UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-29038
TANISYS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
WYOMING 74-2675493
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12201 TECHNOLOGY BLVD., SUITE 130
AUSTIN, TEXAS 78727
(Address of principal executive offices) (Zip Code)
(512) 335-4440
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicated below is the number of shares outstanding of the Registrant's
only class of common stock at May 8, 1998:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
-------------- ----------------------------
Common Stock, no par value 20,729,714
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998 (unaudited) and September 30, 1997. . . 3
Consolidated Statements of Operations - For the Three and Six Month Periods
Ended March 31, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows - For the Three and Six Month Periods
Ended March 31, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . .14
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . .14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, SEPTEMBER 30,
1998 1997
- ---------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,764,882 $ 1,990,017
Restricted cash 150,774 1,539,448
Trade accounts receivable, net of allowance of $288,312 and
$180,157, respectively 4,267,739 3,519,369
Accounts receivable from related parties 12,371 12,371
Inventory, net of allowance of $250,923 and $317,023, respectively 3,548,770 4,489,050
Prepaid expenses and other current assets 538,248 364,042
- ---------------------------------------------------------------------------------------------------
Total current assets 10,282,784 11,914,297
- ---------------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation of
$2,194,500 and $1,730,832, respectively 4,551,278 2,539,324
Organization costs, net 256 512
Patents and trademarks, net 75,276 80,327
Goodwill, net of accumulated amortization of $6,872,207
and $5,079,457, respectively 298,791 2,091,541
Other noncurrent assets 541,807 605,957
- ---------------------------------------------------------------------------------------------------
Total Assets $ 15,750,192 $ 17,231,958
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,208,025 $ 3,917,786
Accounts payable to related parties - 250
Accrued liabilities 2,813,035 710,189
Revolving credit note 4,227,015 4,172,516
- ---------------------------------------------------------------------------------------------------
Total current liabilities 11,248,075 8,800,741
- ---------------------------------------------------------------------------------------------------
Obligations under capital lease 66,985 81,114
- ---------------------------------------------------------------------------------------------------
Total liabilities 11,315,060 8,881,855
- ---------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, no par value, 50,000,000 shares
authorized, 20,729,714 and 20,334,714 shares issued and
outstanding, respectively 29,034,774 28,599,524
Foreign translation adjustment (2,625) -
Accumulated deficit (24,597,017) (20,249,421)
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 4,435,132 8,350,103
- ---------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 15,750,192 $ 17,231,958
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS.
3
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
Net sales $ 7,531,424 $12,057,378 $17,207,247 $27,321,039
Cost of goods sold 6,266,533 10,454,191 13,789,190 24,122,427
- ------------------------------------------------------------------------------------------------------------
Gross profit 1,264,891 1,603,187 3,418,057 3,198,612
- ------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 666,550 653,634 1,477,115 1,172,342
Sales and marketing 682,234 736,344 1,353,906 1,434,330
General and administrative 1,269,488 884,181 2,287,851 1,743,655
Depreciation and amortization 1,064,621 1,042,892 2,131,826 2,063,482
Bad debt expense 133,000 1,759,806 241,943 1,806,647
- ------------------------------------------------------------------------------------------------------------
Total operating expenses 3,815,893 5,076,857 7,492,641 8,220,456
- ------------------------------------------------------------------------------------------------------------
Operating loss (2,551,002) (3,473,670) (4,074,584) (5,021,844)
- ------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 14,684 2,690 34,210 14,399
Interest expense (152,090) (151,604) (307,222) (316,874)
- ------------------------------------------------------------------------------------------------------------
Net loss $(2,688,408) $(3,622,584) $(4,347,596) $(5,324,319)
- ------------------------------------------------------------------------------------------------------------
Basic and diluted loss from operations per share $ (0.13) $ (0.21) $ (0.21) $ (0.32)
- ------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 20,580,936 16,937,045 20,488,203 16,539,432
Diluted 20,580,936 16,937,045 20,488,203 16,539,432
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS.
