<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, 2000
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)
_______________________________________
1808-B North Cherry Street
Knoxville, Tennessee 37917
(Address of principal executive office)
(865) 524-1070
(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, 2000 was 8,548,329 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, 2000 2
and March 31, 2000
Condensed Consolidated Statements of Operations -- For the Three Months 4
and the Six Months Ended September 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows -- For the Six Months 5
Ended September 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 6
</TABLE>
<PAGE>
Tice Technology, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
-------------------------------------
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000(1)
------------- ---------
(unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 5,987 $ 218,828
Accounts receivable, less allowance
for doubtful accounts of $21,000
and $15,000 at September 30, 2000
and March 31, 2000, respectively 74,134 79,295
Prepaid expenses and other assets 25,996 7,235
Inventory, net 609,692 591,314
----------- ----------
Total current assets 715,809 896,672
Property and equipment:
Leasehold improvements 8,523 8,523
Furniture, fixtures and equipment 654,216 653,753
Vehicles 42,043 42,043
----------- ----------
Total property and equipment 704,782 704,319
Less accumulated depreciation (542,787) (524,451)
----------- ----------
Property and equipment, net 161,995 179,868
Patents, net 203,038 203,857
Debt issuance costs, net 29,941 35,384
Other assets 18,090 14,630
----------- ----------
Total assets $1,128,873 $1,330,411
=========== ==========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
(1) The March 31, 2000 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,
2000 2000(1)
-------------- --------------
(unaudited)
Liabilities and Stockholders' Deficit
<S> <C> <C>
Notes payable and current maturities of long-term debt $ 278,671 $ 10,965
Accounts payable 127,847 32,997
Accrued interest 18,253 76,389
Other accrued liabilities 243,925 93,447
Notes payable to related parties, current portion 100,000 50,000
----------- -----------
Total current liabilities 768,696 263,798
Notes payable to related parties, long-term portion 468,234 445,612
Notes payable, long-term portion, net of $61,946 discount 963,440 961,181
----------- -----------
Total liabilities 2,200,370 1,670,591
----------- -----------
Stockholders' deficit:
Capital stock, no par value; 2,000 shares authorized; 13,493 13,493
750 shares issued and outstanding at September 30,
and March 31, 2000
Common Shares, par value $.01; 30,000,000 shares authorized; 85,483 85,126
8,548,329 and 8,512,615 shares issued and outstanding
at September 30, and March 31, 2000, 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, 2000
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 3,245,983 3,221,340
Accumulated deficit (4,423,956) (3,667,639)
----------- -----------
Total stockholders' deficit (1,071,497) (340,180)
----------- -----------
Total liabilities and stockholders' deficit $ 1,128,873 $ 1,330,411
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
(1) The March 31, 2000 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,
2000 1999 2000 1999
------------------ --------------- --------------- ---------------
(unaudited) (unaudited)
Operating revenues:
<S> <C> <C> <C> <C>
Sales and service $ 137,356 $ 66,095 $ 248,011 $ 169,573
Royalties 45,000 21,592 105,000 48,582
--------- --------- --------- ---------
Total operating revenues 182,356 87,687 353,011 218,155
Operating expenses:
Cost of revenues 184,221 122,057 336,489 240,769
Research and development 109,859 26,597 227,048 51,357
Selling, general and administrative 217,070 191,279 436,131 343,521
--------- --------- --------- ---------
Total operating expenses 511,150 339,933 999,668 635,647
Operating loss (328,794) (252,246) (646,657) (417,492)
Other income (expense):
Interest expense - related parties (14,306) (11,687) (27,166) (26,630)
Interest expense (40,368) (19,824) (72,338) (19,172)
Other (expense) income (1,912) (3,388) 345 2,583
--------- --------- --------- ---------
Total other expense, net (56,586) (34,899) (99,159) (43,219)
--------- --------- --------- ---------
Loss before income taxes (385,380) (287,145) (745,816) (460,711)
Provision for income taxes 4,500 2,159 10,500 4,858
--------- --------- --------- ---------
Net loss $(389,880) $(289,304) $(756,316) $(465,569)
========= ========= ========= =========
Loss per share (Note 4)
Basic and diluted $(0.04) $(0.03) $(0.08) $(0.06)
========= ========= ========= =========
</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>
For the six months
ended September 30,
2000 1999
-------------- -------------
(unaudited)
<S> <C> <C>
Net cash flows from operating activities:
