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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K (Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1999
or
[] 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 0-29038
TANISYS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
WYOMING 74-2675493
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12201 TECHNOLOGY BLVD., SUITE 125 78727
AUSTIN, TEXAS
(Address of principal executive offices) (Zip Code)
(512) 335-4440
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of January 31, 2000 was approximately $10 million based upon
the closing sale price of the Common Stock as reported on the Nasdaq OTC
Bulletin Board. Shares of common stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Indicated below is the number of shares outstanding of the registrant's
only class of common stock at January 31, 2000:
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
Common Stock, no par value 33,987,387
2
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
1999 ANNUAL REPORT ON FORM 10-K
INDEX
PAGE
PART I
ITEM 1. BUSINESS......................................................................4
ITEM 2. PROPERTIES....................................................................10
ITEM 3. LEGAL PROCEEDINGS.............................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........11
ITEM 6. SELECTED FINANCIAL DATA ......................................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS ........................................................14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................................52
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY...............................51
ITEM 11. EXECUTIVE COMPENSATION........................................................54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................64
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .............65
SIGNATURES..................................................................................70
3
PART I.
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS
THE FOLLOWING DISCUSSIONS CONTAIN TREND INFORMATION AND OTHER
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES.
THE ACTUAL RESULTS OF TANISYS TECHNOLOGY, INC., AND ITS WHOLLY OWNED
SUBSIDIARIES, 1ST TECH CORPORATION ("1ST TECH"), DARKHORSE SYSTEMS, INC.
("DARKHORSE") AND ROSETTA MARKETING AND SALES, INC. ("ROSETTA")
(COLLECTIVELY, THE "COMPANY" OR "TANISYS"), COULD DIFFER MATERIALLY FROM
THEIR HISTORICAL RESULTS OF OPERATIONS AND THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS ARE BASED ON THE
BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND
INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED
HEREIN, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT" AND "INTEND"
AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY OR ITS
SUBSIDIARIES OR THE COMPANY'S MANAGEMENT, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT RISKS,
UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN FACTORS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO,
BUSINESS CONDITIONS AND GROWTH IN THE ELECTRONICS INDUSTRY AND GENERAL
ECONOMIES, BOTH DOMESTIC AND INTERNATIONAL; LOWER THAN EXPECTED CUSTOMER
ORDERS; CUSTOMER RELATIONSHIPS AND FINANCIAL CONDITION; RELATIONSHIPS WITH
VENDORS; THE INTEREST RATE ENVIRONMENT; GOVERNMENTAL REGULATION AND
SUPERVISION; SEASONALITY; DISTRIBUTION NETWORKS; DELAYS IN RECEIPT OF ORDERS
OR CANCELLATION OF ORDERS; COMPETITIVE FACTORS, INCLUDING INCREASED
COMPETITION AND NEW PRODUCT OFFERINGS BY COMPETITORS AND PRICE PRESSURES; THE
AVAILABILITY OF PARTS AND SUPPLIES AT REASONABLE PRICES; CHANGING
TECHNOLOGIES; ACCEPTANCE AND INCLUSION OF THE COMPANY'S TECHNOLOGIES BY
ORIGINAL EQUIPMENT MANUFACTURERS ("OEMS"); CHANGES IN PRODUCT MIX; NEW
PRODUCT DEVELOPMENT; THE NEGOTIATION OF NEW CONTRACTS; SIGNIFICANT QUARTERLY
PERFORMANCE FLUCTUATION DUE TO THE RECEIPT OF A SIGNIFICANT PORTION OF
CUSTOMER ORDERS AND PRODUCT SHIPMENTS IN THE LAST MONTH OF EACH QUARTER;
PRODUCT SHIPMENT INTERRUPTIONS DUE TO MANUFACTURING PROBLEMS; ONE-TIME
EVENTS; AND OTHER FACTORS DESCRIBED HEREIN. BASED UPON CHANGING CONDITIONS,
SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD
ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED,
EXPECTED OR INTENDED. THE COMPANY DOES NOT INTEND TO UPDATE THESE
FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS SHOULD BE READ IN
LIGHT OF THESE FACTORS AND THE FACTORS IDENTIFIED IN "ITEM 1. BUSINESS" AND
IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS." ALL REFERENCES TO YEAR PERIODS REFER TO THE COMPANY'S
FISCAL YEARS ENDED SEPTEMBER 30, 1999, 1998 OR 1997, AND REFERENCES TO
QUARTERLY PERIODS REFER TO THE COMPANY'S FISCAL QUARTERS ENDED DECEMBER 31,
MARCH 31, JUNE 30 AND SEPTEMBER 30.
GENERAL
The Company designs, manufactures and markets production level
automated test equipment for a wide variety of memory technologies. Operating
under the Tanisys Technology name since 1994, the Company has developed into
an independent manufacturer of standard and custom semiconductor memory
module test systems for a variety of semiconductor manufacturers, computer
and electronics OEMs and independent memory module manufacturers. The Company
markets the DarkHorse line of memory module test systems and licenses its
proprietary Tanisys Touch technology. The Company's customers currently
include Celestica Corp., Dataram, Inc., Fox Electronics, MCMS, Micron
Technology, Inc., PNY Technologies, Inc., Solectron Corporation and Viking
Components.
During fiscal 1999, 1998 and 1997, a significant portion of the
Company's revenues were derived from the manufacturing and sale of
semiconductor memory modules. Memory module sales accounted for 80.3%, 83.9%
and 88.9% of total net sales for fiscal 1999, 1998 and 1997, respectively. In
December of 1999, the Company sold certain assets and liabilities related to
the memory module manufacturing business and exited the memory module
manufacturing business. Included in the sale was all the stock of Tanisys
(Europe) Ltd., a
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wholly owned subsidiary of the Company. A shortage of computer memory chips
in the fourth fiscal quarter of 1999 and a rapid increase in memory prices
during the same period severely disrupted the Company's memory module
manufacturing business. After dropping by approximately 95% from 1996 to
mid-1999, memory chip prices escalated rapidly in August and September 1999,
before leveling off in October 1999. The Company had great difficulties
obtaining DRAM inventory and lost several key orders. Further, the memory
module manufacturing business in Scotland dropped off completely at the end
of the fourth fiscal quarter due to the loss of the Company's major U.K.
customer, who was acquired by another semiconductor manufacturer and ceased
doing business with the Company.
The December 9, 1999, Asset Purchase Agreement is subject to
stockholder approval. The sale of the memory module manufacturing business
has significantly reduced the Company's revenues. The Company will
concentrate all its resources on the memory module test systems business,
which has become a growing profitable portion of the Company's revenues as
new technologies such as higher speed synchronous DRAM, Rambus-Registered
Trademark- and Double Data Rate synchronous DRAM memory become prevalent
requirements of computing systems.
INDUSTRY BACKGROUND
The demand for semiconductor memory modules in digital electronic
systems has grown significantly over the last several years, and according to
Dataquest, will continue for the foreseeable future. This demand results from
the increased importance of memory in determining system performance. An
increasing demand for greater system performance requires that electronics
manufacturers increase the amount of semiconductor memory incorporated into a
system.
Factors contributing to the growing demand for memory include
growing unit sales of personal computers ("PCs") in the business and consumer
market segments, increasing use of PCs to perform memory-intensive graphics
tasks, increasingly faster microprocessors, the release of increasingly
memory intensive software and the increasing performance requirements of PCs,
workstations, servers and networking and telecommunications equipment.
Semiconductor memory products are segmented into three primary
classes: Dynamic Random Access Memory ("DRAM"), Static Random Access Memory
("SRAM") and non-volatile memory, such as Flash memory. DRAM typically is the
large "main" memory of systems, SRAM provides higher performance, and Flash
memory and other non-volatile memory retain their contents when power is
removed. In addition, within each of these broad categories of memory
products, semiconductor manufacturers are offering an increasing variety of
memory devices designed for application specific uses.
The growing variety of memory components drives the increasing
demand for DarkHorse type cost-effective production memory module test
systems to test each of these categories of memory modules.
MEMORY MODULE MARKET
Since the memory module market influences the memory module test
systems market, the Company feels it is appropriate to comment briefly about
the memory module market. Semiconductor memory modules ("modules") are small
printed circuit board assemblies containing semiconductor memory devices and
support components. Many computer and electronic systems use modules to
permit OEMs to more easily upgrade their systems and to increase flexibility
by permitting different types of modules to configure one base system for
multiple price or performance targets. Semiconductor memory modules are
nearly always attached to a main system board in a daughter card fashion
rather than directly to a computer system board, for reasons of
upgradeability and flexibility. Memory modules permit OEMs to manufacture
systems on a build-to-order (BTO) basis by configuring the system after the
customer's order is placed. The benefits of BTO for OEMs are faster
5
announcement of new systems, increased customer satisfaction, reduced
inventory risk and reduced costs, all of which require cost effective, high
speed, high quality and flexible memory module test systems capability.
Modules typically are manufactured by leading semiconductor memory
component companies and independent third party suppliers. Semiconductor
manufacturers sell modules almost exclusively to OEMs. Third party
manufacturers of modules supply product to two primary market segments: the
OEM channel and the reseller channel. Third party suppliers to the OEM
channel typically offer custom product, although some computer and peripheral
OEMs use off-the-shelf modules. Third party suppliers to the reseller channel
typically offer standard DRAM modules as an upgrade product sold through
computer distributors and retail channels. Both semiconductor memory
suppliers and independent third party module manufacturers are customers for
memory module test systems.
MEMORY MODULE TEST SYSTEMS MARKET
Memory module test systems are important to assure that
semiconductor memory modules meet the necessary specifications of
performance. The memory module test systems market typically is segmented
into memory semiconductor manufacturing and third party memory module
manufacturers for PC OEMs and the aftermarket. System OEMs typically require
the manufacturer of their memory modules to test their completed modules
under demands similar to actual use. Most module manufacturers perform
"at-speed" testing of all modules with accurate test systems. The Company
believes that module test system buyers typically evaluate reliability,
productivity, accuracy, advanced automation, software flexibility, service,
customer support and price as purchase criteria. Significant new purchases of
capital equipment for test capacity are likely, due to changing memory
architectures and strong growth in memory demand.
The actual test sequence for a memory module is unique to its design
in terms of architecture, pinout, speed rating, voltage, organization and
size and will use any of several common test algorithms. Therefore, the
number of potential memory test configurations is much greater than the
number of semiconductor memory module types. This makes test development a
potentially costly and labor intensive task. The ability of a test system
manufacturer to provide support for the development of low cost, accurate
tests is a significant consideration in the buying decision.
Memory module testing requirements for the memory module aftermarket
typically are less robust. Memory additions to systems in use typically are
already tested in accordance with the needs of system manufacturers and often
may need only module identification to assure the correct module is being
installed. Servicing of failed systems often requires limited testing of
modules but typically does not require "at-speed" testing. As a result,
aftermarket module testing often needs less rigorous test capabilities but
higher portability and lower cost than does module testing at the time of
system manufacture.
PRODUCTS AND SERVICES OF THE COMPANY
The Company designs, manufactures and markets memory module test
systems. The Company's memory module test systems are oriented for both
memory module assembly and memory module aftermarket purposes and include a
broad line of test fixtures, test algorithm suites and test services.
MEMORY MODULE TEST SYSTEMS PRODUCTS
The Company's memory module test systems are marketed under the
DarkHorse brand name to utilize existing brand awareness. The current product
line includes the SIGMA-3, the SIGMA-2 and the SIGMA-LC/ SYNC-LC series.
The SIGMA-3 test system is sold to module manufacturers who build leading
edge SDRAM modules for the latest PC100/PC133 specification and who require
high quality, maximum throughput and cost effectiveness in their production
test systems. Most recently the Company has introduced its Rambus-Registered
Trademark- version
6
of the SIGMA-3. This system is targeted at the newest emerging memory
technology and operates at frequencies of over 800 MHz. As the
Rambus-Registered Trademark- technology matures in the marketplace, the
Company will be able to offer this system for its customers' expanding test
capabilities. The Company is also developing a version of the SIGMA-3 memory
module test system with capabilities to test Double Data Rate SDRAM (DDR).
Another major feature of the SIGMA-3 is its backward compatibility to test
older memory technologies such as EDO and Fast Page mode memory.
The Company's product development plans also include testing
capabilities for Flash memory test systems. The growth rate for Flash memory
devices is expected to reach over 50% per year in bit growth over the next
few years. If achieved, there will be a market for a high quality, production
level, cost effective test system.
The SIGMA-2 tester is designed for module manufacturers who need to
perform "at-speed" tests of older synchronous and asynchronous DRAM, SRAM,
Flash memory and VRAM modules. These systems are aggressively priced relative
to systems offered by major competitors. The SIGMA-3 and SIGMA-2 are used
widely by leading module manufacturers throughout the world.
The Company also markets the portable SIGMA-LC and SYNC-LC testers
for the aftermarket segment. Customers in this segment value the ease-of-use
and rapid identification of module type capabilities of these systems. The
types of customers for these testers include module manufacturers, module
retailers, large retail chains using them for PC service purposes, and
distributors.
The Company differentiates its memory module test systems by
targeting its systems' features specifically for the purpose of cost
effective, high quality, production level testing of memory products. The
Company's memory module test systems are designed for comparable performance
at lower prices relative to the general-purpose test systems offered by
competitors.
CUSTOMERS, SALES AND MARKETING
In North America and Europe a majority of the Company's memory
module test systems are sold directly to semiconductor and independent memory
module manufacturers. In Asia, the Company also sells its test systems
through distribution partners and independent sales representative
organizations. In fiscal 1999 and 1998, the Company's ten largest customers
accounted for 90.6% and 52.2% of net memory module test system sales,
respectively. During fiscal 1999, the Company had three customers which
accounted for 43.8%, 13.8% and 12.2% of the Company's net memory module test
system sales, respectively. In fiscal 1998 and 1997, one customer accounted
for 11.3% and 10.3% of the Company's net test system sales, respectively.
Sales generally are made against standard customer purchase orders.
The Company's backlog generally includes those customer orders for which it
accepted purchase orders and planned shipment dates within the next year.
Backlog is not an indicator of future sales, and orders in the backlog are
subject to change in delivery terms or even cancellation. Accordingly, there
is no assurance that current backlog will lead to future sales. The Company's
total backlog of memory module test systems was approximately $258,000 and
$370,000 at fiscal 1999 and 1998 year end, respectively.
COMPETITION
The memory module and memory test equipment industries are intensely
competitive. These markets include a large number of competitive companies,
several of which have achieved a substantial market share. Certain of the
Company's competitors in these markets have substantially greater financial,
marketing, technical, distribution and other resources, greater name
recognition, and larger customer bases than the Company. In the memory module
test systems market, the Company competes primarily with companies supplying
automatic test
7
equipment. The Company also faces competition from new and emerging companies
that have recently entered or may in the future enter the markets in which
the Company participates.
The Company expects its competitors to continue to improve the
performance of their current products, to reduce their current product sales
prices and to introduce new products that may offer greater performance and
improved pricing, any of which could cause a decline in sales or loss of
market acceptance of the Company's products. There can be no assurance that
enhancements to or future generations of competitive products will not be
developed that offer better prices or technical performance features than the
Company's products. To remain competitive, the Company must continue to
provide technologically advanced products, improve quality levels, offer
flexible delivery schedules, deliver finished products on a reliable basis,
reduce manufacturing costs and compete favorably on the basis of price. In
addition, increased competitive pressure has led in the past, and may
continue to lead to, intensified price competition, resulting in lower prices
and gross margin, which could materially adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to compete successfully in the future.
RESEARCH AND DEVELOPMENT
The Company's management believes that the timely development of new
memory module test systems and technologies is essential to maintain the
Company's competitive position. In the electronics market, the Company's
research and development activities are focused primarily on new memory
module testing technology and continual improvement in its memory test
products. Additionally, the Company provides research and development
services for customers either as joint or contracted development. The Company
plans to continue to devote substantial research and development efforts to
the design of new memory module test systems that address the requirements of
semiconductor companies, OEMs and independent memory module manufacturers.
The Company's research and development expenses were $1,602,131 in
fiscal 1999, $1,692,059 in fiscal 1998 and $1,589,103 in fiscal 1997. A
portion of the research and development expense is focused on creating a
patent portfolio to protect the Company's intellectual property and to create
a competitive edge over competitors.
INTELLECTUAL PROPERTY
The Company has filed the following applications with the U.S.
Patent and Trademark Office for patents to protect its intellectual property
rights in products and technology that have been developed or are under
development:
NESTED LOOP METHOD OF IDENTIFYING SYNCHRONOUS MEMORIES. Issued as
U.S. Patent 5,812,472 on September 22, 1998. The patent describes how to
automatically identify a synchronous memory module configuration using a
table-based method with nested loops.
PARAMETRIC TEST SYSTEM AND METHOD. Issued as U.S. Patent 6,008,664
on December 28, 1999. This patent application describes a method for
performing a leakage test more quickly.
CONTACT TEST METHOD AND SYSTEM FOR MEMORY TESTERS. Issued as U.S.
Patent 5,956,280 on September 21, 1999. This patent application describes a
contact test for determining pin-to-pin and ground shorts, as well as opens
for memory modules.
SYNCHRONOUS MEMORY TESTER. Issued as U.S. Patent 5,914,902 on June
22, 1999. This patent describes the operation of the synchronous memory
tester.
SYNCHRONOUS MEMORY TEST METHOD. Issued as U.S. Patent 5,912,852 on
June 15, 1999. This patent describes the method of operation of the
synchronous memory tester.
8
METHOD AND SYSTEM FOR IDENTIFYING A MEMORY MODULE CONFIGURATION.
Issued as U.S. Patent 5,999,468 on December 7, 1999. This patent application
describes a speedier approach for identifying memory modules.
SYNCHRONOUS MEMORY TEST SYSTEM. Issued U.S. Patent Number 5,995,424
on November 30, 1999. This patent describes the operation of the SYNC-LC
memory tester.
CAPACITANCE SENSITIVE SWITCH AND SWITCH ARRAY. Issued as U.S. Patent
5,508,700 on April 16, 1998. The patent describes a broad range of
applications for capacitance sensitive touch technology covering hardware,
firmware, software and methods of operations.
CAPACITIVE SENSITIVE SWITCH METHOD AND SYSTEM. Issued as U.S. Patent
5,933,102 on August 3, 1999. This patent deals with simultaneous measurement
of multiple touch sensors.
SYNCHRONOUS MEMORY IDENTIFICATION SYSTEM. Serial Number 08/895,550
filed July 1997. This patent application describes additional applications
for the use of table-based method with nested loops to automatically identify
a synchronous memory module configuration.
MICROSEQUENCER FOR MEMORY TEST SYSTEMS. Serial Number 09/033,363
filed March 1998. This patent application discusses the sequencer function in
the SIGMA-3 tester with emphasis on exception handling and timing set
compression through use of VLIW instructions.
PROGRAMMABLE PULSE GENERATOR. Serial Number 09/032,968 filed March
1998. This patent application describes the PPG operation in the SIGMA-3
tester.
TESTER SYSTEMS. Serial Number 09/033,364 filed March 1998. This
patent application describes the code generation for the SIGMA-3 tester.
METHOD AND SYSTEM FOR TESTING RAMBUS MEMORY MODULES. This patent
application, which will replace the provisional application with Serial
Number 60/097,894, describes a low cost method of testing Rambus memory
modules.
