TAVA 10K: PART 2
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TAVA|R.W. BECK
In March 1998, TAVA and R.W. Beck Plant Management Ltd., a leading engineering and consulting firm to the utility industry, teamed together to address Year 2000 compliance issues in control and automation systems in the electrical utility industry.
In May 1998, TAVA and Beck, as co-owners, formed TAVA/R.W. Beck, LLC ("TAVA/Beck"). TAVA Y2k granted the LLC a license to apply the Plant
Y2kOneTM technology exclusively to the utility industry. TAVA/Beck has its own management and professional staff. Staffing plans provide for growth to a resource base of more than 200 personnel.
Through June 30, 1998, TAVA/Beck has executed agreements with 16 clients. These include both independent power producers and public utilities.
Subsequent to June 30, 1998, the Los Angeles Department of Water and Power authorized an agreement with TAVA/Beck, subject to City Council review, to address embedded system issues with funding limited to $9 million for a period of 24 months.
Also subsequent to June 30, 1998, TAVA/Beck signed an agreement with Y2K Africa, an affiliate of the state utility of South Africa. Y2K Africa will apply the TAVA/Beck Utility Y2k(TM) products and services to electric, gas, water, and wastewater utilities in South Africa and throughout the continent. TAVA/ Beck did not have any direct financial impact on TAVA during fiscal 1998. The Company expects a financial contribution from this entity to begin during the first quarter of fiscal 1999.
CMED
In fiscal 1998, TAVA entered into an agreement to license its Plant Y2kOneTM technology to Colorado MEDtech, Inc. ("CMED"). Pursuant to this agreement, CMED will undertake to modify the Plant Y2kOneTM software tool and database structure to tailor it specifically to the needs of the healthcare market. The modified system, to be known as BioMed Y2kOne, is intended to assess compliance of biomedical devices used in hospitals, clinics, and extended care facilities.
CMED will work directly with clients, and in cooperation with information technology service companies that are providing Year 2000 compliance services in the health care industry. CMED will offer a combination of tools and services to support health care institutions' efforts to establish Year 2000 compliance for their biomedical devices.
TAVA will receive, as a royalty, a percentage of gross profits generated by this activity. TAVA did not receive any license income from CMED during fiscal 1998. License revenues from this activity are expected beginning in the second quarter of fiscal 1999.
In late fiscal 1997, TAVA signed a strategic alliance agreement with PacifiCorp Energy Services, Inc. ("PacifiCorp"), a division of PacifiCorp Holdings, Inc., a leading electrical utility with international operations headquartered in Portland, Oregon. The alliance agreement addressed the joint development of business in automating utility and industrial power distribution substations and was intended to combine TAVA's automation technology and know-how with the utility specific experience and know-how of the PacifiCorp engineering resources. The alliance activity resulted in one significant project award in early fiscal 1998. During fiscal 1998 there has been little to no activity from this alliance.
Competition.
Many firms throughout the United States provide control systems integration services comparable to those offered by TAVA. TAVA believes that the dominant practice among firms in the control systems integration business is to focus their competitive efforts on a single geographic region or a particular marketplace.
Examples include vertical market prominence (water and waste-water treatment, power-generation, petroleum, mining, and chemical industries) or functional prominence (programmable logic control, distribution control systems, and data acquisition). By focusing upon a particular market, many firms typically acquire expertise, specialized resources and business relationships that result in a competitive advantage only within that market.
TAVA believes that through its acquisition strategy, it has assembled a broad range of market expertise which, when combined with its large resource base and diverse geographical presence, gives it competitive advantages over many other firms. Because of its resource base, TAVA can address projects of a size and scope many other integrators cannot. TAVA's geographic reach gives it a competitive advantage in serving customers that have multiple manufacturing facilities spread across the country.
While most independent control system integrators are much smaller than TAVA, there are some general engineering firms which are larger and better financed.
TAVA competes in certain markets with these firms but generally not across all markets. One example of such a competitor is the automated System Division of Raytheon Engineers and Constructors International, Inc.
Specifically in the market for Year 2000 compliance in factory automation and process control, TAVA has encountered little competition for its comprehensive product offering. Raytheon is clearly the Company's largest competitor in this area.
Research and development.
TAVA conducts limited research and development through both customer funded projects or internal research projects. Costs are incurred in specific system projects that employ existing technologies for which feasibility previously has been established to develop applications within specific industries. These applications are produced to have broad application in specific industries.
Once technological feasibility is established, the Company capitalizes software development costs up to the time the product is available for sale to customers.