Net loss $(756,316) $ (465,569)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 36,560 16,458
Increase in cash surrender value of life insurance (3,460) (960)
Provision for doubtful accounts receivable 6,000 --
Increase in inventory reserve 12,000 --
Changes in operating assets and liabilities:
Receivables (839) 8,370
Prepaid expenses 1,622 (7,700)
Inventory (30,379) (125,629)
Accounts payable and accrued liabilities 209,814 (135,237)
--------- ----------
Net cash used by operating activities (524,998) (710,267)
--------- ----------
Cash flows from investing activities:
Purchases of property and equipment (463) (62,083)
Additions to patents (2,398) (18,434)
Additions to other assets (20,383)) --
--------- ----------
Net cash used by investing activities (23,244) (80,517)
--------- ----------
Cash flows from financing activities:
Proceeds from notes payable to related parties 50,000 --
Proceeds from notes payable and long-term debt 267,063 1,000,000
Principal payments on notes payable to related parties -- (149,282)
Principal payments on notes payable and long-term debt (6,662) (33,712)
Net proceeds from issuance of stock and stock warrants 25,000 1,027,363
--------- ----------
Net cash provided by financing activities 335,401 1,844,369
--------- ----------
Net (decrease) increase in cash and cash equivalents (212,841) 1,053,585
Cash and cash equivalents, beginning of period 218,828 24,155
--------- ----------
Cash and cash equivalents, end of period $ 5,987 $1,077,740
========= ==========
</TABLE>
Noncash investing and financing activities:
During the six months ended September 30, 2000, the Company converted $22,622 of
accrued interest into notes payable to related parties.
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, 2000.
The information furnished reflects all adjustments which are necessary for
a fair presentation of the Company's financial position as of September 30,
2000 and the results of its operations for the three month and six month
periods ended September 30, 2000 and 1999 and its cash flows for the six
month periods ended September 30, 2000 and 1999. 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, 2000 and 1999 are not necessarily indicative of the results
to be expected for the respective full years.
3. Inventory
<TABLE>
<CAPTION>
Inventory consists of the following:
September 30, March 31,
2000 2000
---------------- ------------
<S> <C> <C>
Raw Materials $251,582 $246,970
Work In Process 223,453 226,346
Finished Goods 206,657 177,998
-------- --------
681,692 651,314
Reserve for Obsolescence (72,000) (60,000)
-------- --------
Inventory $609,692 $591,314
======== ========
</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 Months Six Months
Ending September 30, Ending September 30,
2000 1999 2000 1999
-------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Loss:
Basic and diluted:
Loss available to
common stockholders $ (389,880) $ (289,304) $ (756,316) $ (465,569)
Shares:
Basic and diluted:
Weighted average common
shares outstanding 9,269,603 9,262,489 9,266,128 8,404,285
</TABLE>
5. Effect of New Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, and in July 1999 issued SFAS 137 which
deferred the effective date of SFAS 133, as it pertains to the Company, to
July 1, 2000. This statement has not had a material impact on the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with
the SEC. SAB 101 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosures related to revenue
recognition policies. It is effective no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. This statement
has not had a material impact on the Company.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44") which clarifies the application of
Accounting Principles Board Opinion 25 for certain transactions. The
interpretation addresses many issues related to granting or modifying stock
options including changes in accounting for modifications of awards
(increased life, reduction of exercise price, etc.). It is effective July
1, 2000 but certain conclusions cover specific events that occur after
either December 15, 1998 or January 12, 2000. The effects of applying the
interpretation are to be recognized on a prospective basis from July 1,
2000. FIN 44 has not had a material impact on the Company.
7
<PAGE>
6. Notes Payable and Long-Term Debt
On May 31, 2000, the Company issued a $50,000 promissory note at a 12%
interest rate due April 5, 2001 to an officer to provide working capital.
The note is collateralized by the Company's accounts receivable and
inventory, and has terms similar to the other promissory notes described
below.
During the period of June 23 through July 5, 2000, the Company issued three
promissory notes for a total of $250,000 to three outside investors to
provide working capital. The terms of each of the notes are the same,
including interest rates of 12% and due dates of April 5, 2001. The notes
are collateralized by the Company's accounts receivable and inventory.