4
TANISYS TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($2,688,408) ($3,622,584) ($4,347,596) ($5,324,319)
Adjustments to reconcile net loss to net cash earned (used) in
operating activities:
Depreciation and amortization 1,139,496 1,042,892 2,280,132 2,063,482
Issuance of stock options 123,000 - 123,000 -
(Increase) decrease in restricted cash (83,311) - 1,388,674 -
(Increase) decrease in accounts receivable 276,235 (671,822) (748,370) (1,985,764)
(Increase) decrease in inventory 228,349 (1,528,307) 940,280 (1,767,682)
Increase in prepaid expense (127,495) (156,164) (174,206) (329,753)
Decrease in other assets 52,428 - 64,150 -
Increase in accounts payable and accrued liabilities 3,193,407 3,689,199 2,392,835 3,119,438
- ------------------------------------------------------------------------------------------------------------------------------
Net cash earned (used) in operating activities 2,113,701 (1,246,786) 1,918,899 (4,224,598)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (2,328,353) (434,353) (2,515,666) (870,043)
Proceeds from sale of property and equipment - - 21,637 -
Patent and trademark costs - - - (6,094)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,328,353) (434,353) (2,494,029) (876,137)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Draws (payments) on revolving credit note, net (96,304) 330,090 54,499 1,700,941
Principal payments on capital lease obligations (2,842) (21,534) (14,129) (33,475)
Increase in foreign translation adjustment (2,625) - (2,625) -
Net proceeds from issuance of common stock 107,000 - 182,000 -
Net proceeds from exercise of stock options - 22,460 128,250 32,900
Net proceeds from exercise of stock warrants 2,000 1,330,968 2,000 2,485,968
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,229 1,661,984 349,995 4,186,334
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (207,423) (19,155) (225,135) (914,401)
Cash and cash equivalents, beginning of period 1,972,305 1,794,323 1,990,017 2,689,569
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $1,764,882 $1,775,168 $1,764,882 $1,775,168
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for interest $152,090 $151,604 $307,222 $316,874
Cash received from interest $14,684 $2,690 $34,210 $14,399
Non-cash activity:
20,000 shares issued to satisfy accounts payable $32,000 - $32,000 -
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS.
5
TANISYS TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Tanisys Technology, Inc.
("Tanisys") and its wholly owned subsidiaries (collectively referred to as
the "Company") as of the dates and for the periods indicated. All material
intercompany accounts and transactions have been eliminated in consolidation.
All adjustments have been made to the accompanying interim consolidated
financial statements which are, in the opinion of the Company's management,
necessary for fair presentation of the Company's operating results.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. It is recommended that these interim consolidated
financial statements be read in conjunction with the Company's consolidated
financial statements and the notes thereto for the fiscal year ended
September 30, 1997 contained in the Company's Form 10-K as filed with the
Securities and Exchange Commission on December 29, 1997.
NOTE 2: INVENTORY
Inventory consists of the following:
March 31, September 30,
1998 1997
---------- -------------
Raw Materials $2,807,153 $3,976,488
Work-in-process 223,901 204,783
Finished goods 768,639 624,802
---------- ----------
3,799,693 4,806,073
Less inventory allowance (250,923) (317,023)
---------- ----------
Inventory, net $3,548,770 $4,489,050
---------- ----------
---------- ----------
Inventory is stated at the lower of cost or market value. Inventory costs
include direct materials, direct labor and certain indirect manufacturing
overhead expenses.
6
NOTE 3: STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
In the first quarter of fiscal 1998, the Company adopted SFAS No. 128, "Earnings
per Share," which establishes standards for computing and presenting earnings
per share ("EPS") for entities with publicly held common stock or potential
common stock. This statement requires the restatement of historical earnings
per share amounts to conform with the new methodology. However, the adoption of
this statement did not change the calculation of Primary EPS to Basic or Diluted
EPS from prior years because of the antidilutive effect of the common stock
equivalents.
