<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 December 31, 1998
--------------------------------------------------
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------------------------------------------
Commission File Number 0-19167
---------------------------------------------------------
TAVA Technologies, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-1042227
-------- ----------
(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
---------------------------------------------
Issuer'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 issuer (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the past 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 February 1, 1999 was 22,207,716.
Transitional Small Business Disclosure format (check one):
YES NO
-- --
<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 December 31, 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 12
Item 3 Quantitative and Qualitative Disclosures about Market Risk 17
Part II Other Information
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Note 5) (Unaudited)
Current assets:
Cash $ 7,505,000 $ 4,993,000
Trade accounts receivable, net of allowance for
doubtful accounts (Note 2) 22,037,000 14,901,000
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 3) 12,230,000 7,214,000
Inventories 198,000 188,000
Prepaid expenses and other current assets 705,000 569,000
Deferred income taxes (Note 6) 580,000 --
- -----------------------------------------------------------------------------------------------------
Total current assets 43,255,000 27,865,000
Property and equipment, at cost, net of accumulated depreciation 3,441,000 2,919,000
Capitalized software costs, net of accumulated amortization 4,493,000 4,881,000
Other assets:
Excess of cost over fair value of assets acquired,
net of accumulated amortization 7,605,000 7,915,000
Investment in unconsolidated affiliate (Note 4) 1,071,000 --
Debt issuance costs, net of accumulated amortization 239,000 364,000
Other assets 234,000 237,000
- -----------------------------------------------------------------------------------------------------
Total assets $60,338,000 $44,181,000
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 5) $ 1,700,000 $ --
Current portion of long-term debt (Note 5) 986,000 568,000
Accounts payable 6,270,000 5,740,000
Billings in excess of costs and estimated earnings
on uncompleted contracts (Note 3) 4,407,000 1,819,000
Accrued expenses 3,526,000 2,416,000
Income taxes payable (Note 6) 598,000 --
- -----------------------------------------------------------------------------------------------------
Total current liabilities 17,487,000 10,543,000
Long-term debt, net of current portion (Note 5) 4,847,000 5,304,000
- -----------------------------------------------------------------------------------------------------
Total Liabilities 22,334,000 15,847,000
Stockholders' equity (Note 5):
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; 22,151,533 and 21,991,213 shares issued and outstanding
December 31 and June 30, 1998, respectively 2,000 2,000
Additional paid-in capital 36,488,000 36,165,000
Retained earnings (deficit) 1,514,000 (7,833,000)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 38,004,000 28,334,000
Total liabilities and stockholders' equity $60,338,000 $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 Six months ended
December 31, December 31,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Systems integration and services $25,143,000 $10,484,000 $41,533,000 $21,803,000
License agreements and software sales 4,744,000 -- 8,156,000 --
- -------------------------------------------------------------------------------------------------------------------------
Total revenue 29,887,000 10,484,000 49,689,000 21,803,000
Cost of revenue 15,435,000 6,807,000 25,445,000 14,595,000
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 14,452,000 3,677,000 24,244,000 7,208,000
Expenses:
Sales expenses 2,287,000 1,177,000 4,093,000 2,004,000
General and administrative expenses 5,546,000 2,746,000 9,465,000 5,592,000
Amortization of capitalized software and goodwill 1,029,000 258,000 1,941,000 546,000
- -------------------------------------------------------------------------------------------------------------------------
8,862,000 4,181,000 15,499,000 8,142,000
Income (loss) from operations 5,590,000 (504,000) 8,745,000 (934,000)
Other income (expense):
Equity in earnings of unconsolidated affiliate 467,000 -- 1,071,000 --
Interest expense (239,000) (150,000) (517,000) (315,000)
Other 8,000 73,000 48,000 93,000
- -------------------------------------------------------------------------------------------------------------------------
236,000 (77,000) 602,000 (222,000)
Income (loss) before income taxes 5,826,000 (581,000) 9,347,000 (1,156,000)
Income tax expense (benefit) (Note 6) (75,000) -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $5,901,000 $(581,000) $ 9,347,000 $(1,156,000)
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common shareholders (Note 7) $5,901,000 $(611,000) $ 9,347,000 $(1,214,000)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share (Note 7):
Basic $0.27 $(0.04) $0.42 $(0.08)
Diluted $0.25 $(0.04) $0.39 $(0.08)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - basic 22,129,679 17,110,148 22,084,727 16,070,391
- -------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 23,994,928 17,110,148 24,113,980 16,070,391
- -------------------------------------------------------------------------------------------------------------------------
</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>
Six months ended December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $9,347,000 $(1,156,000)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation 473,000 331,000
Amortization of goodwill and capitalized software costs 1,941,000 546,000
Non-cash interest expense 141,000 --
Allowance for doubtful accounts 858,000 246,000
Undistributed earnings of unconsolidated affiliate (1,071,000) --
Gain on sale of fixed assets -- (15,000)
Deferred income taxes (580,000) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Sale of accounts receivable 2,058,000 --
Accounts receivable (10,052,000) (2,957,000)
Costs and estimated earnings in excess of billings on uncompleted contracts (5,016,000) (1,183,000)
Other assets (143,000) (391,000)
Increase (decrease) in:
Accounts payable 530,000 (585,000)
Billings in excess of costs and estimated earnings on uncompleted contracts 2,588,000 346,000
Accrued expenses and other liabilities 1,110,000 (238,000)
Income taxes payable 598,000 --
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 2,782,000 (5,056,000)
- ------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Capitalized software costs (1,146,000) (1,842,000)
Purchase of equipment (937,000) (277,000)
Proceeds from the sale of property and equipment -- 873,000
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (2,083,000) (1,246,000)
- ------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Borrowings under line of credit 1,700,000 --
Principal payments on notes and other borrowings (238,000) (1,406,000)
Proceeds from the exercise of warrants and options, net of costs 323,000 5,141,000
Proceeds from the sale of common stock, net of offering costs -- 4,826,000
Preferred stock dividend -- (58,000)
Other 28,000 (51,000)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 1,813,000 8,452,000
- ------------------------------------------------------------------------------------------------------------------
Increase in cash 2,512,000 2,150,000
Cash, beginning of period 4,993,000 907,000
- ------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 7,505,000 $ 3,057,000
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
- --------------------------------------------------------------------------------------------------------------------
Cash paid for income taxes $ 42,000 $ --
Cash paid for interest 362,000 288,000
- --------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash investing and financing activities:
- --------------------------------------------------------------------------------------------------------------------
Conversion of long-term debentures to common stock $ -- $ 2,685,000
Equipment purchased under long-term capital leases 58,000 109,000
- --------------------------------------------------------------------------------------------------------------------
</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 December 31, 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 results of operations for interim
periods are not necessarily indicative of results to be expected for a full
year.
