Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1997
or
[ ] TRANSACTION 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 of Incorporation) (I.R.S. Employer
Identification Number)
12201 TECHNOLOGY BLVD., SUITE 130 78727
AUSTIN, TEXAS (Zip Code)
(Address of Principal Executive Office)
(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 is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements in
Part III of this Form 10-K or any amendments to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of November 30, 1997 was approximately $43.3 million based upon
the closing sale price of the Common Stock as reported on the Nasdaq Stock
Market's SmallCap Market (the "Nasdaq SmallCap Market"). 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. There were 20,409,714
shares of the Registrant's Common Stock outstanding at November 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
1997 ANNUAL REPORT ON FORM 10-K
INDEX
PAGE
-----
PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 10
Item 3. Legal Proceedings.............................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............................................ 10
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters......................... 11
Item 6. Selected Financial Data........................................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition & Results of Operations............ 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 24
Item 8. Financial Statements and Supplementary Data.................................................... 24
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........... 42
PART III
Item 10. Directors and Executive Officers of the Company................................................ 43
Item 11. Executive Compensation......................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 53
Item 13. Certain Relationships and Related Transactions................................................. 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 55
SIGNATURES.................................................................................................. 58
i
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 its 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, 1997, 1996 or 1995, 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 offers build-to-order services, designs and markets products
consisting of semiconductor memory modules, designs and builds memory module
testers and provides design services in conjunction with the licensing of its
Touch sensor products. Operating under the Tanisys Technology name since 1994,
the Company is rapidly growing into a prominent independent manufacturer of
standard and custom semiconductor memory modules for a variety of computer and
electronics OEMs. The Company also markets the DarkHorse line of memory testers
and licenses its proprietary Tanisys Touch technology. In 1997, the Company
changed its focus from selling off-the-shelf semiconductor memory modules to
specializing in services designed to provide OEM customers with build-to-order
board-level solutions. The Company has developed extensive design and
manufacturing expertise under its Comprehensive Logistics and Supply Solutions
("CLASS") Program to respond to its customers' rapidly changing requirements. To
this end, the Company maintains a design center as well as manufacturing
facilities in Austin, Texas. The Company's principal customers include
electronic OEMs, semiconductor manufacturers, computer distributors, value-added
resellers ("VARs") and system integrators. The Company's OEM customers include
1
Siemans AG, Bay Networks Inc., Compaq Computer Corporation, Dell Computer
Corporation, Packard-Bell NEC Company and Solectron Corp.
The Company was organized under the laws of the Province of British
Columbia, Canada, on January 27, 1984, as Montebello Resources Ltd. to exploit
the mineral, oil and gas exploration business in British Columbia and Manitoba,
Canada. On October 7, 1992, the Company changed its name to First American
Capital Group Inc. The Company was unsuccessful in the oil and gas business, and
in 1992 deemed itself inactive pursuant to the rules and regulations of the
Vancouver Stock Exchange ("VSE"), where its common stock, no par value per share
(the "Common Stock"), had been traded. During the first two quarters of 1993,
the Company was reorganized in accordance with the rules of the VSE. As part of
this reorganization, the Company acquired certain computer game controller
technology, which was the forerunner of the Company's Tanisys Touch technology.
The Company changed its name to Rosetta Technologies Inc. on May 13, 1993. In
June 1993, Rosetta Marketing and Sales, Inc. was incorporated in the State of
Texas as a wholly owned subsidiary of the Company to provide marketing for the
Company's products. On June 30, 1993, the Company acquired all of the
outstanding capital shares of Timespan Communications Corp. ("Timespan") for the
issuance of Common Stock and the assumption of certain indebtedness. Also on
June 30, 1993, the Company filed Articles of Continuance with the Secretary of
State of the State of Wyoming and was issued a Certificate of Continuance, which
continued the corporation's charter under the Wyoming Business Corporation Act
as if it had been incorporated thereunder. On October 1, 1993, the Company
caused all of the software technology owned by Timespan to be transferred to the
Company, and Timespan subsequently has been liquidated. On July 11, 1994, the
Company changed its name to Tanisys Technology, Inc. The Company's Common Stock
has traded on the Nasdaq SmallCap Market under the symbol "TNSU" since May 22,
1997.
Effective May 21, 1996, the Company acquired, through mergers with its
wholly owned subsidiaries, all of the outstanding common stock of 1st Tech and
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 OEMs in the
computer networking and telecommunications industries.
INDUSTRY BACKGROUND
The demand for semiconductor memory modules in digital electronic systems
has grown significantly over the last several years, resulting in the increased
importance of memory in determining system performance. An increasing demand for
greater system performance requires that electronics manufacturers increase the
amount of 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 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 which are
designed for application specific uses.
The growing variety of memory components also drives demand for memory
tester systems to test each of these memory module types.
2
MARKETS
THE DRAM MARKET
Of the three primary classes of semiconductor memory, DRAM is predominately
used in computers due to lower cost and increased performance. Market demand for
higher performance PCs and workstations and the increased focus on
high-throughput networking and telecommunications systems are creating a need
for higher volumes of DRAM memory in electronic systems. For example,
International Business Machines Corp ("IBM") has estimated that PCs use 70% of
all memory, and market researcher International Data Corporation ("IDC") expects
the average amount of memory used by each PC to grow from 19.6 megabytes in 1996
to 96 megabytes by 2001.
The Company believes the near-term DRAM market will fragment into increased
numbers of semiconductor memory module designs due to different architectures,
voltages and densities emerging for new systems while demand continues for
current and older designs. Popular among the architectures are Synchronous DRAM
("SDRAM"), Synchronous Graphics RAM ("SGRAM"), RAMBUS (a new proprietary memory
technology), Video RAM ("VRAM"), Fast Page Mode ("FPM") and Extended Data Out
("EDO"). DRAM integrated circuits are undergoing a shift to 64 megabits
("Mbits") and in operating voltages from 5.0 volts to 3.3 volts and less.
Therefore, the Company anticpates the combinations of module types are likely to
proliferate greatly over the next number of years.
THE SRAM MARKET
The market for SRAM typically is segmented into low power and high speed
segments. Low power SRAM devices are used primarily in computing or electronics
industry applications in which minimal power consumption is the top priority.
Popular uses of low power SRAM devices include portable computers that rely on
battery power.
The primary market demand for high speed SRAM devices is to "buffer" fast
system components from slower system components. In PCs, the most common use of
SRAM devices has been as "cache" memory, which increases a system's performance
and avoids having the increasingly faster microprocessor waiting on slower DRAM.
Access rates of DRAMs have not increased as fast as the speed of
microprocessors, and therefore, the demand for cache memory has increased. High
speed SRAMs also are seeing a rapid proliferation of configuration combinations
due to advances in speed, architecture, density and operating voltages. These
advances are needed primarily due to the increasing speed and complexity of
microprocessors such as the Pentium II, Pentium Pro, the PowerPC and the Alpha
microprocessor family. High speed SRAMs are achieving access times below 3
nanoseconds and are developing synchronous modes similar to SDRAMs to meet the
needs of these new microprocessors.
THE FLASH MEMORY MARKET
Flash memory is a specialized non-volatile memory that can be updated
similar to DRAM but retains its data after power has been turned off. The
ability to update the contents of Flash memory is the main benefit relative to
most other non-volatile memory devices, such as erasable programmable read only
memory ("EPROM") devices, that makes Flash memory useful for containing software
which is likely to need updating. Typical uses include Basic Input Output System
("BIOS") for PCs, control memory for the rapidly evolving market of thin
client/network computer/Windows terminals, control programs for routers and
other networking equipment and storage for portable computers, personal digital
assistants and digital cameras. Consequently, the market for Flash memory is
growing rapidly.
Flash memory is often packaged in removable modules to meet the needs of
portable applications. These modules vary widely for their target systems. There
are many Flash memory architectures available in the market today, which are
often offered in multiple modes and voltages. Therefore, Flash memory has many
configurations and the number of configurations has proliferated widely.
3
MEMORY MODULE MARKET
Semiconductor memory modules are small printed circuit board assemblies
containing semiconductor memory devices and support circuitry. Many computer and
electronic systems use semiconductor memory modules as standard architectural
components. The modules permit OEMs to easily upgrade their systems and to
increase flexibility by permitting different types of modules to configure the
one base system for multiple price or performance targets. Semiconductor memory
modules often attach directly to a computer system board, eliminating or
reducing the need to include memory devices on the system board for space
reasons as well as flexibility of the base system. Semiconductor memory modules
also permit OEMs to manufacture systems on a build-to-order basis by permitting
the OEM to configure the system after the customer's order is placed. The
benefits of build-to-order for OEMs are faster availability, increased customer
satisfaction, reduced investment in inventories and reduced costs. Semico
Research Corporation estimates that the market size for semiconductor memory
modules in 1997 is $22.6 billion worldwide.
The memory module market is segmented into off-the-shelf and custom
components. Off-the-shelf modules often comply with industry standards and are
available from multiple vendors. These are usually popular, high volume designs
using DRAM memory which are used in desktop PCs, notebook computers, network
routers, disk drive controllers and printers. These modules typically are sold
directly to OEMs and to end users via computer resellers.
Custom semiconductor memory modules meet the unique needs of OEM computer
and electronic systems. The proliferation of memory device options has resulted
in specialized semiconductor memory modules that are ideal for the performance
of a particular system or a set of applications but are not available
off-the-shelf. These custom modules are typically contracted from a few
suppliers. The limited market for such modules often dictates build-to-order
manufacturing in order to limit inventory risks.
Computer and electronics manufacturers frequently choose to use memory
expert partners for the design and manufacture of semiconductor memory modules
due to the wide array of memory devices which can be considered for a target
system. Increasing speeds make the design and testing of modules more complex,
thus using memory partners permits system manufacturers to focus on
differentiating their product. OEMs outsource these services in a range of
levels, including build-to-print (manufacturing only), turnkey design and
manufacture, vendor specification and build-to-order.
The manufacturers of semiconductor memory modules consist of two subsets:
semiconductor manufacturers who build modules and independent third parties who
acquire memory devices and integrate them into modules. Although semiconductor
vendors dominate the business today, third party vendors are rapidly gaining
market share. The Company expects this trend to continue as it believes that
semiconductor manufacturers may not have a business model in place which is
suited to meet the needs of many large customers of custom semiconductor memory
modules, including support for build-to-order.
Independent third party manufacturers of semiconductor memory 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
semiconductor memory modules. Third party suppliers to the reseller channel
typically offer standard DRAM semiconductor memory modules as an upgrade product
sold through computer distributors and retail channels. Semiconductor
manufacturers sell modules almost exclusively to OEMs. Both semiconductor memory
suppliers and independent third party module manufacturers are customers for
module testers, and as such, represent both potential customers and competitors
of the Company. The memory module tester market is described below under the
heading "Memory Module Tester Market."
MEMORY MODULE TESTER MARKET
Memory module testers are important to assure that semiconductor memory
modules meet the necessary specifications of performance. Memory module tester
use typically is segmented into system
4
manufacture and system aftermarket. System manufacture typically involves the
manufacturer of the memory module being able to test its completed modules. This
usually requires "at speed" testing, where the module is exercised under the
same demands as actual use. Buyers generally evaluate reliability, productivity,
accuracy, advanced automation, software flexibility, service, customer support
and price. The Company believes that these purchase criteria are typical of
module tester buyers as well. Most manufacturers of semiconductor memory modules
perform "at speed" testing of all modules with exacting and accurate testers.
Significant expansion of test capacity is likely due to changing architectures
and strong growth of memory demand.
The actual test for a module is unique to its design in terms of
architecture, pinout, speed rating, voltage, organization and size which 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 modules. This makes test development a potentially costly task. The
ability of a tester manufacturer to provide support for the development of low
cost, accurate tests is a significant consideration in the buying decision.
Module testing requirements for the system aftermarket are typically less
robust. Memory additions to systems in use typically are already tested in
accordance with the needs of the system manufacture segment and 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 usually has
higher sensitivity for portability and cost than does module testing at the time
of system manufacture.
TOUCH SENSOR MARKET
The touch sensor market is extremely broad since the sensor is capable of
being utilized in any application where a switch is needed. Any product which
benefits from a low profile, sealed, environmentally robust, highly durable, low
cost, simple or easily customized switch is a very good candidate for a touch
sensor switch.
PRODUCTS
The Company offers build-to-order services, designs and markets products
consisting of semiconductor memory modules, designs and builds memory module
testers and provides design services in conjunction with the licensing of its
Touch sensor products. The Company's semiconductor memory modules include DRAM,
SRAM and Flash memory. The Company offers custom semiconductor memory modules,
as well as standard semiconductor memory modules that comply with industry
standards established by the Joint Electronic Development Engineering Council
("JEDEC"). The Company's memory module testers are oriented for both system
assembly and aftermarket purposes and include a broad line of test fixtures and
test algorithems.
COMPREHENSIVE LOGISTICS AND SUPPLY SOLUTIONS
The Company offers build-to-order services for custom products under its
CLASS program. CLASS is oriented toward building alliances with semiconductor
suppliers and major computer and electronic manufacturers. The Company will
assist these customers in achieving fast time-to-market for new products as well
as rapid manufacturing cycle times. The Company will assist semiconductor
suppliers develop increased market share and help the computer and electronic
manufacturers to be faster to market, providing lower cost and more rapidly
satisfying the needs of their customers.
Specific functions of CLASS include design/development, quick-turn
prototyping, assembly, test development, documentation, supply chain management,
complete Electronic Data Interchange ("EDI") integration, support services and
security/disaster recovery plan. The Company offers design expertise in
5
memory and other product areas and is unique in maintaining its own commercial
test equipment capabilities.
SEMICONDUCTOR MEMORY MODULES
DRAM. The Company offers a wide line of DRAM semiconductor memory modules,
including single in-line semiconductor memory modules ("SIMMs"), dual in-line
semiconductor memory modules ("DIMMs") and small outline dual in-line
semiconductor memory modules ("SO DIMMs"). The Company's DRAM modules are
available in various configurations of up to 168 pins and densities of up to 256
MBytes. These modules are available in FPM, EDO, SDRAM and SGRAM architectures,
with both 5.0 volt and 3.3 volt versions.
