization and pending the introduction
of the Company's new products. The other primary customer with decreased sales
has been put on credit hold pending resolution of a disputed account balance.
This hold also resulted in decreased international sales, as one of the primary
customers is a Latin American distributor of TES's products. 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. Sales
to the international distributor who is a primary customer are expected to
increase in the current quarter as the Company is taking measures to resolve the
account disputes. Sales to the other primary customer are expected to remain low
during the current quarter pending delivery of the Company's new products later
in 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
June 30
1999 1998
---- ----
<S> <C> <C>
Operating revenues:
Sales and service 79.3% 79.3%
Royalties 20.7% 20.7%
-------- -------
Total operating revenues 100.0% 100.0%
Operating expenses:
Cost of revenues 91.0% 52.1%
Research and development 19.0% 23.2%
Selling, general, and administrative 116.7% 56.2%
-------- -------
Total operating expenses 226.7% 131.5%
Operating loss (126.7%) (31.5%)
Other expense:
Interest expense - related parties (11.5%) (6.1%)
Interest income (expense) 0.5% (2.0%)
Other income (expense) 4.6% (0.2%)
-------- -------
Total other expense (6.4%) (8.3%)
-------- -------
Loss before income taxes (133.1%) (39.8%)
Provision for income taxes 2.1% 2.1%
-------- -------
Net loss (135.2%) (41.9%)
======== =======
</TABLE>
Three Months Ended June 30, 1999 and June 30, 1998
Total Revenues. Total revenues for the first quarter of fiscal 2000
---------------
which ended June 30, 1999 decreased by approximately $99,000 to $130,468 from
$229,764 in the first quarter of the previous year. This decrease was
primarily the result of lower product sales in the Company's traditional
products and reduced royalties from the Company's licensee. Product sales and
service revenues were down 43% to $103,478 in the first quarter of fiscal
2000 as compared to $182,308 in the same period of fiscal 1999. Royalty
income amounted to $26,990 for the first quarter of fiscal 2000 as compared
to $47,456 in the same period of fiscal 1999.
Sales of the Label Loader/Folders were the primary source of sales
during the first quarter of fiscal 2000 that ended June 30, 1999. This is an
increase from 15% of total product sales in the
10
<PAGE>
same period of the prior year. The remainder of total product sales primarily
represented replacement part sales. Automatic J-Tackers and Single Needle
Belt Loop Machines, which accounted for 41% and 35%, respectively, of total
product sales in the first quarter of the prior year, contributed no sales
during the first quarter of fiscal 2000. The primary reasons for the lack of
sales of these products was reduced marketing of these products by the
Company due to capital constraints and reallocation of the Company's
marketing focus, as well as increased competition from other manufacturers.
Sales of these traditional products have also declined as the Company's
customers are waiting for the introduction of the Company's new products
using the Electronic Gearing Technology. The Company anticipates introducing
products using the Electronic Gearing Technology beginning in the second half
of fiscal year 2000.
Cost of Revenues. Cost of revenues decreased approximately 1% to
-----------------
$118,712 in the first quarter of fiscal 2000 from $119,632 in the first
quarter of fiscal 1999. Cost of revenues as a percentage of total product and
service revenues increased from 66% in the 1999 period to 115% in the 2000
period as a result of constant levels of total overhead costs allocated to
cost of revenues and declining total product sales. Management believes that
further reductions to manufacturing overhead and salaries would have been
detrimental to future operations, especially in light of funding the Company
secured in the first quarter of fiscal 2000.
Research and Development. Research and development costs decreased to
-------------------------
$24,760 in the first quarter of fiscal 2000 from $53,458 in the first quarter
of fiscal 1999 due to decreased salary and benefits costs resulting from the
Company's cost cutting efforts mandated by capital constraints. 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 expenses increased by $23,100 or 18% to $152,242 in the first
quarter of fiscal 2000 from $129,141 in the first quarter of fiscal 1999. The
increased costs are primarily the result of increased salary and benefit
costs related to a new management appointment during the first quarter of
fiscal 2000.
Operating Loss. The Company had an operating loss of $165,246 in the
---------------
first quarter of fiscal 2000 as compared to an operating loss of $72,467 for
the same period of the previous year. The increase in the operating loss
between the two periods is primarily attributable to reduced product sales
and reduced royalty revenue coupled with stable cost of revenues and
increased selling, general, and administrative expenses.