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Numerator:
Net loss-numerator for basic and diluted
Earnings per share ($2,688,408) ($3,622,584) ($4,347,596) ($5,324,319)
Denominator:
Denominator for basic earnings per share-
Weighted average shares 20,580,936 16,937,045 20,488,203 16,539,432
Effect of dilutive securities:
None - - - -
----------- ----------- ----------- -----------
Denominator for diluted earnings per share-
Adjusted weighted average shares 20,580,936 16,937,045 20,488,203 16,539,432
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings per share ($0.13) ($0.21) ($0.21) ($0.32)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings per share ($0.13) ($0.21) ($0.21) ($0.32)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Stock options and warrants not included in the
denominator for diluted earnings per share as
their effect would have been antidilutive 4,169,316 2,492,200 4,169,316 2,492,200
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
COMMON STOCK
During the three months ended March 31, 1998, 50,000 shares of common stock were
purchased by the Chief Executive Officer of the Company, as provided under his
employment agreement, for total gross proceeds of $75,000.
During the same time period, 20,000 shares of common stock were issued in
exchange for legal services in the amount of $32,000.
WARRANTS
During the three months ended March 31, 1998, warrants were exercised for the
purchase of 200,000 shares of common stock for total gross proceeds of $2,000.
At March 31, 1998, warrants for the purchase of 89,999 shares of common stock
were outstanding, of which 67,497 were exercisable.
7
OPTIONS
During the three months ended March 31, 1998, the Board of Directors authorized
stock options exercisable for the purchase of 660,000 share of common stock to
be re-issued to former employees at the original exercise price, thus resulting
in $123,000 in compensation expense due to a market valuation adjustment.
NOTE 4: RELATED PARTY TRANSACTIONS
In accordance with the terms of his employment agreement, the Chief Executive
Officer purchased 50,000 shares of common stock for a total purchase price of
$75,000 in January 1998. (See Note 3)
In accordance with the terms of two separation agreements, stock options for the
purchase of 660,000 shares of common stock were re-issued to former senior
officers of the Company at the original exercise price. (See Note 3)
In February 1998, the Chairman of the Board of Directors exercised stock
warrants for the purchase of 200,000 shares of common stock for a net exercise
price of $2,000. (See Note 3)
NOTE 5: RECENT PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income," SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," and SFAS No. 132, "Employers' Disclosure
About Pension and Other Postretirement Benefits," All of which must be adopted
by the Company as of October 1, 1998. Management believes the adoption of these
new standards will have no material effect on the company's financial position
or results of operations.
8
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS AND INFORMATION RELATING TO TANISYS AND ITS SUBSIDIARIES THAT ARE
BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY
AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED IN
THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," AND
"INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY
OR ITS MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS REFLECT THE CURRENT RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATED TO
CERTAIN FACTORS INCLUDING, WITHOUT LIMITATIONS, COMPETITIVE FACTORS, GENERAL
ECONOMIC CONDITIONS, CUSTOMER CONCENTRATIONS, CUSTOMER RELATIONSHIPS AND
FINANCIAL CONDITIONS, RELATIONSHIPS WITH VENDORS, THE INTEREST RATE ENVIRONMENT,
GOVERNMENTAL REGULATION AND SUPERVISION, SEASONALITY, DISTRIBUTION NETWORKS,
PRODUCT INTRODUCTIONS AND ACCEPTANCE, TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY
PRACTICES, ONE-TIME EVENTS AND OTHER FACTORS DESCRIBED HEREIN. BASED UPON
CHANGING CONDITIONS, SHOULD ANY ONE OF MORE OF THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED,
BELIEVED, ESTIMATED, EXPECTED OR INTENDED. THE COMPANY DOES NOT INTEND TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following is a discussion of the interim consolidated financial
condition and results of operations of the Company for the three and six-month
periods ended March 31, 1998 and 1997. It should be read in conjunction with
the Consolidated Financial Statements, the Notes thereto and other financial
information included elsewhere in this report, and also in the Company's Form
10-K as filed with the Securities and Exchange Commission on December 29, 1997.