The following chart summarizes the Company's more than 550 off-the-shelf
DRAM module products:
PRODUCT DESCRIPTION TYPES MODES DENSITIES PRIMARY USAGE
- -------------------------------- ---------------- ------------ --------------- ------------------------------
168-pin Synchronous DIMM X64/x72ECC SDRAM 8MB-256MB Newest PCs, high-end
workstations
168-pin DIMMs (Unbuffered) X64/x72ECC FPM/EDO 8MB-256MB Newer PCs, servers,
workstations, routers
144-pin SO DIMM X64 FPM/EDO 8MB-64MB Newer notebooks, network PCs,
switches, routers
72-pin SO DIMM X32 FPM/EDO 4MB-32MB Legacy laptops, notebooks and
set-tops
72-pin SIMMs X32/x36/x40 FPM/EDO 4MB-128MB Legacy PC systems, servers,
routers
MEMORY MODULE TESTER PRODUCTS
The Company's memory module testers are marketed under the DarkHorse brand
name to utilize existing brand awareness. The tester line is oriented toward
both module manufacturers for system assembly and aftermarket purposes. The
SIGMA-2 tester is designed for module manufacturers who need to perform "at
speed" tests of synchronous and asynchronous DRAM, SRAM, Flash memory and VRAM
modules. It is aggressively priced relative to major competitors. The SIGMA-2 is
being 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. The types of customers for these testers include
module manufacturers, module retailers, large retail chains using them for PC
service purposes, and distributors. New tester development is ongoing, driven by
new memory industry developments.
The DarkHorse testers have standard or optional capabilities to support the
following types of products:
-- 30 and 72 pin SIMMs for PCs -- Buffered 168 pin DIMMs for PCs
-- Buffered 168 pin DIMMs for Apple Computer Inc. computers
-- Unbuffered 168 pin DIMMs for PCs
-- Unbuffered 168 pin SDRAM DIMMs for PCs
-- 144 pin SO DIMMs for certain proprietary notebook computers
-- 144 pin JEDEC SO DIMMs
-- SOJ normal DRAM components
-- SOJ SRAM components
6
-- SOJ wide DRAM components
-- TSOP DRAM components
-- DIP SRAM components
-- Notebook docking adapters
-- 60, 68 and 88 pin credit card semiconductor memory modules
-- VRAM upgrades for Apple Computer Inc. computers
-- Modules for Sun Microsystems Inc. SPARC workstations
-- Modules for Silicon Graphics Inc. workstations
-- Modules for Dell Computer Corp. Servers
-- 80 pin JEDEC Flash memory
-- Modules for Intel Corp. "COAST" architecture
-- Prototype development of proprietary test fixtures
The Company differentiates its testers by targeting its tester features
specifically for the purpose of testing memory products. The products are
planned for comparable performance relative to general purpose testers from
Hewlett-Packard Company and Advantest at significantly lower prices.
TOUCH SENSOR PRODUCTS
Tanisys Touch is a proprietary technology which is protected by patents,
copyrights and trademarks and is an intellectual property asset available for
licensing to third parties for incorporation into their products. The Company
licenses Tanisys Touch to OEMs which embed it into various products as a robust
switching mechanism. The touch sensor market is primarily an alternative to a
variety of switch technologies such as mechanical switches, membrane switches
and bubble switches.
Some advantages of Tanisys Touch relative to alternative switch technologies
are no moving parts, high reliability, ability to work through most plastics,
easy customization, abiltiy to work on multiple materials and low cost. Relative
to other vendors' touch implementations, Tanisys Touch does not need reference
capacitors, analog to digital converters or multiple electrodes. Instead, the
Company's proprietary technology is designed to be a reliable, simple, low cost
touch implementation, and the Company intends to position these advantages
against alternative switch technologies.
CUSTOMERS, SALES AND MARKETING
The Company's primary customers include computer and electronics OEMs,
semiconductor manufacturers, distributors, corporate end users, VARs and systems
integrators. In fiscal 1997 and 1996, the Company's ten largest customers
accounted for approximately 53.2% and 45.3% of net sales, respectively. During
fiscal 1997, the Company had one customer, Tandy Corporation, that accounted for
12.0% of net sales. In fiscal 1996, no one customer accounted for more than 10%
of net sales.
The Company primarily sells its module products directly and through a
network of independent sales representative organizations to OEM customers
worldwide. The Company sells the majority of its tester products directly to
other module manufacturers and sells a portion through distribution partners and
independent sales representative organizations. Licensing of Tanisys Touch is
through licensing agreements direct to the customer.
The Company maintains relationships with leading global suppliers of memory
semiconductor devices and frequently works jointly with these suppliers in
quoting customer opportunities.
The Company's OEM marketing activities include advertising in trade and
business magazines, direct mail and solicitation via the Company's Internet web
site.
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
7
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 was $2.4 million and $356 thousand at fiscal 1997 and 1996 year end,
respectively.
RESEARCH AND DEVELOPMENT
The Company's management believes that the timely development of new
products 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 module products, the continual
improvement in memory test products and solutions and the ongoing improvement in
manufacturing processes and technologies. 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 module products which address the
requirements of OEM, corporate and retail customers.
The Company's management believes that its Tanisys Touch technology has been
developed to a viable commercial level and that the next step is introduction of
consumer products utilizing Tanisys Touch into the marketplace by OEMs. Support
continues to be provided to OEMs in the PC and appliance industries toward this
end. It is not anticipated that significant additional research and development
efforts will be required for this technology.
The Company's research and development expenses were $2.6 million in fiscal
1997, $1.1 million in fiscal 1996 and $410 thousand in fiscal 1995.
COMPETITION
The memory module and memory test equipment industries are intensely
competitive. Each of these markets includes a large number of competitive
companies, several of which have achieved a substantial market share. Certain of
the Company's competitors in each of these markets have substantially greater
financial, marketing, technical, distribution and other resources, greater name
recognition, lower cost structures and larger customer bases than the Company.
In the memory module market, the Company competes against semiconductor
manufacturers that maintain captive memory module production capabilities,
including Samsung Electronics Company Ltd. ("Samsung") and Micron Electronics,
Inc. (a subsidiary of Micron Technology, Inc.). The Company also competes with
independent memory module manufacturers, including Smart Modular Technologies,
Inc. and Kingston Technology, Inc. In the memory tester market, the Company
competes primarily with companies such as Hewlett-Packard, Inc. and Advantest,
Inc. Competition for the Company's CLASS business of manufacturing services
includes SCI Systems, Inc. and Avex Electronics, Inc. The Company faces
competition from current and prospective customers that evaluate the Company's
capabilities against the merits of manufacturing products internally. In some
cases the Company's tester customers represent direct competition to the
Company's memory module business. In addition, certain of the Company's
competitors, such as Samsung, are significant suppliers to the Company. These
suppliers may have the ability to manufacture competitive products at lower
costs than the Company as a result of their higher levels of integration. 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 and manufacturing services, improve quality levels, offer flexible
8
delivery schedules, deliver finished products on a reliable basis, reduce
manufacturing and testing 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.
INTELLECTUAL PROPERTY
The Company has filed seven applications with the U.S. Patent and Trademark
Office for patents to protect its intellectual property rights for products and
technology that have been sold, licensed or are under development, as follows:
1. Application covering claims for hardware, firmware, software and
methods operations for a broad range of applications for its touch
technology. The patent was granted on April 16, 1996 under Registration No.
5,508,700. Corresponding international patent applications have been filed
in selected European, Asian and North American countries. Management of the
Company believes that if competitors decide to pursue the discrete touch
market, they could be in violation of the Company's patent. The Company has
no knowledge of any such infringement to date.
2. Application for "Computer Input Device for Use in Conjunction with a
Mouse Input Device." This pending application is targeted to protect the
Company's technology related to capacitive sensing used in a mouse pad or
other flush-mounted touch device.
3. Application for "Capacitive Sensitive Input Circuit with Common
Pad." This pending application is targeted to protect the Company's touch
technology which could be used in extreme or hostile environments and can
function to improve the reliability of touch sensor operation in such
environments.
4. Application for "Capacitive Sensitive Switch Method and System,"
This pending application relates generally to touch sensor switches, and
more particularly to an automated digital system for sensing the capacitance
of touch pads to determine when a physical object has come into contact with
a touch pad.
5. Application for "Synchronous Memory Identification System." This
application relates generally to memory test systems, and more particularly
to an automated method and system for identifying SDRAM and SGRAM memories.
6. Application for "Nested Loop Method of Identifying Synchronous
Memories." This application relates generally to memory test systems, and
more particularly to a nested loop method which may be used in a memory test
system to identify SDRAM and SGRAM memories.
7. Application for "Synchronous Memory Test System." This application
relates generally to memory test systems, and more particularly to a test
system for SDRAM and SGRAM memories.
There can be no assurance that these 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 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
9
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 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, local and foreign 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, 1997, the Company had 143 full-time employees. Those
employees included 27 engineering and product development employees, 28 finance
and administration employees, 20 employees in the sales, marketing, technical
and customer support areas and 68 manufacturing employees.
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,
engineers, 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.
FACTORS THAT AFFECT FUTURE RESULTS
The Company's business, financial condition and results of operations can be
impacted by a number of factors. See "Item 7. Management's Discussion And
Analysis Of Financial Condition And Results Of Operations--Factors That May
Affect Future Results."
ITEM 2. PROPERTIES
At November 30, 1997, the Company and its wholly owned subsidiaries, 1st
Tech and DarkHorse, leased and occupied approximately 33,000 square feet of
space for their production facility and corporate and administrative offices at
12201 Technology Boulevard, Suite 130, Austin, Texas, pursuant to a lease which
expires on August 15, 2000. The Company has the right to terminate the lease
anytime after August 31, 1998 upon sixty days' advance written notice . The
lease has certain expansion options, renewal options and rights of first
refusal. The Company currently is paying annual rental of $209,721, plus a pro
rata charge for property taxes, common area maintenance and insurance. The
Company believes that its current facilities are adequate to meet its current
needs.
ITEM 3. LEGAL PROCEEDINGS
At the date hereof, there is no pending, or to the best knowledge of the
Company, threatened litigation involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
PART II.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
On May 22, 1997, the Company began trading on the Nasdaq SmallCap Market
under the symbol "TNSU." From March 20, 1995 to June 6, 1997, the Common Stock
was traded on the 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. From July 11, 1994 to March 19, 1995, the
Common Stock was traded on the VSE under the symbol "TNS," with prices quoted in
Canadian dollars. From July 7, 1993 to July 10, 1994, the Common Stock was
traded under the symbol "RSG," with prices quoted in Canadian dollars.
The table below sets forth the high and low closing prices of the Common
Stock from October 1, 1994 through May 22, 1997, as reported by the VSE, and
from May 23, 1997 to September 30, 1997, as reported on the Nasdaq SmallCap
Market. These price quotations reflect interdealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
COMMON STOCK
--------------------
QUARTER ENDED HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
FISCAL 1996:
December 31, 1995............................................................ $ 3.00 $ 1.70
March 31, 1996............................................................... 4.90 2.45
June 30, 1996................................................................ 5.20 3.25
September 30, 1996........................................................... 4.20 2.50
FISCAL 1997:
December 31, 1996............................................................ $ 6.25 $ 3.50
March 31, 1997............................................................... 5.35 2.75
June 30, 1997................................................................ 4.50 2.87
September 30, 1997........................................................... 5.56 4.06
FISCAL 1998:
Through December 22, 1997.................................................... $ 4.15 $ 2.00
STOCKHOLDERS
On September 30, 1997, there were 20,334,714 shares of Common Stock
outstanding held by 299 holders of record. The last reported sales price on the
Common Stock on November 28, 1997 was $2.75 per share.
DIVIDENDS
To date, 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. In addition, at this time restrictions
in the Company's revolving credit facility prohibit the payment of cash
dividends.
11
PRIVATE PLACEMENT
In July 1997, the Company completed an equity financing of 2,240,000 shares
of Common Stock for cash at an offering price of $2.50 per share. The Company
believes that the transaction was exempt from registration under the Securities
Act by reason of Section 4(2) of the Securities Act. The shares were sold to a
limited number of persons, all of whom were accredited investors as defined by
Item 501 of Regulation D of the Securities and Exchange Commission, such persons
were provided access to all relevant information regarding the Company and/or
represented to the Company that they were "sophisticated" investors, and such
persons represented to the Company that the shares were purchased for investment
purposes only and with no view to distribution.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below are derived from
the Consolidated Financial Statements of the Company, which financial statements
have been audited by Arthur Andersen LLP, independent public accountants, to the
extent indicated in their report 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
entirely by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and Notes thereto.
FISCAL YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................................... $ 47,674 $ 14,989 $ 359 $ 113 $ 0
Loss from continuing operations............................. (10,114) (3,684) (2,445) (1,972) (660)
Goodwill amortization expense............................... (3,585) (1,494) N/A N/A N/A
Loss per weighted average common share...................... (0.58) (0.31) (0.29) (0.30) (0.27)
Total assets................................................ 17,232 17,463 1,613 2,295 2,488
Long-term debt.............................................. 81 123 0 0 0
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,
1997, 1996 and 1995. 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
"Business--Forward Looking Statements--Cautionary Statements.")
The Company was organized under the laws of the Province of British
Columbia, Canada, on January 27, 1984, as Montebello Resources Ltd., and pursued
oil and gas exploration in British Columbia and Manitoba, Canada. In October
1992, the Company changed its name to First American Capital Group Inc.
Unsuccessful in the exploration business, the Company became dormant pursuant to
the rules and regulations of the VSE. During the first two quarters of 1993, the
Company was reorganized in accordance with the rules of the VSE. As part of this
reorganization, the Company acquired Timespan and its
12
computer game controller technology. Timespan, a wholly owned subsidiary of the
Company, was dissolved as of October 23, 1996. The Company changed its name to
Rosetta Technologies Inc. in May 1993 and to Tanisys Technology, Inc. in July
1994. Until May 21, 1996, the Company focused on research and development of
highly specialized applications of capacitive touch sensing technology.
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 $2.3 million, the proceeds of
which were used to reduce short-term debt and provide working capital for 1st
Tech.
The Company's net sales and gross profit increased dramatically in the
current fiscal year and the last two quarters of fiscal year 1996, due to the
acquisitions of 1st Tech and DarkHorse. In fiscal 1997, revenues were $47.7
million with gross profit of $6.2 million (13.0% of revenue) versus fiscal 1996
revenues of $15.0 million and gross profit of $2.3 million (15.5% of revenue).