Interest Expense and Interest Expense B Related Parties. Interest
--------------------------------------------------------
expenses decreased and were offset by increased interest income, primarily
the result of the proceeds of the equity investment received during the first
quarter of fiscal 2000. Interest expense -- related parties remained
relatively constant reflecting both a constant interest rate and additions to
the notes payable --related parties and offsetting reductions due to
conversion of certain notes payable to Common Shares and retirement of
certain notes payable to a shareholder.
11
<PAGE>
Net Loss. The Company had a net loss of $176,265 in the first quarter of
---------
fiscal 2000 as compared to a net loss of $96,367 for the same period in the
previous year. The increase in the net loss between the two periods is
primarily attributable to reduced product sales and reduced royalty revenues
coupled with stable cost of revenues and increased selling, general and
administrative expenses.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations through a
combination of cash flows from operations, bank and individual borrowings,
and issuances of stock. 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. These expenditures have been
reduced in each of the last two fiscal years, but are expected to increase in
fiscal 2000 and beyond. See "Future Operations."
Net cash used by operating activities was $386,667 in the first quarter
of fiscal 2000 and $108,661 in the first quarter of fiscal 1999. The primary
causes of the net use of cash from operations in the first quarter of fiscal
2000 was the operating loss of $176,265, a reduction in accounts payable
and accrued liabilities by $152,471 and other decreases in working capital.
The primary cause of the net use of cash in the first quarter of fiscal 1999
was the net loss of $96,367 offset by increases and decreases in working
capital items.
Net cash used by investing activities was $11,307 in the 2000 period and
$2,527 in the 1999 period. Primary uses of funds were related to patents in
fiscal 2000 and capital expenditures in fiscal 1999. Capital expenditures
were $0 in the first quarter of fiscal 2000 and $1,841 in the first quarter
of fiscal 1999. Capital expenditures are expected to increase over the next
year during which time the Company expects to increase spending for capital
expenditures related to new product introductions.
Net cash provided by financing activities was $1,870,735 in the 2000
period and $127,582 in the 1999 period. The cash provided by financing
activities in the first quarter of fiscal 2000 was related to the proceeds of
the private placement of stock of $1,330,000 and notes payable of $1,000,000
offset somewhat by expenses related to issuance of the stock and associated
debt of $296,752, a reduction of notes payable to related parties of $149,282
and other reductions of notes payable and long term debt. The cash provided
by financing activities in the first quarter of fiscal 1999 was primarily
related to proceeds from notes payable issued to others of $238,543 and notes
payable issued to related parties of $78,643 offset somewhat by reductions in
notes payable and long-term debt of $189,969 and other reductions of notes
payable to related parties.
The Company's principal commitments at June 30, 1999 consisted primarily
of notes payable to related parties as well as other notes payable. Of the
other notes payable, $1,000,000 in principal have a maturity of June 2003.
The notes payable to related parties are subordinate to other notes payable
and cannot be repaid until the $1,000,000 in principal of other notes payable
has been paid in full. The Company has used a portion of the proceeds of
these notes to provide working capital for operations and for the continuing
development of the Electronic Gearing Technology as well as
12
<PAGE>
to reduce accounts payable previously incurred relating to the costs of license
and royalty agreement negotiations, registration of securities of the Company
and ongoing regulatory compliance.
During the first quarter of fiscal 2000, the Company entered into an
agreement with investors to provide the Company $280,000 of additional capital
through the issuance of 700,000 restricted Common Shares and completed a private
placement for the Company to secure an additional $2,050,000 of funds to be used
mainly for working capital, capital expenditures, additional patent work,
retirement of certain notes payables to a shareholder, payment of existing
accounts payable, and for costs associated with the offering. Upon the
successful completion of the offering on June 25, 1999, the Company issued
1,500,000 restricted Common Shares for $0.70 per share and $1,000,000 in
promissory notes. The notes include warrants to purchase 100,000 restricted
Common Shares of the Company at $0.50 per share for 48 months. The notes bear
interest at 10% per annum. The interest accrued during the first year is
payable at the end of the year. Thereafter, accrued interest is payable
quarterly. The notes may be prepaid without penalty and are secured by the
patents on the Electronic Gearing Technology.
In connection with the offering, the placement agent received a commission
of 10% on the proceeds of the sale of the notes and the shares. The finder
received a fee of 3% of the funds raised (including the initial $280,000) and
options to purchase 50,000 restricted Common Shares at $1.00 per share for five
years.
As part of this agreement, two related party note holders agreed to convert
their existing notes payable and interest thereon totaling $296,451 to 318,151
Common Shares of the Company. In addition, except for a $125,000 payment from
the proceeds of the offering, the Company's majority stockholder agreed to
subordinate all amounts due him to the $1,000,000 in new notes payable.