On November 3, 2000, the Company issued a $100,000 promissory note at a 12%
interest rate to an outside investor to provide working capital. The note
is payable upon demand commencing December 3, 2000.
7. Accounts Receivable Financing Facility
On July 5, 2000, the Company entered into an agreement with an accounts
receivable financing firm to provide up to $250,000 of advances on customer
invoices. The terms of the agreement provide for the lender to advance up
to 75% of the value of assigned invoices at a floating interest rate,
currently 13.5%, plus administrative fees based on the value of the
invoices assigned. These advances will be collateralized by the Company's
trade accounts receivable, inventory and general intangibles.
8. Subsequent Events
In September 2000, the Company entered into letters of intent to acquire
the assets and assume certain liabilities of two companies: (1) MidSouth
Sign Company, a Knoxville, Tennessee sign fabrication and survey company,
and (2) LandOak Company, a Knoxville, Tennessee vehicle and equipment
leasing company. Both businesses, in the opinion of management, bring
operating synergies to the Company including sharing of manufacturing
expertise and the development of customer financing programs. Each business
would be operated and managed as autonomous business units and would be
wholly-owned subsidiaries of Tice Technology, Inc., as Tice Engineering and
Sales, Inc. currently is. Two directors of the Company, Mr. Pat Martin and
Mr. Mike Atkins, have partial ownership of one of the companies and have
100% ownership of the other. The proposed acquisitions would require the
Company to issue up to 13 million shares of common stock if consummated.
Several conditions to closing, among others, include the completion of a
definitive purchase agreement, certain creditor approvals and completion by
the Company of due diligence procedures. Each acquisition is contingent on
the completion of the other. The targeted closing date, if all conditions
are met, is December 31, 2000.
During fiscal year 2000, the Company increased the number of employees,
office and manufacturing space and product development capabilities to
prepare for anticipated growth in its business. This growth has been slower
to develop than anticipated, due primarily to
8
<PAGE>
a longer development cycle for new products. Accordingly, the Company
incurred an operating loss for fiscal year 2000 and for the first six
months of fiscal year 2001. Due to delays in the market launch of new
products, management has taken steps to reduce costs where possible, has
implemented headcount reductions and has concentrated efforts to complete
the development of certain products in a timely manner to improve cash
flow.
Management anticipates an increase in revenues and cash flows from
operations in fiscal year 2001 which, it believes, along with borrowings
available from its accounts receivable financing facility and additional
short-term borrowings recently obtained, will be sufficient to meet
anticipated cash needs for working capital and capital expenditures for the
next year. However, there can be no assurance that the Company will be able
to meet its operating plans, achieve profitability, or raise additional
equity financing.
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, 2000.
Since 1964, TES has been developing products that provide technical
solutions to problems related 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.
9
<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 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 possible 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 one primary customer. This customer represented
60% of product sales revenue in the first six months of fiscal year 2001,
whereas the same customer represented 37% of product sales revenue in the first
six months of fiscal year 2000. There are no gains or losses included in
operations related to foreign currency exchanges due to the terms of
international sales that require payment in U.S. currency. Domestic sales
accounted for 98% of sales during the first six months of fiscal year 2001, but
international sales are expected to increase as additional distributors have
been signed to pursue sales internationally. Sales to the other primary
customers 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.