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"), TAVA
Y2kOne, Inc. ("TAVA Y2k"). TAVA Y2k was formed in October 1997 and TAVA Alabama
was formed in 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.
Reclassifications have been made to the accompanying 1997 consolidated
statements of operations and cash flows to conform to the current year
presentation.
Note 2. Trade accounts receivable.
The following is a summary of trade accounts receivable:
December 31, 1998 June 30, 1998
- --------------------------------------------------------------------------------
Completed contracts $ 1,759,000 $ 4,504,000
Uncompleted contracts 22,078,000 11,410,000
Retainage 363,000 292,000
- --------------------------------------------------------------------------------
24,200,000 16,206,000
Allowance for doubtful accounts (2,163,000) (1,305,000)
- --------------------------------------------------------------------------------
Trade accounts receivable, net $22,037,000 $14,901,000
- --------------------------------------------------------------------------------
Note 3. Costs and estimated earnings on uncompleted contracts.
The following information is applicable to uncompleted contracts:
December 31, 1998 June 30, 1998
- --------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $ 80,464,000 $56,806,000
Estimated earnings 23,437,000 19,345,000
- --------------------------------------------------------------------------------
103,901,000 76,151,000
Billings to date (96,078,000) (70,756,000)
- --------------------------------------------------------------------------------
$ 7,823,000 $ 5,395,000
- --------------------------------------------------------------------------------
6
<PAGE>
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
Notes to consolidated financial statements
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 $ 12,230,000 $ 7,214,000
Billings in excess of costs and estimated earnings
on uncompleted contracts (4,407,000) (1,819,000)
- --------------------------------------------------------------------------------
$ 7,823,000 $ 5,395,000
- --------------------------------------------------------------------------------
Costs and estimated earnings in excess of billings on uncompleted contracts at
December 31, 1998 includes an amount which is the subject of a dispute and
litigation between one of the Company's subsidiaries, All Control, and a
customer. The dispute arises from certain change orders and other contractual
matters. The change orders were made at the request of the customer. In the
opinion of management and legal counsel, the Company has a legal right to file
the claim and it is reasonable to assert that the Company will succeed in its
efforts to prevail in this matter, although it is impossible to predict the
final outcome of this dispute and litigation. Revenue from the disputed contract
is only recognized to the extent that contract costs relating to the claim have
been incurred. During the quarter ended December 31, 1998, the customer added
TAVA as a party to the litigation.
Note 4. Equity investment in TAVA/Beck.
The following is a summary of selected financial information for the Company's
equity affiliate, TAVA/Beck, as of and for the six months ended December 31,
1998:
- --------------------------------------------------------------------------------
Current assets $ 5,328,000
Non-current assets 170,000
Current liabilities (3,237,000)
Non-current liabilities (118,000)
- --------------------------------------------------------------------------------
Members' equity $ 2,143,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Revenue $11,193,000
Gross profit 7,013,000
Income from continuing operations 1,944,000
Net income 1,944,000
Net income - TAVA 1,071,000
Net income - R.W. Beck $ 873,000
- --------------------------------------------------------------------------------
7
<PAGE>
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
Notes to consolidated financial statements
Note 5. Line of credit, debt and capital lease obligations.
<TABLE>
<CAPTION>
The following is a summary of the Company's indebtedness at:
December 31, June 30,
1998 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Line of credit:
- ------------------------------------------------------------------------------------------------------------------
$3,000,000 revolving line of credit pursuant to a loan agreement with a
commercial bank, collateralized by substantially all assets of TAVA Y2k,
interest payable monthly at the prime rate(1) plus 1/2% per annum. Any
outstanding balance is due in December 1999. $ 1,700,000 $ --
- ------------------------------------------------------------------------------------------------------------------
Debt and capital lease obligations:
- ------------------------------------------------------------------------------------------------------------------
Term note payable to a small business investment company. Interest is at 11.5%
per annum through June 1999, 12.5% per annum thereafter, payable quarterly.
Principal payments of $250,000 due June and December 1999, balance due March
2000. The note, in the principal amount of $4,000,000, has been discounted by
$796,000. The discount, which is being amortized through March 2000, 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 December 31, 1998 was $589,000. 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 future dates.