Management believes that the funds from the recent private placement will allow
the Company to complete and market new products utilizing the Electronic Gearing
Technology as well as hire additional personnel to sell and support both the
existing products and future products. Finally, the Company has reached an
agreement with a regional bank to provide the Company with a $1,000,000
revolving line of credit for additional working capital resources to be secured
by the Company's accounts receivable, inventory, and fixed assets.
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-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,
13
<PAGE>
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. Upon attempting to install the upgrade in
December 1998, it was discovered that memory size needed to be increased. The
Company purchased additional memory in January 1999 for $677. The Company has
completed approximately 50% of the installation and does not anticipate any
material disruption in its operations as the result of installing the upgrades.
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
September 30, 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 position, although the Company does have manual
procedures in place that would help keep disruption to a minimum.
Future Operations
Now that the Company has completed its recent private placement and
subsequent agreement with a regional bank for a line of credit for additional
working capital, management believes its customers and potential customers are
anticipating the introduction of new products into the market place. These new
products, if successfully developed, will include the Company's Electronic
Gearing Technology in sewing applications. Management believes that, although
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, the majority of future revenues are dependent on
anticipated new product introductions. Management previously reduced overhead in
all areas in order to lower operating expenses until the Company completed its
financing and until production begins on the FS2000 Felling Machines which uses
the Electric Gearing Technology. At that time, management expects that overhead
will increase as necessary to meet production demands of the Felling Machine and
other new product development activities.
14
<PAGE>
Recent 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 that its competitors have not attempted
or have failed to develop. Management believes that these products and upgrades
can be completed with the existing research and development staff. 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. Research and development of these items has been halted but
is expected to resume now that additional working capital has been obtained and
as soon as additional engineering personnel are added.
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
or lease an existing facility that will provide sufficient space for the
Company's needs. The Company owns approximately six acres of undeveloped land
where a new facility could be constructed, or suitable other land is available
should the Company decide to build. 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 present site, thus allowing
the possible use of the existing site until a decision is reached with regard to
future facility needs.
As of June 30, 1999, the Company had backlog orders it believes to be firm
totaling approximately $228,000 of which approximately $14,000 is for equipment
that is part of the Company's standard product line and is expected to be
completed by September 30, 1999. The backlog also reflects orders of
approximately $214,000 for eleven FS2000 Felling Machines. Delivery of the
FS2000 is expected to begin in the second half of fiscal 2000 as a result of the
successful completion in June 1999 of the Company's private placement offering.
In addition, the Company has received requests from 69 different manufacturers
for a FS2000 trial unit. The Company also has indications of interest for
additional orders totaling approximately $1,200,000 relating to products, other
than the Felling Machine, using the Electronic Gearing Technology upon
completion of production models and $490,000 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
15
<PAGE>
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
In the event the Company needed additional financing, 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. Such other factors include, among others:
. the 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;
16
<PAGE>
. the 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;
. the 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, cost
effective basis, and the failure of any 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 and that TES's products will
not infringe on patents owned by others, or the risk that competitors
will develop similar or functionally similar products; 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.
Not applicable.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On April 30, 1999, the Company entered into an agreement with The Lanrick
Group, Inc. under which two principals of The Lanrick Group, Inc., Michael A.
Atkins and Patrick L. Martin, each purchased 300,000 Common Shares and LandOak
Securities, LLC purchased 100,000 Common Shares (on behalf of its employees) in
connection with the private placement offering described below, all at a price
of $0.40 per share. The Company received a total of $280,000 for such shares.
In connection with this purchase, LandOak Securities, LLC agreed to act as
placement agent in a private placement offering of 1,500,000 Common Shares at
$0.70 per share and $1,000,000 in notes payable which mature four years from
issuance and bear interest at a rate of 10% per annum with no interest payable
for the first twelve months, but payable quarterly thereafter. Accompanying
each
17
<PAGE>
$10,000 of notes are warrants to purchase 1,000 Common Shares of the Company
which may be exercised during the four year period beginning on the date of
issuance at an exercise price of $0.50 per share. The private placement was
completed on June 25, 1999 with all securities offered sold. The Company
received $2,050,000, less commissions of $203,913. The securities were sold to
accredited investors and non-accredited investors that the Company believed,
based on representations from such investors that they either alone or with a
purchaser representative had sufficient knowledge and experience in financial
and business matters so as to be capable of evaluating the merits and risks of
the investment. The exemption from registration claimed was Rule 506 of
Regulation D promulgated under Section 4(2) of the Securities Act of 1933 (the
"Act").
