<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
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[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 0-19167
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TAVA Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Colorado 84-1042227
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(State of incorporation) (IRS Employer Identification No.)
7887 East Belleview Avenue, Suite 820 Englewood, Colorado 80111
------------------------------------- ----------------------------
(Address of principal executive offices) (City) (State) (Zip code)
(303) 771-9794
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(Registrant's telephone number including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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 Exchange 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 the issuer's $0.0001 par value common stock
on October 9, 1998 was 22,051,216.
<PAGE>
TAVA TECHNOLOGIES, INC.
FORM 10-Q
Table of contents
Part I Financial Information Page
Item 1 Financial Statements 3
The financial information as to September 30, 1998 and
1997 is unaudited. The financial information as to June
1998 is extracted from the Company's Form 10-KSB
for the year ended June 30, 1998.
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk 14
Part II Other Information
Item 1 Legal Proceedings 15
Item 2 Changes in Securities and Use of Proceeds 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Note 4) (Unaudited)
Current assets:
Cash $ 4,348,000 $ 4,993,000
Trade accounts receivable, net of allowance for
doubtful accounts (Note 2) 17,893,000 14,901,000
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 3) 9,191,000 7,214,000
Inventories 200,000 188,000
Prepaid expenses and other current assets 546,000 569,000
- -------------------------------------------------------------------------------------------------------------------
Total current assets 32,178,000 27,865,000
Property and equipment, at cost, net of accumulated depreciation 2,992,000 2,919,000
Capitalized software costs, net of accumulated amortization 5,209,000 4,881,000
Other assets:
Excess of cost over fair value of assets acquired,
net of accumulated amortization 7,761,000 7,915,000
Investment in unconsolidated affiliate 604,000 --
Debt issuance costs, net of accumulated amortization 306,000 364,000
Other assets 252,000 237,000
- -------------------------------------------------------------------------------------------------------------------
Total assets $49,302,000 $44,181,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 4):
Financial institutions and other $ 358,000 $ 315,000
Capital lease obligations 218,000 253,000
Accounts payable 6,151,000 5,740,000
Billings in excess of costs and estimated earnings
on uncompleted contracts (Note 3) 2,026,000 1,819,000
Accrued expenses 3,324,000 2,416,000
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 12,077,000 10,543,000
Long-term debt, net of current portion (Note 4):
Financial institutions and other 4,828,000 4,845,000
Capital lease obligations 443,000 459,000
- ------------------------------------------------------------------------------------------------------------------
Total long-term debt 5,271,000 5,304,000
Stockholders' equity (Notes 4 and 6):
Preferred stock, par value $.0001 per share; authorized
10,000,000 shares, shares issued and outstanding - none -- --
Common stock, par value $.0001 per share; authorized 200,000,000 shares;
22,051,216 and 21,991,213 shares issued and outstanding at
September 30 and June 30, 1998, respectively 2,000 2,000
Additional paid-in capital 36,339,000 36,165,000
Accumulated deficit (4,387,000) (7,833,000)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 31,954,000 28,334,000
Total liabilities and stockholders' equity $49,302,000 $44,181,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Systems integration and services $16,390,000 $11,319,000
License agreements and software product sales 3,412,000 --
- ------------------------------------------------------------------------------------------------------------
Total revenue 19,802,000 11,319,000
Cost of revenue 10,010,000 7,494,000
- ------------------------------------------------------------------------------------------------------------
Gross profit 9,792,000 3,825,000
Expenses:
Sales expenses 1,806,000 827,000
General and administrative expenses 3,919,000 3,151,000
Amortization of capitalized software costs and goodwill 912,000 276,000
- ------------------------------------------------------------------------------------------------------------
6,637,000 4,254,000
Income (loss) from operations 3,155,000 (429,000)
Other income (expense):
Equity in earnings of unconsolidated affiliate 604,000 --
Interest expense (278,000) (165,000)
Other, net 40,000 19,000
- ------------------------------------------------------------------------------------------------------------
366,000 (146,000)
Income (loss) before income tax expense 3,521,000 (575,000)
Income tax expense (Note 5) 75,000 --