Accordingly, the Company granted 20,000 additional warrants on December 31, 1998
which are exercisable to purchase an equal number of common shares for $6.25
through December 2003. If any of the debt remains outstanding in June 1999 or
March 2000, a proportionate number of 125,000 stock purchase warrants will be
granted at each of those times to purchase an equal number of common shares at
the then fair market value of the common stock. All warrants expire five years
after the date of grant. 3,411,000 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 redeemed or converted, monthly principal payments are
due beginning June 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
Other promissory note indebtedness 270,000 376,000
Capital lease obligations secured by computer and telephone equipment 638,000 712,000
- -------------------------------------------------------------------------------------------------------------------
Total indebtedness 5,833,000 5,872,000
Less current portion 986,000 568,000
- -------------------------------------------------------------------------------------------------------------------
Long-term portion $ 4,847,000 $5,304,000
- -------------------------------------------------------------------------------------------------------------------
<FN>
(1) At December 31, 1998, the prime rate of interest was 7.75% per annum.
</FN>
</TABLE>
8
<PAGE>
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
Notes to consolidated financial statements
Other financing
R.W. Beck and TAVA each owns a 50% equity interest in TAVA/Beck LLC, with R.W.
Beck having voting control. The Company guarantees, in proportion to its
interest, TAVA/Beck's debt payable to R.W. Beck.
In December 1998, the Company entered into an accounts receivable factoring
program with a commercial bank. As of December 31, 1998, the Company had
factored $2,058,000 of its receivables. The Company has accounted for the
receivable factoring as a sale, and accordingly, has reduced its accounts
receivable in the amount of $2,058,000. Under the factoring agreement, the
receivables are discounted at an interest rate of 9.75% per annum over the
period from sale to collection of the receivables.
Note 6. Income taxes.
For the six months ended December 31, 1998, income tax expense (benefit) was
comprised of the following:
Current $ 580,000
Deferred (580,000)
- --------------------------------------------------------------------------------
$ --
- --------------------------------------------------------------------------------
In recognizing a deferred tax asset, management believes that it is more likely
than not that the deferred tax asset will be realized.
A reconciliation of the Federal statutory tax rate of 34% and the Company's
effective tax rate of 0% for the six months ended December 31, 1998 is as
follows:
Income tax benefit (expense) computed at the
Federal statutory rate $ (3,178,000)
Compensation deduction related to exercise of
non-qualified stock options 409,000
Non-deductible goodwill amortization (125,000)
State income and franchise taxes, net of Federal
tax benefit (388,000)
Net change in deferred items (580,000)
Change in effective income tax rate 430,000
Change in valuation allowance 3,212,000
Other, net 220,000
- ------------------------------------------------------------------------------
$ --
- ------------------------------------------------------------------------------
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of assets and liabilities.
Cumulative temporary differences and tax loss carryforwards at December 31, 1998
are as follows:
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities):
Net operating loss carry forwards $ 3,715,000
Accounts receivable 870,000
Accrued items, deductible when paid for tax purposes 201,000
Other, net 5,000
Capitalized software costs (1,806,000)
Property and equipment ( 101,000)
- --------------------------------------------------------------------------------
Total 2,884,000
Less valuation allowance (2,304,000)
- --------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 580,000
- --------------------------------------------------------------------------------
9
<PAGE>
TAVA TECHNOLOGIES, INC. and SUBSIDIARIES
Notes to consolidated financial statements
At December 31, 1998, the Company had net operating loss carryforwards ("NOLs")
of approximately $9,000,000 available for Federal income tax purposes that
expire through the year 2019. Utilization of a portion of the NOLs is subject to
an annual limitation as a result of Internal Revenue Code Section 382.
Note 7. Earnings per share.
The Company calculates earnings per share on a basic and diluted 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 reflect 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
and six month periods ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss):
Net income (loss) $5,901,000 $ (581,000) $9,347,000 $(1,156,000)
Preferred stock dividend -- (30,000) -- (58,000)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common
stockholders, as adjusted $5,901,000 $ (611,000) $9,347,000 $(1,214,000)
- ----------------------------------------------------------------------------------------------------------------------
Number of shares:
Weighted average common shares outstanding 22,129,679 17,110,148 22,084,727 16,070,391
- ----------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $0.27 $(0.04) $0.42 $(0.08)
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Net income (loss):
Net income (loss) $5,901,000 $(581,000) $9,347,000 $(1,156,000)
Interest expense on convertible debt 34,000 -- 69,000 --
Preferred stock dividend -- (30,000) -- (58,000)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common
stockholders, as adjusted $5,935,000 $(611,000) $9,416,000 $(1,214,000)
- ----------------------------------------------------------------------------------------------------------------------
Number of shares:
Weighted average common shares outstanding 22,129,679 17,110,148 22,084,727 16,070,391
Incremental shares upon exercise of stock
options 770,626 -- 906,024 --
Incremental shares upon exercise of stock
purchase warrants 84,988 -- 113,594 --
Incremental shares upon conversion of
debentures 1,009,635 -- 1,009,635 --
- ----------------------------------------------------------------------------------------------------------------------
Weighted average common shares and
assumed conversions outstanding 23,994,928 17,110,148 24,113,980 16,070,391
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $0.25 $(0.04) $0.39 $(0.08)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<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 Six months ended
December 31, December 31,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of equivalent common shares:
Shares upon exercise of stock options 760,000 2,798,345 410,000 2,798,345
Shares upon exercise of stock
purchase warrants 274,800 1,355,557 274,800 1,355,557
Shares upon conversion of debentures -- 1,790,433 -- 1,790,433
Shares upon conversion of preferred shares -- 1,333,340 -- 1,333,340
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<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
the year ended June 30, 1998, to which reference should be made. The Company
disclaims any obligation to subsequently 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 December 31, 1998 compared to
the three months ended December 31, 1997.
