As filed with the Securities and Exchange Commission on March 11, 1997
Registration No. 0-29038
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10/A
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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TANISYS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
WYOMING 74-2675493
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12201 TECHNOLOGY BOULEVARD, SUITE 130
AUSTIN, TEXAS 78727 78727
(Address of principal executive offices) (Zip Code)
(512) 335-4440
Registrant's Telephone Number, Including Area Code
_______________
Securities to be registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class to be registered each class is to be registered
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NONE NOT APPLICABLE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
TANISYS TECHNOLOGY, INC.
FORM 10
ITEM PAGE
NUMBER NUMBER
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-- Index 2
1. Business 3
2. Financial Information 22
3. Properties 32
4. Security Ownership of Certain Beneficial Owners
and Management 33
5. Directors and Executive Officers 36
6. Executive Compensation 39
7. Certain Relationships and Related Transactions 46
8. Legal Proceedings 47
9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters 48
10. Recent Sales of Unregistered Securities 49
11. Description of Registrant's Securities to be Registered 50
12. Indemnification of Directors and Officers 53
13. Financial Statements and Supplementary Data 54
14. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 54
15. Financial Statements and Exhibits 55
16. Signatures 105
Index to Exhibits 106
2
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. (the "Company") and its wholly owned
subsidiaries, 1st Tech Corporation ("1st Tech") and DarkHorse Systems, Inc.
("DarkHorse") (collectively, the "Tanisys Group"), 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
Tanisys Group'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
Tanisys Group'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 Tanisys Group's
technologies by original equipment manufacturers ("OEMs"); changes in product
mix; new product development; the timing of 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 Tanisys Group 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 2. Financial Information--Management's Discussion and Analysis of
Financial Condition and Results of Operations." All references to year periods
refer to the Tanisys Group's fiscal years ended September 30, 1996, 1995 or
1994, and references to quarterly periods refer to the Tanisys Group's fiscal
quarters ended December 31, 1996 or 1995, unless otherwise indicated.
GENERAL
The Tanisys Group is a technology solutions company that provides custom
design, engineering and manufacturing services, test solutions and standard and
custom module products to leading OEMs in the computer, networking and
telecommunications industries. The Company's recent acquisitions of 1st Tech
and DarkHorse created a technology company with a diverse product and service
line.
The Tanisys Group has products and capabilities in both hardware and
software development, advanced design, manufacture, marketing, sales and
delivery. The Tanisys Group provides quality,
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sophisticated surface mount assemblies and quick-response turnkey solutions
to OEMs and believes that the turnkey capabilities achieved by it and its
direct competitors provide customers with shorter production and delivery
cycles, more overall flexibility and quicker turnaround than can be obtained
by large memory module manufacturers in the electronics manufacturing
services ("EMS") industry. The products and services of the Tanisys Group
include custom design, engineering, memory test equipment, standard and
custom memory modules, patented touch technology, manufacturing, testing and
logistics services.
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. ("Rosetta") was incorporated in the
State of Texas as a wholly owned subsidiary of the Company to provide marketing
for the Company's products. However, Rosetta was never activated and today
remains a dormant company. 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
trades on the VSE under the symbol "TNS.U," quoted in U.S. dollars.
Through its recent acquisitions of 1st Tech and DarkHorse, the Tanisys
Group has become a quality manufacturer of specialty modules, standard and
custom memory modules and memory test systems for a wide variety of electronic
system applications and industries. The Tanisys Group has extensive design,
engineering, manufacturing, logistics and test expertise, which management
believes provides it with competitive advantages over larger module
manufacturers, including the ability to respond to its customers' rapidly
changing requirements and minimization of inventory exposures. The Tanisys
Group's principal customers include major electronic OEMs, semiconductor
manufacturers, computer distributors, corporate end users, government agencies,
personal computer catalog retailers, value added resellers ("VARs") and system
integrators. OEM customers include Bay Networks, Inc., Compaq Computer
Corporation, Dell Products LP, Hewlett-Packard Company, Siemens AG
Semiconductors and Toshiba Corporation, although no one of these customers
represented at least 10% of the Company's sales revenue in fiscal 1996. In the
first quarter of fiscal 1997, three customers produced more than 10% of net
sales each: Tandy Corp., 18.4%; Algo Marketing, Inc., 16.9%; and Itautec
America, Inc., 14.9%.
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RECENT DEVELOPMENTS
On November 20, 1996, the Tanisys Group signed two contracts with Siemens
Components, Inc. ("Siemens") to provide design engineering, quick-turn
manufacturing, warehousing, distributing and testing of memory modules for
Siemens and certain of its customers. Under the terms of the agreements,
Siemens is utilizing the quick-turn manufacturing and logistics services
provided by the Tanisys Group in order to better service their customers and to
support them in inventory reduction and management. The consummation of these
agreements furthers the Tanisys Group's strategy and represents an important
milestone in establishing long-term relationships with major customers as the
primary provider of turnkey design, development and manufacturing solutions.
ACQUISITIONS
On April 9, 1996, the Company, its wholly owned subsidiary, Tanisys
Acquisition Corp., 1st Tech and 1st Tech's principal stockholder, Gary W.
Pankonien, entered into an Agreement and Plan of Merger, which agreement was
subsequently amended (as amended, the "1st Tech Agreement"). On April 20, 1996,
the stockholders of the Company approved the transactions contemplated by the
1st Tech Agreement. Upon the effective date of the 1st Tech Agreement, an
aggregate of 2,950,000 shares of Common Stock were exchanged for the outstanding
shares of 1st Tech common stock. 1st Tech merged with and into Tanisys
Acquisition Corp., ceasing to exist, with Tanisys Acquisition Corp. changing its
name to 1st Tech Corporation. Presently, 1st Tech operates as a wholly owned
subsidiary of the Company and provides design, engineering and custom
manufacturing services to the electronics market.
On April 9, 1996, the Company, its wholly owned subsidiary, Tanisys
Acquisition Corp. II, DarkHorse Systems, Inc. and its principal stockholders,
Archer Lawrence, Jack Little and Gary W. Pankonien, entered into an Agreement
and Plan of Merger, which agreement was subsequently amended (as amended, the
"DarkHorse Agreement"). On April 20, 1996, the stockholders of the Company
approved the transactions contemplated by the DarkHorse Agreement and an
aggregate of 1,200,000 shares of Common Stock were exchanged for the outstanding
shares of DarkHorse Systems, Inc. common stock. DarkHorse Systems, Inc. merged
with and into Tanisys Acquisition Corp. II, ceasing to exist, with Tanisys
Acquisition Corp. II changing its name to DarkHorse Systems, Inc. Presently,
DarkHorse operates as a wholly owned subsidiary of the Company and designs and
markets tester equipment and technology to a large and diverse marketplace,
including personal computer users and electronic equipment manufacturers.
INDUSTRY OVERVIEW
The following is a summary of the markets in which the Company competes.
For a description of the Company's specific products and services, see "Item 1.
Business--Products and Services."
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The demand for electronic products and components has grown dramatically
over the last several years as a result of expanding unit sales in a number of
industries, including computer, appliance, telecommunications, consumer
electronics and automotive, with expansion into other industries ongoing. The
demand for greater functionality and product integration has required
electronics manufacturers to increase the number and complexity of electronic
devices incorporated into their products. As a result of this trend, the
Tanisys Group believes that the percentage of total product costs represented by
electronic assemblies has risen steadily over the past few years. Integrated
Circuit Engineering ("ICE"), an independent data source, determined that in 1995
the total worldwide market for semiconductor devices exceeded $120 billion.
The Tanisys Group does not design or manufacture any semiconductor devices
or any of the other components that are used in the design and assembly of
memory and other types of modules. All of these items are either furnished by
the customer to be assembled by the Tanisys Group in EMS or purchased by the
Tanisys Group as raw materials for the assembly of modules on a turnkey basis.
Memory integrated circuits encompass several types of devices designed to
perform specific functions within computer and other electronic systems. The
most significant categories of semiconductor memory are dynamic random access
memory ("DRAM"), static random access memory ("SRAM") and non-volatile memory,
including Flash, in addition to an emerging technology known as synchronous DRAM
("SDRAM" or "SyncDRAM"). DRAM provides large capacity "main" memory; SRAM
provides specialized high speed memory; Flash and other non-volatile memory
provide low power memory that retains data after a system is turned off; and
SyncDRAM is quickly becoming the replacement for ("FPM") DRAM. In addition,
within each of these broad categories of memory products, semiconductor
manufacturers are offering an increasing variety of memory devices that are
designed for application specific uses.
The growth in semiconductor memory devices has created an increased demand
for reliable, cost-effective testing solutions. Historically, memory testing
has been the primary responsibility of the memory semiconductor companies due to
the expensive equipment required for the process. However, as the industry
matures, the need for memory test capability has extended into OEMs, VARs,
retail outlets, service centers and end users. This need for increased testing
is being driven by stringent quality requirements, increased production volume,
new complex memory solutions, loss prevention and customer expectations.
Tanisys Group management estimates the worldwide desktop and portable memory
test market for 1997 to be approximately $29 million in revenue, which
represents an estimated 33% increase over 1996. Based upon a survey conducted
by an independent consultant retained by the Company, management estimates that
desktop testers, used by high volume customers such as OEMs, semiconductor
manufacturers and VARs, represent approximately 52% of the projected market and
that portable testers, used by retailers, third-party service companies and
VARs, represent approximately 48% of the projected market. The increase in
memory complexity and the shear number of products continues to fuel significant
growth in this market.
The proliferation of electronic devices throughout the world has
necessitated new approaches to providing intuitive personal access to the
products and their applications. The Tanisys Touch product line competes in
this area through its capacitive touch technology. Any product that uses
switches or controls is a candidate for the application of this technology,
including appliances, personal computers,
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point-of-sale terminals, automated teller machines ("ATMs"), gas pumps,
multimedia kiosks, industrial and medical equipment, financial systems,
computer-based training systems, gaming machines and many other electronic
devices used by the public. Consistent across industries manufacturing these
products is the search for low cost, highly reliable, intuitive user access.
In 1996, the personal computer industry is projected to sell 63.7 million
units for both desktop and notebook systems, according to Dataquest, Inc., a
market research firm.
DESIGN, ENGINEERING, MANUFACTURING AND LOGISTICS SERVICES
The increased cost of capital equipment as well as the complexity and
expertise required to set up and operate an electronic manufacturing operation
has resulted in the trend of outsourcing by OEMs. By outsourcing design,
manufacturing and logistics functions, OEMs are able to focus their resources on
their own areas of core competence and competitive advantage, such as unique
technology, system design and marketing capabilities. OEM outsourcing practices
range from contract manufacturing, in which the OEM may turn to an outside
supplier to procure components and design and manufacture a specific product for
the OEM on a turnkey basis, to consignment, in which the OEM employs the outside
supplier to design, engineer, manufacture, maintain inventory and distribute a
product using components supplied by the OEM.
One of the most significant opportunities is the manufacture of memory
modules. Memory modules are compact circuit board assemblies consisting of
DRAM, SRAM, Flash or other semiconductor memory devices and related circuitry.
The suppliers of memory modules include semiconductor manufacturers who maintain
captive memory module production facilities and independent memory module
manufacturers that source memory devices from a wide variety of suppliers.
Although some semiconductor manufacturers have the ability to manufacture
significant volumes of standard memory modules, generally these companies are
focused on adding value through their silicon expertise, rather than through
their memory module manufacturing capabilities. Management of the Tanisys Group
believes that the business models of most semiconductor manufacturers may not
adequately address OEMs' changing requirements for a broad range of custom and
application specific products.
Independent manufacturers of memory modules have experience with a broad
range of memory devices and offer substantial expertise in component selection
and module product development. Due to the fact that independent manufacturers
do not produce their own semiconductor devices, they have the ability to mix and
match devices from a variety of semiconductor suppliers in a single memory
module. Independent manufacturers of memory modules currently address two
primary market segments: the OEM channel and the personal computer reseller
channel. Suppliers to the OEM channel typically offer custom and application
specific modules to the workstation and telecommunications industries, as well
as standard memory modules for use by computer and peripheral OEMs. Suppliers
to the personal computer reseller channel typically offer standard DRAM memory
modules as an upgrade product sold through computer distributors and retail
channels.
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MEMORY TEST SYSTEMS
The memory test market is growing rapidly due to the increasing and ever
changing complexities, configurations, densities and technologies of memory
devices. Semiconductor manufacturers are the major users of memory test
systems on a chip level as well as on modules. In addition, the market
extends into independent manufacturers of modules, OEMs, retail outlets,
service centers and end users. The Tanisys Group believes that the desire to
produce as well as purchase quality memory products is driving an increased
awareness of the need for memory testing.
Memory test systems can be classified into two main areas:
semiconductor chip level testers and memory module testers. Semiconductor
chip level testers are utilized to completely characterize a semiconductor
device to guarantee its performance to a standard set of specifications.
Memory module testers are utilized to characterize an assembly of
semiconductor devices to a desired specification, whether standard or custom.
This characterization and testing is done to insure quality of performance
following a manufacturing process.
Test systems generally are designed as generic testers that must be
programmed and customized by the user to a specific purpose. The testers may
be configured to test personal computer motherboards, controllers or simply
memory modules. The common features these testers provide are their
abilities to manipulate the semiconductors' inputs and outputs in relation to
time at various voltages. The patterns of tests are known as test algorithms
or test vectors.
MEMORY MODULES
Electronic systems increasingly employ memory modules as building blocks
in system design as a result of the many advantages memory modules offer OEMs
and end users. The use of memory modules enables OEMs to offer a relatively
easy path for upgradeability of a personal computer or workstation, a feature
of system design that is increasingly required by end users. The use of
memory modules allows OEMs to increase flexibility by enabling them to easily
configure a system with a variety of different levels of memory, thus
enabling OEMs to address multiple price points or applications with a single
base system design. To achieve this upgradeability and flexibility, both
personal computer and communications OEMs frequently design their systems to
use memory modules as a "daughter card," reducing the need to include memory
devices on the motherboard. This design structure frees space on the
motherboard and enables the OEM to use a single motherboard as a common
central element for a variety of different systems, resulting in significant
cost savings. The use of memory modules further reduces OEMs' costs by
allowing them to add expensive memory devices to products during the final
stages of the manufacturing process, thereby reducing the need for
work-in-process inventories.
The market for memory modules includes both standard and custom modules.
The high volume standard memory module market includes modules that can be
sourced from many module suppliers and are designed to be incorporated into a
wide variety of equipment. These modules employ designs meeting widely used
industry specifications of the Joint Electronic Development Engineering
Council ("JEDEC"), primarily utilizing DRAM memory, and are available with a
variety of options to address the needs of multiple OEMs. Standard memory
modules typically are used in desktop personal
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computers and printers and are marketed directly to OEMs and through computer
resellers directly to end users.
Specialty memory modules include both custom and application specific
modules. The varying requirements of different electronic systems and the
increased number of memory device options have resulted in a market for
custom memory modules that are designed to enhance the performance of a
particular system or a set of applications. These modules are usually based
on either DRAM, SyncDRAM, SRAM or Flash technologies and may include
additional control circuitry. Custom memory modules typically are sourced
from a limited number of suppliers. Application specific or custom memory
modules generally are used in mobile computers, workstations and
telecommunications devices, such as routers and switches, and are sold
primarily to OEMs.
CAPACITIVE TOUCH TECHNOLOGY
Capacitive touch is an electronic input technology that utilizes the
sensing of touch with a high speed microprocessor circuit, replacing
mechanical input devices. Mechanical input devices typically require a
motion or displacement to sense an event. The capacitive touch technology
eliminates this requirement. The benefits of this technology include longer
life cycles, applications in harsher environments, greater flexibility in
design and lower cost in many cases. The technology can be applied to
products such as gas pumps, appliances, ATMs, cellular telephones and almost
any other electronic appliance.
THE DRAM MARKET
DYNAMIC RANDOM ACCESS MEMORY. A DRAM is a high density, low cost per
bit semiconductor device that stores digital information in the form of bits
and provides high speed storage and retrieval of data. DRAMs are the most
widely used semiconductor memory component in most PC systems. The
development of more powerful personal computers and workstations and the
increasing emphasis on high-throughput networking and telecommunications
products have resulted in the need for higher volumes and greater varieties
of DRAM memory in electronic systems. For example, personal computers
currently based on 486, Pentium-Registered Trademark- and PowerPC-Registered
Trademark- microprocessors frequently employ 8 to 16 megabytes ("Mbytes") of
DRAM, which is significantly more memory than that employed by older
generation personal computers. The adoption of Windows 95 and NT and other
advanced operating systems is further increasing the need for DRAM, as 16
Mbytes of DRAM memory are required for higher performance to support Windows
95 multitasking capabilities.
THE SRAM MARKET
STATIC RANDOM ACCESS MEMORY. A SRAM is a semiconductor device that
performs memory functions much the same as a DRAM, but does not require its
memory cells to be electronically refreshed. In addition, a SRAM can be
designed to operate faster than a DRAM. A SRAM contains more complex
electronic circuitry than a DRAM and consequently has higher per bit
production costs. The market for SRAMs includes the high speed SRAM segment
and the low power SRAM segment. The market for high speed SRAM devices has
grown rapidly over the last few years, driven primarily by the inability of
slower DRAM devices to support the increasing speed requirements of personal
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computer and data communications systems. Due to existing architectural
limitations, DRAM speeds have not increased commensurably with improvements
in microprocessor speeds. DRAMs typically operate at 10 to 20 megahertz
("Mhz"), or 100 to 50 nanoseconds ("ns"), while microprocessor bus speeds for
most Pentium-Registered Trademark- -class personal computers currently sold
are 66 MHz (15 ns) or higher. Operating at 66 MHz or faster, high
performance SRAM devices can be used as "cache" memory, which increases a
system's performance. For example, in a personal computer or workstation,
L2, or secondary, cache memory can increase system performance by acting as
an intermediary between fast microprocessors and slower DRAM main memory. In
disk drives, SRAM cache memories can be used as a high speed buffer to
accelerate data throughput from the drive to the system bus.
The Tanisys Group's SRAM family focuses on the high performance, or
"Very Fast," sector of the SRAM market, supporting cache memory requirements
in computers. Very Fast SRAM provides access times approximately five times
faster than those of a DRAM. The market for Very Fast SRAM has grown with
the number of applications that require a "buffer" or "cache" of high speed
memory between the central processing unit and the main DRAM-based memory.
High speed SRAMs are experiencing rapid advancements in speed,
architecture, organization, density and operating voltages. These
advancements are primarily necessitated by the increasing speed and
functionality of microprocessors such as the Pentium-Registered Trademark-,
the PowerPC-Registered Trademark-, the Alpha-Registered Trademark- and the
SPARC-Registered Trademark-. High speed SRAMs are reaching access times
below 3 ns. High speed SRAM architecture has evolved from asynchronous
random access to synchronous pipelined burst mode corresponding with the
Pentium-Registered Trademark- architecture, and synchronous serial access
corresponding with reduced instruction set computing ("RISC") architectures.
SRAM devices are available in organizations ranging from 1 bit to 36 bits
wide and densities of up to 4 megabits. In addition, industry trends toward
lower voltage microprocessors, such as the Intel P54C (3.3 volt
Pentium-Registered Trademark-), have created a need for new, low voltage SRAM
cache memories.
Low power SRAM devices are used primarily in computing or industrial
applications in which efficient power management is of greatest importance.
Primary applications for low power SRAM devices include mobile computing and
other environments in which electronic systems rely on battery power or
require low power dissipation.
THE FLASH MEMORY MARKET
Flash memory is an application of non-volatile memory used to retain
stored data after a system's power has been turned off. The ability of Flash
devices to be electronically rewritten to update parameters or system
software provides greater flexibility and ease of use than other non-volatile
memory devices, such as older erasable programmable read only memory
("EPROM") devices. Flash memory is one of the fastest growing segments of
the memory market, as a growing range of applications utilize Flash memory in
the computer, telecommunications, networking, consumer electronics,
automotive, industrial control and instrumentation industries. For example,
Flash memory can be used in communication devices such as routers, in which
Flash memory provides storage of control programs and system-critical data.
Another common application for Flash memory is in PC cards, which are small
form factor devices that are inserted into notebook and subnotebook computers
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and consumer electronics products such as personal digital assistants
("PDAs") and digital cameras to provide added storage.
THE SYNCDRAM MARKET
The introduction of the SyncDRAM as a replacement of FPM DRAM, which is
currently occurring, is considered to be a major shift in computing system
architecture creating the requirement to redesign the memory system control
logic. SyncDRAM is unique in that the memory can be accessed by the
processor in a synchronous instead of asynchronous manner, which is
inherently a faster operation. This transition will create the demand for a
total redesign of memory modules and require new testing equipment to
implement its use.
PRODUCTS AND SERVICES
The products and services of the Tanisys Group are divided into three
basic categories based on the areas of product specialization of each of the
three companies that comprise the consolidated group. These products and
services are custom design, engineering, standard and custom memory modules,
manufacturing, testing, logistics services, memory test equipment and
patented touch technology. Memory module products represented approximately
95% of the Tanisys Group's total net sales in fiscal 1996 and in the first
quarter of fiscal year 1997, on a pro forma basis, and semiconductor memory
product testing equipment represented substantially all of the balance of the
Tanisys Group's revenue.
RESEARCH, DESIGN ENGINEERING AND PROTOTYPE TECHNOLOGIES SERVICES
The Tanisys Group believes it is proactively responding to the
increasing competition and shorter product life cycles that its customers are
facing in their respective industries. The Tanisys Group's design engineers
work jointly with customers to design products that will exceed the minimum
requirements and specifications for functionality, quality and reliability.
The transition from concept to prototype to a performance reliable,
manufacturable product with planned production requirements is expertly
managed so that the product volume-to-market cycle is as short as possible,
saving both time and expense. This process is aided by the quick-turn
capabilities in the Tanisys Group's manufacturing and surface mount assembly
processes. The Tanisys Group's intent is to position itself to be the
manufacturer of choice due to its intimate knowledge of the product and the
customers' requirements.