For purposes of the following discussion, references to year periods refer to
the Company's fiscal year ended September 30, 1997 and references to quarterly
periods refer to the Company's fiscal quarters ended March 31, 1998 and 1997.
Effective February 1998, the Company established Tanisys (Europe), Ltd., a
wholly owned subsidiary of Tanisys located in Scotland. Tanisys (Europe), Ltd.
will offer its Comprehensive Logistics and Supply Solutions (CLASS) program,
build-to-order services, turn key manufacturing services and manufacture and
market products consisting of semiconductor memory modules. Tanisys (Europe),
Ltd will also serve as the European sales and marketing office for Darkhorse
tester products designed and produced by Tanisys Technology, Inc., including the
recently announced Sigma-3-TM- tester that offers module manufacturers truly
affordable, high-volume, production testing systems for 100 MHz SDRAM.
9
RESULTS OF OPERATIONS
The following table sets forth certain consolidated operations data of the
Company expressed as a percentage of net sales (unaudited) for the three and
six-month periods ended March 31, 1998 and 1997:
THREE MONTHS ENDED SIX MONTHS ENDED
March 31, March 31,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 83.2 86.7 80.1 88.3
------ ------ ------ ------
Gross profit 16.8 13.3 19.9 11.7
------ ------ ------ ------
Operating expenses:
Research and development 8.9 5.4 8.6 4.3
Sales and marketing 9.1 6.1 7.9 5.2
General and administrative 16.8 7.3 13.3 6.4
Depreciation and amortization 14.1 8.7 12.4 7.6
Bad debt expense 1.8 14.6 1.4 6.6
------ ------ ------ ------
Total operating expenses 50.7 42.1 43.6 30.1
------ ------ ------ ------
Operating loss (33.9) (28.8) (23.7) (18.4)
Other expense, net (1.8) (1.2) (1.6) (1.1)
------ ------ ------ ------
Net loss (35.7)% (30.0)% (25.3)% (19.5)%
------ ------ ------ ------
------ ------ ------ ------
NET SALES
Net sales consist of custom manufacturing services, custom memory modules,
standard memory modules, design engineering fees, memory module test solutions
and advanced technology services, less returns and discounts. Net sales
decreased to $7.5 million in the second quarter of fiscal 1998 from $12.1
million in the second quarter of fiscal 1997. Net sales decreased to $17.2
million in the first six months of fiscal 1998 from $27.3 million in the first
six months of fiscal 1997. The decrease in fiscal 1998 is primarily due to
changes in product mix. The Company is emphasizing its quick-turn manufacturing
program, Comprehensive Logistics and Supply Solutions ("C.L.A.S.S."), which is
designed to support the build-to-order ("BTO") and configuration-to-order
("CTO") emphasis currently in place or contemplated by all the major personal
computer manufacturers. The semiconductor memory chips used in this program,
primarily Dynamic Random Access Memory ("DRAM"), are supplied by the customer,
which reduces net sales and cost of sales by removing the highest cost component
in a memory module. An additional factor in the decrease of net sales in the
second quarter of fiscal 1998 is the February 1998 introduction of the
Sigma-3-TM- testing system. As a result of this announcement, many customers
postponed test equipment purchases until this product becomes available,
resulting in a short-term decrease in net sales relating to this product line.
Net sales are expected to increase significantly as the Sigma-3-TM- is placed
into mass production.