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,446,000 $ (575,000)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common shareholders (Note 7) $ 3,446,000 $ (605,000)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Net income (loss) per share (Note 7):
Basic $ 0.16 $ (0.04)
Diluted $ 0.14 $ (0.04)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - basic 22,039,775 15,030,634
- ------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 24,166,294 15,030,634
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $3,446,000 $ (575,000)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation 227,000 163,000
Amortization 916,000 289,000
Non-cash interest expense 71,000 --
Allowance for doubtful accounts 362,000 11,000
Undistributed earnings of unconsolidated affiliate (604,000) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (3,354,000) (385,000)
Costs and estimated earnings in excess of billings on uncompleted contracts (1,977,000) (397,000)
Inventories (12,000) (28,000)
Prepaid expenses and other assets 8,000 (66,000)
Increase (decrease) in:
Accounts payable 411,000 (2,204,000)
Accrued expenses and other liabilities 908,000 (327,000)
Billings in excess of costs and estimated earnings on uncompleted contracts 207,000 (166,000)
- ---------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 609,000 (3,685,000)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of equipment (286,000) (167,000)
Capitalized software costs (1,047,000) (663,000)
- ---------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (1,333,000) (830,000)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of notes and other borrowings 11,000 401,000
Principal payments on notes and other borrowings (121,000) (558,000)
Proceeds from the exercise of warrants and options, net of costs 174,000 4,903,000
Preferred stock dividend -- (30,000)
Deferred financing costs, net 15,000 --
- ---------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 79,000 4,716,000
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (645,000) 201,000
Cash, beginning of period 4,993,000 907,000
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Cash, end of period $4,348,000 1,108,000
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Supplemental disclosure of cash flow information:
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Cash paid for income taxes $ 46,000 $ --
Cash paid for interest 190,000 136,000
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Supplemental disclosure of non-cash investing and financing activities:
- ---------------------------------------------------------------------------------------------------------------------
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Conversion of debentures to common stock, net of debt issue costs $ -- $2,685,000
Equipment purchased under capital lease and other financing 14,000 80,000
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</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
Notes to consolidated financial statements
Note 1. Interim financial information.
The accompanying financial statements should be read in conjunction with the
Company's audited consolidated financial statements for the year ended June 30,
1998. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position as of September 30, 1998 and the results of operations and
cash flows for the periods presented. Management believes all such adjustments
are of a normal and recurring nature.
The consolidated financial statements include the accounts of TAVA Technologies,
Inc. ("TAVA"), Topro Systems Integration, Inc. ("Topro"), Management Design &
Consulting Services, Inc. ("Management Design") Advanced Control Technology,
Inc. ("Advanced Control"), Vision Engineering Corporation ("Vision"), All
Control Systems, Inc. ("All Control"), TAVA Alabama, Inc. ("TAVA Alabama"),
which was formed during October 1997, TAVA Y2k One, Inc. ("TAVA Y2k"), which was
formed during January 1998. In addition, the Company owns a 50% interest in
TAVA/Beck LLC ("TAVA/Beck") which was formed in May 1998. The Company does not
have voting control of TAVA/Beck, and, accordingly, accounts for its investment
using the equity method of accounting. The results of operations for interim
periods are not necessarily indicative of results to be expected for a full
year.
Note 2. Trade accounts receivable.
The following is a summary of trade accounts receivable:
September 30,1998 June 30, 1998
- --------------------------------------------------------------------------------
Completed contracts $ 3,823,000 $ 4,504,000
Uncompleted contracts 15,509,000 11,410,000
Retainage 228,000 292,000
- --------------------------------------------------------------------------------
19,560,000 16,206,000
Allowance for doubtful accounts (1,667,000) (1,305,000)
- --------------------------------------------------------------------------------
Trade accounts receivable, net $17,893,000 $14,901,000
- --------------------------------------------------------------------------------
Note 3. Costs and estimated earnings on uncompleted contracts.