METHOD AND SYSTEM FOR TIMING CONTROL IN THE TESTING OF RAMBUS MEMORY
MODULES. This patent application with Serial Number 09/359,173 describes the
method of performing timing measurements for Rambus Memory Modules.
There can be no assurance that the pending patent applications will
be approved or approved in the form requested. The Company expects to
continue to file patent applications where appropriate to protect its
proprietary technologies; however, the Company believes that its continued
success depends primarily on factors such as the technological skills and
innovation of its personnel rather than on patent protection. In addition,
the Company attempts to protect its intellectual property rights through
trade secrets, copyrights, trademarks and a variety of other measures,
including non-disclosure agreements. There can be no assurance, however, that
such measures will provide adequate protection for the Company's trade
secrets or other proprietary information, that disputes with respect to the
ownership of its intellectual property rights will not arise, that the
Company's trade secrets or proprietary technology will not otherwise become
known or be independently developed by competitors or that its intellectual
property rights can otherwise be protected meaningfully. There can be no
assurance that patents will issue from pending or future applications or that
if patents are issued, they will not be challenged, invalidated or
circumvented, or that rights granted thereunder will provide meaningful
protection or other commercial advantage. Furthermore, there can be no
assurance that third parties will not develop similar products, duplicate the
Company's products or design around the patents owned by the Company or that
third
9
parties will not assert intellectual property infringement claims against the
Company. In addition, there can be no assurance that foreign intellectual
property laws will adequately protect the Company's intellectual property
rights abroad. The failure of the Company to protect its proprietary rights
could have a material adverse effect on its business, financial condition and
results of operations.
ENVIRONMENTAL REGULATION
The Company's operations and manufacturing processes are subject to
certain federal, state and local environmental protection laws and
regulations. Public attention has increasingly been focused on the
environmental impact of manufacturing operations that use hazardous materials
or generate hazardous wastes, and environmental laws and regulations may
become more stringent over time. There can be no assurance that failure to
comply with either present or future regulations, or to obtain all necessary
permits required under such regulations, would not subject the Company to
significant compliance expenses, production suspensions or delay,
restrictions on expansion at its present or future locations, the acquisition
of costly equipment or other liabilities.
EMPLOYEES
At September 30, 1999, the Company had 206 employees. There were 184
employees in Austin including 23 engineering and product development
employees, 23 finance and administration employees, 33 employees in the
sales, marketing technical and customer support areas, 105 manufacturing
employees and 22 employees in Scotland.
Between September 30, 1999 and the completion of the sale of the
memory module manufacturing business in December 1999, 5 Austin employees
were terminated for performance problems and 27 Austin employees and 1
Scotland employee left voluntarily to seek other employment. In addition, the
positions of 20 Austin employees and 4 Scotland employees were eliminated on
October 21, 1999 to reduce costs and attract capital infusion.
The sale of the memory module manufacturing business resulted in
42 Austin employees and 17 Scotland employees being offered positions with
the buyer of that business. The positions of 47 Austin employees were
eliminated as a result of that sale.
After completion of the sale of the memory module manufacturing
business in December 1999, the Company had 43 full-time employees. These
employees included 24 engineering, product development, manufacturing and
technical support employees, 11 finance and administration employees and 8
employees in the sales and marketing areas.
Recruitment of personnel in the computer industry, particularly
engineers, is highly competitive. The Company believes that its future
success will depend in part on its ability to attract and retain highly
skilled management, engineering, sales, marketing, finance and technical
personnel. There can be no assurance of the Company's ability to recruit and
retain the employees that it may require.
ITEM 2. PROPERTIES
At February 1, 2000, the Company has leased 39,176 square feet of
space for its corporate offices at 12201 Technology Boulevard, Suite 125,
Austin, Texas, pursuant to a lease, which under agreement with the landlord,
will be terminated on March 17, 2000. The lease has certain expansion
options, renewal options and rights of first refusal. The Company currently
is paying annual rental of approximately $308,000, plus a pro rata charge for
property taxes, common area maintenance and insurance.
10
The Company has subleased 24,330 square feet of this space, until
March 17, 2000, to the buyer of its memory module manufacturing business. The
sublessee is paying annual rental of approximately $197,000, plus 75% of the
operating expenses which the Company is obligated to pay under its lease.
Effective March 18, 2000, the Company will lease 14,846 square feet at
$67,550 for the last 6.5 months of fiscal year 2000, and $151,430 annually
until March 31, 2003, plus a pro rata charge for property taxes, common area
maintenance and insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit filed by one of its
customers for alleged breach of contract. The suit asks for actual damages,
including all related expenses in the amount of $77,838. The Company believes
the suit is without merit and is vigorously defending its position. The
Company believes it is unlikely that the final outcome of this or any other
unknown claims to which the Company becomes a party would have a material
adverse effect on the Company's financial position or results from
operations; however, due to the inherent uncertainty of litigation, there can
be no assurance that the resolution of any particular claim or proceeding
would not have a material adverse effect on the Company's results of
operations for the fiscal period in which such resolution occurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
On July 28, 1999, the Company's stock began trading under the "TNSU"
symbol on the Nasdaq OTC Bulletin Board, which was established for securities
that do not meet the Nasdaq SmallCap Market's listing requirements.
Consequently, selling the Company's common stock could be more difficult
because of the smaller quantities of shares that could be bought and sold,
transactions could be delayed, and security analysts' and news media's
coverage of the Company stock could be reduced. These factors could result in
lower prices and larger spreads in the bid and ask prices for shares of the
Company's common stock. From May 22, 1997 to July 27, 1999, the Company
traded on the Nasdaq SmallCap Market under the symbol "TNSU." From March 20,
1995 to June 6, 1997, the Common Stock was traded on the Vancouver Stock
Exchange ("VSE") under the symbol "TNS.U," with prices quoted in U.S.
dollars. On June 6, 1997, the Company voluntarily delisted its stock on the
VSE, as a result of the change to Nasdaq.
The table below sets forth the high and low closing prices of the
Common Stock from October 1, 1997 through July 27, 1999, as reported on the
Nasdaq SmallCap Market and from July 28, 1999 through January 31, 2000, as
reported on the Nasdaq OTC Bulletin Board. These price quotations reflect
interdealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
11
Common Stock
------------
Quarter Ended High Low
------------- ---- ---
FISCAL 1998:
December 31, 1997 $4.13 $2.00
March 31, 1998 4.50 2.38
June 30, 1998 3.16 2.25
September 30, 1998 2.56 1.50
FISCAL 1999:
December 31, 1998 $2.19 $1.41
March 31, 1999 2.50 1.25
June 30, 1999 1.88 1.00
September 30, 1999 1.31 0.47
FISCAL 2000:
December 31, 1999 0.79 0.24
THROUGH FEBRUARY 18, 2000 $1.62 $0.26
STOCKHOLDERS
On September 30, 1999, there were 24,390,404 shares of Common Stock
outstanding held by 314 holders of record. The last reported sales price on
the Common Stock on January 31, 2000, was $0.42 (rounded) per share.
DIVIDENDS
During the fiscal years ended September 30, 1999 and 1998, the
Company declared and issued dividends of 109,734 and 40,000 shares,
respectively, of Common Stock to the holders of record of its 5% Series A
Convertible Preferred Stock. The Company has not declared or paid any
dividends with respect to the Common Stock, and the current policy of the
Board of Directors is to retain earnings, if any, to provide for the growth
of the Company's business. Consequently, no cash dividends are expected to be
paid on the Common Stock in the foreseeable future. Further, there can be no
assurance that the proposed operations of the Company will generate the
revenue and cash flow needed to declare a cash dividend or that the Company
will have legally available funds to pay dividends at any time in the future.
PRIVATE PLACEMENTS
On June 30, 1998, the Company entered into a Convertible Stock
Purchase Agreement with an accredited investment group. The Company issued
400 shares of its 5% Series A Convertible Preferred Stock, par value $1.00
per share ("Series A Stock"), for $10,000 per share, with offering costs of
approximately $460,000. The Series A Stock is convertible into the Company's
no par value common stock ("Common Stock") at the option of the holder
beginning 90 days after the June 30, 1998 closing date. The conversion price
is the lesser of the fixed conversion price of $2.31 per share or a variable
conversion price. The Series A Stock also provides certain mandatory
redemption rights which are triggered upon the occurrence of certain events.
Attached to the Series A Stock were warrants to purchase 199,999 shares of
Common Stock at $3.00 per share. The warrants are currently exercisable and
have a term of four years. The Company believes that the sale of the Series A
Stock was exempt from registration under the Securities Act by reason of
Section 4(2) of the Securities Act. The underlying Common Stock was
registered under the Securities and Exchange Commission Form S-3 effective
August 13, 1998; however, upon delisting of the Company's stock from the
Nasdaq Smallcap Market on July 27, 1999, the Company became ineligible to
file or maintain registration statements. The net proceeds from this offering
were used as working capital for the Company. These uses of net offering
proceeds were made in the form of direct or
12
indirect payments to others. Upon delisting of the Company's stock from the
Nasdaq SmallCap Market on July 27, 1999, the Company became unable to file or
maintain registration statements.
During the year ended September 30, 1999, the preferred stockholders
converted 175 shares of Series A Stock for 1,535, 198 shares of Common Stock.
After September 30, 1999, the preferred stockholders converted 50 shares of
Series A Stock for 2,740,426 shares of Common Stock.
On July 27, 1999, the Company's common stock was delisted from
trading on the Nasdaq SmallCap Market, but is currently traded on the Nasdaq
OTC Bulletin Board. The delisting was a triggering event under the
Convertible Stock Purchase Agreement; however, the holder has not informed
the Company of any intent to exercise its redemption rights.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are derived
from the consolidated financial statements of the Company, which for the
fiscal year ended September 30, 1999 have been audited by Brown, Graham and
Company, PC independent certified public accountants and for the fiscal years
ended September 30, 1998 and 1997 were audited by Arthur Andersen LLP,
independent certified public accountants, to the extent indicated in their
reports included elsewhere herein.
On May 21, 1996, the Company acquired 1st Tech Corporation and
Darkhorse Systems, Inc. The acquisitions were accounted for using the
purchase method, resulting in total goodwill of $7.2 million to be amortized
over a two-year period. The results of operations have been included in the
consolidated financial statements since the acquisition date. The selected
consolidated financial data set forth below are qualified in their entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements.
(In Thousands, except per share data) FISCAL YEARS ENDED SEPTEMBER 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net sales $10,145 $5,349 $5,294 $1,717 $359
Net income (loss) from
continuing operations 1,043 (2,484) (3,942) (880) (2,445)
Net income (loss) from
discontinued operations (10,010) (6,064) (6,171) (2,804) (2,445)
Goodwill Amortization Expense - (2,092) (3,585) (1,494) N/A
Net income (loss) applicable to common
stock per share:
Continuing operations - (.15) (.22) (.07) -
Discontinued operations (.43) (.44) (.58) (.24) (.29)
Total assets 16,814 15,913 17,232 17,463 1,613
Long term debt 2,757 755 81 123 -
Mandatorily redeemable convertible
preferred stock 1,831 2,390 - - -
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following is a discussion of the consolidated financial condition
and results of operations of the Company for the fiscal years ended September
30, 1999, 1998 and 1997. It should be read in conjunction with the Consolidated
Financial Statements of the Company, the Notes thereto and other financial
information included elsewhere in this report. For purposes of the following
discussion, references to year periods refer to the Company's fiscal year ended
September 30 and references to quarterly periods refer to the Company's fiscal
quarters ended December 31, March 31, June 30 and September 30. (See quote
"Business - Forward Looking Statement - Cautionary Statements.)
Effective May 21, 1996, the Company acquired, through mergers with its
wholly owned subsidiaries, all of the outstanding common stock of 1st Tech
Corporation ("1st Tech") and DarkHorse Systems, Inc. ("DarkHorse") and began
operations in Austin, Texas as a consolidated group of companies providing
custom design, engineering and manufacturing services, test solutions and
standard and custom module products to leading original equipment manufacturers
("OEMs") in the computer networking and telecommunications industries. In
consideration for the acquisitions of 1st Tech and DarkHorse, the Company issued
2,950,000 and 1,200,000 shares, respectively, of Common Stock. Prior but subject
to the consummation of the acquisitions of 1st Tech and DarkHorse by the
Company, 1st Tech issued 1,150,000 shares of its common stock for $2.00 per
share in an equity financing, raising a total of approximately $2,300,000, the
proceeds of which were used to reduce short-term debt and provide working
capital for 1st Tech.
The Company's consolidated operations have been unprofitable since the
merger with 1st Tech and DarkHorse in May 1996. Although the Company was able to
develop increasing revenues from its memory module manufacturing business, it
was not able to generate gross margins at the requisite sales volumes in order
to make the business profitable. A number of factors contributed to the
Company's inability to establish adequate profit margins. The Company failed to
achieve the projected revenues that were required to produce sufficient margin
to meet the Company's ongoing fixed costs. The Company also failed to win, and
on occasion lost, the business of several large customers due to the Company's
weak financial condition, which caused potential customers to be concerned about
the Company's ability to deliver. Additionally, the Company often faced an
unpredictable cost structure due to uncertainties regarding inventory costs. The
market for DRAM chips, the principal component in memory modules, became highly
volatile at various times over the last three years in terms of pricing and
inventory availability. Many of the Company's competitors had greater financial
resources and were able to obtain more advantageous prices, as well as secure
allocations of DRAM during high demand periods. The Company would, at times, be
forced to pay top market prices to procure DRAM, which in turn caused margin
problems. Further, the Company's customers generally were on a single-order
basis with no long term commitments or ability to adjust pricing as to
outstanding orders.
A shortage of computer memory chips in the fourth fiscal quarter of
fiscal 1999 and a rapid increase in memory chip prices during the same period
severely disrupted the Company's business, resulting in major shortfalls of
revenue. After dropping by approximately 95% from 1996 to mid-1999, memory chip
prices escalated rapidly in August and September 1999, quadrupling between July
and September 1999, before leveling off in October 1999. The Company had great
difficulty in obtaining DRAM inventory during this period and lost several key
orders. Additionally, one of the Company's largest customers (comprising
approximately 20.5% of Company sales in fiscal 1999) was acquired, in April
1999, by another semiconductor manufacturer and ceased doing business with the
Company.
14
In July 1999, the Company's stock was delisted from the Nasdaq SmallCap
Market for failure to meet the $2,000,000 net tangible assets requirement.
Delisting of the Company's stock placed the Company in default under the Stock
Purchase Agreement entered into with KA Investments LLC ("KA") dated June 30,
1998, pursuant to which KA purchased 400 shares of 5% Series A Convertible
Preferred Stock ("Series A Stock") of the Company for $4,000,000. Under the
terms of the Stock Purchase Agreement, the Series A Stock was convertible into
common stock based on a formula set forth in the Agreement and quarterly
dividends were payable in common stock or cash. The shares of common stock
issuable under the Stock Purchase Agreement were registered under a Registration
Statement on Form S-3. Upon delisting of the Company's stock from the Nasdaq
SmallCap Market on July 27, 1999, the Company's S-3 was no longer effective.
Delisting also constituted a triggering event for redemption of the
Series A stock. As of the date hereof, the holder of the Series A Stock has not
informed the Company if or when it may exercise any redemption right. As of
February 1, 2000 the aggregate redemption price, including a stipulated
redemption premium, was approximately $2,200,000. The Company does not currently
have sufficient funds to pay the redemption price and the obligation would
therefore be subject to accrual of interest at 15% per annum under the Stock
Purchase Agreement. The Stock Purchase Agreement also restricts transfers of
intellectual property rights unless in connection with the sale of all or
substantially all assets, and further provides that sale of substantially all
assets also constitutes a triggering event for redemption.
On October 15, 1999, the Company hired an investment bank to assist it
in addressing alternatives to improve the overall posture of the Company and
bolster stockholder value. The September 1999 financial results for the Company
and excessive losses in its memory module manufacturing business made the
Company's ability to attract financing unlikely. In consultation with the
investment bank, the Company evaluated selling the memory module manufacturing
business and retaining its other operations.
In October 1999, the Company also engaged a law firm that specialized
in bankruptcy to evaluate alternatives, including a liquidation analysis for the
Company as a whole. This analysis projected a 6-14% return to unsecured
creditors upon liquidation, with the common stockholders receiving nothing.
Management estimated that the cost to shut down its memory module manufacturing
business would exceed $5,000,000. Other factors diminishing the potential return
included the following: the senior lender had a lien on all inventory and
receivables, capital leases encumbered a large portion of fixed assets, and a
substantial portion of the assets are located in Scotland and subject to a
differing priority scheme. The law firm indicated that in its opinion in order
to file a successful reorganization proceeding under Chapter 11 of the U.S.
Bankruptcy Code, the Company needed more cash than was available. Absent a
steady funding source, a successful reorganization proceeding was considered
unlikely.
The investment bank and the Company contacted over fifteen potential
buyers for the memory module manufacturing business. Of the fifteen contacted,
six signed confidentiality agreements with only three giving an indication of
interest in a possible transaction. Two of the inquiries related to the
acquisition of tangible assets only, at a distressed price and without assuming
any liabilities. The third, All Components, Inc. ("ACI"), indicated it would be
willing to consider an acquisition of the memory module manufacturing business,
if structured as an asset sale in which an entity controlled by it would assume
only certain liabilities of the Company.
Although a number of alternatives, including Chapter 7 liquidation,
were considered by the Board of Directors, the best alternative was considered
to be ACI's expression of interest in acquiring the memory module manufacturing
business. On November 12, 1999, the Company and ACI executed a non-binding
letter of intent. The Company agreed not to solicit or negotiate another
acquisition offer (other than for the memory module test systems business) until
December 31, 1999. From November 12, 1999 until December 9, 1999, ACI conducted
continuing due diligence and simultaneously the parties and their counsel
negotiated a definitive asset purchase agreement (the "Asset Purchase
Agreement"). The Asset Purchase Agreement related to the sale of certain assets
15
and business comprising the Company's memory module manufacturing business to an
affiliate of ACI, Tanisys Operation, LP, as well as the sale of the stock of the
Company's wholly owned subsidiary, Tanisys (Europe) Ltd., (the "Sale
Transaction"). In addition, the Company entered into a covenant not to compete
for ten years after the closing of the sale transaction as further described
below.
In connection with the sale transaction, the Company incurred a loss of
$3,319,147. The components of the loss include the following: total
consideration from the Buyer totaled $2,264,907, which included $360,000 in cash
proceeds and $1,904,907 in assumed liabilities. The Company sold assets with a
book value of $2,786,344, which included fixed assets of $666,164, accounts
receivable of $1,077,104 and inventory of $1,043,076. Additionally, in
connection with and as a condition to closing the Sale Transaction, the Company
was able to negotiate a reduction in the aggregate amount payable to the
Company's creditors by $1,677,678. The loss on the sale transaction was
effectively reduced by this debt forgiveness. The stock of the Company's wholly
owned subsidiary, Tanisys (Europe), Ltd., was sold to the buyer, which carried a
book value of $1,214,187.
The Company incurred additional expenses which have been paid in
connection with the Sale Transaction including the following: fixed assets of
the memory module manufacturing business totaling $1,136,869 were written off,
stock and warrants valued at $98,091 were issued to creditors in satisfaction of
amounts owed, expenses to terminate various lease obligations in the amount of
$109,000 were incurred, $327,364 in inventory and $64,710 in deferred financing
costs were written off, $128,604 was paid to the Company's principal lender to
terminate its line of credit, professional fees were paid in the amount of
$85,572, and a variety of additional miscellaneous costs totaling $71,091 were
paid.
