<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 December 31, 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 February 10, 1999 were 5,994,064 Common Shares, 750,000 Class B
Common Shares and 0 Class D Common Shares.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Page
----
Condensed Consolidated Balance Sheets -- As of December 31, 1998
and March 31, 1998 2
Condensed Consolidated Statements of Operations -- For the Three
Months and the Nine Months Ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -- For the Nine Months
Ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
1
<PAGE>
Tice Technology, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
-------------------------------------
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998 (1)
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 5,279 $ 19,063
Accounts receivable 154,183 192,615
Note receivable -- 11,993
Prepaid expenses 12,470 9,013
Inventory, net 354,678 394,116
--------- ----------
Total current assets 526,610 626,800
Property and equipment:
Land 130,000 130,000
Equipment 533,110 528,740
Vehicles 107,751 124,599
--------- ----------
Total property and equipment 770,861 783,339
Less accumulated depreciation (593,774) (603,700)
--------- ----------
Property and equipment, net 177,087 179,639
Patents, net 179,419 174,462
Note receivable from related party -- 79,610
Other assets 54,418 41,818
--------- ----------
Total assets $ 937,534 $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>
December 31, March 31,
1998 1998 (1)
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current maturities notes payable $ 264,590 $ 255,039
Accounts payable 272,762 304,448
Accrued liabilities 71,679 38,815
Notes payable to related parties 43,117 8,741
----------- -----------
Total current liabilities 652,148 607,043
Notes payable to related parties 690,924 556,310
Note payable, long-term portion 10,287 --
----------- -----------
Total liabilities 1,323,359 1,163,353
----------- -----------
Stockholders' deficit:
Capital stock, no par value, 2,000 shares authorized, 13,493 13,493
780 shares issued and outstanding at December 31,
and March 31, 1998
Common Shares, par value $.01, 30,000,000 shares authorized, 59,941 59,076
5,994,064 and 5,907,639 shares issued and outstanding
at December 31, and March 31, 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 December 31, and March 31, 1998
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 1,704,161 1,603,727
Accumulated deficit (2,170,920) (1,744,820)
----------- -----------
Total stockholders' deficit (385,825) (61,024)
----------- -----------
Total liabilities and stockholders' deficit $ 937,534 $ 1,102,329
=========== ===========
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.
</TABLE>
3
<PAGE>
Tice Technology, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
-----------------------------------------------
<TABLE>
<CAPTION>
For the three months For the nine months
ended December 31, ended December 31,
1998 1997 1998 1997
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Sales and service $ 159,007 $ 217,219 $ 503,336 $ 746,501
License fees -- -- -- 250,000
Royalties 36,146 102,664 111,555 115,572
---------- ---------- ---------- -----------
Total operating revenues 195,153 319,883 614,891 1,112,073
Operating expenses:
Cost of revenues 117,161 171,542 406,493 617,240
Research and development 34,105 59,975 134,052 147,298
Selling, general, administrative 149,695 206,568 425,542 1,987,251
----------- ---------- ---------- -----------
Total operating expenses 300,961 438,085 966,087 2,751,789
Operating loss (105,808) (118,202) (351,196) (1,639,716)
Other income (expense):
Interest expense - related parties (17,669) (4,796) (48,321) (38,569)
Interest expense (16,418) (4,861) (22,295) (39,271)
Gain on sale-fixed assets 3,274 -- 3,274 --
Other income 3,860 158 3,593 2,325
----------- ---------- ---------- -----------
Total other expense, net (26,953) (9,499) (63,749) (75,515)
----------- ---------- ---------- -----------
Loss before income taxes (132,761) (127,701) (414,945) (1,715,231)
Provision for income taxes 3,615 -- 11,155 5,000
----------- ---------- ---------- -----------
Net loss $ (136,376) $ (127,701) $ (426,100) (1,720,231)
=========== ========== ========== ===========
Basic and diluted loss per share (Note 4) $ (0.02) $ (0.02) $ (0.06) $ (0.27)
=========== ========== ========== ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
Tice Technology, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
Nine months ended
December 31, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Net cash used by operating activities $ (319,309) $ (319,078)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of fixed assets 3,793 824
Capital expenditures (4,369) (6,214)
Additions to patents and other assets (8,929) (33,104)
----------- -----------
Net cash used by investing activities (9,505) (38,494)
----------- -----------
Cash flows from financing activities:
Net proceeds from notes payable to related parties 169,224 254,221
Net proceeds from notes payable 44,507 28,958
Proceeds from issuance of stock 101,299 32,158
----------- -----------
Net cash provided by financing activities 315,030 315,337
----------- -----------
Net decrease in cash and cash equivalents (13,784) (42,235)
Cash and cash equivalents, beginning of period 19,063 69,393
----------- -----------
Cash and cash equivalents, end of period $ 5,279 $ 27,158
=========== ===========
Noncash investing and financing activities:
During the nine months ended December 31, 1997, the Company converted
$265,680 of debt into Common Stock.