The following information is applicable to uncompleted contracts:
September 30,1998 June 30, 1998
- --------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $70,142,000 $56,806,000
Estimated earnings 26,403,000 19,345,000
- --------------------------------------------------------------------------------
96,545,000 76,151,000
Less billings to date (89,380,000) (70,756,000)
- --------------------------------------------------------------------------------
$ 7,165,000 $ 5,395,000
- --------------------------------------------------------------------------------
These amounts are included in the accompanying consolidated balance sheets under
the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 9,191,000 $ 7,214,000
Billings in excess of costs and estimated
earnings on uncompleted contracts (2,026,000) (1,819,000)
- --------------------------------------------------------------------------------
$ 7,165,000 $5,395,000
- --------------------------------------------------------------------------------
6
<PAGE>
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
Notes to consolidated financial statements
Note 4. Long-term debt and capital lease obligations.
The following is a summary of the Company's indebtedness at September 30 and
June 30, 1998:
<TABLE>
<CAPTION>
Long-term debt: September 30, 1998 June 30, 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Term note payable to a small business investment company. Interest is at 11.5%
per annum, payable quarterly. Principal due January 2001. The note, in the
principal amount of $4,000,000, has been discounted by $796,000. The discount,
which is being amortized through January 2001, represents the value assigned to
155,000 stock purchase warrants which were granted to the lender. The value of
the discount has been calculated using the Black-Scholes option pricing model.
The stock purchase warrants are exercisable through March 2003 to purchase an
equal number of common shares for $4.91 per share. The unamortized discount at
September 30 and June 30, 1998 was $659,000 and $730,000, respectively. The note
is collateralized by substantially all assets of the Company and its
subsidiaries. The note provides for the granting of up to 270,000 additional
stock purchase warrants to purchase an equal number of common shares at the then
current market price based upon the amount of indebtedness outstanding on
certain anniversary dates of the note. Additional warrants, if granted, are
exercisable as follows: 20,000 at $4.91 per share and 250,000 at the then fair
market value per share at the time of grant. All warrants expire five
years after the date of grant. $3,341,000 $3,270,000
9% convertible debentures with a small business investment fund. Outstanding
borrowings bear interest at 9.0% per annum, interest payable monthly. If the
debentures are not sooner repaid or converted, monthly principal payments are
due beginning March 1, 1999 in the amount of 1% of the then remaining principal
amount outstanding. The debentures are convertible into the Company's common
stock at the rate of one share for each $1.50 of principal. The loan is
collateralized by a second security
position on all the assets of the Company and its subsidiaries. 1,514,000 1,514,000
Term note payable to a finance institution. Interest at 7.5% per annum,
principal and interest payable monthly through December 1999. Secured by
financed software. 165,000 185,000
Four year promissory note bearing interest at 8.0% per annum payable to a
creditor. Monthly payments, including interest, of $6,103 through April
2000. 109,000 125,000
Non-interest bearing note payable to Advanced Control's legal counsel.
Principal payments due monthly. The note has been discounted using an
effective interest rate of 10.25%. 57,000 66,000
Capital lease obligations secured by computer and telephone equipment.
Interest rates range from 8.6% to 12.6%. Monthly payments are due through
July 2001. 661,000 712,000
- ------------------------------------------------------------------------------ --------------------------------------
Total indebtedness 5,847,000 5,872,000
Less current portion 576,000 568,000
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Long-term portion $5,271,000 $5,304,000
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</TABLE>
7
<PAGE>
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
Notes to consolidated financial statements
Note 5. Income taxes.
For the three months ended September 30, 1998, the Company recorded current
income tax expense in the amount of $75,000 related to current amounts payable
for state income and franchise taxes. At September 30, 1998, the Company had net
operating loss carryforwards ("NOLs") of approximately $15,000,000 available for
Federal income tax purposes. Utilization of a portion of the NOLs is subject to
an annual limitation as a result of Internal Revenue Code Section 382.
Note 6. Stockholders' equity.
During the three months ended September 30, 1998, holders of 43,187 stock
options and stock purchase warrants exercised their rights thereunder and
received an equal number of shares of the Company's common stock. The Company
received proceeds in the amount of $85,500.
During the three months ended September 30, 1998, employees purchased 16,816
shares of the Company's common stock under the 1992 Employees Stock Purchase
Plan. The Company received proceeds in the amount of $89,400.
Note 7. Earnings per share.
