TAVA 10K: Item 1. Description of business.
Recent Developments - Fiscal 1996-1998.
TAVA Technologies, Inc., a Colorado corporation formed in 1974, is an industrial information technology company providing consulting and system integration services to industrial markets. The Company designs, configures and installs software based information and control systems that provide automatic control and optimization of discrete and continuous manufacturing processes while acquiring, storing and converting real time process data for use by operators and enterprise management information systems. The Company's products and services provide its clients greater operating efficiencies and the ability to optimize the performance of information based businesses.
As an independent system integrator, the Company's client specific solutions may include hardware and software components from a wide variety of suppliers as well as Company proprietary products and custom software. The Company's professional staff includes system engineers, software developers, system analysts and technicians.
In fiscal 1996, TAVA began a program of select acquisitions of other system integration companies in geographical and industry vertical markets not then served effectively by the Company. The strategy included four primary elements:
- applying the infrastructure of the acquired companies to bring TAVA's existing products and services to new geographical markets;
- taking the newly acquired vertical market expertise, technologies and products to TAVA's existing markets;
- providing a nationwide operating platform from which TAVA could more effectively deliver standard product and service solutions to clients with multiple site locations; and
- developing a larger resource base to position TAVA to address larger projects and clients than its immediate competition.
In fiscal 1996 TAVA acquired three independent system integration companies: Management Design and Consulting Services, Inc., headquartered in Atlanta, Georgia ("Management Design"); Advanced Control Technology, Inc., headquartered in Albany, Oregon, ("Advanced Control") and Vision Engineering Corporation, based in Cypress, California with sales and engineering offices in Sacramento, Los Angeles, Phoenix and Chicago and a sales office in Boston ("Vision"). In fiscal 1997, TAVA acquired All Control Systems, Inc. in West Chester, Pennsylvania ("All Control"). To further expand its market presence, in fiscal 1998 TAVA opened new offices in Greenville, South Carolina, Houston, Texas, and Minneapolis, Minnesota and formed a wholly-owned subsidiary, TAVA Alabama, Inc. ("TAVA Alabama"), which opened an engineering office in Birmingham, Alabama.
TAVA is now one of the nation's largest independent systems integration companies providing information and control system technologies to industrial users. The Company believes that its growth through acquisition has been successful and plans to continue to acquire systems integration companies selectively to further its original objectives, as well as obtain additional complementary product and consulting practice expertise.
TAVA manages its business through a structure that combines a centrally managed national sales and marketing function with local solution delivery through its various operating offices. Large and/or geographically diverse projects and programs are often executed with combined resources from more than one office.
Through the course of its development, TAVA has retained certain key management personnel from each of the acquired organizations, has promoted other employees to senior management positions in the combined organization, and has recruited new personnel to fill a variety of management positions in the new company structure. During the year ended June 30, 1998, TAVA added 12 new senior management personnel in finance, sales and marketing and operations.
Through 1995, TAVA invested in a company, Direct Measurement Corporation ("DMC"), which developed and marketed products utilizing a unique gas flow measuring method. During fiscal 1996, TAVA sold its remaining investment in DMC but, as a condition of that sale, retained a future royalty interest in sales of DMC products. DMC was purchased by an unrelated third party which is obligated
under the royalty agreement. No royalty income has been generated to date.
Description of Business.
TAVA is a project based industrial information technology company that provides consulting and system integration services to industrial clients in a broad base of industries including: aerospace, airport facility operations, automotive, chemical, petro-chemical and refining, food and beverage, forest products, pulp and paper, mining and mineral processing, power generation, transmission and distribution, pharmaceutical and bio-technology, semi-conductor and electronic component, and environmental control. As a supplier of software based information and control systems, the Company provides information based, enterprise performance optimization for its clients.