This is an increase in revenues of $32.7 million, or 218.1%, and in gross profit
of $3.9 million, or 166.1%. The increase in revenues and gross profits are due
primarily to the acquisitions of 1st Tech and Darkhorse on May 21, 1996. Net
losses increased to $10.1 million in fiscal 1997, or 21.2% of revenues, from
$3.7 million in fiscal 1996, or 24.7% of revenues. The increases in revenues,
gross profit and net losses are due primarily to the acquisitions of 1st Tech
and DarkHorse on May 21, 1996.
Management believes that revenues and gross profits will fluctuate due to
the continuing oversupply of memory chips, which dramatically drives down the
prices of the Company's products, the continuing fluctuations in the cost of
memory and components and other factors, including changes in pricing by
suppliers and competitors and changes in the proportion of contract
manufacturing done--where the customer consigns the material--versus
manufacturing on a turnkey basis--where the Company purchases the necessary
materials.
13
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data of the
Company expressed as a percentage of net sales for the fiscal years ended
September 30, 1997, 1996 and 1995:
1997 1996 1995
------------ ------------ ------------
Net sales............................................... 100.0% 100.0% 100.0%
Cost of goods sold...................................... 87.0 84.5 30.7
------ ------ ------
Gross profit............................................ 13.0 15.5 69.3
------ ------ ------
Operating expenses:
Research and development.............................. 5.4 7.2 114.2
Sales and marketing................................... 6.4 7.9 378.6
General and administrative............................ 7.6 12.9 249.3
Depreciation and amortization......................... 8.8 11.7 19.8
Bad debt expense...................................... 4.7 0.3 5.3
------ ------ ------
Total operating expenses................................ 32.9 40.0 767.2
------ ------ ------
Operating loss.......................................... (19.9) (24.5) (697.9)
Other income (expense), net............................. (1.3) (0.2) 16.3
------ ------ ------
Net loss................................................ (21.2)% (24.7)% (681.6)%
------ ------ ------
------ ------ ------
NET SALES
Until the date of the acquisitions of 1st Tech and DarkHorse on May 21,
1996, net sales consisted of software sales, less returns and discounts, and
design engineering fees. After the acquisitions, net sales consist of custom
manufacturing services, custom semiconductor memory modules, standard
semiconductor memory modules, design engineering fees, memory module test
solutions and advanced technology services, less returns and discounts. Net
sales for fiscal 1997 increased to $47.7 million from $15.0 million in fiscal
1996. The increases in fiscal 1997 are primarily due to the acquisitions of 1st
Tech and DarkHorse and, to a lesser degree, to increases in sales volume in both
the memory and tester product lines. Net sales increased to $15.0 million in
fiscal 1996 from $359 thousand in fiscal 1995. This increase in sales was
primarily due to the acquisitions of 1st Tech and DarkHorse.
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 for fiscal 1997 increased to $6.2
million from $2.3 million in fiscal 1996. Gross profit margin decreased to 13.0%
from 15.5% in 1997 versus 1996. The decrease in gross profit margin was
primarily due to the acquisitions of 1st Tech and DarkHorse and the dramatic
change in the types of products being sold by the Company before and after the
acquisitions.
Gross profit increased to $2.3 million in 1996 from $249 thousand in 1995,
an increase of 836.4%. Gross profit margin declined to 15.5% in 1996 from 69.3%
in 1995. The increase in gross profit and the decrease in gross profit margin
are primarily due to the change in concentration of product sales resulting from
the acquisitions of 1st Tech and DarkHorse.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the costs associated with the
timely development of new products and technologies. These relate primarily to
the costs of materials, personnel, management and employee compensation and
engineering design consulting fees. Research and development expenses
14
increased to $2.6 million in fiscal 1997 from $1.1 in fiscal 1996, representing
a 140.2% increase from year to year. The substantial increase is due to the
acquisitions of the additional product lines of 1st Tech and DarkHorse and the
related research and development expenditures, and the development of new memory
module products and new tester products.
Research and development expenses increased to $1.1 million in fiscal 1996
from $410 thousand in fiscal 1995, a 163.5% increase. The substantial increase
is due to the acquisitions of the additional product lines of 1st Tech and
DarkHorse and the related research and development expenditures, and the
development of new memory module products and new tester 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 $3.0 million in fiscal 1997 from $1.2 million in fiscal 1996, a
158.6% increase. In fiscal years 1997 and 1996, sales and marketing expenses
expressed as a percentage of revenues were 6.4% and 7.9%, respectively. The
increases in actual funds expended are connected with the acquisitions of the
product lines of 1st Tech and DarkHorse. The decreases in the expenses expressed
as a percentage of revenues are caused primarily by the significant increases in
revenues related to the acquisitions of 1st Tech and DarkHorse. Sales and
marketing expenses are expected to remain approximately the same or to grow
slightly when expressed as a percentage of revenue and to continue to increase
significantly in terms of absolute dollars in future periods as revenues
continue to grow.
Sales and marketing expenses decreased to $1.2 million in fiscal 1996 from
$1.4 million in fiscal 1995, a decrease of 13.3%. Expressed as a percentage of
revenues, sales and marketing expenses were 7.9% in 1996 and 378.6% in 1995. The
decrease in expenses expressed as a percentage of revenues is primarily caused
by the significant increase in revenues related to the acquisitions of 1st Tech
and DarkHorse. The decrease in actual expenditures is due in large part to the
decrease in commission expenses relating to software revenue.
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 1997 and 1996, general and administrative
expenses increased to $3.6 million from $1.9 million, an 88.2% increase. General
and administrative expenses expressed as a percentage of revenues were 7.6% and
12.9% in fiscal years 1997 and 1996, respectively. The increase in actual funds
expended in fiscal 1997 is due primarily to the acquisitions of 1st Tech and
DarkHorse. The decrease in expenses expressed as a percentage of revenues is
primarily caused by the significant increase in revenues related to the
acquisitions of 1st Tech and DarkHorse and, to a lesser extent, to the
institution of cost controls on general and administrative expenses. The
absolute dollar expenses associated with the general and administrative area are
expected to increase significantly in future periods due to anticipated
continued growth in business activity and increased costs associated with being
a reporting company. The general and administrative expenses are not expected to
grow significantly in future periods when expressed as a percentage of sales.
General and administrative expenses increased to $1.9 million in fiscal 1996
from $894 thousand in fiscal 1995, representing an increase of 115.8%. General
and administrative expenses expressed as a percentage of revenues were 12.9% and
249.3% in fiscal years 1996 and 1995, respectively. The increase in general and
administrative expenses and the decrease as a percentage of revenue during this
time period were due to the acquisitions of 1st Tech and DarkHorse.
15
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 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 1997, the amount charged to bad debt
expense was $2.2 million, compared to a total of $46 thousand for fiscal 1996.
The increase in fiscal 1997 bad debt expense is primarily due to a $1.7 million
bad debt expense for one customer and to increased sales in conjunction with the
acquisitions of 1st Tech and DarkHorse.
Bad debt expense increased to $46 thousand for fiscal 1996 from $19 thousand
for fiscal 1995, due primarily to the increase in sales relating to the
acquisitions of 1st Tech and DarkHorse.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes the depreciation for all fixed assets
and the amortization of intangibles, including goodwill incurred in the
acquisitions of 1st Tech and DarkHorse. In fiscal 1997, depreciation and
amortization increased to $4.2 million from $1.7 million in fiscal 1996. The
substantial increases are due primarily to the amortization of goodwill recorded
in conjunction with the acquisitions of 1st Tech and DarkHorse and to the
depreciation of the acquired assets of 1st Tech and DarkHorse.
Depreciation and amortization increased to $1.7 million in fiscal 1996 from
$71 thousand in fiscal 1995. The substantial increases are due primarily to the
amortization of goodwill recorded in conjunction with 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 is primarily attributable to borrowings from
a revolving credit note. Substantially all of the interest expense relates to
credit line draws made for short-term inventory requirements and to fund trade
accounts receivable. Interest income relates to investment of available cash in
short-term interest bearing accounts and cash equivalent securities. Other
income (expense), increased to $616 thousand of expense in fiscal 1997 from $30
thousand of expense in fiscal 1996 and $59 thousand of income in fiscal 1995.
The Company had no debt and earned interest on its available cash until its May
21, 1996 acquisitions of 1st Tech and DarkHorse. Thereafter, the Company
incurred net interest expense due to the increased balances of inventories,
accounts receivable and borrowings. The Company expects to continue to require
borrowings to fund growth in inventories and accounts receivable in the future
and therefore expects to continue to reflect net interest expense.
PROVISION FOR INCOME TAXES
During 1997 and 1996, the Company incurred consolidated net operating losses
for U.S. income tax purposes of approximately $6.0 million and $1.8 million,
respectively. The loss carryforwards expire in 2012 and 2011, respectively.
During 1997 and 1996, the Company had temporary differences resulting in future
tax deductions of $513 thousand and $693 thousand, respectively, principally
representing tax basis in accrued liabilities and intangible assets. Deferred
income tax assets from the loss carryforwards and asset basis differences
aggregate $4.6 million and $2.2 million, respectively, at September 30, 1997.
For financial reporting purposes, valuation allowances of $4.6 million and
$2.2 million have 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 carryforward 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
16
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 does not believe that an
IRS Code Section 382 limitation exists as of September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception the Company has utilized the funds acquired in equity
financings of its Common Stock, in the exercise of warrants, exercise of stock
options, capital and operating leases, 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
1997, the Company generated $9.2 million in net cash from financing activities
versus $3.3 million in fiscal 1996. The $9.2 million in fiscal 1997 consisted of
$2.5 million from the exercise of warrants and options, $1.1 million of net cash
draws on the Company's revolving credit note and $5.6 million in private
placements of Common Stock. At September 30, 1997, the Company had $2.0 million
of cash, $1.5 million of restricted cash and a working capital surplus of $3.1
million. 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 June 27, 1997, the Company received approval of an $8.5 million,
three-year revolving credit facility from a new financial institution. The
transaction was completed on July 24, 1997. Borrowings under the line of credit
are based on eligible accounts receivable, inventory and equipment and subject
to the terms and conditions of the credit agreement. The line of credit is
collateralized by all of the Company's assets. The interest rate on this line of
credit is prime plus 2%.
Capital expenditures totaled approximately $1.5 million and $404 thousand in
fiscal years 1997 and 1996, respectively. These capital expenditures were
primarily for the purchase of enterprise information systems, manufacturing
equipment, test equipment and the expansion of manufacturing facilities. The
Company expects to fund capital expenditures of approximately $625 thousand in
the first quarter of fiscal 1998 for additional manufacturing capacity, test
equipment and expansion of manufacturing facilities through working capital,
operating leases and capital leases.
The Company entered into a 60-month operating lease for equipment valued at
$1.5 million effective March 1, 1997. This lease required a letter of credit
equal to approximately 40% of the equipment cost for the first year of the
lease, with annual decreases in the letter of credit over the life of the lease.
During fiscal 1997, there were significant declines in DRAM and SRAM
semiconductor prices. Since the fiscal 1997 year end, there have been continued
declines in certain DRAM and SDRAM semiconductor prices. Because a substantial
portion of the Company's net sales are attributable to the resale of
semiconductor memory devices, future price declines could have a material
adverse effect on the Company's business, financial condition and results of
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's business, financial condition and results of operations could
be impacted by a number of factors, including without limitation the following.
SIGNIFICANT CUSTOMER CONCENTRATION
A significant percentage of the Company's net sales are produced by a
relatively small number of customers. In fiscal 1997 and 1996, the ten largest
customers accounted for approximately 53.2% and 45.3% of net sales,
respectively. One customer, Tandy Corporation, accounted for 12.0% of total
sales in fiscal 1997, while no one customer accounted for more than 10% of total
sales in fiscal 1996. While the Company expects to continue to be dependent on a
relatively small number of customers for a significant
17
percentage of its net sales, there can be no assurance that any of the top ten
customers in fiscal 1997 will continue to utilize the Company's products or
services. Absent replacement or other sales growth, the loss of any significant
customer could materially and adversely affect the Company's result of
operations, business and financial condition. The actual customers producing the
sales are different between the two periods, and the Company expects this type
of variation in volume of purchases from a particular customer to continue.
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 customer's 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.
PRODUCT CONCENTRATION; DEPENDENCE ON MEMORY MARKET
A substantial majority of the Company's net sales is derived from memory
products. The market for memory products is characterized by frequent
transitions in which products rapidly incorporate new features and performance
standards. A failure to develop products with required feature sets or
performance standards or a delay as short as a few months in bringing a new
product to market could significantly reduce the Company's net sales for a
substantial period, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The market for semiconductor memory devices 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 over capacity. During fiscal 1997, there were significant declines in
DRAM and SRAM semiconductor prices. Since the fiscal 1997 year end, there have
been continued declines in certain DRAM and SDRAM semiconductor prices. Because
a substantial portion of the Company's net sales are attributable to the resale
of semiconductor memory devices, future price declines could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON 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. Moreover, changes in end-user demand for the products
sold by any individual OEM customer can have a rapid and exaggerated effect on
demand for the Company's products from that customer in any given period,
particularly in the event that the OEM customer has accumulated excess
inventories of products purchased from the Company. 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.
18
INTENSE COMPETITION
The memory module and memory test equipment industries are intensely
competitive. Each of these markets includes a large number of competitive
companies, several of which have achieved a substantial market share. Certain of
the Company's competitors in each of these markets have substantially greater
financial, marketing, technical, distribution and other resources, greater name
recognition, lower cost structures and larger customer bases than the Company.
In the memory module market, the Company competes against semiconductor
manufacturers that maintain captive memory module production capabilities,
including Samsung Electronics Company Ltd. ("Samsung") and Micron Electronics,
Inc. (a subsidiary of Micron Technology, Inc.). The Company also competes with
independent memory module manufacturers, including Smart Modular Technologies,
Inc. and Kingston Technology, Inc. In the memory tester market, the Company
competes primarily with companies such as Hewlett-Packard, Inc. and Advantest,
Inc. Competition for the Company's CLASS business of manufacturing services
includes SCI Systems, Inc. and Avex Electronics, Inc. The Company faces
competition from current and prospective customers that evaluate the Company's
capabilities against the merits of manufacturing products internally. In some
cases the Company's tester customers represent direct competition to the
Company's memory module business. In addition, certain of the Company's
competitors, such as Samsung, are significant suppliers to the Company. These
suppliers may have the ability to manufacture competitive products at lower
costs than the Company as a result of their higher levels of integration. 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 and manufacturing services, improve quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis, reduce
manufacturing and testing 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.
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. Aside from fluctuations
typically resulting from the different products and customer mix associated with
acquisitions, 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 due to excess
product inventory accumulation by such customers, adverse changes in the mix of
products sold by the Company and the inability to procure required components.