During 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 have increased
appreciably since that time. As a consequence of the manpower and resources that
were expended to develop and introduce the Plant Y2kOneTM products, meaningful
comparisons of the changes in the Company's operating results from its fiscal
quarters ended December 31, 1998 and 1997 are difficult to make.
During the quarter ended December 31, 1998, the Company had net income in the
amount of $5,901,000, compared to a net loss in the amount of $581,000 for the
corresponding quarter of fiscal 1998. Revenue increased by $19,403,000 or 185%
to $29,887,000 for the quarter ended December 31, 1998 compared to the same
quarter of the preceding year. The growth in revenue is primarily attributed to
sales of the Company's Plant Y2kOneTM products and services. Sales of these
products and services were approximately $22,130,000 during the current quarter
with minimal sales in the corresponding quarter of the preceding year. The gross
margin during the quarter ended December 31, 1998 improved to 48% compared to
35% for the comparable period of the preceding year. Plant Y2kOneTM revenue is
very labor intensive, with a considerably smaller portion of revenue derived
from the resale of material and other lower margin non-labor elements, as
compared to core system integration services revenue. Software product and
license fee sales were $4,744,000 during the current quarter. These sales also
contribute greater margins than revenue from core systems integration services.
Management anticipates that gross margins will remain at these levels during the
next several quarters.
Operating expenses increased by $4,681,000 to $8,862,000 for the quarter ended
December 31, 1998 compared to the corresponding quarter of the preceding year.
The increase is primarily attributable to higher sales and other administrative
expenses, incurred to support growing operations. As a percentage of revenue,
sales, marketing and administrative expenses decreased from 37% in the 1997
quarter to 26% in the current quarter. In addition, during the current quarter,
the Company added 24 employees to its staff and also added contract employees,
resulting in a total increase in staff to 61 during the quarter. Amortization
expense increased by $771,000 or 299%. The increase is attributable to the
amortization of software development costs associated with the Company's Plant
Y2kOneTM products. Although management believes that the Company's Plant
Y2kOneTM products may continue to be a valuable asset beyond December 1999,
costs associated with their development are being amortized through that date.
Management anticipates amortization expenses will increase in calendar year
1999. Total operating expenses, including amortization of goodwill and
capitalized software costs, decreased as a percentage of sales from 40% to 30%.
12
<PAGE>
TAVA TECHNOLOGIES, INC.
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
December 31, 1998, the Company capitalized $550,000 of software development
costs, substantially all of which is related to its Plant Y2kOneTM products and
database. This compares to $1,179,000 capitalized for the December 1997 quarter.
Earnings from the Company's investment in TAVA/Beck LLC were $467,000 during the
current quarter. There were no operating results in the corresponding quarter of
the preceding year. Interest expense increased by $89,000 during the current
quarter. The increase is primarily due to interest associated with a term note
borrowing incurred during March 1998.
During the current quarter, the Company recorded a current provision for state
income and franchise taxes in the amount of $505,000 for taxable income in
states that do not permit the filing of a consolidated income tax return.
Additionally, the Company recognized a deferred tax benefit of $580,000 based on
the realization of net operating loss carryforwards ("NOLs") to offset future
taxable income. In recognizing a deferred tax asset, management believes that it
is more likely than not that the deferred tax asset will be realized. As a
result, the Company recorded an income tax benefit in the amount of $75,000 for
the quarter ended December 31, 1998.
Results of operations for the six months ended December 31, 1998 compared to the
six months ended December 31, 1997.
During the six month period ended December 31, 1998, the Company had net income
in the amount of $9,347,000, compared to a net loss of $1,156,000 for the
corresponding period of fiscal 1998. Revenue increased by $27,886,000 or 128% to
$49,689,000 for the six months ended December 31, 1998 compared to the same
period of the preceding year. Gross margin increased from 33% to 49% from 1997
to 1998. Sales of the Company's Plant Y2kOneTM products and services were
approximately $35,626,000 during the current six month period. The net loss
incurred during the first six months of fiscal 1998 is primarily attributed to
the start-up costs associated with the Company's Plant Y2kOneTM products and
services. These products and services became generally available for sale during
the third quarter of fiscal year 1998.
As a result of the Company's rapid growth, operating expenses increased by
$7,357,000, or 90%, to $15,499,000 for the six months ended December 31, 1998.
Sales expenses increased by 104% to $4,093,000 and general and administrative
expenses increased by 69% to $9,465,000 from 1997 to 1998. During the six month
period ended December 31, 1998, the Company hired 61 additional employees at all
levels and in all disciplines, plus additional contract employees. Non-cash
expenditures for the amortization of capitalized software, goodwill and
depreciation amounted to $1,941,000 during the current six month period. This
compares to $546,000 for the corresponding six month period of the previous
year. Interest expense for the current period increased to $517,000 from
$315,000 compared to the six months ended December 31, 1997. The increase is
primarily due to interest associated with a term note borrowing incurred during
March 1998.
During the six months ended December 31, 1998, the Company capitalized
$1,146,000 of software development costs, substantially all of which is related
to its Plant Y2kOneTM products and database. This compares to $1,842,000
capitalized for the six months ended December 31, 1997.
During the six months ended December 31, 1998, the Company recorded a provision
for state income and franchise taxes in the amount of $580,000 for taxable
income in states that do not permit the filing of a consolidated income tax
return. Additionally, the Company recognized a deferred tax benefit of $580,000
based on the realization of net operating loss carryforwards ("NOLs") to offset
future taxable income. In recognizing a deferred tax asset, management believes
that it is more likely than not that the deferred tax asset will be realized. As
a result, the Company recorded no income tax expense for the six months ended
December 31, 1998. At December 31, 1998, the Company had NOLs of approximately
$9,000,000 available for Federal income tax purposes that expire through 2019.