Contracts for the systems are negotiated for a fixed price for a defined scope of work or executed on a time and materials basis. Before commencing a project, TAVA consults with the customer to develop: a functional description document defining what the project will accomplish; a design document to define how the project will be undertaken to satisfy the stated objectives; and acceptance test procedures, which define in advance how the project will be determined successful.
Control systems:
The control systems that TAVA provides are typically based on Programmable Logic Controllers, Computer Numerical Controllers, DDC Controllers networked with measurement and control devices, and operator interfaces, typically Personal Computers, that use both text and graphics to display the plant or system operation and performance characteristics, usually in real-time. Systems typically include third party hardware components, packaged software applications, custom software developed by TAVA staff and sometimes TAVA proprietary products.
Third party component and packaged software application suppliers include: Wonderware, Rockwell Automation, Intellution, General Electric, Square D, Modicon, Microsoft, Digital Equipment Corporation, IBM, Hewlett Packard and many others. The purchased products are readily available on a national basis and TAVA is not dependent upon any particular supplier or group of suppliers.
Systems are generally assembled, configured and programmed at TAVA's operating facilities and are accepted and approved by the customer prior to shipment for installation. TAVA staff generally executes the final system installation and start-up at the client's site.
Information systems:
TAVA provides information systems that generally are either personal computer or mini-computer based, typically in a client server architecture. The systems are networked both to a control system in order to gather plant or process operating data, and to enterprise management information systems such as Enterprise Resource Planning systems to improve and optimize functionality.
The information systems may include: third party package software applications such as advanced planning and scheduling modules as supplied by companies such as I2; third party packaged manufacturing execution system applications such as those supplied by RWT, Wonderware Corporation, Intellution, Inc., and others; custom applications developed by TAVA staff and sometimes TAVA proprietary products.
Consulting:
In its consulting capacity, TAVA's staff provides clients with operations improvement analyses, business process engineering and information technology planning. TAVA brings particular emphasis and expertise to enterprise wide integration of management information and process control and automation systems.
TAVA proprietary products:
TAVA develops, on a limited basis, packaged, re-usable software applications for specific automation, control and information system requirements. These products are generally sold as part of an overall system. Some current TAVA products include applications for use in process line data acquisition, airport runway lighting control systems, automatic positioning of overhead cranes, batch processing for color mixing, power consumption monitoring, and Year 2000 assessment. These products provide the Company with competitive advantages and increased margins in its system sales. The Company plans to continue to develop similar products on a select basis.
Sales and marketing:
The Company sells all of its products and services through its national sales and marketing organization, spread geographically across the United States but reporting to its Executive Vice President of Sales and Marketing. This organization combines geographical territory responsibility with specific, industry market focus. In fiscal 1998, the Company added an international sales manager, resident in the U.S., who manages international business development activities. To date, the Company's direct international sales have been minimal and have primarily been associated with supporting the international affiliates of its U.S. based companies.
Project execution:
The Company executes its projects from its various operating offices spread geographically across the United States. The Company's staff includes system engineers, software developers, system analysts and technicians. Large and/or geographically diverse projects and programs are executed with combined
resources from more than one office.
Projects are executed based on a TAVA standard methodology that continues to be expanded in scope and detail. This TAVA methodology is critical to consistent solution delivery across all offices and is the foundation for inter-office project teaming. The Company has invested significantly in and will continue to invest in intra-net and other information technology infrastructure to improve internal communications and overall project execution performance.
During fiscal 1998, TAVA provided information and control systems and other technical services to national firms including the following:
Coca-Cola Merck Hershey
IVAX Kimberly Clark Kraft
Boeing Hewlett Packard Georgia Pacific
Cyprus Minerals Lipton
In addition, during fiscal 1998, TAVA provided Year 2000 products and services to national firms including the following:
General Motors Weyerhaeuser Koch Industries
Chevron Amgen Bayer Corp.
Boeing Bristol-Myers-Squibb Polaroid Corp.