SURFACE MOUNT ASSEMBLY SERVICES
The Tanisys Group has a substantial investment in various pieces of
specialized module assembly equipment, including six Quad Systems, Inc. and
four Amistar Corporation surface mount technology ("SMT") machines, DarkHorse
and Terradyne, Inc. ("Terradyne") testing equipment, reflow soldering
machines, a sophisticated hand-drop assembly line and board washing
equipment. The SMT process solders the leads on integrated circuits and
other electronic components to the surface of the printed circuit board
("PCB"), which replaces older pin-through-hole technology. The SMT process
accommodates substantially greater density than can be achieved with the
older technologies. This allows for a reduction in the size of the PCB,
enhances the performance of the module and usually
11
reduces the costs of materials and components. Advanced SMT technologies,
including double-sided attachment of components and fine pitch component
placement on the PCBs, have further increased component density, reduced the
PCB size and achieved substantial economies in the cost of the finished
modules. Double-sided placement attaches SMT components on both sides of the
PCB, and fine-pitch SMT places components that have tightly spaced leads.
Substantially all of the modules assembled by the Tanisys Group employ the
SMT process, and an increasing percentage utilizes fine-pitch component
placement and/or double-sided component attachment. The Tanisys Group
intends to continue investing in the equipment and technologies required to
develop the resources required to exceed customers' expectations and
requirements.
SEMICONDUCTOR MEMORY TESTING EQUIPMENT
The DarkHorse testers are designed, maintained and enhanced by the
Tanisys Group's professional engineering staff. The current emphasis is on
development of a tester for the new and growing SyncDRAM portion of the
module industry. Phase 1 of this development, which has been completed,
consisted of designing attachments which allow the current models to test the
new SyncDRAM modules. New testers that are designed specifically for the new
SyncDRAMs are now in the development stage.
All of the DarkHorse testers are designed by the Tanisys Group's
professional engineers and manufactured by the Tanisys Group's manufacturing
operation, utilizing the SMT process and the hand-drop line. The Tanisys
Group's commitment to continuous quality improvement in its manufacturing
operation has been essential to the success of this product line. DarkHorse
currently offers two testers, the Sigma 2 and the Sigma LC, which compete in
the automatic testing equipment ("ATE") market for the testing of both chips
and modules. DarkHorse's competitors include Terradyne, Terradyne/Megatest
Division of Terradyne ("Megatest") and Realm Systems, Inc. ("Realm"), all of
which provide generic test equipment that requires the user to custom program
the equipment for specific applications. The DarkHorse test systems are
pre-programmed and include an extensive set of pre-programmed algorithms and
test programs that are accessed through an intuitive user interface.
SIGMA 2. The Sigma 2 unit is geared toward accurate, extensive and
expedient testing of memory for the manufacturer who needs additional
parametric testing and performs large volume testing, such as manufacturers
of personal computers and other electronic products. The Sigma 2 has
additional tests not available on the Sigma LC, which are demanded in
high-end testing environments.
SIGMA LC. The Sigma LC unit is portable and tests memory in the same
accurate, extensive and expedient manner as Sigma 2, but is geared toward
single in-line memory module ("SIMM") users whose volume is lower and whose
testing needs are slightly less extensive. The market for the Sigma LC
ranges from in-house service technicians to memory manufacturers.
MEMORY MODULES
The Tanisys Group designs and markets over 400 products consisting of
memory modules, which include DRAM, SRAM, SyncDRAM and Flash memory. The
products offered include custom and application specific memory modules, as
well as standard memory modules that comply with
12
industry standards established by JEDEC. The target market segments for
these products include personal computers, mission critical servers,
telecommunications/data communications, custom electronic assemblies, memory
products and contract manufacturing services to the electronics market.
Historically, the majority of the Tanisys Group's revenues have come from
sales of standard products to the memory after-market as well as custom
products and custom assembly for the OEM markets using advanced surface mount
technologies and manufacturing processes.
An important aspect of the Tanisys Group manufacturing operations is its
focus on product testing. The Tanisys Group tests 100% of its memory modules
for full functionality. The Tanisys Group believes that it has established
substantial technical expertise in the testing of memory modules, and its
staff of experienced test engineers develop proprietary testing routines and
parameters that enable it to diagnose problems in system design or memory
components, to characterize the performance of new products and to provide
high quality products in volume.
TOUCH TECHNOLOGY
Tanisys Touch is a proprietary technology which is integrated into
electronic products to provide greater ease of use. Tanisys Touch allows
manufacturers to create devices that can be controlled simply by using your
finger. This intuitive characteristic means that users can rely more on
simple touch controls rather than on complex user control interfaces.
Tanisys Touch has the following advantages: no moving parts, lower cost of
implementation, the ability to be mounted under a variety of materials,
expanded ease-of-use functionality, environmentally robust and monolithic
construction that can be mounted directly to the surface of products,
including compound curves. While applicable markets for touch include any
electronic device, the initial focus is on computers and appliances due to
market size and product development cycles.
AVAILABILITY OF RAW MATERIALS
The Tanisys Group's manufacturing operations use numerous suppliers for
electronic components and materials, including DRAM components, used in its
operations. Shortages of certain types of electronic components have
occurred in the past and may occur in the future. The Tanisys Group's
contract manufacturing operations procure materials and components based on
purchase orders received and accepted from customers while seeking to
minimize the overall level of inventory. Component shortages or price
fluctuations could have an adverse effect on the Tanisys Group's business and
results of operations.
CUSTOMERS, SALES AND MARKETING
The Tanisys Group's principal customers include major and second-tier
electronics OEMs, semiconductor manufacturers, computer and electronics
distributors, VARs, system integrators and major consumer electronics retail
outlets.
13
On a pro forma basis, approximately 95% of the Tanisys Group's sales are
derived from the 1st Tech product and service line, which includes standard
and custom memory modules, custom electronics modules, design, engineering,
manufacturing and logistical inventory control services. Substantially all
of the balance of the Tanisys Group's sales are derived from the DarkHorse
tester product line, which also includes design and engineering services,
maintenance contracts and consumable replacement parts. In fiscal 1996, the
top ten customers of the 1st Tech products accounted for 48% of Tanisys Group
sales on a pro forma basis, and no one customer accounted for 10% or more of
such sales. In the first quarter of fiscal 1997, three customers produced
more than 10% of net sales each: Tandy Corp., 18.4%; Algo Marketing, Inc.,
16.9%; and Itautec America, Inc., 14.9%.
The Company believes that it has proven the Tanisys Touch technology and
that the next step is inclusion of this technology by OEMs in the
marketplace. This can occur only if the OEM's product designs include the
technology because the discrete Tanisys Touch technology is not easily
retrofitted into existing products. Since July 1995 and prior to the
acquisitions of 1st Tech and DarkHorse, the Company focused substantially all
of its time and effort in developing and marketing Tanisys Touch to the
personal computer and appliance marketplace through major OEMs. Currently,
the Company is developing a touch-enabled product for personal computers. In
addition, the Company is working with AMP, Incorporated, a leading appliance
parts manufacturer, to introduce a touch-enabled appliance. The Tanisys
Group has no assurance that either of these endeavors will be successful.
The Tanisys Group primarily sells its products and services through
direct sales in the United States, Europe and Asia and also uses a network of
independent sales representatives located throughout the United States and
Europe for certain OEM customers and large retail electronics stores. Sales
outside these areas are made through distributors, which purchase products
for resale outside the United States.
The Tanisys Group's sales and marketing efforts are conducted in an
integrated process involving direct sales people, independent sales
representatives, customer service representatives and senior executives. An
important aspect of the selling cycle is the team approach whereby a senior
executive is combined with marketing, manufacturing, engineering and sales
counterparts to work closely with the major OEM and semiconductor accounts.
Especially important are the related selling opportunities of product lines.
Conceivably, once a relationship is established with an OEM, there is
opportunity to sell all product lines into the same account.
Relationships with leading semiconductor manufacturers located in the
United States, Japan, South Korea, Taiwan and Europe have been developed by
the Tanisys Group, and many of these vendors are also customers. The Tanisys
Group frequently works jointly with these vendors in bidding for customer
designs to be incorporated into an OEM's system.
The Tanisys Group plans to expand its sales and marketing organization
to increase the sales of its products and services and establish Tanisys
Touch, 1st Tech and DarkHorse brand names worldwide. Current marketing
activities include direct mail solicitations and participation in trade
shows, and future marketing activities also will include advertising in trade
publications targeted at high technology industries.
14
Sales generally are made pursuant to standard purchase orders. Only
those customer orders for which purchase orders have been accepted and
assigned shipment dates within the next 12 months are included in backlog.
Because the Tanisys Group's current backlog is subject to change in delivery
schedules and is subject to cancellation with only limited or no penalties,
backlog is not necessarily an indication of future net sales. There can be
no assurances that current backlog will necessarily lead to net sales for any
future period. At February 28, 1997, the backlog was $929,358.
TANISYS GROUP STRATEGY
The Tanisys Group's objectives are (i) to continue to develop its
technologies to deliver products and services that provide its customers with
distinct market advantages; (ii) to strengthen its position as a leading
supplier of memory modules and memory test systems in high growth markets;
(iii) to establish and grow long-term relationships with customers for all
product lines by utilizing the combination of creativity and experience of
its personnel to help their customers profitably differentiate their products
by transforming ideas into creative and manufacturable solutions, recognizing
that each customer is different and has unique needs; (iv) to continue to
maintain and continuously improve its world-class manufacturing capabilities;
and (v) to continue to provide extraordinary customer support. The Tanisys
Group has established its strategy in order to accomplish these goals and to
ensure that customers continually improve time-to-market production in
volume. The following are key elements of the Tanisys Group's strategy:
ESTABLISH THE TANISYS GROUP AS A LEADER IN ENGINEERING AND DESIGN SERVICES
The Tanisys Group's engineering, design and manufacturing staff delivers
value-added services, focusing on research, design, prototype, development
and manufacturing services, and gives the Tanisys Group the ability to
differentiate itself from competitors that primarily concentrate on the
manufacturing aspects of the industry. The Tanisys Group believes that its
professionals have the creative ability and experience to understand a
customer's ideas, analyze the technology and work with them to create a
product design. They can then proceed with the building of the necessary
prototypes to prove, design and develop a manufacturing model, thereby moving
the customer from the concept stage to a manufacturable product. The Tanisys
Group maintains a unique advantage in the EMS industry through an obvious
depth of understanding of the product gained by its manufacturing staff from
its engineering staff.
EXPAND MANUFACTURING AND LOGISTICS CAPACITY AND EXPERTISE
Further expansion and automation of manufacturing capacity is planned
through investment in advanced manufacturing equipment, while maintaining
responsiveness to OEMs through short design cycle and rapid turnaround. The
Tanisys Group has made and will continue to make investments in advanced
manufacturing process equipment and technologies, and the Tanisys Group will
continue to work closely with customers concerning the identification and
implementation of all advances in process technologies needed to design and
manufacture new and more complex products. The Tanisys Group believes that
it benefits from significant economics of scale in procurement and equipment
utilization due to its high volume manufacturing of a wide variety of memory
module products. An experienced
15
manufacturing staff is in place, and automated specialized surface mount
lines have been established, enabling the manufacture of products in a cost
effective manner. An important aspect of the Tanisys Group's manufacturing
strategy is to focus extensively on product quality to address the stringent
requirements of leading electronics OEMs worldwide. In addition, the Tanisys
Group believes that it has established particular expertise in materials
management through efficient procurement, inventory tracking and control and
management information systems.
DEVELOP NEW CUSTOMERS FOR EXISTING PRODUCTS AND SERVICES
The Tanisys Group intends to expand the marketing of its products and
services worldwide through the use of its in-house sales organization and by
contracting with independent sales representative organizations that have
existing relationships with potential customers for other products and
services. The intent is to establish long-term relationships with major OEMs
as the primary provider of turnkey design, development and manufacturing
solutions for new and existing products and services.
EXPAND THE SCOPE OF PRODUCTS AND SERVICES
The Tanisys Group intends to expand the scope of products and services
provided to existing customers who are already familiar with the total
quality focus of the Tanisys Group. The intent is to establish long-term
relationships as a primary provider of a complete slate of products and
services with these customers.
CONTINUE TO PROVIDE TOTAL QUALITY MANAGEMENT OF PRODUCTION AND BUSINESS
PROCESSES
The Tanisys Group continuously endeavors to improve production quality,
reduce cycle time and provide innovative solutions for customer problems.
The combination of full-service component and materials purchasing, inventory
and materials management and continuous flow manufacturing with sophisticated
computer-aided design and manufacturing capabilities shortens the response
time for fulfilling customer requests. The Tanisys Group is International
Standards Organization ("ISO") 9002 compliant and is in the process of
becoming certified.
EXPAND DEVELOPMENT OF DARKHORSE MEMORY TEST EQUIPMENT PRODUCT LINE
The requirements for reliable and reasonably priced test instrumentation
has grown rapidly as customers' emphasis on quality control in manufacturing
has increased. The transition to dual in-line memory modules ("DIMMs") and
SyncDRAMs and the increasingly smaller sizes require the design or redesign
of sophisticated memory testers. The EMS industry requires larger, more
automated testers that will work in conjunction with continuous flow
manufacturing lines, and the increasingly competitive nature of the industry
necessitates more economic pricing than this type of tester has today. The
retail industry requires reliable and reasonably priced portable testers for
loss prevention with pass/fail testing and for module identification purposes.
16
DEVELOP PRODUCTS USING THE TOUCH TECHNOLOGY
The Tanisys Touch strategy is focused on the computer and appliance
industries due to market size and product development cycles, which
management believes will provide shorter time to revenue than other potential
industry markets. Initial focus is on select major manufacturers in the
computer and appliance industries with license agreements used for specific
new product development. This strategy is consistent with the overall focus
on the high volume OEM type customer as opposed to the retail channels.
EXPAND MANUFACTURING CAPABILITIES AND SERVICES
The intensely competitive nature of the electronics manufacturing
industry has forced the major competitors to expand the range of products and
value-added services provided to their principal customers in order to serve
as single-source providers of a comprehensive and growing set of
solutions-based products and services. By providing research, design and
prototype capabilities, the Tanisys Group can assist a customer in the
critical development and pre-production planning phase of product
implementation and follow through with the more traditional manufacturing
services. Industry parts suppliers also are customers of the Tanisys Group,
providing it with direct acquisition channels and thereby creating strategic
alliances. This allows a customer to utilize fewer service providers to
streamline the process and achieve better efficiencies in the development
cycle due to fewer transitions from one provider to another. This type of
strategic relationship gives a competitive advantage to both the electronics
manufacturer and to the customer within their respective industries.
The continuing rapid advances in technology further support customers'
utilization of outsourcing to companies in the electronics industry.
Companies operating in the advanced electronic industries must devote more
and more resources, which ultimately are limited, to the development of new
technologies either for the next generation of an existing product or the
development of new products. Due to continuously reducing sizes and
increasing higher performance expectations and performance standards,
state-of-the-art manufacturing and assembly equipment and processes must be
used in order to meet the volume and time-to-market requirements.
ACHIEVE TECHNOLOGICAL LEADERSHIP IN MEMORY MODULE DESIGN
The Tanisys Group designs both application specific and standard memory
modules. Through its experience with substantially all types of memory
devices supplied by a wide range of leading semiconductor manufacturers, the
Tanisys Group has developed significant expertise in memory module design and
component selection. Its extensive library of product designs and layouts of
memory modules are used to increase speed and efficiency in introducing new
products, assisting its OEM customers in achieving time-to-market advantages.
The Tanisys Group's strategy is to apply its design expertise to continue to
develop new memory modules that address emerging opportunities utilizing
DRAM, SyncDRAM, SRAM and Flash technologies. In addition, a substantial base
of proprietary testing routines and parameters has been developed, which
enables the diagnosing of problems in system design or memory components, in
order to characterize the performance of new products and to provide high
quality products in volume.
17
The transition to SyncDRAM should allow the Tanisys Group to continue to
differentiate itself from the competition through its advanced design
capabilities at higher processor speeds. This transition will necessitate a
large number of new designs and the development of new memory test equipment
as well as replacement of older existing test equipment.
INTRODUCE NEXT GENERATION MEMORY TEST EQUIPMENT
The continuing development of new memory technologies and changing
functionality will create the demand for next generation testing equipment
and capabilities. The Tanisys Group believes it is well positioned through
the DarkHorse memory test products to take advantage of these changes and
market expansion. The transition to SyncDRAM will necessitate the
development of new test programs and the replacement of existing test
equipment.
EXPAND OEM RELATIONSHIPS AND DISTRIBUTION CHANNELS
The Tanisys Group's experienced applications engineers continually work
with OEMs to seek and support multiple design opportunities over numerous
product generations. The Tanisys Group plans to continue to develop
relationships with its existing OEM customers and to establish relationships
with new OEM customers both domestically and internationally. The Tanisys
Group is growing its sales force to address new opportunities with OEM
customers and corporate end users worldwide. The Tanisys Group also plans to
broaden its distribution channels by focusing additional marketing and sales
resources on the computer reseller channel and establishing worldwide
recognition of the Tanisys brand name.
EXPAND INTERNATIONAL SALES AND MARKETING
The Tanisys Group is expanding its sales and marketing efforts
internationally with an objective of establishing worldwide recognition of
its products and the Tanisys, 1st Tech and DarkHorse brand names.
RESEARCH AND DEVELOPMENT
Tanisys Group management believes that the timely development of new
products and technologies is essential to maintain the Tanisys Group's
competitive position. In the electronics market, the Tanisys Group'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 Tanisys Group provides research and development services
for customers either as joint or contracted development. The Tanisys Group
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.
Tanisys Group 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 major OEMs. Support continues to be provided to OEMs in the
personal
18
computer and appliance industries toward this end. However, it is not
anticipated that significant additional research and development efforts will
be required for this technology.
The Tanisys Group's research and development expenses were $1.5 million
in fiscal year 1996 and $519 thousand in the first quarter of fiscal 1997.
COMPETITION
The Tanisys Group is a technology solutions company with broad industry
product and service lines and believes that while it faces different
competitors in its three product and service lines, there is no one company
currently competing in all product and service lines because, to the best
knowledge of management, no other company currently offers design and
manufacture of both memory modules and test equipment. Competition in some
products, such as 1st Tech's memory manufacturing, is intense due to the
large number of competitors with substantially greater financial, marketing,
technical, distribution and other resources. However, the DarkHorse and
Tanisys Touch lines are characterized by limited effective competition in the
segments of the markets targeted by the Tanisys Group and its patented
technology.
The basic competitive strategy of the Tanisys Group is to utilize the
high end custom engineering design, advanced manufacturing processes, module
test solutions, targeted sales and marketing and advanced warehousing and
distribution capabilities to deliver advanced technologies, solutions and
services packaged in such a way that a customer is not required to deal with
a substantial number of vendors but can look solely to the Tanisys Group to
satisfy all of its needs. The Tanisys Group will continue to target
customers with which a long-term, primary or sole source relationship can be
established in order to provide broad-based solutions to any technological or
manufacturing needs.
The competitors in the 1st Tech product line include module
manufacturers such as SMART Modular Technologies, Micron Electronics and
Celestica, Inc. Additional competition comes from certain suppliers who may
have the ability to manufacture competitive products at lower costs as a
result of their higher levels of integration. In addition, some current and
prospective customers may currently or in the future manufacture internally.
In the memory testing industry, the DarkHorse line competes primarily
with Terradyne, Megatest and Realm, although they provide only generic test
equipment requiring the user to custom program the equipment for each
specific application. The DarkHorse test systems are pre-programmed with an
extensive set of algorithms and test programs that are accessed through an
intuitive user interface.
The Tanisys Group believes that its competition in the capacitive touch
market is limited to a few companies that are pursuing limited applications
of their technology as opposed to the broader market it has targeted.
19
INTELLECTUAL PROPERTY
The Company has filed four 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 "Keyboard Command Operation for Computer System."
This pending application is targeted to protect the Company's
technology that associates multiple commands with different keyswitch
actuations and that is applicable for computer keyboards.
3. 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.
4. 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.
There can be no assurance that these pending patent applications will be
approved or approved in the form requested. The Tanisys Group expects to
continue to file patent applications where appropriate to protect its
proprietary technologies; however, the Tanisys Group 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
Tanisys Group 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 Tanisys Group's trade secrets or other proprietary
information, that disputes with respect to the ownership of its intellectual
property rights will not arise, that the Tanisys Group's trade secrets or
proprietary technology will not otherwise become known or be independently
developed by competitors or that its intellectual property rights can otherwise
be protected meaningfully. There can be no assurance that patents will issue
from pending or future applications or that, if patents are issued, they will
not be challenged, invalidated or circumvented, or that rights granted
thereunder will provide meaningful protection or other commercial advantage.
Furthermore, there can be no assurance that third parties will not develop
similar products, duplicate the Tanisys Group's products or design around the
patents owned by the Tanisys Group or that third parties will not assert
intellectual property infringement claims against the Tanisys Group. In
addition, there can be no assurance that foreign intellectual property laws
20
will adequately protect the Tanisys Group's intellectual property rights
abroad. The failure of the Tanisys Group to protect its proprietary rights
could have a material adverse effect on its business, financial condition and
results of operations.
ENVIRONMENTAL REGULATION
The Tanisys Group'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 Tanisys Group 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 February 28, 1997, the Tanisys Group had 134 full-time and 5 part-time
employees.
21
ITEM 2. FINANCIAL INFORMATION.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the captions
"Consolidated Income Statement Data" and "Consolidated Balance Sheet Data" are
derived from the consolidated financial statements of the Company and its
subsidiaries, which financial statements have been audited by Arthur Andersen
LLP (fiscal 1996, 1995 and 1994), independent public accountants, to the extent
indicated in their report included elsewhere herein. On May 21, 1996, the
Company acquired 1st Tech and DarkHorse, which resulted in them becoming wholly
owned subsidiaries of the Company. The acquisitions were accounted for using
the purchase method of accounting. The results for 1st Tech and DarkHorse have
been included in the consolidated financial statements since the date of the
acquisitions.