Utilization of a portion of the NOLs is subject to an annual limitation as a
result of Internal Revenue Code Section 382.
13
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TAVA TECHNOLOGIES, INC.
Liquidity and capital resources.
During December 1998, the Company entered into a $3,000,000 revolving line of
credit with a commercial bank. The credit facility was entered into to provide
short-term financing of the Company's accounts receivable, which have grown
significantly during the last six months. The facility is secured by the assets
of TAVA Y2kOne, Inc. At December 31, 1998, $1,700,000 is outstanding under the
line of credit.
As a result of the increase in accounts receivable and costs incurred to date in
excess of billings to customers from the higher levels of revenue and
anticipated revenue, the Company increased its allowance for doubtful accounts
by $858,000 to $2,163,000 during the six months ended December 31, 1998.
Management continually reviews the allowance for adequacy and believes that its
current level will be sufficient to provide for any potential losses that may be
incurred in the collection of the Company's accounts receivable and the ultimate
recognition of costs incurred in excess of billings to customers. Management
anticipates that the Company's accounts receivable and costs in excess of
billings will continue to increase in the future in proportion to expected
revenue growth.
During December 1998, the Company sold $2,058,000 of its accounts receivable
under a factoring agreement with a commercial bank. Under the factoring
agreement, the receivables are discounted at an interest rate of 9.75% per annum
over the period from sale to collection of the receivables.
The Company's working capital position improved to $25,768,000 at December 31,
1998 from $17,322,000 at June 30, 1998. The Company's cash position at December
31, 1998 was $7,505,000, an increase of $2,512,000 from June 30, 1998.
The Company's convertible debenture agreements require principal repayments
beginning June 1, 1999. If the debentures are not converted into the Company's
common stock, the Company believes it will have adequate financial resources to
comply with the repayment terms.
Subsequent to December 31, 1998, the Company was approved for an equipment lease
facility with a financial institution. The facility permits the Company to enter
into lease arrangements up to an aggregate amount of $500,000. The Company
anticipates utilizing this facility during the next 12 months for acquiring
additional computer equipment for anticipated additional employees.
In order to support the anticipated higher levels of future operations,
management believes that the Company may require additional credit or financing
facilities. Management believes that, if required, additional credit facilities
will be available to the Company on commercial terms.
Capital expenditures and product development costs.
The Company is continuing with the implementation and installation of a project
accounting and financial and operational reporting system. As of December 31,
1998, the Company has capitalized total costs of $776,000, which includes
$367,000 capitalized during the current quarter in connection with this
implementation. In addition, the Company has commitments of approximately
$75,000 during the remainder of fiscal 1999 to complete the installation of this
project.
During the six months ended December 31, 1998, the Company capitalized
$1,146,000 of costs, substantially all of which is related to its Plant Y2kOneTM
products and database. To date, $4,341,000 has been capitalized for software
development. At December 31, 1998, the net book value of capitalized software
costs of Plant Y2kOneTM was $3,143,000. All costs associated with the
development of the Plant Y2kOneTM database will be fully amortized by December
1999, and, as a result, amortization of capitalized software costs will be
higher over the next 12 month period.
The Company has no other material commitments for capital expenditures. However,
the Company recently expanded the office space it leases for its corporate
office and has recently announced the opening of a new engineering and sales
office in Walnut Creek, California. Together with anticipated staff additions,
management believes that the Company will be acquiring telephone systems,
computer equipment and furniture to accommodate future growth.
14
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TAVA TECHNOLOGIES, INC.
Cash flow.
During the six months ended December 31, 1998, cash increased by $2,512,000.
Funds provided by operations were $2,782,000, an increase of $7,838,000 over the
corresponding period of the preceding year. The increase is attributable to the
higher levels of operating activity and additional financing activities.
Operating funds were used to finance accounts receivable, which increased by
$7,136,000 and costs in excess of billings, which increased by $5,016,000,
during the six month period. During the first two quarters of fiscal 1999,
investments were made in capital equipment, $937,000, and in capitalized
software development costs, $1,146,000. Financing activities provided $1,813,000
of cash proceeds, primarily from borrowings in the amount of $1,700,000. In
addition, the Company made debt principal repayments in the amount of $238,000,
and received cash in the amount of $323,000 from the exercise of stock options
and stock purchase warrants.
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 financial position, results of
operations or its cash flows.
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, results of operations or its cash
flows.
Statement of Financial Accounting Standards 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." Statement 134 established accounting and
reporting standards for certain activities of mortgage banking enterprises and
other enterprises that conduct operations that are substantially similar to the
primary operations of a mortgage banking enterprise. Statement 134 is effective
for the first fiscal quarter beginning after December 15, 1998. Management
believes the adoption of this statement will have no material impact on TAVA's
consolidated financial statements.
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 recently appointed a senior level executive to assess and
monitor its internal and external exposure to Year 2000 compliance. 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
15
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TAVA TECHNOLOGIES, INC.
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 mitigate
them.
Internal hardware and software. During the past two years, the Company has
replaced or added new equipment to its inventory of network and systems
computers. The Company has committed approximately $1,350,000 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 is presently implementing the installation of a new
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 February 1999. The cost of this
system is expected to be approximately $850,000, 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 March 1999 with a
resulting installation expected by July 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 significant
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.
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 support 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 develop and execute the remediation plan
and conduct system and enterprise wide training.
16
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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.