The Company also expects to pay future costs in addition to those
detailed above in connection with the Sale Transaction for the following: lease
termination costs for capital equipment of $835,669, professional fees of
$158,460, proxy costs of $100,000, warranty expenses totaling $51,535, and
additional expenses for litigation totaling $141,540. These costs have been
accrued by the Company and are included on the Consolidated Balance Sheet with
liabilities of discontinued operations.
Since consummating the sale transaction in December 1999, the Company
has refocused its efforts on its memory module test systems business. Following
the sale of its memory module manufacturing business, the Company also retained
its proprietary Tanisys Touch technology, available for licensing to third
parties. Although not currently under license, this technology provides an
imbedded switching mechanism alternative to mechanical and other switch
technologies. In fiscal 1999, the Company derived $118,000 in revenue from this
technology. After closing of the Sale Transaction, the Company has the same
directors and retains its officers associated with the memory module test
systems business, including Charles T. Comiso as the Company's Chief Executive
Officer.
Although there can be no assurance that the Sale Transaction will have
the intended effect on the company's financial condition and continuing
operations, management believes that the Company's retained memory module test
systems business will be able to succeed on its own, generate a positive cash
flow, and yield net profits for the Company.
The results of the memory module manufacturing business have been
classified as discontinued operations and prior periods have been restated to
reflect the sale. The loss on the sale, as well as the costs associated with the
disposition of the memory module manufacturing business, have been recorded in
the consolidated financial statements as of September 30, 1999.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data of
the Company expressed as a percentage of net sales for the years ended September
30, 1999, 1998 and 1997:
16
Continuing Operations: 1999 1998 1997
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 44.5 55.3 65.5
--------- -------- --------
Gross profit 55.5 44.7 34.5
--------- -------- --------
Operating expenses:
Research and development 15.8 31.7 30.0
Sales and marketing 15.2 24.1 22.5
General and administrative 6.9 12.5 11.4
Depreciation and amortization 1.5 16.8 26.3
Bad debt expense 2.3 2.5 14.7
--------- -------- --------
Total operating expenses 41.7 87.6 104.9
--------- -------- --------
Operating income (loss) 13.8 (42.9) (70.4)
Other expense, net (3.5) (3.5) (4.1)
--------- -------- --------
Net income (loss) from
continuing operations 10.3% (46.4) (74.5)
Net loss from discontinued operations (98.7%) (113.4) (116.6)
--------- -------- --------
--------- -------- --------
Net income (loss) (88.4)% (159.8%) (191.1%)
--------- -------- --------
--------- -------- --------
NET SALES
Net sales consist of memory module test system solutions, less returns
and discounts. Net sales increased to $10,145,108 in fiscal 1999 from $5,349,285
in fiscal 1998, an increase of 90%. The increase in fiscal 1999 is due to market
acceptance of the SIGMA-3 test systems in the Company's memory module test
systems product line.
Net sales of $5,349,285 increased in fiscal 1998 from $5,294,000 in
fiscal 1997, an increase of 1%. Sales in fiscal 1997 and 1998 were fairly
constant with shipments of SIGMA-2 and LC/Sync LC testers prior to introduction
of the SIGMA-3 test systems.
COST OF SALES AND GROSS PROFIT
Cost of sales includes the costs of all components and materials
purchased for the manufacture of products and the direct labor and overhead
costs associated with manufacturing. Gross profit increased to $5,632,506 in
fiscal 1999 from $2,389,630 in fiscal 1998. Gross profit margin increased to
55.5% in fiscal 1999 from 44.7% in fiscal 1998. The increase in gross profit, as
well as the increase in gross profit margin, was due primarily to the increased
sales of SIGMA-3 memory module tests systems and associated manufacturing cost
efficiencies.
In fiscal 1998, gross profit increased to $2,389,630 from $1,828,108 in
fiscal 1997. Gross profit margin increased to 44.7% in fiscal 1998 from 34.5% in
fiscal 1997. The increase in gross profit, as well as the increase in gross
profit margin, was due to increased manufacturing efficiencies and reduced
component costs.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the costs associated with
the design and testing of new technologies and products. These relate primarily
to the costs of materials, personnel, management and employee compensation and
engineering design consulting fees. Research and development expenses decreased
to $1,602,131 in fiscal 1999 from $1,692,059 in fiscal 1998, representing a
decrease of 5.3%. Research and development expenses are expected to increase
with expenditures for development of test systems for new technologies and to
decrease as a percentage of revenues as growth in revenues occurs.
17
Research and development expenses increased to $1,692,059 in fiscal
1998 from $1,589,103 in fiscal 1997, representing an increase of 6.5%. The
increase was primarily due to the development of new test system products.
SALES AND MARKETING
Sales and marketing expenses include all compensation of employees and
independent sales personnel, as well as the costs of advertising, promotions,
trade shows, travel, direct support and overhead. Sales and marketing expenses
increased to $1,537,717 in fiscal 1999 from $1,287,903 in 1998. Sales and
marketing expenses expressed as a percentage of revenues in fiscal 1999 and 1998
were 15.2% and 24.1%, respectively. The increase in sales and marketing expenses
is attributable to additional expenses focused on introducing the SIGMAo 3 test
system. The decrease in expenses expressed as a percentage of revenues relate
directly to increased revenues in fiscal 1999. Sales and marketing expenses are
expected to increase in terms of absolute dollars and to decrease as a
percentage of revenues in future periods as growth in revenue occurs.
Sales and marketing expenses increased to $1,287,903 in fiscal 1998
from $1,188,754 in 1997. Sales and marketing expenses expressed as a percentage
of revenues in fiscal 1998 and 1997 were 24.1% and 22.5%, respectively. The
small increase in sales and marketing expenses and the small increase in
expenses expressed as a percentage of revenues relate directly to consistent
revenues in 1997 and 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of personnel
costs, including employee compensation and benefits, and support costs including
utilities, insurance, professional fees and all costs associated with a
reporting company. In fiscal years 1999 and 1998, general and administrative
expenses increased to $703,900 from $665,420, a 5.8% increase. General and
administrative expenses expressed as a percentage of revenues were 6.9% and
12.5% in fiscal years 1999 and 1998, respectively. The increase in actual funds
expended in fiscal 1999 is due primarily to normal increases in costs. The
absolute dollar expenses associated with the general and administrative area are
expected to increase at a much slower pace than revenues in future periods with
the anticipated continued growth in business activity. The general and
administrative expenses are expected to decline in future periods when expressed
as a percentage of sales.
In fiscal years 1998 and 1997, general and administrative expenses
increased to $665,420 from $602,783, a 10.4% increase. General and
administrative expenses expressed as a percentage of revenues were 12.5% and
11.4% in fiscal 1998 and 1997, respectively. The increase in actual funds
expended in fiscal 1998 was due primarily to the additional expenditures related
to the Company's rent and personnel costs.
BAD DEBT EXPENSE
Bad debt expense consists of amounts charged to expense because of
trade accounts receivable becoming uncollectible. The Company's method of
accounting for bad debts is to use historical actual expenses to estimate the
amount of current sales which will be uncollectible and to provide for them by
creating an allowance which is netted against the trade accounts receivable. The
Company writes off amounts related to specific accounts as the collection of
these accounts becomes questionable. For fiscal 1999, the amount charged to bad
debt expense was $233,196 compared to $136,139 for fiscal 1998.
For fiscal 1998, the amount charged to bad debt expense was $136,139
compared to $780,785 for fiscal 1997.
18
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes the depreciation for all fixed
assets and the amortization of intangibles, including goodwill incurred in the
May 1996 acquisitions of 1st Tech and DarkHorse. Depreciation and amortization
decreased to $155,466 in fiscal 1999 from $902,064 in fiscal 1998. The decrease
is due primarily to the completion of amortization in April 1998 of goodwill
relating to the acquisitions of 1st Tech and DarkHorse. Depreciation and
amortization is expected to increase slightly in terms of absolute dollars and
decrease significantly as a percentage of revenues as growth in revenues occurs.
Depreciation and amortization decreased to $902,064 in fiscal 1998 from
$1,393,880 in fiscal 1997. The decrease was due primarily to the completion of
amortization in April 1998 of goodwill relating to the acquisitions of 1st Tech
and DarkHorse.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income less
interest expense. Interest expense was attributable to borrowings from a
revolving credit note. Substantially all of the interest expense related to
credit line draws made for short-term inventory requirements and to fund
accounts receivable. Interest income relates to investment of available cash in
short-term interest bearing accounts and cash equivalent securities. The Company
incurs net interest expense in order to maintain balances of inventories and
accounts receivable. Other income (expense) increased to $356,774 of expense in
fiscal 1999 from $189,809 of expense in fiscal 1998. The increase in other
income (expense) is primarily due to an increase in short-term borrowings on the
revolving credit note. The Company expects to continue to require borrowings to
fund growth in accounts receivable and inventory in the future and therefore
expects net interest expense to increase.
Other income (expense) decreased to $189,809 of expense in fiscal 1998
from $215,499 of expense in fiscal 1997. The decrease in other income (expense)
is primarily due to a decrease in short-term borrowings on the revolving credit
note.
PROVISION FOR INCOME TAXES
For the years ended September 30, 1999, 1998 and 1997, the Company
incurred consolidated net operating losses for U.S. income tax purposes of
approximately $4,229,000, $5,252,000 and $6,023,000 and for non-U.S. income tax
purposes of approximately $817,000 and $369,000 and $-0-, respectively. The loss
carryforwards of approximately $22,886,000 at September 30, 1999 begin to expire
in 2011. At September 30, 1999 and 1998, the Company had temporary differences
resulting in future tax deductions of approximately $4,791,766 and $756,000,
respectively, principally representing differences in accounting and tax basis
in accrued liabilities and reserves and anticipated loss from discontinued
operations. Deferred income tax assets from the loss carryforwards and asset
basis differences aggregate approximately $8,456,000 and $6,888,000, at
September 30, 1999, and 1998, respectively.
For financial reporting purposes, a valuation allowance of $8,456,000
and $6,888,000 at September 30, 1999 and 1998, respectively, has been recorded
to offset the deferred tax assets due to the uncertainty as to whether the
benefits will be realized.
The availability of the net operating loss carryforwards and future tax
deductions to reduce taxable income is subject to various limitations under the
Internal Revenue Code of 1986, as amended (the "Code"), in the event of an
ownership change as defined in Section 382 of the Code. The Company may lose the
benefit of such net operating loss carryforwards due to Internal Revenue Service
("IRS") Code Section 382 limitations. This section states that after
reorganization or other change in corporate ownership, the use of certain
19
carryforwards may be limited or prohibited. The Company believes that the IRS
Code Section 382 limitation did not exist as of September 30, 1999, and if
triggered, the consequence is expected to have no material impact on the
Company's consolidated financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company has utilized the funds acquired in equity
financings of its Common Stock, exercise of warrants, exercise of stock options,
vendor credits, certain bank borrowings and funds generated from operations to
support its operations, carry on research and development activities, acquire
capital equipment, finance inventories and accounts receivable and pay its
general and administrative expenses. For fiscal 1999, the Company generated
$3,846,201 in net cash from financing activities versus $3,568,696 in fiscal
1998. The $3,846,201 in fiscal 1999 consisted of $558,750 from Common Stock
sales, proceeds from stockholders notes of $2,000,000 and $1,287,451 on
revolving credit and capital lease obligations. At September 30, 1999, the
Company had $684,949 of cash, $290,511 restricted cash and a negative working
capital of $6,619,275. The negative working capital is primarily attributable to
approximately $6,580,928 of short-term liabilities related to discontinued
operations. Restricted cash represents customer payments deposited into the
Company's lockbox account but not yet transferred to pay down the Company's line
of credit.
On November 2, 1998, the Company completed a private placement of
$2,000,000 of debt with warrants. On January 31, 2000, certain holders of the
debt elected to convert an aggregate amount of $1,800,000 into 7,200,000 shares
of the Company's common stock pursuant to an offer made by the Company. Interest
was accrued on the notes through January 31, 2000 and was converted into an
aggregate of 42,629 shares of the Company's common stock in accordance with the
terms of the loan agreements.
Capital expenditures totaled $192,156 and $759,752 in fiscal 1999 and
1998, respectively. These capital expenditures were primarily for the purchase
of test equipment, expansion of manufacturing facilities and upgrades to
enterprise information systems.
The Company believes that its existing funds, anticipated cash flows
from operations, amounts available from future vendor credits, bank borrowings,
capital and operating leases and equity financings will be sufficient to meet
its working capital and capital expenditure needs for the next twelve months at
the projected level of operations. However, should there be a significant
increase in sales above projected levels which requires additional investments
in equipment, inventory and accounts receivable, the Company may be required to
obtain additional funding through debt or rely upon a future equity offering or
offerings for such funding. There is no assurance that the Company would be able
to locate debt funding or that it would be successful in its attempts to raise a
sufficient amount of funds in an equity offering or offerings. The Company's
potential inability to raise needed funds to meet its projected level of
operations or increase above current projections could have a material adverse
effect on the Company.
INTERNATIONAL SALES
International sales accounted for 31.9% and 31.3% of net sales in
fiscal 1999 and 1998, respectively. The Company anticipates that international
sales will increase in future periods and will account for an increasing portion
of net sales. The Company is subject to the risks associated with the imposition
of legislation and regulations relating to the import or export of high
technology products. The Company cannot predict whether quotas, duties, taxes or
other charges or restrictions upon the importation or exportation of the
Company's products will be implemented by the U.S. or other countries. Because
sales of the Company's products have been denominated to date in U.S. dollars,
increases in the value of the U.S. dollar could increase the price of the
Company's products so that they become relatively more expensive to customers in
the local currency of a particular country, leading to a reduction in sales and
profitability in that country. Some of the Company's customer purchase orders
and agreements are governed by foreign laws, which may differ significantly from
U.S.
20
laws. Therefore, the Company may be limited in its ability to enforce its rights
under such agreements and to collect damages, if awarded. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
SIGNIFICANT CUSTOMER CONCENTRATION
In North America and Europe a majority of the Company's memory module
test systems are sold directly to semiconductor and independent memory module
manufacturers. In Asia, the Company also sells its test systems through
distribution partners and independent sales representative organizations. In
fiscal 1999 and 1998, the Company's ten largest customers accounted for 90.6%
and 52.2% of net memory module test system sales, respectively. During fiscal
1999, the Company had three customers which accounted for 43.8%, 13.8% and 12.2%
of the Company's net memory module test system sales, respectively. In fiscal
1998 and 1997, one customer accounted for 11.3% and 10.3% of the Company's net
test system sales, respectively.
The Company, in general, has no firm long-term volume commitments from
its customers and generally enters into individual purchase orders and
agreements with non-binding forecasts. Customer purchase orders and forecasts
are subject to change, cancellation or delay with little or no consequence to
the customer. Therefore, the Company has experienced such changes and
cancellations and expects to continue to do so in the future. The replacement of
canceled, delayed or reduced purchase orders with new business cannot be
assured. The Company's business, financial condition and results of operations
will depend significantly on its ability to obtain purchase orders from existing
and new customers, upon the financial condition and success of its customers,
the success of customers' products and the general economy. Factors affecting
the industries of the Company's major customers could have a material adverse
effect on the Company's business, financial condition and results of operations.
NO ASSURANCE OF PRODUCT QUALITY, PERFORMANCE AND RELIABILITY
The Company expects that its customers will continue to establish
demanding specifications for quality, performance, reliability and delivery. To
date, the Company's quality problems have not had a significant effect on the
Company's results of operations and the known quality problems have been or are
in the process of being remedied. There can be no assurance that the problems
will not occur in the future with respect to quality, performance, reliability
and delivery of the Company's products. If such problems occur, the Company
could experience increased costs, delays in or cancellations or rescheduling of
orders or shipments, delays in collecting accounts receivable and increases in
product returns and discounts, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
PRODUCT CONCENTRATION; DEPENDENCE ON MEMORY MARKET
The market for semiconductor memory module test systems has been
cyclical. The industry has experienced significant economic downturns at various
times, characterized by diminished product demand, accelerated erosion of
average selling prices and production overcapacity. During fiscal 1999, there
were significant declines as well as increases in DRAM and SRAM semiconductor
prices. Since the Company's test systems are sold into the semiconductor and
memory module market, future price changes could have a material adverse effect
on the Company's business, financial condition and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations and gross margin have fluctuated
significantly from period to period in the past and may in the future continue
to fluctuate significantly from period to period. The primary factors that have
affected and may in the future affect the Company's results of operations
include the loss of a principal customer or customers or the reduction in orders
from a customer. Other factors that may affect the Company's results of
operations in the future include fluctuating market demand for and changes in
the selling prices of the
21
Company's products, market acceptance of new products and enhanced versions of
the Company's products, delays in the introduction of new products and
enhancements to existing products, and manufacturing inefficiencies associated
with the startup of new product introductions. In addition, the Company's
operating results may be affected by the timing of new product announcements and
releases by the Company or its competitors; the timing of significant orders;
the ability to produce products in volume; delays, cancellations or rescheduling
of orders due to customer financial difficulties or other events; inventory
obsolescence, including the reduction in value of the Company's inventories due
to unexpected price declines and unexpected product returns; the timing of
expenditures in anticipation of increased sales; cyclicality in the Company's
targeted markets; and expenses associated with acquisitions.
Sales of the Company's individual products and product lines toward the
end of a product's life cycle typically are characterized by steep declines in
sales, pricing and gross margin, the precise timing of which may be difficult to
predict. The Company could experience unexpected reductions in sales of products
as customers anticipate new product purchases. In addition, to the extent that
the Company manufactures products in anticipation of future demand that does not
materialize, or in the event a customer cancels outstanding orders during a
period of either declining product selling prices or decreasing demand, the
Company could experience an unanticipated decrease in sales of products. These
factors could give rise to charges for obsolete or excess inventory, return of
products or discounts. In the past, the Company has had to write-down and
write-off excess or obsolete inventory. To the extent that the Company is
unsuccessful in managing product transitions, its business, financial condition
and results of operations could be materially and adversely affected.
The need for continued significant expenditures for research and
development and ongoing customer service and support, among other factors, will
make it difficult for the Company to reduce its operating expenses in any
particular period if the Company's expectations for net sales for that period
are not met. The Company believes that period-to-period comparisons of the
Company's financial results are not necessarily meaningful and should not be
relied upon as indications of future performance.
DEPENDENCE ON SEMICONDUCTOR, COMPUTER, TELECOMMUNICATIONS AND NETWORKING
INDUSTRIES
Demand for the Company's line of memory module test systems is driven
by the increased demand for higher level memory module technology in
semiconductor, computer, telecommunications and networking industries. The
Company may experience substantial period-to-period fluctuations in future
operating results due to factors affecting the semiconductor, computer,
telecommunications and networking industries. From time to time, each of these
industries has experienced downturns, often in connection with, or in
anticipation of, declines in general economic conditions. A decline or
significant shortfall in growth in any one of these industries could have a
material adverse impact on the demand for the Company's products and therefore a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company's net sales
and results of operations will not be materially and adversely affected in the
future due to changes in demand from individual customers or cyclical changes in
the semiconductor, computer, telecommunications, networking or other industries
utilizing the Company's products.
HISTORY OF LOSSES; UNCERTAIN PROFITABILITY
The Company has experienced operating losses since inception. At
September 30, 1999, the Company had an accumulated deficit of approximately
$39,359,910.