The selected consolidated financial data set forth below is qualified in
its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements, the notes thereto and the other financial
information included elsewhere in this report.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------------
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31, FISCAL YEARS ENDED SEPTEMBER 30,
------------------- ------------------------------------------------------------
1996(2) 1995 1996 1996(2) 1995 1994 1993 1992
CONSOLIDATED INCOME PRO FORMA(3)
STATEMENT DATA: (UNAUDITED)
Net sales $15,264 $ 84 $66,524 $14,989 $ 359 $ 114 $ - $ -
Cost of goods sold 13,668 9 61,709 12,661 110 34 - -
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 1,595 75 4,814 2,328 249 80 - -
Operating expenses:
Research and development 519 101 1,525 1,080 410 409 181 -
Sales and marketing 698 73 2,831 1,177 1,358 394 117 18
General and administrative 906 298 4,203 1,977 913 1,029 342 12
Depreciation and amortization 1,456 19 5,583 2,474 71 60 28 -
Unusual charge (1) - - - - - 199 - -
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 3,579 491 14,142 6,708 2,752 2,091 668 30
Income (loss) from operations (1,984) (416) (9,327) (4,380) (2,503) (2,011) (668) (30)
Other income (expense), net (154) 15 (347) (30) 58 39 7 (103)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $(2,137) $ (401) $(9,675) $(4,410) $(2,445) $(1,972) $ (660) (133)
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) per share $ (0.13) $(0.04) $ (0.82) $ (0.37) $ (0.29) $ (0.30) $ (0.27) $ (0.13)
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Weighted average common
shares outstanding 16,164 9,097 11,766 11,766 8,436 6,611 2,861 1,025
AT DECEMBER 31, AT SEPTEMBER 30,
--------------- -----------------------------------------------
CONSOLIDATED BALANCE 1996(2) 1996(2) 1995 1994 1993 1992
SHEET DATA:
Cash and cash equivalents $ 1,794 $ 2,690 $ 1,317 $ 1,952 $ 2,076 $ 48
Working capital 2,840 2,809 1,183 1,766 2,155 (83)
Total assets 20,039 20,222 1,613 2,295 2,488 48
Short-term debt 4,446 3,075 - - - 121
Long-term obligations 111 123 - - - -
Shareholders' equity 12,138 13,110 1,379 1,941 2,457 (83)
- --------------------
22
(1) As of September 30, 1994, the Company determined that it would not utilize
in its current or future product line certain technology purchased in 1993.
Therefore, the remaining goodwill of $198,739 associated with this purchase
was charged to expense in the period ended September 30, 1994.
(2) 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 the issuance of an aggregate of 4,150,000 shares of
Common Stock. The acquisitions were accounted for using the purchase
method of accounting. Under the purchase method, the excess of purchase
price over the estimated fair value of the net assets acquired
($10,656,998) is classified as goodwill and amortized against earnings over
a two-year period. The amount of goodwill amortized for the fiscal year
ended September 30, 1996 was $2,220,208. The results of operations of 1st
Tech and DarkHorse have been included in the consolidated financial
statements since the date of the acquisitions.
(3) The unaudited pro forma information has been prepared assuming the
acquisitions took place as of October 1, 1995. The unaudited pro forma
information includes adjustments for amortization of intangibles arising
from the transaction and the issuance of common shares. The unaudited pro
forma financial information is not necessarily indicative of the results of
operations as they would have been had the transactions been effective at
the beginning of fiscal 1996, nor is it necessarily indicative of the
results of operations which may occur in the future. The primary reason
for the variation between the pro forma 1996 and actual 1996 results is
that actual results include only operations from 1st Tech and DarkHorse and
amortization of the related goodwill from the date of the acquisitions (May
21, 1996) to year end. Because the 1st Tech and DarkHorse acquisitions
were accounted for as a purchase, the historical results for fiscal 1995,
1994, 1993 and 1992 do not include the results of either 1st Tech or
DarkHorse.
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 Tanisys Group for the fiscal years ended September
30, 1996, 1995 and 1994 and for the three-month periods ended December 31, 1996
and 1995. It should be read in conjunction with the Condensed Consolidated
Financial Statements of the Tanisys Group, the Notes thereto and other financial
information included elsewhere herein. For purposes of the following
discussion, references to year periods refer to the Tanisys Group's fiscal years
ended September 30, 1996 and 1995, and references to quarterly periods refer to
the Tanisys Group's fiscal quarters ended December 31, 1996 and 1995.
The Company was organized under the laws of the Province of British
Columbia, Canada, on January 27, 1984, as Montebello Resources Ltd., and
operated unsuccessfully as an oil and gas exploration company in British
Columbia and Manitoba, Canada. In October 1992, the Company changed its name to
First American Capital Group Inc. The Company then deemed itself inactive
pursuant to the rules and regulations of the VSE, where its 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. 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 and
DarkHorse and began operations in Austin, Texas as a consolidated group of
companies providing custom design, engineering and manufacturing of memory
modules, design and manufacturing of memory test equipment and capacitive
23
touch sensing products to leading 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 believes that 1st Tech's offering was exempt from registration under
the Securities Act of 1933, as amended (the "Securities Act"), by reason of
Section 4(2) of the Securities Act.
The Tanisys Group's net sales and gross profit increased dramatically in
the last two quarters of fiscal year 1996 and the first quarter of the current
fiscal year due to the acquisitions of 1st Tech and DarkHorse. In fiscal 1996,
revenues were $15.0 million with gross profit of $2.3 million (15.5% of revenue)
versus fiscal 1995 revenues of $.4 million and gross profit of $.2 million
(69.4% of revenue). This is an increase of revenues of $14.6 million, in excess
of 4,000%, and in gross profit of $2.1 million, more than 800%. Net losses
increased to $4.4 million in fiscal 1996, or 29.4% of gross revenues, from $2.4
million in fiscal 1995, or 681.6% of gross 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 could fluctuate in the foreseeable future due to the continuing
oversupply of memory chips, which dramatically drives down the prices of the
Tanisys Group's products; the continuing fluctuations in the cost of memory and
components; the fact that many of the Tanisys Group's competitors are better
capitalized and can purchase inventory in sufficient quantities to obtain more
favorable pricing; 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 Tanisys Group purchases the necessary materials.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of income
data of the Tanisys Group expressed as a percentage of net sales on a combined
basis, taking into account the acquisitions of 1st Tech and DarkHorse as if they
had occurred October 1, 1995, with the exception of the amortization of
goodwill, which is from May 21, 1996, the date of the acquisitions:
24
(UNAUDITED)
COMBINED COMBINED
THREE MONTHS ENDED FISCAL YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -----------------
1996 1995 1996
------ ------ -----------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 89.5 96.7 92.8
----- ----- -----
Gross profit 10.5 3.3 7.2
Operating expenses:
Research and development 3.4 0.7 2.3
Sales and marketing 4.6 2.5 4.3
General and administrative 5.9 2.8 11.0
Depreciation and amortization 9.5 0.1 3.7
Unusual charge 0.0 0.0 0.0
----- ----- -----
Total operating expenses 23.5 6.2 21.3
----- ----- -----
Operating income (loss) -13.0 -2.9 -14.1
Other income (expense), net -1.0 -0.3 -0.5
----- ----- -----
Net income -14.0% -3.2% -14.6%
----- ----- -----
----- ----- -----
The following table sets forth certain consolidated statement of income
data of the Tanisys Group expressed as a percentage of sales giving effect to
the acquisitions of 1st Tech and DarkHorse on May 21, 1996:
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31, FISCAL YEARS ENDED SEPTEMBER 30,
------------------ --------------------------------
1996 1995 1996 1995 1994
------ ------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 89.5 10.7 84.5 30.7 29.8
----- ----- ----- ----- -----
Gross profit 10.5 89.3 15.5 69.3 70.2
Operating expenses:
Research and development 3.4 120.3 7.2 114.2 359.6
Sales and marketing 4.6 87.3 7.9 378.6 346.1
General and administrative 5.9 356.5 13.2 254.6 897.1
Depreciation and amortization 9.5 22.3 16.5 19.8 60.2
Unusual charge 0.0 0.0 0.0 0.0 174.6
----- ----- ----- ----- -----
Total operating expenses 23.5 586.5 44.8 767.2 1837.6%
----- ----- ----- ----- -----
Operating income (loss) -13.0 -497.2 -29.2 -697.9 -1733.0
Other income (expense), net -1.0 17.4 -0.2 16.3 34.2
----- ----- ----- ----- -----
Net income -14.0% -479.8% -29.4% -681.6% -1733.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
NET SALES
On the historical accounting basis, net sales consist of software sales,
less returns and discounts, and design engineering fees from 1994 to May 21,
1996, the date of the acquisitions of 1st Tech and DarkHorse. After the May 21,
1996 acquisitions, net sales consist of custom manufacturing services, custom
memory modules, standard memory modules, design engineering fees, memory module
test
25
solutions, advanced technology services and computer software, less returns
and discounts. Net sales increased from $84 thousand in the first quarter of
fiscal 1996 to $15.3 million in the first quarter of fiscal 1997. The
increase in fiscal 1997 is due primarily to the acquisitions of 1st Tech and
DarkHorse and, to a lesser degree, to increases in sales volume in the 1st
Tech memory module product line. Net sales increased from $114 thousand in
fiscal 1994 to $359 thousand in fiscal 1995, a 215% increase, and to $14.989
million in fiscal 1996, a 4,075% increase. The increase in sales in fiscal
1995 from fiscal 1994 was due primarily to new software products and
additional distributors. The increase in fiscal 1996 is due to the
acquisitions of 1st Tech and DarkHorse.
On a pro forma basis, net sales decreased from $33.6 million in the first
quarter of fiscal 1996 to $15.3 million in the first quarter of fiscal 1997.
The decrease in fiscal 1997 is due primarily to the substantial decrease in the
cost of the chips and components used in the manufacture of memory modules,
which are purchased by the Tanisys Group and become a major component in cost of
goods sold. Net sales were $67.952 million in fiscal 1996.
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. On the historical accounting basis, gross profit
increased from $75 thousand in the first quarter of fiscal 1996 to $1.6 million
in the first quarter of fiscal 1997. Gross margin decreased from 89.3% in first
quarter fiscal 1996 to 10.5% in first quarter fiscal 1997. The increase in
gross profit as well as the decrease in gross margin were due primarily 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. To a
lesser extent, the improvement in the Company's gross profit was due to the
addition of consignment inventory of certain memory components, shortening the
manufacturing response time and making it possible to compete on the basis of
timeliness of delivery rather than price alone, while not exposing the Tanisys
Group's assets to the risk of carrying larger inventories. Gross profit
increased from $80 thousand in 1994 to $249 thousand in fiscal 1995, a 211%
increase, to $2.328 million in fiscal 1996, an 835% increase. Gross profit
margin declined from 70% in fiscal 1994 to 69% in fiscal 1995 to 16% in fiscal
1996. The profit margins in fiscal 1994 and 1995 were primarily attributable to
the sale of software developed in conjunction with research and development on
the capacitive touch technology, which had very little cost of sales associated
with that development. The gross profit margin in fiscal 1996 is primarily from
the manufacturing operation subsequent to the acquisitions and is discussed in
the next paragraph.
On a pro forma basis, gross profit increased from $1.1 million in the first
quarter of fiscal 1996 to $1.6 million in the first quarter of fiscal 1997. For
the same period, gross margin increased from 3.3% to 10.5%. The increases in
gross profit as well as gross margin are due primarily to the change in product
mix between the two periods. In fiscal 1996, gross profit was $5.138 million
and gross profit margin was 7.56%. The Company consistently made strategic
purchasing and pricing decisions during fiscal 1996 that sacrificed gross profit
percentage to establish relationships with customers and vendors.
26
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the costs associated with the
design and testing of new technologies and products. These costs relate
primarily to the costs of materials, personnel, management and employee
compensation and engineering design consulting fees. On the historical
accounting basis, research and development expenses increased from $101 thousand
in first quarter fiscal 1996 to $519 thousand in first quarter fiscal 1997,
representing an increase of 415.6% from period to period. The substantial
increase was due primarily to the acquisitions of the additional product lines
of 1st Tech and DarkHorse and related research and development expenditures.
Research and development increased from $409 thousand in fiscal 1994 to $410
thousand in fiscal 1995 and to $1.080 million in fiscal 1996, a 163% increase.
The increases in fiscal 1994 and 1995 were associated with development of the
capacitive touch technology, and the substantial increase in fiscal 1996 was due
to the acquisitions of 1st Tech and DarkHorse.
On a pro forma basis, research and development expenses increased from $234
thousand in the first quarter of fiscal 1996 to $519 thousand in the first
quarter of fiscal 1997, representing an increase of 122% period to period. The
substantial increase was due primarily to the availability of operating capital
with which to fund research and development by 1st Tech and DarkHorse after the
acquisitions. Research and development expenses were $1.511 million in fiscal
1996. The steady growth of research and development expense reflects the
commitment to continuing development of new products, including module products,
testing equipment, advanced technology and computer software.
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. On the historical accounting
basis, sales and marketing expenses increased from $73 thousand in first quarter
fiscal 1996 to $698 thousand in first quarter fiscal 1997, an 855.5% increase.
In the first quarter of fiscal years 1996 and 1997, sales and marketing expenses
expressed as a percentage of revenues were 87.3% and 4.6%, respectively. The
increase in actual funds expended was connected with the acquisitions of the
product lines 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. 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 increased from $394 thousand in
fiscal 1994 to $1.358 million in fiscal 1995, a 245% increase, and decreased to
$1.177 million in fiscal 1996, a 13% decrease. In fiscal years 1994, 1995 and
1996, sales and marketing expenses expressed as a percent of revenues were 346%,
378% and 8%, respectively. The increase from fiscal 1994 to fiscal 1995 was
connected with the effort to establish markets for the software products
developed by the Company. The decrease in 1996, after the acquisitions of 1st
Tech and DarkHorse, reflects the decrease in commission expenses due to the
decrease in sales revenue discussed under the paragraph heading "Net Sales"
above.
On a pro forma basis, sales and marketing expenses decreased from $844
thousand in the first quarter of fiscal 1996 to $698 thousand in the first
quarter of fiscal 1997. The decrease between the two
27
periods was due primarily to the decrease in revenues, as discussed under the
paragraph heading "Net Sales" above, and the corresponding reduction of
commission expense. Sales and marketing expenses were $2.828 million in
fiscal 1996. 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.
GENERAL AND ADMINISTRATIVE
General and administrative costs consist primarily of personnel costs,
including all compensation and employee benefits, and support costs including
utilities, insurance, professional fees and all costs associated with a
reporting company. On the historical accounting basis, general and
administrative expenses increased to $906 thousand in first quarter fiscal 1997
from $298 thousand in first quarter fiscal 1996, a 203.9% increase. In the
first quarter of fiscal years 1996 and 1997, general and administrative expenses
expressed as a percentage of revenues were 356.5% and 5.9%, respectively. The
increase in actual funds expended in fiscal 1997 is due primarily 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
revenue. General and administrative expenses decreased from $1.089 million in
fiscal 1994 to $984 thousand in fiscal 1995, a 10% decrease, and increased to
$4.451 million in fiscal 1996, a 352% increase. The decrease in fiscal 1995
from fiscal 1994 reflects the implementation of cost saving measures designed to
make general and administrative expenditures more effective. The increase in
fiscal 1996 is due to the acquisitions of 1st Tech and DarkHorse.
On a pro forma basis, general and administrative expenses decreased to $906
thousand in the first quarter of fiscal 1997 from $949 thousand in the first
quarter of fiscal 1996. The slight decrease is due to the decreased level of
revenues, as discussed under the paragraph heading "Net Sales" above. General
and administrative expenses were $4.541 million in fiscal 1996. Expressed as a
percentage of net sales, general and administrative expenses were 7% in fiscal
year 1996. The general and administrative expenses are not expected to grow
significantly in future periods when expressed as a percentage of sales.
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. Depreciation and amortization increased
to $1.5 million in first quarter fiscal 1997 from $19 thousand in first quarter
fiscal 1996. The substantial increase is due primarily to the amortization of
the goodwill recorded in conjunction with the acquisitions of 1st Tech and
DarkHorse.
28
UNUSUAL CHARGE
On the historical accounting basis, other income (expense) increased from
$39 thousand in fiscal 1994 to $59 thousand in fiscal 1995, a 51.3% increase,
and decreased to -$30 thousand in fiscal 1996, a 151.0% decrease. On a pro
forma basis, other income (expense) was -$294 thousand in fiscal 1996. The
expense shown in fiscal 1994 relates to the recognition by the Company that the
computer game controller technology acquired in 1993 would not be utilized in
the Company's current or future operations. Therefore, the remaining $199
thousand of goodwill associated with that purchase was charged as an unusual
charge in fiscal 1994. No other goodwill chargeoffs are currently expected
except through amortization charges over the useful life of the respective
assets.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income less
interest expense. Interest expense is attributable to borrowings from a bank
credit line. Substantially all of the interest expense in the three-year pro
forma period relates to credit line draws made for short-term inventory
requirements and to fund accounts receivable. Interest income relates to
investment of available cash in short-term interest bearing accounts and cash
equivalent securities. The Company 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 increased balances
of inventories and accounts receivable. The Tanisys Group 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
The Company has never paid income taxes and at September 30, 1996 had a net
operating loss carryover of $4.3 million. While there can be no assurance that
the Tanisys Group will generate the taxable income required to use all or any
part of the carryover prior to the expiration of the carryover, the Tanisys
Group would be able to incur taxable income in the carryover period equal to the
total loss carryover without the payment of taxes. The existing carryover
expires 15 years after the year in which it was incurred. Therefore, if the
carryover is not used to offset future taxable income, the $4.3 million net
operating loss carryforward at September 30, 1996 will expire in fiscal years
2010 ($2.548 million) and 2011 ($1.785 million).
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
ownership change as defined in Section 382 of the Code. This section states
that after reorganization or other change in corporate ownership, the use of
certain carryovers may be significantly limited or prohibited. There are two
kinds of ownership changes that can trigger carryover limitation: an ownership
change involving a 5% stockholder and any tax-free reorganization. In either
case, one or more 5% stockholders must have increased their percentage of
ownership in the corporation by more than 50% over the pre-change ownership
percentage generally within three years of ownership change. The Company does
not believe that an IRS Code Section 382 limitation currently exists.
29
LIQUIDITY AND CAPITAL RESOURCES
During the three fiscal years presented in this analysis, until the May 21,
1996 acquisitions of 1st Tech and DarkHorse, the Company primarily utilized
funds generated by equity financings of its Common Stock and the exercise of
warrants issued in certain of those equity financings to generate the funds
required to fund its research and development activities, acquire capital
equipment and pay its general and administrative expenses.
Since inception and until the May 21, 1996 acquisitions by the Company, 1st
Tech and DarkHorse used funds generated from operations, an equity financing,
capital leases, operating leases, vendor credits and certain bank borrowings to
support their respective operations, acquire capital equipment and finance
inventory acquisitions and accounts receivable balances. During the first
quarter of fiscal 1997, the Company generated $2.5 million in net cash from
financing activities versus $.1 million in the first quarter of fiscal 1996.
The $2.5 million in fiscal 1997 consisted of $1.2 million from the exercise of
warrants and options to purchase common stock and $1.4 million of net draws on
the Company's revolving credit note.
Subsequent to the May 21, 1996 acquisitions, the Tanisys Group has utilized
the funds acquired in an equity financing of its Common Stock prior to such date
and from the exercise of warrants and stock options, capital leases, 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, finance accounts
receivable balances and pay its general and administrative expenses. There have
been no further offerings or issuances of unregistered securities other than in
connection with the issuance of Common Stock upon the exercise of warrants and
stock options. At the date of the acquisitions of 1st Tech and DarkHorse, these
companies had $2.8 million in cash, of which $2.3 million was obtained by 1st
Tech in the equity financing closed simultaneously with the Company's
acquisitions of 1st Tech and DarkHorse. At December 31, 1996, the Tanisys Group
had $1.794 million of cash and $2.840 million of working capital.
The Company currently has approximately $2.0 million in accounts receivable
which are not in compliance with the agreed payment terms. The Company is
aggressively attempting to collect the accounts and has been assured that full
or partial payment will be made. However, at this time there is no assurance
that the accounts will be collected or if collected, what time period will be
required for full collection. The Company has a total of $250 thousand of
insurance coverage on these accounts. Until collection can be made, the Company
will be required to use virtually all of its cash and cash equivalents to carry
these accounts. Accounts over 90 days are excluded from the borrowing base
available credit under the revolving credit note discussed in the next
paragraph.
The Tanisys Group has a $6 million revolving credit note at a financial
institution bearing interest at the financial institution's prime rate plus a
percentage between one and three percent (8.25% as of December 31, 1996)
depending upon a ratio which is calculated monthly. This revolving credit note
is due on the earlier of demand or when the note matures June 30, 1998 and is
secured by all of the Company's assets. Draws are made as necessary from funds
available for borrowing, which are limited to the lower of the commitment amount
or a borrowing base amount calculated based on certain levels of accounts
receivable. At December 31, 1996, $4.4 million was outstanding and there were
no
30
additional borrowings available under the revolving credit note. The
revolving credit note, as amended as of February 21, 1997, has certain
restrictions concerning, among other things, the payment of dividends,
acquisition of additional debt and no material changes in management. In
addition, conditions of the note contain a minimum tangible net worth
requirement, which at February 28, 1997 was $4 million, and require a
combined ratio of earnings before interest, taxes, depreciation and
amortization (adjusted) to interest expense of 1.25:1. Due to losses
sustained, at February 28, 1997 and December 31, 1996, the Tanisys Group did
not comply with this ratio or the net worth requirement. The financial
institution has waived compliance with the covenants for the three months
ended December 31, 1996. In connection with the granting of the waivers, the
Company agreed with the financial institution to phase the total amount of
the revolving credit note down to $4 million over an eight-week period
beginning February 21, 1997, and to reduce the percentage of qualified
accounts receivable included in the borrowing base from 80% to 70% by 1% per
week for five weeks and then 1% per month over the subsequent five-month
period. At February 28, 1997, the Company had utilized $4.8 million of its
revolving credit note and had $675 thousand available thereunder.