Market risk represents the risk of loss that may impact the financial position,
results of operations, or cash flows of the Company due to adverse changes in
financial market prices, including interest rate risk. The Company is subject to
interest rate risk through a short-term line of credit, which bears interest at
prime plus 1/2% and other fixed rate term debt. The Company does not consider
this potential interest rate risk to be significant to the financial statements
as a whole. The Company manages its interest rate risk generally through
short-term financing arrangements and long-term fixed rate borrowings.
PART II - OTHER INFORMATION
Item 1. Legal proceedings.
During the quarter ended December 31, 1998, the following events transpired with
regard to pending litigation previously reported in the Company's Form 10-KSB/A
No. 1 for the fiscal year ended June 30, 1998:
(a) With regard to the civil suit filed by Jon Walker, Sr. and Imogene
Walker in the U.S. District Court for the District of Oregon on or
about May 28, 1998, discovery remains stayed due to motions filed
by the defendants. The Company's motion to transfer the action to
the U.S. District Court for the District of Colorado was granted
on December 15, 1998. The Company has not yet been notified of the
assignment of this case to a judge within the District.
(b) With regard to the Marshall/Hyman litigation, during the quarter
ended December 31, 1998 Marshall/Hyman amended its complaint to
add TAVA as a party to the litigation, claiming that TAVA served
as the alter ego of All Control Systems. Discovery is proceeding
in the matter and trial is expected to be held in June 1999.
Item 2. Changes in securities and use of proceeds.
During the quarter ended December 31, 1998, the Company issued the following
securities in private transactions not registered under the Securities Act of
17
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TAVA TECHNOLOGIES, INC.
1933. The Company relied upon the exemption from registration available for
private transactions set forth in Section 4(2) of that Act. The Company intends
to use any proceeds from future exercise of these securities for general working
capital.
(a) In accordance with the provisions of the Loan and Security
Agreement dated March 27, 1998, effective December 31, 1998 the
Company issued to the holder of outstanding debt a five year stock
purchase warrant exercisable to purchase 20,000 shares of Common
Stock at a price of $6.25 per share. See Note 5 to the
accompanying unaudited financial statements. In accordance with
the Loan and Security Agreement, the Company has certain
obligations to register for public sale the shares underlying the
stock purchase warrant.
(b) During the quarter ended December 31, 1998, the Company issued an
aggregate of 255,000 Incentive Stock Options to employees in
accordance with its 1997 Stock Option and Bonus Plan. All of the
options were issued at exercise prices, which were equal to 100%
of the fair market value of the Common Stock at the date of grant.
The Company's future issuance of shares upon exercise of these
options will be effected in accordance with the Registration
Statement on Form S-8 filed on October 17, 1997.
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)
10.1 Employment Agreement dated December 21, 1998 with John
Jenkins. Filed herewith.
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.
Not applicable.
18
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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: February 15, 1998 /s/ John Jenkins
-----------------------------------------
John Jenkins
Chairman of the Board,
President and Chief Executive Officer
Date: February 15, 1998 /s/ Douglas H. Kelsall
-----------------------------------------
Douglas H. Kelsall
Chief Financial Officer and Secretary
Date: February 15, 1998 /s/ Robert C. Ogden
-----------------------------------------
Robert C. Ogden
Chief Accounting Officer
19
Exhibit 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement is made effective as of the 21st day of December,
1998 ("Effective Date"), by and between TAVA Technologies, Inc., a Colorado
corporation ("Company"), and John Jenkins ("Jenkins").
WHEREAS, the Company desires to retain the services of Jenkins in the capacity
of President and Chief Executive Officer of Company, and Jenkins is willing to
be so employed, subject to the terms and conditions of this Agreement,
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Employment. The Company agrees to employ Jenkins and Jenkins agrees
to accept the employment described in this Agreement.
Section 2. Duties. Jenkins shall be employed as President and Chief Executive
Officer of the Company, with such duties, responsibilities and authority as are
customarily delegated to such position and those as may from time to time be
assigned to Jenkins by the Board of Directors. Jenkins shall have full
responsibility and authority for formulating policies and for the management and
operation of Company, subject to the general direction and control of the Board
of Directors. The Board of Directors shall use its best efforts, subject to its
fiduciary obligations to the Company and its shareholders, to have Jenkins
re-elected to the Board of Directors so long as Jenkins is employed hereunder in
the position of President and Chief Executive Officer. Jenkins shall not be
entitled to additional compensation by reason of service as a director of the
Company or as a fiduciary of an employee benefit plan of the Company.
Section 3. Extent of Services. Jenkins shall devote his entire working time,
attention, and energies to the performance of his duties and shall not be
engaged in any other business activity, whether or not pursued for gain. Jenkins
may invest his personal assets in such form or manner as will not require
services on his part. Jenkins shall at all times faithfully and to the best of
his ability perform his duties under this Agreement. The duties shall be
rendered at the Company's principal executive office in metropolitan Denver,
Colorado, or at such other place or places as the needs of the Company may from
time-to-time dictate.
Section 4. Term. The term of employment under this Agreement shall be three
years, commencing on January 1, 1999 ("Commencement Date"). Upon the
Commencement Date, this Agreement shall supersede the Employment Agreement dated
January 28, 1997 between the Company and Jenkins. This Agreement may be renewed
at the end of the term for an additional term upon the written agreement of the
parties. If there is no written agreement for an additional term, Jenkins'
employment hereunder will continue as though extended on a month to month basis,
upon the terms set forth herein.
Section 5. Compensation.