Other factors that may affect the Company's results of operations in the future
include fluctuating market demand for and declines in the selling prices of the
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
reschedulings of orders due to customer financial difficulties or other events,
inventory obsolescence, including the reduction in value of the Company's
19
inventories due to unexpected price declines, unexpected product returns, the
timing of expenditures in anticipation of increased sales, cyclicality in the
Company's targeted markets, and expenses associated with acquisitions. In
particular, declines in DRAM, SDRAM, and SRAM semiconductor prices could affect
the valuation of the Company's inventory which could result in adverse changes
in the Company's business, financial condition and results of operations. The
concentration of the Company's assets in its Austin, Texas facility could make
the Company's exposure to business disruptions greater than if the Company's
assets were more geographically dispersed.
The Company's net sales and gross margin have varied and will continue to
vary significantly based on a variety of factors, including the mix of products
sold and the manufacturing services provided, the channels through which the
Company's products are sold, changes in product selling prices and component
costs, the level of manufacturing efficiencies achieved and pricing by
competitors. The selling prices of the Company's existing products have declined
in the past, and the Company expects that prices will continue to decline in the
future. In particular, during fiscal 1997 and 1996, the selling prices of the
Company's existing products declined due to significant declines in DRAM, SDRAM
and SRAM semiconductor prices. Moreover, since the fiscal 1997 year end,
declines in the selling prices of certain of the Company's existing products
have continued due to further declines in certain DRAM and SDRAM semiconductor
prices. Because a substantial portion of the Company's turnkey sales are
attributable to the resale of semiconductor devices, continued decline in the
prices of these components could have a material adverse effect on the Company's
net sales. Accordingly, the Company's ability to maintain or increase net sales
will be highly dependent upon its ability to increase unit sales volumes of
existing products and to introduce and sell new products in quantities
sufficient to compensate for the anticipated declines in selling prices.
Declining product selling prices may also materially and adversely affect the
Company's gross margin unless the Company is able to reduce its cost per unit to
offset declines in product selling prices. There can be no assurance that the
Company will be able to increase unit sales volumes, introduce and sell new
products or reduce its cost per unit. In addition, the Company's business has in
the past been subject to seasonality. The Company expects that its business will
experience more significant seasonality as it expands its sales and marketing
efforts in Europe.
Sales of the Company's individual products and product lines toward the end
of a product's life cycle are typically 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, returns of
products by distributors, or substantial price protection charges 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 capital equipment
purchases, 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 has significantly increased
its expense levels to support its growth, and there can be no assurance that the
Company will maintain its current level of net sales or rate of growth for any
period in the future. 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. Due to the foregoing factors,
it is likely that in some future period the Company's operating results will be
below the expectations of public market analysts or investors. In such event,
the market price of the Company's securities would be materially and adversely
affected.
20
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 components in the Company's memory module and
tester products. The electronics industry has experienced in the past, and may
experience in the future, shortages in semiconductor devices, including DRAM,
SDRAM and SRAM memory. 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.
MANAGEMENT OF GROWTH; EXPANSION OF OPERATIONS
The Company has significantly expanded its operations over the last several
years. This growth has resulted in a significant increase in responsibility for
existing management which has placed, and may continue to place, a significant
strain on the Company's limited personnel and management, manufacturing and
other resources. The Company's ability to manage the recent and any possible
future growth will require a significant expansion of its manufacturing
capacity, accounting and other internal management systems and the
implementation of a variety of procedures and controls. There can be no
assurance that significant problems in these areas will not occur. Any failure
to expand these systems and implement such procedures and controls in an
efficient manner and at a pace consistent with the Company's business could have
a material adverse effect on the Company's business, financial condition and
results of operations.
In connection with the Company's acquisitions and growth, the Company's
operating expenses have increased significantly, and the Company anticipates
that operating expenses will continue to increase in absolute dollars in the
future. In particular, 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 capital equipment, 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. Certain customers have
required and may continue to require rapid increases in production and
accelerated delivery schedules which have placed and may continue to place a
significant burden on the Company's resources. In order to achieve anticipated
sales levels and profitability, the Company will continue to be required to
manage its assets and operations efficiently. In addition, should the Company
continue to expand geographically, it may experience certain inefficiencies from
the management of geographically dispersed facilities.
The Company anticipates that future demand for its products will require
expansion of its current operations and the addition of new production lines in
the future. It also anticipates it will be required to move to a larger
facility. Should the Company's relocation to this facility be delayed or should
the Company experience any unexpected disruptions associated with this
transition, the Company's results of operations could be materially and
adversely affected. There can be no assurance that any such expansion will be
completed successfully.
21
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 is
currently transitioning from fast page mode and EDO memory to SDRAM. 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, availability
of production capacity, achievement of acceptable manufacturing yields 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 the delay in 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 KEY PERSONNEL
The Company's future operating results depend in 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. The Company is actively recruiting such
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.
INTERNATIONAL SALES
International sales accounted for 3.5% and 2.7% of net sales in fiscal 1997
and 1996, respectively. The Company anticipates that international sales will
increase in future periods and will account for an increasing portion of net
sales. As a result, an increasing portion of the Company's sales will be subject
to certain risks, including changes in regulatory requirements, tariffs and
other barriers, timing and availability of export licenses, political and
economic instability, difficulties in accounts receivable collections, natural
disasters, difficulties in staffing and managing foreign subsidiary and branch
operations, difficulties in managing distributors, difficulties in obtaining
governmental approvals for telecommunications and other products, foreign
currency exchange fluctuations, the burden of complying with a wide variety of
complex foreign laws and treaties and potentially adverse tax consequences. The
Company is also 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
22
U.S. or other countries. Because sales of the Company's products have been
denominated to date primarily 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. Future international activity may result in increased foreign currency
denominated sales. Gains and losses on the conversion to U.S. dollars of
accounts receivable, accounts payable and other monetary assets and liabilities
arising from international operations may contribute to fluctuations in the
Company's results of operations. Some of the Company's customer purchase orders
and agreements are governed by foreign laws, which may differ significantly from
U.S. 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.
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. In the past,
the Company has experienced quality problems resulting in product returns and
cancellations. 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 reschedulings 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.
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 material 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 these or other companies will not in 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. 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
23
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.
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company expects to make acquisitions
of, or significant investments in, businesses that offer complementary products
and technologies. Any such future acquisitions or investments would expose the
Company to the risks commonly encountered in acquisitions of businesses. Such
risks include, among others, difficulty of assimilating the operations,
information systems and personnel of the acquired businesses, the potential
disruption of the Company's ongoing business, the inability of management to
maximize the financial and strategic position of the Company through the
successful incorporation of acquired employees and customers, the maintenance of
uniform standards, controls, procedures and policies and the impairment of
relationships with employees and customers as a result of any integration of new
management personnel. There can be no assurance that any potential acquisition
will be consummated or, if consummated, that it will not have a material adverse
effect on the Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICES
There has been a history of significant volatility in the market prices of
the common stock of technology companies, including the Common Stock of the
Company, and it is likely that the market price of the Company's Common Stock
will continue to be subject to significant fluctuations. Factors such as the
timing and market acceptance of new product introductions by the Company, demand
for products of the Company's customers, the introduction of new products by the
Company's competitors, variations in quarterly operating results, changes in
securities analysts' recommendations regarding the Company's Common Stock,
developments in the technology industry and general economic conditions may have
a significant impact on the market price of the Company's Common Stock. In
addition, the equity markets in recent years have experienced significant price
and volume fluctuations that have affected the market prices of technology
companies and that have often been unrelated to the operating performance of
such companies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
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.
ITEM PAGE
- ------------------------------------------------------------------------------------------------------------- -----
Report of Independent Public Accountants..................................................................... 25
Consolidated Balance Sheets at September 30, 1997 and 1996................................................... 26
Consolidated Statements of Operations for the Years Ended September 30, 1997, 1996 and 1995.................. 27
Consolidated Statements of Stockholders' Equity for for Years Ended September 30, 1997, 1996 and 1995........ 28
Consolidated Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and 1995.................. 29
Notes to Consolidated Financial Statements................................................................... 30
24
[LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tanisys Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Tanisys
Technology, Inc. (a Wyoming corporation), and subsidiaries as of September 30,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1997. 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 audit 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
October 24, 1997
25
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 1,990,017 $ 2,689,569
Restricted cash................................................................. 1,539,448 --
Trade accounts receivable, net of allowance of $180,157 and $84,557 in 1997 and
1996, respectively............................................................ 3,519,369 5,069,399
Accounts receivable from related parties........................................ 12,371 17,691
Inventory....................................................................... 4,489,050 1,804,458
Prepaid expense................................................................. 364,042 217,570
-------------- --------------
Total current assets.......................................................... 11,914,297 9,798,687
-------------- --------------
Property and equipment, net of accumulated depreciation of $1,732,524 and $906,589
in 1997 and 1996, respectively.................................................. 2,539,324 1,817,479
Organization costs, net........................................................... 512 1,024
Patents and trademarks, net....................................................... 80,327 84,337
Goodwill, net of accumulated amortization of $5,079,457 and $1,493,958 in 1997 and
1996, respectively.............................................................. 2,091,541 5,677,040
Other noncurrent assets........................................................... 605,957 84,000
-------------- --------------
Total Assets.................................................................. $ 17,231,958 $ 17,462,567
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 3,917,786 $ 2,920,530
Accounts payable to related parties............................................. 250 64,618
Accrued liabilities............................................................. 710,189 929,376
Revolving credit note........................................................... 4,172,516 3,075,000
-------------- --------------
Total current liabilities..................................................... 8,800,741 6,989,524
-------------- --------------
Obligations under capital lease................................................. 81,114 123,000
-------------- --------------
Total liabilities............................................................. 8,881,855 7,112,524
-------------- --------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, no par value, 50,000,000 shares authorized, 20,334,714 and
15,978,537 shares issued and outstanding, at September 30, 1997 and September
30, 1996, respectively.......................................................... 28,599,524 20,469,136
Accumulated deficit............................................................... (20,249,421) (10,119,093)
-------------- --------------
Total stockholders' equity...................................................... 8,350,103 10,350,043
-------------- --------------
Total Liabilities and Stockholders' Equity........................................ $ 17,231,958 $ 17,462,567
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these consolidated financial
statements.
26
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
-------------- ------------- -------------
Net sales.......................................................... $ 47,673,950 $ 14,988,946 $ 358,726
Cost of goods sold................................................. 41,479,865 12,660,900 110,097
-------------- ------------- -------------
Gross profit....................................................... 6,194,085 2,328,046 248,629
-------------- ------------- -------------
Operating expenses:
Research and development......................................... 2,593,866 1,079,927 409,805
Sales and marketing.............................................. 3,044,052 1,177,214 1,358,032
General and administrative....................................... 3,632,895 1,930,204 894,372
Depreciation and amortization.................................... 4,190,583 1,748,063 71,043
Bad debt expense................................................. 2,230,808 46,393 19,003
-------------- ------------- -------------
Total operating expenses....................................... 15,692,204 5,981,801 2,752,255
-------------- ------------- -------------
Operating loss..................................................... (9,498,119) (3,653,755) (2,503,626)
-------------- ------------- -------------
Other income (expense):
Interest income.................................................. 45,659 74,238 56,250
Interest expense................................................. (661,368) (108,332) --
Other income..................................................... -- 4,182 2,290
-------------- ------------- -------------
Net loss........................................................... $ (10,113,828) $ (3,683,667) $ (2,445,086)
-------------- ------------- -------------
Loss per weighted average common share............................. $ (0.58) $ (0.31) $ (0.29)
-------------- ------------- -------------
-------------- ------------- -------------
Weighted average number of common shares........................... 17,537,914 11,765,850 8,436,320
-------------- ------------- -------------
-------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
27
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OFSTOCKHOLDERS' EQUITY
COMMON STOCK TOTAL
--------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
------------ ------------- -------------- --------------
Balance, September 30, 1994......................... 7,995,325 $ 5,931,456 $ (3,990,340) $ 1,941,116
------------ ------------- -------------- --------------
Net loss............................................ -- -- (2,445,086) (2,445,086)
Private placements, net............................. 900,000 1,607,232 -- 1,607,232
Issued as payment of commission..................... 48,980 120,001 -- 120,001
Exercise of stock options........................... 6,000 12,724 -- 12,724
Issued for retirement of debt....................... 115,000 142,928 -- 142,928
------------ ------------- -------------- --------------
Balance, September 30, 1995......................... 9,065,305 $ 7,814,341 (6,435,426) 1,378,915
------------ ------------- -------------- --------------
Net loss............................................ -- -- (3,683,667) (3,683,667)
Acquisition of businesses, net (Note 2)............. 4,150,000 8,300,000 -- 8,300,000
Issued as payment of consulting bonus
(Note 2).......................................... 207,500 788,500 -- 788,500
Private placements, net (Note 9).................... 975,177 1,511,796 -- 1,511,796
Issued as payment of commission..................... 45,555 102,499 -- 102,499
Exercise of stock warrants.......................... 1,515,000 1,905,000 -- 1,905,000
Issued for retirement of debt....................... 20,000 47,000 -- 47,000
------------ ------------- -------------- --------------
Balance, September 30, 1996......................... 15,978,537 20,469,136 (10,119,093) $ 10,350,043
------------ ------------- -------------- --------------
Net loss............................................ -- -- (10,113,828) (10,113,828)
Private placements, net (Note 9).................... 2,280,000 5,600,000 -- 5,600,000
Exercise of stock options........................... 16,000 42,420 -- 42,420
Exercise of stock warrants.......................... 2,060,177 2,487,968 -- 2,487,968
Other (Note 9)...................................... -- -- (16,500) (16,500)
------------ ------------- -------------- --------------
Balance, September 30, 1997......................... 20,334,714 $ 28,599,524 $ (20,249,421) $ 8,350,103
------------ ------------- -------------- --------------
The accompanying notes are an integral part of these consolidated financial
statements.