This investment is designed to create both improved margins through repeat sales of applications in specific vertical markets and to improve TAVA's competitive position in these markets. Costs that are incurred prior to determining technological feasibility are charged to expense.
During the year ended June 30, 1998, TAVA capitalized $3,188,000 of
costs it incurred to develop its Plant Y2kOneTM product and service offering and $736,000 to develop other software products.
The Company does not anticipate that further major development effort will be incurred on its Plant Y2kOneTM products other than the continued expansion of the vendor management database.
TAVA's product development resources have been re-directed to programs put on hold during the Year 2000 ramp up. Some of these programs have grown out of the Year 2000 engagement experience.
Backlog.
At June 30, 1998 and 1997, the sales order backlogs for the Company's system integration and services business were approximately $34,059,000 and $12,153,000, respectively. This included a backlog of approximately $20,984,000 from its Year 2000 products and services business at June 30, 1998.
There was no corresponding backlog at June 30, 1997.
Certain of the Company's contracts require the provision of its systems integration services as a smaller portion of a large contract. Consequently, the Company can not always control the timing of the execution of its work on a specific project. This restriction may prevent contracted backlog from being completed within an ensuing twelve month period.
This backlog measurement includes time and expense contracts which, generally may be cancelled upon 30 days' notice.
Employees.
At June 30, 1998, TAVA had 491 full-time employees, including 41 contract or temporary employees. During the year ended June 30, 1998, the Company added 174 employees, an increase of 55% over the previous year. No employee is represented by a labor union and the Company believes its employee relations are good.
Item 3. Legal proceedings.
At June 30, 1998, TAVA and certain of its officers and directors were parties to certain legal proceedings. On June 17, 1998 and thereafter, TAVA, John Jenkins, its President and a director, Kevin Fallon, its Chief Operating Officer, and H. Robert Gill, a former director, were served with a complaint in a civil case brought by Jon Walker, Sr. and Imogene Walker. The case was filed in the U.S. District Court for the District of Oregon on or about May 28, 1998. Also named
as defendants were TAVA's prior financial consulting firm and one of its principals, a broker-dealer firm with offices in Denver, Colorado and one of its representatives, and numerous John Does and John Doe entities.
The complaint relates to the following circumstances: on May 28, 1997, the approximate time that Mr. Walker resigned as a director of TAVA, he and his wife sold a sizable block of TAVA shares in the open market to a third party not affiliated with TAVA. The Walkers allege that as of that date, TAVA substantially had completed
its Plant Y2kOneTM products, and intentionally withheld this information from Mr. Walker, while disclosing it to the unaffiliated purchaser. The Walkers also allege that the defendants aggressively induced them to sell the shares, which they otherwise would have held until May 1998. The Walkers have asked for relief consisting of 929,428 TAVA shares, for which they will tender the proceeds of
their sale, or, in the alternative, money damages equal to the difference between the $1.50 price at which they sold the shares in May 1997 and the $13.00 price in May 1998, when they claim they would have sold. The defendants believe that the Walker's claims are wholly untrue and deny all of the allegations. TAVA and the related defendants have filed motions to dismiss the federal securities claim for failure to state a claim; to dismiss the claims asserted against Messrs. Gill and Fallon for lack of jurisdiction; and to transfer the action to the U.S. District Court for the District of Colorado. TAVA understands that the other named defendants have filed similar motions. All of these motions are scheduled for oral argument in November, 1998. Discovery has been stayed pending
outcome of these motions On September 11, 1998, the Walkers filed a stipulation and order dismissing all claims against TAVA's prior financial consulting firm and its principal. TAVA intends to defend the case aggressively and has been advised that the other defendants will do the same. Although the case is in a very early stage, as of this date, management believes that the claims clearly
are groundless and that its defense of the case will be successful.
TAVA's subsidiary, All Control, is a party to a civil action filed in U.S. District Court for the District of Maryland by Marshall/Hyman, a joint venture, which acted as the general contractor on a computer chip processing facility project located in Manasas, Virginia. Marshall/Hyman filed the suit on December
5, 1997, claiming damages in excess of $100,000. On the same date in the same court, All Control filed a counterclaim requesting damages in excess of $3,900,000 arising under its subcontract. Discovery is proceeding in the matter and trial is expected to be held in January of 1999. TAVA intends to pursue this claim vigorously. In connection with this same project, other lesser claims are pending among All Control and other parties.
TAVA is also a party to various disputes involving matters of contract compliance and payment of its billings. Management does not believe that the outcome of any of these disputes will have a material adverse effect on TAVA's results of operations, its financial position or cash flows. At June 30, 1998, TAVA has provided an allowance for doubtful accounts receivable in the amount of
$1,305,000. |