5.1 Base Salary. Jenkins will receive a minimum base salary of $241,000
per calendar year payable in accordance with the Company's standard payroll
<PAGE>
procedures. This base salary shall be reviewed annually and may be increased
from time to time in the discretion of the Company's Board of Directors, but
shall not be decreased during the term of this Agreement without the consent of
Jenkins. The base salary provided for in this subsection shall in no way be
deemed exclusive and shall not prevent Jenkins from participating in any other
compensation or benefit plan of Company.
5.2 Designated Bonus Program. Jenkins shall participate in the Company's
designated bonus program, which currently provides the opportunity for Jenkins
to earn an annual cash bonus equal to 50% of his base salary. Receipt of
compensation under the designated bonus program shall not preclude Jenkins from
receiving additional bonus or incentive compensation granted in accordance with
other Company programs or in the discretion of the Board of Directors.
5.3 Incentive Stock Options. On the Effective Date, as a matter of separate
inducement, Jenkins shall be granted 150,000 incentive stock options expiring
December 20, 2008. Each option shall be exercisable at a price equal to the
average of the closing price reported by Nasdaq over the five trading days prior
to the Effective Date. The options shall become exercisable as follows: 50,000
on December 21, 1999; 50,000 on December 21, 2000; and 50,000 on December 21,
2001. Except as provided in Section 6 of this Agreement, no option shall become
exercisable if Jenkins' employment with the Company has been terminated before
the initial exercise date specified above.
5.4 Other Benefits. Jenkins shall receive the vacation, sick leave, medical
and dental insurance and other fringe benefits provided to full-time, non-union
employees of the Company. Company will pay the premiums for a $500,000 term life
insurance for which Jenkins names beneficiary.
Section 6. Termination.
6.1 For Cause. The Company may terminate Jenkins' employment at any time
"for cause" with immediate effect upon delivering written notice to Jenkins. For
purposes of this Agreement, "for cause" shall include: (a) embezzlement, theft,
larceny, material fraud, or other acts of dishonesty; (b) Jenkins' neglect or
intentional disregard of his duties under this Agreement, or any other material
violation by Jenkins of this Agreement; (c) conviction of or entrance of a plea
of guilty or nolo contendere to a felony or other crime which has or may have a
material adverse affect on Jenkins' ability to carry out his duties under this
Agreement or upon the reputation of the Company; (d) conduct involving moral
turpitude; (e) gross insubordination or repeated insubordination after written
warning by the Board of Directors; (f) unauthorized disclosure by Jenkins of the
confidences of the Company; or (g) material and continuing failure by Jenkins to
perform the duties described in Section 2 above in a quality and professional
manner for at least thirty (30) days after written warning by the Board of
Directors. Upon termination for cause, the Company's sole and exclusive
obligation will be to pay Jenkins his compensation earned through the date of
termination, and Jenkins shall not be entitled to any compensation after the
date of termination.
6.2 Upon Death. This Agreement shall terminate upon the date of Jenkins'
death. Upon such date, all stock options granted pursuant to Section 5.3 of this
Agreement shall become fully vested and exercisable, and the Company shall pay
to Jenkins' spouse, if living, or to his estate, if his spouse is not then
living, Jenkins' base salary and bonus compensation earned through the date of
death.
<PAGE>
6.3 Upon Disability. The Company's rights to terminate Jenkins' employment
upon his total disability and Jenkins' rights to compensation thereupon shall be
in accordance with the Company's policy concerning disability applicable to
full-time, non-union employees. In addition, all stock options granted pursuant
to Section 5.3 of this Agreement shall become fully vested and exercisable as of
the date of such termination.
6.4 By the Company Without Cause. The Company may terminate Jenkins'
employment without cause, whether before or after the initial term of this
Agreement, in accordance with this Section 6.4.
6.4.1 In the event of the Company's termination of this Agreement,
other than for cause, within one year following a change in control of the
Company, Jenkins will receive (i) continuation of base salary payments for
24 months following the date of termination; (ii) full and immediate
vesting and exercisability of all stock options granted pursuant to Section
5.3 of this Agreement; and (iii) payment of any accrued bonus, regardless
of whether the scheduled payment date falls before or after the date of
termination. The Company's obligation to continue base salary payments
shall terminate immediately upon Jenkins' violation of Section 7 of this
Agreement. For purposes of this Agreement, a "change in control of the
Company," shall mean a change in control of a nature that would be required
to be reported in response to Item 5(e) of Schedule 14A of Regulation 14A
under the Securities and Exchange Act of 1934 (the "Act"); provided that,
without limitation, such a change in control shall be deemed to have
occurred if (i) any "person" (as that term is used in Section 13(d) and
14(d) of the Act) other than the Company or any "person" who on the date
hereof is a director or officer of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Act), directly or
indirectly, of securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding securities, or (ii)
during any period of two consecutive years during the term of this
Agreement, individuals who at the beginning of such period constitute the
Board cease for any reason to constitute at least a majority thereof,
unless the election of each director who was not a director at the
beginning of such period has been approved in advance by directors
representing at least two-thirds of the directors then in office who were
directors at the beginning of the period.
6.4.2 In the event of the Company's termination of this Agreement,
other than for cause, and other than within one year following a change in
control of the Company, Jenkins will receive: (i) continuation of base
salary payments for a period of 12 months following the date of
termination; (ii) full and immediate vesting and exercisability of all
stock options which, in accordance with Section 5.3, would become
exercisable within 12 months following the date of termination; and (iii)
payment of any accrued bonus, regardless of whether the scheduled payment
date falls before or after the date of termination. The Company's
obligation to continue base salary payments shall terminate immediately
upon Jenkins' acceptance of other full time employment and/or Jenkins'
violation of Section 7.
