<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 September 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)
(865) 925-4501
(Registrant's telephone number, including area code)
-------------------------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of each of the registrants' classes of
common stock on November 1, 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 September 30, 1999 2
and March 31, 1999
Condensed Consolidated Statements of Operations -- For the Three Months 4
and the Six Months Ended September 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows -- For the Six Months 5
Ended September 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements 6
</TABLE>
1
<PAGE>
Tice Technology, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
-------------------------------------
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999 (1)
------------- ----------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $1,077,740 $ 24,155
Accounts receivable, net 56,875 65,245
Prepaid expenses 15,397 8,097
Inventory, net 513,283 387,654
---------- ---------
Total current assets 1,663,295 485,151
Property and equipment:
Land held for sale 130,000 130,000
Building and improvements 8,014 --
Equipment 562,272 536,254
Vehicles 135,802 107,751
---------- ---------
Total property and equipment 836,088 774,005
Less accumulated depreciation (600,564) (596,364)
---------- ---------
Property and equipment, net 235,524 177,641
Patents, net 192,087 178,803
Debt issuance costs, net 40,828 --
Other assets 5,710 4,350
---------- ---------
Total assets $2,137,444 $ 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>
September 30, March 31,
1999 1999 (1)
------------ ---------
<S> <C> <C>
(unaudited)
Liabilities and stockholders' equity (deficit)
Notes payable and current maturities of long-term debt $ 190,502 $ 214,790
Accounts payable 49,727 233,030
Accrued liabilities 56,228 109,798
Notes payable to related parties, current portion 50,000 197,698
----------- -----------
Total current liabilities 346,457 755,316
Notes payable to related parties, long-term portion 424,083 620,482
Note payable, long-term portion, net of $85,000 discount 919,386 9,424
----------- -----------
Total liabilities 1,689,926 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 September 30,
and March 31, 1999
Common Shares, par value $.01; 30,000,000 shares authorized; 85,126 59,941
8,512,615 and 5,994,064 shares issued and outstanding
at September 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 September 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 3,131,340 1,704,161
Accumulated deficit (2,789,941) (2,324,372)
----------- -----------
Total stockholders' equity (deficit) 447,518 (539,277)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 2,137,444 $ 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 For the six months
ended September 30, ended September 30,
1999 1998 1999 1998
---- ---- ----- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Sales and service $ 66,095 $ 162,021 $ 169,573 $ 344,329
Royalties 21,592 27,953 48,582 75,409
--------- --------- --------- ---------
Total operating revenues 87,687 189,974 218,155 419,738
Operating expenses:
Cost of revenues 122,057 169,700 240,769 289,332
Research and development 26,597 46,489 51,357 99,947
Selling, general and administrative 191,279 146,706 343,521 275,847
--------- --------- --------- ---------
Total operating expenses 339,933 362,895 635,647 665,126
Operating loss (252,246) (172,921) (417,492) (245,388)
Other income (expense):
Interest expense - related parties (11,687) (16,633) (26,630) (30,652)
Interest expense (19,824) (1,299) (19,172) (5,877)
Other (expense) income (3,388) 291 2,583 (267)
--------- --------- --------- ---------
Total other expense, net (34,899) (17,641) (43,219) (36,796)
--------- --------- --------- ---------
Loss before income taxes (287,145) (190,562) (460,711) (282,184)
Provision for income taxes 2,159 2,795 4,858 7,540
--------- --------- --------- ---------
Net loss $(289,304) $(193,357) $(465,569) $(289,724)
========= ========= ========= =========
Loss per share (Note 4)
Basic and diluted $ (0.03) $ (0.03) $ (0.06) $ (0.04)
========= ========= ========== =========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
<PAGE>
Tice Technology, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
<TABLE>
<CAPTION>
Six months ended
September 30, September 30,
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
Net cash flows from operating activities:
Net loss $ (465,569) $(289,724)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 16,458 6,988
Increase in cash surrender value of life insurance (960) (8,400)
Increase in utility/security deposits (400) --