10
<PAGE>
<TABLE>
<CAPTION>
Percentage of total revenues
----------------------------
For the three months For the six months
ended September 30, ended September 30,
2000 1999 2000 1999
----- ----- ------ -------
<S> <C> <C> <C> <C>
Operating revenues:
Sales and service 75.3% 75.4% 70.3% 77.7%
Royalties 24.7% 24.6% 29.7% 22.3%
------ ------ ------ -------
Total operating revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenues 101.0% 139.2% 95.3% 110.4%
Research and development 60.3% 30.3% 64.3% 23.5%
Selling, general and administrative 119.0% 218.1% 123.6% 157.5%
------ ------ ------ -------
Total operating expenses 280.3% 387.6% 283.2% 291.4%
Operating loss (180.3%) (287.6%) (183.2%) (191.4%)
Other income (expense):
Interest expense - related parties (7.8%) (13.3%) (7.7%) (12.2%)
Interest expense (22.1%) (22.6%) (20.5%) (8.8%)
Other (expense) income (1.1%) (3.9%) 0.1% 1.2%
------ ------ ------ -------
Total other expense, net (31.0%) (39.8%) (28.1%) (19.8%)
------ ------ ------ -------
Loss before income taxes (211.3%) (327.4%) (211.3%) (211.2%)
Provision for income taxes 2.5% 2.5% 3.0% 2.2%
------ ------ ------ -------
Net loss (213.8%) (329.9%) (214.3%) (213.4%)
====== ====== ====== =======
</TABLE>
Three Months Ended September 30, 2000 and September 30, 1999
------------------------------------------------------------
Total Operating Revenues. Total revenues for the second quarter of fiscal
------------------------
year 2001, which ended September 30, 2000, increased by $94,669 to $182,356 from
$87,687 in the second quarter of the previous year. This increase was largely
the result of a 108% increase in sales and service revenues to $137,356 in the
second quarter of fiscal year 2001 from $66,095 in the second quarter of fiscal
year 2000. Increased sales and service revenues reflect improving sales of the
Company's traditional products despite slower market conditions and increased
competition. The Company anticipates introducing products using the Electronic
Gearing Technology beginning in the second half of fiscal year 2001. In the
second quarter of fiscal year 2001, sales of label loader/folders were $98,845,
or 72% of the Company's product sales and service revenue, compared to none in
the same period of the previous fiscal year. No other single product accounted
for more than 10% of product sales and service during the current period.
Royalty income increased 108% primarily due
11
<PAGE>
to increased sales by the Company's licensee of embroidery equipment utilizing
Electronic Gearing Technology, particularly in the western hemisphere.
Cost of Revenues. Cost of revenues increased 51% to $184,221 in the second
----------------
quarter of fiscal year 2001 from $122,057 in the second quarter of fiscal year
2000. Cost of revenues, though increased, comprised a smaller percentage of
sales and service revenues because manufacturing costs increased at a lower rate
than sales and service revenues. Manufacturing headcount was reduced during the
second quarter of fiscal year 2001. However, management believes that further
reductions in manufacturing salaries and overhead would be detrimental to future
operations, especially in light of anticipated product introductions in the
second half of fiscal year 2001.
Research and Development. Research and development costs increased 313% to
------------------------
$109,859 in the second quarter of fiscal year 2001 from $26,597 in the second
quarter of fiscal year 2000. Most of the increase was due to increased salaries
and benefits as a result of hiring two engineers in September, 1999 and the
increased allocation to 100% of the salary and benefits of one of the officers
who now spends full time in research and development. These increases were a
result of the need to rebuild the staffing levels of the research and
development area after previous headcount reductions. Depreciation and rent
expenses increased as a result of the Company investing in new computerized
design equipment and moving to an upgraded manufacturing and design facility.
Materials and travel expenses increased as the Company worked to complete new
products and pursued new development opportunities.
Selling, General and Administrative. Selling, general and administrative
-----------------------------------
expenses increased 14% to $217,070 in the second quarter of fiscal year 2001
from $191,279 in the second quarter of fiscal year 2000 due primarily to
increased legal, accounting and investor relations expenses. These increased
costs were partially offset by decreases in advertising costs and regulatory
compliance expenses. Management has taken steps during the current fiscal
quarter to further reduce selling, general and administrative costs through
reduced headcount and other spending reductions.
Operating Loss. The Company had an operating loss of $328,794 in the
--------------
second quarter of fiscal year 2001 compared to an operating loss of $252,246 in
the second quarter of fiscal year 2000. The increased operating loss is
primarily attributable to increased costs of revenues, research and development
costs and selling, general and administrative expenses, partially offset by
increased operating revenues.
Interest Expense and Interest Expense - Related Parties. Interest expense
-------------------------------------------------------
increased in the second quarter of fiscal year 2001 to $40,368 from $19,824 in
the second quarter of fiscal year 2000 reflecting the cost of additional
financing obtained by the Company at the end of the first quarter of fiscal year
2000 and additional borrowings incurred by the Company during the past two
quarters. 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 increased due to increased borrowings from related parties.
12
<PAGE>
Net Loss. The Company's net loss increased to a net loss of $389,880 in
--------
the second quarter of fiscal year 2001 from a net loss of $289,304 for the
second quarter of fiscal year 2000 due to an increased net operating loss and
increased interest expenses.