During the nine months ended December 31, 1998, the Company converted
$24,707 of accounts payable into notes payable and $79,610 of a note
receivable from related party was applied against a note payable to a
related party.
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
</TABLE>
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 December 31,
1998 and the results of its operations and its cash flows for the three
month periods and nine month periods ended December 31, 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 nine month
periods ended December 31, 1998 and 1997 are not necessarily indicative of
the results to be expected for the respective full years .
<TABLE>
<CAPTION>
3. Inventory
Inventory consists of the following:
December 31, March 31,
1998 1998
----------- ---------
<S> <C> <C>
Raw Materials $ 353,334 $ 363,472
Work In Process 8,243 66,410
Finished Goods 113,101 84,234
----------- -----------
474,678 514,116
Reserve for Obsolescence (120,000) (120,000)
----------- -----------
Inventory $ 354,678 $ 394,116
=========== ===========
</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 Nine Month
Period Ending Period Ending
December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Loss:
Basic and diluted:
Loss available to
common stockholders $ (136,376) $ (127,701) $ (426,100) $(1,720,231)
---------- ---------- ---------- -----------
Shares:
Basic and diluted:
Weighted average common
shares outstanding 6,742,477 6,605,918 6,691,487 6,316,319
---------- ---------- ---------- -----------
</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 impact 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 and in the audited financial statements and notes
thereto for the year ended March 31, 1998.
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 nine months of fiscal 1998 ending
December 31, 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. 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 place with Brother Industries, Ltd. of Nagoya, Japan as well as
expected additional license agreements currently under negotiation.
8
<PAGE>
The Company's product sales and service revenues have previously been
largely attributable to sales to three primary customers. These three customers
represented 70.4% of product sales revenue in the first nine months of fiscal
1998, whereas the same three customers represented 66.9% of product sales
revenue in the first nine 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 24.3% of total product sales in the
first nine months of fiscal 1998 to 13.5% in the same period of fiscal 1999.
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. 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. 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. Since the close of the Bobbin World Show,
orders totaling $210,000 have been received for the FS2000 Felling Machine. To
date, 48 customers have requested FS2000 trial units.
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 Nine Months Ended
December 31, December 31
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating revenues:
Sales and service 81.5% 67.9% 81.9% 67.1%
License fees 0.0% 0.0% 0.0% 22.5%
Royalties 18.5% 32.1% 18.1% 10.4%
------ ------ ------ ------
Total operating revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenues 60.0% 53.6% 66.1% 55.5%
Research and development 17.5% 18.7% 21.8% 13.2%
Selling, general, administrative 76.7% 64.6% 69.2% 178.7%
------ ------ ------ ------
Total operating expenses 154.2% 136.9% 157.1% 247.4%
Operating loss (54.2%) (36.9%) (57.1%) (147.4%)
Other expense:
Interest expense - related parties (9.1%) (1.5%) (7.9%) (3.5%)
Interest expense (8.4%) (1.5%) (3.6%) (3.5%)
Gain on sale-fixed asset 1.7% 0.0% 0.5% 0.0%
Other income 2.0% 0.0% 0.6% 0.2%
------ ------ ------ -------
Total other expense (13.8%) (3.0%) (10.4%) (6.8%)
------ ------ ------ -------
Loss before income taxes (68.0%) (39.9%) (67.5%) (154.2%)
Provision for income taxes 1.9% 0.0% 1.8% 0.4%
------ ------ ------ -------
Net loss (69.9%) (39.9%) (69.3%) (154.6%)
====== ====== ====== =======
</TABLE>
Three Months Ended December 31, 1998 and December 31, 1997
Total Revenues. Total revenues for the third quarter of fiscal 1999 which
ended December 31, 1998 decreased by approximately $124,700 to $195,153 from
$319,883 in the third quarter of the previous year. This decrease was largely
the result of an approximate 64.8% reduction in royalty revenues from $102,664
reported in the three month period ending December 31, 1997 to $36,146 for the
three month period ending December 31, 1998. Management believes that royalty
revenues continue to be affected by the poor financial condition of the Asian
market. Sales revenues also decreased by approximately 26.8% from $217,219 for
the three month period ending December 31, 1997 to $159,007 for the three month
period ending December 31, 1998.