Capital expenditures totaled approximately $523 thousand, $815 thousand,
and $852 thousand in fiscal years 1994, 1995 and 1996, respectively, and
approximately $8 thousand and $436 thousand in the first quarter of fiscal years
1996 and 1997, respectively. These expenditures were primarily for the purchase
of computer systems, manufacturing equipment, test equipment and the expansion
of manufacturing facilities. The Tanisys Group plans to spend approximately $2
million in the remainder of fiscal 1997 in capital expenditures for additional
manufacturing capacity.
The Tanisys Group has entered into certain capital lease arrangements. The
outstanding principal on these obligations at December 31, 1996 was $163
thousand. See Note 6 to the Company's Consolidated Financial Statements.
The Tanisys Group believes that its existing funds, anticipated cash flow
from operations and amounts available from future vendor credits, bank
borrowings, the exercise of outstanding warrants issued in prior equity
financings, and equity financings will be sufficient to meet its working capital
and capital expenditure needs for the next 12 months. However, if the warrant
holders should choose not to exercise a significant amount of the outstanding
warrants, the Company would be required to obtain alternate sources for
additional debt and rely upon a future equity offering or offerings for such
funding. Management is considering proposals to reduce the exercise price of
outstanding warrants. There is no assurance that the warrant holders will
choose to exercise their warrants or, in the event that they choose not to
exercise, 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.
SIGNIFICANT CUSTOMER CONCENTRATION
A significant percentage of the Tanisys Group's net sales is produced by a
relatively small number of customers. In the first quarters of fiscal 1996 and
1997, the ten largest customers accounted for approximately 66% and 73% of net
sales, respectively. No single customer produced as much as 10% of net sales
during the first quarter of fiscal year 1996. In the first quarter of fiscal
year 1997, each
31
of three customers produced more than 10% of net sales: Tandy Corp., 18.4%;
Algo Marketing, Inc., 16.9%; and Itautec America, Inc., 14.9%. While the
Company expects to continue to be dependent on a relatively small number of
customers for a significant 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. The actual customers producing
the sales are different between the two periods, and the Company expects this
type of variation of volume of purchases from a particular customer to
continue throughout this fiscal year.
The Company in general has no firm long-term volume commitments from its
customers and generally enters into individual purchase orders with its
customers. Customer purchase orders 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.
ITEM 3. PROPERTIES.
At February 28, 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 April 30, 1998. The lease has certain expansion options, renewal
options and rights of first refusal. The Company currently is paying annual
rental of $184,118, 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.
32
ITEM 4. 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 February 28, 1997.
A total of 16,635,155 shares of the Company's Common Stock were issued and
outstanding at February 28, 1997.
NO. OF SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) OF CLASS (2)
------------------------------------ ------------- ------------
Gary W. Pankonien 1,995,000 12.0%
12201 Technology Boulevard, Suite 130
Austin, Texas 78727
Parris H. Holmes, Jr. 1,018,425 (3) 6.1%
9311 San Pedro, Suite 400
San Antonio, Texas 78216
James E. Sowell 1,332,648 (4) 7.7%
3131 McKinney Avenue, Suite 200
Dallas, Texas 75204
- -----------------
(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, Class B,
Class C and other Common Stock Purchase Warrants (collectively, the
"Warrants") exercisable within 60 days for each individual and 16,635,155
shares of Common Stock issued and outstanding at February 28, 1997.
(3) Includes 105,000 shares that Mr. Holmes has the right to acquire upon
exercise of stock options, exercisable within 60 days, and 42,000 shares
that Mr. Holmes has the right to acquire upon the exercise of Warrants,
exercisable within 60 days.
(4) Represents 788,824 shares owned by Jim Sowell Construction Co., Inc., a
private company owned 100% by Mr. Sowell, 558,824 shares that Mr. Sowell
has the right to acquire upon the exercise of Warrants owned by Jim Sowell
Construction Co., Inc., exercisable within 60 days, and 15,000 shares that
Mr. Sowell has the right to acquire upon exercise of stock options,
exercisable within 60 days.
33
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock at February
28, 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 16,635,155 shares of the Company's Common
Stock were issued and outstanding at February 28, 1997.
COMMON STOCK
-------------------------
5% BENEFICIAL OWNERS, DIRECTORS NUMBER
AND NAMED EXECUTIVE OFFICERS OF SHARES(1) PERCENT(2)
------------------------------- ------------ ----------
Mark C. Holliday 422,578 (3) 2.5%
Gary W. Pankonien 1,995,000 12.0%
Joe O. Davis 8,000 *
Chris Efstathiou, Jr. 25,000 *
Guy L. Fielder 0 *
Benjamin S. Marz 71,957 (4) *
Donald R. Turner 25,000 *
Parris H. Holmes Jr. 1,018,425 (5) 6.1%
Gordon H. Matthews 152,500 (6) *
Alan H. Portnoy 0 *
James E. Sowell 1,332,648 (7) 7.7%
Theodore W. Van Duyn 175,000 (8) 1.0%
All executive officers and directors as a group
(12 persons, including the executive officers
and directors listed above) 5,226,108 (9) 29.2%
- -----------------
*Represents less than one percent (1%) of the issued and outstanding shares of
Common Stock.
(1) Unless otherwise noted, each of the persons named has sole voting and
investment power with respect to the shares reported.
(2) The percentages indicated are based on outstanding stock options, Class B,
Class C and other Common Stock Purchase Warrants (collectively, the
"Warrants") exercisable within 60 days for each individual and 16,635,155
shares of Common Stock issued and outstanding at February 28, 1997.
(3) Includes 306,666 shares that Mr. Holliday has the right to acquire upon
exercise of stock options, exercisable within 60 days, and 14,706 shares
that Mr. Holliday has the right to acquire upon the exercise of Warrants,
exercisable within 60 days.
(4) Includes 66,667 shares that Mr. Marz has the right to acquire upon exercise
of stock options, exercisable within 60 days.
34
(5) Includes 105,000 shares that Mr. Holmes has the right to acquire upon
exercise of stock options, exercisable within 60 days, and 42,000 shares
that Mr. Holmes has the right to acquire upon the exercise of Warrants,
exercisable within 60 days.
(6) Includes 55,000 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.
(7) Represents 788,824 shares owned by Jim Sowell Construction Co., Inc., a
private company owned 100% by Mr. Sowell, 558,824 shares that Mr. Sowell
has the right to acquire upon the exercise of Warrants owned by Jim Sowell
Construction Co., Inc., exercisable within 60 days, and 15,000 shares that
Mr. Sowell has the right to acquire upon exercise of stock options,
exercisable within 60 days.
(8) Includes 75,000 shares that Mr. Van Duyn has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(9) Includes 623,333 shares that 12 directors and executive officers have the
right to acquire upon exercise of stock options, exercisable within 60
days, and 615,530 shares that such directors and executive officers have
the right to acquire upon the exercise of Warrants, exercisable within 60
days.
35
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The Company's directors, executive officers and key employees and their
respective ages and positions as of February 28, 1997 are as follows:
NAME AGE POSITION(S)
---- --- -----------
Mark C. Holliday 44 Chairman of the Board and Chief
Executive Officer
Gary W. Pankonien 46 President, Chief Operating Officer and
Director
Joe O. Davis 53 Senior Vice President, Chief Financial
Officer and Corporate Secretary
Chris Efstathiou, Jr. 37 Vice President of Materials
Guy L. Fielder 43 Vice President of Engineering
Benjamin S. Marz 44 Vice President of Sales and Customer
Service
Donald R. Turner 41 Corporate Controller
Parris H. Holmes, Jr. 53 Vice Chairman of the Board (1)(2)(3)
Gordon H. Matthews 60 Director (1)
Alan H. Portnoy 51 Director (1)
James E. Sowell 48 Director (2)(3)
Theodore W. Van Duyn 48 Director (2)(3)
- -----------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Committee.
The following are biographies of the Company's executive officers,
directors and key employees for the past five years.
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. Mr. Holliday has over 20 years of computer industry experience in large
multinational companies as well as new ventures in computer software
development, most recently with BMC Software, Inc., a software development
company, where he served as director of research and development from March 1988
to February 1994.
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
elected a Director in July 1996. 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. He 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. He 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.
36
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
Enterprises, a long distance telephone company listed on the New York Stock
Exchange and located in Monroe, Louisiana, in April 1993. He 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.
CHRIS EFSTATHIOU, JR., Vice President of Materials, has more than 15 years
of experience in the electronics industry in high-tech purchasing. He joined
1st Tech in December 1994 as Vice President of Materials and the Company in May
1996 upon its acquisition of 1st Tech. 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, he 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.
GUY L. FIELDER, Vice President of Engineering, joined the Company in
October 1996. Mr. Fielder was self-employed as an engineering consultant from
October 1991 to November 1996. He was employed with Compaq Computer Corporation
from May 1982 to October 1991, where he was the 18th employee, a member of its
start-up team and intimately involved in the formation of Compaq's organization,
structure and culture. As a senior research and development manager at Compaq,
he developed state-of-the-art portable personal computers that won numerous
industry awards and grossed over $2 billion in sales.
BENJAMIN S. MARZ, Vice President of Sales and Customer Service, joined the
Company in April 1994. Prior to joining the Company, Mr. Marz was Vice
President of Sales and Customer Service of Technology Works, Inc., a memory
manufacturing company, from February 1993 to April 1994 after serving two years
on their board. He was President of Computerland in Austin, Texas from July
1990 to February 1993 and Executive Vice President of Crown Furniture and
Jewelry from August 1984 to July 1990.
DONALD R. TURNER, CPA, Corporate Controller, joined the Company effective
upon the acquisition of 1st Tech in May 1996. He 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. He was Controller of Stratum Technologies, Inc. from September
1992 to January 1993. Prior to joining Stratum, he 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 a Director of the Company since August
1993, having served as Chairman of the Board until March 1994, at which time he
was elected Vice Chairman of the Board. Mr. Holmes is Chairman and Chief
Executive Officer of Billing Information Concepts Corp., a
37
third-party billing clearinghouse and information management services
business, and Chairman of U.S. Long Distance Corp., a telecommunications
company which he founded in 1985.
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. He 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. He serves on the Board of
Directors of V-Tel Corporation, an Austin, Texas company specializing in
teleconferencing services.
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,
he 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, he was Executive
Vice President and Chief Operating Officer of Goldstar America, Inc., a
subsidiary of the Lucky-Goldstar Group, a Korean conglomerate.
JAMES E. SOWELL has served as a Director of the Company since May 1995 and
is the founder of Jim Sowell Construction Co., Inc., which began in 1972
primarily for single-family home construction. Since 1972, the company has
expanded its scope of operations and ownership to include land development,
income property development, financial institutions, country club and golf
course operations and ownership, hotel and restaurant ownership and operations,
as well as interests in major corporations. Mr. Sowell has served as a Director
of the Company since 1995 and also is a Director of Billing Information Concepts
Corp. He was Chairman of the Board of Business Capital Corporation ("BCC"),
Arlington Golf Club, Inc. ("AGC") and Sable Homes, Inc. ("SHI") and a general
partner of SBS Venture ("SBS"). All of these entities filed petitions for
relief under the U.S. Bankruptcy Code--BCC in March 1991 (emerged in January
1992), AGC in April 1992 (dismissed in January 1993), SHI in September 1993
(liquidated in December 1993) and SBS in September 1991 (petition withdrawn in
December 1991).
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. He 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.
38
COMMITTEES AND BOARD COMPENSATION
The Board of Directors conducts its business through meetings of the Board
of Directors and through its committees. In accordance with the Bylaws of the
Company, the Board of Directors has established a Compensation Committee, an
Audit Committee and a Stock Option Committee. The Board of Directors does not
currently utilize a nominating committee or committee performing similar
functions.
COMPENSATION COMMITTEE
The Compensation Committee reviews and makes recommendations to the Board
of Directors concerning major compensation policies and compensation of officers
and executive employees. This committee is comprised of Directors Holmes,
Sowell 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 6. Executive
Compensation--Benefit Plans--1997 Non-Employee Director Plan."
ITEM 6. EXECUTIVE COMPENSATION.
The following Summary Compensation Table sets forth information concerning
compensation of the Company's Chief Executive Officer and each of the two other
most highly compensated executive officers of the Company whose aggregate cash
compensation exceeded $100,000 (collectively, the "Named Executive Officers")
for each of the three fiscal years ended September 30, 1996, 1995 and 1994:
39
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------
FISCAL ------------------- SECURITIES UNDER
PRINCIPAL POSITION YEAR SALARY($) BONUS OPTIONS/SARS GRANTED(#))
------------------ ---- --------- ------ ------------------------
Mark C. Holliday 1996 $127,341 $ 0 100,000
Chairman of the Board 1995 125,000 0 110,000
and Chief Executive Officer 1994 62,500(1) 0 200,000
Gary W. Pankonien 1996 95,336 66,664 150,000
President and 1995 N/A N/A N/A
Chief Operating Officer 1994 N/A N/A N/A
Benjamin S. Marz 1996 103,262 0 0
Vice President of Sales 1995 102,000 0 0
and Customer Service 1994 40,625(2) 0 100,000
- -------------------
1) Amount shown reflects Mr. Holliday's salary from February 14, 1994, the
beginning date of his employment with the Company, through the end of
fiscal 1994.
(2) Amount shown reflects Mr. Marz's salary from April 18, 1994, the beginning
date of his employment with the Company, through the end of fiscal 1994.
STOCK OPTION GRANTS
The following table provides information related to stock options granted
to the named executive officers during fiscal 1996 and the first three months of
fiscal 1997:
INDIVIDUAL GRANTS
------------------------------ POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM(2)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(#)(1) 1996 ($/SH) DATE 5%($) 10%($)
- ----------------- ------------- ----------- -------- ----------- ------ ------
Mark C. Holliday 100,000 12.3% $3.62 3/27/01 $100,014 $221,005
Gary W. Pankonien 150,000 18.5% 3.69 5/09/01 152,922 337,917
Benjamin S. Marz 0 - - - - -
- -------------------
(1) For each named executive officer, the option listed represents a grant
under the Company's 1993 Stock Option Plan. See "Executive Compensation--
Employee Benefit Plans--1993 Stock Option Plan." The options granted in
1996 are exercisable one-third on each of the three anniversaries following
the date of grant.
(2) Calculation based on stock option exercise price over period of option
assuming annual compounding. The columns present estimates of potential
values based on certain mathematical assumptions. The actual value, if
any, that an executive officer may realize is dependent upon the market
price on the date of option exercise.
40
AGGREGATED STOCK OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION
VALUES
The following table provides information related to stock options exercised
by the named executive officers during the 1996 fiscal year and the number and
value of options held at fiscal year end. The Company does not have any
outstanding stock appreciation rights.
INDIVIDUAL GRANTS
---------------------- NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE(1) OF UNEXERCISED
ACQUIRED OPTIONS AT FY END(#) IN-THE-MONEY
UPON OPTION VALUE -------------------------- OPTIONS AT FY END($)
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----- ----------- -------- ----------- ------------- ----------- -------------
Mark C. Holliday 0 N/A 169,999 240,001 $329,032 $253,068
Gary W. Pankonien 0 N/A 0 150,000 N/A 39,000
Benjamin S. Marz 0 N/A 66,666 33,334 189,998 95,002
- -------------------
(1) Market value of the underlying securities at September 30, 1996 ($3.95),
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 employees of the Tanisys
Group (collectively, the "Participants"). Generally, all employees of the
Tanisys Group who are 21 years of age and who 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.
ADMINISTRATION OF THE 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
41
of the Board of Directors. The Stock Option Committee currently consists of
three non-employee members of the Board of Directors, Parris H. Holmes, Jr.,
James E. Sowell 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 VSE 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 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).
GENERAL. The 1993 Option Plan was approved by the Company's stockholders
on March 31, 1994 and adopted by the Board of Directors on October 25, 1993.
The purposes of the 1993 Option Plan are to advance the best interests of the
Tanisys Group by providing its employees and consultants who have substantial
responsibility for the Tanisys Group's management, success and growth, with
additional incentive and to increase their proprietary interest in the success
of the Tansiys Group, thereby encouraging them to remain in the Tanisys Group's
employ or service.
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 100% 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.
42
Under the terms of the 1993 Option Plan, 2,600,000 shares of Common Stock
have been reserved for the granting of options. At February 28, 1997, options
to purchase 1,909,900 shares had been granted under the 1993 Option Plan,
leaving 690,100 shares available for future grants under the 1993 Option Plan.
In addition, at February 28, 1997, options to purchase 142,500 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 represents the average closing price of the
Common Stock as quoted on the VSE for the two-week trading period preceding the
date of grant.
AMENDMENT AND TERMINATION OF THE 1993 OPTION PLAN. 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.
ADMINISTRATION OF THE 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.
GENERAL. 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 February 28, 1997) of nonqualified
options ("Director Options") exercisable for the
43
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 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 Director Fee Option (other than upon exercise or conversion)
or its underlying Common Stock.
Common Stock issued under the Director Plan may be newly issued or treasury
shares. Already owned Common Stock may be used as payment for the exercise
price of options if approved by the Board of Directors at the time of exercise.
If any option granted under the Director Plan terminates, expires or is
surrendered, new options may thereafter be granted covering such shares.
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 287,500
shares previously granted to current outside directors under the 1993 Option
Plan. At February 28, 1997, no options had been granted under the Director Plan
except for the 287,500 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.
TERMINATION OF THE DIRECTOR PLAN. 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
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'
44
notice as provided therein. Pursuant to the terms of the employment
agreements, annual base salaries are $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, the employee is entitled to receive, within 45 days of such
termination, salary, bonus and other benefits which would have been payable for
a 24-month period based on amounts in effect on the termination date, but in no
event less than a total of $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 he received as consideration for the acquisition by the Company of
1st Tech.
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 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.
The Company entered into an employment agreement with Guy Fielder effective
October 11, 1996. The employment agreement has a one-year term after which it
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. Fielder's annual base salary is $96,000 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 100,000 shares of Common Stock at
$4.17 per share. The shares underlying the option vest one-third on each of the
first three anniversaries of the grant date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Directors Holmes, Sowell and Van Duyn comprise the Compensation Committee
of the Board of Directors of the Company.
Parris H. Holmes, Jr., Vice Chairman of the Board and a member of the
Audit, Compensation and Stock Option Committees, is Chairman of the Board and
Chief Executive Officer of Billing Information Concepts Corp. and is Chairman of
the Board of U.S. Long Distance Corp.
45
James E. Sowell, a Director of the Company and a member of the Compensation
and Stock Option Committees, is a Director and serves on the Audit and
Compensation Committees of Billing Information Concepts Corp.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Upon the closing of the acquisitions of 1st Tech and DarkHorse on May 21,
1996, Parris H. Holmes, Jr., Vice Chairman of the Company's Board of Directors,
was paid a consulting bonus fee of 207,500 shares of Common Stock, representing
5% of the aggregate shares of Common Stock issued in connection with such
acquisitions. These shares were issued in payment for services rendered in
connection with the acquisitions, including consulting and negotiation
strategies. Based on the closing price of the Common Stock on May 21, 1996, the
value of these shares was $871,500.
Upon the acquisitions of 1st Tech and DarkHorse by the Company on May 21,
1996, Gary W. Pankonien, the principal stockholder of 1st Tech and one of the
principal stockholders of DarkHorse, 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. Mr. Pankonien also was granted a stock
option under the 1993 Option Plan, exercisable over a five-year period, for the
purchase of an aggregate of 150,000 shares of Common Stock at $3.69 per share.
The shares underlying the option vest one-third on each of the first three
anniversaries of the grant date. In connection with the acquisitions, Mr.
Pankonien was granted the right to designate two individuals for appointment to
the Company's Board of Directors and to name an advisory director. Mr.
Pankonien and Alan Portnoy were appointed Directors, and Archer Lawrence became
an advisor to the Board of Directors, in July 1996.
On May 21, 1996, 1st Tech purchased a Quad QSP-2 High Speed Fine Pitch
Surface Mount Assembly System from Gary Pankonien for $225,000. Previously,
this equipment had been leased by Mr. Pankonien. The purchase price represented
the fair market value of the equipment, and the price and terms are similar to
what could have been obtained from a third party.
Since the May 21, 1996 effective date of the Company's acquisition of 1st
Tech, the Tanisys Group has paid $10,000 to 1st Tech Molding, Inc., a private
company owned 45% by Mr. Pankonien, as payment for plastic packaging products
required for various products manufactured by the Tanisys Group. In addition,
the Tanisys Group has paid 1st Tech Molding, Inc. $25,000 as an advance for
product currently being produced for DarkHorse but not yet invoiced by 1st Tech
Molding, Inc. The prices and terms are similar to what could have been obtained
from a third party.
The Company paid a fee for consulting services of 45,555 shares of Common
Stock to Parris H. Holmes, Jr. upon the closing of its $1,600,000 equity
financing effective December 20, 1995, which shares had a total value of $91,110
based on the closing price of the Common Stock on December 20, 1995.
On October 3, 1994, the Company has entered into a Consulting Contract with
Mr. Holmes for services outside his responsibility as a member of the Company's
Board of Directors, including assisting with financial planning, capital
structure and development of corporate strategy. The contract was
46
amended on June 22, 1995. During fiscal year 1996, Mr. Holmes was paid
$8,000 per month from October 1995 through May 1996 with a final payment of
$3,000 for June 1996. A total of $67,000 was paid to Mr. Holmes under this
Consulting Contract.