Six Months ended September 30, 2000 and September 30, 1999
----------------------------------------------------------
Total Operating Revenues. Total operating revenues for the six months
------------------------
ended September 30, 2000 increased $134,856 to $353,011 from $218,155 in the six
months ended September 30, 1999. This increase was the result of a 46% increase
in sales and service revenues to $248,011 in the six months ended September 30,
2000 from $169,573 in the same period of the prior year. Increased sales and
service revenues reflected an improvement in sales of the Company's traditional
products despite slower market conditions and increased competition. The Company
anticipates introducing products incorporating the Electronic Gearing Technology
in the second half of fiscal year 2001. In the six months ended September 30,
2000 there were $137,908 of sales of the Label Loader/Folders compared to
$46,896 of sales of the same product in the comparable period last year. No
other products accounted for more than 10% of product sales in either period.
Royalty income increased 116% in the six months ended September 30, 2000
compared to the same period of the prior year primarily due to increased sales
by the Company's licensee of embroidery equipment utilizing Electronic Gearing
Technology, particularly in the western hemisphere.
Cost of Revenues. Cost of revenues increased 40% to $336,489 in the six
----------------
months ended September 30, 2000 from $240,769 in the same period of the prior
year. Cost of revenues, though increased, comprised a smaller percentage of
sales and service revenues because manufacturing costs increased at a lower rate
than sales and service revenues. Manufacturing headcount was reduced during the
second quarter of fiscal year 2001. However, management believes that further
reductions in manufacturing salaries and overhead would be detrimental to future
operations, especially in light of anticipated product introductions in the
second half of fiscal year 2001
Research and Development. Research and development costs increased 342% to
------------------------
$227,048 in the six months ended September 30, 2000 from $51,357 in the same
period of the prior year. Most of the increase was due to increased salaries and
benefits as a result of hiring two engineers in September, 1999 and the
increased allocation to 100% of the salary and benefits of an officer who now
spends full time in research and development. These increases were a result of
the need to rebuild the staffing levels of the research and development area
after previous headcount reductions. Depreciation and rent expenses increased as
a result of the Company investing in new computerized design equipment and
moving to an upgraded manufacturing and design facility. Materials and travel
expenses increased as the Company worked to complete new products and pursued
new development opportunities.
Selling, General and Administrative. Selling, general and administrative
-----------------------------------
expenses increased by 27% to $436,131 in the six months ended September 30,
2000 from $343,521 in the same period of the prior year due to increased salary,
benefits, legal, accounting and investor relations expenses. These increased
costs were partially offset by decreases in advertising costs and regulatory
13
<PAGE>
compliance expenses. Management has taken steps during the current fiscal
quarter to reduce selling, general and administrative costs through reduced
headcount and other spending reductions.
Operating Loss. The Company had an operating loss of $646,657 in the six
--------------
months ended September 30, 2000 compared to an operating loss of $417,492 in the
same period of the prior year. The increased operating loss is primarily
attributable to increased costs of revenues, research and development costs and
selling, general and administrative expenses, partially offset by increased
operating revenues.
Interest Expense and Interest Expense - Related Parties. Interest expense
-------------------------------------------------------
increased to $72,338 in the six months ended September 30, 2000 from $19,172 in
the same period of the prior year, reflecting the cost of additional financing
obtained by the Company at the end of the first quarter of fiscal year 2000 and
additional borrowings incurred by the Company during the past two quarters.
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 increased due to increased borrowings from related parties.
Net Loss. The Company's net loss increased to a net loss of $756,316 in
--------
the six months ended September 30, 2000 compared to a net loss of $465,569 for
the same period of the prior year due to an increased net operating loss and
increased interest expenses.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations through a
combination of cash flow from operations, bank financing and investor debt and
equity. The Company's capital requirements have arisen primarily from the need
to provide cash for operations, for purchases of fixed and intangible assets,
and for expenditures for research and development and marketing new technology.
These expenditures increased during the past fiscal year and are expected to
continue to increase in fiscal year 2001 and beyond. See "Future Operations" for
further discussion.