10
<PAGE>
Decreased product sales and service revenues reflected decreases in sales to two
of the Company's primary customers. One primary customer is in the process of
relocating to Latin America and has postponed purchase of capital equipment
until the relocation is complete. The other primary customer, being a Latin
American distributor for the Company, has orders placed that are awaiting
shipment pending the distributor bringing its account current. The Company is
working on increasing direct sales to end users as well as signing additional
distributors to cover the growing Latin American market.
Sales of the Label Loader/Folders increased in the third quarter of fiscal
1999 representing 57.23% of total product revenue as opposed to 25.5% of product
revenue in the same period of the prior year. This increase was the result of
one of the Company's primary customers replacing older versions of the unit with
the newer upgraded model. Sales of Single Needle Belt Loop Machines and
Automatic J-Tackers decreased in the third quarter of fiscal 1999 representing
13.82% and 2.25%, respectively, of total product revenue as opposed to 30.1% and
6.9%, respectively, of product revenue in the same period of the prior year.
This decrease was largely the result of decreased sales to two primary
customers. Sales of the Single Needle Belt Loop Machines are expected to
increase in the fourth quarter of fiscal 1999 as back orders are shipped when
acceptable credit terms are arranged with the customer.
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 31.7% to
$117,161 in the third quarter of fiscal 1999 from $171,542 in the third quarter
of fiscal 1998. This was largely the result of decreased material purchases and
overhead applied during the third quarter of fiscal 1999. Decreases in material
purchases during the 1999 period were directly related to the decrease in sales
revenue for that period. Overhead applied decreased approximately 32.5% during
the 1999 period as compared to the same period of the prior year largely as a
result of decreases in indirect labor and related benefits. Management
recognized the need to continue to reduce the Company's general overhead
expenses and found it necessary to layoff personnel. Cost of revenues as a
percentage of sales revenue decreased slightly from 78.97% in the 1998 period to
73.68% in the 1999 period. Cost of revenues as a percentage of total revenues
increased from 53.63% in the 1998 period to 60.04% in the 1999 period largely as
a result of an approximate 64.8% decrease in royalty revenues in the 1999
period. Royalty revenues have no associated costs.
11
<PAGE>
Research and Development. Research and development ("R&D") costs decreased
approximately 43% to $34,105 in the third quarter of fiscal 1999 from $59,975 in
the third quarter of fiscal 1998. This decrease was primarily due to decreases
in salary and related benefits from a temporary cutback in engineering staff
during the fiscal 1999 period. Since the completion of the FS2000 Felling
Machine, management decided that it was necessary to reduce the overhead
expenses attributable to R&D until additional working capital can be secured to
fund new R&D projects. See "Future Operations." 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 27.5% to $149,695 in the third
quarter of fiscal 1999 from $206,568 in the third quarter of fiscal 1998. This
decrease was primarily due to (i) increased travel and related expenses incurred
in the 1998 period to pursue sales leads and license negotiations which resulted
from the Company's equipment exhibit at the July 1997 IMB trade show in Germany,
(ii) expenses incurred in the 1998 period for recruiting additional engineering
staff, (iii) decreased legal and accounting expenses during the 1999 period, and
(iv) decreased salary and related benefits during the 1999 period due to
management's decision to layoff personnel not critical to operations to reduce
overhead.
Operating Loss. Operating loss was reduced to $105,808 for the third
quarter of fiscal 1999 from $118,202 for the third quarter of fiscal 1998. The
decreased losses primarily resulted from overhead reductions in the 1999 period
through the temporary layoff of personnel.