Kraft Johnson & Johnson Kennecott Minerals/Utah Copper
Sales to any one customer during fiscal 1998 did not exceed 10% of the Company's contract revenue. During 1997, sales to one customer accounted for approximately 18% of contract revenue.
In Denver, Colorado, Chicago, Illinois and Phoenix, Arizona, TAVA operates service divisions that provide instrumentation calibration and small scope system configuration services to local customers on a "demand" service basis.
This work is generally done at the customer's facility. As of June 30, 1998, the group employed approximately 15 technicians on a full time basis. These technicians also occasionally support larger system integration engineering projects. The Company plans to continue to invest in and grow this business across its organization.
Year 2000 initiative:
In late June 1997, TAVA engineers confirmed the existence of Year 2000 compliance issues in process control and factory automation systems. Management believes that TAVA was one of the first organizations to determine that Year 2000 issues were a very real and serious concern in these systems. Although Year 2000 issues had been earlier recognized in classical management information or
financial systems, TAVA found that the issue had not been understood as a potentially severe problem in process control, factory automation and facility management systems.
Most such systems are complex combinations of hardware and software from a variety of vendors. Therefore, a compliance issue with a single component and the corresponding solution must be considered in the context of the impact on the total system. Only a few components in any given system could have Year 2000 compliance issues. Finding these components and determining the resulting impact
in an ordered and accurate fashion is the critical and significant challenge.
Given these circumstances, TAVA believed that a system integrator with process control and factory automation practice experience would be the logical choice to effect the required solutions.
To address this market, commencing in 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 and it developed a proprietary package of products and services, Plant Y2kOneTM, as the foundation of its approach. Plant Y2kOneTM 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
product is provided under license for use by clients directly or in combination with consulting and technical services supplied by TAVA.
The Company's Year 2000 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 TAVA's database of vendor Year 2000 compliance statements. Custom code is analyzed with TAVA'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.
TAVA supplies complete Year 2000 project consulting services built upon the methodology and use of the database and tools; or licenses 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 project staffing and management requirements for Year 2000
consulting and service engagements entered into by TAVA are undertaken by engineering and technical staff of TAVA's subsidiaries. As Year 2000 compliance projects are a straightforward extension of the Company's core technologies, with the exception of specific training on the Plant Y2kOneTM product, the Company has not had to invest in significant training of its personnel in order to support this initiative. Newly hired employees have generally been able to
contribute within the first few weeks of employment.
The Company has made significant financial and resource investment in developing the Plant Y2kOneTM product, in particular, the vendor compliance database. The Company established a technology and resource center at its West Chester, Pennsylvania office to support this effort. In January 1998, TAVA formed a wholly-owned subsidiary, TAVA Y2k One, Inc. ("TAVA Y2k"), which owns the Plant
Y2kOneTM products and administers the operations and business affairs for this business.
As of June 30, 1998, the Plant Y2kOneTM vendor compliance database included more than 40,000 items and continues to grow as the Company addresses new engagements. In the fourth quarter of its fiscal 1998, the Company began to see rapidly accelerating market acceptance of its Plant Y2kOneTM products and services. TAVA Y2k received in excess of $20,000,000 in new orders for the product and related services in that quarter. Many of these orders exceed $1,000,000 for the assessment and analysis phase of the project alone.
Orders generally include licenses of the Plant Y2kOneTM product and some quantity of TAVA services that are provided on a time and expense basis. When TAVA continues with clients from the assessment and analysis stage to conversion planning and remediation, that activity will generally include purchase of TAVA services and third party hardware and software components as required by the remediation
programs.
The scope and magnitude of these programs has placed significant demands on TAVA management and staff resources. As many client organizations are late in addressing Year 2000 issues in their factory automation systems, schedules are now very compressed. The Company has increased staff significantly in order to meet this demand, adding 174 employees during the 1998 fiscal year.
To date, hiring qualified staff has not been a major difficulty as the Company is hiring from all of its 14 offices. It is not competing for the same type of employees required for Year 2000 remediation in traditional management information systems.