There can be no assurance that the Company will not continue to incur
losses or that the Company will be able to raise cash as necessary to fund
operations.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE
AVAILABLE
22
The Company's capital requirements will depend on numerous factors,
including market acceptance and demand for its products; the resources the
Company devotes to the development, manufacture and marketing of its
products; the progress of the Company's product development programs; the
resources required to protect the Company's intellectual property; the
resources expended, if any, to acquire complementary businesses, products and
technologies; and other factors. The timing and amount of such capital
requirements cannot be accurately predicted. Funds also may be used for the
acquisition of businesses, products and technologies that are complementary
to those marketed by the Company. Consequently, although the Company believes
that its revenues and other sources of liquidity will provide adequate
funding for its capital requirements through at least 2000, the Company may
be required to raise additional funds through public or private financings,
collaborative relationships or other arrangements. There can be no assurance
that the Company will not require additional funding or that such additional
funding, if needed, will be available on terms attractive to the Company or
at all. Any additional equity financings may be dilutive to stockholders, and
debt financing, if available, may involve restrictive covenants. In addition,
the number of shares of Common Stock issuable upon the conversion of the
Series A Stock is subject to adjustment upon the occurrence of certain
events. Such adjustments may be dilutive to stockholders and may inhibit the
Company's ability to consummate additional equity financings.
MANAGEMENT OF GROWTH; EXPANSION OF OPERATIONS
In order to continue to provide quality products and customer
service and to meet anticipated demands of its customers, the Company will be
required to continue to increase staffing and other expenses, including
expenditures on research and development, sales and marketing. Should the
Company increase its expenditures in anticipation of a future level of sales
that does not materialize, the Company's business, financial condition and
results of operations would be materially and adversely affected. In order to
achieve anticipated sales levels and profitability, the Company will continue
to be required to manage its assets and operations efficiently.
RAPID TECHNOLOGICAL CHANGE
The semiconductor, computer, telecommunications and networking
industries are subject to rapid technological change, short product life
cycles, frequent new product introductions and enhancements, changes in
end-user requirements and evolving industry standards. The Company's ability
to be competitive in these markets will depend in significant part upon its
ability to invest significant amounts of resources for research and
development efforts, to successfully develop, introduce and sell new products
and enhancements on a timely and cost-effective basis and to respond to
changing customer requirements that meet evolving industry standards. For
example, the semiconductor memory market transitioned from fast page mode and
EDO memory to SDRAM over the past three years. Other transitions from SDRAM
to Rambus-Registered Trademark- and DDR SDRAM are occurring in 2000. The
success of the Company in developing new and enhanced products will depend
upon a variety of factors, including integration of the various elements of
its complex technology; timely and efficient completion of product design;
timely and efficient implementation of manufacturing and assembly processes;
and product performance, quality and reliability. The Company has
experienced, and may in the future experience, delays from time to time in
the development and introduction of new products. Moreover, there can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products or enhancements. There can be no
assurance that defects or errors will not be found in the Company's products
after commencement of commercial shipments, which could result in delayed
market acceptance of such products. The inability of the Company to introduce
new products or enhancements that contribute to sales could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON SOLE OR LIMITED SOURCES OF SUPPLY
The Company is dependent on certain suppliers, including limited and
sole source suppliers, to provide key components used in the Company's
products. In particular, the Company is dependent in significant part upon
certain limited or sole source suppliers for critical, and in some cases
custom components in the Company's
23
memory module test systems. The Company has experienced and may continue to
experience delays in component deliveries and quality problems with respect
to certain component deliveries, which have caused and could in the future
cause delays in product shipments and have required and could in the future
require the redesign of certain products. The Company generally has no
written agreements with its suppliers. There can be no assurance that the
Company will receive adequate component supplies on a timely basis in the
future. The inability to continue to obtain sufficient supplies of components
as required, or to develop alternative sources if required, could cause
delays, disruptions or reductions in product shipments or require product
redesigns which could damage relationships with current or prospective
customers, could increase costs and/or prices and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in a significant part
upon the continued contributions of its key technical and senior management
personnel, many of whom would be difficult to replace. The Company's future
operating results also depend in significant part upon its ability to
attract, train and retain qualified management, manufacturing and quality
assurance, engineering, marketing, sales and support personnel. However,
competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting, training or retaining such
personnel now or in the future. There may be only a limited number of persons
with the requisite skills to serve in these positions, and it may be
increasingly difficult for the Company to hire such persons over time. The
loss of any key employee, the failure of any key employee to perform in his
or her current position, the Company's inability to attract, train and retain
skilled employees as needed or the inability of the officers and key
employees of the Company to expand, train and manage the Company's employee
base could materially and adversely affect the Company's business, financial
condition and results of operations.
DEPENDENCE ON AVAILABILITY, RECRUITMENT AND RETENTION OF TECHNICAL PERSONNEL
The Company depends upon its ability to attract, hire and retain
technical personnel who possess the skills and experience necessary to meet
the Company's own personnel needs and the technical requirements of its
clients. Competition for individuals with proven technical skills is intense.
The computer industry in general experiences a high rate of attrition of such
personnel. The Company competes for such individuals with competitors,
providers of outsourcing services, temporary personnel agencies, computer
systems consultants, customers and potential customers. Many large
competitors have announced extensive campaigns to hire additional technical
personnel. Failure to attract and retain sufficient technical personnel would
have a material adverse effect on the Company's business, operating results
and financial condition.
LIMITED OPERATING HISTORY
Although the Company has been in existence since 1984, its current
operations have been in place only since its acquisition of DarkHorse in
1996. Accordingly, the Company is still in many respects subject to certain
risks and uncertainties inherent in a new enterprise, including limited
capital and other resources, reliance on key personnel, operating in a highly
competitive environment, inability to develop long-term relationships with
its customers, suppliers and lenders, lack of name recognition, higher
overhead costs, and difficulty in addressing unanticipated problems, delays
and expenses.
UNCERTAINTY REGARDING PROTECTION OF PROPRIETARY RIGHTS
In the semiconductor, computer, telecommunications and networking
industries, it is typical for companies to receive notices from time to time
alleging infringement of patents, copyrights or other intellectual property
rights of others. While there is currently no pending intellectual property
litigation involving the Company, the Company may from time to time be
notified of claims that it may be infringing patents, copyrights or other
intellectual property rights owned by third parties. There can be no
assurance that third parties will not in
24
the future pursue claims against the Company with respect to the alleged
infringement of patents, copyrights or other intellectual property rights. In
addition, litigation may be necessary to protect the Company's intellectual
property rights and trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against third party claims of
invalidity. Any litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations.
There can be no assurance that infringement, invalidity, right to
use or ownership claims by third parties or claims for indemnification
resulting from infringement claims will not be asserted in the future. The
failure to obtain a license under a patent or intellectual property right
from a third party for technology used by the Company could cause the Company
to incur substantial liabilities and to suspend the manufacture of the
products utilizing the intellectual property. In addition, should the Company
decide to litigate such claims, such litigation could be extremely expensive
and time consuming and could materially and adversely affect the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation.
The Company attempts to protect its intellectual property rights
through a variety of measures, including non-disclosure agreements,
trademarks, trade secrets and to a lesser extent, patents and copyrights.
There can be no assurance, however, that such measures will provide adequate
protection for the Company's trade secrets or other proprietary information,
that disputes with respect to the ownership of its intellectual property
rights will not arise, that the Company's trade secrets or proprietary
technology will not otherwise become known or be independently developed by
competitors or that the Company can otherwise meaningfully protect its
intellectual property rights.
EFFECTS OF DELISTING FROM NASDAQ SMALLCAP MARKET; LACK OF LIQUIDITY OF LOW
PRICED STOCKS
In July 1999, the Company's stock was delisted from trading on the
Nasdaq SmallCap Market, and on July 28, 1999, the Company's stock began
trading on the Nasdaq OTC Bulletin Board, which was established for
securities that do not meet the Nasdaq SmallCap Market's listing
requirements. Consequently, buying or selling the Company's common stock
could be more difficult because of the smaller quantities of shares that
could be bought and sold, transactions could be delayed, and security
analysts' and news media's coverage of the Company stock could be reduced.
These factors could result in lower prices and larger spreads in the bid and
ask prices for shares of the Company's common stock.
In addition to delisting, with the trading price of the Common Stock
below $5.00 per share, trading in the Common Stock also is subject to the
requirements of certain rules promulgated under the Exchange Act, which
require additional disclosures by broker-dealers in connection with any
trades involving a stock defined as a penny stock (generally, any non-Nasdaq
or other national equity security that has a market price of less than $5.00
per share, subject to certain exceptions). Such rules require the delivery,
prior to any penny stock transaction, of a disclosure schedule explaining the
penny stock market and the risks associated therewith, and impose various
sales practice requirements on broker-dealers who sell penny stock to persons
other than established customers and accredited investors (which are
generally institutions). For these types of transactions, the broker-dealer
must make a special suitability determination for the purchase and have
received the purchaser's written consent to the transaction prior to the
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from effecting transactions in Common Stock,
which could severely limit the market liquidity of the Common Stock and the
ability of stockholders to sell their shares of Common Stock in the secondary
market.
ENVIRONMENTAL REGULATION
The Company's operations and manufacturing processes are subject to
certain federal, state, local and foreign environmental protection laws and
regulations. Public attention has increasingly been focused on the
25
environmental impact of manufacturing operations that use hazardous materials
or generate hazardous wastes, and environmental laws and regulations may
become more stringent over time. There can be no assurance that failure to
comply with either present or future regulations, or to obtain all necessary
permits required under such regulations, would not subject the Company to
significant compliance expenses, production suspensions or delay,
restrictions on expansion at its present or future locations, the acquisition
of costly equipment or other liabilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments, which
would require disclosure under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company and the related
report of the Company's independent public accountants thereon are included
in this report at the pages indicated.
CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 1999 AND 1998 AND
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997:
Reports of Independent Public Accountants..........................................27
Consolidated Balance Sheets at September 30, 1999 and 1998.........................29
Consolidated Statements of Operations for the Years Ended September 30, 1999,
1998 and 1997.....................................................................30
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997.................................................31
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998 and 1997...............................................................32
Notes to the Consolidated Financial Statements.....................................33
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tanisys Technology, Inc.:
We have audited the accompanying consolidated balance sheet of Tanisys
Technology, Inc. (a Wyoming corporation), and subsidiaries as of September
30, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. The consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tanisys
Technology, Inc., and subsidiaries as of September 30, 1999, and the results
of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company has incurred net losses of
$8,996,728, $8,547,796 and $10,113,828 for the years ended September 30,
1999, 1998, and 1997, respectively. Current liabilities exceed current assets
by $6,619,275 and total liabilities exceed total assets by $3,872,620 at
September 30, 1999. These factors, and others discussed in Note 1, raise
substantial doubt about Tanisys Technology, Inc.'s ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
/s/ Brown, Graham and Company P.C.
Austin, Texas
February 14, 2000
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tanisys Technology, Inc.:
We have audited the accompanying consolidated balance sheet of Tanisys
Technology, Inc. (a Wyoming corporation), and subsidiaries as of September
30, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended September 30, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tanisys Technology, Inc.,
and subsidiaries as of September 30, 1998, and the results of their
operations and their cash flows for each of the two years in the period ended
September 30, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Austin, Texas
October 30, 1998
28
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $684,949 $239,446
Restricted cash (Note 6) 290,511 154,271
Trade accounts receivable, net of allowance of $333,703 and
$406,157, respectively 1,977,390 1,219,422
Inventory (Note 3) 540,458 923,942
Prepaid expenses and other 205,974 124,792
Net current assets of discontinued operations (Note 2) 7,610,991 5,820,493
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 11,310,273 8,482,366
Property and equipment, net of accumulated depreciation and amortization of
$747,988 and $351,995 respectively (Note 4) 496,391 676,457
Other noncurrent assets 60,680 73,514
Net noncurrent assets of discontinued operations (Note 2) 4,946,235 6,680,963
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $16,813,579 $15,913,300
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,199,200 $1,829,111
Accrued liabilities (Note 5) 529,087 436,340
Revolving credit note (Note 6) 1,978,403 639,765
Current portion of obligations under capital lease (Note 8) 30,939 59,112
Net current liabilities of discontinued operations (Note 2) 14,191,919 8,389,518
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 17,929,548 11,353,846
Long-term debt to shareholders, net of discounts (Note 7) 1,722,749 -
Long-term portion of obligations under capital lease (Note 8) 9,920 32,934
Net noncurrent liabilities of discontinued operations (Note 2) 1,023,982 721,817
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 20,686,199 12,108,597
- -----------------------------------------------------------------------------------------------------------------------------
Mandatorily redeemable convertible preferred stock:
5% Series A Convertible Preferred Stock, $1 par value, 400 shares
authorized, 225 and 400 shares issued and outstanding, respectively (Note 9) 1,831,483 2,390,475
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (Note 10):
Common stock, no par value, 50,000,000 shares authorized,
24,390,404 and 20,799,714 shares issued and outstanding, respectively 31,968,495 29,114,774
Additional paid-in capital 1,687,312 1,687,312
Accumulated other comprehensive loss - (2,625)
Accumulated deficit (39,359,910) (29,385,233)
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (5,704,103) 1,414,228
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity (Deficit) $16,813,579 $15,913,300
=============================================================================================================================
29
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $10,145,108 $5,349,285 $5,294,000
Cost of goods sold 4,512,602 2,959,655 3,465,892
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 5,632,506 2,389,630 1,828,108
- -----------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 1,602,131 1,692,059 1,589,103
Sales and marketing 1,537,717 1,287,903 1,188,754
General and administrative 703,900 665,420 602,783
Depreciation and amortization 155,466 902,064 1,393,880
Bad debt expense 233,196 136,139 780,785
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,232,410 4,683,585 5,555,305
- -----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1,400,096 (2,293,955) (3,727,197)
Other income (expense):
Interest income 13,675 23,808 15,981
Interest expense (371,514) (213,617) (231,480)
Other income 1,065 - -
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 1,043,322 (2,483,764) (3,942,696)
- -----------------------------------------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes:
Loss from discontinued operations, net of income taxes (6,690,903) (6,064,032) (6,171,132)
of $-0-
Estimated loss on disposal of memory module
manufacturing business (3,319,147) - -
- -----------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations (10,010,050) (6,064,032) (6,171,132)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss $(8,966,728) $(8,547,796) $(10,113,828)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $1,043,322 $(2,483,764) $(3,942,696)
Preferred stock dividend and amortization of the
value of the beneficial conversion feature on
the preferred stock (1,007,949) (588,016) -
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) from continuing operations
applicable to common stockholders 35,373 (3,071,780) (3,942,696)
Loss from discontinued operations (10,010,050) (6,064,032) (6,171,132)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders $(9,974,677) $(9,135,812) $(10,113,828)
- -----------------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share:
Income (loss) from continuing operations
applicable to common stockholders $ - $(0.15) $(0.22)
Loss from discontinued operations (0.43) (0.29) (0.35)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stock $(0.43) $(0.44) $(0.58)
- -----------------------------------------------------------------------------------------------------------------------------
Diluted income (loss) per common share:
Income (loss) from continuing operations
applicable to common stockholders $.01 $(0.15) $(0.22)
30
Loss from discontinued operations (0.33) (0.29) (0.35)
- -----------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders $(0.32) $(0.44) $(0.58)
- -----------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL FOREIGN TOTAL
COMMON STOCK PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
-----------------------
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
-------------------------------------------------------------------------------------
Balance, September 30, 1996 15,978,537 $20,469,136 $ - $ - $(10,119,093) $10,350,043
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss - - - - (10,113,828) (10,113,828)
Sale of stock 2,280,000 5,600,000 - - - 5,600,000
Exercise of stock warrants and options 2,076,177 2,530,388 - - - 2,530,388
Other - - - - (16,500) (16,500)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 20,334,714 28,599,524 - - (20,249,421) 8,350,103
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss - - - - (8,547,796) (8,547,796)
Exercise of stock warrants and options 275,000 130,250 - - - 130,250
Sale of stock 100,000 150,000 - - - 150,000
Stock issued for services 50,000 62,000 - - - 62,000
Stock options issued for services - 123,000 - - - 123,000
Stock warrants issued in connection
with issuance of mandatorily
redeemable
convertible preferred stock - - 283,803 - - 283,803
Beneficial conversion feature associated
with mandatorily redeemable
convertible preferred stock - - 1,403,509 - - 1,403,509
Amortization of beneficial
conversion feature - - - - (538,016) (538,016)
Stock dividend paid on mandatorily
redeemable convertible preferred 40,000 50,000 - - (50,000) -
stock
Foreign translation adjustment - - - (2,625) - (2,625)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 20,799,714 29,114,774 1,687,312 (2,625) (29,385,233) 1,414,228
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss - - - - (8,966,728) (8,966,728)
Exercise of stock warrants and options 1,815,000 558,750 - - - 558,750
Stock issued for services 30,000 30,000 - - - 30,000
Stock issued for interest on shareholder 100,758 133,333 - - - 133,333
debt
Stock warrants issued for debt financing - 75,000 - - - 75,000
costs
Stock warrants issued for operating lease - 56,284 - - - 56,284
Stock warrants issued in connection with
issuance of debt to stockholders - 461,538 - - - 461,538
Conversion of mandatorily redeemable
convertible preferred stock to
common stock 1,535,198 1,424,485 - - - 1,424,485
Amortization of beneficial conversion - - - - (865,493) (865,493)
feature
Stock dividend paid on mandatorily
redeemable convertible preferred 109,734 114,331 - - (142,456) (28,125)
stock
Foreign translation adjustment - - - 2,625 - 2,625
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 24,390,404 $31,968,495 $ 1,687,312 $ - $(39,359,910) $(5,704,103)
- ---------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
31
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ($8,966,728) ($8,547,796) (10,113,828)
Deduct: Net loss from discontinued operations (10,010,050) (6,064,032) (6,171,132)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income (loss) from continuing operations 1,043,322 (2,483,764) (3,942,696)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 455,923 1,135,969 1,545,001
Amortization of warrant cost issued for debt 184,287 - -
Stock issued for interest - -
Stock compensation for services 133,333 185,000 -
30,000
(Increase) decrease in restricted cash (136,240) 1,385,177 (1,539,448)
(Increase) decrease in accounts receivable, net (757,968) (362,254) 104,613
(Increase) decrease in inventory 383,484 (23,892) (133,592)
Increase in prepaid expenses and other (81,182) (25,808) (46,414)
Increase (decrease) in accounts payable and accrued liabilities (565,289) 149,433 779,964
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities of continuing operations 689,670 (40,139) (3,232,572)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of fixed assets (192,156) (759,752) (151,121)
Other assets 12,834 64,550 (52,703)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities of continuing operations (179,322) (695,202) (203,824)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of debt to shareholders 2,000,000 - -
Proceeds from issuance of common stock - 150,000 5,600,000
Net proceeds from issuance of preferred stock and warrants - 3,665,000 -
Draws (payments) on revolving credit note, net 1,034,906 (362,009) 163,400
Payments on capital lease obligations (51,187) (14,545) -
Proceeds from exercise of stock options - 128,250 42,420
Proceeds from exercise of stock warrants 558,750 2,000 2,487,968
Other - - (16,500)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities of continuing operations 3,542,469 3,568,696 8,277,288
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from discontinued operations (3,607,314) (4,583,926) (5,540,444)
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 445,503 (1,750,571) (699,552)
Cash and cash equivalents, beginning of year 239,446 1,990,017 2,689,569
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 684,949 $ 239,446 $ 1,990,017
- -------------------------------------------------------------------------------------------------------------------------------
32
Supplemental disclosure of cash flow information:
Interest paid $ 941,408 $ 610,334 $ 661,368
Non-cash investing and financing activities:
Stock and stock options issued for services 30,000 185,000 -
Preferred stock dividend accrued 28,125 - -
Preferred stock dividend paid in common stock 114,331 50,000 -
Amortization of beneficial conversion feature on preferred stock 865,493 538,016 -
Capital lease additions 1,094,039 1,000,631 73,527
Accrued fixed asset additions - 3,114,855 -
Issuance of stock warrants in connection with issuance of debt to
Shareholders 461,538 - -
Conversion of preferred stock to common stock 1,424,485 - -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Tanisys
Technology, Inc. ("Tanisys") and its wholly owned subsidiaries, 1st Tech
Corporation ("1st Tech"), DarkHorse Systems, Inc. ("DarkHorse"), Rosetta
Marketing and Sales Inc., and Tanisys (Europe) Ltd., which is located in
Scotland, (collectively, the "Company"). The consolidated financial statements
have been prepared in accordance with generally accepted accounting principles.