In connection with the agreement with the placement agent, Charles R. West
was appointed President and Chief Executive Officer of the Company and agreed to
convert a promissory note made by the Company in his favor to Common Shares as
described below. One director agreed to do the same as further described below.
The majority shareholder also agreed to subordinate certain of the debt the
Company owes him to the notes sold in the private placement and to vote his
shares to elect Mr. West and representatives of the investors in the private
placement to the Company's board of directors until the happening of certain
events. The Company also gave the investors certain registration rights.
On April 30, 1999 in connection with the agreement with The Lanrick Group,
Inc., Billie Joe Clayton, a director of the Company, converted notes payable by
the Company to him and related accrued interest totaling $195,300 to 217,000
Common Shares at a price of $0.90 per share in a transaction not involving any
public offering pursuant to Section 4(2) of the Act. Also pursuant to Section
4(2), Charles R. West, who became President and Chief Executive Officer of the
Company effective May 1, 1999, converted notes payable by the Company to him and
related accrued interest of $101,151 to 101,151 Common Shares at a price of
$1.00 per share.
The Company'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 until
July 31, 1999. Of the 1,000,000 Warrants issued, 800 were exercised.
Since August 1, 1997, the effective date of the registration statement, and
prior to June 30, 1999, TTI has incurred for its account in connection with the
issuance and distribution of the securities registered the following amounts:
18
<PAGE>
<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>
(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 $40,159 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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Index
<TABLE>
<CAPTION>
Exhibit Page
Table Number Number
------------------ -----------
<S> <C> <C>
I. Articles of Incorporation and Bylaws 3
(i) Certificate of Incorporation of Tice Technology, Inc. (i) +
(ii) Bylaws of Tice Technology, Inc. (ii) +
II. Instruments Defining Rights of Security Holders 4
(i) Common Stock Purchase Warrant Agreement Between Tice x
Technology, Inc. and Warrant Agent
(ii) Form of Promissory Note Issued in Connection with Private #
Placement Closed on June 25, 1999
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Table Number Number
------------------ -----------
<S> <C> <C>
(iii) Warrant Agreement relating to Right to Purchase up #
to 100,000 Common Shares of Tice Technology, Inc.
Received by Holders of the Promissory Notes
(iv) Security Agreement Pledging Patents as Security for #
Promissory Notes
(v) Registration Rights Agreement Giving Purchasers under the #
Private Placement Closed on June 25, 1999 Certain Demand and
Piggyback Registration Rights
(vi) Option Agreement Relating to Option to Purchase Up to #
50,000 Common Shares of Tice Technology, Inc. Granted to Finder
III. Material Contracts 10
(i) Employment Agreement Between William A. Tice and Tice #
Technology, Inc.
(ii) Employment Agreement Between Charles R. West and Tice #
Technology, Inc.
(iii) Incentive Stock Option Plan and Agreement Between Charles #
R. West and Tice Technology, Inc.
IV. Financial Data Schedule 27 __
</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.
# Previously filed as an exhibit to Form 10-K for the year ended March 31,
1999.
(b) The Company filed one report on Form 8-K dated April 30, 1999 reporting the
sale of securities pursuant to the agreement with The Lanrick Group, Inc.
(which at the time as a group constituted 12% of the issued and outstanding
Common Shares of the Company) and the private placement offering.
20
<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/ Charles R. West
-------------------------------------------
Charles R. West, President and
Chief Executive Officer
Date: August 12, 1999
-------------------------------------------
By: /s/ Karen A. Walton
-------------------------------------------
Karen A. Walton, Chief Financial Officer
Date: August 12, 1999
-------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TICE TECHNOLOGY, INC. FOR THE THREE MONTHS ENDED
6/30/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,496,916
<SECURITIES> 0
<RECEIVABLES> 93,530
<ALLOWANCES> 0
<INVENTORY> 412,931
<CURRENT-ASSETS> 2,019,266
<PP&E> 774,005
<DEPRECIATION> 598,463
<TOTAL-ASSETS> 2,427,789
<CURRENT-LIABILITIES> 356,698
<BONDS> 1,332,089
0
0
<COMMON> 106,115
<OTHER-SE> 632,887
<TOTAL-LIABILITY-AND-EQUITY> 739,002
<SALES> 130,468
<TOTAL-REVENUES> 136,439
<CGS> 118,712
<TOTAL-COSTS> 295,714
<OTHER-EXPENSES> 14,943
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,943
<INCOME-PRETAX> (173,566)
<INCOME-TAX> 2,699
<INCOME-CONTINUING> (165,246)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (176,265)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