Strategic alliances and other ventures:
Since many TAVA clients for Year 2000 support services are multi-national corporations with off-shore operations, during fiscal 1998, the Company developed a Solution Provider Partner Program to provide local international support of client's off-shore manufacturing operations.
Solution Provider Partners are system integration firms with experience in factory automation that are located near TAVA's clients sites and which can supply staff to support TAVA's international project manpower requirements. The Solution Provider Partner undertakes to train its personnel on use of TAVA's Plant Y2kOneTM product.
In addition to the staff augmentation role in support of TAVA projects, these organizations serve as value added resellers of the Plant Y2kOneTM product in their own regional markets. As of June 30, 1998, this program had not yet contributed any material direct revenue.
The Company expects that its Solution Provider Partner Program will continue to have value beyond the Year 2000. Staff augmentation support will be required for non-Year 2000 engagements and select partners will serve as a value added resale distribution channel for other TAVA products and service.
At June 30, 1998, TAVA had agreements with 23 Solution Provider Partners in locations ranging from Asia to Europe and Africa, providing the Company with an additional resource pool of more than 1000 personnel.
In its undertaking to address Year 2000 compliance issues in factory automation systems, TAVA has developed formal Strategic Alliance and teaming agreements with a number of information technology service companies.
Agreements have been signed with: Unisys Corporation, Computer Science Corporation; CTA Incorporated; Software Control International and Data Dimensions, Inc. The Company also is working on a similar but informal cooperation basis with others such as Keane Inc.
The immediate purpose of these alliances is to form complementary teaming arrangements that provide clients complete Year 2000 project services, covering both conventional management information systems, the domain of the TAVA alliance partners, as well as TAVA's domain of factory automation systems. TAVA and its alliance partners believe that this teaming structure is viable in
non-Year 2000, information technology business development as well.
In the non-Year 2000 context, TAVA and an alliance partner team together to provide integrated enterprise IT solutions that link process control to conventional management information systems. As in Year 2000 teaming arrangements, the TAVA alliance partner provides the management information systems expertise and TAVA provides the automation, information technology domain experience. A number of
projects have already been identified for pursuit with an alliance partner.
In early fiscal 1998, TAVA developed Year 2000 product marketing alliances with two automation product suppliers, Wonderware and Square D Corporation. The general effect of these alliances has been to assist in creating awareness of the Year 2000 issue in factory automation systems. The alliances did not produce any significant direct commercial effect.
The Company has determined that the cooperative marketing programs were not reaching the right decision making level in target clients. These specific alliances are no longer being actively supported. TAVA has active working relationships with these organizations on non-Year 2000 business activity.
TAVA expects that the demand for Year 2000 compliance products and services will remain very strong through calendar year 1999 and into calendar Year 2000. As many organizations will not complete total remediation prior to January 1, 2000, some projects will include a temporary solution that will need to be addressed through installation of a permanent solution in the months after January 1, 2000.
The Company has already seen that many client organizations involved in Year 2000 compliance programs have put other industrial information technology projects on hold. There are two immediate reasons for this. One is that most companies had not budgeted for this activity and are using other capital project
funds as the source of funding Year 2000 programs; the second is that clients, for fear of duplicate or contrary spending, want to avoid executing new information technology projects until they have a completed Year 2000 conversion plan that addresses their entire information technology structure. As a result, TAVA expects that during fiscal 1999 and 2000, much of its revenue base will come from projects that involve a Year 2000 compliance element.
The Company believes that the Year 2000 event is an unparalleled opportunity to secure new clients for whom it will continue to provide system integration and consulting services beyond Year 2000. Through the end of fiscal 1998, the Company had secured Year 2000 business with more than 100 clients. The Company's ability to expand business with these clients after Year 2000 of course depends on the quality of execution of its Year 2000 compliance support projects.
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