COST OF SALES AND GROSS PROFIT
Cost of sales includes the costs of all components and materials purchased
for the manufacture of products and the direct labor and overhead costs
associated with manufacturing. Gross profit decreased to $1.3 million in second
quarter fiscal 1998 from $1.6 million in the second quarter of fiscal 1997.
Gross profit increased to $3.4 million in the first six months of fiscal 1998
from $3.2 million in the first six months of fiscal 1997. Gross profit margin
increased to 16.8% in second quarter 1998 from 13.3% in second quarter fiscal
1997. Gross profit margin increased to 19.9% in the first six months of fiscal
1998 from 11.7% for the same time period in 1997. The increase in gross profit
as well as the increase in gross profit margin was due primarily to the
transition to the C.L.A.S.S. program and the continuing decline in the cost of
raw materials, as described in Net Sales above.
10
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the costs associated with
the design and testing of new technologies and products. These relate
primarily to the costs of materials, personnel, management and employee
compensation, and engineering design consulting fees. Research and
development expenses increased to $667 thousand in second quarter fiscal 1998
from $654 thousand in second quarter fiscal 1997. Expenses for the first six
months of fiscal 1998 increased to $1.5 million from $1.2 million in the
first six months of fiscal 1997. The increase was due primarily to the
development of new tester products and expenses related to the design of
standard and custom modules. Expenses relating to research and development
are expected to remain approximately the same in terms of absolute dollars
and to decrease as a percentage of revenue as the anticipated growth in
revenue occurs.
SALES AND MARKETING
Sales and marketing expenses include all compensation of employees and
independent sales personnel, as well as the costs of advertising, promotions,
trade shows, travel, direct support and overhead. Sales and marketing
expenses decreased to $682 thousand in second quarter fiscal 1998 from $736
thousand in second quarter fiscal 1997. Sales and marketing expenses have
remained at $1.4 million for the first six months of fiscal 1998 and fiscal
1997. Sales and marketing expenses expressed as a percentage of revenues
have increased to 7.9% in the first six months of fiscal 1998 from 5.2% in
the first six months of fiscal 1997, primarily due to decreased revenues.
Sales and marketing expenses are expected to increase slightly when expressed
as a percentage of revenue and to continue to increase in terms of absolute
dollars in future periods as revenues increase.
GENERAL AND ADMINISTRATIVE
General and administrative costs consist primarily of personnel costs,
including compensation and employee benefits, and support costs including
utilities, insurance, professional fees and all costs associated with a
reporting company. General and administrative expenses increased to $1.3
million in second quarter fiscal 1998 from $884 thousand in second quarter
fiscal 1997, an increase of 44%. In the first six months of fiscal years 1998
and 1997, general and administrative expenses were $2.3 million and $1.7
million, respectively. The increase in actual funds expended in fiscal 1998
is primarily due to the expansion of the Company's facilities and operation
hours and the addition of staff and contract labor. In second quarter fiscal
1998, compensation expense of $123 thousand was incurred in conjunction with
the re-issuance of stock options to former employees in accordance with the
terms of two separation agreements. Expenses associated with the general and
administrative area are expected to decrease significantly in absolute
dollars and as a percentage of revenue in future periods due to expense
containment programs currently in effect.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes the depreciation for all fixed
assets exclusive of those used in the manufacturing process and included as
part of "Cost of Sales" and the amortization of intangibles, including
goodwill incurred in the acquisitions of 1st Tech and DarkHorse.
Depreciation and amortization increased to $1.1 million in second quarter
fiscal 1998 from $1.0 million in second quarter fiscal 1997. Depreciation
and amortization expenses for the first six months of 1998 were $2.1 million,
an increase of 3% from the same time period in fiscal 1997. The increase is
due primarily to the purchases of additional network equipment and accounting
software. Depreciation expenses are expected to decrease as a percentage of
revenue and increase in terms of absolute dollars with additional facility
expansions and equipment purchases used in research and development.
Amortization expenses are expected to decrease significantly in the third
quarter of fiscal 1998 due to the complete amortization of goodwill relating
to the acquisition of 1st Tech and DarkHorse.