Changes in operating assets and liabilities:
Receivables 8,370 85,984
Prepaid expenses (7,300) (22,161)
Inventory (125,629) 19,201
Accounts payable and accrued liabilities (135,237) (26,636)
---------- ---------
Net cash used by operating activities (710,267) (234,748)
---------- ---------
Cash flows from investing activities:
Purchases of property and equipment (62,083) (3,358)
Additions to patents (18,434) (8,103)
---------- ---------
Net cash used by investing activities (80,517) (11,461)
---------- ---------
Cash flows from financing activities:
Proceeds from notes payable to related parties -- 169,631
Proceeds from notes payable and long-term debt 1,000,000 46,602
Principal payments on notes payable to related parties (149,282) --
Principal payments on notes payable and long-term debt (33,712) --
Net proceeds from issuance of stock and stock warrants 1,333,200 24,998
Expenses related to placement of associated debt (305,837) --
---------- ---------
Net cash provided by financing activities 1,844,369 241,231
---------- ---------
Net increase (decrease) in cash and cash equivalents 1,053,585 (4,978)
Cash and cash equivalents, beginning of period 24,155 19,063
---------- ---------
Cash and cash equivalents, end of period $1,077,740 $ 14,085
========== =========
</TABLE>
Noncash investing and financing activities:
During the six months ended September 30, 1999, the Company converted $96,610
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. During the six months
ended September 30, 1998, the Company converted $24,707 of accounts payable to
a long-term note payable.
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 September 30,
1999 and the results of its operations and its cash flows for the three
month and six month periods ended September 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 and six month periods ended
September 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>
September 30, March 31,
1999 1999
---- ----
<S> <C> <C>
Raw Materials $ 360,023 $ 343,968
Work In Process 184,270 118,103
Finished Goods 88,990 45,583
--------- ---------
633,283 507,654
Reserve for Obsolescence (120,000) (120,000)
--------- ---------
Inventory $ 513,283 $ 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 non-cumulative 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 Six Month
Period Ending Period Ending
September 30 September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss:
Basic and diluted:
Loss available to
common stockholders $ (289,304) $ (193,357) $ (465,569) $ (289,724)
Shares:
Basic and diluted:
Weighted average common
shares outstanding 9,262,489 6,661,315 8,404,285 6,665,992
</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 $262,000 associated with the stock
issuance which were charged to additional paid-in-capital. Approximately
$41,000 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.
As a condition of this transaction, one current Director converted notes
payable and related accrued interest of $195,300 into 217,000 Common Shares
and the new President and Chief Executive Officer converted $101,151 of
notes payable and related accrued interest into 101,151 Common Shares. The
majority stockholder and holder of approximately $424,000 of related party
notes payable agreed to subordination of these notes until the $1,000,000
of notes payable are repaid in full.
7. Line of Credit
On September 27, 1999, the Company entered into an agreement with a
regional bank to provide up to a $1,000,000 revolving line of credit. The
Company's receivables, inventory and certain fixed assets secure this line
of credit. In addition, both the Company's majority stockholder and
President and Chief Executive Officer have personally guaranteed this line
of credit. The Company's majority stockholder and holder of approximately
$424,000 of related party notes agreed to subordination of these notes
until the bank line of credit is repaid in full. The Company must meet
certain debt to equity and eligible collateral requirements to utilize this
line of credit. There was no amount outstanding under this agreement as of
September 30, 1999.
8. Lease Agreement and Reclassification of Land
On November 4, 1999, the Company entered into a five-year lease agreement
for a 44,000 square foot office and manufacturing facility in Knoxville,
Tennessee. The terms of the lease allow the Company to terminate anytime
after thirty-six months with six months notice. In addition, the Company
has the right of first refusal for additional space at the same site. The
Company's obligation under this lease is $10,472 per month for the five-
year period. The Company leases its current office and manufacturing
facility on a month to month lease and will terminate this lease as of
December 31, 1999.