The Company calculates earnings per share on a basic and dilutive basis. Basic
earnings per share includes no dilution and is computed by dividing the net
income available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects the
dilutive effect of securities that are common stock equivalents that were
outstanding during the period. Common stock equivalents are not included in the
calculation of earnings per share when the effect is anti-dilutive.
The following is a reconciliation of the net income (loss) and the number of
common shares used in the calculation of earnings (loss) per share for the three
month periods ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic earnings (loss) per share:
Net income (loss):
Net income (loss) $ 3,446,000 $ (575,000)
Preferred stock dividend -- (30,000)
- -----------------------------------------------------------------------------------------------------------
Net income (loss) available to common stockholders $ 3,446,000 $ (605,000)
- -----------------------------------------------------------------------------------------------------------
Number of shares:
Weighted average common shares outstanding 22,039,775 15,030,634
- -----------------------------------------------------------------------------------------------------------
Basic per share amounts $ 0.16 $ (0.04)
- -----------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Net income (loss):
Net income (loss) $ 3,446,000 $ (575,000)
Interest expense on convertible debt 34,000 --
Preferred stock dividend -- (30,000)
- -----------------------------------------------------------------------------------------------------------
Net income (loss) available to common stockholders, as adjusted $ 3,480,000 $ (605,000)
- -----------------------------------------------------------------------------------------------------------
Number of shares:
- -----------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 22,039,775 15,030,634
Incremental shares upon exercise of stock options 974,268 --
Incremental shares upon exercise of stock purchase warrants 142,616 --
Incremental shares upon conversion of debentures 1,009,635 --
- -----------------------------------------------------------------------------------------------------------
Weighted average common shares and assumed conversions outstanding 24,166,294 15,030,634
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Diluted per share amounts $ 0.14 $ (0.04)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
Notes to consolidated financial statements
The following were not included in the computation of diluted earnings (loss)
per share as the effect would be anti-dilutive.
<TABLE>
<CAPTION>
Three months ended September 30,
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Number of equivalent common shares:
Incremental shares upon exercise of stock options 766,000 1,579,634
Incremental shares upon exercise of stock purchase warrants 159,800 713,300
Incremental shares upon conversion of debentures -- 1,934,402
Incremental shares upon conversion of preferred shares -- 1,333,340
- ----------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
TAVA TECHNOLOGIES, INC.
Forward-looking statements
Statements made in this Form 10-Q that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
Section 27A of the Act and Section 21E of the 1934 Act. These statements often
can be identified by the use of terms such as "may," "will," "expect,"
"anticipate," "estimate," or "continue," or the negative thereof. The Company
intends that such forward-looking statements be subject to the safe harbors for
such statements. The Company wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. Any forward-looking statements represent management's best judgment as to
what may occur in the future. However, forward-looking statements are subject to
risks, uncertainties and important factors beyond the control of the Company
that could cause actual results and events to differ materially from historical
results of operations and events and those presently anticipated or projected.
These factors include those discussed in the Company's Form 10-KSB/A No. 1 for
year ended June 30, 1998, to which reference should be made. The Company
disclaims any obligation subsequently to revise any forward-looking statements
to reflect events or circumstances after the date of such statement or to
reflect the occurrence of anticipated or unanticipated events.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of operations for the three months ended September 30, 1998 compared to
the three months ended September 30, 1997.
During late June 1997, the Company announced its plans to develop its Plant
Y2kOneTM suite of products and services. During the ensuing two quarters, the
Company expended considerable time and resources to plan and develop these
products. They became widely available for sale during the third quarter of the
fiscal year ended June 30, 1998. Sales of these products and services increased
appreciably during both the fourth quarter of the fiscal year ended June 30,
1998 and the current fiscal quarter. As a consequence of the manpower and
resources that were expended to develop and introduce Plant Y2kOneTM products,
meaningful comparisons of the changes in the Company's operating results from
its fiscal quarters ended September 30, 1998 and 1997 are difficult to make.