Since June 1, 1996, the Tanisys Group has reimbursed Mr. Holmes $49,913 for
expenses incurred in connection with issues involving corporate finance,
business operations and business opportunities.
ITEM 8. LEGAL PROCEEDINGS.
At the date hereof, there are no pending, or to the best knowledge of the
Company, threatened matters involving litigation involving the Company.
47
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Since March 20, 1995, the Common Stock has been traded on the VSE under
the symbol "TNS.U," with prices quoted in U.S. dollars. 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. In January 1993, the Company voluntarily deemed itself
inactive and its Common Stock did not trade until July 7, 1993.
The table below sets forth the high and low closing prices of the Common
Stock from October 1, 1994 through March 7, 1997, as reported by the VSE.
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 1995:
December 31, 1994(1) $3.54 $2.22
March 31, 1995(2) 5.24 2.95
June 30, 1995 3.95 2.05
September 30, 1995 3.80 1.85
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
January 1 through
March 7, 1997 $5.35 $3.25
- -------------------
(1) Closing prices were quoted in Canadian dollars during this quarter,
converted at a rate of .73 per $1.00 Cdn. on December 5, 1994 (high for the
quarter) and .74 per $1.00 Cdn. on October 26, 1994 (low for the quarter).
(2) Closing prices were quoted in Canadian dollars through March 17, 1995,
converted at a rate of .71 per $1.00 Cdn. on February 16, 1995 (high for
the quarter).
48
HOLDERS
On March 7, 1997, the closing price of the Common Stock on the VSE was
$3.35 per share. At March 7, 1997, there were 248 registered holders of
record of the Common Stock, and the number of beneficial holders was unknown.
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, the
Company's bank borrowings prohibit the payment of cash dividends.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The Company believes that the transactions set forth below were exempt
from registration under the Securities Act by reason of Section 4(2) of the
Securities Act. In connection with each of these transactions, 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 (the "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. Restrictive legends were
placed on all stock certificates.
On August 24, 1994, the Company sold an aggregate of 1,500,000 shares of
Common Stock to 13 accredited investors for cash at an offering price of
$1.00 per share. These purchasers also received nontransferable Class A
Stock Purchase Warrants (the "Class A Warrants") to purchase an aggregate of
1,500,000 shares of Common Stock. Each Class A Warrant entitled the holder
thereof to purchase, at any time until August 31, 1995, one share of Common
Stock at an exercise price of $1.00, subject to adjustment. If the Class A
Warrants were not exercised during such period, each Class A Warrant entitled
the holder thereof to purchase, at any time from September 1, 1995 until
August 31, 1996, one share of Common Stock at an exercise price of $1.25,
subject to adjustment. All of the Class A Warrants were exercised prior to
their expiration date of August 31, 1996.
On May 8, 1995, the Company sold an aggregate of 900,000 shares of
Common Stock to 11 accredited investors for cash at an offering price of
$2.00 per share. The purchasers also received nontransferable Class B Stock
Purchase Warrants (the "Class B Warrants"). Each Class B Warrant entitled
the holder thereof to purchase, at any time until May 8, 1996, one share of
Common Stock at an exercise price of $2.00, subject to adjustment. If the
Class B Warrants were not exercised during such period, each Class B Warrant
entitles the holder thereof to purchase, at any time from May 9, 1996 until
May 8, 1997, one share of Common Stock at an exercise price of $2.30, subject
to adjustment.
49
Following May 8, 1997, the Class B Warrants will no longer be exercisable and
will have no value. At February 28, 1997, Class B Warrants have been
exercised for the purchase an aggregate of 115,000 shares of Common Stock.
In October 1995, a warrant granting the right to acquire 34,000 shares
of Common Stock for a period of two years was issued to W. Audie Long, Esq.,
an unaffiliated party, as payment for legal services rendered. The warrant
entitled the holder to purchase, at any time until October 12, 1996, one
share of Common Stock at an exercise price of $2.00 per share, subject to
adjustment, and if not exercised during such period, entitles the holder to
purchase at any time until October 13, 1997, one share of Common Stock at an
exercise price of $2.25 per share, subject to adjustment. Following October
13, 1997, this warrant will no longer be exercisable and will have no value.
At February 28, 1997, the warrant had not been exercised.
In December 1995, the Company sold an aggregate of 941,177 shares of
Common Stock to 11 accredited investors for cash at an offering price of
$1.70 per share. The purchasers also received nontransferable Class C Stock
Purchase Warrants (the "Class C Warrants"). Each Class C Warrant entitled
the holder to purchase, at any time until December 20, 1996, one share of
Common Stock at an exercise price of $1.70 per share, subject to adjustment.
If the Class C Warrants have not been exercised during such period, each
Class C Warrant entitles the holder to purchase, at any time from December
21, 1996 until December 20, 1997, one share of Common Stock at an exercise
price of $1.95 per share, subject to adjustment. Following December 20,
1997, the Class C Warrants will no longer be exercisable and will have no
value. At February 28, 1997, Class C Warrants have been exercised for the
purchase an aggregate of 544,118 shares of Common Stock.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company currently consists of
50,000,000 shares of no par value Common Stock and 10,000,000 shares of
preferred stock, par value $1.00 per share (the "Preferred Stock"), which is
subject to designation and issuance by the Board of Directors in the future.
On February 28, 1997, there were 16,635,155 shares of Common Stock
outstanding and held of record by approximately 248 registered stockholders,
and the number of beneficial holders was unknown. There are currently no
outstanding shares of Preferred Stock. At February 28, 1997, there were a
total of 3,555,959 shares of Common Stock reserved for issuance upon exercise
of outstanding stock options under the 1993 Option Plan, compensation
contract options and the Warrants. See "Executive Compensation--Employee
Benefit Plans" and "Warrants" below.
COMMON STOCK
Holders of Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors from funds legally available therefor.
See "Item 9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters - Dividend Policy." Each share of Common
Stock entitles the holder thereof to one vote upon matters voted upon by the
stockholders.
50
Cumulative voting for the election of directors is not permitted, which means
that the holders of a majority of shares voting for the election of directors
can elect all members of each class of the Board of Directors. Except as
otherwise required by applicable Wyoming law, a majority vote is sufficient
for any action that requires the vote or concurrence of stockholders, except
that a plurality vote is sufficient to elect directors.
The holders of Common Stock do not have any preemptive, subscription,
redemption or conversion rights or privileges. Upon liquidation or
dissolution of the Company, the holders of Common Stock are entitled to share
ratably in the net assets of the Company remaining after payment of
liabilities and liquidation preferences of any outstanding shares of
Preferred Stock. All shares of Common Stock now outstanding are fully paid
and non-assessable.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series, without further stockholder approval or
action, with such designations, powers, limitations, restrictions,
qualification, rights, preferences and privileges as the Board of Directors
may determine.
WARRANTS
The Company currently has outstanding three series of Warrants to
purchase Common Stock. The Class B and Class C Warrants were issued to
investors purchasing shares of Common Stock in equity financings closed
effective August 24, 1994 and December 20, 1995, respectively. In addition,
a warrant was issued in October 1995 to W. Audie Long, Esq., an unaffiliated
party, in payment of legal fees. The Class B Warrants, the October 1995
warrant and the Class C Warrants are referred to herein as the "Warrants."
CLASS B WARRANTS. A total of 900,000 Class B Warrants were issued in
May 1995 in connection with the Company's $1,800,000 equity financing. Each
Class B Warrant entitled the holder thereof to purchase, at any time until
May 8, 1996, one share of Common Stock at an exercise price of $2.00 per
share, subject to adjustment. Class B Warrants not exercised as of May 8,
1996 entitle the holders thereof to purchase, at any time from May 9, 1996
until May 8, 1997, one share of Common Stock at an exercise price of $2.30,
subject to adjustment. Following May 8, 1997, the Class B Warrants will no
longer be exercisable and will have no value. At February 28, 1997, Class B
Warrants have been exercised for the purchase of 15,000 shares of Common
Stock at $2.00 per share and 100,000 shares at $2.30 per share.
OCTOBER 1995 WARRANT. In October 1995, a warrant granting the right to
acquire 34,000 shares of Common Stock for a period of two years was issued to
W. Audie Long, Esq., an unaffiliated party, in payment for legal services
rendered. This warrant entitled the holder to purchase, at any time until
October 12, 1996, one share of Common Stock at an exercise price of $2.00 per
share, subject to adjustment, and if not exercised during such period,
entitles the holder to purchase at any time until October 13, 1997, one share
of Common Stock at an exercise price of $2.25 per share, subject to
adjustment. Following October 13, 1997, this warrant will no longer be
exercisable and will have no value. At February 28, 1997, this warrant had
not been exercised.
51
CLASS C WARRANTS. A total of 941,177 Class C Warrants were issued as of
December 1995 in connection with the Company's $1,600,000 equity financing.
Each Class C Warrant entitles the holder thereof to purchase, at any time
until December 20, 1996, one share of Common Stock at an exercise price of
$1.70 per share, at any time until December 20, 1996, subject to adjustment.
If the Warrants have not exercised, then for the period December 21, 1996 to
December 20, 1997, each Class C Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of $1.95 per share, subject to
adjustment. At February 28, 1997, Class C Warrants have been exercised for
the purchase of 544,118 shares Common Stock at $1.70 per share.
The Warrants may be exercised in whole only upon surrender of the
Certificate therefor on or prior to the expiration dates at the offices of
the Company with the Exercise Form attached to the certificate duly completed
and executed, accompanied by payment (in the form of cash or certified or
bank cashier's check payable to the order of the Company) of the full
exercise price.
The Warrants contain provisions that provide for adjustment of the
exercise price in the event the outstanding shares of Common Stock shall be
subdivided into a greater number of shares, a non-cash dividend in Common
Stock shall be paid in respect of Common Stock or the outstanding shares of
Common Stock shall be combined into a smaller number of shares thereof.
The Company is not required to issue fractional shares, and in lieu
thereof, will make a cash payment based upon the current estimated fair
market value of such fractional shares. The registered owner of a Warrant
will not possess any rights as a stockholder of the Company unless and until
the Warrant is exercised. Upon the respective expiration date of the
Warrants, they will no longer be exercisable for shares of Common Stock and
will not have any value.
TRANSFER AGENT. The Company's transfer agent and registrar is Montreal
Trust Company of Canada, Vancouver, B.C., Canada.
CERTAIN PROVISIONS OF THE ARTICLES AND THE BYLAWS
Certain provisions in the Articles and Bylaws and the Wyoming Business
Corporation Act (the "WBCA") could make more difficult the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to first negotiate with the Company. The
Company believes that the benefits of increased protection of the Company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantage of discouraging third party proposals that may be favored by
some stockholders because, among other things, negotiation of such proposals
could result in an improvement of their terms.
CLASSIFIED BOARD OF DIRECTORS. The Articles and the Bylaws provide that
the Board of Directors is divided into three classes of directors, each
containing, as nearly as possible, an equal number of directors. Directors
within each class are elected to serve three-year terms, and approximately
one-third of the directors sit for election at each annual meeting of the
Company's stockholders. A classified
52
board of directors may have the effect of deterring or delaying any attempt
by any group to obtain control of the Company by a proxy contest because such
third party would be required to have its nominees elected at two separate
annual meetings of the Board of Directors in order to elect a majority of the
members of the Board of Directors. The Bylaws provide that the number of
directors will be fixed from time to time exclusively by the Board of
Directors but shall consist of not more than 15 nor less than 3 directors.
The Company's Bylaws allow the Board of Directors to increase the number of
directors from time to time and to fill any vacancies on the Board of
Directors, including vacancies resulting from an increase in the number of
directors. This provision gives the Board of Directors flexibility to deal
with an attempted hostile takeover by a stockholder who may acquire a
majority voting interest in the Company without paying a premium therefor.
This provision allows the Board of Directors to increase its size and prevent
a "squeeze-out" of any remaining minority interest soon after a new majority
stockholder gains control over the Company. However, the Company's Bylaws
permit the removal of a director with or without cause.
PREFERRED STOCK. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company, making
removal of present management more difficult, or resulting in restrictions
upon the payment of dividends and other distributions to the holders of the
Common Stock or adversely affecting the market price of the Common Stock. In
addition, the voting and conversion rights of any class or series of
Preferred Stock issued by the Company could adversely affect, among other
things, the voting rights of existing stockholders.
STOCK OPTIONS. The Company's 1993 Option Plan provides that in the
event of a change in control of the Company, the Stock Option Committee may
waive vesting limitations to provide that all options then outstanding shall
be exercisable in full. For the purposes of the 1993 Option Plan, a "change
in control" of the Company shall mean a change in control of a nature that is
reportable in response to Item 5(f) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") as
in effect on the date hereof, provided that, without limitation, such a
change in control shall be deemed to have occurred if: (i) any "person" (as
such term is used in the Exchange Act) that does not own, directly or
indirectly, any shares of the Company's capital stock on the date of adoption
of the 1993 Option Plan is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding securities; or (ii)
during any period of two consecutive years, individuals who at the beginning
of such period constitute the Board of Directors of the Company cease for any
reason to constitute at least a majority thereof.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bylaws provide that the Company shall indemnify any and
all persons who may serve or who have served at any time as directors or
officers, or who at the request of the Board of Directors of the Company may
serve or at any time have served as directors or officers of another
corporation in which the Company at such time owned or may own shares of
stock or of which it was or may be a creditor, and their respective heirs,
administrators, successors and assigns, against any and all expenses,
including amounts paid upon judgments, counsel fees and amounts paid in
settlement (before or after suit is commenced), actually and necessarily
incurred by such persons in connection with the defense or settlement of any
claim, action, suit or proceeding in which they, or any of them, are made
53
parties, or a party, or which may be asserted against them or any of them, by
reason of being or having been directors or officers or a director or officer
of the Company, or of such other corporation, except in relation to matters
as to which any such director or officer or former director or officer or
person shall be adjudged in any action, suit or proceeding to be liable for
his own negligence or misconduct in the performance of his duty. Such
indemnification shall be in addition to any other rights to which those
indemnified may be entitled under any law, by-law, amendment, vote of
stockholders or otherwise.
LIMITATION OF LIABILITY
Article 12 of the Articles provides that no director shall be personally
liable to the Company or any shareholder for monetary damages for breach of
fiduciary duty as a director, except for any matter in respect of which such
director shall be liable under Section 17-16-834 of the Wyoming Business
Company Act (the "WBCA") or any amendment thereto or successor provision
thereto, or shall be liable by reason that, in addition to any and all other
requirements for such liability, he (i) shall have breached his duty of
loyalty to the Company or its shareholders, (ii) shall not have acted in good
faith or, in failing to act, shall not have acted in good faith, (iii) shall
have acted in a manner involving intentional misconduct or a knowing
violation of law or, in failing to act, shall have acted in a manner
involving intentional misconduct or a knowing violation of law, (iv) shall
have derived an improper personal benefit, or (v) shall have voted for or
assented to a distribution made in violation of Section 17-16-640 of the
WBCA or the Articles of the Company if it is established that he did not
perform his duties in compliance with Section 17-16-830 of the WBCA.
This provision may have the effect of reducing the likelihood of
derivative litigation against directors and may discourage or deter
stockholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action, if successful,
might otherwise have benefited the Company and its stockholders. However,
this provision, together with the provision described above that requires the
Company to indemnify its officers and directors against certain liabilities,
is intended to enable the Company to attract qualified persons to serve as
directors who might otherwise be reluctant to do so.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been
informed that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
NONE.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE.
54
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS. Included at the page indicated are (i) the
consolidated condensed financial statements of the Company and its wholly
owned subsidiaries, 1st Tech and DarkHorse, at December 31, 1996 and for the
three months of fiscal 1997 and 1996; (ii) the consolidated financial
statements of the Company, 1st Tech and DarkHorse at September 30, 1996 and
1995 and for the fiscal years ended September 30, 1996, 1995 and 1994 and the
related report of the Company's independent public accountants thereon; (iii)
the combined financial statements at March 31, 1996 and 1995 and for the
three months of 1996 and 1995; (iv) the combined financial statements of 1st
Tech and DarkHorse at December 31, 1995 and 1994 for the fiscal years ended
December 31, 1995, 1994 and 1993 and the related report of the Company's
independent public accountants thereon; and (v) pro forma combined statement
of operations for the Company, 1st Tech and DarkHorse for the fiscal year
ended September 30, 1996.
ITEM PAGE
---- ----
INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS:
Consolidated Balance Sheets - December 31, 1996
(Unaudited) and September 30, 1996. . . . . . . . . . . . . . . . 58
Consolidated Condensed Statements of Loss - For the Three-Month
Periods Ended December 31, 1996 and 1995 (Unaudited). . . . . . . 59
Consolidated Condensed Statements of Cash Flows - For the
Three-Month Periods Ended December 31, 1996 and 1995 (Unaudited). 60
Notes to Interim Consolidated Condensed Financial
Statements (Unaudited). . . . . . . . . . . . . . . . . . . . . . 61
CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 1996 AND 1995
AND FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994:
Report of Independent Public Accountants as to the Company's
financial statements. . . . . . . . . . . . . . . . . . . . . . . 64
Consolidated Balance Sheets of the Company at September 30,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Consolidated Statements of Loss of the Company for the Years
Ended September 30, 1996, 1995 and 1994 . . . . . . . . . . . . . 66
Consolidated Statements of Stockholders' Equity of the Company
for the Years Ended September 30, 1996, 1995 and 1994 . . . . . . 67
Consolidated Statements of Cash Flows of the Company for the
Years Ended September 30, 1996, 1995 and 1994 . . . . . . . . . . 68
Notes to the Company's Consolidated Financial Statements . . . . . 69
COMBINED FINANCIAL STATEMENTS AT AND FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 (UNAUDITED):
Combined Balance Sheets - March 31, 1996 and 1995. . . . . . . . . 80
Combined Statements of Income and Retained Earnings - For the
Three-Month Periods Ended March 31, 1996 and 1995 . . . . . . . . 82
Combined Statements of Cash Flows - For the Three-Month Periods
Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . 83
1ST TECH AND DARKHORSE COMBINED FINANCIAL STATEMENTS AT
DECEMBER 31, 1995 AND FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995,
1994 AND 1993:
Report of Independent Public Accountants as to 1st Tech's and
DarkHorse's financial statements. . . . . . . . . . . . . . . . . 85
1st Tech and DarkHorse Combined Balance Sheets at
December 31, 1995 and 1994. . . . . . . . . . . . . . . . . . . . 86
55
1st Tech and DarkHorse Combined Statements of Income for the
Years Ended December 31, 1995, 1994 and 1993. . . . . . . . . . . 87
1st Tech and DarkHorse 1995 and 1994 Combined Statements of
Stockholders' Equity for the Years Ended December 31, 1995,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . 88
1st Tech and DarkHorse Combined Statements of Cash Flows for
the Years Ended December 31, 1995, 1994 and 1993. . . . . . . . . 89
Notes to Combined Financial Statements of 1st Tech and DarkHorse . 91
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE COMPANY,
1ST TECH AND DARKHORSE FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1996 (UNAUDITED). . . . . . . . . . . . . . . . . . . 98
56
TANISYS TECHNOLOGY, INC.
AND SUBSIDIARIES
INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
AT DECEMBER 31, 1996 (UNAUDITED) AND SEPTEMBER 30, 1996
AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
57
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1996 1996
- -----------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,794,323 $ 2,689,569
Trade accounts receivable, net of allowance of $98,450 and 6,383,341 5,069,399
$84,557, respectively
Accounts receivable from related parties 17,691 17,691
Inventory 2,043,833 1,804,458
Prepaid expense 391,159 217,570
- -----------------------------------------------------------------------------------------------
Total current assets 10,630,347 9,798,687
- -----------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation of 2,131,481 1,817,479
$1,081,516 and $906,589, respectively
Incorporation costs, net 896 1,024
Patents and trademarks, net 87,905 84,337
Goodwill, net of accumulated amortization of $3,552,333 and 7,104,665 8,436,790
$2,220,208, respectively
Other assets 84,127 84,000
- -----------------------------------------------------------------------------------------------
$ 20,039,421 $ 20,222,317
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,762,142 $ 2,920,530
Accounts payable to related parties -- 64,618
Accrued liabilities 582,621 929,376
Revolving credit note 4,445,851 3,075,000
- -----------------------------------------------------------------------------------------------
Total current liabilities 7,790,614 6,989,524
- -----------------------------------------------------------------------------------------------
Obligations under capital lease 111,059 123,000
- -----------------------------------------------------------------------------------------------
Total liabilities 7,901,673 7,112,524
- -----------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Share capital-Common stock, no par value, 50,000,000 shares 25,120,576 23,955,136
authorized, 16,626,655 and 15,978,537 shares issued and
outstanding at December 31, 1996 and September 30,
1996, respectively
Accumulated deficit (12,975,883) (10,838,398)
Accumulated foreign currency translation adjustment (6,945) (6,945)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 12,137,748 13,109,793
- -----------------------------------------------------------------------------------------------
$ 20,039,421 $ 20,222,317
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
58
TANISYS TECHNOLOGY, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF LOSS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1996 1995
- -----------------------------------------------------------------------
Net sales $15,263,661 $ 83,643
Cost of goods sold 13,668,236 8,969
- -----------------------------------------------------------------------
Gross profit 1,595,425 74,674
- -----------------------------------------------------------------------
Operating expenses:
Research and development 518,708 100,611
Sales and marketing 697,986 73,053
General and administrative 906,315 298,224
Depreciation and amortization 1,456,340 18,692
- -----------------------------------------------------------------------
Total operating expenses 3,579,349 490,580
- -----------------------------------------------------------------------
Operating loss (1,983,924) (415,906)
- -----------------------------------------------------------------------
Other income (expense):
Interest income 11,709 14,589
Interest expense (165,270) --
- -----------------------------------------------------------------------
Net loss $(2,137,485) $(401,317)
- -----------------------------------------------------------------------
Loss per weighted average common share $ (0.13) $ (0.04)
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Weighted average number of common shares 16,163,626 9,097,305
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
59
TANISYS TECHNOLOGY, INC. and SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED DECEMBER 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(2,137,485) $ (401,317)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 1,456,340 18,692
(Increase) decrease in accounts receivable (1,313,942) 3,986
(Increase) decrease in inventory (239,375) 3,987
Increase in prepaid expense (173,589) (9,610)
Decrease in accounts payable and accrued liabilities (569,761) (86,744)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,977,812) (471,006)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (435,690) (7,720)
Patents and trademark costs (6,094) (8,831)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (441,784) (16,551)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 115,000
Draws (payments) on revolving credit note, net 1,370,851 -
Principal payments on capital lease obligations (11,941) -
Net proceeds from exercise of stock options 10,440 -
Net proceeds from exercise of warrants 1,155,000 -
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,524,350 115,000
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (895,246) (372,557)
Cash and cash equivalents, beginning of period 2,689,569 1,317,024
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,794,323 $ 944,467
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 165,270 $ 0
Interest received $ 11,709 $ 14,589
Non-cash activity:
Shares issued to related parties and others to satisfy accrued liabilities $ 0 $ 47,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
60
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements present the consolidated financial
position, results of operations and cash flows of Tanisys Technology, Inc. and
its wholly-owned subsidiaries (the "Company") as of the dates and for the
periods indicated. All material intercompany accounts and transactions have
been eliminated in consolidation.