The Company owns land previously held for future expansion. As a result of
the above-mentioned lease of the new office and manufacturing facility, the
Company has now put the land up for sale.
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. Historically, 95% of TES's customers have been 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.
8
<PAGE>
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 accompanying financial statements
reflect the recording of revenues due from estimated 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 47% of product sales revenue in the first six months of fiscal 2000,
whereas the same three customers represented 60% of product sales revenue in the
first six months of fiscal 1999. This decrease in percentage resulted from
decreased sales to two of the three primary customers. One such customer has
reduced purchases due to its 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 Six Months Ended
September 30, September 30,
1999 1998 1999 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
Operating revenues:
Sales and service 75.4% 85.3% 77.7% 82.0%
Royalties 24.6% 14.7% 22.3% 18.0%
------- ------ ------ ------
Total operating revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenues 139.2% 89.3% 110.4% 68.9%
Research and development 30.3% 24.5% 23.5% 23.8%
Selling, general and administrative 218.1% 77.2% 157.5% 65.7%
------- ------ ------ ------
Total operating expenses 387.6% 191.0% 291.4% 158.4%
Operating loss (287.6)% (91.0)% (191.4)% (58.4)%
Other expense:
Interest expense - related parties (13.3)% (8.8)% (12.2)% (7.3)%
Interest expense (22.6)% (0.7)% (8.8)% (1.4)%
Other (expense) income (3.9)% 0.2% 1.2% (0.1)%
------- ------ ------ ------
Total other expense (39.8)% (9.3)% (19.8)% (8.8)%
------- ------ ------ ------
Loss before income taxes (327.4)% (100.3)% (211.2)% (67.2)%
Provision for income taxes 2.5% 1.5% 2.2% 1.8%
------- ------ ------ ------
Net loss (329.9)% (101.8)% (213.4)% (69.0)%
======= ====== ====== ======
</TABLE>
Three Months Ended September 30, 1999 and September 30, 1998
Total Operating Revenues. Total revenues for the second quarter of fiscal
2000, which ended September 30, 1999, decreased by approximately $102,287 to
$87,687 from $189,974 in the second quarter of the previous year. This decrease
was largely the result of an approximate 59% reduction in sales and service
revenues to $66,095 in the second quarter of fiscal 2000 from $162,021 in the
second quarter of fiscal 1999. Decreased sales and service revenues reflect
declining sales of the Company's traditional products, the result of slower
market conditions and increased competition, the Company's decision to refocus
its marketing away from the traditional products and customers awaiting new
products using the Company's Electronic Gearing Technology. The Company
anticipates introducing products using the Electronic Gearing Technology
beginning in the second half of fiscal 2000. In the second quarter of fiscal
2000, there were no sales of Automatic J-Tackers
10
<PAGE>
or Label Loader/Folders and $12,900 (20%) in sales of the Single Needle Belt
Loop machine as compared to $1,790 (1%), $27,890 (17%) and $59,950 (37%),
respectively, in the same period last year. Royalty income, based on estimates,
was reduced by 20% due to continuing slower market conditions, particularly in
the Asian markets.
Cost of Revenues. Cost of revenues decreased approximately 28% to $122,057
in the second quarter of fiscal 2000 from $169,700 in the second quarter of
fiscal 1999. Cost of revenues, though decreased, comprised a large percentage of
sales and service revenues as a result of constant levels of total overhead
costs allocated to cost of revenues coupled with declining sales and service
revenues. Management believes that further reductions to manufacturing salaries
and overhead would have been detrimental to future operations, especially in
light of anticipated product introductions in the second half of fiscal 2000.
Research and Development. Research and development costs decreased
approximately 42% to $26,597 in the second quarter of fiscal 2000 from $46,489
in the second quarter of fiscal 1999 due to previous reduction in salary and
benefits costs. Spending for research and development is expected to increase as
the Company undertakes new development opportunities.