All significant intercompany balances and transactions have been eliminated in
consolidation.
The Company designs, manufacturers and markets memory module test
systems and provides design services in conjunction with the licensing of its
touch sensor products.
On December 9, 1999, the Company sold its memory module manufacturing
business, including all of the common stock of Tanisys (Europe), Ltd. The assets
and liabilities and the loss from the sale of the memory module manufacturing
business have been included in the accompanying consolidated financial
statements as discontinued operations. (See Note 2 for discontinued operations)
GOING CONCERN
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. Numerous factors could affect
the Company's operating results, including, but not limited to, general economic
conditions, competition, and changing technologies. A change in any of these
factors could have an adverse effect on the Company's consolidated financial
position or results of operations. The Company was able to generate $1,043,322
in income before discontinued operations, however, the Company has sustained
substantial operating losses in recent years. In addition, the Company's working
capital position has deteriorated due to the ongoing losses from operations. At
September 30, 1999, current liabilities exceed current assets by $6,619,275, and
total liabilities exceed total assets by $3,872,620.
33
In view of these matters, realization of a major portion of the assets
in the accompanying consolidated balance sheet is dependent upon continued
operations of the Company, which in turn may be dependent upon the success of
its future operations. Management believes that the sale of certain assets and
the assumption of certain liabilities by the buyer of its memory module
manufacturing business in December 1999, including all the stock of Tanisys
(Europe) Ltd., plus anticipated cash flows from operations will provide the
opportunity for the Company to continue as a going concern.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be classified as cash equivalents. Cash
equivalents are carried at cost, which approximates market value. The Company
places its cash investments in high credit quality instruments.
34
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORY
Inventory is stated at the lower of cost or market value. In the second
quarter of fiscal 1999, the Company changed its method of accounting for
inventories from a weighted-average cost basis to a standard cost method. The
change did not have a significant effect on results of operations for 1997, 1998
or 1999, nor is it anticipated that it will have a material effect on future
periods. Prior to the change, the Company's inventory costs would not have
differed significantly under the two methods. Inventory costs include direct
materials, direct labor and certain indirect manufacturing overhead expenses.
(See Note 3)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives, which range from three to seven years. Leasehold
improvements and assets subject to capital lease are amortized using the
straight-line method over the shorter of the term of the lease or life of the
asset. Maintenance and repairs are expensed as incurred.
GOODWILL
Goodwill has been amortized against earnings over two years. For the
years ended September 30, 1998, and 1997, amortization expense of approximately
$2,092,000 and $3,585,000, respectively, has been reflected in operating
expenses in continuing and discontinued operations in the accompanying
consolidated statements of operations. (See Note 2)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The mandatorily redeemable convertible preferred stock was issued
during fiscal 1998. The preferred stock contains a beneficial conversion feature
which has been charged to accumulated deficit and is reflected as an increase in
preferred stock up to the earliest date the preferred stock can be converted to
Common Stock. (See Note 9)
FOREIGN CURRENCY
The Scotland subsidiary uses the Pound Sterling as its functional
currency. The Company's Scotland assets and liabilities are translated into U.S.
Dollars at the exchange rate at the balance sheet date. Income and expense items
are translated at the average exchange rate prevailing during the period. The
aggregate transaction gains and losses included in the determination of net loss
are not material for any period presented. (See Note 2)
35
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION
Revenue from sales is recognized when the related products are shipped,
typically freight on board shipping point or at the time the services are
rendered. The Company warrants products against defects, has a policy concerning
the return of products and accrues the cost of warranting these products as the
items are shipped.
RESEARCH AND DEVELOPMENT
Research and development expenses relate primarily to the technological
development and enhancement of the Company's products. Research and development
costs are charged to expense as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. This statement is effective for the
Company in fiscal 1999. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from contributions by stockholders.
There was no impact to the Company as a result of the adoption of SFAS No. 130,
as there were no differences between net loss and comprehensive loss available
to common stockholders for the year ended September 30, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 requires publicly held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operating decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the consolidated financial statements is also to be provided. SFAS
No. 131 is effective for the Company in fiscal year 1999. The Company has
adopted this statement, but due to the sale of the memory module manufacturing
business the company does not have operating segments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
fiscal 1999 presentation. (See Note 2)
36
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
2. DISCONTINUED OPERATIONS
On December 9, 1999, the Company sold certain assets of its memory
module manufacturing business, including all the stock of Tanisys (Europe) Ltd.,
a wholly owned subsidiary of the Company located in Scotland. The sale also
included the assumption of certain liabilities by the buyer. The results of the
memory module manufacturing operations have been classified as discontinued
operations in all fiscal periods presented.
Revenue of the discontinued operations was $42,364,464, $27,796,729 and
$42,379,950 in fiscal 1999, 1998 and 1997, respectively.
The loss on the sale, as well as the costs associated with the
disposition of the memory module manufacturing business, has been recorded in
the consolidated financial statements as of September 30, 1999. Included in the
loss is an accrual of $1,327,502, which represents the Company's best estimate
of the remaining costs associated with the disposition of the discontinued
operations.
Assets and liabilities of the memory module manufacturing business
consisted of the following:
September 30,
------------------------------
1999 1998
------------------------------
Cash $ 220,103 $ 13,661
Trade accounts receivable 5,013,731 2,987,497
Inventory (net) 1,952,251 2,300,729
Prepaid expenses 424,906 518,606
----------- ----------
Net current assets $ 7,610,991 $5,820,493
----------- ----------
----------- ----------
Property and equipment (net) $ 4,319,960 $6,075,342
Other assets 626,275 605,621
----------- ----------
Net noncurrent assets $ 4,946,235 $6,680,963
----------- ----------
----------- ----------
Accrued liabilities $ 5,375,894 $3,740,946
Accounts payable 3,253,199 2,819,018
Revolving credit line 4,242,743 1,626,495
Capital leases, current 1,320,083 203,059
----------- ----------
Net current liabilities $14,191,919 $8,389,518
----------- ----------
----------- ----------
Capital leases net of current $ 1,023,982 $ 721,817
----------- ----------
----------- ----------
Net assets disposed of have been separately classified in the
accompanying consolidated balance sheet at September 30, 1999. The September 30,
1998 consolidated balance sheet has been restated to conform with the current
year's presentation.
37
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
2. DISCONTINUED OPERATIONS (CONTINUED)
Included in the discontinued liabilities are leases for certain
equipment. Future minimum lease payments under these leases at September 30,
1999 were as follows:
Capital Leases
--------------
2000 $ 1,492,070
2001 619,140
2002 539,599
2003 24,808
-----------
Total minimum lease payments 2,675,617
Amounts representing interest (331,552)
-----------
Present value of minimum capital lease payments 2,344,065
Less: current portion (1,320,083)
-----------
Long-term capital lease obligation $ 1,023,982
-----------
-----------
The Company had a letter of credit totaling $434,562 and $506,988 at
September 30, 1999 and 1998, as collateral for an operating lease for
manufacturing equipment. As of September 30, 1999, the Company has cash in an
escrow account with a financial institution which is pledged against the letter
of credit. This amount has been included in net noncurrent assets of
discontinued operations in the accompanying consolidated financial statements.
3. INVENTORY
Inventory consists of the following:
September 30,
------------------------
1999 1998
------------------------
Raw materials $297,252 $648,060
Work-in-process 21,648 77,047
Finished goods 221,558 198,835
-------- --------
$540,458 $923,942
-------- --------
-------- --------
38
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30,
--------------------------
1999 1998
--------------------------
Equipment $ 967,780 $ 755,911
Furniture and fixtures 207,240 207,240
Leasehold improvements 69,359 65,301
---------- ----------
1,244,379 1,028,452
Less accumulated
depreciation and amortization (747,988) (351,995)
---------- ----------
$ 496,391 $ 676,457
---------- ----------
---------- ----------
Included in the amounts above is approximately $40,861 and $92,046 of
property and equipment acquired under capital leases at September 30, 1999 and
1998, respectively. The accumulated amortization related to these assets totaled
approximately $5,105 and $80,734 at September 30, 1999 and 1998, respectively.
Depreciation and amortization expense includes depreciation and
amortization of property and equipment and amortization of goodwill.
Depreciation and amortization expense as reflected in the accompanying
consolidated statements of operations is as follows:
Year Ended September 30,
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
Cost of goods sold $300,457 $ 233,905 $ 151,121
Operating expenses 155,466 902,064 1,393,880
-------- ---------- ----------
$455,923 $1,135,969 $1,545,001
-------- ---------- ----------
-------- ---------- ----------
39
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
September 30,
--------------------------
1999 1998
--------------------------
Unearned revenue $ - $ 83,333
Warranty 52,652 155,850
Salaries, wages and commissions 35,280 28,408
Franchise, sales and property taxes 15,258 31,758
Dividends payable 28,125 -
Interest payable 51,111 -
Professional fees 20,510 54,817
Service fees 140,000 -
Engineering fees 150,000 -
Other liabilities 36,151 82,174
-------- --------
$529,087 $436,340
-------- --------
-------- --------
6. REVOLVING CREDIT NOTE
The Company obtained an $8,500,000 revolving credit note effective
July 24, 1997 with a financial institution. The revolving credit note
contains an annual commitment fee of $85,000 and bears interest at the prime
rate plus 2% (10.25% at September 30, 1999).
The Company also issued to the lender stock purchase warrants to
purchase 65,000 shares of Common Stock at a price of $5.38 per share, which
was 5% over the market closing price on the date the note agreement was
executed. These stock purchase warrants expire on July 24, 2002. (See Note 10)
The revolving credit note has a maturity date of July 24, 2000, and
it is secured by all of the Company's assets. The maturity date will
automatically be extended for successive additional terms of three years each
unless one party gives written notice to the other, not less than 60 days
prior to the maturity date.
Borrowings are based upon 85% of eligible accounts receivable and
eligible inventory amounts as defined in the borrowing agreement. The amounts
outstanding at September 30, 1999 and 1998 were $6,221,146 and $2,266,260,
respectively. Additional amounts that were available at September 30, 1999
and 1998 was $871 and $0, respectively. In addition, the Company is required
to maintain a lockbox account to be used for the collection of the Company's
trade accounts receivable. All collections must be applied to reduce the
outstanding balance of the revolving credit note. The balance of this lockbox
account is reflected as restricted cash in the accompanying consolidated
balance sheets. Included in discontinued operations for September 30, 1999
and 1998 were $4,242,743 and $1,626,495, respectively, of the credit line.
(See Note 2)
40
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
7. LONG-TERM DEBT
In November 1998, the Company issued $2,000,000 in debt with
attached stock warrants to certain stockholders of the Company. The debt is
due in two years and carries an interest rate of 10 percent per annum. The
interest is due quarterly and payable in either unregistered shares of common
stock or cash, at the option of the Company. One stock warrant was issued for
each dollar of debt, resulting in the issuance of 2 million stock warrants.
Each warrant is exercisable into one share of common stock beginning on
December 1, 1998, at an exercise price of $0.25 per share. The exercise price
increases to $0.50 per share after August 1, 1999 and $1.00 per share after
October 1, 2000. The warrants expire on November 1, 2001. During the year
ended September 30, 1999, the Noteholders were issued 1,600,000 shares of
common stock upon the exercise of certain warrants.
The Company determined the fair value of the warrants to be
approximately $461,538, and has reflected this value as a discount on the
debt. The debt discount is being amortized as interest expense over the life
of the related debt. Long-term debt to shareholders consists of the following
at September 30, 1999:
- -----------------------------------------------------------------------------
Notes payable $2,000,000
Less - unamortized discount (277,251)
- -----------------------------------------------------------------------------
Long-term debt owed to shareholders, net of discount $1,722,749
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
In connection with the placement and issuance of this debt, the
Company incurred costs of $21,350 and issued 100,000 stock warrants to the
Company's chairman of the board and 25,000 stock warrants to its legal
counsel. Each warrant is exercisable into one share of common stock at $0.01
per share beginning on December 1, 1998, and the warrants expire on November
1, 2001. As of September 30, 1999, all of these warrants had been exercised
for 125,000 shares of common stock. The Company valued the warrants at $0.60
per share, or $75,000. The total debt issuance costs of $96,350 have been
reflected in other noncurrent assets in the accompanying consolidated balance
sheet and are being amortized on the straight line method over the life of
the related debt.
8. LEASE COMMITMENTS
The Company leases certain equipment and office space under
noncancellable leases with expiration dates ranging from 1999 through 2013.
41
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
8. LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments under all leases at September 30, 1999
were as follows:
Capital Operating
Leases Leases
------- ---------
2000 $38,921 $272,672
2001 12,270 4,713
2002 - 4,713
2003 - 1,446
Thereafter - 11,567
--------- ----------
Total minimum lease payments 51,191 $295,111
----------
----------
Amounts representing interest 10,332
---------
Present value of minimum capital lease payments 40,859
Less: current portion (30,939)
---------
Long-term capital lease obligation $9,920
---------
---------
Rent expense recorded under all operating leases was $405,228,
$258,689 and $262,437, for the years ended September 30, 1999, 1998 and 1997,
respectively. Interest rates on the capital leases range from 7.0% to 42.4%.
9. PREFERRED STOCK
Pursuant to a Convertible Stock Purchase Agreement (the "Stock
Purchase Agreement"), on June 30, 1998 the Company issued 400 shares of its
5% Series A Convertible Preferred Stock, par value $1 per share ("Series A
Stock"), for $4,000,000.
The Series A Stock is convertible into the Company's no par value
common stock ("Common Stock") at the option of the holder. The conversion
price is the lesser of the fixed conversion price of $2.31 per share or a
variable conversion price. The Company has valued this beneficial conversion
feature at $1,403,509 and has reflected this amount in additional paid-in
capital and as a charge to the accumulated deficit as a dividend in the
amount of $865,493 and $538,016 for the years ended September 30, 1999 and
1998, respectively.
The Series A Stock carries mandatory redemption rights that can be
exercised by the holder if certain triggering events occur. On July 27, 1999,
the Company's common stock was delisted from trading on the NASDAQ SmallCap
Market, but is currently traded on the NASDAQ OTC Bulletin Board. The
delisting was a triggering event under the Stock Purchase Agreement; however,
the holder has not informed the Company of any intent to exercise its
redemption rights. At September 30, 1999, the aggregate redemption price,
including a stipulated redemption premium, was approximately, $2,475,000.
42
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
9. PREFERRED STOCK (CONTINUED)
Dividends are payable quarterly in either cash or registered shares
of Common Stock, but must be paid in cash upon the occurrence of certain
events. For the years ended September 30, 1999 and September 30, 1998, the
Company paid dividends of $114,331 and $50,000 by issuing 109,734 shares and
40,000 shares of Common Stock, respectively, at the market value.
Attached to the Series A Stock were warrants to purchase 199,999
shares of Common Stock at $3.00 per share. The warrants currently are
exercisable and have a term of four years from June 30, 1998. The Company has
valued the warrants at $283,803 and has reflected this amount in additional
paid-in capital during the year ended September 30, 1998.
During the year ended September 30, 1999, the preferred stockholders
converted 175 shares of Series A Stock for 1,535,198 shares of Common Stock.
At September 30, 1999 and 1998, the carrying value of the Series A
Stock consists of the following:
1999 1998
---------------------------
Balance, October 1 $ 2,390,475 $ -
Issuance of Series A Stock - 4,000,000
Offering costs - (460,229)
Value of beneficial conversion feature - (1,403,509)
Value of attached warrants - (283,803)
Amortization of beneficial conversion feature 865,493 538,016
Conversion of perferred stock for common stock (1,424,485) -
---------------------------
Balance, September 30 $ 1,831,483 $ 2,390,475
---------------------------
43
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
10. STOCKHOLDERS' EQUITY
WARRANTS
During the years ended September 30, 1999, 1998, and 1997, the Company
issued warrants to various individuals or companies for services in connection
with debt. Each stock warrant entitles the holder to purchase one share of
Common Stock at a particular price, vesting period and expiration date specified
within each individual warrant agreement. The shares issued upon exercise of
these stock warrants are subject to resale restrictions. The following
summarizes the warrants issued by the Company:
For the Year Ended September 30,
--------------------------------------------------------------------------------------
1999 1998 1997
----------------------- ------------------------- ------------------------
Stock Warrant Stock Warrant Stock Warrant
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------------------------- --------------------------- --------------------------
Outstanding beginning of year 289,998 $3.00 to $5.38 289,999 $.01 to $5.38 1,860,177 $1.70 to $2.30
Granted 2,200,000 $.01 to $.25 199,999 $3.00 489,999 $.01 to $5.38
Exercised (1,725,000) $.01 to $.25 (200,000) $.01 (2,060,177) $.01 to $1.15
Expired (4,999) $3.41 - - - -
--------- -------------- ----------------------------------------------------------
Outstanding end of year 759,999 $.25 to $5.38 289,998 $3.00 to $5.38 289,999 $.01 to $5.38
--------- -------------- ----------------------------------------------------------
--------- -------------- ----------------------------------------------------------
Exercisable end of year 753,331 $.01 to $5.38 276,665 $.01 to $5.38 - -
--------- -------------- ----------------------------------------------------------
--------- -------------- ----------------------------------------------------------
STOCK OPTIONS
The Company has two stock option plans. All options granted under the
plans are exercisable for Common Stock as permitted by SFAS No. 123, "Accounting
for Stock-Based Compensation".
The 1993 Stock Option Plan permits grants to the Company's directors,
key employees and consultants. The 1997 Non-Employee Director Plan permits
grants to the Company's non-employee directors. The stock options granted under
each of these plans are granted at fair market value on the date of grant, vest
ratably over a predefined period and expire no more than ten years from the date
of grant. At September 30, 1999, the Company had reserved a total of 5,890,000
shares of Common Stock for the plans.