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. It is recommended that these interim condensed financial
statements be read in conjunction with the Company's consolidated financial
statements and the notes thereto for the fiscal year ended September 30, 1996
contained in the Company's Registration Statement on Form 10 (SEC File No.
0-29038) filed with the Securities and Exchange Commission on November 27, 1996,
as amended by Form 10/A Amendment No. 1 filed January 24, 1997.
In the opinion of management, all adjustments, which are of a normal recurring
nature, considered necessary to present fairly the consolidated financial
position as of December 31, 1996, the consolidated results of operations for the
three-month periods ended December 31, 1996 and 1995 and the consolidated cash
flows for the three-month periods ended December 31, 1996 and 1995 have been
made.
NOTE 2: RECEIVABLES
One customer accounted for a significant percentage of the Company's accounts
receivable at December 31, 1996. Accounts receivable from one memory module
customer represented $1.8 million, or 27%, of the $6.4 million balance of
accounts receivable at December 31, 1996. Management believes the receivables
will be collected within a year, although there is no assurance that such will
be the case. The Company's business, financial condition and results of
operations will depend in significant part upon its ability to obtain orders
from new customers, as well as the financial condition and success of its
customers, the success of its customers' products and the general economy.
Factors affecting any of the Company's major customers and their respective
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
NOTE 3: INVENTORY
Inventory consists of the following:
(Unaudited) (Audited)
December 31, September 30,
1996 1996
----------- -------------
Raw materials $1,306,194 $1,343,522
Work-in-process 131,411 203,017
Finished goods 606,228 257,919
----------- -----------
$2,043,833 $1,804,458
61
NOTE 4: REVOLVING CREDIT NOTE
At December 31, 1996, the Company did not comply with certain financial
covenants. The financial institution has waived compliance with those covenants
as of and for the three months ended December 31, 1996. See "Note 7: Subsequent
Events" below.
NOTE 5: SHARE CAPITAL, OPTIONS AND WARRANTS
STOCK OPTIONS
During the first quarter of fiscal 1997, stock options were exercised for the
purchase of 4,000 common shares for total gross proceeds of $10,440.
WARRANTS
During the first quarter of fiscal 1997, warrants were exercised for the
purchase of 644,118 common shares for total gross proceeds of $1,155,000.
NOTE 6: COMMITMENTS AND CONTINGENCIES
The Company is not currently using the computer game controller technology, and
the associated royalty does not relate to any of the Company's current products.
NOTE 7: SUBSEQUENT EVENTS
In January 1997, stock options were exercised for the purchase of 8,500 common
shares for total gross proceeds of $22,460.
In February 1997, in connection with the waiver of the non-compliance with the
financial covenants noted in "Note 4" above, the Company agreed to reduce the
maximum amount of available borrowings of the revolving credit note referred to
in "Note 4" above from $6 million to $4 million over an eight-week period. In
conjunction with this reduction, the Company also agreed to reduce the
percentage of qualified accounts receivable included in the borrowing base from
its current 80% to 70%. This reduction would occur 1% per week over a five-week
period and an additional 1% per month over the subsequent five-month period.
The Company had outstanding borrowings against the revolving note of $4.4
million at February 15, 1997.
The Company has a total of $1.5 million in accounts receivable which are in
excess of 90 days past invoice date. Two customers, one of which is discussed
in "Note 2" above, account for $1.1 million of the amount past due over 90 days.
The total accounts receivable on these two accounts is $2.2 million, of which
the Company has insurance coverage of $250 thousand and therefore exposure of
approximately $1.95 million in potential loss.
62
TANISYS TECHNOLOGY, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AT SEPTEMBER 30, 1996 AND 1995
AND FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
63
ARTHUR ANDERSEN LLP
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,
1996 and 1995, and the related consolidated statements of loss, shareholders'
equity and cash flows for each of the three years in the period ended
September 30, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
October 25, 1996
64
TANISYS TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
- ----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,689,569 $ 1,317,024
Trade accounts receivable, net of allowance of $84,557 5,069,399 60,454
and $25,000 in 1996 and 1995, respectively
Accounts receiable from related parties 17,691 --
Inventory 1,804,458 15,414
Prepaid expense 217,570 24,735
- ----------------------------------------------------------------------------------------------------------
Total current assets 9,798,687 1,417,627
- ----------------------------------------------------------------------------------------------------------
Property and equipment, net (includes $200,000 in 1996 of 1,817,479 118,705
equipment purchased from a related party, Note 8)
Incorporation costs, net 1,024 2,283
Patents and trademarks, net 84,337 74,468
Goodwill, net 8,436,790 --
Other assets(includes $25,000 in 1996 of a long term deposit to 84,000 --
1st Tech Molding, a related party, Note 8)
- ----------------------------------------------------------------------------------------------------------
$ 20,222,317 $ 1,613,083
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,920,530 $ 112,853
Accounts payable to related parties 64,618 --
Accrued liabilities 929,376 121,315
Revolving credit note 3,075,000 --
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 6,989,524 234,168
- ----------------------------------------------------------------------------------------------------------
Obligations under capital lease 123,000 --
- ----------------------------------------------------------------------------------------------------------
Total liabilities 7,112,524 234,168
- ----------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Share capital-Common stock, no par value, 50,000,000 shares 23,955,136 7,814,341
authorized, 15,978,537 and 9,065,305 shares issued and
outstanding in 1996 and 1995, respectively
Accumulated deficit (10,838,398) (6,428,481)
Accumulated foreign currency translation adjustment (6,945) (6,945)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,109,793 1,378,915
- ----------------------------------------------------------------------------------------------------------
$ 20,222,317 $ 1,613,083
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
65
TANISYS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF LOSS
(Expressed in U.S. Dollars)
FOR THE YEARS ENDED SEPTEMBER 30,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Net sales $ 14,988,946 $ 358,726 $ 113,786
Cost of goods sold 12,660,900 110,097 33,901
- ----------------------------------------------------------------------------------------------------------
Gross profit 2,328,046 248,629 79,885
- ----------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 1,079,927 409,805 409,150
Sales and marketing 1,177,214 1,358,032 393,786
General and administrative (Note 8) 1,976,597 913,375 1,028,808
Depreciation and amortization 2,474,313 71,043 60,472
Unusual charge -- -- 198,739
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 6,708,051 2,752,255 2,090,955
- ----------------------------------------------------------------------------------------------------------
Operating loss (4,380,005) (2,503,626) (2,011,070)
- ----------------------------------------------------------------------------------------------------------
Other income (expense):
Foreign exchange gain -- 2,290 --
Interest income 74,238 56,250 39,145
Interest expense (108,332) -- --
Other 4,182 -- --
- ----------------------------------------------------------------------------------------------------------
Net loss $ (4,409,917) $(2,445,086) $(1,971,925)
- ----------------------------------------------------------------------------------------------------------
Loss per weighted average common share $ (0.37) $ (0.29) $ (0.30)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Weighted average number of common shares 11,765,850 8,436,320 6,610,710
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
66
TANISYS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(EXPRESSED IN U.S. DOLLARS)
ACCUMULATED
FOREIGN
SHARE CAPITAL CURRENCY TOTAL
------------------------- ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT DEFICIT ADJUSTMENT EQUITY
- ------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1993 6,495,325 $ 4,468,700 $ (2,011,470) $ 0 $ 2,457,230
- ------------------------------------------------------------------------------------------------------------------------
Net loss (1,971,925) (1,971,925)
Private placements 1,500,000 1,462,756* 1,462,756
Foreign currency translation adjustment (6,945) (6,945)
- ------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 7,995,325 5,931,456 (3,983,395) (6,945) 1,941,116
- ------------------------------------------------------------------------------------------------------------------------
Net loss (2,445,086) (2,445,086)
Private placements 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 (6,428,481) (6,945) 1,378,915
- ------------------------------------------------------------------------------------------------------------------------
Net loss (4,409,917) (4,409,917)
Acquisition of businesses (Note 2) 4,150,000 11,786,000* 11,786,000
Issued as payment of consulting bonus
(Note 2) 207,500 788,500** 788,500
Private placements (Note 7) 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 $23,955,136 $(10,838,398) $(6,945) $13,109,793
- ------------------------------------------------------------------------------------------------------------------------
* net of issuance costs
** paid to related parties
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
67
TANISYS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
FOR THE YEARS ENDED SEPTEMBER 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(4,409,917) $(2,445,086) $(1,971,925)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 2,474,313 71,043 60,472
Write-downs 21,927 - -
Unusual charge - - 198,739
Decrease (increase) in trade
accounts receivable (856,885) 84,855 (99,926)
Increase in accounts receivable
from related parties (17,691) - -
Decrease in investment tax
credits receivable - - 57,456
Increase in inventory (156,733) (2,757) (12,657)
Increase in prepaid expense (103,789) (13,810) (3,843)
(Decrease) increase in accounts
payable and accrued liabilities (1,323,521) 22,870 323,392
- -----------------------------------------------------------------------------------------------
Net cash used in operating activities (4,372,296) (2,282,885) (1,448,292)
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (342,882) (48,962) (96,414)
Incorporation costs - - (1,010)
Patents and trademark costs (32,763) (42,776) (38,261)
Cash obtained in acquisition of
businesses 2,817,230 - -
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 2,441,585 (91,738) (135,685)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of
common stock 1,614,295 1,727,233 1,462,756
Draws (payments) on revolving
credit note, net (195,881) - -
Principal payments on capital
lease obligations (20,158) - -
Net proceeds from exercise of
stock options - 12,724 -
Net proceeds from exercise
of warrants 1,905,000 - -
- -----------------------------------------------------------------------------------------------
Net cash provided by financing
activities 3,303,256 1,739,957 1,462,756
- -----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - - (3,169)
- -----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 1,372,545 (634,666) (124,390)
Cash and cash equivalents, beginning
of period 1,317,024 1,951,690 2,076,080
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 2,689,569 $ 1,317,024 $ 1,951,690
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Supplemental disclosure of cash
flow information:
Interest paid $ 108,332 $ 1,152 $ 121
Interest received $ 74,238 $ 57,402 $ 35,153
Non-cash activity:
Shares issued to related parties
and others to satisfy accrued
liabilities $ 47,000 $ 142,928 -
Shares issued to purchase businesses $12,574,500 - -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
68
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
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"). The Company provides custom design,
engineering and manufacturing services, test solutions and standard and
custom module products to leading original equipment manufacturers in the
computer, networking and telecommunications industries. Numerous factors
affect the Company's operating results, including general economic
conditions, competition, changing technologies, component shortages or price
fluctuations. A change of any of these factors could have an adverse effect
on the Company's financial position or results of operations. The Company
has experienced losses since inception. The Company continues to develop
additional products, and with current year acquisitions (Note 2), the Company
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 consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States which, as
applied to these financial statements, conform in all material respects with
accounting principles generally accepted in Canada. All significant
intercompany balances and transactions have been eliminated in consolidation.
Tanisys is a Wyoming corporation which was originally organized in British
Columbia, Canada to pursue oil and gas exploration. Unsuccessful in the
exploration business and dormant pursuant to the rules and regulations of the
Vancouver Stock Exchange, several investors gained control of the Company to
raise financing and complete the acquisition of Timespan. Timespan had
software technology and patent applications which, in part, are the
foundation of the Company's development and marketing efforts.
Tanisys changed its name from Rosetta Technologies Inc. on July 11, 1994.
Prior to Rosetta Technologies Inc., the Company had been known as First
American Capital Group Inc. and Montebello Resources Ltd.
Certain reclassifications of amounts related to 1994 and 1995 have been made
to conform with the 1996 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. The Company
places its cash investments in high credit quality instruments.
69
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECEIVABLES
The Company grants credit to domestic and international original equipment
manufacturers, distributors and end users. The Company carries a business
credit policy covering certain accounts receivable. The insurance policy
provides protection against losses from uncollectible accounts resulting from
insolvency of specified customers. As of September 30, 1996, the total
available coverage under the policy was $2,050,000.
INVENTORY
Inventory is stated at the lower of cost or market. In the third quarter of
1996, the Company changed its method of accounting for inventories from the
first-in, first-out (FIFO) method to a weighted average cost basis. The
change did not have a significant effect on results of operations for 1996,
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. Costs include direct materials, direct
labor and certain indirect manufacturing overhead expenses.
REVENUE RECOGNITION
Revenues from direct sales and sales to resellers are recognized when the
related products are shipped. The Company warrants products against defects
and has a policy concerning the return of products.
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
lives:
Machinery and equipment 3-7
Office and engineering equipment 5
Computer equipment and software 3
Furniture and fixtures 5
Vehicles 5
Leasehold improvements Shorter of useful life or
remaining term of the lease
Incorporation costs are amortized on a straight-line basis over five years.
Upon dissolution of Timespan, the Company wrote-off $747 in unamortized
incorporation costs. Accumulated amortization at September 30, 1996, 1995
and 1994 was $512, $1,522 and $761, respectively.
Patents and trademarks are amortized on a straight-line basis over 10 years.
In fiscal 1995, the Company wrote-off $12,095 in trademark costs related to
the registration of the name SpinWizard, since the product associated with
that trademark is no longer being sold. Accumulated amortization at
September 30, 1996, 1995 and 1994, was $10,799, $6,569 and $0, respectively.
70
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 amount that the carrying amount
of the assets exceed fair value. Fair value is determined based upon the
present value of estimated expected future cash flows using a discount rate
commensurate with risks involved. Based on its review, the Company believes
no impairment has occurred as of September 30, 1996.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
the exchange rate at the balance sheet date. Revenues, costs, and expenses
are translated at average rates of exchange prevailing during the year.
Gains and losses on foreign currency transactions are included in other
expenses. Translation adjustments resulting from this process are charged or
credited to equity.
RESEARCH AND DEVELOPMENT
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," capitalization of software development costs begins upon
the establishment of technological feasibility. The ongoing assessment of
the recoverability of these costs requires considerable judgment by
management with respect to certain external factors, including, but not
limited to, anticipated future gross product revenues, estimated economic
life and changes in software and hardware technology. After considering the
above factors, the Company has determined that software development costs
incurred for the years ended September 30, 1996, 1995 and 1994 were properly
expensed.
LOSS PER SHARE
Loss per share is calculated based upon the weighted average number of common
shares outstanding during the year.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" (FAS 121), was issued. Under FAS 121, an impairment loss
must be recognized, for long-lived assets and certain identifiable
intangibles to be held and used by an entity, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. FAS 121 is effective for financial statements issued for fiscal
years beginning after December 15, 1995, and must be adopted on a prospective
basis. Restatement of previously issued financial statements is not
permitted. The Company adopted FAS 121 effective October 1, 1995. Such
adoption did not have a material effect on the financial condition or results
of operations of the Company.
71
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), was issued. FAS 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, FAS 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 No. 25, "Accounting for Stock Issued
to Employees" (APB 25). Entities electing to remain with the accounting
prescribed by APB 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method recommended by FAS 123
had been applied. The accounting requirements of FAS 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The disclosure requirements of FAS 123 are effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
intends to measure compensation costs in accordance with APB 25 and to
provide pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting under FAS 123 had been applied.
Therefore, FAS 123 will not have a material effect on the financial position
or results of operations of the Company.
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 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 Mr. Gary W. Pankonien, former owner of 1st Tech and 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.
72
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
2. ACQUISITIONS OF 1ST TECH AND DARKHORSE (CONTINUED)
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 $11,786,000
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 $10,656,998
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. The fair value of the commission paid
was 207,500 shares at a price of $3.80 at the date of issuance. Goodwill was
determined as the number of shares issued to 1st Tech and DarkHorse
(3,492,500) at the closing price on May 21, 1996 of ($5.05) discounted by 40%
to $3.03 to give effect to the restrictiveness of the shares and the risks
involved.
Goodwill is being amortized against earnings over a two-year period. The
amount of goodwill amortized for the year ended September 30, 1996 was
$2,220,208. The results of operations of 1st Tech and DarkHorse have been
included in the consolidated financial statements since the acquisition date.
The unaudited pro forma information has been prepared assuming that these
acquisitions had taken place at the beginning of the fiscal year. The
unaudited pro forma information includes adjustments for amortization of
intangibles arising from the transactions and common shares issued. The
unaudited pro forma financial information is not necessarily indicative of
the results of operations as they would have been had the transactions been
effective at the beginning of fiscal 1996 or fiscal 1995, nor is it
necessarily indicative of the results of operations which may occur in the
future. The unaudited pro forma information is as follows:
1996 1995
(Unaudited) (Unaudited)
----------- ------------
Net sales $66,523,607 $106,668,217
Net loss (9,674,523) (7,095,706)
Net loss per common share (0.82) (.84)
73
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
3. INVENTORY
Inventory consists of the following:
1996 1995
---------- --------
Raw materials $1,343,522 $ ---
Work-in-process 203,017 ---
Finished goods 257,919 15,414
---------- -------
$1,804,458 $15,414
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1996 1995
--------------------------------------------------------------------------------------
Accumulated Accumulated
Depreciation & Net Book Depreciation & Net Book
Cost Amortization Value Cost Amortization Value
- --------------------------------------------------------------------------------------------------------------------
Manufacturing equipment $1,055,964 $234,159 $ 821,805 $ --- $ --- $ ---
Office equipment 579,117 224,102 355,015 29,084 11,038 18,046
Engineering equipment 253,482 77,807 175,675 17,507 7,022 10,485
Computer equipment 118,696 87,448 31,248 97,829 57,585 40,244
Computer software 223,872 115,821 108,051 21,971 15,114 6,857
Furniture and fixtures 295,585 90,186 205,399 40,170 12,641 27,529
Vehicles 39,445 9,861 29,584 --- --- ---
Leasehold improvements 157,907 67,205 90,702 25,854 10,310 15,544
- --------------------------------------------------------------------------------------------------------------------
$2,724,068 $906,589 $1,817,479 $232,415 $113,710 $118,705
- --------------------------------------------------------------------------------------------------------------------
The Company had approximately $266,000 and $0 of property and equipment
acquired under capital lease at September 30, 1996 and 1995, respectively.
The accumulated amortization related to these assets totaled $47,000 and $0
at September 30, 1996 and 1995, respectively. The related amortization
expense was $16,000 and $0 for the years ended September 30, 1996 and 1995,
respectively.
5. REVOLVING CREDIT NOTE
The Company has a revolving credit note with a financial institution of
$6,000,000 bearing interest at the financial institution's prime rate plus a
percentage between one and three percent (8.25% as of September 30, 1996)
depending upon a ratio. The ratio is computed monthly, combining 1st Tech and
DarkHorse indebtedness to annualized earnings before income taxes,
depreciation and amortization. At September 30, 1996, the Company did not
comply with certain financial covenants. The financial institution has
amended and waived the covenants at September 30, 1996 and for prior periods.
Additionally, the financial institution will issue, when needed, letters of
credit up to $2,000,000. The revolving credit note extends through June 30,
1998 and is secured by all of the Company's assets. Paydowns on the note are
made by daily collections of accounts receivable. Draws are made as
necessary. The amount outstanding at September 30, 1996 was $3,075,000. The
amount available on the line at September 30, 1996 was $2,925,000 limited by
qualified accounts receivable as defined in the note. At September 30, 1996,
there were no outstanding letters of credit.
74
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
6. LEASE COMMITMENTS
The Company leases certain equipment and office space under noncancelable
leases with expiration dates ranging from 1997 through 2000.
Future minimum lease payments under all leases at September 30, 1996 were as
follows:
Capital Leases Operating Leases
-------------- ----------------
1997 $ 62,661 $376,804
1998 57,276 219,841
1999 56,481 66,288
2000 27,528 27,620
--------- --------
Total minimum lease payments 203,946 690,553
Amounts representing interest (33,159)
--------
Present value of minimum capital
lease payments 170,787
Less: current portion 47,787
--------
Long-term capital lease obligation $123,000
--------
--------
Rent expense recorded under all operating leases was $118,189, $48,619 and
$34,377 for 1996, 1995 and 1994, respectively.
7. PRIVATE PLACEMENTS
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 of $1.70 in 1997 and $1.95 in 1998. The
warrants expire after 1998. A commission of 45,555 shares at the price of
$2.25 per share was paid to AWL Enterprises Ltd. 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 of $2.00 in 1996 and $2.25 in 1997. The warrants expire after
1997.
8. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries entered into the following related party
transactions:
General & administrative expense includes consulting fees and expenses.
Consulting fees and expenses in the amount of $870,000 ($788,500 of which
was paid in stock--see Note 2), $159,000 and $256,000 were paid to the
Company's directors or companies that they owned for the years ended
September 30, 1996, 1995 and 1994, respectively.