Net cash used by operating activities totaled $524,998 during the first six
months of fiscal year 2001 and $710,267 during the same period of the previous
fiscal year. The primary uses of cash from operating activities during the six
months ended September 30, 2000 were the net loss of $756,316 partially offset
by net non-cash charges to income of $51,100, increased accounts payable and
accrued expenses of $209,814 and other increases and decreases of working
capital items. The primary uses of cash during the six months ended September
30, 1999 were the net loss of $465,569, the reduction of accounts payable and
accrued expenses of $135,237, increased inventories of $125,629 and other
increases and decreases in working capital items and non-cash items.
Net cash used by investing activities totaled $23,244 during the first six
months of fiscal year 2001 and $80,517 during the same period of the previous
fiscal year. The primary uses of cash by investing activities during the six
months ended September 30, 2000 were the additions to other assets of $20,383
and additions to patent costs of $2,398. The uses of cash by investing
activities during the six months ended September 30, 1999 were additions to
patent costs of $18,434 and capital expenditures for transportation and computer
equipment. Capital expenditures for the six months ending September 30, 2000 and
September 30, 1999 were $463 and $62,083, respectively.
Net cash provided by financing activities totaled $335,401 during the first
six months of
14
<PAGE>
fiscal year 2001 and $1,844,369 during the same period of the previous year. The
primary sources of cash provided by financing activities during the six months
ended September 30, 2000 were proceeds of $267,063 from the issuance of notes
payable, $50,000 from the issuance of notes payable-related parties and $25,000
from the issuance of stock. The primary sources of cash provided by financing
activities during the six months ended September 30,1999 were the proceeds from
the issuance of $1,000,000 of long-term notes payable and $1,027,363 of stock
and stock warrants, offset somewhat by $33,712 of principal payments on notes
payable and $149,282 of principal payments on notes payable-related parties.
The Company's principal commitments at September 30, 2000 consisted
primarily of notes payable to related parties, other notes payable, accounts
payable and other accrued liabilities. Other notes payable, including both the
short-term and long-term portions, were $1,242,111 net of $61,946 of debt
discount. Of the other notes payable, $1,000,000 in principal have a maturity
date of June 2003. Total notes payable-related parties, including both the
short-term and long-term portions, were $568,234 of which $468,234 is
subordinated to other notes payable and cannot be repaid until such other notes
payable have been paid in full. The Company has used a portion of the proceeds
of these notes to provide working capital for operations and for the continuing
development of the Electronic Gearing Technology as well as to fund the costs of
license and royalty agreement negotiations, registration of securities of the
Company and ongoing regulatory compliance.
In July 2000, the Company entered into an agreement with an accounts
receivable financing firm. The terms of this agreement call for the lender to
advance 75% of the face value of the Company's invoices for a maximum loan
balance of $250,000. The $250,000 limit may be increased at the Company's
request with the consent of the firm. The Company pays a variable market rate of
interest plus additional administrative fees based on the value of the invoices.
As of September 30, 2000, the interest rate was 13.5% and the loan balance was
$17,063.
In June and July 2000, the Company issued three promissory notes for a
total of $250,000 to outside investors and a $50,000 promissory note to an
officer to provide working capital. The terms of each of the notes are the same,
including interest rates of 12% and due dates of April 5, 2001. The notes are
collateralized by the Company's accounts receivable and inventory. In September,
the Company issued $25,000 of its Common Shares in a private placement. On
November 3, 2000, the Company issued a $100,000 promissory note at a 12%
interest rate to an outside investor to provide working capital. The note is
payable upon demand commencing December 3, 2000. In addition, the Company is
attempting to raise up to $525,000 of additional equity through a private
placement of stock.
In September 2000, the Company entered into letters of intent to acquire
the assets and assume certain liabilities of two companies. See "Future
Operations" for further discussion.
During fiscal year 2000, the Company increased the number of employees,
office and manufacturing space and product development capabilities to prepare
for anticipated growth in its business. This growth has been slower to develop
than anticipated, due primarily to a longer development cycle for new products.
Accordingly, the Company incurred an operating loss for fiscal year 2000 and the
first six months of fiscal year 2001. Due to delays in the market launch of new
products, management has taken steps to minimize costs where possible, has
implemented headcount reductions and has concentrated efforts to complete
product development efforts in a timely manner to improve cash flow.