44
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
10. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options
outstanding at September 30, 1999:
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------------
Weighted
Average Weighted-
Remaining Weighted-
Range of Exercise Contractual Life Average Weighted Average
Prices Shares (Years) Exercise Price Shares Exercise Price
- ------------------ --------- --------------- ------------- ---------------------------------
$0.50 - $0.99 1,082,200 6.96 $0.56 -
$1.00 - $1.75 1,636,417 4.13 1.70 1,063,909 $1.71
$1.76 - $2.00 2,435,500 5.21 1.97 696,375 1.93
Over $2.00 82,500 0.15 2.95 82,500 2.94
--------- ---------
5,236,617 1,842,784
--------- ---------
--------- ---------
A summary of the activity of the Company's stock option plans is
presented below:
September 30,
-----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
Weighted Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- ---------- -------------- -------- --------------
Outstanding, beginning of year 4,396,917 $1.91 2,387,317 $3.24 1,804,100 $2.81
Granted 1,410,700 $0.84 2,478,400 1.95 882,500 4.20
Cancelled or expired (481,000) $2.00 (393,800) 3.72 (283,283) 3.51
Exercised (90,000) $1.75 (75,000) 1.71 (16,000) 2.65
---------- ---------- ----------
Outstanding, end of year 5,236,617 4,396,917 1.91 2,387,317 3.24
---------- ---------- ----------
---------- ---------- ----------
Options exercisable, end of year 1,842,784 $1.72 1,226,492 1.91 1,083,700 2.50
Weighted average fair value of
options granted during
the year $0.46 $1.54 $2.23
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 1999, 1998 and 1997:
For the Year Ended September 30,
----------------------------------------------
1999 1998 1997
------- -------- --------
Dividend yield - - -
Expected volatility 50.3% 82.0% 79.0%
Risk-free interest rate 4.5% 5.6% 6.5%
Expected life (years) 7 5 5
45
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
10. STOCKHOLDERS' EQUITY (CONTINUED)
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for grants under the stock option plans since the exercise price of the options
equals the fair market value of the Common Stock on the date of grant.
Had compensation cost for all stock option grants been determined based
on their fair market value at the grant dates consistent with the fair value
method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net loss and net loss per share would have been increased to the
pro forma amounts indicated below:
For the Year Ended September 30,
--------------------------------------------------------
1999 1998 1997
------------- ------------ -------------
Net loss As reported $(8,966,728) $(8,547,796) $(10,113,828)
Pro forma (9,622,699) (9,808,987) (10,988,476)
Net loss applicable
to Common Stock As reported (9,974,677) (9,135,812) (10,113,828)
Pro forma (10,630,648) (10,397,003) (10,988,476)
Net loss applicable
to Common Stock
per share As reported (0.43) (0.44) (0.58)
Pro forma (0.46) (0.50) (0.63)
11. INCOME TAXES
For the years ended September 30, 1999, 1998 and 1997, the Company
incurred consolidated net operating losses for U.S. income tax purposes of
approximately $4,229,000, $5,252,000 and $6,023,000 and for non-U.S. income tax
purposes of approximately $817,000 and $369,000 and $-0-, respectively. The loss
carryforwards of approximately $22,886,000 at September 30, 1999 begin to expire
in 2011. At September 30, 1999 and 1998, the Company had temporary differences
resulting in future tax deductions of approximately $4,791,766 and $756,000,
respectively, principally representing differences in accounting and tax basis
in accrued liabilities and reserves and anticipated loss from discontinued
operations. Deferred income tax assets from the loss carryforwards and asset
basis differences aggregate approximately $8,456,000 and $6,888,000, at
September 30, 1999, and 1998, respectively.
For financial reporting purposes, a valuation allowance of $8,456,000
and $6,888,000 at September 30, 1999 and 1998, respectively, has been recorded
to offset the deferred tax assets due to the uncertainty as to whether the
benefits will be realized.
The availability of the net operating loss carryforwards and future tax
deductions to reduce taxable income is subject to various limitations under the
Internal Revenue Code of 1986, as amended (the "Code"), in the event of an
ownership change as defined in Section 382 of the Code. The Company may lose the
benefit of such net operating loss carryforwards due to Internal Revenue Service
("IRS") Code Section 382 limitations. this section states that after
reorganization or other change in corporate ownership, the use of certain
carryforwards may be limited or prohibited. The Company believes that the IRS
Code Section 382 limitation did not exist as of September 30, 1999 and if
triggered the consequence is expected to have no material impact on the
Company's consolidated financial position or results of operations.
46
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
12. EARNINGS PER SHARE
Basic income or loss per common share is computed based on the weighted
average number of common shares outstanding during each period. For the year
ended September 30, 1999, diluted income or loss per common share are computed
based on the weighted average number of common shares outstanding, after giving
effect to the potential issuance of common stock on the exercise of options and
warrants and the conversion of convertible preferred stock and the impact of
assumed conversions. For the years ended September 30 ,1998 and 1997,
potentially dilutive securities have not been included in the diluted loss per
common share calculation as they would have been antidilutive. The following
table provides a reconciliation between basic and diluted shares outstanding:
1999 1998 1997
---------- ---------- -----------
Weighted average number of
common shares used in basic
earnings per share 23,044,153 20,609,782 17,537,914
Effect of dilutive securities
Stock Options 1,842,784 - -
Warrants 753,331 - -
Preferred Stock 4,691,573 - -
---------- ---------- -----------
Weighted average number of
common shares and dilutive
potential common stock used
in diluted earnings per share 30,331,841 20,609,782 17,537,914
---------- ---------- -----------
---------- ---------- -----------
The following data shows the amount used in computing diluted earnings per share
and the effect on income:
1999
-------------
Diluted earnings per share:
Income from continuing operations applicable
to common stockholders $35,373
Income impact of assumed conversions:
Preferred stock dividends 142,456
-------------
Income from continuing operations after
assumed conversions of dilutive securities 177,829
-------------
Loss from discontinued operations (10,010,050)
-------------
Net loss applicable to common stockholders
after assumed conversion of dilutive securities ($9,832,221)
-------------
-------------
47
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
13. RELATED PARTY TRANSACTIONS
In accordance with the terms of his employment agreement, the chief
executive officer purchased 100,000 shares of unregistered Common Stock for a
total purchase price of $150,000 in fiscal 1998. The Company believes the
purchase price represented the fair value of unregistered Common Stock on the
dates of purchase.
In accordance with the terms of two separation agreements with senior
officers of the Company, the exercise periods of previously granted stock
options for the purchase of a total of 660,000 shares of Common Stock were
extended, resulting in a charge of $123,000 in fiscal 1998 in the accompanying
consolidated statements of operations.
General and administrative expense includes consulting fees and
expenses in the amount of $43,693, $52,415 and $112,089 paid with common stock ,
stock options or cash to the Company's directors for the fiscal years ended
September 30, 1999, 1998 and 1997, respectively.
In July 1997, the Company entered into a contract with a director for
consulting services in connection with a private placement of restricted common
stock in return for 200,000 warrants with an exercise price of $0.01 per share.
Those warrants were exercised in their entirety in February 1998.
General and administrative expense includes professional fees in the
amount of $105,000, $62,000, and $197,623 paid to two stockholders of the
Company for legal and other services provided for the years ended September 30,
1999, 1998 and 1997, respectively. Of these amounts, $105,000, $62,000,and
$100,000, respectively, were paid with common stock or warrants.
During fiscal 1997, two former stockholders of DarkHorse were paid
$37,809 each. A third stockholder's debt to the Company was reduced by $5,500
from $17,691 to $12,191. This debt was paid in full in April 1998. Prior to the
acquisition, DarkHorse was an S-Corporation. These obligations arose at the date
of acquisition to cover the taxes on earnings passed on to the three
stockholders for the period from January 1, 1996 to the date of acquisition.
Upon the acquisitions of 1st Tech and DarkHorse by the Company on
May 21, 1996, the principal stockholder of 1st Tech who was also one of three
principal stockholders of DarkHorse became the chief operating officer of the
Company until October 1997, and was issued an aggregate of 1,995,000 shares of
Common Stock in exchange for shares of 1st Tech and DarkHorse owned by him. The
1,995,000 shares had a total value of $8,379,000 based on the closing price of
the Common Stock on May 21, 1996. This stockholder also was granted a stock
option under the Company's 1993 Stock Option Plan, exercisable over a five-year
period, for the purchase of an aggregate of 150,000 shares of Common Stock at
$3.69 per share. The shares underlying the option vest one-third on each of the
first three anniversaries of the grant date. In connection with the
acquisitions, this stockholder was granted the right to designate two
individuals for appointment to the Company's Board of Directors and to name an
advisory director.
48
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
13. RELATED PARTY TRANSACTIONS (CONTINUED)
To take advantage of an inventory purchase opportunity, the Company
requested that all outstanding stock purchase warrant holders exercise their
warrants by March 31, 1997, which was substantially prior to the scheduled
expiration dates of the warrants. As an inducement for the early exercise, the
exercise price was discounted 50%. An additional incentive was offered to stock
purchase warrant holders who funded their subscription immediately upon notice
of such request. This inducement consisted of an offer of 200,000 warrants at an
exercise price of $.01 per share, prorated among the warrant holders who funded
upon notice of such request.
On January 12, 2000, the Company issued 1,150,000 shares of Common
Stock to two officers, legal counsel and consultants in connection with the sale
of the memory module manufacturing business. The common stock was valued at
$223,300 based on the market value at the date of issue and has been included in
the estimated loss on disposal of the memory module manufacturing business in
the accompanying consolidated financial statements.
14. SIGNIFICANT CUSTOMERS
Following are the Company's customers with more than 10% of total net
sales during the years ended September 30, 1999, 1998 and 1997, and customers
from which the Company had accounts receivable that exceeded 10% of total
accounts receivable at September 30, 1999, 1998 and 1997. Amounts less than 10%
are reflected as a dash.
-----------------------------------------------------------------------------------------
Customers A B C D
-----------------------------------------------------------------------------------------
Year Ended September 30, 1999
Net Sales 43.8% 13.8% 12.2% -
Accounts Receivable 36.3% - 46.8% -
Year Ended September 30, 1998
Net Sales 11.3% - - -
Accounts Receivable 25.7% - - -
Year Ended September 30, 1997
Net Sales 10.3% - - -
Accounts Receivable 10.2% - 12.1% 20.5%
49
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
15. EMPLOYEE BENEFITS
The Company sponsors The Tanisys Technology Inc., 401(k) Plan (the
"Plan") which qualifies under Section 401(k) of the IRS Code for eligible
employees. Eligible employees may defer a portion of their annual compensation
under the Plan subject to maximum limitations. Generally, all employees of the
Company who are 18 years of age are eligible for participation in the 401(k)
Plan on the first day of the month following their dates of hire.
Under provisions of the Plan, the Company may elect to make
discretionary matching contributions to the Plan for the benefit of the
participants. No such discretionary contributions were made in fiscal 1999,
1998 or 1997.
16. SUBSEQUENT EVENTS
On December 17, 1999, the Company entered into an agreement with
Silicon Valley Bank under an Accounts Receivable Purchase Agreement to sell its
receivables for a percentage of the face amount, not to exceed $2,000,000. The
Company must repurchase a receivable if it is more than 90 days old or if the
debtor files for bankruptcy.
Subsequent to September 30, 1999, the Company has issued 2,262,900
stock options to employees, directors and consultants.
During the year ended September 30, 1999, the preferred stockholders
converted 175 shares of Series A Stock for 1,535,198 shares of Common Stock.
After September 30, 1999, the preferred stockholders converted 60 shares of
Series A Stock for 2,740,426 shares of Common Stock.
On January 31, 2000, holders of the Company's long term debt elected
to convert an aggregate amount of $1,800,000 into 7,200,000 shares of the
Company's common stock pursuant to an offer made by the Company. Interest was
accrued on the notes through January 31, 2000 and was converted into an
aggregate of 42,629 shares of the Company's common stock in accordance with the
terms of the loan agreements.
17. CONTINGENCIES
The Company is a defendant in a lawsuit filed by one of its customers
for alleged breach of contract. The suit asks for actual damages, including all
related expenses in the amount of $77,838. The Company believes the suit is
without merit and is vigorously defending its position.
Under the terms of a preferred stock purchase agreement with certain
investors, the Company is required, among other items, to be in compliance with
the listing and maintenance requirements of the stock exchange on which the
common stock is listed. As a result of non-compliance, the investors have the
right to redeem the outstanding amount of preferred stock. In July 1999, NASDAQ
ruled that the Company failed to meet the exchange's requirements for listing.
Currently, the investors have taken no action. (See Note 9)
Under the terms of the Asset Purchase Agreement for the sale of the
memory module manufacturing business in December 1999, the Company is not in
compliance with the date that requires shareholders ratification of the sale by
proxy. Under the terms of the agreement, if the Company is not in compliance
with the covenants, the buyer could invalidate the transaction.
50
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999, 1998 AND 1997
Under the terms of a lease agreement between Tanisys (Europe), Ltd.and
Akeler Limited, the Company guaranteed the payment of rent in the amount of
approximately $200,000 per year. At the present time, Tanisys (Europe), Ltd. is
in compliance with the lease agreement, but if Tanisys Technology, Inc. should
become liable, the Company would have recourse against the purchaser of the
memory module manufacturing business.
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The Company's directors, executive officers and key employees and their
respective ages and positions as of January 27, 2000 are as follows:
NAME AGE POSITION(S)
Charles T. Comiso 62 President, Chief Executive Officer and Director
John R. Bennett 39 Vice President of Sales and Marketing
Richard R. Giandana 57 Vice President of Administration and Human Resources
Terry W. Reynolds 43 Vice President of Finance
Joseph C. Klein 43 Vice President of Engineering and Manufacturing
W. Audie Long 56 Corporate Secretary
Parris H. Holmes, Jr. 56 Chairman of the Board (1)(2)(3)
Gordon H. Matthews 62 Director (1)
Theodore W. Van Duyn 50 Director (2)(3)
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Committee.
The following are biographies of the Company's executive officers,
directors and key employees for the past five years.
CHARLES T. COMISO joined the Company as Chief Executive Officer,
President and Director in October 1997. Prior to joining the Company, Mr.
Comiso served as a Senior Officer of Wyse Technology, Inc. from 1984 to
September 1997. From 1995 to September 1997, Mr. Comiso served as Senior Vice
President of the Wyse Technology, Inc., and from 1990 to 1995 as President and
Chief Executive Officer of Link Technologies, Inc., a wholly owned subsidiary
of Wyse Technology, Inc. Mr. Comiso is an electrical engineer with more than 36
years of technology industry experience and also has held positions with
Hewlett-Packard Company, Texas Instruments, IT&T Labs and Bendix Corporation.
JOHN R. BENNETT, Vice President of Sales and Service, joined the
Company in November 1996 with many years of sales and marketing experience in
the electronics, computer and peripherals businesses. Prior to being promoted
to his current position of Vice President, Sales and Customer Service in
October 1997, Mr. Bennett most recently acted in the role as Director of Sales
at Tanisys, with prior responsibilities for the sales management of Tanisys'
DarkHorse line of memory test equipment. Other positions held by Mr. Bennett
include Senior Consultant, IBM, from October 1995 to November 1996, Vice
President, Marketing, CACTUS Inc., from August 1994 to October 1995 and
National Marketing Manager and National Sales Manager, CalComp (Division of
Lockheed), from July 1988 to August 1994.
52
RICHARD R. GIANDANA, Vice President of Human Resources, joined the
Company in May 1998 with many years' experience in domestic and international HR
and education management, including experience in Europe, Australia, and Latin
America. He has worked in high-tech manufacturing with IBM, Xerox and Tandem
Computers. Mr. Giandana was formerly a member of the faculties at the Rochester
(NY) Institute of Technology and Cabrillo (CA) College. He was also President of
the Center for Training and Communication in Scotts Valley, CA and has provided
consulting services and training to high-tech firms in California and Texas,
including his SELLING IDEAS TO DECISION-MAKERS seminar.
JOSEPH C. KLEIN, Ph.D., Vice President of Engineering, joined the
Company in November 1997. Prior to joining the Company, Mr. Klein was Vice
President of Research and Development for PNY Technologies, Inc. from November
1994 to November 1997 and was WorldWide Memory Manager for IBM PC Company from
November 1984 to November 1994.
PARRIS H. HOLMES, JR. has served as Chairman of the Board since October
1997 and as Director of the Company since August 1993. Mr. Holmes also served as
Chairman of the Board from August 1993 until March 1994, at which time he was
elected Vice Chairman of the Board. Mr. Holmes has been Chairman and Chief
Executive Officer of Billing Concepts Corp., a third-party billing clearinghouse
and information management services business, since May 1996. Mr. Holmes served
as Chairman of the Board and Chief Executive Officer of USLD Communications
Corp. from September 1986 until August 1996 and continued as Chairman of the
Board of USLD Communications Corp. until June 1997.
W. AUDIE LONG has served as Senior Vice President, General Counsel and
Corporate Secretary of Billing Concepts Corp. since February 1998. Mr. Long was
Senior Vice President-Legal and Regulatory Affairs and General Counsel of USLD
Communications Corp. ("USLD") from February 1991 to January 1998 and was
Corporate Secretary of USLD from August 1993 to January 1998.
GORDON H. MATTHEWS has served as a Director of the Company since 1994.
Mr. Matthews is a named inventor in over 40 US and foreign patents, and is the
acknowledged inventor of voice mail. Mr. Matthews is currently Chairman of the
Board of PremiseNET, Inc., a company that he founded in 1996. PremiseNET
produces a CPE system called MAXX that brings voice mail, automated attendant
and other Call Processing functions to the home and small business. He is also a
member of the Board of Vtel, the leader in teleconferencing services and
equipment. He was recognized as the Inventor of the Year by the Texas Bar
Association and was nominated for induction into the National Inventor's Hall of
Fame. Prior to founding PremiseNET, Mr. Matthews owned and operated a consulting
service that taught companies the methodology of creating meaningful patent
portfolios.
TERRY W. REYNOLDS, CPA, joined the Company as Vice President of Finance
in January 2000. Prior to joining the Company, Mr. Reynolds served from October
of 1998 to December of 1999 as Chief Financial Officer of Doyle Wilson
Homebuilder. From September of 1996 to October of 1998, Mr. Reynolds was the
Chief Financial Officer for Windsport, and prior to that he worked for the
public accounting firms of Charles Douthitt & Co. and Arthur Andersen LLP. He
has over 20 years of experience in financial management, and has also held
positions with Chrysler Technologies Corporation and First Financial
Corporation.
THEODORE W. VAN DUYN has served as a Director since March 1994. Mr. Van
Duyn has been Chief Technology Officer for BMC Software, Inc. since February
1993. Mr. Van Duyn joined BMC Software, Inc. in 1985 as Director of Research and
served as Senior Vice President, Research and Development, from 1986 until
assuming his current position.
53
All directors hold office for their elected term or until their
successors are duly elected and qualified. If a director should be disqualified
or unable to serve as a director, the Board of Directors may fill the vacancy so
arising for the unexpired portion of his term. All officers serve at the
discretion of the board of Directors. There are no family relationships between
members of the Board of Directors or any executive officers of the Company.
COMMITTEES AND BOARD COMPENSATION
The Board of Directors conducts its business through meetings of the
Board of Directors and through its committees. In accordance with the Bylaws of
the Company, the Board of Directors has established a Compensation and Stock
Option Committee and an Audit Committee. The Board of Directors does not
currently utilize a nominating committee or committee performing similar
functions.
COMPENSATION AND STOCK OPTION COMMITTEE
The Compensation Committee reviews and makes recommendations to the
Board of Directors concerning major compensation policies and compensation of
officers and executive employees including stock options. This committee is
comprised of Directors Holmes and Van Duyn.
AUDIT COMMITTEE
The Audit Committee acts on behalf of the Board of Directors with
respect to the Company's financial statements, record-keeping, auditing
practices and matters relating to the Company's independent public accountants,
including recommending to the Board of Directors the firm to be engaged as
independent public accountants for the next fiscal year; reviewing with the
Company's independent public accountants the scope and results of the audit and
any related management letter; consulting with the independent public
accountants and management with regard to the Company's accounting methods and
the adequacy of its internal accounting controls; approving professional
services by the independent public accountants; and reviewing the independence
of the independent public accountants. The Audit Committee is comprised of
Directors Holmes and Matthews.