28
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
-------------- ------------- -------------
Cash flows from operating activities:
Net loss............................................................ $ (10,113,828) $ (3,683,667) $ (2,445,086)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization..................................... 4,420,359 1,808,693 71,043
Write-downs....................................................... -- 21,927 --
Increase in restricted cash....................................... (1,539,448) -- --
(Increase) decrease in accounts receivable........................ 1,550,030 (856,885) 84,855
(Increase) decrease in accounts receivable from related parties... 5,320 (17,691) --
Increase in inventory............................................. (2,684,592) (156,733) (2,757)
Increase in prepaid expense and other............................. (146,472) (103,789) (13,810)
Increase in other noncurrent assets............................... (521,957) -- --
Increase (decrease) in accounts payable and accrued liabilities... 713,700 (1,323,521) 22,870
-------------- ------------- -------------
Net cash used in operating activities............................... (8,316,888) (4,311,666) (2,282,885)
-------------- ------------- -------------
Cash flows from investing activities:
Purchases of fixed assets......................................... (1,546,088) (403,512) (48,962)
Patents and trademark costs....................................... (6,094) (32,763) (42,776)
Cash obtained in acquisition of businesses........................ -- 2,817,230 --
-------------- ------------- -------------
Net cash (used in) provided by investing activities................. (1,552,182) 2,380,955 (91,738)
-------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock........................ 5,600,000 1,614,295 1,727,233
Draws (payments) on revolving credit note, net.................... 1,097,516 (195,881) --
Principal payments on capital lease obligations................... (41,886) (20,158) --
Net proceeds from exercise of stock options....................... 42,420 -- 12,724
Net proceeds from exercise of stock warrants...................... 2,487,968 1,905,000 --
Other............................................................. (16,500) -- --
-------------- ------------- -------------
Net cash provided by financing activities........................... 9,169,518 3,303,256 1,739,957
-------------- ------------- -------------
Increase (decrease) in cash and cash equivalents.................... (699,552) 1,372,545 (634,666)
Cash and cash equivalents, beginning of year........................ 2,689,569 1,317,024 1,951,690
-------------- ------------- -------------
Cash and cash equivalents, end of year.............................. $ 1,990,017 $ 2,689,569 $ 1,317,024
-------------- ------------- -------------
-------------- ------------- -------------
Supplemental disclosure of cash flow information:
Income taxes paid................................................. -- -- --
Interest paid..................................................... $ 661,368 $ 108,332 $ 1,152
Non-cash investing and financing activities:
Shares issued to related parties and others to satisfy accrued
liabilities..................................................... -- $ 47,000 $ 142,928
Shares issued to purchase businesses (Note 2)..................... -- $ 9,088,500 --
The accompanying notes are an integral part of these consolidated financial
statements.
29
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
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"), Timespan
Communications Corp. ("Timespan") and Rosetta Marketing and Sales Inc.
(collectively, the "Company"). Timespan was dissolved as of October 23, 1996.
The Company provides custom design, engineering and manufacturing services, test
solutions and standard and custom module products to original equipment
manufacturers in the computer, networking and telecommunications industries.
Numerous factors affect the Company's operating results, including, but not
limited to, general economic conditions, competition, changing technologies,
component shortages and price fluctuations. 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 has experienced losses since inception. The
Company continues to develop additional products, and with acquisitions during
fiscal year 1996 (Note 2), now has existing salable products. The continued
success of the Company depends upon the Company's ability to generate sufficient
sales from the development of new products or increased sales of existing
products. The Company believes that its existing funds, anticipated cash flow
from operations, amounts available from future vendor credits, bank borrowings
and equity financings will be sufficient to meet its working capital and capital
expenditure needs for the next 12 months at the projected level of operations.
However, if there should be a significant increase in sales levels which require
additional investments in equipment, inventory and accounts receivable, the
Company would be required to obtain alternate sources for additional debt and
rely upon a future equity offering or offerings for such funding. There is no
assurance that the Company will be able to locate an alternate source or sources
for the required increase in its outstanding debt or that it will be successful
in its attempts to raise a sufficient amount of funds in a subsequent equity
offering or offerings. In such event, the Company's inability to raise needed
funds could have a material adverse effect on 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.
RECLASSIFICATIONS
Certain reclassifications of amounts related to 1996 and 1995 have been made
to conform with the 1997 presentation.
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. Restricted cash represents
deposits which are available only to pay down the revolving credit note. (Note
6)
INVENTORY
Inventory is stated at the lower of cost or market value. In the third
quarter of fiscal 1996, the Company changed its method of accounting for
inventories from the first-in, first-out method to a
30
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
weighted average cost basis. The change did not have a significant effect on
results of operations for 1996 or 1997, 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.
REVENUE RECOGNITION
Revenue from sales is recognized when the related products are shipped,
typically freight on board ("FOB") shipping point or at the time the services
are rendered. The Company warrants products against defects and has a policy
concerning the return of products and accrues the cost of warranting these
products as they are shipped.
DEPRECIATION AND AMORTIZATION
The Company uses the straight-line method of depreciation. Under the
straight-line method of depreciation, the Company is using the following
estimated useful lives:
Machinery and equipment.................... 3-7 years
Office and engineering equipment........... 5 years
Computer equipment and software............ 3 years
Furniture and fixtures..................... 5 years
Vehicles................................... 5 years
Leasehold improvements..................... Shorter of useful life or
remaining term of the lease
The Company reviews the carrying amount of its intangible assets and related
amortization periods on an annual basis for impairment by reviewing undiscounted
cash flow projections, excluding interest, as is required under Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of." Impairment loss
is recognized based upon the difference between the carrying amount of the
assets and the fair value. Fair value is determined based upon the net present
value of estimated expected future cash flows using a discount rate commensurate
with risks involved. Effective October 1, 1995, the Company adopted SFAS No.
121. The impact of adoption was not material to the Company's consolidated
financial position or the results of operations. Based on its review, the
Company believes no impairment has occurred as of September 30, 1997.
LOSS PER SHARE
Loss per share is calculated based upon the weighted average number of
common shares outstanding during the year. Common stock equivalents have not
been included because their effect would be antidilutive.
31
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 defines a
fair value based method of accounting for employee stock options or similar
equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, SFAS No. 123 also allows entities to
continue to measure compensation costs for employee stock compensation plans
using the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting prescribed by APB
No. 25 must make pro forma disclosures of net income and earnings per share as
if the fair value based method recommended by SFAS No. 123 had been applied. The
accounting requirements of SFAS No. 123 are effective for transactions entered
into in fiscal years that begin after December 15, 1995. The disclosure
requirements of SFAS No. 123 are effective for financial statements for fiscal
years beginning after December 15, 1995. The Company measures compensation costs
in accordance with APB No. 25 and provides pro forma disclosures of net loss and
loss per share as if the fair value based method of accounting under SFAS No.
123 had been applied. (Note 9)
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," in June 1996. This
statement will require the Company to classify its financial assets pledged as
collateral separately in financial statements. This statement is effective for
fiscal years beginning after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The FASB
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement 125." SFAS 127 moves forward some, but not all, of the provisions
of SFAS 125 to December 31, 1997. The Company believes that the adoption of this
statement will not have a material impact on the financial condition or results
of operation of the Company.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
establishes standards for computing and presenting earning per share ("EPS") for
entities with publicly held common stock or potential common stock. SFAS No. 128
simplifies the standards for computing EPS previously found in APB Opinion No.
15, "Earning Per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS, which excludes dilution. It also requires dual presentation of basic
and diluted EPS on the face of the statements of operations, for all entities
with complex capital structures. SFAS No. 128 is effective for financial
statement for periods ending after December 15, 1997 and early adoption is not
permitted. Management of the Company does not anticipate that the adoption of
SFAS No. 128 will have a material difference from EPS as currently presented.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997, with earlier application permitted. The Company believes that
the adoption of this statement will not have a material effect on the financial
condition or results of operations of the Company.
32
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
2. ACQUISITIONS OF 1ST TECH AND DARKHORSE
On May 21, 1996, the Company acquired 1st Tech and DarkHorse, as a result of
which 1st Tech and DarkHorse became wholly owned subsidiaries of the Company in
exchange for an aggregate of 4,150,000 shares of the Company's common stock. 1st
Tech is engaged primarily in the design, manufacture and sale of standard memory
products to the memory aftermarket and custom memory assemblies to original
equipment manufacturers, and offers engineering design and contract
manufacturing services. DarkHorse designs and markets memory testing equipment
primarily to electronic equipment manufacturers.
At the closing of the acquisitions, the Company granted options for the
purchase of 550,000 common shares to key employees of 1st Tech and DarkHorse,
allowed the primary stockholder of 1st Tech, who is also one of the three former
owners of DarkHorse, to appoint two members to the Company's seven-member Board
of Directors, and paid a consulting bonus to a Director of the Company of
207,500 common shares at a price of $3.80 per share.
The acquisitions of 1st Tech and DarkHorse were accounted for using the
purchase method of accounting. The net purchase price was allocated as follows:
Purchase price.................................................. $8,300,000
Assets acquired:
Working capital other than note payable....................... 3,907,459
Fixed assets.................................................. 1,607,771
Other assets.................................................. 241,627
Liabilities assumed:
Note payable.................................................. (3,276,674)
Other liabilities............................................. (137,365)
Commission paid............................................... (788,500)
Closing costs................................................. (425,316)
----------
Excess of purchase price over net assets acquired--Goodwill..... $7,170,998
The fair value of working capital, fixed assets, other assets, note payable
and other liabilities was based on the historical cost from the financial
statements of 1st Tech and DarkHorse, which was estimated to be materially equal
to fair market value. The fair value of the consulting bonus paid was 207,500
shares at a price of $3.80 at the date of issuance. Purchase price was
determined as the number of shares issued for 1st Tech and DarkHorse (4,150,000)
at a per share price of $2.00, utilizing the offering price of the private
placement of shares of common stock of 1st Tech immediately prior to the
acquisition.
33
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
2. ACQUISITIONS OF 1ST TECH AND DARKHORSE (CONTINUED)
Goodwill is being amortized against earnings over a two-year period. The
amount of goodwill amortized at fiscal year ended September 30, 1997 and
September 30, 1996 was $5,079,457 and $1,493,958, respectively. The results of
operations of 1st Tech and DarkHorse have been included in the consolidated
financial statements since the acquisition date.
3. TRADE ACCOUNTS RECEIVABLE
The Company grants credit to domestic and international original equipment
manufacturers, distributors and end users. Until February 28, 1997, the Company
carried a business credit policy covering certain accounts receivable. The
insurance policy provided protection against losses from uncollectible accounts
resulting from nonpayment by specified customers. At September 30, 1997, no
credit policy was in place. Effective November 1, 1997 the Company purchased a
business credit policy covering certain accounts receivable. This insurance
policy will provide protection against losses from uncollectible accounts
resulting from nonpayment by specified customers and has a deductible of $50
thousand with a maximum policy amount of $5 million.
During fiscal 1997, the Company had a single significant customer who
accounted for 12% of net sales. In fiscal 1996 and 1995, no single customer
accounted for more than 10% of net sales.
At September 30, 1997, two customer balances exceeded 10% of total trade
accounts receivables, with one customer balance at 13% and the second at 22% of
total trade accounts receivables. At September 30, 1996 two customers had
balances exceeding 10% of accounts receivable, with one customer at 12% and
another at 12% of total trade accounts receivables.
For fiscal 1997, the amount charged to bad debt expense was $2.2 million,
compared to a total of $46 thousand for fiscal 1996 and $19 thousand for fiscal
1995. The increase in fiscal 1997 bad debt expense is primarily due to a $1.7
million write off for one customer and to increased sales in conjunction with
the acquisitions of 1st Tech and DarkHorse.
4. INVENTORY
Inventory consists of the following:
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
Raw materials..................................................... $ 3,659,465 $ 1,343,522
Work-in-process................................................... 204,783 203,017
Finished goods.................................................... 624,802 257,919
------------ ------------
$ 4,489,050 $ 1,804,458
$882 thousand of inventory was for one customer. This customer is
financially responsible for inventory purchased by the Company that decreases in
value or is rendered obsolete or unsalable provided the inventory was acquired
in accordance with contractual terms.
34
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
5. PROPERTY AND EQUIPMENT
Property and equipment at September 30 consists of the following:
1997 1996
------------------------------------------ ------------------------------------------
ACCUMULATED NET ACCUMULATED NET
DEPRECIATION & BOOK DEPRECIATION & BOOK
COST AMORTIZATION VALUE COST AMORTIZATION VALUE
------------ -------------- ------------ ------------ -------------- ------------
Manufacturing
equipment.............. $ 1,447,039 $ 432,668 $ 1,014,371 $ 1,055,964 $ 234,159 $ 821,805
Office equipment......... 579,117 393,939 185,178 579,117 224,102 355,015
Engineering equipment.... 320,783 154,583 166,200 253,482 77,807 175,675
Computer equipment....... 514,892 157,846 357,046 118,696 87,448 31,248
Computer software........ 623,856 251,270 372,586 223,872 115,821 108,051
Furniture and fixtures... 359,614 163,306 196,308 295,585 90,186 205,399
Vehicles................. 39,445 17,750 21,695 39,445 9,861 29,584
Leasehold improvements... 385,410 159,470 225,940 157,907 67,205 90,702
------------ -------------- ------------ ------------ -------------- ------------
$ 4,270,156 $ 1,730,832 $ 2,539,324 $ 2,724,068 $ 906,589 $ 1,817,479
------------ -------------- ------------ ------------ -------------- ------------
------------ -------------- ------------ ------------ -------------- ------------
The Company had approximately $280,000 and $266,000 of property and
equipment acquired under capital leases at September 30, 1997 and 1996,
respectively. The accumulated amortization related to these assets totaled
$96,000 and $47,000 at September 30, 1997 and 1996, respectively. The related
amortization expense was $49,000 and $16,000 for the years ended September 30,
1997 and 1996, respectively.
Depreciation and amortization expense as reflected in the accompanying
consolidated financial statements is as follows:
DEPRECIATION AND AMORTIZATION
EXPENSE FOR FISCAL YEAR
-------------------------------------
1997 1996 1995
------------ ------------ ---------
Cost of Goods Sold......................................................... $ 229,776 $ 60,630 $ --
Operating Expenses......................................................... 4,190,583 1,748,063 71,043
------------ ------------ ---------
Total Depreciation and Amortization Expense................................ $ 4,420,359 $ 1,808,693 $ 71,043
------------ ------------ ---------
6. REVOLVING CREDIT NOTE
The Company obtained a new $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 as quoted
in The Wall Street Journal plus 2% (10.50% at September 30, 1997). The Company
also issued 65,000 stock purchase warrants to the lender at a price of $5.38,
which was 5% over the market closing price on the date of signing the note
agreement. These stock purchase warrants expire on July 24, 2002. The revolving
credit note has a maturity date of July 24, 2000 and is secured by all of the
Company's assets. Such 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 sixty days prior to the maturity date, that such party
elects not to extend the maturity date. Borrowings are based upon 85% of
eligible accounts
35
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
6. REVOLVING CREDIT NOTE (CONTINUED)
receivables and eligible inventory amounts as defined in the borrowing
agreement. The amount outstanding at September 30, 1997 was $4,172,516. The
amount available to draw at September 30, 1997 was $1,089,124. 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 shown as restricted cash in the accompanying consolidated
balance sheet.