15
<PAGE>
Management anticipates an increase in revenues and cash flows from
operations in fiscal year 2001 which, it believes, along with borrowings
available from its accounts receivable financing facility and additional short-
term borrowings recently obtained, will be sufficient to meet anticipated cash
needs for working capital and capital expenditures for the next year. However,
there can be no assurance that the Company will be able to meet its operating
plans, achieve profitability, or raise additional equity financing.
Future Operations
Management believes that, although its traditional products will continue
to generate sales revenue and that TES will continue to generate opportunities
to solve other problems for customers as they occur in their manufacturing
processes, the majority of future revenues is dependent on anticipated new
product introductions. During previous fiscal years, management reduced overhead
in order to reduce operating expenses until the Company receives sufficient
financing to complete the development of new products utilizing the patented
Electronic Gearing Technology. In June 1999, the Company completed a private
placement that allowed management to hire additional engineering and development
personnel and to purchase the materials necessary to complete the product
development efforts of the FS-2000 Felling Machine. During the past twelve
months, efforts to complete this product for sale to customers has been ongoing,
and management feels it is nearing the successful completion of this process.
Management estimates that the FS-2000 will be available for shipment to
customers in the second half of fiscal year 2001. In addition, the Company has
entered into three additional product development efforts, two of which utilize
the Electronic Gearing Technology and are anticipated for completion and
shipment to customers during the second half of fiscal year 2001. One such
project, the CS-2000, utilizes Electronic Gearing Technology for a blanket
manufacturing operation and demonstrates the expanded capabilities (left-handed
sewing machine) of the technology. The other project utilizing the Electronic
Gearing Technology uses dual sewing heads that sew simultaneously. These two
products will add diversity to the sewing applications and industries that are
supported by the Company.
The Company has considered several potential product opportunities that
would utilize the Electronic Gearing Technology such as a three-dimensional
stitching machine for automotive air bags, a multi-head buttonhole machine and a
keyhole buttonhole machine. However, work on these opportunities has been put on
hold until current projects are completed. The Company has had discussions with
other users outside the apparel industry who have expressed interest in other
products utilizing the Electronic Gearing Technology.
To provide for growth opportunities, the Company entered into two
distribution agreements for the FS-2000 felling machine. One, a worldwide
distribution agreement, gives the Company access to international markets and
the other gives the Company access to the Canadian market through an established
sales channel. The Company will continue to sell directly to domestic customers.
The Company anticipates that income from license fees and royalty revenues
will increase over the next several years as its existing licensee increases the
sales of currently licensed products
16
<PAGE>
and introduces new electronically geared equipment to the market, and as
additional manufacturers license the technology.
To provide for continued growth, the Company leased a manufacturing
facility that will provide sufficient space for the Company's needs. The
Company relocated to the new facility in December 1999. Management believes
that the new facility, with approximately 44,000 square feet, can accommodate
its planned production and administrative needs well into the future.
As of September 30, 2000, the Company had backlog orders it believes to be
firm totaling approximately $1,150,000. Approximately $60,000 is for equipment
that is part of the Company's standard product line and $40,000 is for equipment
being developed using traditional technology, all of which is expected to be
completed by December 31, 2000. The backlog also reflects orders of
approximately $500,000 for twenty-six FS-2000 Felling Machines and approximately
$550,000 for ten multi-head sewing machines. Delivery of the FS-2000 is expected
to begin in the fourth quarter of fiscal year 2001 as a result of continuing
product development efforts. In addition, the Company has received requests from
in excess of seventy-five different manufacturers for FS-2000 trial units and
information about the FS-2000. The Company also has indications of interest for
additional orders totaling approximately $1,875,000 relating to products, other
than the Felling Machine, using the Electronic Gearing Technology. There is no
assurance that these indications of interest will become firm orders.
In September 2000, the Company entered into letters of intent to acquire
the assets and assume certain liabilities of two companies: (1) MidSouth Sign
Company, a Knoxville, Tennessee sign fabrication and survey company, and (2)
LandOak Company, a Knoxville, Tennessee vehicle and equipment leasing company.