Selling, General and Administrative. Selling, general and administrative
expenses increased approximately 30% to $191,279 in the second quarter of fiscal
2000 from $146,706 in the second quarter of fiscal 1999 due to increased salary
and benefit costs associated with new management, increased marketing activities
related to new product introductions anticipated in the second half of fiscal
2000 and increased expenses related to key man life insurance.
Operating Loss. The Company had an operating loss of $252,246 in the second
quarter of fiscal 2000 as compared to an operating loss of $172,921 in the
second quarter of fiscal 1999. The increase in the net operating loss is
primarily attributable to reduced sales and service revenue not proportionally
offset with reduced cost of revenues coupled with increased selling, general and
administrative expenses.
Interest Expense and Interest Expense - Related Parties. Interest expense
increased in the second quarter of fiscal 2000 to $19,824 from $1,299 in the
second quarter of fiscal 1999 reflecting the cost of new debt funding secured by
the Company at the end of the first quarter of fiscal 2000. Interest expense is
net of interest income received by the Company from the investment of the new
debt and equity funds. Interest expense-related parties was reduced due to both
the retirement of certain notes payable to a shareholder, and the conversion of
certain other notes payable to Common Shares.
Net Loss. The Company had a net loss of $289,304 in the second quarter of
fiscal 2000 as compared to a net loss of $193,357 for the second quarter of
fiscal 1999. The increase in net loss between the two periods is mainly
attributable to reduced sales and service revenues not proportionally offset
with reduced cost of revenues, increased selling, general and administrative
expenses and increased interest expense.
11
<PAGE>
Six Months ended September 30, 1999 and September 30, 1998
Total Operating Revenues. Total revenues for the six months ended September
30, 1999 decreased approximately $201,583 to $218,155 from $419,738 in the six
months ended September 30, 1998. This decrease was primarily the result of an
approximate 51% reduction in sales and service revenues to $169,573 in the six
months ended September 30, 1999 from $344,329 in the same period of the prior
year. Decreased sales and service revenues reflect declining sales of the
Company's traditional products, the result of slower market conditions and
increased competition, the Company's decision to refocus it's marketing away
from the traditional products and customers awaiting new products utilizing the
Company's Electronic Gearing Technology. The Company anticipates introducing
products incorporating the Electronic Gearing Technology beginning in the second
half of fiscal 2000. In the six months ended September 30, 1999, there were no
sales of Automatic J-Tackers, $46,896 (28%) in sales of the Label Loader/Folders
and $12,900 (8%) in sales of the Single Needle Belt Loop machine as compared to
$77,045 (22%), $20,561 (6%) and $95,177 (28%), respectively, in the same period
last year. Royalty income, based on estimates, was reduced 36% in the six months
ended September 30, 1999 compared to the same period of the prior year due to
continuing slower market conditions, particularly in the Asian markets.
Cost of Revenues. Cost of Revenues decreased approximately 17% to $240,769
in the six months ended September 30, 1999 from $289,332 in the same period of
the prior year. Cost of revenues, though decreased, comprise a larger percentage
of sales and service revenues as a result of constant levels of total overhead
costs allocated to cost of revenues coupled with declining sales and service
revenues. Management believes that further reductions to manufacturing salaries
and overhead would have been detrimental to future operations, especially in
light of anticipated product introductions in the second half of fiscal 2000.
Research and Development. Research and development costs decreased
approximately 49% to $51,357 in the six months ended September 30, 1999 from
$99,947 in the same period of the prior year due to previous reductions in
salary and benefit costs. Spending for research and development is anticipated
to increase as the Company undertakes new product development opportunities.
Selling, General and Administrative. Selling, general and administrative
expenses increased by approximately 25% to $343,521 in the six months ended
September 30, 1999 from $275,847 in the same period of the prior year due to
increased salary and benefit costs associated with new management, increased
marketing activities related to new product introductions anticipated in the
second half of fiscal 2000 and increased expenses related to key man life
insurance.