On July 1, 1997, the Company's previous revolving credit note with a
different financial institution was terminated. Borrowings under the agreement
were limited to 73% of eligible accounts receivable and were secured by
substantially all of the Company's assets. The financial institution continued
to grant the Company's loan requests at an interest rate of prime plus 1% to 3%
depending on a ratio computed monthly until the new revolving credit note was in
place on July 24, 1997.
7. LEASE COMMITMENTS
The Company leases certain equipment and office space under noncancellable
leases with expiration dates ranging from 1998 through 2002.
Future minimum lease payments under all leases at September 30, 1997 were as
follows:
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
1998........................................................ $ 91,823 $ 631,689
1999........................................................ 57,275 599,956
2000........................................................ 41,821 576,747
2001........................................................ 0 321,447
2002........................................................ 0 160,973
------------- ----------------
Total minimum lease payments................................ $ 190,919 $ 2,290,812
Amounts representing interest............................... 33,854
-------------
Present value of minimum capital lease payments............. 157,065
Less: current portion....................................... 75,951
-------------
Long-term capital lease obligation.......................... $ 81,114
-------------
-------------
Rent expense recorded under all operating leases was $540,039, $118,189 and
$48,619 for fiscal 1997, 1996 and 1995, respectively. The Company had a letter
of credit totaling $579,415 as collateral for an operating lease for
manufacturing equipment.
8. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries entered into the following related party
transactions:
General and administrative expense includes consulting fees and expenses in
the amount of $112,089, $870,000 ($788,500 of which was paid in stock--Note 2)
and $159,000 paid to the Company's directors for the fiscal years ended
September 30, 1997, 1996 and 1995, respectively.
36
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
8. RELATED PARTY TRANSACTIONS (CONTINUED)
In July 1997, the Company entered into a contract with a director for
consulting services in consideration of the issuance of warrants exercisable for
the purchase of 200,000 shares of Common Stock at $0.01 per share from January
31, 1998 through December 31, 1999.
General and administrative expense includes professional fees in the amount
of $197,623, $100,000 of which was paid in stock--see Note 9-- and $122,000 and
$97,000 of which was paid in cash to two stockholders of the Company for legal
and other services provided for the years ended September 30, 1997, 1996 and
1995, respectively.
During the fiscal year ended September 30, 1997, two former stockholders of
Darkhorse were paid $37,809 each. A third stockholder debt to the Company was
reduced by $5,500, from $17,691 to $12,191. Prior to the acquisition, Darkhorse
was an S-Corporation. These amounts 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 and one of three principal
stockholders of DarkHorse became president and 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 the Company's
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.
On May 21, 1996, 1st Tech purchased a Quad QSP-2 High Speed Fine Pitch
Surface Mount Assembly from the president and chief executive officer of 1st
Tech, who became president and chief operating officer of the Company, for
$225,000. Previously, this equipment had been leased.
To take advantage of an inventory purchase opportunity, the Company
requested that all outstanding stock purchase warrantholders exercise their
warrants by March 31, 1997, which was substantially prior to the scheduled
expiration dates of the warrants. As an inducement for this early exercise, the
exercise price was discounted 50%. An additional incentive was offered to stock
purchase warrantholders 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 warrantholders who funded
upon notice of such request. (Note 9)
9. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS
In the past three fiscal years, the Company has closed three separate
private placements. In July 1997, the Company completed an equity financing of
2,240,000 common shares for gross proceeds of $5,600,000. Legal fees related to
the financing were settled through the issuance of 40,000 common shares at the
price of $2.50 per share. (Note 8)
37
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
9. STOCKHOLDERS' EQUITY (CONTINUED)
In December 1995, the Company completed an equity financing of 941,177
common shares and common stock purchase warrants to purchase 941,177 shares of
common stock at an exercise price per share of $1.70 in 1996 and $1.95 in 1997.
The stock warrants have been exercised. Legal fees in connection with the equity
financing were paid through the issuance of 45,555 shares of Common Stock at a
price of $2.25 per share, to a stockholder acting as legal counsel.
In November 1995, the Company completed an equity financing of 34,000 common
shares and common stock purchase warrants to purchase 34,000 shares of common
stock at an exercise price per share of $2.00 in 1996 and $2.25 in 1997. The
stock warrants have been exercised.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with
$1 par value. There were no preferred shares issued and outstanding at September
30, 1997 and 1996.
RETAINED EARNINGS
A final distribution in the amount of $16,500 was made during fiscal year
1997 to the prior owners of Darkhorse pursuant to the terms of the acquisition
agreement. The purpose of this distribution was to cover federal income taxes
incurred by the prior owners as a result of their investment in the S-
Corporation. (Note 8)
STOCK OPTIONS
A rollforward of stock option activity is as follows:
FISCAL 1997 FISCAL 1996
-------------------------- --------------------------
STOCK OPTION STOCK OPTION
SHARES PRICE SHARES PRICE
---------- -------------- ---------- --------------
Outstanding--Beginning of year............... 1,804,100 $ 1.10 to 3.69 1,364,450 $ 1.10 to 3.32
Granted...................................... 882,500 3.41 to 5.81 834,900 3.13 to 3.72
Canceled or expired.......................... (283,283) 1.10 to 5.81 (395,250) 2.02 to 3.72
Exercised.................................... (16,000) 2.61 to 2.72 -- --
---------- -------------- ---------- --------------
Outstanding--End of year..................... 2,387,317 1.10 to 5.81 1,804,100 $ 1.10 to 3.69
Exercisable--End of year..................... 1,083,700 555,232
The Company's 1993 Stock Option Plan permits grants to the Company's
directors, key employees and consultants as an incentive for them to remain in
the Company's employ or service. The duration of options granted under the 1993
Stock Option Plan cannot exceed ten years (five years with respect to holder of
10% or more of the Company's shares in the case of incentive stock options). The
grant price is determined by the Option Committee of the Board of Directors, but
in no instance shall it be lower than the fair market value of the stock as of
the date of grant. Fair market value shall be determined as the closing price of
the Company's stock on the Nasdaq SmallCap Market for the date of the grant.
Under the terms of the 1993 Stock Option Plan, 2,600,000 shares are reserved for
the granting of stock options. At September 30, 1997, options to purchase
1,885,817 shares had been granted under the 1993 Option Plan and remain
outstanding, leaving 714,183 shares available for future grants under the 1993
Option Plan. In
38
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
9. STOCKHOLDERS' EQUITY (CONTINUED)
addition, at September 30, 1997, options to purchase 139,000 shares
("compensation contract options") had been granted outside the 1993 Option Plan,
prior to its adoption. The compensation contract options vested one third on
each of the first three anniversaries of the date of grant, and are exercisable
for five years after the date of grant.
The Company's 1997 Non-Employee Director Plan (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 this 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 six
eligible individuals at November 30, 1997) 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. Options granted
under the Director Plan vest in three equal portions over three years from the
date of grant and are exercisable for a period of five years from the date of
grant. The grant price shall be valued at the fair market value per share on the
date of grant, as determined by the closing price of the Company's stock on the
Nasdaq SmallCap Market on the date of grant. 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, including options for 362,500 shares previously granted to current
outside directors under the 1993 Option Plan. At September 30, 1997, no options
had been granted under the Director Plan except for the 362,500 shares
previously granted under the 1993 Option Plan.
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.
WARRANTS
Each stock warrant entitles the holder to purchase one share of common stock
at a particular price, vesting period and expiration date to be specified within
each individual warrant agreement. During fiscal 1997, 2,060,177 stock warrants
were exercised and no stock warrants expired. During 1997, 200,000 stock
warrants with an exercise price of $.01 per share were issued to stock purchase
warrantholders who exercised warrants by March 31, 1997 upon request of the
Company (Note 8). In addition, 200,000 stock
39
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
9. STOCKHOLDERS' EQUITY (CONTINUED)
warrants were issued to a director at an exercise price of $.01 per share as a
consulting bonus. The Company had stock warrants outstanding for the purchase of
Common Stock in 1997 and 1996 as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1997 1996
---------------------------- ----------------------------
STOCK WARRANT STOCK WARRANT
SHARES PRICE SHARES PRICE
---------- ---------------- ---------- ----------------
Outstanding--Beginning of year...................... 1,860,177 $ 1.70 to $2.30 2,400,000 $ 1.00 to $2.30
Granted............................................. 489,999 $ .01 to $5.38 975,177 $ 1.70 to $2.25
Exercised........................................... 2,060,177 $ .01 to $1.15 1,515,000 $ 1.25 to $2.00
---------- ---------------- ---------- ----------------
Outstanding--End of year............................ 289,999 $ .01 to $5.38 1,860,177 $ 1.70 to $2.30
Exercisable--End of year............................ 0 1,860,177 $ 1.70 to $2.30
STOCK BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This new standard defines a fair value based method of accounting
for employee stock options or similar equity instruments. SFAS No. 123 gives
entities a choice of recognizing related compensation expense by adopting the
new fair value method or to continue to measure compensation using the intrinsic
value approach under APB 25. If APB No. 25 is used by an entity, SFAS No. 123
requires supplemental disclosure to show the effects of using SFAS No. 123 for
stock option issuances effective after December 15, 1994. The Company continues
to account for stock options under APB No. 25. Had compensation expense for all
of the Company's stock option plans been determined consistent with SFAS No.
123, the Company's net loss would have been increased to the following pro forma
amounts:
FOR YEAR
FOR YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-------------- -------------
Net loss:
As reported.................................................. $ (10,113,828) $(3,683,667)
Pro forma.................................................... (10,988,475) (3,809,027)
-------------- -------------
Loss per share:
As reported.................................................. (0.58) (0.31)
Pro forma.................................................... (0.63) (0.32)
Because the SFAS No. 123 method of accounting has not been applied to stock
options issued prior to December 15, 1994, the resulting pro forma compensation
expense may not be representative of that to be expected in future years. The
fair value of each option is estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted-average assumptions
used for grants in 1997 and 1996: risk-free interest rate of approximately 6.5%;
expected volatility of approximately 79% based on the performance of publicly
traded businesses within the Company's industry; expected lives of approximately
5 years for the 1993 Stock Option Plan, and no dividends are expected to be
paid.
40
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
10. INCOME TAXES
During 1997 and 1996, the Company incurred consolidated net operating losses
for U.S. income tax purposes of approximately $6,023,000 and $1,785,000,
respectively. The loss carryforwards expire in 2012 and 2011, respectively.
During 1997 and 1996, the Company had temporary differences resulting in future
tax deductions of $513,000 and $693,000, respectively, principally representing
tax basis in accrued liabilities and intangible assets. Deferred income tax
assets from the loss carryforwards and asset basis differences aggregate
$4,649,000 and $2,240,000 respectively at September 30, 1997.
For financial reporting purposes, valuation allowances of $4,649,000 and
$2,240,000 have 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 carryforward 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 carryforward 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 does not believe that an
IRS Code Section 382 limitation exists as of September 30, 1997.
11. EMPLOYEE BENEFITS
Effective January 1, 1995, 1st Tech sponsored the 1st Tech 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. The requirements for eligibility
include a minimum age of 21 and a minimum of six months of service as a full
time employee. As of the date of acquisition, all employees of the Company
became eligible to participate in the Plan. Effective August 1, 1997, the Plan
changed its name to The Tanisys Technology Inc., 401(k) Plan.
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 1997, 1996 or 1995.
12. SUBSEQUENT EVENTS
In October 1997, Mark C. Holliday, Chairman of the Board and Chief Executive
Officer, and Gary W. Pankonien, President and Chief Operating Officer, stepped
down and Charles T. Comiso assumed the responsibilities of President and Chief
Executive Officer. Parris H. Holmes, Jr., Vice Chairman of the Board, was named
Chairman of the Board. These changes were immediate. Messrs. Holliday and
Pankonien both agreed to remain on the Company's Board of Directors.
The Company entered into an employment agreement with Charles T. Comiso
effective October 21, 1997. This agreement expires on October 20, 1998 and will
continue thereafter unless terminated by either party with 120 days' notice. Mr.
Comiso's annual salary will be $180,000 until such time as the Company reports
positive cash flow from operations for all three months of a fiscal quarter,
then his annual salary will increase to $240,000. The agreement provides for the
granting of a seven-year option to purchase 1,000,000 shares of Common Stock at
an exercise price to be determined during the first 60 days of the employment
period. The exercise price has been determined to be $2.00 per share. The option
shall vest as to 100,000 and 150,000 shares on the first and second
anniversaries of the agreement, respectively, and as
41
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
12. SUBSEQUENT EVENTS (CONTINUED)
to 250,000 shares on each of the third, fourth and fifth anniversaries of the
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 Common Stock at
an exercise price equal to the closing price of the Company's Common Stock as
reported on the Nasdaq SmallCap Market 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 employment agreement, Mr.
Comiso agreed to purchase $150,000 of the Company's Common Stock at a maximum
price of $3.00 per share. Subsequently, Mr. Comiso purchased 50,000 shares of
Common Stock, from the Company for $75,000 and has committed to purchase an
additional 50,000 shares for $75,000 in January 1998. These shares are
restricted, and the Company has no registration obligations.
The Board of Directors of the Company has approved the establishment of
severance packages that provide for the continuation of the salaries and bonuses
of both Mark C. Holliday, the former Chairman of the Board and Chief Executive
Officer, and Gary W. Pankonien, the former President and Chief Operating
Officer, until April and May of 1998, respectively. While the Board of Directors
and the former officers have agreed to the general terms, the specific
agreements are still in the process of being completed and signed.