Interest Expense and Interest Expense - Related Parties. Interest expense
and interest expense - related parties increased from $9,657 in the 1998 period
to $34,087 in the 1999 period primarily due to additional debt incurred
subsequent to December 31, 1997 to provide working capital.
Nine Months Ended December 31, 1998 and December 31, 1997
Total Revenues. Total revenues decreased approximately 44.7% in the first
nine months of fiscal 1999 to $614,891 from $1,112,073 in the first nine months
of the prior year. This decrease in the first nine 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 32.58% to $503,336 in the 1999 period as
compared to $746,501 in the same period of fiscal 1998. Decreases in product
sales in the 1999 period as compared to the same period of the prior year
resulted primarily from decreased sales of Ergonomic Stands as well as an
approximate 11% decrease in international sales, which related to decreased
sales to the Company's primary Latin American distributor. The first nine
months of the fiscal 1998 period also included $250,000 in license fee income
whereas the same period of fiscal 1999 had no comparable income. Income from
royalties decreased slightly to $111,555 for the first nine months of fiscal
1999 as compared to $115,572 for the same period of the prior year.
12
<PAGE>
Sales of the Automatic J-Tackers increased in the first nine months of
fiscal 1999 representing 16.02% of total product revenue as opposed to 6.6% 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 and the Label Loader/Folders as a percentage of total product revenue
decreased slightly to 23.28% and 22.16%, respectively, for the fiscal 1999
period from 23.7% and 25%, respectively, for the fiscal 1998 period. Sales of
Ergonomic Stands decreased to 2.81% of sales in the first nine months of fiscal
1999 from 14.5% of sales in the same period of the prior year. These figures
relating to sales of Ergonomic Stands include only orders in which the customer
purchases the stand alone, with or without table top, for use as a
table/workstation or to mount existing equipment at the customer's location.
Ergonomic Stands, however, are also typically purchased as an optional part of a
package unit and are included with approximately 95% of orders for products such
as Single Needle Belt Loop Machines and Label Loader/Folders. Therefore, sales
of Ergonomic Stands are typically higher when taking into consideration sales of
the unit as an integral part of another product. In addition, to remain
competitive, the Company introduced a Manual Ergonomic Stand in the third
quarter of fiscal 1998, which sells at a lower price than the pneumatic and
electronically operated stands that the Company also provides. Sales of the
Manual Ergonomic Stands contributed to the reduction in total dollar volume of
sales of Ergonomic Stands.
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 34% to $406,493
in the fiscal 1999 period from $617,240 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 $193,000 for the
first nine months of fiscal 1999 which was directly related to the decrease in
sales revenue for that period. Total overhead applied decreased 21.4% from
$141,373 in the first nine months of fiscal 1998 to $111,090 for the same period
of fiscal 1999. This decrease primarily related to decreased salary and related
benefits.
Research and Development. R&D costs decreased by 9% to $134,052 in the
first nine months of fiscal 1999 from $147,298 in the first nine months of
fiscal 1998 due to decreases in salary and related benefits. This decrease was
primarily due to temporary cutbacks in engineering staff during the third
quarter of the fiscal 1999 period. 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 $1,560,000 to $425,542 in the first nine months of fiscal 1999
from $1,987,251 in the first nine 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 an approximate 23%
decrease from the 1998 period. The 1998 period reflected costs incurred for
recruiting additional engineering staff as well as increased advertising, travel
and related expenses incurred to exhibit equipment at the July 1997 IMB trade
show in Germany and subsequent trips to follow-up on leads generated from the
show whereas the 1999 period had no comparable costs. The 1999 period reflected
decreases in (i) legal and accounting expenses, and (ii) salary and related
benefits due to management's decision to reduce overhead by laying off personnel
not critical to operations.
Operating Loss. The operating loss decreased from $1,639,716 in the first
nine months of fiscal 1998 to $351,196 in the first nine months of fiscal 1999.
The decreased losses were primarily due to expenses incurred during the 1998
period which were non-recurring expenses relating to the registration process
offset somewhat by the increased sales and license fee revenues received during
the period.