During the quarter ended September 30, 1998, the Company realized net income in
the amount of $3,446,000. This compares to a net loss in the amount of $575,000
for the corresponding quarter of the preceding year. The significant increase in
the results of operations was primarily attributed to the addition of sales of
Plant Y2kOneTM products and services. These sales, in the amount of $13,854,000
during the current quarter, carry a significantly higher gross margin than that
achieved in the Company's core systems integration business. No sales of Plant
Y2kOneTM products or services were recorded in the fiscal quarter ended
September 30, 1997. Total revenue increased by 75% to $19,802,000 from
$11,319,000 for the corresponding quarter of the preceding year. Gross margin
increased this quarter to 49% of sales from 38% for the corresponding quarter of
the previous year. Management believes that gross margins will continue in the
current range while sales of Plant Y2kOneTM products and services continue to
make a significant contribution.
Selling, general and administrative expenses increased by 56% during the current
quarter to $6,637,000 from $4,254,000 during the 1997 quarter. The increase is
attributable to the addition of new employees, the opening of four new offices
and a general increase in business activity in preparation for the introduction
of the Company's Plant Y2kOneTM products. Of the $2,383,000 increase in
operating expenses, $979,000 was attributable to the development of a national
sales and marketing department and expenses incurred for the introduction of the
Company's Plant Y2kOneTM product suite. Additionally, amortization accounted for
$636,000 of the increase. Amortization associated with its Plant Y2kOneTM
capitalized software development costs was $581,000 during the current quarter.
Management believes that operating costs will continue to increase but will
decrease as a percentage of revenue in the near-term.
10
<PAGE>
TAVA TECHNOLOGIES, INC.
Other income and expense includes the Company's 50% share of the equity earnings
of TAVA/Beck, LLC, which was formed during May 1998. TAVA/Beck performs year
2000 consulting and other services to the electrical utility industry on a
national basis. Interest expense increased by $113,000 to $278,000 during the
quarter ended September 30, 1998 compared to the quarter ended September 30,
1997. This increase was attributable to a combination of debt principal bearing
a higher average interest rate during the current quarter and the conversion of
debt principal to common stock, which occurred during the first two months of
the 1997 quarter.
For the current quarter, the Company recorded a provision for state income and
franchise taxes in the amount of $75,000 for taxable income in states which do
not permit the filing of a consolidated income tax return. The Company recorded
no provision for Federal income taxes as a result of the utilization of net
operating loss carryforwards ("NOLs"). At September 30, 1998, the Company had
NOLs of approximately $15,000,000 available for Federal income tax purposes.
Utilization of a portion of the NOLs is subject to an annual limitation as a
result of Internal Revenue Code Section 382.
The Company capitalizes the cost of developing software products which have
achieved technological feasibility, but are not yet ready for sale to customers,
when it believes there is a market for future use of the technology or when
enhancements are made to existing software products. During the quarter ended
September 30, 1998, the Company capitalized $1,012,000 of software development
costs related to its Plant Y2kOneTM products. The Company is amortizing the cost
associated with the development of Plant Y2kOneTM through December 1999.
Liquidity and capital resources at September 30, 1998.
At September 30, 1998, the Company's working capital was $20,101,000, an
increase of $2,779,000 from June 30, 1998. The increase is primarily the result
of increases of $2,992,000 in costs and estimated earnings in excess of billings
on uncompleted contracts (unbilled accounts receivable) and $1,977,000 in trade
accounts receivable. This was offset by increases of $411,000 in accounts
payable, $207,000 in billings in excess of costs and estimated earnings on
uncompleted contracts and $908,000 in other accrued expenses. The significant
increase in trade accounts receivable and unbilled accounts receivable is a
consequence of continued, significant growth of the Company's Plant Y2kOneTM
products and services. Management continues to review the Company's accounts
receivable for collectibility and believes reserves for potential uncollectible
accounts are adequate. During the current quarter, the Company increased its
allowance for doubtful accounts by $362,000 primarily as a result of the
increased level of accounts receivable.
The Company anticipates that accounts receivable will grow significantly during
this current fiscal year due to the continued growth of its business. Management
believes that accounts receivable growth can be financed by cash on hand,
establishing new short-term credit facilities and anticipated positive cash flow
from operations. In the event that the Company is not successful in arranging
new credit facilities or generating cash flow from operations, it may need to
curtail its anticipated growth.