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
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 November 30, 1997 are as follows:
NAME AGE POSITION(S)
- ------------------------------------------------ --- ------------------------------------------------
Charles T. Comiso (1)........................... 60 President, Chief Executive Officer and Director
Joe O. Davis.................................... 54 Senior Vice President, Chief Financial Officer
and Corporate Secretary
John R. Bennett................................. 37 Vice President of Sales and Customer Service
Chris Efstathiou, Jr. .......................... 38 Vice President and General Manager
Joseph C. Klein................................. 41 Vice President of Engineering
Donald G. McCord................................ 41 Vice President of Marketing
Donald R. Turner................................ 42 Corporate Controller
Parris H. Holmes, Jr. .......................... 54 Chairman of the Board (2)(3)(4)
Mark C. Holliday................................ 45 Director
Gordon H. Matthews.............................. 61 Director (2)
Gary W. Pankonien............................... 47 Director
Alan H. Portnoy................................. 52 Director (2)
Theodore W. Van Duyn............................ 49 Director (3)(4)
- ------------------------
(1) Mr. Comiso was named President and Chief Executive Officer and appointed to
the Board of Directors in October 1997.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) 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 President, Chief Executive Officer
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 parent
company 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 35 years of technology industry
experience and also has held positions with Hewlett Packard Company, Texas
Instruments, IT&T Labs and Bendix Corporation.
JOE O. DAVIS, CPA, joined the Company as Senior Vice President, Chief
Financial Officer and Corporate Secretary in July 1996. Prior to joining the
Company, Mr. Davis served from June 1990 to April 1993 as Chief Financial
Officer of San Marcos Telephone Company, which was acquired by Century Telephone
43
Enterprises, a long distance telephone company listed on the New York Stock
Exchange and located in Monroe, Louisiana, in April 1993. Mr. Davis continued
his employment with Century Telephone Enterprises as Vice President of Finance
and Planning until July 1996. He has 27 years of experience in financial
management and business planning, both domestically and internationally, has
served as a member of the board of directors of various public and private
companies in the United States and Australia, and was a partner with Peat
Marwick Mitchell & Co., now known as KPMG Peat Marwick, for three years.
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's 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.
CHRIS EFSTATHIOU, JR., Vice President and General Manager, has more than 17
years of experience in the electronics industry in high-tech purchasing. Mr.
Efstathiou joined 1st Tech in December 1994 as Vice President of Materials and
the Company in May 1996 upon its acquisition of 1st Tech. Mr. Efstathiou was
promoted to Vice President and General Manager of the Company in September 1997.
Previously, Mr. Efstathiou worked from May 1990 to December 1994 as the Director
of Strategic Materials for Dell Computer Corporation, a personal computer
manufacturer. Prior to working with Dell, Mr. Efstathiou was involved for more
than 10 years in high-tech purchasing, including 4 years with Advent Corporation
and more than 2 years with Wang Laboratories, Inc.
JOSEPH C. KLEIN, Ph.D., Vice President of Engineering, joined the Company in
November 1997. Dr. Klein has over 15 years of experience in the electronics and
computer industry. Prior to joining the Company, Dr. Klein was Vice President of
Engineering/Research and Development for PNY Technologies, Inc. from November
1994 to November 1997 and was World Wide Manager of Semiconductor Memory Product
for IBM from November 1984 to November 1994.
DONALD G. MCCORD, Vice President of Marketing, joined the Company in June
1997 initially as a consultant and then as Vice President of Marketing. Mr.
McCord has over seventeen years in high technology businesses. Mr. McCord served
as Regional Sales Manager for Creative Labs from August 1994 to November 1996
and Manager of Desktop Development for IBM's AMBRA subsidiary from October 1993
to August 1994. Marketing roles have included Manager of Desktop Product
Marketing at Dell Computer from August 1988 to October 1993 as well as positions
at Intel, Western Digital and Texas Instruments, Inc.
DONALD R. TURNER, CPA, Corporate Controller, joined the Company effective
upon the acquisition of 1st Tech in May 1996. Don Turner was a founding officer
and board member of 1st Tech, where he served as Vice President, Chief Financial
Officer and Secretary-Treasurer from January 1993 until the purchase by Tanisys
in May 1996. Mr. Turner was Controller of Stratum Technologies, Inc. from
September 1992 to January 1993. Prior to joining Stratum, Mr. Turner was
Controller of Phillips Distribution, a San Antonio, Texas based packaging
distribution company, from March 1984 until September 1992.
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 Information Concepts Corp., a third-party billing
clearinghouse and information management services business, since May 1996. Mr.
Holmes served as Chairman of the Board of USLD Communications Corp. from
September 1986 until August 1996 and continued as Chairman of the Board of USLD
Communications Corp. until June 1997.
44
MARK C. HOLLIDAY joined the Company as President, Chief Executive Officer
and a Director in February 1994 and was elected Chairman of the Board in March
1994. In October 1997, Mr. Holliday resigned as Chairman of the Board and Chief
Executive Officer and currently serves the Company in the capacity of Director.
Mr. Holliday has over 20 years of computer industry experience in large
multinational companies as well as new ventures in computer software
development. Prior to joining Tanisys Mr. Holliday was with BMC Software, Inc.,
a software development company, where he served as director of research and
development from March 1988 to February 1994.
GORDON H. MATTHEWS has served as a Director of the Company since September
1994. Since June 1992, Mr. Matthews has owned and operated Matthews Voice Mail
Management, Inc., which provides voice mailboxes on a monthly rental basis for
specialized applications. Mr. Matthews has owned and operated Matthews
Communications Systems, Inc., which tracks the pace of golf course play and
increases efficiency and net profitability of golf courses, since May 1989. In
June 1996, Mr. Matthews started a new company, Matthews Communications
Management, Inc., which offers advanced telephone control products. Mr. Matthews
serves on the Board of Directors of V-Tel Corporation, an Austin, Texas company
specializing in teleconferencing services.
GARY W. PANKONIEN was appointed President and Chief Operating Officer of the
Company after the acquisition of 1st Tech and DarkHorse in May 1996 and was
elected a Director in July 1996. In October 1997, Mr. Pankonien resigned as
President and Chief Operating Officer and currently serves the Company in the
capacity of Director. Prior to 1st Tech's acquisition by the Company, Mr.
Pankonien served as Chairman and Chief Executive Officer of 1st Tech since its
inception in January 1993 and as Chairman and Chief Executive Officer of
DarkHorse since May 1992. Mr. Pankonien was Chief Operations Officer of Stratum
Technologies, Inc., a memory module manufacturer and reseller located in Austin,
Texas, from January 1992 until August 1992, when he purchased Stratum and was
appointed Chairman of the Board and Chief Executive Officer. Stratum was
dissolved in June 1995. Mr. Pankonien was employed with Compaq Computer
Corporation, a personal computer manufacturer, from February 1984 until October
1991 as Notebook Computer Design and Operations Manager and co-developed and
currently holds the patent for the first notebook computer.
ALAN H. PORTNOY has served as a Director of the Company since July 1996.
Since October 1996, Mr. Portnoy has served as President of Macronix America
Inc., a semiconductor manufacturing company. From January 1994 to October 1996,
Mr. Portnoy served as President of Galactic Enterprises, Inc., which provides
corporate development and strategic marketing services for high technology
start-up companies and multinational corporations in the semiconductor, computer
and communications fields. From September 1987 to January 1994, Mr. Portnoy was
Executive Vice President and Chief Operating Officer of Goldstar America, Inc.,
a subsidiary of the Lucky-Goldstar Group, a Korean conglomerate.
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.
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 vacancy so arising may be filled by the Board of
Directors 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
45
Compensation and Stock Option Committees and an Audit Committee. The Board of
Directors does not currently utilize a nominating committee or committee
performing similar functions.
COMPENSATION AND STOCK OPTION COMMITTEES
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.
The Stock Option Committee meets semi-annually and makes recommendations to
the Board of Directors concerning the granting of stock options under the 1993
Option Plan. 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, Matthews and Portnoy.
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."
46
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 four other
most highly compensated executive officers of the Company whose base salary and
bonus exceeded $100,000 for fiscal year 1997.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
AWARDS
-------------------------
ANNUAL COMPENSATION SECURITIES UNDERLYING
FISCAL ---------------------- OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (#)
- -------------------------------------------------------------------- ------ ---------- --------- -------------------------
MARK C. HOLLIDAY (1) 1997 $ 131,043 $ 0 0
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER 1996 127,341 0 100,000
1995 125,000 0 110,000
GARY W. PANKONIEN (2) 1997 125,000 182,667 100,000
PRESIDENT AND CHIEF OPERATING OFFICER 1996 95,336 66,664 150,000
1995 N/A N/A N/A
BENJAMIN S. MARZ (3) 1997 118,791 0 60,000
VICE PRESIDENT OF SALES AND CUSTOMER SERVICE 1996 103,262 0 0
1995 102,000 0 0
CHRIS EFSTATHIOU 1997 116,884(4) 0 60,000
VICE PRESIDENT AND GENERAL MANAGER 1996 37,458 0 60,000
1995 N/A N/A N/A
JOE O. DAVIS 1997 115,000 0 30,000
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND CORPORATE 1996 55,322(5) 0 120,000
SECRETARY 1995 N/A N/A N/A
JOHN R. BENNETT (6) 1997 109,032 25,000 50,000
VICE PRESIDENT OF SALES AND CUSTOMER SERVICE 1996 N/A N/A N/A
1995 N/A N/A N/A
- ------------------------
(1) Mr. Holliday resigned as Chairman of the Board and Chief Executive Officer
in October 1997 and currently serves as a member of the Board of Directors
of the Company.
(2) Mr. Pankonien resigned as President and Chief Operating Officer in October
1997 and currently serves as a member of the Board of Directors of the
Company. The amount shown as compensation for fiscal 1996 is from May 21,
1996, the date Mr. Pankonien became an employee of the Company, through the
end of fiscal 1996.
(3) Since October 4, 1997, Mr. Marz is no longer an employee of the Company.
(4) The amount shown reflects Mr. Efstathiou's salary from May 21, 1996, the
date he became an employee of the Company, through the end of fiscal 1996.
(5) Amount shown reflects Mr. Davis's salary from July 11, 1996, the beginning
date of his employment with the Company, through the end of fiscal 1996.
(6) Mr. Bennett was elected Vice President of Sales and Customer Service 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.
47
STOCK OPTION GRANTS
The following table provides information related to stock options granted to
the named executive officers during fiscal 1997:
INDIVIDUAL GRANTS
-------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM(2)
OPTIONS IN FISCAL BASE PRICE EXPIRATION ----------------------
NAME GRANTED(#)(1) 1997 ($/SH) DATE 5%($) 10%($)
- ----------------------------- ------------- ----------- ----------- ----------- ---------- ----------
Gary W. Pankonien 100,000 11.3% $ 4.50 (3) $ 124,327 $ 274,730
Chris Efstathiou 60,000 6.8% $ 4.09 10/10/01 67,799 149,819
Joe O. Davis 30,000 3.4% $ 4.09 10/10/01 33,900 74,910
- ------------------------
(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 1997
to Mr. Pankonien are exercisable one-fourth on each of the four
anniversaries following the date of grant. The options granted in fiscal
1997 to Messrs. Efstathiou and Davis are exercisable one-third on each of
the three 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.
(3) In the process of being determined as part of the finalization of Mr.
Pankonien's severance package.
AGGREGATED STOCK OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR END OPTION
VALUES
The following table provides information related to stock options exercised
by the named executive officers during the 1997 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 NUMBER OF SECURITIES VALUE(1) OF UNEXERCISED
-------------------------------- UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED OPTIONS AT FY END(#) AT FY END($)
UPON OPTION VALUE -------------------------- --------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ------------------- ----------- ----------- ------------- ----------- -------------
Mark C. Holliday 0 N/A 306,667 103,333 $ 556,688 $ 70,666
Gary W. Pankonien 0 N/A 200,000 50,000 $ 18,650 ($ 6,400)
Benjamin S. Marz 0 N/A 66,667 0 $ 197,338 0
Chris Efstathiou 0 N/A 20,000 100,000 $ 7,460 $ 13,300
Joe O. Davis 0 N/A 40,000 110,000 $ 37,320 $ 73,830
- ------------------------
(1) Market value of the underlying securities at September 30, 1997 ($4.06),
minus the exercise price.
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
48
employees of the Company (collectively, the "Participants"). Generally, all
employees of the Company who are 21 years of age and who as of December 31 or
July 31 have completed six months of service during which they worked at least
500 hours are eligible for participation in the 401(k) Plan.
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.
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 three members of the Board of 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's 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
49
defined as the closing price of the Common Stock as reported for that day in THE
WALL STREET JOURNAL listing of composite transactions for Nasdaq.
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, 2,600,000 shares of Common Stock have been
reserved for the granting of options. At September 30, 1997, options to purchase
1,885,817 shares had been granted under the 1993 Option Plan, leaving 714,183
shares available for future grants under the 1993 Option Plan. In addition, at
September 30, 1997, options to purchase 139,000 shares ("compensation contract
options") had been granted outside the 1993 Option Plan, prior to its adoption.
The compensation contract options vested one third on each of the first three
anniversaries of the date of grant, are exercisable for five years after the
date of grant and included grants of options for 45,000 shares each to three
non-employee directors of the Company and 20,000 shares to a design engineer
employed by the Company. The exercise price for each of the compensation
contract option grants represented the average closing price of the Common Stock
as quoted on the VSE for the two-week trading period preceding the date of
grant.
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 five eligible individuals at November 30, 1997) 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. In each case, such
Director Options vest in three equal
50
portions over three years from the first date of the individual's service to the
Company as a director or date of grant, as the case may be, and are exercisable
for a period of five years from the date of 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 will
expire five 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 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.
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, including options for 362,500
shares previously granted to current outside directors under the 1993 Option
Plan. At September 30, 1997, no options had been granted under the Director Plan
except for the 362,500 shares previously granted under the 1993 Option 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. This agreement expires on October 20, 1998 and will
continue thereafter unless terminated by either party with 120 days' notice. Mr.
Comiso's annual salary will be $180,000 until such time as the Company reports
positive cash flow from operations for all three months of a fiscal quarter,
then his annual salary will increase to $240,000. The agreement provides for the
granting of a seven-year option to purchase 1,000,000 shares of Common Stock at
an exercise price to be determined during the first 60 days of the employment
period. The exercise price has been determined to be $2.00 per share. The option
shall vest as to 100,000 and 150,000 shares on the first and second
anniversaries of the agreement, respectively, and as to 250,000 shares on each
of the third, fourth and fifth anniversaries of the 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 Common Stock at an exercise
price equal to the closing price of the Company's Common Stock as reported on
the Nasdaq SmallCap Market 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 employment agreement, Mr. Comiso agreed to
purchase $150,000 of the Company's Common Stock at a maximum price of $3.00 per
share. Subsequently, Mr. Comiso purchased 50,000 shares of Common Stock, from
the Company for $75,000 and has committed to purchase an additional 50,000
shares for $75,000 in January 1998. These shares are restricted, and the Company
has no registration obligations.