11
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income less
interest expense. Interest expense is attributable to borrowings from a
revolving credit note. Substantially all of the interest expense relates to
credit line draws made for short-term inventory requirements and to fund
accounts receivable. Interest income relates to investment of available cash
in short-term interest bearing accounts and cash equivalent securities.
Other income (expense) decreased to $137 thousand of expense in the second
quarter of fiscal 1998 from $149 thousand in the second quarter of fiscal
1997, a net decrease of 8%. Other income (expense) has decreased 10% to $273
thousand in the first six months of fiscal 1998 from $302 thousand in the
first six months of fiscal 1997. The Company incurs net interest expense in
order to maintain increased balances of inventories and accounts receivable.
The Company expects to continue to require borrowings to fund growth in
accounts receivable in the future and therefore expects to continue to
reflect net interest expense. Interest expense is expected to increase
slightly in terms of absolute dollars due to debt related to short-term
borrowings for accounts receivable and inventory purchases to support the
increase in revenues.
PROVISION FOR INCOME TAXES
During fiscal 1997, the Company incurred consolidated net operating
losses for U.S. income tax purposes of approximately $6.0 million. The loss
carryforwards expire in 2012 and 2011, respectively. During 1997, the
Company had temporary differences resulting in future tax deductions of $513
thousand, principally representing tax basis in accrued liabilities and
intangible assets. Deferred income tax assets from the loss carryforwards and
asset basis differences aggregated $4.6 million and $2.2 million at September
30, 1997.
For financial reporting purposes, valuation allowances of $4.6 million
and $2.2 million have been recorded to offset the deferred tax assets due to
the uncertainty as to whether the benefits will be realized.
The availability of the net operating loss carryforward and future tax
deductions to reduce taxable income are subject to various limitations under
the Internal Revenue Code of 1986, as amended (the "Code"), in the event of
an ownership change as defined in Section 382 of the Code. The Company may
lose the benefit of such net operating loss carryforwards due to Internal
Revenue Service ("IRS") Code Section 382 limitations. This section states
that after reorganization or other change in corporate ownership, the use of
certain carryforwards may be limited or prohibited. The Company does not
believe that an IRS Code Section 382 limitation existed as of September 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Tanisys has utilized the funds acquired in equity
financings of its common stock, the exercise of stock 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, accounts receivable balances and pay its general and
administrative expenses. During the second quarter of fiscal 1998, the
Company generated $7 thousand in net cash from financing activities versus
$1.7 million in the second quarter of fiscal 1997. The $7 thousand in fiscal
1998 consisted primarily of $109 thousand from the purchase of common stock
and stock warrants net of $96 thousand in net payments on the Company's
revolving credit note. At March 31, 1998, the Company had $1.9 million of
cash and restricted cash.
Capital expenditures totaled approximately $2.3 million and $434
thousand in the second quarter of fiscal years 1998 and 1997, respectively.
These expenditures were primarily for the purchase of manufacturing
equipment, test equipment and the expansion of manufacturing facilities. The
Company plans to spend approximately $4.8 million in the remainder of fiscal
1998 in capital expenditures for additional manufacturing capacity through
working capital, operating leases and capital leases. At May 5, 1998, $1.7
million of the estimated $4.8 million had been committed for the purchase of
capital expenditures, to be financed through operating and capital leases.
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The Company has entered into certain capital lease arrangements. The
outstanding principal on these obligations at March 31, 1998 was $188
thousand.
The Company believes that its existing funds, anticipated cash flow from
operations and amounts available from future vendor credits, bank borrowings,
the exercise of outstanding warrants and stock options and equity financings
will be sufficient to meet its working capital and capital expenditure needs
for the next 12 months. There is no assurance that the Company will be able
to locate an alternate source or sources for the required increase in its
outstanding debt or that it will be successful in its attempts to raise a
sufficient amount of funds in a subsequent equity offering or offerings. In
such event, the Company's inability to raise needed funds could have a
material adverse effect on the Company.