<PAGE>
6.5 By Jenkins Without Cause. Jenkins may at any time terminate his
employment hereunder without cause upon 90 days' prior written notice to the
Company, in which case Jenkins shall be entitled to receive his base salary and
all compensation accrued and payable through the date of termination.
Section 7. Covenant Not to Compete.
7.1 Covenant. During Jenkins' employment with the Company, and for a
period of 12 months thereafter, Jenkins shall not:
7.1.1 own, manage, operate, control, be employed by,
participate in, or be connected in any manner with the ownership,
management, operation or control of any business operating in the
Company's "Central Region" which is engaged in the type of
business conducted by the Company at the time this Agreement
terminates. Nevertheless, Jenkins may own less than five percent
of the outstanding equity securities of a company that is engaged
in such business if the equity securities of such company are
registered under the Securities Exchange Act of 1934. In the
event of Jenkins' actual or threatened breach of this paragraph,
the Company shall be entitled to a preliminary restraining order
and injunction restraining Jenkins from violating its provisions.
Nothing in this Agreement shall be construed to prohibit the
Company from pursuing any other available remedies for such
breach or threatened breach, including the recovery of damages
from Jenkins.
7.1.2 induce or attempt to persuade any former, current or
future employee, agent, manager, consultant, or other participant
in the Company's business to terminate such employment or other
relationship in order to enter into any relationship with
Jenkins, any business organization in which Jenkins is a
participant in any capacity whatsoever, or any other business
organization in competition with the Company's business; or
7.1.3 use contracts, proprietary information, trade secrets,
confidential information, customer lists, mailing lists,
goodwill, or other intangible property used or useful in
connection with the Company's business.
7.2 Consideration. Company and Jenkins acknowledge and agree that the
Company's promise to pay severance to Jenkins in the event it terminates his
employment without cause, whether or not such compensation becomes due under the
terms of this Agreement, is given as additional and sufficient consideration for
the covenant contained in this Section.
Section 8. Severability. The covenant set forth in Section 7 above shall be
construed as a series of separate covenants, one for each county in each of the
states of the United States to which such restriction applies. If, in any
judicial proceeding, a court of competent jurisdiction shall refuse to enforce
any of the separate covenants deemed included in this Agreement, or shall find
that the term or geographic scope of one or more of the separate covenants is
unreasonably broad, the parties shall use their best good faith efforts to
attempt to agree on a valid provision which shall be a reasonable substitute for
the invalid provision. The reasonableness of the substitute provision shall be
<PAGE>
considered in light of the purpose of the covenants and the reasonable
protectable interests of the Company and Jenkins. The substitute provision shall
be incorporated into this Agreement. If the parties are unable to agree on a
substitute provision, then the invalid or unreasonably broad provision shall be
deemed deleted or modified to the minimum extent necessary to permit
enforcement.
Section 9. Proprietary Information; Inventions Confidentiality. Concurrently
with the execution of this Agreement, the parties have entered into a
Proprietary Information and Inventions Agreement, the terms and conditions of
which are incorporated herein by this reference.
Section 10. Remedies. Jenkins acknowledges that monetary damages would be
inadequate to compensate the Company for any breach by Jenkins of the covenants
set forth in Section 7 above. Jenkins agrees that, in addition to other remedies
which may be available, the Company shall be entitled to obtain injunctive
relief against the threatened breach of this Agreement or the continuation of
any breach, or both, without the necessity of proving actual damages.
Section 11. Waiver. The waiver by the Company of the breach of any provision of
this Agreement by Jenkins shall not operate or be construed as a waiver of any
subsequent breach by Jenkins.
Section 12. Arbitration. Any controversy or claim arising out of or relating to
this Agreement or the breach thereof shall be settled by arbitration in the City
and County of Denver, Colorado in accordance with the rules then existing of the
American Arbitration Association and judgment upon the award may be entered in
any court having jurisdiction thereof.
Section 13. Entire Agreement. This Agreement supersedes any and all other
Agreements, whether oral or in writing, between the parties with respect to the
employment of Jenkins by the Company. Each party to this Agreement acknowledges
that no representations, inducements, promises, or agreements, orally or
otherwise, have been made by either party, or anyone acting on behalf of any
party, that are not embodied in this Agreement, and that no agreement,
statement, or promise not contained in this Agreement shall be valid or binding.
Section 14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original but all of which, when
taken together, shall constitute only one legal instrument. This Agreement shall
become effective when copies hereof, when taken together, shall bear the
signatures of both parties hereto.
TAVA Technologies, Inc.
By /s/ Douglas H. Kelsall /s/ John Jenkins
----------------------- ----------------
Douglas H. Kelsall John Jenkins
Vice President - Finance and
Administration
<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
DECEMBER 31, 1998 AND FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,505,000
<SECURITIES> 0
<RECEIVABLES> 24,200,000
<ALLOWANCES> 2,163,000
<INVENTORY> 198,000
<CURRENT-ASSETS> 13,515,000
<PP&E> 6,288,000
<DEPRECIATION> 2,847,000
<TOTAL-ASSETS> 60,388,000
<CURRENT-LIABILITIES> 17,487,000
<BONDS> 4,847,000
0
0
<COMMON> 2,000
<OTHER-SE> 38,002,000
<TOTAL-LIABILITY-AND-EQUITY> 60,338,000
<SALES> 8,156,000
<TOTAL-REVENUES> 49,689,000
<CGS> 25,445,000
<TOTAL-COSTS> 14,380,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 517,000
<INCOME-PRETAX> 9,347,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,347,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,347,000
<EPS-PRIMARY> .42
<EPS-DILUTED> .39
</TABLE>