One of the Company's subsidiaries has received preliminary approval from and
continues to negotiate with a bank for a revolving line of credit in the amount
of $3,000,000. Advances, if any, on this line of credit will be used for working
capital purposesod the subsidiary, primarily to fund the subsidiary's accounts
receivable position.
Cash flow.
For the quarter ended September 30, 1998, the Company's cash position decreased
by $645,000. Cash flow provided by operations during the current quarter was
$609,000. This compares to negative operating cash flow in the amount of
$3,685,000 during the corresponding quarter of the previous year. This
significant improvement is primarily the result of the Company's increased
profitability.
11
<PAGE>
TAVA TECHNOLOGIES, INC.
Cash used in investing activities during the current quarter was $1,333,000 and
represented an increase of $503,000 or 61% over the 1997 quarter. This increase
is primarily attributable to costs of $1,012,000 incurred in the development and
enhancement of the Company's Plant Y2kOne.TM products.
Cash provided by financing activities during the current quarter was $79,000 as
compared to $4,716,000 provided during the 1997 quarter. This decrease from the
prior year is primarily due to the significant cash generated from the exercise
of stock options and stock purchase warrants during the 1997 quarter.
Capital expenditures.
The Company is continuing with the implementation and installation of a project
accounting and financial and operational reporting system. As of September 30,
1998, the Company has capitalized total costs of $433,000, which includes
$125,000 capitalized during the current quarter. In addition, the Company has
commitments of approximately $150,000 during the remainder of fiscal 1999 to
complete the installation of this project. The Company has no other material
commitments for capital expenditures.
Impact of recently issued accounting standards.
Effective July 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" which modifies the revenue recognition criteria
for software products and supersedes Statement of Position 97-1, "Software
Revenue Recognition." This statement requires, among other things, that the
individual elements of a contract for the sale of software products be
identified and accounted for separately. The effect of the adoption of this
pronouncement was not material to the Company's revenue or cost of revenue
recognized for the quarter ended September 30, 1998.
Statement of Financial Accounting Standards 131 "Disclosures About Segments of
an Enterprise and Related Information." Statement 131 supersedes Statement of
Financial Accounting Standards 14 "Financial Reporting for Segments of a
Business Enterprise." Statement 131 establishes standards on the way that public
companies report financial information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. Statement 131 defines operating segments
as components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
The additional disclosures required by Statement 131 are effective for annual
financial statements for periods beginning after December 15, 1997 and require
comparative information for earlier years to be restated. Statement 131 will not
affect the Company's financial position or its reuslts of operations.
Year 2000 assessment.
The following disclosure is made pursuant to the Year 2000 Information and
Readiness Disclosure Act. The following disclosure originated from the Company
and concerns (1) assessments, projections, or estimates of Year 2000 processing
capabilities; (2) plans, objectives, or timetables for implementing or verifying
Year 2000 processing capabilities; (3) test plans, dates, or results; and/or (4)
reviews and comments concerning Year 2000 processing capabilities as defined by
the Act.
The Company has assessed Year 2000 compliance matters and has determined that it
has potential for exposure regarding Year 2000 compliance in three areas of its
internal and external business activities. These areas include (1) its own
internal hardware and software systems which are utilized to process and provide
the Company's accounting and operational information, (2) the hardware and
software systems it has historically designed and installed in its clients'
control systems, and (3) Year 2000 inventory, assessment and remediation
services it is providing to assist its customers in identifying their own
potential exposure in their manufacturing and control systems under the
Company's Plant Y2kOneTM product and service offering. The following discusses
management's assessment of those risks and the steps it is taking to minimize
them.
12
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TAVA TECHNOLOGIES, INC.