General & administrative expense includes professional fees. Professional
fees in the amount of $122,000, $97,000 and $42,000 were paid to two
stockholders of the Company for legal and other services provided for the
years ended September 30, 1996, 1995 and 1994, respectively.
75
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
At September 30, 1996, each of two former stockholders of DarkHorse were
owed $32,309 ($64,618 in accounts payable to related parties) and a third
stockholder owed the Company $17,691 (in accounts receivable from related
parties). Prior to the acquisition, DarkHorse was an S-corporation.
These amount 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, Gary W. Pankonien, the principal stockholder of 1st Tech and one of
the three principal stockholders of DarkHorse, 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.
Mr. Pankonien 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 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, Mr.
Pankonien was granted the right to designate two individuals for
appointment to the Company's Board of Directors and to name an advisory
director. Mr. Pankonien and Alan Portnoy were appointed Directors, and
Archer Lawrence became an advisor to the Board of Directors in July 1996.
On May 21, 1996, 1st Tech purchased a Quad QSP-2 High Speed Fine Pitch
Surface Mount Assembly from Gary Pankonien for $225,000. Previously, this
equipment had been leased by Mr. Pankonien.
Since May 21, 1996, Tanisys has paid $10,000 to 1st Tech Molding for
payment for plastic packaging products required for various products
manufactured by Tanisys, and $25,000 in 1996 as a long-term deposit.
1st Tech Molding is a private company owned 45% by Mr. Pankonien.
9. SHARE CAPITAL, OPTIONS AND WARRANTS
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, 1996 and 1995.
76
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
9. SHARE CAPITAL, OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTIONS
1996 1995
------------------------------ ------------------------------
SHARES OPTION PRICE SHARES OPTION PRICE
- -------------------------------------------------------------------------------------------------------------
Outstanding-Beginning of year 1,364,450 $1.10 to 3.32 US 1,003,000 $1.50 to 3.70CDN
Granted 834,900 3.13 to 3.72 US 958,750 2.02 to 3.32 US
4.00 CDN
Canceled or expired (395,250) 2.02 to 3.72 US (591,300) 2.80 US
2.33 to 4.00 CDN
Exercised --- --- (6,000) 2.40 to 3.55 CDN
- -------------------------------------------------------------------------- -------------------------------
Outstanding-End of year 1,804,100 $1.10 to 3.69 US 1,364,450 $2.02 to 3.32 US
$1.50 to 4.00 CDN
- -------------------------------------------------------------------------- -------------------------------
Exercisable-End of year 555,232 265,001
- -------------------------------------------------------------------------- -------------------------------
In February 1996, the Board of Directors approved a resolution to translate
all option prices currently in CDN$ to US$. The exchange rate used was 1.00
CDN$ to .7353 US$. This was the exchange rate on the date of the board
resolution.
The Company's 1993 Stock Option Plan is for the Company's directors, key
employees and consultants as an incentive for them to remain in the Company's
employ or service. Options granted vest over a three year period, one-third
per year, and expire after five years, or thirty days after the date of
termination. 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 average closing price of the Company's stock on the
Vancouver Stock Exchange for the two weeks preceding the grant. Under the
terms of the 1993 Stock Option Plan, 2,600,000 shares are reserved for the
granting of options.
WARRANTS
Each warrant entitles the holder to purchase one share of common stock at a
particular price during the first year following the date of issuance and at
a second price in year two. The warrants expire after year two. During
fiscal 1996, 1,515,000 warrants were exercised and no warrants expired.
975,177 warrants were issued as part of the Company's two private placements
in 1995 and 1996. The Company had warrants outstanding for the purchase of
its common stock in 1996 and 1995 as follows:
NUMBER OF WARRANTS EXERCISE PRICE
--------------------- ---------------------
ISSUE DATE 1996 1995 YEAR 1 YEAR 2
---------- --------- --------- -------- --------
August 1994 --- 1,500,000 $1.00 $1.25
May 1995 885,000 900,000 $2.00 $2.30
November 1995 34,000 --- $2.00 $2.25
January 1996 941,177 --- $1.70 $1.95
--------- ---------
Total 1,860,177 2,400,000
--------- ---------
--------- ---------
77
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
10. INCOME TAXES
The Company accounts for deferred income taxes using the liability method. At
September 30, 1996, the Company's Canadian subsidiary, Timespan, had a
non-capital loss carryforward of approximately CDN $127,000 which may be
applied against future taxable income. The loss carryforward results in a
deferred tax asset of CDN $57,000 which expires in 2000. Additionally, at
September 30, 1996, Timespan had deferred tax assets of CDN $43,000
principally relating to unclaimed investment tax credits.
During 1996 and 1995, the Company incurred consolidated net operating losses
for U.S. income tax purposes of approximately $1,785,000 and $2,548,000,
respectively. The loss carryforwards expire in 2011 and 2010, respectively.
During 1996, the Company had temporary differences resulting in future tax
deductions of $693,000 principally representing tax basis in accrued
liabilities and intangible assets. Deferred income tax assets from the loss
carryforwards and asset basis differences aggregate $2,240,000.
For financial reporting purposes, valuation allowances of $2,240,000 and
$1,413,000 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 carryovers 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 carryovers may be limited or prohibited. There are two kinds of
ownership changes that can trigger the income limitation: an ownership change
involving a 5% stockholder and any tax-free reorganization. In either case,
one or more 5% stockholders must have increased their percentage of
ownership in the corporation by more than 50% over the lowest pre-change
ownership percentage generally within three years of ownership change. The
Company does not believe that an IRS Code Section 382 Limitation exists as of
September 30, 1996.
No federal or state taxes were due or paid in 1996 and 1995.
11. UNUSUAL CHARGE
At September 30, 1994, the Company determined that it would not utilize in
its current or future products, the computer game controller technology
purchased from Timespan. Therefore, the remaining goodwill associated with
the Timespan acquisition of $198,739 was charged to expense as an unusual
charge in the period ended September 30, 1994 (Note 13).
12. EMPLOYEE BENEFITS
Effective January 1, 1995, 1st Tech sponsored an employee benefit plan (the
Plan) which qualifies under Section 401(k) of the Internal Revenue Service
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 of the date of acquisition, all employees of the
Company joined the Plan.
78
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(EXPRESSED IN U.S. DOLLARS EXCEPT AS INDICATED)
12. EMPLOYEE BENEFITS (CONTINUED)
Under provisions of the Plan, the Company may elect to make matching
contributions to the Plan for the benefit of the participants. No
contributions were made in 1996.
13. COMMITMENTS AND CONTINGENCIES
During fiscal 1993, the Company's subsidiary Timespan entered into a five
year royalty agreement with its former principal stockholders. The agreement
provides for royalties to be paid for the use of the computer game controller
technology. The royalties are to be paid subsequent to Timespan achieving a
CDN $3,000,000 net cumulative profit from the sale of devices involving the
technology. The royalties will be calculated as the lesser of CDN $250,000
per annum or 5% of the gross wholesale receipts, as defined in the agreement,
from sales exceeding the above noted amount. If the amount payable is less
than CDN $250,000 in any particular year, the difference will be carried
forward to the following year to increase the maximum amount payable in that
year. The Company is not currently using the computer game controller
technology and the royalty does not relate to the Company's current products
(Note 11).
14. SUBSEQUENT EVENTS
In October 1996, the Company granted, subject to regulatory approval, stock
options to key employees for the purchase of 423,000, 110,000 and 5,000
common shares at a per share price of $4.09, $4.17 and $4.44, respectively.
These options are not considered outstanding until approved by the Vancouver
Stock Exchange.
Timespan, a wholly owned subsidiary of the Company, was dissolved as of
October 23, 1996.
79
TANISYS TECHNOLOGY, INC.
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED FINANCIAL STATEMENTS AT AND FOR
THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
80
TANISYS TECHNOLOGY, INC.
1ST TECH TECHNOLOGY, INC.
DARKHORSE SYSTEMS, INC.
COMBINED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
MARCH 31, MARCH 31,
1996 1995
- ---------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 495,173 $ 16,864
Accounts receivable 4,509,245 7,470,424
Inventory 2,649,242 3,662,028
Prepaid expense 128,065 273,118
- ---------------------------------------------------------------------------
Total current assets 9,300,422 11,422,434
- ---------------------------------------------------------------------------
Fixed assets, net of accumulated depreciation 1,382,050 693,333
Other assets 136,647 11,500
- ---------------------------------------------------------------------------
$9,300,422 $12,127,267
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,915,469 $ 4,796,170
Accrued expenses 1,135,904 1,420,576
Note payable 3,766,846 5,000,000
- ---------------------------------------------------------------------------
Total current liabilities 8,818,219 11,216,746
- ---------------------------------------------------------------------------
Obligations under capital leases 181,940 62,700
- ---------------------------------------------------------------------------
Total liabilities 9,000,159 11,279,446
- ---------------------------------------------------------------------------
Commitment
Stockholders' equity:
Share capital 9,525 9,500
Deficit 720,520 838,321
Distributions to stockholders (429,782) 0
- ---------------------------------------------------------------------------
Total stockholders' equity 300,263 847,821
- ---------------------------------------------------------------------------
$9,300,422 $12,127,267
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
81
TANISYS TECHNOLOGY, INC.
1ST TECH TECHNOLOGY, INC.
DARKHORSE SYSTEMS, INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995
- -------------------------------------------------------------------
Revenue $13,637,582 $21,472,813
Cost of goods sold 12,342,354 19,638,168
- -------------------------------------------------------------------
Gross profit 1,295,228 1,834,645
- -------------------------------------------------------------------
Expenses:
Research and development 197,467 93,638
Sales and marketing 551,676 331,454
General and administration 689,153 789,213
- -------------------------------------------------------------------
Total expenses 1,438,296 1,214,305
- -------------------------------------------------------------------
Other items:
Interest income 145 0
Interest expense (150,891) (109,289)
Other income 24,845 17,660
- -------------------------------------------------------------------
Total other items (125,901) (91,629)
- -------------------------------------------------------------------
Net income (loss) before taxes (268,969) 528,711
Income tax expense 0 0
- -------------------------------------------------------------------
Net income (loss) (268,969) 528,711
Deficit, beginning of period 989,489 309,610
- -------------------------------------------------------------------
Deficit, end of period 720,520 838,321
- -------------------------------------------------------------------
82
TANISYS TECHNOLOGY, INC.
1ST TECH TECHNOLOGY, INC.
DARKHORSE SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (268,969) $ 528,711
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 69,654 58,146
Decrease (increase) in accounts receivable 3,129,235 (2,086,351)
Decrease (increase) in inventory 527,142 (2,070,578)
Decrease (increase) in prepaid 45,268 (228,618)
(Decrease) increase in accounts payable
and accruals (481,531) 1,904,359
- ------------------------------------------------------------------------------
Net cash used in operating activities 3,020,799 (1,894,331)
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Receipts (payments) made for other assets (52,647) 29,500
Purchase of fixed assets (143,191) (10,330)
- ------------------------------------------------------------------------------
Net cash used in investing activities 195,838 19,170
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (362,782) 0
Draws (payments) on revolving credit note (3,528,752) 1,687,000
Principal payments on capital lease obligations (17,816) (46,300)
- ------------------------------------------------------------------------------
Net cash provided by financing activities (3,528,752) 1,640,700
- ------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (703,791) (234,461)
Cash and cash equivalents, beginning of period 1,198,964 251,325
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of period 495,173 16,864
- ------------------------------------------------------------------------------
Supplemental disclosure:
Interest paid $ 150,891 $ 109,283
83
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED FINANCIAL STATEMENTS
AT DECEMBER 31, 1995 AND FOR THE
FISCAL YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
TOGETHER WITH AUDITORS' REPORT
84
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 1st Tech Corporation and
DarkHorse Systems, Inc.:
We have audited the accompanying combined balance sheets of 1st Tech
Corporation and DarkHorse Systems, Inc. (Texas corporations), as of December
31, 1995 and 1994, and the related combined statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility
of the Companies' 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 1st Tech Corporation and
DarkHorse Systems, Inc., as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
October 25, 1996
85
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED BALANCE SHEETS -- DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
----------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,198,964 $ 251,325
Accounts receivable, net of allowance for
doubtful accounts of $124,500 and $0,
respectively 7,438,903 5,184,073
Inventory 3,176,384 1,591,450
Accounts receivable, related parties 199,577 200,000
Prepaid expenses and other 173,333 44,500
----------- ----------
Total current assets 12,187,161 7,271,348
----------- ----------
PROPERTY AND EQUIPMENT, net 1,261,232 632,649
----------- ----------
OTHER LONG-TERM ASSETS 84,000 41,000
----------- ----------
Total assets $13,532,393 $7,944,997
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
----------- ----------
CURRENT LIABILITIES:
Book overdrafts $ 574,000 $ 698,000
Accounts payable 3,291,738 2,539,134
Accrued expenses 1,057,926 463,253
Income taxes payable 58,000 10,000
Revolving credit note 6,915,000 3,313,000
Notes payable to related parties 509,240 493,000
Current portion of obligations under
capital leases 42,000 109,000
----------- ----------
Total current liabilities 12,447,904 7,625,387
----------- ----------
OBLIGATIONS UNDER CAPITAL LEASES 152,000 -
----------- ----------
Total liabilities 12,599,904 7,625,387
----------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Capital stock, no par value-
1st Tech, 1,000,000 shares authorized,
issued and outstanding - -
DarkHorse, 100,000,000 shares authorized;
1,155,000 issued and outstanding - -
Contributed capital 10,000 10,000
Retained earnings 989,489 309,610
Due from stockholder (67,000) -
----------- ----------
Total stockholders' equity 932,489 319,610
----------- ----------
Total liabilities and stockholders' equity $13,532,393 $7,944,997
----------- ----------
----------- ----------
The accompanying notes are an integral part
of these combined financial statements
86
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
------------ ----------- -----------
NET PRODUCT SALES $106,309,491 $42,707,651 $22,965,821
COST OF SALES 99,443,822 39,263,567 20,424,645
------------ ----------- -----------
6,865,669 3,444,084 2,541,176
------------ ----------- -----------
OPERATING EXPENSES:
Sales and marketing 2,249,637 1,299,603 387,266
General and administrative 2,902,629 1,394,211 1,459,527
Research and development 394,338 273,935 90,440
------------ ----------- -----------
Total operating expenses 5,546,604 2,967,749 1,937,233
------------ ----------- -----------
INCOME FROM OPERATIONS 1,319,065 476,335 603,943
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (728,169) (383,149) (239,171)
Interest income 21,451 425 2,283
Other income (expense) (7,468) 13,122 34,156
------------ ----------- -----------
(714,186) (369,602) (202,732)
------------ ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 604,879 106,733 401,211
------------ ----------- -----------
PROVISION FOR INCOME TAXES 58,000 23,020 142,305
------------ ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 546,879 83,713 258,906
------------ ----------- -----------
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 133,000 - -
------------ ----------- -----------
NET INCOME $ 679,879 $ 83,713 $ 258,906
------------ ----------- -----------
------------ ----------- -----------
UNAUDITED PRO FORMA DATA (Note 3):
Income before provision for income
taxes and cumulative effect of
change in accounting principle $ 604,879 $ 106,733 $ 401,211
Pro forma adjustments to reflect
federal and state income tax 223,805 39,491 148,448
------------ ----------- -----------
Pro forma income from continuing
operations after provision for
income tax and before cumulative
effect of change in accounting
principle 381,074 67,242 252,763
------------ ----------- -----------
Adjustment to reflect change in
accounting principle - 91,342 41,469
------------ ----------- -----------
Pro forma net income $ 381,074 $ 158,584 $ 294,232
------------ ----------- -----------
------------ ----------- -----------
The accompanying notes are an integral part
of these combined financial statements.
87
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
COMMON STOCK
--------------------------------------------------------
1ST TECH DARKHORSE
--------------------------- ---------------------------
SHARES SHARES TOTAL
ISSUED AND CONTRIBUTED ISSUED AND CONTRIBUTED TREASURY DUE FROM RETAINED STOCKHOLDERS'
OUTSTANDING(1) CAPITAL OUTSTANDING(2) CAPITAL STOCK STOCKHOLDER EARNINGS EQUITY
-------------- ----------- -------------- ----------- ------------ ----------- -------- -------------
BALANCE, December 31,
1992 - $ - 360,937 $ 3,000 - $ - $ (2,979) $ 21
Net income - - - - - - 258,906 258,906
Issuance of stock 1,000,000 1,000 842,188 50,000 - - - 51,000
--------- ------ --------- ------- ----------- -------- -------- --------
BALANCE, December 31,
1993 1,000,000 1,000 1,203,125 53,000 - - 255,927 309,927
Net income - - - - - - 83,713 83,713
Purchase of
treasury stock - - (842,188) (44,000) 70,000,000 - (30,030) (74,030)
Retirement of
treasury stock - - - - (70,000,000) - - -
Stock split
(3.2 for 1) - - 794,063 - - - - -
--------- ------ --------- ------- ----------- -------- -------- --------
BALANCE, December 31,
1994 1,000,000 1,000 1,155,000 9,000 - - 309,610 319,610
Net income - - - - - - 679,879 679,879
Distributions - - - - - (67,000) - (67,000)
--------- ------ --------- ------- ----------- -------- -------- --------
BALANCE, December 31,
1995 1,000,000 $1,000 1,155,000 $ 9,000 - $(67,000) $989,489 $932,489
--------- ------ --------- ------- ----------- -------- -------- --------
--------- ------ --------- ------- ----------- -------- -------- --------
(1) Reflects a 10:1 stock split approved by 1st Tech board of directors on
May 25, 1995.
(2) Reflects a 1:83 reverse stock split approved by DarkHorse board of
directors on April 9, 1996.
88
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 679,879 $ 83,713 $ 258,906
Adjustments to reconcile net income before
cumulative effect of change in accounting
principle to net cash provided by (used
in) operating activities-
Depreciation and amortization 138,400 232,877 89,239
Changes in operating assets and liabilities-
Increase in accounts receivable (2,254,830) (4,347,867) (836,206)
(Increase) decrease in accounts
receivable, related parties 423 (88,156) (2,540)
Increase in inventory (1,584,934) (509,358) (1,068,927)
(Increase) decrease in prepaid
expenses and other assets (171,833) 36,970 (122,470)
Increase in accounts payable 752,604 904,895 1,518,126
(Decrease) increase in bank overdrafts (124,000) 698,000 -
Increase in accrued expenses 794,923 231,671 240,782
----------- ----------- -----------
Net cash provided by (used in) operating
activities (1,769,368) (2,757,255) 76,910
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (549,678) (446,189) (308,070)
----------- ----------- -----------
Net cash used in investing activities (549,678) (446,189) (308,070)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in revolving credit note 3,602,000 3,113,000 200,000
Principal payments on capital leases (132,305) (86,506) -
Advances to shareholder (67,000) - -
Borrowings (payments) on note payable
to shareholders (136,010) (14,696) 492,696
Purchase of stock - (24,030) -
Issuance of stock - - 1,000
----------- ----------- -----------
Net cash provided by financing activities 3,266,685 2,987,768 693,696
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 947,639 (215,676) 462,536
CASH AND CASH EQUIVALENTS, beginning of year 251,325 467,001 4,465
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,198,964 $ 251,325 $ 467,001
----------- ----------- -----------
----------- ----------- -----------
89
1995 1994 1993
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest $ 571,478 $ 350,549 $ 19,750
----------- ----------- -----------
----------- ----------- -----------
Income taxes $ 14,449 $ 145,700 $ -
----------- ----------- -----------
----------- ----------- -----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of certain accrued expenses to
notes payable to shareholders (see Note 9) $ 152,250 $ - $ -
----------- ----------- -----------
----------- ----------- -----------
Note issued to shareholder for stock $ - $ 74,000 $ -
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part
of these combined financial statements.
90
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
1. BASIS OF PRESENTATION AND ORGANIZATION:
The accompanying combined financial statements include the accounts of 1st
Tech Corporation and DarkHorse Systems, Inc. (collectively referred to as the
Companies). The Companies' financial statements have been combined as both
of these entities are under common ownership. All significant intercompany
accounts and transactions have been eliminated in combination.
1st Tech Corporation (1st Tech) is a privately held S-Corporation that was
incorporated under the laws of the State of Texas on January 20, 1993. 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. In addition, 1st Tech offers engineering
design and contract manufacturing services. The principal market for the
Company's products is domestic-based original equipment manufacturers in the
electronics industry, including personal computer manufacturers and
telecommunications service providers.
DarkHorse Systems, Inc. (DarkHorse), is a privately held S-Corporation that
was incorporated under the laws of the State of Texas in 1992. DarkHorse is
engaged in the business of designing and marketing memory testing equipment
primarily to domestic electronic equipment manufacturers.
Effective May 21, 1996, Tanisys Technology, Inc. (Tanisys), acquired all of
the outstanding common stock of the Companies in exchange for 4.15 million
shares of Tanisys' common stock (Note 14).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Revenue is stated net of actual and estimated returns. Sales are recognized
when the related products are shipped. The Company warrants products against
defects and has a policy concerning the return of products.
CASH AND CASH EQUIVALENTS
The Companies consider 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.
INVENTORY
Inventory is stated at the lower of cost or market, with cost being
determined on a weighted average cost basis. Costs include direct materials,
direct labor and certain indirect manufacturing overhead expenses.
91
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment has been computed by the straight-line method
beginning January 1, 1995. Depreciation and amortization of property and
equipment in prior years was computed by the double declining balance-method.
The straight-line method of depreciation was adopted in order to provide for
depreciation and amortization expense on a basis more consistent with the
property and equipment's actual utilization and has been applied to
acquisitions of prior years. The effect of the change in 1995 was to
increase income from operations by approximately $95,000. The pro forma
amounts shown on the statement of income have been adjusted for the effect of
retroactive application of depreciation and amortization on the straight-line
basis.