DIRECTORS' COMPENSATION
Directors are not paid a fee for attending Board of Director or
committee meetings, but are reimbursed for their travel expenses to and from the
meetings.
Outside directors were granted stock options under the Company's 1993
stock option plan at the time of their election or appointment to the board of
directors from April 1994 until January 1997, when the board of directors
approved the Company's 1997 non-employee director plan. See "Item 11, executive
compensation--benefit plans--1997 non-employee director plan."
ITEM 11. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth information
concerning compensation of the Company's Chief Executive Officer and each of the
six other most highly compensated executive officers of the Company whose base
salary and bonus exceeded $100,000 for fiscal year 1999.
SUMMARY COMPENSATION TABLE
Long-Term
54
Annual Compensation Compensation Awards
------------------------- -----------------------
Fiscal Securities Under
Options/
Name and Principal Position Year Salary ($) Bonus SARs Granted (#)
- --------------------------- -------- ------------ ---------- -----------------------
CHARLES T. COMISO 1999 212,154 (1) 0 200,000
PRESIDENT, CHIEF EXECUTIVE 1998 172,500 (2) 0 1,000,000
OFFICER AND DIRECTOR 1997 N/A N/A N/A
RAYMOND F. LEBLANC 1999 110,232 (3) 0 300,000
VICE PRESIDENT, WORLDWIDE SALES 1998 N/A N/A N/A
1997 N/A N/A N/A
JOHN R. BENNETT 1999 184,147 0 25,000
VICE PRESIDENT OF SALES 1998 155,050 0 105,000 (4)
1997 109,032 (5) 25,000 50,000
JOSEPH C. KLEIN 1999 120,000 0 60,000
VICE PRESIDENT OF ENGINEERING 1998 104,538 (6) 0 130,000
1997 N/A N/A N/A
JOE O. DAVIS 1999 105,417 (7) 0 0
SENIOR VICE PRESIDENT, 1998 115,000 0 180,000 (8)
CHIEF FINANCIAL OFFICER AND 1997 115,000 0 30,000
CORPORATE SECRETARY
CHRIS EFSTATHIOU 1999 120,000 0 60,000
SENIOR VICE PRESIDENT OF 1998 120,000 0 180,000 (9)
OPERATIONS AND GENERAL 1997 116,884 0 60,000
MANAGER
KIRK A. HARTSTEIN 1999 100,262 0 35,000
VICE PRESIDENT OF MANUFACTURING 1998 N/A (10) 0 51,000 (11)
- AUSTIN 1997 N/A (10) 0 0
(1) The amount shown includes reimbursement for costs associated with Mr.
Comiso's relocation from Los Altos Hills, CA to Austin, TX.
(2) The amount shown reflects Mr. Comiso's salary from October 21, 1997, the
beginning date of his employment with the Company, through the end of fiscal
1998.
(3) The amount shown reflects Mr. LeBlanc's salary from January 7, 1999, the
beginning date of his employment with the Company, through the end of fiscal
1999.
(4) The amount shown includes 50,000 stock options issued in previous years
that were re-priced on September 24, 1998 to $1.75 per share.
(5) Mr. Bennett was elected Vice President of Sales on October 1, 1997 and
previously served as Director of Sales of the Company. Amount shown reflects
Mr. Bennett's salary from November 1, 1996, the beginning date of his
employment with the Company, through the end of fiscal 1997.
55
(6) The amount shown reflects Dr. Klein's salary from November 10, 1997, the
beginning date of his employment with the Company, through the end of fiscal
1998.
(7) The amount shown reflects Mr. Davis' salary through August 31, 1999, his
last day of his employment with the Company.
(8) The amount shown includes 150,000 stock options issued in previous years
that were re-priced on September 24, 1998 to $1.75 per share.
(9) The amount shown includes 120,000 stock options issued in previous years
that were re-priced on September 24, 1998 to $1.75 per share.
(10) Mr. Hartstein's salary did not exceed $100,000 in either 1998 or 1997.
(11) The amount shown includes 6,000 stock options issued in previous years
that were re-priced on September 24, 1998 to $1.75 per share
STOCK OPTION GRANTS
The following table provides information related to stock options granted to the
named executive officers during fiscal 1999:
Individual Grants
------------------------------- Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Exercise Price Appreciation for
Underlying Employees or Base Option Term (2)
Options In Fiscal Price Expiration -----------------------
Name Granted (#)(1) 1999 ($/Sh) Date 5%($) 10%($)
- ---- -------------- ----------- ---------- ----------- --------- --------
Charles T. Comiso 200,000 16.5% $.56 9/14/06 45,595 106,256
Chris Efstathiou 60,000 4.9% $.56 9/14/06 13,679 31,877
John R. Bennett 25,000 2.1% $.56 9/14/06 5,699 13,282
Joseph C. Klein 60,000 4.9% $.56 9/14/06 13,679 31,877
Raymond F. LeBlanc 250,000 20.6% $1.91 1/26/06 194,390 453,012
Raymond F. LeBlanc 50,000 4.1% $.56 9/14/06 11,399 26,564
Richard R. Giandana 35,000 2.9% $.56 9/14/06 7,979 18,595
Kirk A. Hartstein 35,000 2.9% $.56 9/14/06 7,979 18,595
Donald R. Turner 50,000 4.1% $.56 9/14/06 11,399 26,564
- --------------------
(1) For each named executive officer, the option listed represents a grant
under the Company's 1993 Stock Option Plan. See "Executive Compensation
- Employee Benefit Plans--1993 Stock Option Plan." The options granted
in fiscal 1999 are exercisable one-fourth on each of the four
anniversaries following the date of grant.
(2) Calculation based on stock option exercise price over period of option
assuming annual compounding. The columns present estimates of potential
values based on certain mathematical assumptions. The actual value, if
any, that an executive officer may realize is dependent upon the market
price on the date of option exercise.
56
AGGREGATED STOCK OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR END OPTION
VALUES
The following table provides information related to stock options
exercised by the named executive officers during the 1999 fiscal year and the
number and value of options held at fiscal year end. The Company does not have
any outstanding stock appreciation rights.
Individual Grants
-----------------
Shares Number of Securities Value(1) of Unexercised
Acquired Underlying Unexercised In-the-Money
Upon Options at FY End(#) Options at FY End($)
Name Option Value ------------------------------- ------------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
(#)
------------ -------- ----------- ------------- ----------- -------------
Charles T. Comiso 0 N/A 100,000 1,100,000 $ 0 $ 0
Joe O. Davis 0 N/A 140,000 40,000 0 0
Chris Efstathiou 0 N/A 115,000 65,000 0 0
Donald R. Turner 0 N/A 94,833 71,167 0 0
Donald G. McCord 0 N/A 53,750 61,250 0 0
John R. Bennett 0 N/A 42,083 87,917 0 0
Joseph C. Klein 0 N/A 32,500 157,500 0 0
Richard Giandana 0 N/A 12,500 72,500 0 0
Kirk A. Hartstein 0 N/A 12,750 73,250 0 0
Raymond LeBlanc 0 N/A 0 300,000 0 0
W. Audie Long 0 N/A 6,250 18,750 0 0
(1) Market value of the underlying securities at September 30, 1999 ($.49),
minus the exercise price.
REPRICING OF OPTIONS
REPORT OF COMPENSATION AND STOCK OPTION COMMITTEE
The Compensation and Stock Option Committee of the Board of Directors of
the Company has furnished the following report regarding the repricing of
options during fiscal 1998. All options repriced during fiscal 1998 resulted
from an exchange of options under the 1993 Option Plan for new options with a
lower exercise price under the same plan.
The Committee believes that the value of the Company to its stockholders is
necessarily dependent upon the Company's ability to attract and retain qualified
and competent employees. The 1993 Option Plan was expressly established to
provide an additional incentive to such individuals to continue in the service
of the Company. In September of 1998, the Committee believed that the value of
certain options previously granted to key employees under the 1993 Option Plan
had eroded to such an extent that the intended incentive to such employees had
failed, and that as a result, it was in the best interests of the Company and
its stockholders to reprice such options. The Committee believes that by
repricing the options previously granted under the 1993 Stock Option Plan, the
Company restored the incentive for such employees. The options granted in
replacemnet of previously granted options were made with an exercise price equal
to the fair market price of the underlying Common Stock on the date of the
repricing. The number of shares subject to exercise and the vesting periods
remain unchanged.
57
TEN-YEAR OPTION REPRICINGS
The following table provides information related to each option repricing
held by any executive officer of the Company during the last ten completed
fiscal years.
Number of Market Price
Securities of Stock at Exercise Price Length of Original
Underlying Time of at Time of New Option
Options Repricing Repricing Exercise Term Remaining at
Name and Principal Repriced or Amendments Amendments Price (2) Date of Repricing
Position Date Amended (#) ($) ($) ($) Amendment
- --------------------- -------- ----------- ------------- -------------- --------- ------------------
John R. Bennett 10/10/96 20,000 $1.75 $4.09 $1.75 25 Months
VP - Sales 5/15/97 30,000 $1.75 $3.41 $1.75 32 Months
Joe O. Davis 8/23/96 120,000 $1.75 $3.13 $1.75 23 Months
CFO 10/10/96 30,000 $1.75 $4.09 $1.75 25 Months
Chris Efstathiou, Jr. 5/9/96 60,000 $1.75 $3.69 $1.75 20 Months
General Manager 10/10/96 60,000 $1.75 $4.09 $1.75 25 Months
Richard R. Giandana 3/22/98 40,000 $1.75 $2.69 $1.75 42 Months
VP - Human Resouces
Mark Holliday 11/25/94 110,000 $1.75 $2.94 $1.75 18 Months
Director 3/27/96 100,000 $1.75 $3.62 $1.75 18 Months
Donald G. McCord 9/11/97 100,000 $1.75 $4.63 $1.75 36 Months
VP - Marketing
Gary Pankonien 5/9/96 150,000 $1.75 $3.69 $1.75 18 Months
Director 8/19/97 100,000 $1.75 $4.50 $1.75 18 Months
Donald R. Turner 5/9/96 60,000 $1.75 $3.69 $1.75 18 Months
Controller 10/10/96 50,000 $1.75 $4.09 $1.75 25 Months
EMPLOYEE BENEFIT PLANS
401(k) RETIREMENT PLAN
On May 21, 1996, the effective date of the Company's acquisition of
1st Tech, the Company adopted the 1st Tech 401(k) Plan (the "401(k) Plan").
Participation in the 401(k) Plan is offered to eligible employees of the
Company (collectively, the "Participants"). Generally, all employees of the
Company who are 18 years of age are eligible for participation in the 401(k)
Plan on the first day of the month following their dates of hire.
The 401(k) Plan is a form of defined contribution plan that provides
that Participants generally may make voluntary salary deferral contributions,
on a pre-tax basis, of between 1% and 15% of their base compensation in the
form of voluntary payroll deductions up to a maximum amount as indexed for
cost-of-living adjustments ("Voluntary Contributions"). Since its adoption of
the 401(k) Plan, the Company has not made any matching contributions, but may
elect in the future to make matching contributions of up to 100% of the first
6% of a Participant's compensation contributed as salary deferral. The
company is the trustee of its 401(k) Plan.
STOCK OPTION PLANS
1993 STOCK OPTION PLAN. The Company's 1993 Stock Option Plan (as
thereafter amended, the "1993 Option Plan") is administered by a committee
(the "Stock Option Committee") of two members of the Board of
58
Directors. The Stock Option Committee currently consists of two non-employee
members of the Board of Directors, Parris H. Holmes, Jr. and Theodore W. Van
Duyn.
The 1993 Option Plan grants broad authority to the Stock Option
Committee to grant options to key employees and consultants selected by the
Stock Option Committee; to determine the number of shares subject to options;
the exercise or purchase price per share, subject to SEC requirements; the
appropriate periods and methods of exercise and requirements regarding the
vesting of options; whether each option granted shall be an incentive stock
option ("ISO") or a non-qualified stock option ("NQSO") and whether
restrictions such as repurchase options are to be imposed on shares subject
to options and the nature of such restrictions, if any. In making such
determinations, the Stock Option Committee may take into account the nature
and period of service of eligible participants, their level of compensation,
their past, present and potential contributions to the Company and such other
factors as the Stock Option Committee in its discretion deems relevant. The
purposes of the 1993 Option Plan are to advance the best interests of the
Company by providing its employees and consultants who have substantial
responsibility for the Company's management, success and growth, with
additional incentive and to increase their proprietary interest in the
success of the Company, thereby encouraging them to remain in the Company
employ or service.
The 1993 Option Plan further directs the Stock Option Committee to
set forth provisions in option agreements regarding the exercise and
expiration of options according to stated criteria. The Stock Option
Committee oversees the methods of exercise of options, with attention being
given to compliance with appropriate securities laws and regulations.
The options have certain anti-dilution provisions and are not
assignable or transferable, other than by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order. During the
lifetime of an optionee, the options granted under the 1993 Option Plan are
exercisable only by the optionee or his or her guardian or legal
representative. The Company or its subsidiaries may not make or guarantee
loans to individuals to finance the exercise of options under the 1993 Option
Plan. The duration of options granted under the 1993 Option Plan cannot
exceed ten years (five years with respect to a holder of 10% or more of the
Company's shares in the case of an ISO).
The 1993 Option Plan provides for the grant of ISOs, under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), and stock
options that do not qualify under Section 422 of the Code ("NQSOs"). The
option price for ISOs may not be less than 100% of the fair market value of
the Common Stock on the date of grant, or 110% of fair market value with
respect to any ISO issued to a holder of 10% or more of the Company's shares.
The exercise price of NQSOs also is limited to the fair market value of the
Common Stock on the date of grant. Common Stock issued under the 1993 Option
Plan may be newly issued or treasury shares. The 1993 Option Plan does not
permit the use of already owned Common Stock as payment for the exercise
price of options. If any option granted under the 1993 Option Plan
terminates, expires or is surrendered, new options may thereafter be granted
covering such shares. Fair market value is defined as the closing price of
the Common Stock as reported for that day on the Nasdaq OTC Bulletin Board.
On March 31, 1994, the stockholders of the Company approved the 1993
Option Plan, which was adopted by the Board of Directors on October 25, 1993.
Under the terms of the 1993 Option Plan, 5,000,000 shares of Common Stock
have been reserved for the granting of options. At September 30, 1999,
options to purchase 4,582,517 shares had been granted under the 1993 Option
Plan, leaving 417,483 shares available for future grants under the 1993
Option Plan.
59
The 1993 Option Plan terminates on October 24, 2003. The Stock
Option Committee is authorized to amend or terminate the 1993 Option Plan at
any time, except that it is not authorized without stockholder approval
(except with regard to adjustments resulting from changes in capitalization)
to (i) increase the aggregate number of shares which may be issued under
options pursuant to the provisions of the 1993 Option Plan; (ii) reduce the
option price at which an ISO may be granted to an amount less than the fair
market value per share at the time such option is granted; (iii) change the
class of employees eligible to receive options; (iv) materially modify the
requirements as to affiliate eligibility for participation in the 1993 Option
Plan; (v) materially increase the benefits accruing to participants under the
1993 Option Plan; or (vi) effect an amendment that would cause ISOs issued
pursuant to the 1993 Option Plan to fail to meet the requirements of
"incentive stock options" as defined in Section 422 of the Code, provided,
however, that the Stock Option Committee shall have the power to make such
changes in the 1993 Option Plan and in the regulations and administrative
provisions thereunder or in any outstanding option as in the opinion of
counsel for the Company may be necessary or appropriate from time to time to
enable any ISOs granted pursuant to the Plan to continue to qualify as
"incentive stock options" under the Code and the regulations which may be
issued thereunder as in existence from time to time.
1997 NON-EMPLOYEE DIRECTOR PLAN. The Company's 1997 Non-Employee
Director Plan (the "Director Plan") is administered by the Board of
Directors. The Director Plan authorizes the granting of nonqualified options
to eligible persons.
The Director Plan was adopted by the Company's Board of Directors on
January 15, 1997. Prior to this date, non-employee directors were granted
options under the 1993 Option Plan. The purpose of the plan is to advance the
interests of the Company by providing an additional incentive to attract and
retain qualified and competent directors, upon whose efforts and judgment the
success of the Company is largely dependent, through the encouragement of
stock ownership in the Company by such persons.
The Director Plan authorizes the granting to non-employee directors
(totaling four eligible individuals at November 30, 1999) of nonqualified
options ("Director Options") exercisable for the purchase of 25,000 shares of
Common Stock on the date they are elected or appointed to the Board of
Directors, whether at the annual meeting of stockholders or otherwise, at an
exercise price equal to the fair market value of the Common Stock on the date
such non-employee director is elected or appointed. In addition, upon their
re-election, each non-employee director receives, on the first business day
after the date of each annual meeting of stockholders of the Company,
commencing with the annual meeting of stockholders immediately following the
full vesting of any previously granted Director Option, a Director Option to
purchase an additional 25,000 shares of Common Stock at an exercise price per
share equal to the fair market value of the Common Stock on the date of
grant. Options granted from the inception of the 1993 Stock Option Plan
through April 1997 vest one third on each of the first three anniversaries of
the date of grant and are exercisable for five years after the date of the
grant. Options granted after April 1997 vest one fourth on each of the first
four anniversaries of the date of grant and are exercisable for seven years
after the date of the grant.
The Director Plan also provides for the granting of discretionary
options ("Discretionary Options") from time to time by the Board of Directors
to any non-employee director of the Company. The Discretionary Options will
vest according to the vesting schedule determined by the Board of Directors
and expire no more than seven years from the date of grant. At least six
months must elapse from the date of the acquisition of the Discretionary
Option to the date of disposition of the Discretionary Fee Option (other than
upon exercise or conversion) or its underlying Common Stock.
Common stock issued under the Director Plan may be newly issued or
treasury shares. Already owned Common Stock may be used as payment for the
exercise price of options if approved by the Board of Directors at the time
of exercise. if any option granted under the Director Plan terminates,
expires or is surrendered, new options may thereafter be granted covering
such shares.
60
Under the terms of the Director Plan, 800,000 shares of Common Stock
(subject to certain adjustments) have been reserved for issuance upon
exercise of Director Options and Discretionary Options. At September 30,
1999, 677,500 options had been granted under the Director Plan. Options, once
granted and to the extent vested and exercisable, will remain exercisable
throughout their term, except that the unexercised portion of a Director
Option will terminate 30 days after the date an optionee ceases to be a
director for any reason other than death, in which case the Director Option
will terminate one year after the optionee's death or six months after the
optionee's death if the death occurs during the 30-day period referenced
above.
The Director Plan terminates on January 15, 2007, and any Director
Option or Discretionary Option outstanding on such date will remain
outstanding until it has either expired or been exercised.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Charles T.