Operating Loss. The Company had an operating loss of $417,492 in the six
months ended September 30, 1999 as compared to an operating loss of $245,388 in
the same period of the prior year. The increase in the net operating loss is
primarily attributable to reduced sales and service revenue not proportionally
offset with reduced cost of revenues coupled with increased selling, general and
administrative expenses.
12
<PAGE>
Interest Expense and Interest Expense - Related Parties. Interest expense
increased in the second quarter of fiscal 2000 to $19,172 from $5,877 in the
second quarter of fiscal 1999 reflecting the cost of new debt funding secured by
the Company at the end of the first quarter of fiscal 2000. Interest expense is
net of interest income received by the Company from the investment of the new
debt and equity funding. Interest expense - related parties was reduced due to
both the retirement of certain notes payable to a shareholder, and the
conversion of certain notes payable to Common Shares.
Net Loss. The Company had a net loss of $465,569 in the six months ended
September 30, 1999 compared to a net loss of $289,724 for the same period of the
prior year. The increase in net loss between the two periods is mainly
attributable to reduced sales and service revenues not proportionally offset
with reduced cost of revenues, increased selling, general and administrative
expenses and increased interest expense.
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. 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 $710,267 in the six months ended
September 30, 1999 and $234,748 in the same period of the prior year. The
primary causes of the net use of cash from operations in the six months ended
September 30, 1999 was the operating loss of $465,569, a reduction in accounts
payable and accrued liabilities by $236,873, an increase in inventories of
$125,629 and other decreases in working capital. The primary cause of the net
use of cash in the six months ended September 30, 1998 was the net loss of
$289,724 offset by increases and decreases in working capital items.
Net cash used by investing activities was $80,517 in the six months ended
September 30, 1999 and $11,461 in the 1998 period. Primary uses of funds were
related to patents and capital expenditures in fiscal 2000 and capital
expenditures and patents in fiscal 1999. Capital expenditures were $62,083 in
the six months ended September 30, 1999 (delivery vehicle, computer equipment
and leasehold improvements) and $3,358 in the same period of the prior year.
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 $1,844,369 in the six months
ended September 30, 1999 and $241,231 in the same period of the prior year. The
cash provided by financing activities in the six months ended September 30, 1999
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 $305,837, a reduction of notes payable to
related parties of $149,282
13
<PAGE>
and other reductions of notes payable and long-term debt. The cash provided by
financing activities in the six months ended September 30, 1998 was primarily
related to proceeds from notes payable issued to related parties of $169,631,
proceeds of notes payable of $46,602 and proceeds from the issuance of stock of
$24,998.
The Company's principal commitments at September 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 subordinated to other notes payable and
cannot be repaid until the $1,000,000 in principal of other notes payable has
been paid in full. Also, the other notes payable include approximately $191,000
payable to a bank which will mature in December 1999. This note is secured by
land owned by the Company. It is expected that the maturity of the note payable
will be extended until such time as the land is sold. 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 to fund the costs of license and royalty agreement negotiations, registration
of securities of the Company and ongoing regulatory compliance.
During the six months ended September 30, 1999, the Company entered into an
agreement with investors to provide the Company $280,000 of additional capital
through the purchase 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
14
<PAGE>
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, 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 the
installation of the upgrades and is approximately 95% complete testing the
software. The software providers have maintained that they will provide support
for Y2K issues through December 31, 2000 at no charge to the Company. The
Company does not anticipate any material disruption in its operations as the
result of completing its testing of the upgrades which is expected to be
completed by December 1, 1999. The Company believes that the overall cost of
compliance should not exceed $10,000 and expensed 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 developed 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 believe its critical systems are compliant as of
September 30, 1999, there is no guarantee that the Company has identified all of
the risks associated with this issue. 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
15
<PAGE>
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
development activities.
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 as soon as production begins on the FS2000 Felling Machine
and additional engineering personnel are added and trained.