Additionally, the Companies changed the estimated useful lives for its
property and equipment beginning in 1995. The effect of this change did not
have a material impact on income from operations for 1995. Depreciation and
amortization expense are provided over the following estimated useful lives:
Machinery and equipment 3 - 7 years
Office computer equipment and software 3 - 5 years
Furniture and fixtures 5 - 7 years
Leasehold improvements Shorter of useful life or
remaining term of the lease
BANK OVERDRAFTS
Bank overdrafts represent outstanding checks in excess of funds on deposit
where legal right to offset does not exist.
INCOME TAXES
In 1993, 1st Tech elected and was treated for federal and certain state
income tax purposes as a C-Corporation. In 1994, 1st Tech changed its
federal tax status from a C-Corporation to an S-Corporation.
In 1993, DarkHorse elected and was treated for federal and certain state
income tax purposes as a C-Corporation. DarkHorse changed its federal tax
status from a C-Corporation to an S-Corporation in 1995.
In 1995, the Companies have elected and have been treated for federal and
certain state income tax purposes as an S-Corporation under Subchapter S of
the Internal Revenue Code of 1986, as amended. As a result, the income of
the Companies for federal and certain state income tax purposes is included
in the income tax return of the individual shareholders. The accompanying
combined financial statements include recognition of those federal and state
income taxes which are levied on the Companies. (See Note 3 for pro forma
income tax information.)
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" (FAS 121), was issued. Under FAS 121, an impairment loss
must be recognized, for long-lived assets and certain identifiable
intangibles to be held and used by an entity, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. FAS 121 is effective for financial statements issued for fiscal
years beginning after December 15, 1995, and must be adopted on a prospective
basis. Restatement of previously issued financial statements is not
permitted. The Companies adopted FAS 121 effective January 1, 1996. Such
adoption did not have a material effect on the financial condition or results
of operations of the Companies.
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
92
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.
3. PRO FORMA INFORMATION (UNAUDITED):
Pro forma net income has been determined assuming that the Companies had been
taxed as C-Corporations for federal and certain state income tax purposes
since January 1, 1993. The pro forma adjustments to reflect federal and
state income tax assume a blended tax rate of 37 percent. Additionally, the
pro forma amounts shown on the statements of income have been adjusted for
the cumulative effect of change in accounting principle. (See Note 2.)
4. INVENTORIES:
Inventories consist of the following:
December 31
-----------------------
1995 1994
---------- ----------
Raw materials $1,680,101 $ 952,746
Work in process 98,619 17,245
Finished goods 1,397,664 621,459
---------- ----------
Total inventory $3,176,384 $1,591,450
---------- ----------
---------- ----------
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31
-----------------------
1995 1994
---------- ----------
Machinery and equipment $ 805,000 $ 518,000
Office computer equipment and software 553,711 295,765
Furniture and fixtures 249,732 78,000
Leasehold improvements 113,305 63,000
----------- ----------
1,721,748 954,765
Less- Accumulated depreciation and
amortization 460,516 322,116
----------- ----------
Property and equipment, net $ 1,261,232 $ 632,649
----------- ----------
----------- ----------
See Note 2 for description of change in method of calculating depreciation
expense which occurred effective January 1, 1995.
93
The Companies have $440,704 and $195,506 of property and equipment acquired
under capital leases as of December 31, 1995 and 1994, respectively. The
accumulated depreciation related to these assets totaled $81,312 and $30,257
as of December 31, 1995 and 1994, respectively. The related depreciation
expense was $51,055, $27,929 and $2,328 for the years ended 1995, 1994 and
1993, respectively.
6. REVOLVING CREDIT NOTE:
Effective October 1994, 1st Tech obtained a revolving credit note with a
financial institution which provided for maximum borrowings of $5,000,000.
In July 1995, 1st Tech restructured the revolving credit note with the same
financial institution increasing maximum borrowings to $12,000,000. Advances
bear interest at the financial institution's prime rate plus 2 percent (10.50
percent as of December 31, 1995). The borrowings are secured by assets. As
a condition precedent to the restructured note, a $35,000 commitment fee was
paid upon closing. In addition, the revolving credit note contains certain
restrictive covenants. Specifically, 1st Tech must maintain a minimum
tangible net worth as determined by the financial institution, profitability
by quarter as well as compliance with certain financial ratios specified by
the financial institution. 1st Tech is required to report its borrowing
base, determined by eligible accounts receivable, to the financial
institution each week and cannot enter into any additional debt agreements
without prior approval from the financial institution. Indebtedness under
the note was guaranteed by 1st Tech's sole shareholder. As of December 31,
1995 and 1994, advances outstanding under the revolving credit note amounted
to $6,915,000 and $3,313,000, respectively. As of December 31, 1995,
$5,085,000 was available for future borrowings. The revolving credit note is
discretionary and may be modified, suspended or terminated at the election of
the lender at any time.
The carrying amount of the revolving credit note approximates fair value.
As of December 31, 1995, 1st Tech was in violation of certain covenants of
the revolving credit note. 1st Tech obtained a one-time waiver from the
financial institution with respect to these covenant violations. In
addition, as of our report date, the company was not in compliance with
certain debt covenants. A debt waiver has been obtained by the company for
all of the periods.
7. LEASE COMMITMENTS:
The Companies lease certain equipment and office space under noncancelable
leases with expiration dates ranging from 1996 through 2000.
Future minimum principal lease payments under all leases are as follows:
Capital Operating
Leases Leases
------- ----------
1996 $ 57,276 $ 461,817
1997 57,276 443,788
1998 57,276 214,436
1999 54,096 66,287
2000 15,594 11,048
-------- ----------
Present value of minimum capital
lease payments 241,518 $1,197,376
----------
----------
Less- Amount representing interest 47,518
--------
194,000
Less- Current present value of
minimum lease payments 42,000
--------
Long-term capital lease obligations $152,000
--------
--------
94
Rent expense recorded under all operating leases was approximately $240,000,
$115,000 and $66,000 for 1995, 1994 and 1993, respectively.
8. INCOME TAXES:
Effective January 1, 1994, 1st Tech converted from a C-Corporation to an
S-Corporation.
Effective January 1, 1995, DarkHorse converted from a C-Corporation to an
S-Corporation. Upon conversion, DarkHorse computed its built-in gain,
principally relating to inventory, for federal income tax purposes as
approximately $33,000.
The provision for income taxes for the years ended December 31, 1995, 1994
and 1993, consists of the following:
1995 1994 1993
------- ------- --------
Current-
Federal income tax $ - $11,525 $142,305
Federal built-in gain 33,000 - -
Texas franchise tax 25,000 11,495 -
------- ------- --------
$58,000 $23,020 $142,305
------- ------- --------
------- ------- --------
9. RELATED-PARTY TRANSACTIONS:
1st Tech's sole shareholder has a one-third interest in DarkHorse. During
1995, 1994 and 1993, the Companies had certain intercompany transactions
which are eliminated in the combined financial statements.
In November 1995, 1st Tech entered into an operating lease for certain
manufacturing equipment with its sole shareholder. The lease extends for a
period of 36 months with monthly payments totaling $6,200. The future
minimum lease payments associated with this lease are included in the amounts
disclosed in Note 7. In conjunction with the acquisition of the Companies,
as described in Note 14, the leased equipment was purchased from the
shareholder in May 1996 for $200,000 and the lease was canceled.
1st Tech made a loan to its sole shareholder during 1994 of approximately
$195,300. Interest on the loan accrues on a monthly basis at 1st Tech's
incremental borrowing rate of prime plus 2 percent (10.50 percent as of
December 31, 1995). Amounts due from the sole shareholder relating to this
loan and other cash advances totaled $199,000 and $148,000 as of December 31,
1995 and 1994, respectively. In conjunction with the acquisition of the
Companies, as described in Note 14, the then outstanding balance of $204,772
was charged to equity as a deemed shareholder distribution.
During 1993, 1st Tech's sole shareholder loaned $443,000 to 1st Tech. The
loan is subordinated to 1st Tech's existing notes payable to bank, and no
principal amounts can be repaid to the sole shareholder as long as amounts
remain outstanding under the bank line of credit. The loan bears interest at
prime plus 2-1/2 percent (11 percent as of December 31, 1995). Interest
payments on the loan are due quarterly and the principal was due December 31,
1995, with a contingency option to extend the due date up to an additional
three years. In conjunction with the acquisition of the Companies, as
described in Note 14, the loan was credited to equity as a deemed shareholder
contribution.
Additionally, as of December 31, 1993, 1st Tech had approximately $331,000
payable to Stratum Technologies, Inc., a separate corporation wholly owned by
the sole shareholder of 1st Tech Corporation. The balance was subsequently
paid during 1994.
95
In 1994, 1st Tech loaned approximately $40,000 to Granite Software, Inc., a
company 20 percent owned by 1st Tech's sole shareholder. During 1995, this
amount was written off as uncollectible.
During 1994, DarkHorse repurchased certain ownership interests from two
shareholders for amounts totaling approximately $74,000 in exchange for notes
payable bearing interest at 9 percent per annum. Principal payments totaling
approximately $69,000, representing the remaining outstanding balances, were
made during 1995 on these notes payable.
Additionally, as of December 31, 1994, approximately $232,400 of salaries and
bonuses were outstanding to 1st Tech's shareholders. During 1995, $152,400
was converted to notes payable bearing interest at 9 percent per annum; while
the remaining $80,000 was paid in cash. Principal payments totaling
approximately $92,000 were made on these notes payable during 1995. The
remaining amounts outstanding on the notes, including accrued interest, were
paid in full in April 1996.
10. SIGNIFICANT CUSTOMERS:
The Companies sell their products to a variety of domestic-based memory
aftermarkets and original equipment manufacturers in the electronics
industry. The Companies perform ongoing credit evaluations of their
customers' financial condition and, generally, require no collateral from
customers. If the financial condition and operations of these customers
deteriorate, the Companies' operating results could be adversely affected.
For the year ended December 31, 1994, the Companies had one customer that
accounted for approximately 13 percent of its total combined revenue. The
Companies had no customers whose sales accounted for greater than 10 percent
of combined revenue for the years ended December 31, 1995 and 1993.
1st Tech carries a business credit insurance policy covering certain accounts
receivable. The insurance policy provides protection against losses from
uncollectible accounts resulting from insolvency of specified customers. As
of December 31, 1995, the total available coverage under the policy was
approximately $9,925,000.
11. EMPLOYEE BENEFITS:
Effective January 1, 1995, 1st Tech sponsored an employee benefit plan (the
Plan) which qualifies under Section 401(k) of the Internal Revenue Code for
all 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 one
year of service.
Under the provisions of the Plan, 1st Tech makes a discretionary matching
contribution to the Plan for the benefit of the participants. 1st Tech made
contributions of approximately $41,000 during 1995.
Effective September 1, 1995, DarkHorse established a defined contribution
plan (the DarkHorse Plan) whereby eligible employees are allowed to
contribute up to 10 percent of their gross wages, subject to limitations.
All employees of DarkHorse are eligible to participate in the DarkHorse Plan.
Under the provisions of this plan, DarkHorse may make discretionary matching
contributions to the DarkHorse Plan for the benefit of the participants.
DarkHorse made matching contributions of approximately $33,000 during 1995.
96
12. COMMITMENTS AND CONTINGENCIES:
On December 13, 1995, 1st Tech Molding, Inc. (Molding), a company 50 percent
owned by the sole shareholder of 1st Tech, entered into an office space lease
agreement. The lease agreement is for five years commencing on February 1,
1996, with total aggregate minimum lease payments of approximately $610,000.
1st Tech served as the guarantor for the Molding office space lease
agreement. In conjunction with the acquisition of the Companies, as
described in Note 14, the guarantee was removed.
Additionally, on February 14, 1996, Molding entered into a five-year loan and
security agreement used to purchase certain equipment totaling approximately
$476,000. 1st Tech served as the guarantor for the Molding loan and security
agreement. In conjunction with the acquisition of the Companies, as
described in Note 14, the guarantee was removed.
13. PREFERRED STOCK:
The Company is authorized to issue 1,000,000 shares of preferred stock.
There are no preferred shares issued and outstanding as of December 31, 1995
and 1994.
14. SUBSEQUENT EVENTS:
Effective May 21, 1996, Tanisys Technology, Inc., acquired all of the
outstanding common stock of the Companies in exchange for 4.15 million shares
of Tanisys' common stock. Prior to the closing of the acquisition and as a
precedent to the acquisition, 1st Tech completed a private placement of
1,150,000 shares of its common stock for gross proceeds of $2,300,000.
Additionally, DarkHorse issued 45,000 shares of its common stock to certain
key employees.
97
TANISYS TECHNOLOGY, INC.
1ST TECH CORPORATION AND
DARKHORSE SYSTEMS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
98
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(UNAUDITED)
The following unaudited pro forma combined statements of operations for the
year ended September 30, 1996, give effect to the following:
The acquisitions of 1st Tech and DarkHorse, which were effective
as of May 21, 1996 are assumed to have occurred as of October 1,
1995.
The unaudited pro forma consolidated statement of operations for the year
ended September 30, 1996 reflects the unaudited historical income statement
of the Company for the year ended September 30, 1996, and the unaudited
historical income statements for 1st Tech and DarkHorse for the year ended
September 30, 1996.
The pro forma financial information does not reflect the effects of any of
the anticipated changes to be made by the Company as a result of the
acquisitions.
The pro forma statements are provided for informational purposes only and
should not be construed to be indicative of the Company's results of
operations had the transactions actually been completed on the date assumed
and do not project the Company's results of operations for any future period.
The significant assumptions and adjustments are disclosed in the
accompanying notes to the unaudited pro forma combined statement of
operations.
The following unaudited pro forma consolidated statement of operations and
accompanying notes should be read in conjunction with the audited financial
statements and other financial information pertaining to the Company and its
subsidiaries included elsewhere in this report.
99
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS(1)
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(UNAUDITED)
9/30/96 9/30/96 9/30/96 Adjusted
1st Tech DarkHorse Tanisys Combined Adjustments Combined
----------- ---------- ----------- ----------- --------------- -----------
Sales $64,282,000 $3,495,000 $ 195,311 $67,952,322 $(1,428,704)(b) $ 66,523,607
Cost of sales 61,201,000 1,600,000 9,618 62,810,618 (1,101,275)(b) 61,709,343
----------- ---------- ----------- ----------- ----------- ------------
Gross Profit 3,061,000 1,895,000 185,693 5,141,693 (327,429) 4,814,264
----------- ---------- ----------- ----------- ----------- ------------
Research & Development 237,000 611,000 677,342 1,525,342 1,525,342
Sales & Marketing 2,107,000 424,000 299,934 2,830,934 2,830,934
General & Administrative 2,710,000 442,000 1,356,919 4,508,919 (52,000)(c) 4,456,919
Goodwill amortization --- --- 2,220,208 2,220,208 3,108,291 (a) 5,328,499
----------- ---------- ----------- ----------- ----------- ------------
Operating expenses 5,054,000 1,477,000 4,554,403 11,085,403 3,056,291 14,141,694
----------- ---------- ----------- ----------- ----------- ------------
Operating income (1,993,000) 418,000 (4,368,710) (5,943,710) (3,383,720) (9,327,429)
Other income (expense) (383,000) 14,000 73,906 (295,094) (52,000)(c) (347,094)
Provision for taxes --- --- --- --- --- ---
----------- ---------- ----------- ----------- ----------- ------------
Net income $(2,376,000) $ 432,000 $(4,294,804) $(6,238,804) $(3,435,720) $ (9,674,523)
----------- ---------- ----------- ----------- ----------- ------------
Weighted average
number of common
shares outstanding 11,765,850
Earnings per
common share $(0.82)
- -------------------
(1) The acquisitions of 1st Tech and DarkHorse which were effective as of
May 21, 1996 are assumed to have occurred as of October 1, 1995.
(a) Increased amortization of goodwill expense related to the acquisitions
of 1st Tech and DarkHorse to reflect a full year of amortization.
(b) Eliminated intercompany sales between 1st Tech and DarkHorse.
(c) Eliminated miscellaneous charges between 1st Tech and DarkHorse.
100
(b) EXHIBITS
The exhibits listed below are filed as part of this report. See
the Index of Exhibits included with the exhibits.
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)
4.1 Form of Warrant Agreement dated May 17, 1995 (Exhibit
4.1 to General Form for Registration of Securities on
Form 10, filed November 27, 1996)
4.2 Form of Class B Warrant (Exhibit 4.2 to General Form
for Registration of Securities on Form 10, filed
November 27, 1996)
4.3 Share Purchase Warrant Certificate dated October 13,
1995 (Exhibit 4.3 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
4.4 Form of Warrant Agreement dated as of December 20, 1995
(Exhibit 4.4 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
4.5 Form of Class C Warrant (Exhibit 4.5 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)
10.1 Credit Agreement dated as of May 20, 1996, by and
between 1st Tech, DarkHorse, the Company and Chemical
Bank (now The Chase Manhattan Bank), as amended
(Exhibit 10.1 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
101
10.2 Revolving Credit Note dated as of May 20, 1996, by and between 1st
Tech, DarkHorse and Chemical Bank (now The Chase Manhattan Bank)
(Exhibit 10.2 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)
102
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)
10.13 Consulting Contract dated October 3, 1994 by and between the
Company and Parris H. Holmes, Jr., as amended (Exhibit 10.13 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)
10.16 Employment Agreement dated October 11, 1996 by and between the
Company and Guy Fielder (filed herewith)
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. (filed herewith)
10.23 Inventory Management Service Agreement dated as of November 1,
1996 by and between the Company and Siemens Components, Inc.
(filed herewith)
103
10.24 Amendment and Restatement of Credit Agreement, dated as of
February 21, 1997, by and between 1st Tech, DarkHorse, the Company
and The Chase Manhattan Bank (filed herewith)
10.25 Revolving Credit Note dated as of February 21, 1997, by and
between 1st Tech, DarkHorse, the Company and The Chase Manhattan
Bank (filed herewith)
10.27 1997 Non-Employee Director Plan of Tanisys Technology, Inc. (filed
herewith)
10.28 Form of Non-Employee Director Stock Option Agreement (filed
herewith)
12.1 Statement re Computation of Per Share Earnings for the Fiscal Year
Ended September 30, 1996 (Exhibit 12.1 to General Form for
Registration of Securities on Form 10, filed November 27, 1996)
12.2 Statement re Computation of Per Share Earnings for the Three Months
Ended December 31, 1996 (filed herewith)
21.1 Subsidiaries of the Company (Exhibit 21.1 to General Form for
Registration of Securities on Form 10, filed November 27, 1996)
27.1 Financial Data Schedule for the Fiscal Year Ended September 30,
1996 (Exhibit 27.1 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
27.2 Financial Data Schedule for the Three-Month Period Ended December
31, 1996 (filed herewith)
99.1 Schedule II - Consolidated Valuation and Qualifying Accounts (filed
herewith)
104
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
TANISYS TECHNOLOGY, INC.
Date: March 11, 1997 By: /s/ MARK C. HOLLIDAY
----------------------------
Chairman of the Board and
and Chief Executive Officer
105
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
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)
4.1 Form of Warrant Agreement dated May 17, 1995
(Exhibit 4.1 to General Form for Registration of
Securities on Form 10, filed November 27, 1996)
4.2 Form of Class B Warrant (Exhibit 4.2 to General Form
for Registration of Securities on Form 10, filed
November 27, 1996)
4.3 Share Purchase Warrant Certificate dated October 13,
1995 (Exhibit 4.3 to General Form for Registration
of Securities on Form 10, filed November 27, 1996)
4.4 Form of Warrant Agreement dated as of December 20,
1995 (Exhibit 4.4 to General Form for Registration
of Securities on Form 10, filed November 27, 1996)
4.5 Form of Class C Warrant (Exhibit 4.5 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)
106
10.1 Credit Agreement dated as of May 20, 1996, by and
between 1st Tech, DarkHorse, the Company and
Chemical Bank (now The Chase Manhattan Bank), as
amended (Exhibit 10.1 to General Form for
Registration of Securities on Form 10, filed
November 27, 1996)
10.2 Revolving Credit Note dated as of May 20, 1996, by
and between 1st Tech, DarkHorse and Chemical Bank
(now The Chase Manhattan Bank) (Exhibit 10.2 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)
107
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)
10.13 Consulting Contract dated October 3, 1994 by and
between the Company and Parris H. Holmes, Jr., as
amended (Exhibit 10.13 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)
10.16 Employment Agreement dated October 11, 1996 by and
between the Company and Guy Fielder (filed herewith)
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. (filed herewith)
108
10.23 Inventory Management Service Agreement dated as of
November 1, 1996 by and between the Company and
Siemens Components, Inc. (filed herewith)
10.24 Amendment and Restatement of Credit Agreement, dated
as of February 21, 1997, by and between 1st Tech,
DarkHorse, the Company and The Chase Manhattan Bank
(filed herewith)
10.25 Revolving Credit Note dated as of February 21, 1997,
by and between 1st Tech, DarkHorse, the Company and
The Chase Manhattan Bank (filed herewith)
10.27 1997 Non-Employee Director Plan of Tanisys
Technology, Inc. (filed herewith)
10.28 Form of Non-Employee Director Stock Option Agreement
(filed herewith)
12.1 Statement re Computation of Per Share Earnings for
the Fiscal Year Ended September 30, 1996 (Exhibit
12.1 to General Form for Registration of Securities
on Form 10, filed November 27, 1996)
12.2 Statement re Computation of Per Share Earnings for
the Three Months Ended December 31, 1996 (filed
herewith)
21.1 Subsidiaries of the Company (Exhibit 21.1 to General
Form for Registration of Securities on Form 10,
filed November 27, 1996)
27.1 Financial Data Schedule for the Fiscal Year Ended
September 30, 1996 (Exhibit 27.1 to General Form for
Registration of Securities on Form 10, filed
November 27, 1996)
27.2 Financial Data Schedule for the Three Months Ended
December 31, 1996 (filed herewith)
99.1 Schedule II - Consolidated Valuation and Qualifying
Accounts (filed herewith)
109