Internal hardware and software. During the past 18 months, the Company has
replaced or added new equipment to its inventory of network and systems
computers. The Company has committed approximately $1,300,000 for this hardware
replacement, which has been financed with its cash resources and with lease
financing. This hardware includes the Company's organization-wide network system
and servers, telephone systems and personal computer equipment. The Company has
tested Year 2000 compliance on new hardware as it has been accepted. In
addition, the Company has contracted for the replacement of its
organization-wide accounting and management information computer software. This
new software will operate the Company's accounting and operational information
systems and will be functional at each of its facility locations. The vendor has
warranted that the software is Year 2000 compliant. Customization of the
software has been completed and staff training has begun. It is estimated that
the system will be installed and functional by January 1999. The cost of this
system is expected to be approximately $600,000 including software, hardware and
implementation expense. The primary purpose of acquiring this system is to
provide improved functionality in the area of consolidated financial reporting,
financial project control and management reporting. In addition, the Company is
reviewing its telecommunication systems and analyzing various options to
purchase and install a central telecommunication system that would provide
increased functionality associated with multiple office communication
requirements. This evaluation is expected to be complete by December 1998 with a
resulting installation expected by April 1999. Until this evaluation is
complete, it is not possible to estimate costs associated with a new
telecommunication system. However, it is not anticipated that this program will
be a material capital expenditure. Management intends to develop a contingency
plan by March 31, 1999 if the planned implementation program is delayed.
In addition to the above activities, the Company is in the final process of
completing a full inventory and assessment of its computer hardware, software
systems and embedded devices using its proprietary Plant Y2kOneTM product. It is
anticipated that this process will be completed by December 1998. Management
intends to identify any remaining remediation effort that may be required to
ensure its internal hardware and software systems are Year 2000 compliant.
Prior customer installations. The Company and its subsidiaries have provided
systems integration hardware and software for use by clients in their process
control systems. Generally, the hardware is purchased from a vendor and used
without further customization. Hardware vendor warranties pass to the Company's
clients. Software may be purchased from a third party vendor and further
customized, or be completely designed by the Company. During 1997, the Company
undertook a program of notifying many of its customers that it is aware that
hardware and software it provided may not be Year 2000 compliant and should be
assessed for Year 2000 compliance. To date, the Company has received various
inquires from its clients to provide information regarding Year 2000 compliance
on systems it has developed and has responded to these requests. Management is
not aware of any claims by any customers to provide remediation services under
any warranty agreement (stated or implied) for systems it has developed and
delivered, nor is it aware of any systems it has developed that may be in
violation of any Year 2000 compliance contractual agreements. To the extent any
such claims may be made, the Company intends to address these issues on a case
by case basis.
Year 2000 compliance services and products and remediation services. In late
June 1997, TAVA launched a major business initiative to address Year 2000
compliance problems in process control, factory automation and facility
management systems. The Company determined that addressing the Year 2000 issue
in these systems was a logical extension of its current business. The Company
developed a proprietary package of products and services, Plant Y2kOneTM, as the
foundation of its approach. PlantY2kOneTM includes a methodology, system
inventory suppot tool, access to a Company developed database of Year 2000
compliance information, specific code search engines and a remediation project
management tool, all packaged on CD ROM.
The methodology includes assessment, analysis, planning and remediation phases.
In the assessment phase, the overall project is defined and organized. An
inventory of all process control hardware and software is then completed using
the Company's inventory builder tool. In the analysis phase, that inventory is
examined, component by component, using the Company's database of vendor Year
2000 compliance statements. Custom code is analyzed with the Company's search
engines to reveal date usage. The conversion planning stage applies the results
of the analysis to develop a plan for bringing the client's system into Year
2000 compliance. The final stage is to execute the remediation plan and conduct
system and enterprise wide training.
13
<PAGE>
TAVA TECHNOLOGIES, INC.
The Company supplies complete Year 2000 project consulting services. They are
built upon the methodology and use of the database and tools; the licensing of
the methodology, tools and database access which are packaged on CD ROM and
supported by internet access, to the client for self execution, or provides a
combination of both approaches.
The Company has employed three general strategies to monitor and limit risk in
performing Year 2000 engagements. These include: proper assignment of skilled
employees; delineation and limitation of liability through contractual terms;
and purchasing professional liability insurance in amounts and on terms
considered appropriate by Company management. The Company believes that this
business is a logical extension of its historical business and as such, it has
the appropriate employee skill sets to execute its Year 2000 engagements.