Comiso effective October 21, 1997. The employment term covers one year and
will continue thereafter unless terminated by either party with 120 days'
notice. Mr. Comiso's salary is $180,000 per annum until such time as the
Company reports positive cash flow from operations for all three months of a
fiscal quarter, then his salary will be $240,000 per annum. Under the terms
of the employment agreement, the Company granted Mr. Comiso a seven-year
option under the 1993 Option Plan to purchase 1,000,000 shares of its common
stock at an exercise price of $2.00. The option vests as to 100,000 and
150,000 shares on the first and second anniversaries of his employment
agreement, respectively, and 250,000 shares on each of the third, fourth and
fifth anniversaries of his employment agreement. Additionally, at such time
as the Company reports positive cash flow from operations for all three
months of a fiscal quarter, the Company will grant to Mr. Comiso a seven-year
option to purchase 500,000 shares of its common stock under the 1993 Option
Plan at an exercise price equal to the closing price of the Company's Common
Stock as reported on the Nasdaq Stock Market's OTC Bulletin Board on the date
of grant. The option shall vest as to 125,000 shares on each of the second,
third, fourth and fifth anniversaries of the date of grant. As part of the
agreement, Mr. Comiso purchased $150,000 of the Company's stock at a maximum
price of $1.50 per share.
Effective July 11, 1996, the Company entered into an employment
agreement with Joe Davis with a term of one year, after which the agreement
continues on a month-to-month basis until terminated by the Company or the
employee upon 120 days' notice as provided therein. Pursuant to the terms of
the employment agreement, Mr. Davis' annual base salary was $115,000 and he
was granted a stock option under the 1993 Option Plan, exercisable over a
five-year period, for the purchase of an aggregate of 120,000 shares of
Common Stock at $1.75 per share. The shares underlying the option vest
one-third on each of the first three anniversaries of the grant date. Mr.
Davis provided 120 days' notice in late April 1999 and left the Company
effective August 31, 1999.
Effective October 31, 1996, the Company entered into an employment
agreement with Kirk A. Hartstein with a term of one year, after which the
agreement continues on a month-to-month basis until terminated by the Company
or the employee upon 120 days' notice as provided therein. Pursuant to the
terms of the employment agreement, Mr. Hartstein's annual base salary was
$87,500 at that time and he was granted a stock option under the 1993 Option
Plan, vesting in equal installments over four years and exercisable over a
seven-year period, for the purchase of an aggregate of 45,000 shares of
Common Stock at $1.75 per share. Mr. Hartstein's employment with Tanisys
terminated effective December 31, 1999.
Effective September 11, 1997, the Company entered into an employment
agreement with Don McCord with a term of one year, after which the agreement
continues on a month-to-month basis until terminated by the Company or the
employee upon 120 days' prior written notices provided therein. Pursuant to
the terms of the employment agreement, Mr. McCord's annual base salary was
$100,000 and he was granted a stock option under the 1993 Option Plan,
vesting in equal installments over four years and exercisable over a
seven-year period, for
61
the purchase of an aggregate of 100,000 shares of Common Stock at $1.75 per
share. Mr. McCord provided 120 days' notice in late May 1999 and left the
Company effective September 30, 1999.
Effective November 10, 1997, the Company entered into an employment
agreement with Joseph C. Klein, Ph.D. with a term of two years. Pursuant to
the terms of the employment agreement, Dr. Klein's annual base salary is
$120,000 and he was granted a stock option under the 1993 Option Plan,
vesting in equal installments over four years and exercisable over a
seven-year period, for the purchase of an aggregate of 100,000 shares of
Common Stock at $2.00 per share and an additional incentive of 50,000 stock
option shares upon the Company's reporting a profitable quarter and the
beginning of customer shipments of Tanisys' SIGMA-3 tester system. Dr.
Klein's employment agreement expired November 9, 1999, however, he remains
the Vice President of Engineering and Manufacturing.
Effective January 7, 1999, the Company entered into an employment
agreement with Raymond F. LeBlanc for a term of one year. Pursuant to the
terms of the employment agreement, Mr. LeBlanc's annual base salary was
$150,000 and he was granted a stock option under the 1993 Option plan,
vesting in equal installments over four years and exercisable over a
seven-year period, for the purchase of an aggregate of 250,000 shares of
Common Stock at $1.91 per share. As part of the agreement, Mr. LeBlanc agreed
to purchase a minimum of 30,000 shares of common stock at a maximum price of
$1.75 per share prior to February 15, 1999. Mr. LeBlanc's employment with
Tanisys terminated effective December 31, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known by the
Company regarding the beneficial ownership of Common Stock by persons owning
beneficially more than 5% of the outstanding Common Stock at January 31,
2000. A total of 33,987,387 shares of the Company's Common Stock were issued
or uncertificated at January 31, 2000.
NO. OF SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) OF CLASS (2)
------------------------------------ ----------------- ------------
Parris H. Holmes, Jr. 1,811,360 (3) 5.3%
7411 John Smith Drive, Suite 200
San Antonio, Texas 78229
- ------------------
(1) Unless otherwise noted, each of the persons named has sole voting and
investment power with respect to the shares reported.
(2) The percentages indicated are based on outstanding stock options and
stock warrants, exercisable within 60 days for each individual and
33,987,387 shares of Common Stock issued and outstanding at January 31,
2000.
(3) Includes 185,000 shares that Mr. Holmes has the right to acquire upon
exercise of stock options, exercisable within 60 days.
62
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock at January
31, 2000 by (i) each person known by the Company to own beneficially more than
5% of the outstanding shares of Common Stock, (ii) each of the Company's
directors, (iii) each named executive officer and (iv) all executive officers
and directors as a group. A total of 33,987,387 shares of the Company's Common
Stock were issued and outstanding at January 31, 2000.
COMMON STOCK
---------------------------
5% BENEFICIAL OWNERS, DIRECTORS NUMBER
AND NAMED EXECUTIVE OFFICERS OF SHARES(1) PERCENT(2)
------------------------------- ------------ ----------
John R. Bennett 81,150 (3) *
Charles T. Comiso 1,460,966 (4) 4.3%
Richard R. Giandana 24,500 (6) *
Parris H. Holmes Jr. 1,816,360 (5) 5.3%
Joseph C. Klein 63,500 (7) *
W. Audie Long 937,023 (8) 2.8%
Gordon H. Matthews 157,500 (9) *
Terry W. Reynolds 0 *
Theodore W. Van Duyn 290,000 (10) *
All executive officers and directors as a group
(9 persons, including the executive officers
and directors listed above) 4,825,999 (11) 14.2%
- ---------------
*Represents less than one percent (1%) of the issued and outstanding shares of
Common Stock.
(1) Unless otherwise noted, each of the persons named has sole voting and
investment power with respect to the shares reported.
(2) The percentages indicated are based on outstanding stock options and
stock warrants exercisable within 60 days for each individual and
33,987,387 shares of Common Stock issued and outstanding at January 31,
2000.
(3) Includes 60,000 shares that Mr. Bennett has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(4) Includes 500,000 shares that Mr. Comiso has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(5) Includes 185,000 shares that Mr. Holmes has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(6) Includes 22,500 shares that Mr. Giandana has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(7) Includes 57,500 shares that Mr. Klein has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(8) Includes 12,500 shares that Mr. Long has the right to acquire upon
exercise of stock options, exercisable within 60 days.
63
(9) Includes 107,500 shares that Mr. Matthews has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(10) Includes 25,000 shares that Mr. Van Duyn has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(11) Includes 970,000 shares that 9 directors and executive officers have
the right to acquire upon exercise of stock options, exercisable within
60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the fiscal year ended September 30, 1999, Parris H. Holmes, Jr.,
Chairman of the Board of Directors billed the Company $51,821 for expenses
incurred in connection with issues involving corporate finance, business
operations and business opportunities.
During the fiscal year ended September 30, 1999, the Company paid the
outside legal counsel to the Company, $30,000 of stock for professional services
relating to legal issues.
On November 2, 1998, the Company completed a private placement of
$2,000,000 of debt with warrants to purchase 2 million shares of Common Stock.
Certain investors who participated in the private placement included Parris H.
Holmes, Jr., Chairman of the Board and Charles T. Comiso, the Chief Executive
Officer of the Company. The Company also issued warrants to purchase 125,000
shares of Common Stock for $.01 per share to Parris H. Holmes, Jr., Chairman of
the Board of Directors, in payment of expenses and professional fees incurred in
connection with the private placement.
In connection with the sale of the Company's memory module
manufacturing business, the Company issued an aggregate of 1,150,000 shares of
the Company's Common Stock valued at $223,300 to the Company's chairman,
president and legal counsel.
64
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) Documents filed with this report:
1) Financial Statements:
The consolidated financial statements of the Company and report of the
Company's independent public accountants thereon have been filed under
Item 8 hereof.
2) The following consolidated financial statement schedule of Tanisys
Technology, Inc. is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts and Allowances
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable or information
required is included in the consolidated financial statements and, therefore,
have been omitted.
(b) Exhibits:
THE EXHIBITS LISTED BELOW ARE FILED AS PART OF OR INCORPORATED
BY REFERENCE IN THIS REPORT. WHERE SUCH FILING IS MADE BY INCORPORATION
BY REFERENCE TO A PREVIOUSLY FILED DOCUMENT, SUCH DOCUMENT IS
IDENTIFIED IN PARENTHESES.
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation of Tanisys Technology, Inc., as
amended (Exhibit 3.1 to Form S-3 filed August 13, 1998)
3.2 Restated Bylaws of the Company (Exhibit 3.5 to General Form
for Registration of Securities on Form 10, filed November 27,
1996)
4.1 Form of Common Stock Certificate (Exhibit 4.6 to Form 10
Registration Statement filed November 27, 1996)
4.2 Form of Class S Warrant Certificate (Exhibit 4.2 to December
31, 1997 to Form 10-Q)
4.3 Registration Rights Agreement dated June 30, 1998 between
Tanisys Technology, Inc. and KA Investments LDC (Exhibit 4.1
to Form S-3 Registration Statement filed August 13, 1998)
10.1 Agreement and Plan of Merger dated as of April 9, 1996, by and
between Tanisys Technology, Inc., Tanisys Acquisition Corp.,
1st Tech Corporation and Gary W. Pankonien ("1st Tech Merger
Agreement") (Exhibit 10.3 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
10.2 Amendment No. 1 dated May 16, 1996, to 1st Tech Merger
Agreement (Exhibit 10.4 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
65
10.3 Articles of Merger (Delaware) of 1st Tech with and into
Tanisys Acquisition Corp., dated May 31, 1996 (Exhibit 10.5 to
General Form for Registration of Securities on Form 10, filed
November 27, 1996)
10.4 Articles of Merger (Texas) of 1st Tech with and into Tanisys
Acquisition Corp., dated May 31, 1996 (Exhibit 10.6 to General
Form for Registration of Securities on Form 10, filed November
27, 1996)
10.5 Agreement and Plan of Merger dated as of April 9, 1996, by and
between Tanisys Technology, Inc., Tanisys Acquisition Corp.
II, DarkHorse Systems, Inc., Jack Little, Archer Lawrence and
Gary W. Pankonien ("DarkHorse Merger Agreement") (Exhibit 10.7
to General Form for Registration of Securities on Form 10,
filed November 27, 1996)
10.6 Amendment No. 1 dated May 16, 1996, to DarkHorse Merger
Agreement (Exhibit 10.8 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
10.7 Articles of Merger (Delaware) of DarkHorse with and into
Tanisys Acquisition Corp. II, dated May 31, 1996 (Exhibit 10.9
to General Form for Registration of Securities on Form 10,
filed November 27, 1996)
10.8 Articles of Merger (Texas) of DarkHorse with and into Tanisys
Acquisition Corp. II, dated May 31, 1996 (Exhibit 10.10 to
General Form for Registration of Securities on Form 10, filed
November 27, 1996)
10.9 Employment Agreement dated July 11, 1996 by and between the
Company and Joe Davis (Exhibit 10.15 to General Form for
Registration of Securities on Form 10, filed November 27,
1996)
10.10 1993 Stock Option Plan, as amended through May 20, 1996
(Exhibit 10.17 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
10.11 Form of Stock Option Agreement (Exhibit 10.18 to General Form
for Registration of Securities on Form 10, filed November 27,
1996)
10.12 401(k) Plan (Exhibit 10.19 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
10.13 Lease Agreement dated May 18, 1993 by and between Tanisys
Technology, Inc., assumptor of 1st Tech Corporation, and AEtna
Life Insurance Company, as amended (Exhibit 10.20 to General
Form for Registration of Securities on Form 10, filed November
27, 1996)
10.14 Master Lease Agreement dated November 9, 1994 by and between
1st Tech and Copelco Capital Inc. (Exhibit 10.21 to General
Form for Registration of Securities on Form 10, filed November
27, 1996)
10.15 Manufacturing Agreement dated as of November 1, 1996 by and
between the Company and Siemens Components, Inc. (Exhibit
10.22 to Amendment No. 2 to General Form for Registration of
Securities on Form 10, filed March 11, 1997)
10.16 Inventory Management Service Agreement dated as of November 1,
1996 by and between the Company and Siemens Components, Inc.
(Exhibit 10.23 to Amendment No. 2 to General Form for
Registration of Securities on Form 10, filed March 11, 1997)
10.17 1997 Non-Employee Director Plan of Tanisys Technology, Inc.
(Exhibit 10.27 to Amendment No. 2 to General Form for
Registration of Securities on Form 10, filed March 11, 1997)
66
10.18 Form of Non-Employee Director Stock Option Agreement (Exhibit
10.28 to Amendment No. 2 to General Form for Registration of
Securities on Form 10, filed March 11, 1997)
10.19 Master Lease Agreement dated January 30, 1997 by and between
the Company and Copelco Capital, Inc. (Exhibit 10.30 to March
31, 1997 Form 10-Q)
10.20 Loan and Security Agreement, dated as of July 24, 1997, by and
between Tanisys Technology, Inc., 1st Tech Corporation,
DarkHorse Systems, Inc., the Company and NationsCredit
Commercial Corporation, through its NationsCredit Commercial
Funding Division (Exhibit 10.32 to Form 10-K)
10.21 Memory Module Corporate Purchase Agreement, dated July 22,
1997, by and between Tanisys Technology, Inc. and Compaq
Computer Corporation (Exhibit 10.33 to September 30, 1997 Form
10-K)
10.22 Employment Agreement, dated as of September 11, 1997, by and
between Tanisys Technology, Inc. and Don McCord (Exhibit 10.34
to September 30, 1997 Form 10-K)
10.23 Employment Agreement, dated as of October 20, 1997, by and
between Tanisys Technology, Inc. and Charles T. Comiso
(Exhibit 10.34 to September 30, 1997 Form 10-K)
10.24 Employment Agreement, dated as of November 10, 1997, by and
between Tanisys Technology, Inc. and Joseph C. Klein, Ph.D.
(Exhibit 10.34 to September 30, 1997 Form 10-K)
10.25 Manufacturing Service Agreement dated February 2, 1998 by and
between the Company and LG Semicon American, Inc. (Exhibit
10.37 to March 31, 1998 Form 10-Q)
10.26 Manufacturing Service Agreement dated March 1, 1998 by and
between the Company and Toshiba America Electronic Components,
Inc. (Exhibit 10.37 to March 31, 1998 Form 10-Q)
10.27 Convertible Preferred Stock Purchase Agreement dated June 30,
1998 between Tanisys Technology, Inc. and KA Investments LDC
(Exhibit 10.1 to Form S-3 Registration Statement filed August
13, 1998)
10.28 Form of Warrant to purchase Common Stock granted by Tanisys
Technology, Inc. to each of KA Investments LDC, Midori Capital
Corporation, Hoth Incorporated and Randy Stein (Exhibit 10.2
to Form S-3 Registration Statement filed August 13, 1998)
10.29 Form of Promissory Note issued by Tanisys Technology, Inc. in
connection with $2 million debt closed November 2, 1998
(Exhibit 10.1 to December 21, 1998 Form 10-Q)
10.30 Form of Warrant Agreement entered into between Tanisys
Technology, Inc. and subscribers to the $2 million debt
offering closed November 2, 1998, and form of attached Stock
Purchase Warrant issued thereunder (Exhibit 10.2 to December
31, 1998 for 10-Q).
10.31 Asset Purchase Agreement entered into between Tanisys
Technology, Inc. and Tanisys Operations, LP, on December 9,
1999 (filed herewith).
10.32 Term Promissory Note for $911,339 issued by Tanisys
Technology, Inc. to Tanisys Operations, LP on December 9, 1999
(filed herewith)
10.33 Term Promissory Note for $85,000 issued by Tanisys Technology,
Inc. to Tanisys Operations, LP on December 9, 1999 (filed
herewith)
67
10.34 Agreement Relating to Noncompetition entered into between
Tanisys Technology, Inc. and Tanisys Operations, LP dated
December 7, 1999 (filed herewith)
10.35 Settlement Agreement entered into between Tanisys Technology,
Inc. and Boston Financial & Equity Corporation dated December
9, 1999 (filed herewith)
10.36 Contract for Sale of Equipment entered into between Tanisys
Operations, LP and Boston Financial & Equity Corporation dated
December 9, 1999, to complete release of the Master Equipment
Lease between Tanisys Technology, Inc. and Boston Financial &
Equity Corporation. (filed herewith)
10.37 Bill of Sale conveying equipment covered by the Master Lease
Agreement between Tanisys Technology, Inc. and Boston
Financial & Equity Corporation to Tanisys Operations, LP dated
December 9, 1999. (filed herewith)
21.1 Subsidiaries of the Company (filed herewith)
23.1 Consent of Arthur Andersen LLP (Exhibit 23.1 to September 30,
1998 Form 10-K)
27.1 Financial Data Schedule (filed herewith)
(c) Reports on 8-K.
Form 8K dated January 12, 2000, and filed January 20, 2000, reporting a
change in the Company's independent auditors.
(d) Schedules.
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SCHEDULE II
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES
FISCAL YEARS ENDED 1999, 1998 AND 1997
(In thousands)
Balance at
Beginning of Charge to Cost Balance at End of
Description Year and Expenses Deductions Year
----------- ------------ -------------- ---------- -----------------
1999 Allowance for uncollectible
accounts receivable $406,157 $ 233,196 $ 160,742 $333,703
1998 Allowance for uncollectible
accounts receivable 180,157 136,139 362,139 406,157
1997 Allowance for uncollectible
accounts receivable 74,557 780,785 886,385 180,157
1999 Allowance for excess and
obsolete inventory 380,333 258,411 136,546 502,198
1998 Allowance for excess and
obsolete inventory 317,023 1,122,799 1,059,489 380,333
1997 Allowance for excess and
obsolete inventory $117,513 $ 239,495 $ 39,985 $317,023
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF TANISYS TECHNOLOGY, INC.
AND SUBSIDIARIES ARE AN INTERGRAL PART OF THIS SCHEDULE.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TANISYS TECHNOLOGY, INC.
Date: February 23, 2000 By: /s/CHARLES T. COMISO
-----------------------------------------
Charles T. Comiso
CHIEF EXECUTIVE OFFICER
PRESIDENT AND DIRECTOR
Date: February 23, 2000 By: /s/TERRY W. REYNOLDS
-----------------------------------------
Terry W. Reynolds
VICE PRESIDENT OF FINANCE
(Duly authorized and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on the 1st day of February 2000.
SIGNATURE TITLE
- --------- -----
/s/ CHARLES T. COMISO Chief Executive Officer
- --------------------------- President and Director
Charles T. Comiso
/s/ PARRIS H. HOLMES, JR. Chairman of the Board
- ---------------------------
Parris H. Holmes, Jr.
/s/ W. AUDIE LONG Corporate Secretary
- ---------------------------
W. Audie Long
/s/ GORDON H. MATTHEWS Director
- ---------------------------
Gordon H. Matthews
/s/ THEODORE W. VAN DUYN Director
- ---------------------------
Theodore W. Van Duyn
70