Interest Expense and Interest Expense-Related Parties. Interest expense
and interest expense-related parties decreased by approximately 9.28% from
$77,840 in the 1998 period to $70,616 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 December 31, 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 $319,309 in the nine month period
ended December 31, 1998 as compared to $319,078 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 $9,505 in the 1999 period as
compared to $38,494 in the 1998 period. Primary uses of funds were related to
capital expenditures and patents. Capital expenditures totaled approximately
$4,369 in the 1999 period and $6,214 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."
14
<PAGE>
Net cash provided by financing activities was $315,030 in the 1999 period
and $315,337 in the 1998 period. The cash provided by financing activities was
proceeds from issuance of stock and notes payable to related parties and others.
The Company's principal commitments at December 31, 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. 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 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
impact 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-digit
year entries will need to be upgraded or replaced to comply with such "Year
2000" requirements.
15
<PAGE>
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. 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 at an additional cost of $677. Installation
of the additional memory is scheduled to be completed by the end of February
1999 and the plan is to complete installation and testing of the Year 2000
upgrade by the end of March 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 March
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. Management has been reducing
overhead in all areas in order to lower operating expenses until the Company
locates additional working capital (which it hopes to do soon) and production
begins on the FS2000 Felling Machines. At that time, management expects that
overhead will increase as necessary to meet production demands of the Felling
Machine.
16
<PAGE>
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 R&D 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 as soon as additional working capital is obtained.
As the demand for the electronic gearing technology continues to grow, the
Company is making preparations to meet the existing and expected future demands
of its manufacturing and research and development efforts. In October 1998,
management retained professional investment bankers to assist the Company in
locating additional capital of up to $2,000,000 for its operations.
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. 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, thus
allowing use of the existing site. 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.
As of December 31, 1998, the Company had backlog orders it believes to be
firm totaling approximately $270,000 of which approximately $69,500 is for
equipment that is part of the Company's standard product line and is expected to
be completed by February 28, 1999. The backlog also reflects orders of
approximately $210,000 for eleven FS2000 Felling Machines. Delivery of the
FS2000 is expected to begin in May 1999 pending the timely receipt of the
additional capital which the Company is working to obtain. 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 products, other than the felling
machine, using the electronic gearing technology upon completion of production
models and
17
<PAGE>
$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.
Such other factors include, among others:
18
<PAGE>
. 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 Section 4(2) of the Securities Act of 1933 (the "Act"), TTI sold 12,500
Common Shares to one individual for $2.00 per share. On October 15, 1998, TTI
sold 15,000 shares to one individual and his spouse for $1.00 per share and, on
October 16, 1998, TTI sold 50,000 shares to one individual also for $1.00 per
share in transactions not involving any public offering pursuant to Section 4(2)
of the Act. On November 17, 1998, the Company issued 4,000 Common Shares at
$1.50 per share to M. W. Colvin as payment for consulting services in a
transaction not involving any public offering pursuant to Section 4(2) of the
Act. 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 three quarters of fiscal 1999.
Since August 1, 1997, the effective date of the registration statement, and
prior to December 31, 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 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
(i) Stock Purchase Agreement and Plan of +
Reorganization (including all schedules)
II. Articles of Incorporation and Bylaws 3
(i) Certificate of Incorporation of Tice Technology, Inc. (i) +
(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 23
</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.
21
<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: February 15, 1999
-------------------------------
By: /s/ Karen A. Walton
----------------------------------
Karen A. Walton, Chief Financial Officer
Date: February 15, 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 period ended 12/31/98
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,279
<SECURITIES> 0
<RECEIVABLES> 154,183
<ALLOWANCES> 0
<INVENTORY> 354,678
<CURRENT-ASSETS> 526,610
<PP&E> 770,861
<DEPRECIATION> 593,774
<TOTAL-ASSETS> 937,534
<CURRENT-LIABILITIES> 652,148
<BONDS> 701,211
0
0
<COMMON> 80,934
<OTHER-SE> (466,759)
<TOTAL-LIABILITY-AND-EQUITY> 937,534
<SALES> 503,336
<TOTAL-REVENUES> 614,891
<CGS> 0
<TOTAL-COSTS> 966,087
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,616
<INCOME-PRETAX> (414,945)
<INCOME-TAX> 11,155
<INCOME-CONTINUING> (426,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (426,100)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