SIGNIFICANT CUSTOMER CONCENTRATION
A significant percentage of the Company's net sales are produced by a
relatively small number of customers. In the second quarter of fiscal 1998
and 1997, the ten largest customers accounted for approximately 78% and 64%
of net sales, respectively. One customer produced 46% of sales in the second
quarter of fiscal 1998. The same customer produced 33% of sales for the six
months ended March 31, 1998. In the second quarter of fiscal 1997, one
customer produced 25% of net sales. The Company's two largest customers
accounted for 13% and 11% of total revenue for the first six months of fiscal
1997. 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 1998
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. 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.
YEAR 2000 COMPLIANCE
The Company is currently in the process of evaluating its information
technology infrastructure for Year 2000 compliance. The Company does not
expect that the cost to modify its information technology infrastructure to
be Year 2000 compliant will be material to its financial condition or results
of operations. The Company does not anticipate any material disruption in
its operations as a result of any failure by the Company to be in compliance.
The Company does not currently have any information concerning Year 2000
compliance status of its suppliers and customers. In the event that any of
the Company's significant suppliers or customers do not successfully and
timely achieve Year 2000 compliance, the Company's business or operations
could be adversely affected.
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PART II. OTHER INFORMATION
ITEM 1. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on March 24, 1998, the
following matters were adopted by the margins indicated:
1. To elect directors Charles T. Comiso and Gordon Matthews to serve until
the 2001 Annual Meeting of Stockholders.
For: 16,155,232
Against: N/A
Abstain: 15,300
2. To ratify the appointment of Arthur Andersen LLP as independent public
accountants of the Company for the fiscal year ending September 30, 1998.
For: 14,896,487
Against: 6,000
Abstain: 1,295,045
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
The exhibits listed below are filed as part of or incorporated by
reference in this report. Where such filing is made by incorporation by
reference to a previously filed document, such document is identified in
parentheses.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Articles of Continuance dated June 30, 1993 (Exhibit 3.1 to Form
10 Registration Statement filed November 27, 1996)
3.2 Articles of Amendment to Articles of Continuance dated July 11,
1994 (Exhibit 3.2 to Form 10 Registration Statement filed November 27,
1996)
3.3 Articles of Amendment dated April 28, 1995 (Exhibit 3.3 to Form 10
Registration Statement filed November 27, 1996)
3.4 Articles of Amendment dated April 15, 1996 (Exhibit 3.4 to Form 10
Registration Statement filed November 27, 1996)
3.5 Restated Bylaws of the Company (Exhibit 3.5 to Form 10 Registration
Statement filed November 27, 1996)
14
4.1 Form of Common Stock Certificate (Exhibit 4.6 to Form 10
Registration Statement filed November 27, 1996)
4.2 Form of Class S Warrant Certificate (Exhibit 4.2 to Form 10-Q for
the Quarterly period Ended December 31, 1997)
10.37 Manufacturing Service Agreement dated February 2, 1998 by and
between the Company and LG Semicon American, Inc. (filed herewith)
10.38 Manufacturing Service Agreement dated March 1, 1998 by and between
the Company and Toshiba America Electronic Components, Inc. (filed
herewith)
27.1 Financial Data Schedule (filed herewith)
CURRENT REPORTS ON 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TANISYS TECHNOLOGY, INC.
Date: May 8, 1988 By: /s/ JOE O. DAVIS
-------------------------------------------------
Joe O. Davis
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND CORPORATE SECRETARY
(Duly authorized and Principal Financial Officer)
Date: May 8, 1998 By: /s/ DONALD R. TURNER
-------------------------------------------------
Donald R. Turner
CORPORATE CONTROLLER
(Duly authorized and Principal Accounting Officer)
15