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 is $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
51
shares of Common Stock at $3.13 per share. The shares underlying the option vest
one-third on each of the first three anniversaries of the grant date.
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 notice to the other of the desire to
terminate such employment. Pursuant to the terms of the employment agreement,
Mr. McCords' annual base salary is $100,000 and he was granted a seven-year
stock option under the 1993 Option Plan, vesting in equal installments over four
years, for the purchase of an aggregate of 100,000 shares of Common Stock at an
exercise price of $4.63 per share.
Effective November 10, 1997, the Company entered into an employment
agreement with Joseph C. Klein, Ph.D., for a term of two years at an annual base
salary of $120,000. Pursuant to the terms of the employment agreement, Dr. Klein
was granted a seven-year stock option under the 1993 Option Plan, vesting in
equal installments over four years, for the purchase of an aggregate of 100,000
share of Common Stock at an exercise price of $2.00 per share and an additional
stock option to purchase of 50,000 shares of Common Stock upon the Company
reporting a profitable quarter and shipments of the Company's new Tester System.
Effective February 15, 1994 and April 18, 1994, the Company entered into
employment agreements with Mr. Holliday and Mr. Marz, respectively, with a term
of one year, after which they continue 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 agreements, annual base
salaries were $127,341 for Mr. Holliday and $103,262 for Mr. Marz.
The Company entered into an employment agreement with Gary W. Pankonien
effective May 21, 1996 with a term of two years and automatic annual renewals if
mutually agreed upon by the Company and the employee. The Company or the
employee may terminate the agreement upon giving notice at least 30 days prior
to the expiration of the then current term. Pursuant to the terms of the
employment agreement, Mr. Pankonien's annual base salary is $125,000. In
addition, he will be paid minimum bonuses of $200,000 and $150,000 payable pro
rata on a monthly basis during the first and second years of employment,
respectively. In the event the employment relationship is terminated by the
Company during the initial two-year term, other than for "cause" as defined
therein, Mr.Pankonien would receive the prorata balance of his salary, bonus and
benefits which would have been payable for a 24-month period based on amounts in
effect on the termination date. The minimum amount he would be entitled to
receive under the agreement is $300,000. The agreement also provides that in the
event his employment is terminated, Mr. Pankonien will continue to be a Director
of the Company as long as he beneficially owns at least 1,000,000 shares of
Common Stock.
In October 1997, Mark C. Holliday, Chairman of the Board and Chief Executive
Officer, and Gary W. Pankonien, President and Chief Operating Officer, stepped
down and Charles T. Comiso assumed the responsibilities of President and Chief
Executive Officer. Parris H. Holmes, Jr., Vice Chairman of the Board, was named
Chairman of the Board. These changes were immediate. Messrs. Holliday and
Pankonien both agreed to remain on the Company's Board of Directors.
The Board of Directors of the Company has approved the establishment of
severance packages that provide for the continuation of the salaries and bonuses
of both Mark C. Holliday, the former Chairman of the Board and Chief Executive
Officer, and Gary W. Pankonien, the former President and Chief Operating
Officer, until April and May of 1998, respectively. While the Board of Directors
and the former officers have agreed to the general terms, the specific
agreements are still in the process of being completed and signed.
52
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 November 30, 1997.
A total of 20,409,714 shares of the Company's Common Stock were issued and
outstanding at November 30, 1997.
NO. OF SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) CLASS(2)
- ---------------------------------------------------------------------------- -------------- -------------
Gary W. Pankonien........................................................... 2,045,000(3) 9.4%
3107 Toro Ring
Austin, Texas 78746
Clark A. Gunderson.......................................................... 1,092,940 5.0%
2615 Enterprise Boulevard
Lake Charles, Louisiana 70601
- ------------------------
(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 exercisable
within 60 days for each individual and 20,409,714 shares of Common Stock
issued and outstanding at November 30, 1997.
(3) Includes 50,000 shares that Mr. Pankonien has the right to acquire upon
exercise of stock options, exercisable within 60 days.
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock at November 30,
1997 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 20,409,714 shares of the Company's Common Stock were
issued and outstanding at November 30, 1997.
COMMON STOCK
----------------------------
5% BENEFICIAL OWNERS, DIRECTORS NUMBER OF
AND NAMED EXECUTIVE OFFICERS SHARES(1) PERCENT(2)
- --------------------------------------------------------------------------- --------------- -----------
John R. Bennett............................................................ 26,817(3) *
Joe O. Davis............................................................... 58,000(4) *
Chris Efstathiou, Jr....................................................... 65,000(5) *
Parris H. Holmes Jr........................................................ 1,070,425(6) 4.9%
Mark C. Holliday........................................................... 500,245(7) 2.3%
Gordon H. Matthews......................................................... 170,900(8) *
Gary W. Pankonien.......................................................... 2,045,000(9) 9.4%
Alan H. Portnoy............................................................ 8,333(10) *
Theodore W. Van Duyn....................................................... 265,000 1.2%
Clark A. Gunderson......................................................... 1,092,940 5.0%
All executive officers and directors as a group (12 persons, including the
executive officers and directors listed above) 5,372,827(11) 24.8%
- ------------------------
* Represents less than one percent (1%) of the issued and outstanding shares
of Common Stock.
53
(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
exercisable within 60 days for each individual and 20,409,714 shares of
Common Stock issued and outstanding at November 30, 1997.
(3) Includes 6,667 share that Mr. Bennett has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(4) Includes 50,000 shares that Mr. Davis has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(5) Includes 40,000 shares that Mr. Efstathiou has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(6) Includes 105,000 shares that Mr. Holmes has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(7) Includes 306,666 shares that Mr. Holliday has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(8) Includes 82,500 shares that Mr. Matthews has the right to acquire upon
exercise of stock options, exercisable within 60 days, and 1,900 shares
owned by his daughter.
(9) Includes 50,000 shares that Mr. Pankonien has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(10) Includes 8,333 shares that Mr. Portnoy has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(11) Includes 722,500 shares that 12 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, 1997 the Company reimbursed Parris
H. Holmes, Jr., then Vice Chairman of the Board of Directors, $67,779.46 for
expenses incurred in connection with issues involving corporate finance,
business operations and business opportunities.
In March 1997, to take advantage of an inventory purchase opportunity, the
Company requested that all outstanding stock purchase warrantsholders exercise
their warrants by March 31, 1997 which was substantially prior to the scheduled
expiration dates of the warrants. As an inducement for this early exercise, the
exercise price was discounted 50%. An additional incentive was offer to stock
purchase warrantholders who funded their subscription early in anticipation of
the successful exercise of the warrants. The warrantholders who funded their
subscriptions immediately upon notice of such request were issued warrants for
the purchase of a total of 200,000 shares of Common Stock at an exercise price
of $.01 per share prorated among the warrantholders who funded upon notice of
such request. Among the investors who took advantage of this opportunity were
several directors and a 5% beneficial owner. Clark Gunderson, a 5% beneficial
owner, exercised 100,000 warrants at a price of $1.15, discounted from $2.30,
and was issued 40,000 warrants with an exercise price of $.01 per share. Mark
Holiday, a member of the Board (Chairman of the Board at the time of the
transaction), exercised 14,412 warrants at a price of $.98, discounted from
$1.96, and received 4,000 of the $.01 warrants. Mr. Holmes exercised 37,950
warrants at a price of $1.15, discounted from $2.30, and received 32,000 of the
$.01 warrants. Theodore Van Duyn, a member of the Board, exercised 40,000
warrants at a price of $1.15, discounted from $2.30.
In July 1997, the Company completed a private placement of its restricted
Common Stock at a price of $2.50 per share. Among the investors participating in
this private placement were several directors and a
54
5% beneficial owner. Mr. Gunderson purchased 150,000 shares. Mr. Van Duyn and
Mr. Holmes purchased 50,000 shares each. As compensation for consulting with
management of the Company, including this transaction, warrants to purchase
200,000 shares of Common Stock at an exercise price of $.01 per share were
issued to Mr. Holmes. These warrants may be exercised on or after January 31,
1998 through December 31, 1999.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 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 Continuance dated June 30, 1993 (Exhibit 3.1 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
3.2 Articles of Amendment to Articles of Continuance dated July 11, 1994 (Exhibit 3.2 to General
Form for Registration of Securities on Form 10, filed November 27, 1996)
3.3 Articles of Amendment dated April 28, 1995 (Exhibit 3.3 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
3.4 Articles of Amendment dated April 15, 1996 (Exhibit 3.4 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
3.5 Restated Bylaws of the Company (Exhibit 3.5 to General Form for Registration of Securities on
Form 10, filed November 27, 1996)
4.6 Specimen of Common Stock Certificate (Exhibit 4.6 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
10.3 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)
10.4 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)
10.5 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)
10.6 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)
10.7 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)
55
10.8 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)
10.9 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)
10.10 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)
10.11 Employment Agreement dated February 15, 1994 by and between the Company and Mark C. Holliday
(Exhibit 10.11 to General Form for Registration of Securities on Form 10, filed November 27,
1996)
10.12 Employment Agreement dated April 18, 1994 by and between the Company and Benjamin S. Marz
(Exhibit 10.12 to General Form for Registration of Securities on Form 10, filed November 27,
1996)
10.14 Employment Agreement dated May 20, 1996 by and between the Company and Gary W. Pankonien
(Exhibit 10.14 to General Form for Registration of Securities on Form 10, filed November 27,
1996)
10.15 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)
10.17 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)
10.18 Form of Stock Option Agreement (Exhibit 10.18 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
10.19 401(k) Plan (Exhibit 10.19 to General Form for Registration of Securities on Form 10, filed
November 27, 1996)
10.20 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)
10.21 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)
10.22 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)
10.23 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)
10.27 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)
10.28 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)
56
10.30 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)
10.32 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 (filed
herewith)
10.33 Memory Module Corporate Purchase Agreement, dated July 22, 1997, by and between Tanisys
Technology, Inc. and Compaq Computer Corporation (filed herewith)
10.34 Employment Agreement, dated as of September 11, 1997, by and between Tanisys Technology, Inc.
and Don McCord (filed herewith)
10.35 Employment Agreement, dated as of October 20, 1997, by and between Tanisys Technology, Inc.
and Charles T. Comiso (filed herewith)
10.36 Employment Agreement, dated as of November 10, 1997, by and between Tanisys Technology, Inc.
and Joseph C. Klein, Ph.D. (filed herewith)
11.1 Statement regarding computation of per share earnings (filed herewith)
21.1 Subsidiaries of the Company (filed herewith)
23.1 Consent of Arthur Andersen LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K.
None.
57
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.
Date: December 29, 1997 TANISYS TECHNOLOGY, INC.
By: /s/ CHARLES T. COMISO
-----------------------------------------
Charles T. Comiso
CHIEF EXECUTIVE OFFICER PRESIDENT AND
DIRECTOR
Date: December 29, 1997
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 29th day of December 1997.
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ CHARLES T. COMISO
- ------------------------------ Chief Executive Officer
Charles T. Comiso President and Director
/s/ JOE O. DAVIS
- ------------------------------ Senior Vice President and
Joe O. Davis Chief Financial Officer
/s/ DONALD R. TURNER
- ------------------------------ Corporate Controller
Donald R. Turner
/s/ PARRIS H. HOLMES, JR.
- ------------------------------ Chairman of the Board
Parris H. Holmes, Jr.
/s/ MARK C. HOLLIDAY
- ------------------------------ Director
Mark C. Holliday
/s/ GORDON H. MATTHEWS
- ------------------------------ Director
Gordon H. Matthews
/s/ GARY W. PANKONIEN
- ------------------------------ Director
Gary W. Pankonien
/s/ ALAN H. PORTNOY
- ------------------------------ Director
Alan H. Portnoy
/s/ THEODORE W. VAN DUYN
- ------------------------------ Director
Theodore W. Van Duyn
58
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
3.1 Articles of Continuance dated June 30, 1993 (Exhibit 3.1 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
3.2 Articles of Amendment to Articles of Continuance dated July 11, 1994 (Exhibit 3.2 to General
Form for Registration of Securities on Form 10, filed November 27, 1996)
3.3 Articles of Amendment dated April 28, 1995 (Exhibit 3.3 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
3.4 Articles of Amendment dated April 15, 1996 (Exhibit 3.4 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
3.5 Restated Bylaws of the Company (Exhibit 3.5 to General Form for Registration of Securities on
Form 10, filed November 27, 1996)
4.6 Specimen of Common Stock Certificate (Exhibit 4.6 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
10.3 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)
10.4 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)
10.5 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)
10.6 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)
10.7 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)
10.8 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)
10.9 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)
10.10 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)
10.11 Employment Agreement dated February 15, 1994 by and between the Company and Mark C. Holliday
(Exhibit 10.11 to General Form for Registration of Securities on Form 10, filed November 27,
1996)
10.12 Employment Agreement dated April 18, 1994 by and between the Company and Benjamin S. Marz
(Exhibit 10.12 to General Form for Registration of Securities on Form 10, filed November 27,
1996)
10.14 Employment Agreement dated May 20, 1996 by and between the Company and Gary W. Pankonien
(Exhibit 10.14 to General Form for Registration of Securities on Form 10, filed November 27,
1996)
10.15 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)
10.17 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)
10.18 Form of Stock Option Agreement (Exhibit 10.18 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
10.19 401(k) Plan (Exhibit 10.19 to General Form for Registration of Securities on Form 10, filed
November 27, 1996)
10.20 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)
10.21 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)
10.22 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)
10.23 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)
10.27 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)
10.28 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)
10.30 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)
10.32 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 (filed herewith)
10.33 Memory Module Corporate Purchase Agreement, dated July 22, 1997, by and between Tanisys
Technology, Inc. and Compaq Computer Corporation (filed herewith)
10.34 Employment Agreement, dated as of September 11, 1997, by and between Tanisys Technology, Inc.
and Don McCord (filed herewith)
10.35 Employment Agreement, dated as of October 20, 1997, by and between Tanisys Technology, Inc.
and Charles T. Comiso (filed herewith)
10.36 Employment Agreement, dated as of November 10, 1997, by and between Tanisys Technology, Inc.
and Joseph C. Klein, Ph.D. (filed herewith)
11.1 Statement regarding computation of per share earnings (filed herewith)
21.1 Subsidiaries of the Company (filed herewith)
23.1 Consent of Arthur Andersen LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)