Both businesses, in the opinion of management, bring operating synergies to the
Company including sharing of manufacturing expertise and the development of
customer financing programs. Each business would be operated and managed as
autonomous business units and would be wholly-owned subsidiaries of Tice
Technology, Inc., as Tice Engineering and Sales, Inc. currently is. Two
directors of the Company, Mr. Pat Martin and Mr. Mike Atkins, have partial
ownership of one of the companies and have 100% ownership of the other. The
proposed acquisitions would require the Company to issue up to 13 million of its
Common Shares if consummated. Several conditions to closing, among others,
include the completion of a definitive purchase agreement, certain creditor
approvals and completion by the Company of due diligence procedures. Each
acquisition is contingent on the completion of the other. The targeted closing
date, if all conditions are met, is December 31, 2000.
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 at TES. 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
17
<PAGE>
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 quarters. Results of operations in any
past period should not be considered indicative of results to be expected in
future periods. Fluctuations in operating results may result in fluctuations in
the price of the Company's common securities
In the event the Company needed additional financing, there can be no
assurance that any such financing will be available on acceptable terms. If such
financing is not available on satisfactory terms, the Company may be unable to
expand its business or develop new customers as desired and its operating
results may be adversely affected. Debt financing will increase expenses and
must be repaid regardless of operating results. Equity financing could result in
dilution to existing stockholders.
Some of the more prominent known risks and uncertainties inherent in the
Company's business are set forth below. However, this section does not discuss
all possible risks and uncertainties to which the Company is subject, nor can it
be assumed that there are not other risks and uncertainties which may be more
significant to the Company. Such other factors include, among others:
. the lack of working capital needed to further develop and apply the
Electronic Gearing Technology and other products and management's
ability to find acceptable financing to supply such working capital;
. the potential failure by the Company to successfully negotiate
additional licensing agreements;
. 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
18
<PAGE>
successfully or on a timely, cost effective basis, and the failure of
any such products to achieve substantial market acceptance;
. the dependence on patents and ability to protect proprietary products,
the potential that existing patents held by TES or future patents
obtained by TES will not be enforceable and that TES's products will
not infringe on patents owned by others, or the risk that competitors
will develop similar or functionally similar products; and
. the potential adverse effect of competition, the potential failure by
the Company to provide competitive timely designs of cost-effective
solutions and products to manufacturers, and the potential adverse
effect of technological change with which the Company is unable to
keep pace.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On September 13, 2000, the Company sold 35,714 Common Shares at a price of
$0.70 per share. The Company claims exemption from registration under Section
4(2) of the Securities Act of 1933.
The Company's line of credit with First Tennessee Bank prohibits it from
declaring or paying dividends without the prior approval of the bank. There is
not currently any outstanding balance on this line of credit.
Item 4. Submission of Matters to a Vote of Security Holders.
TTI held its annual meeting on September 13, 2000. William A. Tice,
Charles R. West, Michael A. Atkins and Patrick L. Martin were elected as four of
the five members of the Board of Directors. One seat remains vacant. Also voted
upon at the meeting was the ratification of the appointment of
PricewaterhouseCoopers LLP as independent auditors for the 2001 fiscal year.
The following are the number of votes for and against each director or matter.
19
<PAGE>
For Withheld
--- --------
Election of Directors
William A. Tice 6,758,176 30,500
Charles R. West 6,758,176 30,500
Michael A. Atkins 6,754,301 34,375
Patrick L. Martin 6,754,301 34,375
For Against Abstain
--- ------- -------
Ratify appointment of
PricewaterhouseCoopers LLP 6,754,226 19,325 15,125
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Index
<TABLE>
<CAPTION>
Exhibit Page
Table Number Number
------------ ------
<S> <C> <C>
I. Articles of Incorporation and Bylaws 3
(i) Certificate of Incorporation of Tice Technology, Inc. (i) +
-
(ii) Bylaws of Tice Technology, Inc. (ii) +
-
II. Instruments Defining Rights of Security Holders 4
(i) Common Stock Purchase Warrant Agreement Between Tice x
Technology, Inc. and Warrant Agent
(ii) Form of Promissory Note Issued in Connection with Private #
Placement Closed on June 25, 1999
(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
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Table Number Number
------------ ------
<S> <C> <C>
(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,
2000.
(b) The Company did not file any reports on Form 8-K during the second quarter
of fiscal 2001.
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 6, 2000
----------------------------------
By: /s/ David G. Camp
----------------------------------------
David G. Camp, Chief Financial Officer
Date: November 6, 2000
----------------------------------
21