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 has leased a manufacturing
facility that will provide sufficient space for the Company's needs. The Company
will relocate to the new facility by December 31, 1999. Management believes that
the new facility, with approximately 43,000 square feet, can accommodate its
planned production and administrative needs well into the future. In addition,
the Company owns approximately six acres of undeveloped land where the Company
planned to construct a facility. The Company is now attempting to sell this
property. Other land is available should the Company decide to build at some
future date.
16
<PAGE>
As of September 30, 1999, the Company had backlog orders it believes to be
firm totaling approximately $256,000 of which approximately $42,000 is for
equipment that is part of the Company's standard product line and is expected to
be completed by December 31, 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 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
17
<PAGE>
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;
. 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.
18
<PAGE>
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 August 13, 1999, TTI issued options to purchase up to 10,000 Common
Shares of TTI at an exercise price of $0.94 per share. The options may be
exercised until August 13, 2002. The options were granted to an individual in
exchange for consulting services in connection with the recently completed
private placement. The securities were issued only to one person and did not
involve any public offering; therefore, an exemption from registration under
Section 4(2) of the Securities Act of 1933 is claimed.
Item 4. Submission of Matters to a Vote of Security Holders
TTI held its annual meeting on September 15, 1999. William A. Tice, Charles
R. West, Michael A. Atkins, Billie Joe Clayton and Patrick L. Martin were
elected as the five members of the Board of Directors. Also voted upon at the
meeting were a Stock Option Plan and Agreement with Charles R. West and
ratification of the appointment of PricewaterhouseCoopers LLP as independent
auditors for the 2000 fiscal year.
<TABLE>
<CAPTION>
For Against Withheld/Non-Votes
--------- ------- ------------------
<S> <C> <C> <C>
Election of Directors
William A. Tice 6,904,976 125 73,601
Charles R. West 6,904,976 125 73,601
Michael A. Atkins 6,904,976 125 73,601
Billie Joe Clayton 6,900,476 4,625 73,601
Patrick L. Martin 6,904,976 125 73,601
Approve Stock Option Plan
with Charles R. West 6,476,152 7,550 495,000
Ratify appointment of
PricewaterhouseCoopers LLP 6,889,376 3,725 85,601
</TABLE>
19
<PAGE>
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 x
Between Tice Technology, Inc. and Warrant Agent
(ii) Form of Promissory Note Issued in Connection with #
Private Placement Closed on June 25, 1999
(iii) Warrant Agreement relating to Rights 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
(vii) Incentive Stock Option Plan and Agreement Between #
Charles R. West and Tice Technology, Inc.
III. 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.
# Previously filed as an exhibit to Form 10-K for the year ended March 31,
1999.
(b) The Company did not file any reports on Form 8-K during the second quarter
of fiscal 2000.
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: November 15, 1999
-----------------
By: /s/ Karen A. Walton
---------------------------------------------
Karen A. Walton, Chief Financial Officer
Date: November 15, 1999
-----------------
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Financial Statements of Tice Technology, Inc. and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,077,740
<SECURITIES> 0
<RECEIVABLES> 56,875
<ALLOWANCES> 0
<INVENTORY> 513,283
<CURRENT-ASSETS> 1,663,295
<PP&E> 836,088
<DEPRECIATION> 600,564
<TOTAL-ASSETS> 2,137,444
<CURRENT-LIABILITIES> 346,457
<BONDS> 1,343,469
0
0
<COMMON> 106,119
<OTHER-SE> 341,399
<TOTAL-LIABILITY-AND-EQUITY> 2,137,444
<SALES> 66,095
<TOTAL-REVENUES> 87,687
<CGS> 122,057
<TOTAL-COSTS> 122,057
<OTHER-EXPENSES> 217,876
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,511
<INCOME-PRETAX> (287,145)
<INCOME-TAX> 2,159
<INCOME-CONTINUING> (287,145)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (289,304)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