Service projects are managed by experienced project managers who assume the role
of managing the overall customer engagement. Service engagements are generally
conducted under a standard professional services agreement that delineates
deliverables and liability. The Company has worked diligently in its contractual
agreements to attempt to limit liability, in most cases to no more than the
total amount of fees paid by the client. Further, the Company has secured
professional liability insurance to address professional liability that may
arise from Year 2000 customer engagements. The Company's standard contracts
specifically disclaim any Year 2000 compliance warranty or guarantees, or the
success of its Year 2000 activities in addressing client compliance, except when
it has been contracted to develop and implement new systems. The Company has
relied on external legal counsel to assist in developing specific contractual
terms to disclaim any legal liability associated with insuring, or guaranteeing
Year 2000 compliance as a result of its activities. To the knowledge of
management, the Company has not been associated with any liability for work it
conducted in providing Year 2000 products and services.
Item 3. Quantitative and qualitative disclosures about market risk.
Not applicable
14
<PAGE>
TAVA TECHNOLOGIES, INC.
PART II - OTHER INFORMATION
Item 1. Legal proceedings
Not applicable
Item 2. Changes in securities and use of proceeds.
Not applicable.
Item 3. Defaults upon senior securities.
Not applicable.
Item 4. Submission of matters to a vote of security holders.
Not applicable.
Item 5. Other information.
Not applicable.
Item 6. Exhibits and reports on Form 8-K
a) Exhibits.
3.1 Restated Articles of Incorporation. (A)
3.2 Amendment to Articles of Incorporation. (B)
3.3 Amendment to Articles of Incorporation re:
Name change. (C)
3.4 Bylaws. (D)
27 Financial Data Schedule.
- --------------------------------------------------------------------------------
(A) Incorporated by reference from the Company's Form
10-KSB for fiscal year ended June 30, 1996.
(B) Incorporated by reference from Exhibit 3.1 to the
Company's Form 10-QSB for the quarter ended
March 31, 1997.
(C) Incorporated by reference from Exhibit 4.3 to the
Company's Form S-8 Registration Statement,
File No. 333-46339.
(D) Incorporated by reference from Exhibit 3.3 to
Registration Statement on Form S-1, File No.
33-47159, effective June 17, 1992.
b) Reports on Form 8-K.
During the quarter covered by this report, the Company
filed the Current Report on Form 8-K listed below, which
reported information pursuant to Item 5, "Other Events." No
financial statements were filed or required to be filed with
this report.
Form 8-K dated and filed September 23, 1998.
15
<PAGE>
TAVA TECHNOLOGIES, INC.
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.
TAVA Technologies, Inc.
(Registrant)
Date: November 13, 1998 /s/ John Jenkins
--------------------------------------
John Jenkins
Chairman of the Board,
President and Chief Executive Officer
Date: November 13, 1998 /s/ Douglas H. Kelsall
--------------------------------------
Douglas H. Kelsall
Chief Financial Officer and Secretary
Date: November 13, 1998 /s/ Robert C. Ogden
--------------------------------------
Robert C. Ogden
Corporate Controller and
Chief Accounting Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLDIATED FINANCIAL STATEMENTS OF TAVA TECHNOLOGIES, INC. AND SUBSIDIARIES AT
SEPTEMBER 30, 1998 AND FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,348,000
<SECURITIES> 0
<RECEIVABLES> 19,560,000
<ALLOWANCES> 1,667,000
<INVENTORY> 200,000
<CURRENT-ASSETS> 32,178,000
<PP&E> 5,594,000
<DEPRECIATION> 2,602,000
<TOTAL-ASSETS> 49,302,000
<CURRENT-LIABILITIES> 12,077,000
<BONDS> 0
0
0
<COMMON> 2,000
<OTHER-SE> 31,952,000
<TOTAL-LIABILITY-AND-EQUITY> 49,302,000
<SALES> 19,802,000
<TOTAL-REVENUES> 19,802,000
<CGS> 10,010,000
<TOTAL-COSTS> 10,010,000
<OTHER-EXPENSES> 5,993,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 278,000
<INCOME-PRETAX> 3,521,000
<INCOME-TAX> 75,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,446,000
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.14
</TABLE>
